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Nutter Bank Report, September 2013

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09.30.2013 | 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 Amends Mortgage Rules and Changes Compliance Dates
2. Banking Agencies Provide Guidance on Reporting Elder Abuse
3. CFPB Bulletin Warns of Duty to Investigate Consumer Credit Report Disputes
4. Division of Banks Issues Guidance on HUD Changes to Reverse Mortgage Program
5. Other Developments: Qualified Mortgages, Call Reports and Resolution Plans

1. CFPB Amends Mortgage Rules and Changes Compliance Dates

The CFPB has adopted amendments to various mortgage rules released in January, including the ability-to-repay rule, the mortgage servicing rules and the loan originator compensation rules. The amendments released on September 13 clarify what compensation must be counted toward certain thresholds for points and fees under the ability-to-repay and high-cost mortgage rules. The amendments modify the official interpretations of the mortgage servicing rules to allow servicers to send certain early delinquency notices required under state law. The amendments also clarify the circumstances under which administrative staff of a mortgage lender, including a bank, will be classified as loan originators for purposes of the restrictions on loan originator compensation practices and loan originator qualification requirements. In addition, the amendments provide specific procedures for loan servicers to follow if they fail to identify and inform a borrower upon an initial review that certain information is missing from a borrower’s loss mitigation application. The amendments also adjust the effective dates for certain provisions of the loan originator compensation rules. The amendments change the effective date of provisions of the loan originator compensation rules under Regulation Z that focus on compensation plan structures, registration and licensing, and hiring and training requirements from January 10, 2014 to January 1, 2014. All other amendments will become effective when the final rules become effective on January 10, 2014. 

    Nutter Notes: The amendments focus primarily on loss mitigation procedures for loan servicers under Regulation X, amounts counted as loan originator compensation to retailers of manufactured homes and their employees for purposes of applying points and fees thresholds under the Home Ownership and Equity Protection Act and the ability-to-repay rule in Regulation Z, exemptions available to creditors that operate predominantly in rural or underserved areas for various purposes under the mortgage regulations, application of the loan originator compensation rules to bank tellers and other administrative staff, and the prohibition on creditor-financed credit insurance. The CFPB finalized these rules in January 2013. The ability-to-repay rule requires that mortgage lenders generally make a reasonable, good-faith determination that prospective borrowers have the ability to repay their loans. The ability-to-repay rule also provides that loans that are “qualified mortgages” under specified criteria presumptively satisfy the ability-to-repay requirements. The CFPB’s mortgage servicing rules establish protections for homeowners facing foreclosure. The loan originator compensation rules address certain compensation arrangements that, according to the CFPB, incentivize steering borrowers into risky or high-cost loans. The January 2013 rules also include new consumer protections for high-cost mortgages, and add a requirement that escrow accounts be established for a minimum of five years for certain higher-priced mortgage loans.

2. Banking Agencies Provide Guidance on Reporting Elder Abuse

The federal banking agencies have issued guidance to clarify that the privacy provisions of the Gramm-Leach-Bliley Act (the “GLBA”) generally permit financial institutions to report suspected elder financial abuse to appropriate authorities. The guidance released on September 24, titled Interagency Guidance on Privacy Laws and Reporting Financial Abuse of Older Adults, clarifies that certain privacy provisions of the GLBA and its implementing regulations permit the sharing of this type of information under appropriate circumstances without complying with notice and opt-out requirements. The GLBA generally requires that a financial institution notify consumers and give them an opportunity to opt out before providing nonpublic personal information to a third party. Various federal and state authorities either require or encourage reporting of this type of information to the appropriate agency, according to the guidance. Section 502(e) of the GLBA provides a variety of exceptions to the general prohibition against disclosing nonpublic personal information, including exceptions that would permit the sharing of nonpublic personal information about consumers with local, state or federal agencies for the purpose of reporting suspected financial abuse of older adults without the consumer’s authorization under certain circumstances. For example, a financial institution may disclose nonpublic personal information to protect against or prevent actual or potential fraud, unauthorized transactions, claims or other liability. According to the guidance, this exception would permit a financial institution to disclose to appropriate authorities nonpublic personal information in order to report an incident that results in taking an older adult’s funds without actual consent, or report incidents of obtaining an older adult’s consent to sign over assets through misrepresentation of the intent of the transaction. 

    Nutter Notes: The guidance defines elder abuse to include the illegal or improper use of an older adult’s funds, property or assets. According to the guidance, recent studies suggest that financial exploitation is the most common form of elder abuse and that only a small fraction of incidents are reported. The guidance warns that older adults can become targets of financial exploitation by family members, caregivers, scam artists, financial advisers, home repair contractors, fiduciaries (such as agents under power of attorney and guardians) and others. The Financial Crimes Enforcement Network (“FinCEN”) published an advisory in February 2011 that describes potential signs of elder financial exploitation that might trigger requirements to file a Suspicious Activity Report, such as erratic or unusual banking transactions or changes in banking patterns, excessive interest by a caregiver in an older adult’s finances, an older adult showing unusual fear or submissiveness toward a caregiver, or a caregiver beginning to conduct financial transactions on behalf of an older adult without proper documentation. The February 2011 FinCEN advisory also said that signs of elder abuse that may trigger the filing of a Suspicious Activity Report include an older adult moving away from existing relationships and toward new associations, a sudden change in an older adult’s financial management (such as through a change of power of attorney), or an older adult lacking knowledge about his or her financial status or showing a sudden reluctance to discuss financial matters.

3. CFPB Bulletin Warns of Duty to Investigate Consumer Credit Report Disputes

The CFPB has issued a bulletin emphasizing that, under the Fair Credit Reporting Act and its implementing regulations (together, “FCRA”), institutions that furnish information (“furnishers”) to consumer reporting companies are responsible for investigating consumer disputes received from the consumer reporting companies. According to CFPB Bulletin 2013-09, released on September 4, furnishers, including banks, are also responsible for reviewing all relevant information provided by the consumer reporting companies, including documents submitted by consumers. The CFPB said that it expects furnisher to have systems and technology in place to receive information about a dispute from a consumer reporting company and to investigate the consumer’s concerns when a consumer files a dispute about a credit report item. Furnishers must also report the results of the investigation to the consumer reporting company that sent the dispute originally and correct any inaccurate information, according to the CFPB bulletin. The bulletin advises furnishers to modify, delete or permanently block disputed information that is incomplete, inaccurate or cannot be verified. The bulletin warns that the CFPB will take appropriate supervisory and enforcement actions to address violations and seek all appropriate corrective measures, including restitution to harmed consumers, if the CFPB determines that a furnisher has engaged in any acts or practices that violate FCRA or other federal consumer financial laws. 

    Nutter Notes: FCRA permits consumers to file a dispute with a consumer reporting company about an item on their credit report. FCRA generally requires the consumer reporting company to inform the furnisher that the consumer has filed a dispute. FCRA also requires the consumer reporting company to forward all relevant information it has about the dispute to the furnisher. Once the furnisher receives the information, FCRA requires the furnisher to review it, conduct an investigation and respond to the consumer reporting company. An electronic system, known as “e-OSCAR,” is used by the three largest nationwide consumer reporting companies–Equifax, TransUnion and Experian–to send information relating to consumer disputes to furnishers. The CFPB noted in a December 2012 report that the e-OSCAR system did not provide a means for credit reporting companies to forward to furnishers any documents submitted by consumers related to a disputed item on a credit report. According to the CFPB, the e-OSCAR system has since been upgraded to allow the three companies to send furnishers any relevant dispute documents received from consumers.

4. Division of Banks Issues Guidance on HUD Changes to Reverse Mortgage Program

The Massachusetts Division of Banks has issued an Industry Letter on recent HUD changes to its Home Equity Conversion Mortgage (“HECM”) program requirements in Mortgagee Letters 2013-27 and 2013-28 (the “Mortgagee Letters”) released on September 3. The September 11 Industry Letter notes that the changes announced in Mortgagee Letter 2013-27 to the HECM program requirements include a limit on the initial principal amount which can be disbursed in the first 12 months after closing and the establishment of a new mortgage insurance premium structure. The changes become effective for case numbers assigned on or after September 30, 2013, according to the Industry Letter. Mortgagee Letter 2013-28 requires lenders to conduct a financial assessment on all prospective HECM borrowers to evaluate the borrowers’ willingness and ability to meet their financial obligations and the requirements of the mortgage, according to the Industry Letter. The financial assessment requirements become effective for case numbers assigned on or after January 13, 2014. The Industry Letter advises that lenders will also be responsible for determining if a Lifetime Expectancy Set-Aside should be deducted from the HECM proceeds so that the mortgagee can pay property charges such as homeowners insurance and property taxes as they become due. Lenders with an approved reverse mortgage program are permitted to originate HECM reverse mortgage loans on or after September 30, 2013, provided that the lender continues to maintain compliance with state law requirements and HUD’s revised program requirements during the transitional period according to the Industry Letter.

    Nutter Notes: Massachusetts law requires reverse mortgage loans to be made in accordance with programs that have been reviewed and approved by the Division of Banks pursuant to Chapter 167E, Sections 7 and 7A of the General Laws of Massachusetts. The law applies to Massachusetts banks and all other mortgagees making reverse mortgage loans pursuant to Chapter 183, Section 67 of the General Laws of Massachusetts. The Industry Letter reminds reverse mortgage lenders that they are required to update their programs by filing amendments to their reverse mortgage loan programs with the Division of Banks and to establish a deadline for the submission of amendments. Such reverse mortgage loan program amendments must be submitted to the Division of Banks on or before December 15. According to the Industry Letter, each lender with an approved reverse mortgage program must submit amended loan documentation along with any updated policies and procedures via compact disk or flash drive to demonstrate compliance with Mortgagee Letters 2013-27 and 2013-28. Paper submissions will not be accepted. The Industry Letter also advises lenders with an approved reverse mortgage program to notify the Division of Banks if they are no longer originating reverse mortgage loans in Massachusetts or if they intend to cease originating reverse mortgage loans in the future.

5. Other Developments: Qualified Mortgages, Call Reports and Resolution Plans

  • CFPB Publishes Quick Reference Chart for Small Creditor Qualified Mortgages

The CFPB on September 24 released a flowchart on the types of qualified mortgages that small creditors are permitted to originate under the CFPB’s ability-to-repay rule. The flowchart is one of several quick reference charts now available on the CFPB’s mortgage rule implementation web page.

    Nutter Notes: The CFPB amended Regulation Z to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) that generally require creditors to make a reasonable, good faith determination of a consumer’s ability to repay a home mortgage loan. The ability-to-repay rule establishes certain protections from liability under the Dodd-Frank Act requirements for loans meeting the criteria of qualified mortgages.

  • Banking Agencies Proposed Changes to Regulatory Capital Reports

The federal banking agencies, through the FFIEC, issued proposed revisions to Schedule RC-R, Regulatory Capital, of the Consolidated Reports of Condition and Income and Risk-Based Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC 101) on September 24. The proposed changes are consistent with the revised regulatory capital rules approved by the agencies in July 2013.

    Nutter Notes: The report is completed only by advanced approaches institutions. In general, an advanced approaches institution has consolidated total assets of $250 billion or more or consolidated total on-balance sheet foreign exposure of $10 billion or more, or is a subsidiary of a depository institution or holding company that is an advanced approaches institution. Comments on the proposed changes are due by October 11.

  • Federal Reserve and FDIC Issue Model Template for Tailored Resolution Plans

The Federal Reserve and the FDIC on September 3 released an optional model template for tailored resolution plans that bank holding companies with total consolidated assets of $50 billion or more and nonbank financial companies designated for enhanced prudential supervision by the Financial Stability Oversight Council will be submitting for the first time this year.

    Nutter Notes: The initial resolution plans for certain firms (generally those with less than $100 billion in total nonbank assets or $100 billion in U.S. nonbank assets if they are a foreign-based company) must be submitted to the Federal Reserve and the FDIC on or before December 31. The resolution plan rule previously issued by the Federal Reserve and the FDIC permits smaller and less complex firms to file a tailored resolution plan.

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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