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Nutter Bank Report, February 2010

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1.  Banking Agencies Issue Joint Guidance on Small Business Lending
2.  President Outlines New Capital Plan to Support Small Business Lending
3.  Federal Reserve Proposes Amendments to Clarify New Overdraft Fee Rules
4.  OCC Provides Advice to National Banks Offering Tax Refund Anticipation Loans
5.  Other Developments: RESPA GFE Questions and Massachusetts Truth in Lending

Full Reports

1.  Banking Agencies Issue Joint Guidance on Small Business Lending

The federal banking agencies and state bank regulators -- through the Conference of State Bank Supervisors -- have issued new guidance on prudent lending to creditworthy small business borrowers.  Among other things, the Interagency Statement on Meeting the Credit Needs of Creditworthy Small Business Borrowers released on February 5 indicates that examiners generally will not adversely classify a loan solely due to a decline in the collateral value below the loan balance, provided that the loan file documents the borrower’s willingness and ability to repay the loan under reasonable terms.  The Statement expresses concern that supervisory policies and actions may inadvertently curtail the availability of credit to sound small business borrowers and that some depository institutions might refuse credit to sound borrowers because of a borrower’s particular industry or geographic location.  According to the Statement, depository institutions will not be subject to regulatory criticism for small business loans made on the basis of a comprehensive review of a borrower’s financial condition.  The guidance advises depository institutions to understand the long-term viability of a borrower’s business, focus on the strength of its business plan, and have an understanding of the competition and local market conditions affecting the borrower’s business.

Nutter Notes:  The Statement indicates that effective monitoring and managing of credit concentrations may include the use of modeling tools to identify and manage concentration risk and that such models may rely on general data, such as geographic location and industry.  However, the guidance warns that national market trends and general factors like geographic location and industry should not be used as a substitute for the evaluation of an individual borrower’s repayment capacity.  The Statement also provides some insight about what depository institutions can expect from examiners.  Cash flow analyses should cover current and expected cash flows reflecting expectations for the performance of the small business over a reasonable range of possible future conditions, rather than exceedingly optimistic or pessimistic projections.  To the extent that a small business owner uses his or her personal wealth and resources to support a credit application, the guidance suggests that loan files should demonstrate the owner’s credit history and financial strength, including credit score.  The guidance suggests that loan files should document an analysis of any secondary sources of repayment, such as the strength of any guarantor or collateral support, and the ability of the small business owner to provide additional capital.  Finally, the guidance indicates that loans will not be classified by examiners solely on the basis of a borrower’s association with a particular industry or geographic area that is experiencing financial difficulties.

2.  President Outlines New Capital Plan to Support Small Business Lending

President Obama has announced a proposal to encourage small business lending by creating a small business lending fund to provide capital support to community banks, which tend to make more small business loans in proportion to all business lending than larger banks.  A summary of the proposal released on February 2 indicates that a new Small Business Lending Fund would provide low-cost capital to banking organizations with less than $10 billion in assets.  More institutions would be eligible for a capital investment under the new proposal than under a similar idea floated by the administration in October 2009 for banks with less than $1 billion in assets.  The proposal would require legislation to transfer $30 billion out of the Troubled Assets Relief Program (TARP) to the Small Business Lending Fund.  The new fund would be separate from TARP, so participants would not be subject to TARP restrictions, unlike institutions that received capital investments under the U.S. Treasury Department’s Capital Purchase Program (CPP).  The cost of capital provided by the Small Business Lending Fund would be reduced as small business lending is increased to provide an incentive to improve access to credit for small businesses.  The administration has not yet issued a draft of the legislation that would be necessary to implement the program, and it announced that it will work with Congress on additional ideas to enhance credit for small businesses through the fund.

Nutter Notes:  Qualifying banking organizations would have to be approved by their primary federal banking regulator to be eligible for a capital investment from the Fund, according to the summary of the proposal.  Organizations with less than $10 billion in assets that participated in the CPP would be permitted to repay the Treasury and withdraw from the CPP with capital from the Fund.  Banking organizations with less than $1 billion in assets would be eligible to receive an investment equal to a maximum of 5% of risk-weighted assets.  Those with between $1 billion and $10 billion in assets would be eligible for investments of up to 3% of risk weighted assets.  The dividend rate on the capital would begin at 5% on an annual basis, but the rate would be reduced by 1% for every 2.5% increase in incremental business lending activity achieved over a 2-year period (on the basis of new lending beginning on January 1, 2010).  The dividend rate could be reduced to a rate as low as 1% as a result of increased small business lending.  If the capital investment has not been repaid after 5 years, the dividend rate would be increased to encourage return of the capital to the Fund.  While the administration emphasized that the Fund would be separate and distinct from TARP to encourage participation, it is not clear from the administration’s summary whether and to what extent participants may be subject to reporting obligations, or executive compensation or other restrictions.

3.  Federal Reserve Proposes Amendments to Clarify New Overdraft Fee Rules

The Federal Reserve has proposed amendments to the final rule and official staff commentary governing overdraft services adopted in November 2009 to clarify certain aspects of the final rule and to make technical corrections.  The proposed changes announced on February 19 would clarify that the prohibition under the Federal Reserve’s Regulation E (Electronic Fund Transfers) against assessing overdraft fees without a consumer’s affirmative consent applies to all institutions, including those with a policy and practice of declining automated teller machine and one-time debit card transactions when an account has insufficient funds.  Effective July 1, 2010, Regulation E will generally prohibit an institution from assessing any fee or charge for paying an ATM or one-time debit card transaction on an overdrawn account unless the institution satisfies certain requirements, including providing notice and obtaining the consumer’s affirmative consent to the overdraft service.  The final rule provides an exception from the notice and opt-in requirements for institutions that have a policy and practice of declining ATM and one-time debit card transactions when the institution has a reasonable belief that the consumer’s account has insufficient funds at the time.  The proposed amendment to the final rule and the related commentary would explain that the exception provides relief only from the notice and opt-in requirements when no overdraft fees are assessed.

Nutter Notes:  The proposed amendments would also change the Federal Reserve’s Regulation DD (Truth in Savings) and its official staff commentary to clarify the application of the rule to retail sweep programs and to clarify certain terminology for overdraft fee disclosures.  Regulation DD requires institutions that disclose balance information to a consumer through an automated system to disclose a balance that does not include additional amounts that may be provided under an overdraft protection service, including a program involving an automatic transfer of funds from another account of the consumer.  A retail sweep program involves two legally distinct subaccounts, a transaction subaccount and a savings subaccount, which together make up the consumer’s sweep account.  Notwithstanding the establishment of two legally distinct subaccounts, the sweep account statement typically shows a single account balance, and a single account on which all transactions into and out of the sweep account are reflected.  The proposed amendment to the official commentary would clarify that Regulation DD does not require an institution to exclude from the consumer’s available balance funds that may be transferred from a savings subaccount pursuant to a retail sweep program when disclosing a transaction account balance under such a program.  Comments on the proposed amendments will be due 30 days after publication in the Federal Register, which is expected shortly.

4.  OCC Provides Advice to National Banks Offering Tax Refund Anticipation Loans

The Office of the Comptroller of the Currency has issued a policy statement describing the measures national banks are expected to follow if they offer tax refund anticipation loans (RALs) and similar products through third-party tax preparers.  The OCC Policy Statement on Tax Refund-Related Products released on February 18 includes new requirements relating to contract terms, fees, and compliance verification procedures necessary to meet safety and soundness expectations.  Since RALs and other tax refund products (such as “pre-file” or “pay-stub” loans and “refund anticipation checks”) are provided through third-party tax preparers, the statement recommends that national banks perform substantive due diligence before entering into a business arrangement with a tax preparer, including background checks, assessing general competence and business practices and operations, and evaluating counter-party risk (such as potential conflicts of interest, reputation, financial capacity and condition).  The statement also recommends that the written agreement with the tax preparer should specifically describe the products and services that the bank is committed to provide, should prohibit the tax preparer from imposing higher fees for tax preparation services to consumers based on whether they obtain a RAL or claim the earned income tax credit, and should provide that the bank can terminate the agreement if directed by the OCC.

Nutter Notes:  The policy statement describes certain consumer disclosures that national banks are required to provide to meet the OCC’s consumer protection standards.  According to the statement, national banks must deliver consumer disclosures in writing to each prospective customer before the customer applies for such a product or pays a nonrefundable fee, and must have procedures to verify that the disclosures were properly made.  In the case of a RAL, such disclosures should include a statement that a RAL is a loan and not the consumer’s tax refund, that a federal income tax return may be filed electronically without obtaining a RAL and that a consumer may receive a refund directly from the IRS without obtaining a RAL (with an estimate of the average waiting time for an electronic refund to reach a consumer following the approval of an application).  The statement lists a number of other consumer disclosures national banks should provide, such as the total cost of the tax refund-related product, specific breakdowns of fees relating to tax preparation services and tax return filing, and whether or not any fees imposed in connection with an application for a RAL will be refunded if the loan application is denied.  Both the OCC and the Massachusetts Division of Banks have recently issued consumer advisories that highlight alternatives taxpayers can use instead of RALs to encourage consumers to avoid high-cost RALS and other tax refund-related products.

5.  Other Developments: RESPA GFE Questions and Massachusetts Truth in Lending

  • HUD Updates FAQs on Good Faith Estimates

The U.S. Department of Housing and Urban Development has updated its summary of answers to frequently asked questions (FAQs) about the new Real Estate Settlement Procedures Act (RESPA) rules that went into effect at the beginning of the year.  The January 28 update includes additional information about complying with RESPA’s good faith estimate (GFE) requirements.

Nutter Notes:  Among other things, the update clarifies that if a borrower locks an interest rate after the GFE has been issued, a revised GFE must be issued within 3 days of the interest rate lock reflecting the expiration date of the rate lock in Line 1 and “N/A” in Line 4 of the “Important dates” section of the GFE.  Any interest rate-dependent charges (Block 2, Line A and Block 10 on the GFE) and changed terms must also be updated on the revised GFE.

  • Amendments to Massachusetts TIL Rule Proposed to Conform to Federal Rule

The Division of Banks has proposed amendments to its regulation implementing the Massachusetts Truth in Lending statute, Massachusetts General Laws Chapter 140D, to maintain regulatory consistency between federal and state Truth in Lending regulations.  A hearing will be held at the Division’s offices on March 3 at 10:30 a.m., and written comments may be submitted to the Division until 5:00 p.m. on March 4.

Nutter Notes:  The proposed changes include new sections to establish prohibited acts or practices in connection with higher-priced mortgage loans and in connection with credit secured by a consumer’s principal dwelling, and special disclosure requirements for private education loans.  Other amendments would recognize less recent changes to the federal rule relating to electronic signatures, electronic disclosures, and credit card requirements.

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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