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Nutter Bank Report, December 2008

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1.  Federal Reserve Amends Rules on Overdraft Fee Disclosures
2.  Treasury’s Administration of the TARP Criticized in Federal Reports
3.  Court Requires Lender to Work with Massachusetts AG to Avoid Foreclosures
4.  New Federal Consumer Protection Rules for Credit Cards Released
5.  Other Developments:  FHLB Excess Stock and Goodwill Deductions

Full Reports

1.  Federal Reserve Amends Rules on Overdraft Fee Disclosures

The Federal Reserve has published amendments to its Regulation DD, which implements the Truth in Savings Act, to require all depository institutions that offer overdraft payment services to disclose aggregate overdraft fees on periodic statements. Under the current rules, only institutions that promote or advertise the payment of overdrafts are required to disclose overdraft fees on periodic statements. The amended rule released on December 18 will require all institutions to disclose the aggregate dollar amounts charged for overdraft fees and for returned item fees, both for the statement period and the year-to-date. The amendments also require institutions that provide account balance information through an automated system (e.g., ATMs or on-line banking programs) to provide balances that do not include the amount that may be made available to cover overdrafts. The amendments to Regulation DD become effective on January 1, 2010. The Federal Reserve has also proposed amendments to its Regulation E under the Electronic Funds Transfer Act to provide consumers certain protections relating to the assessment of overdraft fees. The proposal solicits comment on two alternative approaches to providing consumers a choice regarding the payment of ATM and one-time debit card overdrafts; either an opt-out or an opt-in approach. Comments on the Regulation E proposal are due 60 days after it is published in the Federal Register.

Nutter Notes:  The FDIC released a report on overdraft protection programs on December 2 that may suggest issues to be addressed in future rules governing overdraft protection programs. The FDIC began a study in 2006 to gather data on the types, characteristics, and use of overdraft programs operated by FDIC-supervised banks. Most banks surveyed (75.1%) automatically enrolled customers in automated overdraft programs. In some cases, customers were not given the choice to opt-in or opt-out of the automated program. By contrast, almost all banks (94.7%) treated linked-account programs as opt-in programs, and line of credit (LOC) programs typically operate on an opt-in basis because customers have to apply and qualify for an overdraft LOC. Automated overdraft usage fees assessed by banks ranged from $10 to $38, and the median fee assessed was $27. About 25% of the surveyed banks also assessed additional flat fees or interest on account balances that remained negative. The majority (81%) of banks operating automated programs allowed overdrafts to take place at ATMs and point-of-sale/debit transactions. Most of those banks informed customers of a nonsufficient fund (NSF) transaction only after the transaction had been completed. The surveyed banks earned an estimated $1.97 billion in NSF-related fees in 2006 (including overdraft program fees), representing 74% of the $2.66 billion in service charges on deposit accounts reported by these banks in their Call Reports.  Total NSF-related fee income accounted for roughly 6% of the total net operating revenues earned by the banks.

2.  Treasury’s Administration of the TARP Criticized in Federal Reports

The U.S. Government Accountability Office (GAO) and the Congressional Oversight Panel for Economic Stability separately published reports criticizing the Treasury Department’s administration of the Troubled Asset Relief Program (TARP) and other programs initiated under the Emergency Economic Stabilization Act (EESA). The GAO report released on December 2, entitled “Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency,” concludes that Treasury has not addressed a number of critical issues, including determining how it will ensure that the Capital Purchase Program (CPP) is achieving its intended goals, how it will monitor compliance with limitations on executive compensation and how it will monitor compliance with limitations on dividend payments. The GAO report also expressed concern about transition planning efforts, and whether Treasury has established an effective management structure and a system of internal controls. GAO issued a number of recommendations to improve the administration of the TARP. The report by the Congressional Oversight Panel, which was required by the EESA, notes that Treasury has not exercised authority granted by EESA to purchase mortgage related assets using the TARP and requests that Treasury explain why it is opposed to an FDIC plan to use $24.4 billion of the TARP fund to assist lenders to modify mortgages to avert foreclosures.

Nutter Notes:  The FDIC proposed a comprehensive loan modification program last month called “Mod in a Box” that is based on the loan modification program implemented by the FDIC as conservator of IndyMac Federal Bank.  According to published reports, Treasury has since required at least one large financial holding company to institute the Mod in a Box program when the FDIC provided the institution with capital on an emergency basis in addition to the capital already provided to the institution by Treasury under the CPP. However, Treasury has not required other CPP participants to implement a loan modification program. The GAO published a separate report in December addressing the status of efforts to prevent residential mortgage foreclosures using the TARP.  The GAO report notes that the standard CPP agreement recites that the recipient financial institution will work to modify the terms of residential mortgages as appropriate, but the report concludes that it is unclear how Treasury will monitor recipient institutions’ efforts to preserve home ownership. The GAO said that it will continue to monitor Treasury’s implementation of EESA. The Congressional Oversight Panel also announced that it will issue two more reports in January 2009. The first will examine the Treasury’s administration of the TARP and its impact on the economy.  The second will recommend reforms to the U.S. financial regulatory structure.

3.  Court Requires Lender to Work with Massachusetts AG to Avoid Foreclosures

The Supreme Judicial Court of Massachusetts has affirmed the grant of a preliminary injunction against an out-of-state lender that made subprime residential mortgage loans to customers in Massachusetts. The court’s December 9 decision under Massachusetts’ consumer protection law (Chapter 93A of the General Laws) affirms a preliminary injunction that significantly limits the lender’s ability to foreclose on residential mortgage loans that were deemed “presumptively unfair.” The court found that the loans were “presumptively unfair” because they included all of the following four characteristics.  First, the interest rate on each loan was adjustable with an introductory fixed rate that applied for three years or less. Second, the introductory rate was at least 3% below the fully indexed rate. Third, the borrower’s debt-to-income ratio exceeded 50% if measured at the fully indexed rate.  Fourth, either the loan-to-value ratio was 100%, the loan featured a substantial prepayment penalty (greater than the “conventional prepayment penalty” defined in the Massachusetts Predatory Home Loan Practices Act) or the prepayment penalty extended beyond the introductory rate period. The court determined that loans with the first three characteristics were “doomed to foreclosure” if they were not refinanced because the borrowers’ ability to repay the loans at the fully indexed rates had not been considered. The fourth characteristic made it “essentially impossible for subprime borrowers to refinance” in the absence of significant appreciation of the mortgaged property.

Nutter Notes:  The preliminary injunction requires the lender to give notice to the Massachusetts Attorney General prior to foreclosing on any residential mortgage loan in Massachusetts. If a loan meets all four of the criteria to be deemed presumptively unfair, the lender is required to work with the Attorney General to restructure the loan or arrange for a workout. One of the four criteria considered by the court to determine whether the loans are presumptively unfair is the size of any prepayment penalty.  In determining whether a prepayment penalty would be considered unfair and deceptive under Chapter 93A, the court looked to the standards applicable to “high-cost home loans” under the Massachusetts Predatory Home Loan Practices Act even though none of the loans made by the lender were high-cost home loans within the meaning of that statute. Though the court recognized that the statute technically did not apply to the loans, the court determined that the statute was “an established, statutory expression of public policy” that certain lending practices were unfair, even when applied to loans that are not high-cost home loans. The court’s decision suggests that lenders that do not make high-cost home loans in Massachusetts may nevertheless be subject to certain standards in the Massachusetts Predatory Home Loan Practices Act through the application of Chapter 93A.

4.  New Consumer Protection Rules for Credit Cards Released

The Federal Reserve, Office of Thrift Supervision and National Credit Union Administration have jointly adopted new regulations under the Federal Trade Commission Act to prohibit depository institutions from engaging in certain credit card account practices determined to be unfair or deceptive. The final rules issued on December 18 prohibit an institution from treating a credit card payment as late unless the institution provides a reasonable amount of time for the consumer to make the payment. The rule specifies that a periodic statement sent at least 21 days prior to the payment due date complies with the new requirement. If different annual percentage rates apply to different balances on a credit card account (e.g., purchases, balance transfers, cash advances), payments exceeding the minimum payment must be allocated either to the credit card balance with the highest rate first or pro rata among all of the balances. The final rule prohibits institutions from calculating interest using a method referred to as “two-cycle billing,” which occurs when a consumer pays the entire account balance one month but not in the next month and interest is calculated using the account balance for days in the previous billing cycle as well as the current cycle. The rule also forbids financing fees for credit availability (such as account-opening fees or membership fees) if such charges are assessed during the first year and would exceed 50% of the initial credit limit. The final rule caps the total amount of fees charged at account opening at 25% of the initial credit limit. Any additional account opening charges (up to 50% of the initial limit) may be spread evenly over the next five billing cycles. The final regulations become effective on January 1, 2010.

Nutter Notes:  In connection with the new consumer protection rules for credit cards, the Federal Reserve also adopted amendments to its Truth in Lending rules, Regulation Z, to revise the disclosures consumers receive for credit card accounts and other revolving credit plans. The final amendments to Regulation Z require changes to the format, timing, and content of credit card applications and solicitations and to the periodic disclosures that consumers receive through the life of an open-end account. Certain key terms, such as any discounted initial rate and when that rate will expire, must be disclosed at account opening in a summary table that is similar to the table required for credit and charge card applications and solicitations. While periodic statements will no longer be required to disclose an “effective annual percentage rate,” they will be required to disclose interest and fee totals for the month and year-to-date. Other changes to periodic statement disclosures include a requirement that interest charges and fees must be grouped separately, and that interest charges must be itemized according to the type of transaction (e.g., purchases or cash advances). The final rule increases the amount of advance notice before a changed term can be imposed from 15 to 45 days, including 45 days’ prior notice before any interest rate increase due to the consumer’s delinquency or default or as a penalty. The rule also adds new requirements for advertising an account with a fixed rate and requirements for reasonable cut-off hours for payments to be considered timely on the due date. The amendments to Regulation Z become effective on January 1, 2010.

5.  Other Developments: FHLB Excess Stock and Goodwill Deductions

  • FHLB Boston will not Repurchase Excess Stock

On December 8, the Federal Home Loan Bank of Boston announced a moratorium on the repurchase of excess stock held by its members to preserve capital. The bank’s letter to members suggests that the bank is not in immediate danger but is implementing the moratorium to preserve capital. The moratorium will remain in effect indefinitely.

Nutter Notes:  The bank said that it is monitoring its investments in private label mortgage-backed securities. The Federal Home Loan Bank of Des Moines announced a similar moratorium on the repurchase of excess stock on December 22.

  • Final Federal Rule Issued on Goodwill Deductions from Tier 1 Capital

The federal banking and thrift regulatory agencies have approved a final rule to permit a banking organization to reduce the amount of goodwill it must deduct from Tier 1 capital by any associated deferred tax liability. Under the final rule, a deferred tax liability that is specifically related to goodwill may be netted against that goodwill, and only the net amount of that goodwill must be deducted from Tier 1 capital.

Nutter Notes:  Under the agencies’ existing regulatory capital rules, certain assets that must be deducted from Tier 1 capital may be reduced by any deferred tax liability specifically related to the asset. The final rule extends that policy to goodwill. The final rule will be effective 30 days after publication in the Federal Register, but organizations may adopt its provisions for regulatory capital reported for the period ending December 31, 2008.

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 in the 2007 Chambers and Partners U.S. rankings. The “well known and well-versed” Nutter team “excels” at corporate and regulatory banking advice, according to the 2007 Chambers Guide. Visit the 2007 U.S. rankings at The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Rena Marie Strand and Lisa M. Jentzen. The information in this publication is not legal advice. For further information, contact:

Gene A. Blumenreich
Tel: (617) 439-2889

Kenneth F. Ehrlich
Tel: (617) 439-2989

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

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