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Nutter Bank Report, February 2018 

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  1. Small Bank Holding Company and Qualified Mortgage Regulatory Relief Bills Pass House
  2. Massachusetts Joins Multi-State Compact to Streamline Fintech Licensing
  3. Consumer Credit Protection Bill Passes Massachusetts House
  4. Federal Court Upholds RESPA Ruling, Reaffirms Constitutionality of CFPB Structure
  5. Other Developments: Swaps and Stress Testing

1. Small Bank Holding Company and Qualified Mortgage Regulatory Relief Bills Pass House

The U.S. House of Representatives has passed two regulatory relief bills with bipartisan support, one of which would raise the ceiling on eligibility to qualify for the Federal Reserve’s Small Bank Holding Company Policy Statement from $1 billion to $3 billion in total assets. The bill, known as the Small Bank Holding Company Relief Act, was approved by a vote of 280 - 139 in the House on February 8, and is currently pending before the Senate Committee on Banking, Housing, and Urban Affairs. The second bill, the Mortgage Choice Act, was also approved on February 8 by a vote of 280 – 131. The Mortgage Choice Act would clarify the points-and-fees test for purposes of determining whether a mortgage can be considered a “Qualified Mortgage.” Specifically, the bill would exclude insurance premiums held in escrow and, under certain circumstances, fees paid to companies affiliated with the creditor from the calculation of the 3% points and fees limitation to qualify for the safe harbor for Qualified Mortgages under the Truth in Lending Act ability-to-repay requirements. Click here for the text of the Small Bank Holding Company Relief Act of 2018, and here for the text of the Mortgage Choice Act.

     Nutter Notes:  If the Small Bank Holding Company Relief Act is approved by the Senate and signed into law by the President, bank holding companies and savings and loan holding companies with less than $3 billion in total consolidated assets that satisfy the requirements of the Small Bank Holding Company Policy Statement would not be subject to the regulatory capital requirements imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) but, rather, the pre-Dodd-Frank Act capital requirements which permitted, among other things, a bank holding company’s Tier 1 capital to be comprised of trust preferred and certain other hybrid securities, subject to certain limitations. Qualifying small bank holding companies may issue trust preferred securities and other qualifying hybrid securities and count them as Tier 1 capital, subject to certain limitations. The qualifying small bank holding company exemption from the Dodd-Frank Act capital requirements does not apply to any depository institution subsidiary of either a small bank holding company or a small savings and loan holding company. The Small Bank Holding Company Policy Statement, which is Appendix C to Part 225 of the Federal Reserve’s rules and regulations, also allows qualifying small bank holding companies and savings and loan holding companies that are not engaged in any nonbanking activities involving significant leverage and that do not have a significant amount of outstanding debt held by the general public to follow less-stringent regulatory standards when acquiring other financial institutions and to incur comparatively greater amounts of debt than larger holding companies in order to acquire other financial institutions.

2. Massachusetts Joins Multi-State Compact to Streamline Fintech Licensing

Massachusetts has joined six other states in a multi-state agreement that standardizes certain elements of the licensing process for money services businesses. The agreement announced on February 6 by the Conference of State Bank Supervisors (“CSBS”) provides that if one member state reviews certain elements of a money transmitter license application, such as information technology, cybersecurity, a business plan, and background checks, then the other member states will accept the findings. The CSBS said that the multi-state agreement is expected to significantly reduce the time and costs associated with obtaining money services business (“MSB”) licenses, including licenses for financial technology (or fintech) companies involved in electronic payments. The other states that are part of the multi-state agreement are Georgia, Illinois, Kansas, Tennessee, Texas, and Washington. The CSBS said that it expects other states to join the multi-state agreement. Click here for the CSBS’s announcement.

     Nutter Notes:  The CSBS’s multi-state agreement on MSB licensing is the first step in the CSBS’s Vision 2020 initiative announced in May 2017. The goal of Vision 2020 is to create an integrated, 50-state system of licensing and supervision for fintech companies by the year 2020. According to the CSBS, the project will involve redesigning the Nationwide Multistate Licensing System (“NMLS”) to include a common fintech licensing platform. The CSBS said that it will promote industry awareness campaigns to address de-risking practices in the areas of anti-money laundering, Bank Secrecy Act, and cybersecurity to enable banks to service non-banks in the fintech space. Vision 2020 will also include model approaches to enhance uniformity among state bank regulators in examinations, best practices, and identifying and reporting non-bank violations of law and regulations, according to the CSBS. The Vision 2020 project was, in part, a reaction to the OCC’s proposal to consider applications for special purpose national bank charters for fintech companies.

3. Consumer Credit Protection Bill Passes Massachusetts House

The Massachusetts House of Representatives has approved a bill that would prohibit consumer credit bureaus from charging fees to Massachusetts residents for placing credit freezes and provide Massachusetts residents more control over their credit reports. The bill was approved by the House on February 14 by a 152 – 0 vote and, if approved by the Massachusetts Senate and signed into law by the Governor, also would require that businesses, including banks, obtain a consumer’s consent before accessing or using the consumer’s credit reports and credit scores in connection with an application for credit even if a security freeze is not in place. A security freeze prohibits a consumer credit bureau from releasing any information in a consumer credit  report without the consumer’s express authorization. The bill would allow a consumer to place and lift a credit freeze at any time at no cost to the consumer. The bill would also encourage the consumer credit bureaus to establish a centralized source, including, but not limited to, a website, for consumers to manage credit freezes with all of the bureaus. Click here for the text of the bill and legislative status.

     Nutter Notes:  The consumer credit protection bill was introduced in the wake of the Equifax data security breach, and provides additional consumer protections to Massachusetts residents whose personal information has been compromised in a data security breach. The bill would require that, if a data security breach includes the Social Security number or federal tax identification number of a Massachusetts resident, then the business responsible for notifying the Massachusetts resident of the security breach under state law must offer free credit monitoring services at no cost to the resident for a period of one year. Currently, Massachusetts law requires a business that owns or licenses data that includes personal information about a Massachusetts resident to provide notice as soon as practicable and without unreasonable delay to the resident when the business knows or has reason to know of a data security breach involving such resident’s personal information. Massachusetts law does not currently require that the business offer any identity theft or fraud protection services in connection with a data security breach notice, such as credit monitoring.

4. Federal Court Upholds RESPA Ruling, Reaffirms Constitutionality of CFPB Structure

A federal appeals court has upheld an earlier decision by a three-judge panel that the CFPB cannot retroactively apply a new RESPA interpretation and that the CFPB is bound by the three-year statute of limitations for RESPA violations. The January 31 ruling by the D.C. Circuit Court of Appeals sitting en banc also affirmed the constitutionality of the CFPB’s leadership structure, which reverses an earlier decision by a three-judge panel of the same court. The ruling came in a case in which a non-bank mortgage lender that was subject to CFPB enforcement action for alleged RESPA violations involving a captive reinsurance arrangement had challenged the constitutionality of both the CFPB’s retroactive application of a new interpretation of the RESPA anti-kickback rule and the CFPB’s leadership structure. As provided in the Dodd-Frank Act, the CFPB has a single director with broad authority who can be removed by the President only “for cause,” and not at will. The court held that the limitation on the President’s power to remove the Director of the CFPB is consistent with prior Supreme Court rulings on other federal agencies, such as the Federal Trade Commission and the Securities and Exchange Commission. Click here for a copy of the court’s ruling.

     Nutter Notes:  The CFPB’s original RESPA enforcement action arose from the CFPB’s determination that the mortgage lender’s so-called captive reinsurance arrangements constituted a violation of the prohibition against kickbacks and unearned fees under Section 8(a) of RESPA. Prior interpretations of another RESPA provision, Section 8(c), by the agency responsible for enforcement of RESPA before the CFPB allowed captive reinsurance arrangements as long as mortgage insurers paid no more than reasonable market value for the reinsurance provided by a lender-affiliated reinsurer. The CFPB reinterpreted Section 8(c) and took the position that even if mortgage insurers paid no more than reasonable market value for the reinsurance, the arrangement nevertheless could constitute a prohibited referral arrangement with the lender affiliate of the reinsurer. The ruling upheld by the court was that the CFPB could not retroactively apply its new interpretation of Section 8(c) to the mortgage lender because it would violate a constitutional due process principle that “people should have fair notice of what conduct is prohibited” and an opportunity to conform their conduct accordingly.

5. Other Developments: Swaps and Stress Testing

  • Federal Banking Agencies Propose Amendments to Swap Margin Rule

The federal banking agencies, along with the Farm Credit Administration and the Federal Housing Finance Agency, have proposed amendments to the swap margin rule to conform with recent rule changes that impose new restrictions on certain qualified financial contracts (“QFCs”) of systemically important banking organizations. Under the amendments proposed on February 5, legacy swaps entered into before the applicable compliance date would not become subject to the margin requirements if they are amended solely to comply with the requirements of the QFC rules.

     Nutter Notes:  The swap margin rule was issued in November 2015 by the agencies to establish minimum margin requirements for swaps and security-based swaps that are not cleared through a clearinghouse. The proposed amendments would also harmonize the definition of “Eligible Master Netting Agreement” in the swap margin rule with recent changes to the definition of “Qualifying Master Netting Agreement” in the capital and liquidity regulations of the federal banking agencies. Click here for a copy of the proposed amendments.

  • OCC Finalizes Changes to Annual Stress Test Requirements

The OCC has published a final rule that will implement several technical and conforming changes to the OCC’s annual stress test regulation, which applies to national banks and federal savings associations with more than $10 billion in assets. The final rule released on February 23 changes the range of possible “as-of” dates used in the global market shock component to conform to changes recently made by the Federal Reserve System to its stress test regulation.

     Nutter NotesThe final rule also changes the transition period for an institution that becomes a covered institution with over $50 billion in assets and makes certain technical changes to clarify the requirements of the OCC’s stress test regulation. Click here for a copy of the final rule.

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. Visit the U.S. rankings at The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Heather F. Merton. The information in this publication is not legal advice. For further information, contact:

Thomas J. Curry
Tel: (617) 439-2087
Kenneth F. Ehrlich
Tel: (617) 439-2989

Michael K. Krebs

Tel: (617) 439-2228

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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