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Nutter Bank Report, August 2011

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1. Court Says Bank Must Halt Foreclosure, Consider Loan Modification
2. Federal Reserve Imposes New Restrictions on Dividend Waivers
3. Division of Banks Proposes Foreclosure Notice and Reverse Mortgage Rules
4. FDIC Clarifies Statement of Policy Under Section 19 of FDI Act
5. Other Developments: Social Media and SLHC Regulatory Reports

1. Court Says Bank Must Halt Foreclosure, Consider Loan Modification
The U.S. District Court for the District of Massachusetts recently ruled that borrowers may proceed with a lawsuit to prevent foreclosure of a residential mortgage loan where the borrowers claimed they were induced by the bank to default on the loan as a first step in negotiating a modification of the loan. The July 22 ruling involved joint borrowers who were not in default under their home mortgage loan, but stopped making payments when the bank allegedly told them it would consider them for a loan modification if they first defaulted and then submitted certain requested financial information. According to the decision, the borrowers promptly submitted the financial information requested by the bank. However, rather than determine the borrowers’ eligibility for a modification, the bank moved to foreclose on the property once the borrowers were in default. The court held that, in telling the borrowers that stopping their payments and submitting the requested financial information were the steps necessary to enter into negotiations for a loan modification, the bank should have known that the borrowers might take those steps. The borrowers did not claim that the bank promised to modify their loan, only that the bank promised to consider them for a loan modification if they took certain steps, including defaulting on their payments. The borrowers also did not claim that the bank promised not to foreclose, but the court found that such a promise would be implicit in a promise to negotiate a loan modification if the borrowers voluntarily stopped making payments.

      Nutter Notes:  The court ruled that if the borrowers can prove that they reasonably relied on the bank’s promise to negotiate a loan modification if they defaulted, then the borrowers would be entitled to the value of their expenditures in reliance on that promise and a return of the loan to non-default status. The court in this case broke new ground under Massachusetts common law because the borrowers did not claim that the parties had actually agreed on the terms of a loan modification, only that the bank had promised to enter into negotiations over those terms. While the court did not hold that the bank must grant a loan modification to the borrowers, it did hold that the bank could not take advantage of the borrowers’ default by foreclosing if the bank had induced the borrowers to default with a promise to consider them for a loan modification and then failed to follow through on that promise. The bank, which is a federal savings bank, also tried to argue that a claim under Massachusetts common law to enforce a promise under a theory of promissory estoppel theory is preempted by the Home Owners’ Loan Act (“HOLA”). The court found that a state-law claim of promissory estoppel is presumptively preempted under OTS rules implementing HOLA, but that the presumption of preemption is rebutted because the doctrine of promissory estoppel is not designed to regulate lending and does not have a disproportionate or substantial effect on lending under OTS preemption criteria.

2. Federal Reserve Imposes New Restrictions on Dividend Waivers
The Federal Reserve has issued an interim final rule that requires savings and loan holding companies in the mutual form of organization (“MHCs”) to make certain required disclosures before waiving dividends declared by subsidiary stock holding companies or subsidiary banks. The August 12 interim final rule applies to MHCs that have made minority stock offerings through a subsidiary holding company or bank. The OTS had long permitted MHCs to decline to receive dividends paid by their subsidiaries and instead to allow those dividends to be paid to minority stockholders. The Federal Reserve interim final rule establishes a new Regulation MM, which implements the Dodd-Frank Act framework for dividend waivers. Regulation MM requires that the vote of an MHC’s board of directors authorizing a dividend waiver contain certain elements designed to disclose and mitigate the conflict of interest the Federal Reserve sees in the waiver of dividends. First, the board resolution must describe the conflict of interest that may exist because of an MHC director’s ownership of stock in the subsidiary declaring the dividends and any actions the MHC and board of directors have taken to eliminate the conflict of interest, such as the directors waiving their right to receive dividends. Second, the resolution must contain an affirmation that a majority of the members of the MHC eligible to vote have, within the 12 months prior to the declaration date of the dividend, voted to approve the waiver of dividends. Any proxy statement used in connection with the member vote must include disclosure of any MHC director’s ownership of stock in the subsidiary stock holding company or subsidiary bank. Public comments on the interim final rule are due by October 27.

      Nutter Notes:  Section 625 of the Dodd-Frank Act amended HOLA to provide conditions under which an MHC may waive its right to receive dividends declared by a subsidiary of the MHC. Under the amendments, dividend waivers are permissible if no insider of the MHC, associate of an insider, or tax-qualified or non-taxqualified employee stock benefit plan of the MHC holds any share of the stock in the class of stock to which the waiver would apply, or the MHC gives written notice to the Federal Reserve of its intent to waive its right to receive dividends at least 30 days before the date of the proposed date of payment of the dividend and the Federal Reserve does not object. If the Federal Reserve objects to the waiver, the MHC may not waive the dividend. The amendments distinguish between those MHCs that waived dividends prior to December 1, 2009 (“Grandfathered MHCs”) and those that did not (“Non-Grandfathered MHCs”). For Grandfathered MHCs, the amendments provide that the Federal Reserve may not object to a waiver of dividends if the waiver would not be detrimental to the safe and sound operation of the subsidiary savings association, and the MHC’s board of directors expressly determines that a waiver of dividends by the MHC is consistent with the fiduciary duties of the board to the MHC’s members. The amendments also require Grandfathered MHCs to provide a dividend waiver notice to the Federal Reserve and include a copy of the resolution of the MHC’s board of directors, in such form as the Federal Reserve determines.

3. Division of Banks Proposes Foreclosure Notice and Reverse Mortgage Rules
The Division of Banks has proposed rules to implement a Massachusetts law enacted in 2010 that requires that notice be provided to residential borrowers in default of a right to cure the default. The Division has also proposed a regulation to clarify the opt-in and counselor certification requirements for in-person counseling required in connection with reverse mortgage loans by the same law, Chapter 258 of the Acts of 2010. Public hearings on both proposed regulations will be held by the Division on September 14. The proposed notice and right-to-cure regulation, 209 CMR 56.00, would establish the form of the right-to-cure notice as well as the information required to be included in the notice, and procedures to determine whether a 150-day notice or a 90-day notice is required and the method of delivery of the notice. The regulation would also allow a borrower to request from the entity foreclosing on the mortgage documentation evidencing that it is the holder of the mortgage or is authorized by the holder of the mortgage to foreclose. The proposed reverse mortgage regulation, 209 CMR 55.00, would establish the eligibility, procedures, disclosures and counseling requirements for a reverse mortgage program. Public comments on both regulations are due by September 21.

      Nutter Notes:  Chapter 258 of the Acts of 2010 amended the existing right-to-cure provisions of Chapter 244, Section 35A of the General Laws of Massachusetts to provide a mortgagor of a residential property with 150 days to cure a default of a required payment by full payment of all amounts that are due without acceleration of the maturity of the unpaid balance of the mortgage. The law also provides that a creditor may begin foreclosure proceedings after a right-to-cure period lasting only 90 days if the creditor has engaged in a good faith effort to negotiate a commercially reasonable alternative to foreclosure, including at least one meeting with the borrower in person or by telephone, and the borrower and the creditor were not successful in resolving their dispute. The law also requires that, to establish that a creditor has made a good faith effort to negotiate a commercially reasonable alternative to foreclosure, the creditor must consider, among other factors, an assessment of the borrower’s current circumstances, and the net present value of receiving payments pursuant to a modified mortgage loan as compared to the anticipated net recovery following foreclosure. The creditor is required to provide documentation of that effort to the borrower 10 days prior to meeting the borrower.

4. FDIC Clarifies Statement of Policy Under Section 19 of FDI Act
The FDIC has issued guidance clarifying restrictions on service by persons convicted of certain criminal offenses on the board or in management of an insured depository institution. The guidance issued on August 8 in FDIC Financial Institution Letter No. 57-2011 (“FIL-57-2011”) clarifies the FDIC’s Statement of Policy under Section 19 of the Federal Deposit Insurance Act. Section 19 prohibits, without the prior written consent of the FDIC, a person convicted of a criminal offense involving dishonesty, breach of trust, money laundering, or drugs from participating in the affairs of an FDIC-insured depository institution. Under existing rules, an application to the FDIC under Section 19 is not required for a record of a conviction that has been completely expunged. The new guidance clarifies that a record of a conviction is considered to be completely expunged if the record is not accessible by any party, including law enforcement, even by court order. According to FIL-57-2011, a Section 19 application also is not required for offenses punishable by imprisonment for a term of one year or less and/or a fine of $1,000 or less, or if there has been one conviction for issuing a bad check or checks with an aggregate face value of $1,000 or less, and no insured financial institution or insured credit union was a payee on any of the checks.

      Nutter Notes:  On May 10, 2011, the FDIC issued a clarification of certain criteria in the FDIC’s Statement of Policy on Section 19 of the FDI Act, including complete expungement, de minimis factors, and de minimis factors for “bad checks.” Section 19 covers institution-affiliated parties, as defined by the FDI Act, and certain others who participate in the conduct of the affairs of an insured depository institution. For example, whether a person who is not an institution-affiliated party is covered depends on the person’s degree of influence or control over the management or affairs of an insured institution. The Statement of Policy clarifies that Section 19 would not apply to a person who is merely an employee of an insured institution’s holding company, but would apply to the holding company’s directors and officers to the extent that they have the power to define and direct the policies of the insured institution. Similarly, directors and officers of affiliates, subsidiaries or joint ventures of an insured institution or its holding company will be covered if they are in a position to influence or control the management or affairs of the insured institution, according to the Statement of Policy. The FDIC recommends that insured depository institutions consider the clarifications made by FIL-57-2011 of the Statement of Policy when reviewing the applicability of Section 19 to current and potential institution-affiliated parties. According to FIL-57-2011, there is no statute of limitations for offenses covered by Section 19.

5. Other Developments: Social Media and SLHC Regulatory Reports

    •    FINRA Provides Guidance on Use of Social Media to Communicate with the Public

The Financial Industry Regulatory Authority (“FINRA”) has issued new guidance to securities firms and brokers on the use of social media to communicate with the public. The new guidance responds to questions raised about FINRA’s January 2010 guidance on the application of FINRA rules governing communications with the public to social media sites.

      Nutter Notes:  The new social media guidance provides additional information about recordkeeping requirements, internal supervision requirements, links to third-party websites and procedures for monitoring data feeds on the firm’s own website.

    •    Federal Reserve Proposes 2-Year Phase-In for SLHC Regulatory Reports

The Federal Reserve issued a proposal on August 22 to phase in most savings and loan holding company (“SLHC”) regulatory reporting requirements with the Federal Reserve over a 2-year period. Public comments on the proposal are due by November 1.    

      Nutter Notes:  The proposal would exempt some SLHCs from initially filing Federal Reserve regulatory reports. Exempt SLHCs would continue to submit Schedule HC, which is currently a part of the Thrift Financial Report, and the OTS H-(b)11 Annual/Current Report.     

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 2009 Chambers and Partners review says that a “real strength of this practice is its strong partners and . . . excellent team work.” Clients praised Nutter banking lawyers as “practical, efficient and smart.” 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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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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