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Nutter Bank Report: June 2019

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06.27.2019 | Legal Update

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  1. Federal Banking Agencies Expand Eligibility to Use Streamlined Call Reports
  2. SEC Adopts Broker-Dealer Best Interest Rule, Disclosure Form, and Related Guidance
  3. OCC Issues New Guidance for Higher-LTV Mortgage Lending in Distressed Communities
  4. Joint Final Rule Expands HQLAs under LCR Rules to Include Certain Municipal Securities
  5. Other Developments: Safety-and-Soundness Exams and Payday Loans

1. Federal Banking Agencies Expand Eligibility to Use Streamlined Call Reports

The federal banking agencies have adopted a final rule to reduce regulatory reporting requirements for certain banks with total assets of less than $5 billion. The final rule released on June 17 expands eligibility to file the agencies’ most streamlined report of condition, the FFIEC 051 Call Report, to any “covered depository institution,” which generally includes a bank with less than $5 billion in total consolidated assets, with no foreign offices, and that is not required to or has not elected to calculate its risk-based capital requirements using the internal ratings-based and advanced measurement approaches under the agencies’ regulatory capital rules. A bank that qualifies as a large or highly complex institution for purposes of the FDIC’s assessment regulations will not qualify as a covered depository institution under the final rule. The final rule also reduces the reporting items on the FFIEC 051 Call Report for the first and third calendar quarter reports each year. The agencies’ final rule includes a reservation of authority that allows a bank’s primary federal regulator to prohibit an otherwise eligible institution from using the FFIEC 051 Call Report. The final rule becomes effective on July 22, 2019. Click here for a copy of the final rule.

Nutter Notes: Only banks with no foreign offices and less than $1 billion in total assets are currently eligible to use the FFIEC 051 Call Report. The final rule implements section 205 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”), which requires the federal banking agencies to issue regulations that allow for certain banks with less than $5 billion in total consolidated assets to have reduced reporting requirements for the first and third quarterly Call Reports each year. The agencies estimate that the first and third quarterly FFIEC 051 Call Reports under the proposal will have 37% fewer reportable items. According to the agencies, the most significant areas of reduced reporting in the first and third quarterly Call Reports for covered depository institutions include data items related to categories of risk-weighting of various types of assets and other exposures under the agencies’ regulatory capital rules, fiduciary (and related services) assets and income, and troubled debt restructurings by loan category.

2. SEC Adopts Broker-Dealer Best Interest Rule, Disclosure Form, and Related Guidance

The U.S. Securities and Exchange Commission (“SEC”) has adopted a new rule under the Securities Exchange Act of 1934 that establishes a standard of conduct for broker-dealers when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities. The new rule adopted on June 5, to be known as Regulation Best Interest, imposes a standard of conduct beyond existing suitability obligations, and applies to all registered broker-dealers, including those involved in third-party networking arrangements with banks. The new rule requires broker-dealers, among other things, to act in the best interest of the retail customer at the time that an investment recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the interests of the retail customer. A retail customer is defined in the new rule to mean a person (or his or her legal representative) who uses the recommendation primarily for personal, family, or household purposes. The final rule also requires broker-dealers to address conflicts of interest by establishing, maintaining, and enforcing policies and procedures reasonably designed to identify and fully and fairly disclose material facts about conflicts of interest. The new rule requires broker-dealers to be in compliance with the requirements of Regulation Best Interest by June 30, 2020. Click here for a copy of the new rule.

Nutter Notes: The SEC’s adoption of Regulation Best Interest was accompanied by the adoption of a new regulatory interpretation of the standard of conduct for investment advisers under the Investment Advisers Act of 1940, and a new short-form disclosure document for investment advisers and broker-dealers. The new regulatory interpretation reaffirms and clarifies the fiduciary duty that an investment adviser owes to its customers, including the duty to provide advice that is in each customer’s best interest, according to the SEC. The interpretation clarifies the duty of an investment adviser to seek best execution and to provide advice and monitoring over the course of the customer relationship, and the duty not to favor one customer over another, to make full and fair disclosure, and to avoid conflicts of interest. The new disclosure form, Form CRS Relationship Summary, requires registered investment advisers and broker-dealers to provide certain information about the nature of their relationship with their retail investor customers. The Form CRS Relationship Summary also includes a link to a dedicated page on the SEC’s investor education website, Investor.gov, which offers educational information about broker-dealers and investment advisers. Click here for a copy of the new regulatory interpretation and here for the corresponding short-form disclosure document for investment advisers and broker-dealers.

3. OCC Issues New Guidance for Higher-LTV Mortgage Lending in Distressed Communities

The OCC has issued new risk management guidance for national banks and federal savings associations involved in higher loan-to-value (“LTV”) residential mortgage lending activities in distressed communities targeted for revitalization, stabilization, or redevelopment. The OCC’s new guidance, issued in OCC Bulletin 2019-28 on June 19, encourages national banks and federal savings associations to “continue to develop responsible, innovative lending strategies intended to meet the credit needs of individual borrowers and support revitalization efforts.” According to the guidance, such lending strategies may include residential mortgage lending products for the purchase, refinancing, or rehabilitation of owner-occupied one- to four-family properties, where the LTV ratio at the time of origination exceeds 90%, and the loan is without mortgage insurance, readily marketable collateral, or acceptable other collateral. The OCC advises that such higher-LTV loans should be made consistent with safe and sound lending practices, promote fair access to credit and fair treatment of borrowers, and comply with applicable laws and regulations. The new guidance rescinds OCC Bulletin 2017-28, “Mortgage Lending: Risk Management Guidance for Higher-Loan-to-Value Lending Programs in Communities Targeted for Revitalization,” issued in August 2017, and applies to all national banks and federal savings associations. Click here for a copy of the new guidance.

Nutter Notes: According to the new guidance, the OCC believes that banks can offer higher-LTV mortgage loans in communities targeted for revitalization as part of responsible lending strategies intended to support long-term community revitalization. When offering higher-LTV loans for the purchase, refinancing, or rehabilitation of owner-occupied one- to four-family residential properties, the guidance advises that higher-LTV loans and their performance should be monitored, tracked, and managed effectively. The guidance also recommends that bank management consider associated credit, operational, compliance, and reputation risks when making higher-LTV loans in support of community revitalization efforts. Finally, the guidance recommends that banks make underwriting decisions for higher-LTV loans based on sound policies and processes, consistent with the bank’s standards for the review and approval of exception loans, including guidelines governing the amounts borrowed and the capacity of borrowers to adequately service the debt, consistent with the Interagency Guidelines for Real Estate Lending.

4. Joint Final Rule Expands HQLAs under LCR Rules to Include Certain Municipal Securities

The federal banking agencies have jointly issued a final rule that adopts without change the agencies’ interim final rule issued in August 2018, amending their liquidity coverage ratio (“LCR”) rules to treat certain eligible municipal obligations as high-quality liquid assets (“HQLAs”). The final rule released on May 30 implements section 403 of the EGRRCPA, which required the agencies to treat a municipal obligation as an HQLA under the LCR rules if that obligation is “liquid and readily-marketable” and “investment grade.” Section 403 defines “municipal obligation” as an obligation of a state, any political subdivision of a state, or any agency or instrumentality of a state or any such political subdivision. Section 403 defines “liquid and readily-marketable” as having the meaning given to that term in the Federal Reserve’s rules at 12 C.F.R. § 249.3, which requires that the obligation is traded in an active secondary market with more than two committed market makers, a large number of non-market maker participants on both the buy and sell sides, timely and observable market prices, and a high trading volume. Section 403 defines “investment grade” as having the meaning given to that term in the OCC’s rules at 12 C.F.R. § 1.2, which requires that the issuer of the obligation have “an adequate capacity to meet financial commitments under the [obligation] for the projected life of the asset or exposure.” The OCC’s definition further clarifies that an issuer has “an adequate capacity to meet financial commitments” if its risk of default is low and it is expected to make full and timely repayment of principal and interest. The final rule becomes effective on July 5, 2019. Click here for a copy of the final rule.

Nutter Notes: The LCR rules, adopted in 2014, established a quantitative liquidity requirement that, according to the agencies, is designed to promote the short-term resilience of the liquidity risk profile of large and internationally active banking organizations. The LCR rules generally apply to a bank holding company, savings and loan holding company, or depository institution if it has total consolidated assets equal to $250 billion or more, it has total consolidated on-balance sheet foreign exposure equal to $10 billion or more, or it is a depository institution with total consolidated assets equal to $10 billion or more and is a consolidated subsidiary of an organization that is subject to the LCR rule (each, a “covered company”). Covered companies generally must maintain an amount of HQLAs equal to or greater than their projected total net cash outflows over a prospective 30 calendar-day period. The LCR rules define three categories of HQLAs—level 1, level 2A, and level 2B liquid assets—and sets forth qualifying criteria for HQLAs and limitations for an asset’s inclusion in a banking organization’s HQLA amount. A municipal obligation that is liquid and readily-marketable, and investment grade will qualify as a level 2B HQLA under the final rule.

5. Other Developments: Safety-and-Soundness Exams and Payday Loans

  • Fed Announces New Process for Determining Scope of Community Bank S&S Exams

The Federal Reserve announced on June 3 that it has updated the process by which it determines the scope of the supervisory work performed in safety-and-soundness examinations of community and regional state member banks (“SMBs”). The updated process, known as Bank Exams Tailored to Risk (BETR), combines surveillance metrics with examiner judgment to classify the levels of risk at an SMB within individual risk dimensions, such as credit, liquidity, and operational risk. Click here for a copy of the announcement.

Nutter Notes: BETR applies to SMBs without a holding company and with less than $100 billion in total consolidated assets and SMBs affiliated with a top-tier holding company that has less than $100 billion in total consolidated assets. According to the Federal Reserve, BETR’s surveillance metrics gauge the potential for an SMB to experience adverse outcomes, such as highly unfavorable financial trends, significant performance shortfalls, severe losses, or supervisory rating downgrades, over a 12- to 24-month period, and under unfavorable market conditions.

  • CFPB Delays Compliance Date for Underwriting Requirements of Payday Loan Rule

The CFPB announced on June 17 that it will delay by 15 months, to November 19, 2020, the compliance date for the mandatory underwriting provisions of the final rule adopted by the CFPB governing payday, vehicle title, and certain high-cost installment loans. The CFPB said that it is delaying the compliance date for the mandatory underwriting provisions because it is in the process of considering whether to rescind them. Click here for a copy of the announcement.

Nutter Notes: The mandatory underwriting provisions of the CFPB’s 2017 final rule provide that it is an unfair and abusive practice for a lender, including a bank, to make a covered short-term or longer-term balloon-payment loan, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay those loans according to their terms. The final rule became effective on January 16, 2018, but most provisions have a compliance date of August 19, 2019. On January 16, 2018, the CFPB issued a statement announcing that it would reconsider the 2017 final rule, and on February 6, 2019, the CFPB requested public comments on whether the mandatory underwriting provisions of the 2017 final rule should be rescinded.

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 ChambersandPartners.com. 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

tcurry@nutter.com

Tel: (617) 439-2087

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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