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Nutter Bank Report, November 2013

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11.26.2013 | Legal Update

The Nutter Bank Report is a monthly electronic publication of the firm’s Banking and Financial Services Group and contains regulatory and legal updates with expert commentary from our banking attorneys.

Headlines

1. CFPB Releases New Integrated Mortgage Disclosure Forms
2. Regulatory Capital Estimation Tool Available for Community Banks
3. OCC Issues Guidance on Mandatory Engagements of Independent Consultants
4. Federal Banking Agencies Provide Guidance on Classification of Securities
5. Other Developments: Deposit Advances, Homeownership Counseling and CRA

1. CFPB Releases New Integrated Mortgage Disclosure Forms

The CFPB has issued a final rule that will require lenders to use new disclosure forms that replace the home mortgage loan application and loan closing disclosures required under the Truth in Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”). The final rule released on November 20 amends Regulation X, which implements RESPA, and Regulation Z, which implements TILA, to require lenders to use the new disclosure forms for most closed-end consumer mortgages. The final rule does not apply to home equity lines of credit, reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to real property. The final rule requires a lender to deliver a Loan Estimate form to a consumer no later than 3 business days after the consumer applies for a home mortgage loan. The Loan Estimate form replaces the Good Faith Estimate form originally designed by the Department of Housing and Urban Development (“HUD”) under RESPA and the early Truth in Lending disclosure statement originally designed by the Federal Reserve under TILA. The lender must deliver a Closing Disclosure form so that the consumer receives it at least 3 business days before the consumer closes on the loan. The Closing Disclosure form replaces the HUD-1, which was originally designed by HUD under RESPA, and the revised Truth in Lending disclosure statement, which was originally designed by the Federal Reserve under TILA. Both of the new forms contain new disclosures required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The final rule becomes effective, and the use of the new forms becomes mandatory, on August 1, 2015.

    Nutter Notes: The Dodd-Frank Act transferred responsibility for administering TILA and RESPA from the Federal Reserve and HUD, respectively, to the CFPB, and directed the CFPB to integrate the mortgage loan disclosures required to be delivered to consumers under TILA and RESPA. The final rule and the new mortgage disclosure forms reconcile the differences between the existing forms and combine other required disclosures, such as the appraisal notice under the Equal Credit Opportunity Act and the servicing application disclosure under RESPA. The final rule also provides explanations of how the forms should be filled out and used. Under the final rule, a mortgage broker may provide the Loan Estimate form to a consumer upon receipt of an application. However, even if the mortgage broker provides the Loan Estimate, the lender will remain responsible for complying with all requirements concerning the disclosure. The final rule also allows lenders and others to provide consumers with written loan estimates prior to application, provided that any such written estimates contain a disclaimer to prevent confusion with the Loan Estimate form. This disclaimer is required for advertisements. The final rule will allow lenders to use a settlement agent to provide the Closing Disclosure form on behalf of the lender. Under current law, settlement agents are required to provide the HUD-1 under RESPA, but lenders are required to provide the revised Truth in Lending disclosure statement. Finally, it is noteworthy that the CFPB has determined not to redefine the way the Annual Percentage Rate (“APR”) is calculated as it had originally proposed, at least for now. 

2. Regulatory Capital Estimation Tool Available for Community Banks

The federal banking agencies have released a regulatory capital estimation tool to help community banks understand the potential effects of the recently approved regulatory capital framework on their regulatory capital ratios. The estimation tool announced on November 19 is available through the websites of the Federal Reserve, the FDIC and the OCC. The estimation tool is not part of the new framework and not a component of regulatory reporting. According to the agencies, results obtained by using the tool are simplified estimates that may not precisely reflect a bank’s actual capital ratios under the new framework. The agencies also cautioned banks that the estimation tool requires certain manual inputs that could have meaningful effects on results and recommended that banks refer to the specific requirements of the new regulatory capital framework when using the estimation tool. The new regulatory capital framework implements the Basel III capital reforms and certain changes required by the Dodd-Frank Act. The new framework was approved in July when the Federal Reserve and the OCC approved a joint final rule and the Federal Deposit Insurance Corporation approved an interim final rule. The joint final rule and the interim final rule are substantively identical. The new framework will begin phasing in on January 1, 2015 for most banking organizations, and the phase-in period for the largest institutions will begin in January 2014.

    Nutter Notes: As the implementation dates for the new regulatory capital framework approach, banks that are in a holding company structure should consider revising their capital and dividend policies to account for the new minimum regulatory capital ratios and other capital requirements mandated under the new framework. For example, the new framework increases the minimum tier 1 capital ratio (the ratio of tier 1 capital to risk-weighted assets) from 4% to 6% and imposes a new common equity tier 1 capital ratio requirement, which requires that all banking organizations maintain a ratio of common equity tier 1 capital to risk-weighted assets of 4.5%. The new framework also establishes limits on a banking organization’s capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold a specified amount of common equity tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements, known as the capital conservation buffer. If a capital ratio of a banking organization falls below the capital conservation buffer, the new regulatory capital framework imposes incremental limitations on capital distributions and discretionary bonus payments based on a maximum payout ratio. 

3. OCC Issues Guidance on Mandatory Engagements of Independent Consultants

The OCC has published a regulatory bulletin (OCC Bulletin No. 33-2013) that provides guidance and establishes standards that the OCC will use when it requires a national bank or federal savings association to engage an independent consultant as part of an enforcement action to address significant violations of law, fraud or harm to consumers. The bulletin issued on November 12 describes how the OCC assesses the need to require a bank to hire an independent consultant in an enforcement action, the expectations for a bank’s due diligence process when retaining an independent consultant, the review of the qualifications of the proposed consultant, the proposed contractual terms of the engagement, and the OCC’s oversight of the performance of the consultant. The bulletin applies to any bank subject to an enforcement action in which the OCC requires the bank to hire an independent consultant to address significant violations of law, fraud, or harm to consumers. The bulletin does not apply when the OCC requires the bank to hire a consultant to provide expertise needed to correct operational or management deficiencies. When the OCC determines that an enforcement action requires the use of an independent consultant to address significant violations of law, fraud, or harm to consumers, the OCC will require the bank to submit information regarding the bank’s due diligence review of the proposed consultant, including the consultant’s qualifications and terms of engagement, according to the bulletin. That submission will be considered to be a request for a written determination from the OCC of supervisory non-objection to the proposed independent consultant and the terms of the contract. According to the bulletin, the OCC expects that a bank’s due diligence will establish that the consultant has sufficient independence, capacity, resources and expertise and that the contract(s) and work plan(s) adequately address the OCC’s supervisory concerns.

    Nutter Notes: The OCC has required banks to retain independent consultants to assess compliance with legal requirements in cases involving material violations of law, and when banks are obligated to provide restitution for violations of consumer protection statutes. For example, the OCC has ordered banks to retain independent consultants to address significant deficiencies with Bank Secrecy Act and anti-money laundering (“BSA”) compliance programs, including reviews of BSA staffing, risk assessment and internal controls. The OCC also has ordered reviews by independent consultants of transaction activity to determine whether banks must file suspicious activity reports (“SAR”), whether SARs that have been filed need to be corrected or amended to meet regulatory requirements, or whether additional SARs should be filed to reflect continuing suspicious activity. The OCC has ordered similar reviews of currency transaction reporting. The OCC has ordered reviews by independent consultants to address significant consumer protection law violations, to identify affected consumers, monitor payments to such consumers, and to provide written reports evaluating compliance with remedial provisions in OCC enforcement actions. The OCC has also required banks to engage independent consultants to perform forensic audits in cases where the OCC has concerns about widespread fraud or systemic irregularities in a bank’s books and records. The bulletin points out that the use of an independent consultant does not absolve bank management or a bank’s board of directors of their responsibility for ensuring that all necessary corrective actions are identified and implemented. 

4. Federal Banking Agencies Provide Guidance on Classification of Securities

The Federal Reserve, the FDIC and the OCC have published guidance for banks and thrifts that outlines principles related to the proper classification of securities without relying on ratings issued by nationally recognized statistical rating organizations (i.e., external credit ratings). The guidance issued on October 29, entitled the Uniform Agreement on the Classification and Appraisal of Securities Held by Depository Institutions, helps to implement Section 939A of the Dodd–Frank Act, which requires each federal agency to remove references to, and requirements of reliance on, external credit ratings in any regulation issued by the agency that requires the assessment of the creditworthiness of a security or money market instrument. The guidance revises the 2004 Uniform Agreement on the Classification of Assets and Appraisal of Securities Held by Banks and Thrifts by replacing references to credit ratings with alternative standards of creditworthiness consistent with the requirements of the Dodd–Frank Act. According to the guidance, the agencies’ current asset classification definitions are not changing. The guidance clarifies how the characteristics of investment securities should be interpreted within the existing classification categories. The agencies expect banks to perform an assessment of creditworthiness that is not solely reliant on external credit ratings, according to the guidance. An assessment may include internal risk analyses and a risk rating framework, third-party research and analytics (which could include external credit ratings), default statistics and other sources of data as appropriate for the particular security. According to the guidance, the depth of analysis should be a function of the security’s risk characteristics.

    Nutter Notes: In accordance with the requirements of the Dodd–Frank Act, the OCC revised its investment security regulations (12 C.F.R. Part 1) in 2012 to remove reliance on external credit ratings. Investments in securities and stock by state member banks are required under the Federal Reserve Act and the Federal Reserve’s Regulation H to comply with the OCC’s investment security regulations. The Federal Deposit Insurance Act limits the investments that a state nonmember bank may make to those permissible for national banks, with certain exceptions approved by the FDIC under 12 C.F.R. Part 362. The FDIC in 2012 amended 12 C.F.R. Part 362 to harmonize the limitations on investments by state and federal savings associations in corporate debt securities with the OCC’s investment security regulations. The OCC’s investment security regulations require banks to monitor investment credit quality through an analytical review of the obligor rather than solely through external credit ratings. According to the new guidance, credit quality monitoring requires bank management to determine whether a security continues to be investment grade or if it has deteriorated and thus requires reclassification. The guidance clarifies the classification standards for securities held by a bank and provides examples that demonstrate when a security is investment grade and when it is not investment grade. Investment grade securities are no longer defined as 1 of the 4 highest credit ratings, but instead are those deemed by the purchasing bank’s credit analyses as having an adequate capacity to repay the obligation. Under the OCC’s investment security regulations, an issuer has adequate capacity to meet its financial commitments if the risk of default is low and the full and timely repayment of principal and interest is expected. 

5. Other Developments: Deposit Advances, Homeownership Counseling and CRA 

  • FDIC and OCC Issue Guidance on Deposit Advance Products

The FDIC and OCC issued final guidance on November 21 to state member banks, national banks and savings associations that offer or may consider offering deposit advance products. The Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products provides risk management advice and describes supervisory expectations for the operation of deposit advance lending programs, such as repeat usage limits that trigger a cooling off period during which a customer cannot take out a deposit advance.

    Nutter Notes: The Federal Reserve declined to join the FDIC and OCC in issuing the guidance. Therefore, the guidance does not apply to state member banks. Instead, the Federal Reserve issued a policy statement in April (when the FDIC and OCC first issued their deposit advance guidance in proposed form) that outlined in general terms the potential risks associated with deposit advance products and warned member banks to provide such credit responsibly. 

  • CFPB Provides Guidance on Providing Borrowers with Lists of Counselors

The CFPB published guidance on November 8 (CFPB Bulletin No. 2013-13) that explains how lenders should provide home mortgage loan applicants with a list of local homeownership counseling organizations. The CFPB’s final rule under the Home Ownership and Equity Protection Act (“HOEPA”) issued earlier this year implemented a requirement of the Dodd-Frank Act that lenders provide consumers with a list of homeownership counseling organizations.

    Nutter Notes: Under the CFPB’s final HOEPA rule, which becomes effective early next year, a lender will be required to provide a list of counselors shortly after receiving a mortgage loan application in connection with a federally-related mortgage loan. According to the guidance, a lender may fulfill that requirement by using the CFPB-developed housing counseling lists, which are available through today’s tool, or by generating its own lists using the same HUD data that the CFPB uses to build its lists. 

  • Federal Banking Agencies Release Revised Guidance on CRA Compliance

The federal banking agencies on November 15 released final revisions to the Interagency Questions and Answers Regarding Community Reinvestment. The revisions focus primarily on community development, clarifying how the agencies will consider community development activities that benefit a broader statewide or regional area that includes a bank’s assessment area, among other things.

    Nutter Notes: With respect to community development activities that are conducted in a broader statewide or regional area, the revised Questions and Answers provide that examiners will consider such activities for CRA credit even if they do not benefit the bank’s assessment area, provided that the bank has been responsive to community development needs and opportunities in its assessment area. 

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, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. The 2012 Chambers and Partners review says that a “broad platform” of legal expertise in the practice “helps clients manage challenges and balance risks while delivering strategic solutions,” while the 2013 Chamber and Partners review reports that Nutter’s bank clients describe Nutter banking lawyers as “proactive” in their thinking, “creative” in structuring agreements, and “forward-thinking in terms of making us aware of regulation and how it may impact us,” which the clients went on to describe as “indicative of a true partner.” 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

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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