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Nutter Bank Report, July 2010

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1.  Congress Advances Bill to Provide Capital to Banks for Small Business Lending
2.  New Federal Rules Require Registration of Originators Employed by Banks
3.  Division of Banks Clarifies When Electronic Mortgage Disclosures Are Permitted
4.  FDIC to Conduct Special Examinations Under MOU with Federal Agencies
5.  Other Developments: Investment Advisers and Regulatory Reform Information

1.  Congress Advances Bill to Provide Capital to Banks for Small Business Lending

Congress has advanced a bill that would establish the Small Business Lending Fund Program to provide equity capital to community banks to encourage the extension of credit to small businesses.  The bill, H.R. 5297, was approved by the House of Representatives on June 17 and received the support of 60 senators in a key procedural vote on July 22.  The legislation would establish in the Treasury Department the Small Business Lending Fund to provide up to $30 billion of capital investments in eligible institutions through preferred stock or other securities, as Treasury may specify.  The initial dividend or interest rate would be 5% on securities issued to Treasury by an eligible institution under the Program.  Within the first 2 years after the date of the capital investment under the Program, the rate may be reduced to a rate as low as 1% based on the amount of the increase in the institution’s small business lending.  However, the rate could potentially increase to 7% if the amount of the institution’s small business lending has remained the same or decreased measured against a baseline.  The bill would require the Treasury Secretary to issue regulations and other guidance to permit eligible institutions to refinance investments received from Treasury under the TARP Capital Purchase Program (CPP) with the investments from the Small Business Lending Fund Program.  Institutions that had less than $10 billion in total assets as of December 31, 2009 would be eligible to apply to receive a capital investment under the new Program.  The legislation is still under consideration in the Senate.

Nutter Notes:  Institutions with less than $1 billion in total assets would be eligible for a capital investment in an amount up to 5% of risk-weighted assets, and institutions with more than $1 billion but not more than $10 billion in total assets would be eligible for a capital investment in an amount up to 3% of risk-weighted assets.  The bill expressly provides that the Small Business Lending Fund Program is separate and distinct from the TARP.  An institution would not, by virtue of receiving a capital investment under the Program, be considered a TARP recipient.  Among other things, this means that participation in the Program would not by itself subject the institution to the Treasury's TARP-related executive compensation regulations under Section 111 of the Emergency Economic Stabilization Act of 2008.  A key difference between the House and Senate versions of the bill relates to the definition of the term “small business lending,” which would affect the types of loans that may be counted towards a reduction of the dividend or interest rate payable on securities issued to Treasury under the Program.  The version currently being considered by the Senate appears to remove real estate development loans from the categories of eligible small business loans, and would also exclude any loan of an original principal amount of $10 million or more and any loan to a business with more than $50 million in revenue.  

2.  New Federal Rules Require Registration of Originators Employed by Banks

The federal banking agencies have issued final rules 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).  Under the rules issued on July 28, the federal banking agencies will provide public notice of the date on which the Nationwide Mortgage Licensing System and Registry (NMLS) will begin accepting registrations under federal requirements.  Depository institutions, their subsidiaries and mortgage loan originators employed by them will have 180 days from that date to comply with the initial federal registration requirements.  Each residential mortgage loan originator will obtain a unique identifier when he or she registers with the NMLS.  Under the final rules, registered mortgage loan originators and depository institutions must provide these unique identifiers to applicants.  The agencies announced that they anticipate that the NMLS could begin accepting federal registrations as early as January 28, 2011, and advised mortgage loan originators employed by depository institutions and their subsidiaries not to register until the agencies instruct them to do so.  The final rules become effective on October 1, 2010.

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 manage and support the licensing of mortgage loan originators by the states.  As part of this registration process, residential mortgage loan originators must furnish to the NMLS information and fingerprints for background checks.  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 are registered with the NMLS.  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.  Division of Banks Clarifies When Electronic Mortgage Disclosures Are Permitted

The Massachusetts Division of Banks clarified in a recent legal opinion letter that certain notices provided to a borrower in a residential mortgage loan transaction must be provided on paper even if the borrower has previously consented to conduct the transaction electronically.  The July 13 opinion letter reviews the laws and regulations applicable to disclosures and signatures by electronic means in mortgage loan transactions in Massachusetts.  The federal Electronic Signatures in Global and National Commerce Act (E-Sign Act) and Massachusetts Uniform Electronic Transaction Act (MUETA) establish a framework for electronic transactions, including the use of electronic signatures and disclosures in mortgage lending transactions.  Under MUETA and E-Sign, a signature, contract, or other record relating to a transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form.  The Division points out in the opinion letter that notices provided to a borrower regarding default, acceleration, repossession, foreclosure, right to cure, or eviction under a credit agreement secured by a primary residence of an individual are not subject to MUETA or E-Sign and the borrower must receive physical (paper) disclosure of these notices.

Nutter Notes:  Under MUETA and E-Sign, an electronic signature will satisfy a legal requirement that certain documents be signed if the parties to the contract have properly consented to conduct the transaction electronically.  As a result, banks in Massachusetts must obtain the proper consent of a borrower prior to making any disclosures or obtaining signatures electronically.  The bank must also inform the borrower when it obtains the required consent that the borrower has the right to receive physical copies of the documents and how the borrower may obtain the copies, the scope of the borrower’s consent, and the hardware or software requirements to access and retain the electronic documents.  In addition, recent amendments to Massachusetts Truth in Lending regulations recognize that disclosures in consumer credit transactions may be provided to the consumer in electronic form, subject to compliance with the consumer consent and other applicable provisions of the E-Sign Act.  The Division’s opinion letter suggests that mortgage lenders consider the OCC’s advisory letter entitled Electronic Consumer Disclosures and Notices, dated October 1, 2004 (AL 2004-11), for details about the type and content of consumer consents, and FannieMae guidelines on preparing a consumer loan which has been documented electronically for sale on the secondary market.

4.  FDIC to Conduct Special Examinations Under MOU with Federal Agencies

The federal banking agencies have approved a new Memorandum of Understanding (MOU) to enhance the FDIC’s existing backup authorities over insured depository institutions that are directly supervised by the Federal Reserve, OCC or OTS.  Under the terms of the agreement among the agencies approved on July 12, the FDIC may make special examinations of 4 categories of insured depository institutions (Covered IDIs) for which the FDIC is not the primary federal regulator.  The 4 categories of Covered IDIs are “problem” institutions (those with composite ratings of 3 or worse or that are undercapitalized), institutions that present a heightened risk to the Deposit Insurance Fund under certain circumstances, institutions that are large and complex, and institutions that are affiliated with organizations that have borrowed more than $5 billion under the FDIC’s Temporary Liquidity Guarantee Program.  According to the FDIC, the MOU will improve the FDIC’s ability to access information necessary to understand, evaluate, and mitigate its exposure to insured depository institutions, particularly the largest and most complex institutions.  The MOU replaces the previous accord among the federal banking agencies on the FDIC’s special examination authority reached in January 2002.    

Nutter Notes:  Under section 10(b)(3) of the Federal Deposit Insurance Act, the FDIC has the authority “to make any special examination of any insured depository institution whenever the [Board of Directors of the FDIC] determines a special examination of any such depository institution is necessary to determine the condition of such depository institution for insurance purposes.”  The MOU gives the FDIC backup supervision authority under an expanded list of circumstances, including when the insurance pricing system suggests an insured depository institution might be at higher risk, when institutions are defined as “large” under international regulatory guidelines, or when large bank holding companies are determined to be systemically important under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which President Obama signed into law on July 21.  When conducting special examinations of a Covered IDI, the FDIC will have access to the reports of examination made by the primary federal regulator and any state regulator and information from other sources.  The FDIC may also participate in examinations and meetings with the institution’s personnel conducted by the primary federal regulator.  At large, complex insured depository institutions, the FDIC will establish an expanded continuous, full-time staff presence on-site.  

5.  Other Developments: Investment Advisers and Regulatory Reform Information

  •  SEC Evaluates Standards of Care Owed by Investment Advisers

The SEC on July 27 published a request for public comment to inform its ongoing study of the obligations and standards of care owed by investment advisers and broker-dealers to retail investors.  The public comment period will remain open for 30 days after publication in the Federal Register, which is expected shortly.

Nutter Notes:  The SEC’s study will evaluate the effectiveness of existing legal or regulatory standards of care for investment advisers, broker-dealers and their associated persons related to the protection of retail customers, and whether there are gaps, shortcomings, or overlaps in the current legal or regulatory standards.  The study is required under the Dodd-Frank Act.

  • FDIC Launches Web Page to Track Regulatory Reforms

The FDIC launched a new regulatory reform webpage, accessible through the FDIC’s main website, on July 22 that is dedicated to the Dodd-Frank Act.  The webpage will track FDIC guidance related to the implementation of the Dodd-Frank Act, related regulatory developments and FDIC summaries of certain provisions of the new law.

Nutter Notes:  The regulatory reform web page currently includes a summary of the FDIC’s primary new responsibilities under the Dodd-Frank Act and a recent Financial Institution Letter describing the permanent increase in the current standard maximum deposit insurance amount of $250,000 made by the new law.

  • Nutter’s Review and Analysis of Dodd-Frank Act Available Online

Nutter’s Banking and Financial Services, Commercial Finance and Securities Regulation Groups have posted a 103-page Review and Analysis of the Dodd-Frank Wall Street Reform and Consumer Protection Act on Nutter’s website.  Click here for a pdf file of the document.

Nutter Notes: The Review and Analysis runs through each of the Dodd-Frank Act’s sixteen titles and highlights provisions of importance.  A detailed Table of Contents helps the reader navigate to particular provisions that may be of interest.

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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