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Nutter Bank Report, May 2009

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05.29.2009 | Legal Update

Headlines
1. FDIC Will Impose Special Assessments Based on Assets, Not Deposits
2. Truth in Lending Act Revised on Credit Cards and Mortgages
3. Mortgage Foreclosures: Pitfalls for Purchasers of Residential Loans
4. President Signs Mortgage Fraud Bill into Law
5. Other Developments: CPP for Small Banks and Investment Advisers Proposal

Full Reports

1. FDIC Will Impose Special Assessments Based on Assets, Not Deposits

The FDIC adopted a final rule to impose a special assessment on insured depository institutions of 5 basis points on assets minus Tier 1 capital reported as of June 30. The amount of the special assessment approved on May 22 will be capped at an amount equal to 10 basis points times an institution’s assessment base for the second quarter 2009 risk-based assessment. The special assessment will be collected on September 30. The final rule also provides that if, after June 30, the reserve ratio of the Deposit Insurance Fund is estimated to fall to a level that the FDIC believes would adversely affect public confidence or to a level close to or below zero at the end of any calendar quarter, the FDIC may impose additional special assessments of up to 5 basis points on all insured depository institutions based on each institution’s total assets minus Tier 1 capital, as reported on the report of condition for that calendar quarter. Any additional special assessment will also be capped at 10 basis points times the institution’s assessment base for the corresponding quarter’s risk-based assessment. The next possible date for imposing any such additional special assessment would be September 30, with collection on December 30, and the latest possible date for imposing an additional special assessment would be December 31, with collection on March 30, 2010. The FDIC’s authority to impose any additional special assessments under the final rule terminates on January 1, 2010.

Nutter Notes: The amount of the special assessment for the second quarter originally announced by the FDIC in a February interim final rule would have been 20 basis points using the same assessment base for the special assessment as the assessment base for the regular risk-based assessment. The size of that proposed special assessment reflected the FDIC’s concerns about the resources available to it to cover potential unforeseen losses. On May 20, Congress increased the FDIC’s authority to borrow from the U.S. Treasury from $30 billion to $100 billion as a part of the Helping Families Save Their Homes Act of 2009, which also authorized a temporary increase in the FDIC’s borrowing authority above $100 billion (but not to exceed $500 billion) until December 31, 2010 based on a process that would require the concurrence of the FDIC Board, the Federal Reserve Board, and the Secretary of the Treasury in consultation with the President. The increase in the FDIC’s statutory borrowing authority allowed it to reduce the size of the special assessment for the second quarter, the FDIC said. The Helping Families Save Their Homes Act of 2009 also extends the temporary deposit insurance coverage limit of $250,000 through the end of 2013 and allows the FDIC to factor in the higher coverage limit for assessment purposes. The FDIC is encouraging institutions to inform depositors that the increase in coverage is temporary and effective only until December 31, 2013, particularly when opening new accounts and certificates of deposit maturing after that date. Insured institutions may pre-order optional temporary signage on the FDIC’s web site at http://www.fdic.gov/regulations/resources/signage/.

2. Truth in Lending Act Revised on Credit Cards and Mortgages

The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 amends the Truth in Lending Act (TILA) to prohibit a creditor from increasing the APR on an existing balance on a consumer credit card account unless specified conditions are met. The CARD Act was signed by the President on May 22 and its requirements generally become effective on February 22, 2010. The CARD Act prohibits a creditor from increasing an APR on an existing credit card balance unless the increase is due solely to a change in the applicable interest rate index, expiration of a promotional rate, payment not received during the 30-day grace period after the payment due date, the completion of a workout plan or the cardholder’s failure to comply with a workout plan. The CARD Act requires a credit card issuer to give a cardholder at least 45 days advance notice of an APR increase unless the increase results from a change in the index, expiration of a promotional rate, or in connection with a workout plan. The amendments to TILA also prohibit a creditor from increasing any APR (except in the circumstances described above), fee or finance charge before the end of the first year from the date when a new credit card account is opened. A promotional rate during the first year is permissible, provided that no increase may be effective before the end of a 6-month period beginning on the date the promotional rate takes effect. The new law directs the Federal Reserve Board to develop regulations to implement certain provisions in the CARD Act, including rules establishing standards for assessing whether penalties and fees, such as late fees and over-the-limit fees, are reasonable and proportional.

Nutter Notes: On May 7, the Federal Reserve Board approved amendments to Regulation Z to revise the disclosure requirements for mortgage loans under TILA. The amendments to Regulation Z implement the Mortgage Disclosure Improvement Act (MDIA), which amended TILA in July 2008. Among other things, the MDIA requires early, transaction-specific disclosures for a mortgage loan secured by a home other than the consumer’s principal home and requires waiting periods between the time when disclosures are given and the mortgage loan closing. The MDIA requirements become effective on July 30, 2009. The new rules implement requirements that lenders wait 7 business days after they provide early disclosures before closing a loan, as well as requirements that lenders provide new disclosures with a revised APR, and wait an additional 3 business days before closing a loan, if a change occurs that makes the APR in the early disclosures inaccurate beyond a specified tolerance. The rules would permit a consumer to expedite the closing to address a personal financial emergency, such as a foreclosure. The MDIA also contains additional disclosure requirements that will not become effective until January 30, 2011 for variable-rate transactions. The current rules do not address those disclosures, but the Federal Reserve Board announced that it plans to issue proposed rules later in 2009 to implement those requirements.

3. Mortgage Foreclosures: Pitfalls for Purchasers of Residential Loans

The Massachusetts Land Court recently decided a case, U.S. Bank National Association, Trustee v. Ibanez, et al., that contains some cautionary guidance for purchasers of residential mortgage loans relating to the mortgage foreclosure process. In the case, borrowers challenged the right of purchasers of residential mortgage loans to conduct foreclosure sales when they did not have a recorded interest in the mortgaged property at the time of the foreclosure sales. The Land Court held that the new owners of the loans did not conduct proper foreclosure sales where assignments of the mortgages being foreclosed were not duly executed prior to the commencement of the foreclosure sales. The court recommended that the assignments of the mortgages also be recorded prior to the commencement of the foreclosure sales, although the lack of recording was not, in and of itself, a fatal problem, according to the decision. Since a foreclosure sale, however, must be conducted by the present holder of the mortgage, to withstand challenge to the foreclosure sale, the current owner of the loan must demonstrate that it is either the original lender or the proper assignee of the mortgage prior to commencing the foreclosure sale. Without a properly executed assignment, the current owner of the loan failed that test. The Land Court also cautioned that backdating the assignments of the mortgages would not cure the defect.

Nutter Notes: This Land Court decision is the most recent instance of a court setting aside a mortgage foreclosure sale where the owner of the loan did not properly document its interest in the mortgage being foreclosed. The courts have increasingly emphasized the importance of obtaining and recording, prior to commencing foreclosure proceedings, duly executed assignments of mortgages. Given the increasing number of loan transfers, whether as part of a loan syndication, securitization, sale or workout, lenders must be careful to obtain properly endorsed original promissory notes and assignments of mortgages and other loan documents as part of the closing process. Failure to do so can jeopardize the ability of the owner of the loan to realize upon its collateral, if necessary. Another recent Massachusetts case suggests that refusing to postpone a foreclosure auction may be considered an unfair business practice under certain circumstances. The case involved borrowers who had found a buyer for their property in foreclosure prior to the date of the auction and requested the payoff figure from the loan servicer, informing the loan servicer of the impending sale of the property. The servicer provided the payoff figure within 5 days, as required by law, but not in time for the borrower to close a sale before the foreclosure auction. Under these circumstances, the court held that failure to postpone the auction could be considered an unfair business practice. For further explanation of these cases or guidance on the foreclosure process, please contact your Nutter attorney or one of the members of Nutter’s Workout, Restructuring and Bankruptcy Practice Group.

4. President Signs Mortgage Fraud Bill into Law

The Fraud Enforcement and Recovery Act of 2009 (FERA) expands the authority of the U.S. Department of Justice to prosecute mortgage fraud involving private mortgage institutions by amending the federal criminal code to include within the definition of a “financial institution” a mortgage lending business or any person or entity that makes, in whole or in part, a federally related mortgage loan. FERA, which was signed into law by the President on May 20, extends the prohibition against making false statements in a mortgage application to employees and agents of a mortgage lending business. A “mortgage lending business” is defined as an organization that finances or refinances any debt secured by an interest in real estate, including private mortgage companies and their subsidiaries, and whose activities affect interstate or foreign commerce. FERA also applies the prohibition against defrauding the federal government to fraudulent activities involving the Troubled Assets Relief Program (TARP), which includes Capital Purchase Program (CPP) participants, or any other federal economic stimulus, recovery, or rescue plan.

Nutter Notes: FERA amends Federal money laundering statutes to clarify that the scope of illegal activity in financial transactions includes the gross proceeds of unlawful activity, not just profits, as the Supreme Court stated in a 2008 money laundering decision. FERA makes it a crime to make a materially false statement or to willfully overvalue a property in order to influence any action by any mortgage lending business. Currently, that offense only applies to federally-regulated institutions, such as banks. The Federal securities laws are also amended by FERA to cover fraud schemes involving commodity futures and options. Currently, the statute does not reach fraud involving options or futures, which include some of the derivatives and other financial products that are considered to be part of the cause of the current financial crisis. FERA establishes a new Financial Crisis Inquiry Commission to examine the causes of the current U.S. financial and economic crisis, taking into account fraud and abuse in the financial sector and other specified factors. The Commission is required to submit a report on its findings to the President and Congress on December 15, 2010, and the Commission chairperson must appear to testify before specified congressional committees within 120 days after the submission of the report.

5. Other Developments: CPP for Small Banks and Investment Advisers Proposal

· Treasury Secretary Announces New CPP Terms for Small Banks

Treasury Secretary Timothy Geithner announced on May 13 that the Treasury is planning to re-open the application window for banks with total assets under $500 million under the CPP, and raise from 3% of risk-weighted assets to 5% of risk-weighted assets the amount that qualifying institutions can apply to receive.

Nutter Notes: According to Secretary Geithner, current CPP participants will be allowed to reapply and will have an expedited approval process, and Treasury will extend the deadline for small banks to form a holding company for the purposes of CPP. Both the window to form a holding company and the window to apply or re-apply for CPP will be open for 6 months.

· SEC Proposes Rule to Increase Protections for Customers of Investment Advisers

A new rule proposed by the Securities and Exchange Commission on May 14 would require all registered investment advisers with custody of client assets to undergo an annual “surprise exam” to verify that those assets exist by an independent public accountant, which would report to the SEC. If such assets are not held or controlled by a firm independent of the adviser, the adviser would be required to obtain a written report about the operating effectiveness of controls over those assets.

Nutter Notes: The proposed rule would also require that all qualified custodians, including banks, that hold advisory client assets deliver custodial statements directly to advisory clients rather than through the investment adviser and that clients be instructed to compare those account statements with account statements or other information received from the adviser. Comments on the proposed rule are due by July 28.

Nutter Bank Report

Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. The Chambers and Partners review says that the “well-known and well-versed” Nutter team “excels” at corporate and regulatory banking advice. “The banking and financial services group at Nutter is staffed by a number of ‘blue-chip caliber partners’ who have formidable reputations in the community banking sector,” Chambers and Partners says. Visit the U.S. rankings at ChambersandPartners.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Lisa M. Jentzen. The information in this publication is not legal advice. For further information, contact:

Kenneth F. Ehrlich
kehrlich@nutter.com
Tel: (617) 439-2989

Michael K. Krebs
mkrebs@nutter.com
Tel: (617) 439-2288

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