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Nutter Bank Report, January 2019

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01.31.2019 | Legal Update

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  1. New Data Breach Law Requires Free Credit Monitoring for Massachusetts Consumers
  2. Attorney General Nominee Indicates Enforcement Policy for Marijuana Businesses
  3. CFPB Reports Assessments of Qualified Mortgage and RESPA Mortgage Servicing Rules
  4. Banks Encouraged to Work with Those Affected by Federal Government Shutdown
  5. Other Developments: Credit Quality and Flood Insurance

1. New Data Breach Law Requires Free Credit Monitoring for Massachusetts Consumers

Recent amendments to the Massachusetts data security breach law will require any person – including, in relevant part, any bank or any bank subsidiary or affiliate – in possession of a consumer’s Social Security number to provide free credit monitoring services to the consumer if a data security breach involves the consumer’s Social Security number. Chapter 444 of the Acts of 2018, signed by Governor Baker on January 10, will require any person that has experienced a data security breach to contract with a third party provider to offer to each Massachusetts resident whose Social Security number was disclosed in the breach credit monitoring services at no cost to the consumer for at least 18 months (or 42 months for a credit bureau that has suffered such a breach). The amendments also require a person whose data security has been breached to certify to the Massachusetts Attorney General and the Director of Consumer Affairs and Business Regulation that the person’s credit monitoring services comply with the new requirements. The new data security breach requirements become effective on April 11, 2019. Click here for a copy of the law amending the data security breach statute.

Nutter Notes: The amendments to the data security breach statute also have added new requirements regarding the notice required to be made to the Massachusetts Attorney General and the Office of Consumer Affairs and Business Regulation in connection with a breach. Under the amended statute, the notice must identify the party responsible for the breach (if known), describe the types of personal information compromised, and state whether the person that has been breached maintains a written information security program. Another new requirement is that the notice to affected consumers will have to identify the parent company of the person that has been breached if the person is owned by another company – including, for example, a bank holding company that owns a bank if the bank has experienced the breach. The amendments prohibit a person that has experienced a breach from delaying notice to affected consumers on the grounds that the person that has been breached has not yet determined the total number of affected consumers. The amendments require that the person instead provide additional notices as soon as practicable after new information becomes available.

2. Attorney General Nominee Indicates Enforcement Policy for Marijuana Businesses

Attorney General nominee William Barr has provided an early indication of the approach that the U.S. Department of Justice (“DOJ”) is likely to take in enforcing federal drug laws against state-licensed marijuana businesses if he is confirmed by the U.S. Senate. During his confirmation hearing on January 15, Barr said that “my approach to this would be not to upset settled expectations and the reliant interests that have arisen as a result of the Cole memorandum,” referring to the guidance to federal prosecutors on federal marijuana enforcement priorities that former Attorney General Jeff Sessions revoked in early 2018. The 2013 and 2014 Cole memoranda described federal marijuana enforcement priorities and clarified whether and to what extent the DOJ would enforce federal drug laws against state-licensed, marijuana-related businesses. When Sessions announced the rescission of the Cole memoranda, he declined to publicly announce any new marijuana enforcement priorities. FinCEN’s 2014 guidance, BSA Expectations Regarding Marijuana-Related Businesses, is based on the federal marijuana enforcement priorities established by the Cole memoranda, and the FinCEN guidance remains effective despite the rescission of the Cole memoranda. The DOJ’s return to the Cole memoranda enforcement priorities would reduce certain risks associated with banking state-licensed marijuana businesses. Click here for a copy of the FinCEN guidance.

Nutter Notes: The budget bill signed by President Trump on January 25 revived the Rohrabacher-Blumenauer Amendment protections for medical marijuana, which had been allowed to lapse with the federal government shutdown. The Rohrabacher-Blumenauer Amendment prohibits the DOJ from expending funds appropriated by Congress to prevent states from “implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” The amendment has been part of DOJ appropriations bills since fiscal year 2015 and has been renewed again through February 15, as part of the short-term spending bill signed by the President to end the shutdown. An attempt by Senator Corey Gardner to legalize at the federal level state-licensed marijuana activity by adding the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act to a criminal justice reform bill was reportedly blocked by Senate Majority Leader Mitch McConnell on December 17. Senator Gardner said that he plans to reintroduce the STATES Act, which is co-sponsored by Senator Elizabeth Warren, in the next Congress.

3. CFPB Reports Assessments of Qualified Mortgage and RESPA Mortgage Servicing Rules

The CFPB has published two reports required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) that assess significant CFPB mortgage lending rules. The first of the two reports released on January 10 assesses the effectiveness of the CFPB’s Ability-to-Repay and Qualified Mortgage (“ATR/QM”) Rule. The second report assesses the effectiveness of the Mortgage Servicing Rule issued by the CFPB under the Real Estate Settlement Procedures Act (“RESPA”). The ATR/QM Rule report indicates that the introduction of the rule did not have a significant impact on access to credit overall, but also that the introduction of the rule was generally not associated with an improvement in loan performance as measured by the percentage of loans becoming 60 or more days delinquent within two years of origination. The report on the ATR/QM Rule also concluded that the rule may have negatively affected access to credit for certain market segments, particularly borrowers with a high debt-to-income ratio. The report on the RESPA Mortgage Servicing Rule indicates that home mortgage loan borrowers who became delinquent were less likely to experience foreclosure as a result of the introduction of the rule. The report also concludes that there is evidence indicating that rule has had an effect on borrowers’ ability to recover from delinquency, whether by self-curing or by obtaining a loan modification. Click here for a copy of the report on the ATR/QM rule, and click here for a copy of the report on the RESPA Mortgage Servicing Rule.

Nutter Notes: The ATR/QM Rule establishes the criteria that must be met for a loan to qualify for a presumption of compliance with the ability-to-repay requirements added to the Truth in Lending Act by the Dodd-Frank Act. The ability-to-repay requirements generally provide that no bank or other creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan. The RESPA Mortgage Servicing Rule implements mortgage servicing provisions of the Dodd-Frank Act that established new timelines for responding to borrower assertions of error and borrower requests for information. The RESPA Mortgage Servicing Rule also established new consumer protections related to how mortgage servicers interact with delinquent borrowers and new processes for considering borrowers for foreclosure alternatives. The RESPA Mortgage Servicing Rule also established new requirements for mortgage servicing policies and procedures, early intervention with delinquent borrowers, continuity of contact with delinquent borrowers, and loss mitigation procedures, as well as certain exemptions from the rule’s requirements.

4. Banks Encouraged to Work with Those Affected by Federal Government Shutdown

The Massachusetts Division of Banks has issued guidance encouraging Massachusetts banks to work with consumers and small businesses affected by the federal government shutdown. The guidance issued on January 17 advises banks to consider prudent workout arrangements to help borrowers facing a temporary hardship in making payments consistent with principles of safety and soundness. According to the Division of Banks, workout arrangements, including loan modifications or new extensions of credit, that are consistent with safe and sound lending practices are generally in the long-term best interest of the bank, and should not be subject to examiner criticism. The Division has also encouraged consumers and small business owners affected by the government shutdown to contact their lenders immediately if they are facing hardship in making payments due to the government shutdown. Click here for a copy of the Division’s guidance.

Nutter Notes: Similar guidance was also issued by the federal banking agencies, along with the CFPB, the Conference of State Bank Supervisors, and the NCUA, on January 17. The federal agencies’ guidance encouraged insured depository institutions to work with consumers facing a temporary hardship in making payments on debts such as mortgages, student loans, car loans, business loans, or credit cards due to the federal government shutdown The federal agencies’ guidance also indicated that prudent workout arrangements that are consistent with safe-and-sound lending practices should not be subject to examiner criticism. Funding for the federal agencies affected by the shutdown will lapse again on February 15 if President Trump and Congress do not resolve their dispute over funding for a proposed border wall. Click here for a copy of the federal agencies’ guidance.

5. Other Developments: Credit Quality and Flood Insurance

  • Report by Federal Banking Agencies Indicates Overall Improvement in Credit Quality

The Shared National Credit Program report released on January 25 by the federal banking agencies indicates that the level of loans with the lowest supervisory ratings (special mention and classified) in a portfolio of the largest and most complex credits shared by multiple regulated financial institutions has declined. However, the agencies also reported that special mention and classified commitment levels remain elevated compared to prior economic cycles, and that risks associated with leveraged lending activities are rising.

Nutter Notes: The Shared National Credit Program reviews credits with minimum aggregate loan commitments totaling $100 million or more that were shared by three or more regulated financial intuitions. The report covers the first and third calendar quarters of 2018. Click here for a copy of the Shared National Credit Program report.

  • Guidance Provided for Lending when National Flood Insurance Program Is Unavailable

The federal banking agencies announced on December 28, 2018 that, during periods in which the authority of the Federal Emergency Management Agency to issue flood insurance policies under the National Flood Insurance Program has lapsed due to a shutdown of the federal government, banks can continue to make loans subject to the National Flood Insurance Act without flood insurance. The agencies advised that such loans would not violate the agencies’ flood insurance rules, consistent with previous guidance issued in 2010.

Nutter Notes: According to the guidance, banks that make loans without flood insurance must continue to make determinations as to whether flood insurance is required; provide timely, complete, and accurate notices to borrowers; and comply with other parts of the flood insurance rules. In addition, the guidance states that banks must evaluate safety and soundness and legal risks and prudently manage those risks during the lapse period. Click here for a copy of the guidance.

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, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. Visit the U.S. rankings at ChambersandPartners.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Heather F. Merton. The information in this publication is not legal advice. For further information, contact:

Thomas J. Curry 

tcurry@nutter.com

Tel: (617) 439-2087

Kenneth F. Ehrlich

kehrlich@nutter.com

Tel: (617) 439-2989

Michael K. Krebs 

mkrebs@nutter.com

Tel: (617) 439-2288

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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