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Nutter Bank Report, April 2009

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1.  FASB Revises Guidance on Accounting for OTTI
2.  Non-Lawyers May Issue Title Insurance in Massachusetts, Federal Court Rules
3.  Banking Agencies Propose Rules on Unfair Credit Card Practices
4.  Court Rules on Confusing TILA Disclosures, Allows Claim for Rescission
5.  Other Developments: CRA Credit for NSP and Legacy Loans Program

Full Reports

1.  FASB Revises Guidance on Accounting for OTTI

The Financial Accounting Standards Board (FASB) has issued new guidance on accounting for impairment losses on debt securities. FASB Staff Position FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, released on April 9 amends existing mark-to-market accounting guidance on other-than-temporary impairment (OTTI). Under the new guidance, if a bank determines that an OTTI exists, the impairment may be separated into two parts. The first part, the credit component, is the amount of the total impairment related to the credit loss. The second, non-credit component is the amount of the total impairment related to all other factors. The amount of the total OTTI related to the credit component of the loss is recognized in earnings. The amount of the total impairment related to all other factors is recognized in other comprehensive income. The total OTTI is presented in the statement of earnings with an offset for the amount of the total OTTI that is recognized in other comprehensive income. The new guidance is effective for interim and annual reporting periods ending after June 15, 2009, but may be adopted retroactively for periods ending after March 15, 2009.

Nutter Notes:  The new OTTI accounting guidance may affect regulatory capital levels and ratios. If a bank records a non-credit component of OTTI, that component will not reduce earnings because it is recorded in other comprehensive income. The portion of OTTI for debt securities recorded in other comprehensive income does not affect the calculation of Tier 1 capital under current regulatory capital measures. An institution would bifurcate OTTI only if it determines that a credit loss exists, the institution does not intend to sell the debt security and it is more likely than not that the institution will not be required to sell the debt security before the anticipated recovery of its remaining amortized cost (considering, for instance, whether cash or working capital requirements or contractual or regulatory obligations indicate that the debt security will be required to be sold before the forecasted recovery occurs). FASB also issued additional guidance on determining fair value when there is no active market or where market prices represent distressed sales. The guidance reaffirms that the objective of fair value measurement in such conditions is to reflect how much an asset would be sold for in an orderly transaction, and that determining fair values may involve the use of modeled cash flows, for example.

2.  Non-Lawyers May Issue Title Insurance in Massachusetts, Federal Court Rules

A recent decision by a federal court may open the door for non-lawyers to conduct more real estate conveyancing activities in Massachusetts, including issuing title insurance policies. The United States District Court for the District of Massachusetts ruled on April 13 that the interconnected steps of a real estate conveyance and the issuance of a title insurance policy do not constitute the practice of law in Massachusetts. The federal court decision contradicts cases previously decided by Massachusetts state courts holding that certain activities related to residential real estate conveyancing constitute the practice of law and, as a result, that the performance of those services by someone other than an attorney licensed in Massachusetts constitutes the unauthorized practice of law. The Massachusetts state court decisions considered activities such as evaluating title, preparing or reviewing legal documents (including deeds, mortgages, releases and other instruments), issuing title certification or a policy of title insurance, and advising persons as to the rights created, conveyed or terminated as activities that constitute the practice of law. The federal court noted that the Massachusetts Supreme Judicial Court has not ruled on the issue, and said that the opinions rendered by lower Massachusetts courts “do not carry precedential value.”

Nutter Notes:  It is customary in Massachusetts for attorneys to conduct residential real estate closings, including acting as title insurance agents, because Massachusetts courts have found that many of the activities performed in connection with the conveyance of real estate constitute the practice of law. For example, the act of certifying title to mortgaged premises involves an assessment of the legal significance of title documents. Since the title insurance company will rely on that legal assessment to issue an insurance policy, the issuance of a title certification has been held by the Massachusetts Superior Court to constitute the practice of law. Chapter 221, Section 46 of the General Laws of Massachusetts generally prohibits the practice of law by corporations or other business entities, which would include banks. However, the recent federal court decision permits an out-of-state corporation that provides settlement services to conduct real estate conveyancing activities in Massachusetts, including issuing title insurance policies. It is not clear under the federal court ruling whether an attorney must still be retained to issue the title certification.

3.  Banking Agencies Propose Rules on Unfair Credit Card Practices

The Federal Reserve and the OTS have proposed amendments to their jointly issued regulations prohibiting certain unfair or deceptive credit card practices under the Federal Trade Commission Act. The proposal announced on April 21 would resolve areas of uncertainty and make technical corrections before the final credit card rules become effective on July 1, 2010. The amendment would clarify that certain consumer protections in the final rule will continue to apply to an outstanding balance following the closure or acquisition of a credit card account or the transfer of the balance to another account issued by the same institution (or its affiliate or subsidiary). For example, institutions would be required in these circumstances to continue to provide consumers a reasonable amount of time to make payment on those balances, allocate payments in excess of the required minimum periodic payment either to the balance with the highest annual percentage rate first or pro rata among all balances, and limit increases in the interest rates that apply to those balances. Comments are due within 30 days after publication of the proposals in the Federal Register.

Nutter Notes:  The proposed amendments would also apply the same set of consumer protections to credit card programs under which interest is waived or refunded as is provided in the final rule for deferred interest programs generally. Under these kinds of promotional programs, interest on purchases is typically deferred, waived or refunded if the consumer pays off the principal balance before a certain due date. However, if the consumer does not pay off the balance by then, interest that has accrued during the life of the program is charged to the consumer. The proposal would require institutions to allocate all payments in excess of the required minimum to pay off balances carried under the promotional program during the last two billing cycles of the promotional period to encourage timely repayment. The proposed commentary to the final rule would clarify that an institution cannot deny a consumer the opportunity to avoid interest charges unless the consumer is more than 30 days delinquent. The Federal Reserve has also issued a proposal to clarify provisions of Regulation Z that were amended in connection with the final credit card rule and to require new advertising disclosures for deferred, waived, or refunded interest programs.

4.  Court Rules on Confusing TILA Disclosures, Allows Claim for Rescission

Conflicting disclosures about the right to rescind a residential mortgage loan transaction may cause the rescission period to be extended under the Truth in Lending Act (TILA) even if the standard rescission notice form delivered at closing is correct, according to a recent federal case in Massachusetts. The United States District Court for the District of Massachusetts ruled on January 26 that a certificate presented to the borrower for signature at the closing that purported to confirm the borrower’s receipt of the notice of the right to rescind would confuse and mislead the average consumer because it contradicted the rescission notice. The rescission notice form complied in all respects with TILA, correctly informing the borrower of the right to rescind the transaction within three business days after the closing date. However, the borrower was also presented with a post-dated certificate at the closing that purported to confirm that three business days had elapsed since the closing and the borrower had not exercised the right to rescind. The borrower was required to sign the certificate at the closing.  The court found that whether or not the notice of the right to rescind complies with TILA, requiring a borrower to sign an instrument on the closing date confirming that the rescission period has elapsed and the right to rescind has not been exercised is likely to confuse and mislead the average borrower. The court held that the borrower could make a claim to rescind the transaction more than 14 months after the closing as a result of the conflicting documents.

Nutter Notes:  Under TILA, the three-day rescission period may be extended for up to three years after the closing date if the lender fails to give adequate notice of the right to rescind.  As the court noted in its decision, TILA does not impose strict liability for technical defects in disclosures. TILA requires that lenders disclose all material terms of a transaction, including the right to rescind, “clearly and conspicuously.” The disclosure need not be perfect. A disclosure is not sufficient if an average consumer—“a consumer who is neither particularly sophisticated nor particularly dense,” as described in the January 26 opinion—would find the disclosure documents confusing. For example, a separate decision by the same federal district court on December 30, 2008 held that the delivery of the “standard” notice of right to rescind form (as set forth in the appendices to Regulation Z) that omitted the closing date nonetheless provided adequate notice because the average consumer would be aware of the date the rescission period expired. The standard notice of the right to rescind states that the rescission period expires three business days after the closing date. Since the borrower is typically present at the closing and, as a result, could easily determine the rescission period, the blank form satisfies the clear and conspicuous standard under TILA, according to the 2008 decision.

5.  Other Developments: CRA Credit for NSP and Legacy Loans Program

  • Massachusetts Division of Banks Confirms CRA Consideration for NSP Participation

The Massachusetts Division of Banks issued a legal opinion on April 27 confirming that participation in the Neighborhood Stabilization Program (NSP) will be eligible for Community Reinvestment Act (CRA) credit regardless of the income levels of NSP borrowers because the purpose of the NSP is to encourage low- to moderate-income homebuyers to purchase and improve foreclosed properties.

Nutter Notes:  The NSP is administered by the U.S. Department of Housing and Urban Development and provides funding to state and local governments (including the Massachusetts Housing Partnership and MassHousing) to acquire and redevelop foreclosed properties. NSP funding is available for borrowers with incomes of up to 120% of the area median income, which could include borrowers whose income exceeds the thresholds for CRA credit.

  • FDIC Answers Questions about the Legacy Loans Program

The FDIC has released answers to frequently asked questions about the Legacy Loans Program announced last month. The FDIC will oversee the formation, funding, and operation of new public-private investment funds in which the U.S. Treasury will co-invest with private investors to purchase loans and other assets from depository institutions.

Nutter Notes:  The FDIC and the Treasury are developing minimum requirements for assets of depository institutions that will be eligible for sale to the public-private investment funds under the program. Each purchase will be financed in part by debt that is guaranteed by the FDIC. This debt will initially be placed at the participant institution and may be resold into the market.

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 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
Tel: (617) 439-2989

Michael K. Krebs
Tel: (617) 439-2288

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