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Nutter Bank Report, January 2011

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1. Bank’s Credit Card Rate Ruled Unconscionable by Massachusetts Court
2. NMLS to Begin Accepting Federal Registration of Mortgage Loan Originators
3. Suit Filed to Invalidate DOL Interpretation Regarding Mortgage Loan Officers
4. Certain High-Cost Credit Protection Transactions Raise Safety and Soundness Concerns
5. Other Developments: 18-65 Accounts, Trustee Process and IOLTAs

1. Bank’s Credit Card Rate Ruled Unconscionable by Massachusetts Court

A Massachusetts court has ruled that credit card interest rates above 18% are unconscionable as a matter of law and cannot be enforced. The ruling was handed down on January 4 in response to a motion for summary judgment in a case involving a bank’s attempt to collect delinquent credit card payments. The plaintiff, a national bank located in South Dakota, filed suit to recover delinquent amounts on two credit cards issued to the defendant, a Massachusetts consumer, who owed more than $33,000 on the two credit card accounts. In response, the consumer filed a counterclaim alleging that the interest rates charged on her credit cards, which ranged from between 10.65% and 54.73%, were greater than the amount allowed by federal law. The court determined that the interest rates charged by the bank did not violate federal law but nevertheless allowed the consumer’s motion for partial summary judgment on the grounds that interest rates above 18% are “so outrageous as to warrant holding [them] … unenforceable.” The court described the dispute as one that “highlights an issue of national concern—mounting credit card debt and unregulated interest rates, which make paying that debt next to impossible.” The case is still pending before the Massachusetts Superior Court in Essex County.

      Nutter Notes:  The court noted that while the national bank was permitted under the National Bank Act to charge interest at the highest rate allowed under South Dakota law, the interest charges must still be consistent with common law concepts of fairness. Because the court was apparently not presented with a credit card agreement containing a choice of law provision, the court decided that Massachusetts had the most significant relationship to the transaction and that its common law principles of unconscionability should apply. The ruling points out that unconscionability of a contract provision under Massachusetts common law is determined by the court on a case-by-case basis, with particular attention to whether the contract provision could “result in oppression and unfair surprise to the disadvantaged party.” The common law doctrine of unconscionability allows a court to declare a provision of a contract unenforceable when the provision is outrageously favorable to the advantaged party. The court said that the bank’s interest charges, in excess of 18%,“drives too hard a bargain for a court of conscience to assist.”

2. NMLS to Begin Accepting Federal Registration of Mortgage Loan Originators

The Nationwide Mortgage Licensing System and Registry (NMLS) is expected to begin accepting registrations of residential mortgage loan originators under federal requirements on or around January 31. The federal banking agencies announced on January 4 that they will confirm the opening date for federal registration on the NMLS closer to the actual date and will publish notice of that date in the Federal Register. The agencies jointly issued final rules last July that require residential mortgage loan originators who are employees of national and state banks, savings associations and other depository institutions and certain of their subsidiaries to meet the registration requirements of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (S.A.F.E. Act). Depository institutions, their subsidiaries and residential mortgage loan originators employed by them will have 180 days from the date the NMLS begins accepting federal registrations to complete initial registration during which period loans can continue to be originated. The federal banking agencies said that they expect the initial registration period to expire on July 29, 2011. After the initial registration period expires, originators will be prohibited from originating residential mortgage loans until they successfully complete the federal registration process. The agencies have advised residential mortgage loan originators employed by depository institutions and their subsidiaries not to register until the agencies instruct them to do so. Updates and technical information about the registration process are available on the NMLS’s web site at:

      Nutter Notes: The S.A.F.E. Act requires, among other things, that each residential mortgage loan originator who is an employee of a depository institution or a subsidiary of a depository institution be registered with the NMLS. The NMLS is a database created by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators to support the licensing of mortgage loan originators by the states. Each residential mortgage loan originator will obtain a unique identifier when he or she registers with the NMLS. Under the federal rules implementing the S.A.F.E. Act, registered mortgage loan originators and depository institutions must provide these unique identifiers to consumers. Consumers will be able to access employment and other background information about registered mortgage loan originators from the NMLS using the unique identifier for each originator. The S.A.F.E. Act generally prohibits employees of depository institutions or their subsidiaries from originating residential mortgage loans unless they register with the NMLS. The federal rules provide a de minimis exception whereby mortgage loan originators who originated 5 or fewer mortgage loans during the previous 12 months are not required to complete the federal registration process. Under both Massachusetts law and the federal S.A.F.E. Act, employees of banks and their subsidiaries are exempt from state licensing requirements for mortgage loan originators, but agents of banks (independent contractors or other individuals who are not employees) do not qualify for the licensing exemption.

3. Suit Filed to Invalidate DOL Interpretation Regarding Mortgage Loan Officers

The Mortgage Bankers Association filed a complaint in federal court in Washington, D.C., on January 12 that seeks to vacate a Department of Labor (DOL) interpretation issued in March 2010 concluding that mortgage loan officers do not qualify for the so-called administrative exemption from overtime pay requirements under the Fair Labor Standards Act (FLSA). The March 2010 interpretation departed from DOL opinion letters issued in 2001 and 2006 that found that mortgage loan officers were exempt from the FLSA’s overtime requirements. The complaint contends the March 2010 administrative opinion should be invalidated because it was issued without following the necessary notice and comment rulemaking procedures and because it conflicts with existing DOL regulations. In its complaint, the Mortgage Bankers Association cites reliance by many mortgage lenders on the earlier DOL opinion letters in classifying mortgage loan officers as exempt and the private party litigation exposure that mortgage lenders now face as a result of the DOL’s change in position. The Mortgage Bankers Association also filed a motion for summary judgment on the same day it filed its complaint.

      Nutter Notes:  DOL administrative interpretations are not binding precedent in a court action but they are given deference as an opinion of the agency charged with enforcing the FLSA. Depository institutions that do not currently track hours worked by their mortgage loan officers or pay overtime for hours worked in excess of forty per week should review these practices while the trade association’s case is pending. Institutions should also note that a job title does not determine whether an employee is exempt from FLSA minimum wage and overtime requirements. The employee’s actual job duties and compensation determine whether the employee is exempt or nonexempt. The challenged interpretation applies to employees who perform the typical job duties of a mortgage loan officer and spend the majority of their time working inside the institution’s offices, including employees who work in home offices from time to time. It does not apply to mortgage loan officers who customarily and regularly work away from their employer’s place of business.

4. Certain High-Cost Credit Protection Transactions Raise Safety and Soundness Concerns

The Federal Reserve has issued guidance to banking organizations and examiners on the potential impact of high-cost credit risk mitigation techniques on a banking organization’s overall capital adequacy. Supervision and Regulation Letter SR 11-1 released on January 25 advises that, in some instances, the high premiums or fees paid for certain credit protection transactions, combined with other terms and conditions, call into question the degree of risk transfer involved in the transaction and may be inconsistent with safety and soundness. According to the Federal Reserve, the primary effect of such high-cost credit protection transactions is to embed a high percentage of expected losses into the premiums and fees paid by a banking institution rather than contribute to a prudent risk-management strategy. SR 11-1 also advises that examiners will scrutinize these transactions and, based on the factors and analysis described in the guidance, examiners may determine that a credit protection transaction should be discounted in the assessment of the banking organization’s management of its risk profile and capital needs, or that the cost of the transaction should be judged as having a negative impact on the banking organization’s earnings and capital.

    Nutter Notes:  The Federal Reserve recommends that banking organizations analyze and document the economic substance of credit protection transactions that have unusually high-cost or innovative features to assess the degree of risk transfer and the associated impact on the organization’s overall capital adequacy. According to the guidance, the analysis should also specify how the transaction aligns with the banking organization’s overall risk-management strategy. In evaluating the degree of risk transfer involved in a transaction, banking organizations should consider, and examiners will assess, factors that include a comparison of the present value of premiums relative to expected losses over a variety of stress scenarios, the pricing of the transaction relative to market prices, and the timing of payments under the transaction relative to the timing of provisioning or write downs and payments by the counterparty. Other relevant assessment factors may include a review of applicable call dates to assess the likely duration of the credit protection relative to the potential timing of future credit losses, an analysis of whether certain circumstances could lead to the banking organization’s increased reliance on the counterparty while the counterparty’s ability to meet its obligations is weakened, and an analysis of whether the banking organization can prudently afford the premiums given its earnings, capital, and overall financial condition.

5. Other Developments: 18-65 Accounts, Trustee Process and IOLTAs

• Division of Banks Updates Its Guidance on 18-65 Accounts

The Massachusetts Division of Banks has reissued a regulatory bulletin that provides banks with guidance on how to comply with the provisions of the so-called “18-65 Law” (Section 2, subparagraph 1 of Chapter 167D of the General Laws). Regulatory Bulletin 3.3-101 was reissued on January 6 to address recent amendments to the 18-65 Law, which include additional disclosure requirements.

       Nutter Notes:  The 18-65 Law was most recently amended on August 4, 2010 by Chapter 234 of the Acts of 2010. The amendment requires banks to disclose annually to all depositors the provisions of the law applicable to a person 18 years of age or younger or 65 years of age or older, in addition to the existing notice posting requirement, and removed the authority of the Commissioner of Banks to establish a procedure for demonstrating 18-65 account eligibility.

• Legislature Increases the Trustee Process Exemption for Bank Accounts

The Massachusetts legislature has amended the statute that provides exemptions from attachment by trustee process to increase the exemption for amounts in a bank account from $500 to $2,500. The amendment also deleted a clause in the statute that provided that a joint account must be treated as if each depositor owns one-half of the amount on deposit. 

     Nutter Notes:  The amendments were included in Section 6 of Chapter 431 of the Acts of 2010, which was signed by the Governor on January 7. The amendments will become effective on February 6, 2011. A trustee who serves a summons on a bank to attach a deposit account after that date must describe the exemption, pointing out that only funds in the account of the debtor in excess of $2,500 are subject to attachment.

• Temporary, Unlimited Deposit Insurance Coverage Extended to IOLTAs

The FDIC issued a final rule on January 18 that extends the temporary, unlimited deposit insurance coverage to Interest on Lawyer Trust Accounts (IOLTAs). The final rule implements the December 29, 2010 amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act to include IOLTAs within the definition of a “noninterest-bearing transaction account” for purposes of the temporary, unlimited coverage afforded to such accounts.

      Nutter Notes: The final rule requires that by no later than February 28, 2011, each insured depository institution that offers noninterest-bearing transaction accounts must prominently post an amended notice in its office lobbies and on its web sites. The notice must explain that IOLTAs will be fully insured through December 31, 2012. Institutions should ensure that their year-end 2010 regulatory reports incorporate the amended treatment of IOLTAs.

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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