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Nutter Bank Report, July 2011

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1. Final Rules Preserve Many – But Not All – OCC Preemption Powers
2. Federal Reserve to Supervise Thrift Holding Companies Patiently
3. Agencies Release Counterparty Credit Risk Management Guidance
4. Agencies Issue Credit Score and Other Consumer Protection Rules
5. Other Developments: Thrift Regulation and Foreclosure Activities

1. Final Rules Preserve Many – But Not All – OCC Preemption Powers

The OCC has issued final rules implementing the preemption provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The final rules issued on July 20 implement several provisions of the Dodd-Frank Act, and also include changes to facilitate the transfer of certain regulatory functions from the OTS and revisions to the OCC’s rules on visitorial powers. The Dodd-Frank Act codifies the legal standard for preemption set forth in a landmark 1996 U.S. Supreme Court decision and changes the preemption standards applicable to federal savings associations to conform to those applicable to national banks. Accordingly, the final rules apply to federal thrifts the same preemption standard as applies to national banks and eliminate preemption for operating subsidiaries of national banks and operating subsidiaries of federal savings associations. OCC rules that preempted state laws that “obstruct, impair, or condition” a national bank’s powers have been removed because the OCC said that language was a source of misunderstanding and confusion about the OCC’s preemption powers. Finally, the OCC’s visitorial powers rule was amended to recognize the ability of state attorneys general to bring enforcement actions in court to enforce applicable laws against national banks and federal thrifts. The final rules became effective on July 21.

      Nutter Notes:  The final rules note that the OCC has reconsidered its position concerning preemption determinations that relied on the “obstructs, impairs, or conditions” standard under the old OCC preemption rule. The OCC said that, to the extent that an existing preemption determination relies exclusively on the phrase “obstructs, impairs, or conditions” as the basis for the determination, the validity of the determination would need to be reexamined to ascertain whether it is consistent with the preemption analysis required by the Dodd-Frank Act. The final rules also clarify the definition of “visitorial powers” to include direct investigations of national banks, such as through requests for documents or testimony directed to a bank to ascertain the bank’s compliance with law. The definition does not include collecting information from other sources, or from the bank through actions that do not constitute visitations, or as otherwise authorized under federal law.

2. Federal Reserve to Supervise Thrift Holding Companies Patiently

The Federal Reserve on July 21 issued supervisory guidance with respect to its supervision of savings and loan holding companies (SLHCs) and their non-depository subsidiaries. Board Supervision and Regulation Letter 11-11 describes the supervisory approach the Federal Reserve will take during the first supervisory cycle for SLHCs. For purposes of the guidance, the first supervisory cycle for an SLHC is the period of time between July 21, 2011, and the close of the first required examination. The guidance states that it is important that any company that owns and operates a savings association be held to appropriate standards of capitalization, liquidity, and risk management consistent with principles of safety and soundness, and appropriate standards of consumer compliance risk management especially where non-depository subsidiaries are engaged in activities involving consumer financial products or services. However, the guidance states, the Federal Reserve is “aware that it will take time” for Federal Reserve supervisory staff “to better understand an SLHC’s operations and business model.” The Federal Reserve “also is aware that SLHC management may need a period of time to make operational changes in response to the Federal Reserve’s supervisory expectations, if necessary.” The first cycle of SLHC examinations “will be instructive to both the Federal Reserve and SLHC management in terms of practical issues that arise in the supervision of an SLHC, particularly in the supervision of an SLHC that engages primarily in commercial, insurance, or broker-dealer activities.”

      Nutter Notes:  Title III of the Dodd-Frank Act transferred to the Federal Reserve on July 21, 2011 the supervisory functions of the OTS related to SLHCs and their non-depository subsidiaries. As a result, approximately 430 SLHCs transferred to Federal Reserve supervision on July 21, 2011. The Dodd-Frank Act provides that all regulations, guidelines, and other advisory materials issued by the OTS on or before the transfer date with respect to SLHCs and their non-depository subsidiaries will be enforceable until modified, terminated, set aside, or superseded. The Federal Reserve has approved a notice that will be published in the Federal Register shortly which outlines the OTS regulations that the Federal Reserve intends to continue to enforce after the transfer date. See “Other Developments” below. The Federal Reserve generally intends to transition SLHCs into the Federal Reserve’s designated supervisory portfolios of holding companies with similar characteristics and risk profiles. SLHCs that engage in significant commercial, insurance, and broker-dealer activities may be included in separate supervisory portfolios. Depending on the size and activities of the SLHC, Federal Reserve supervisory staff will use the first supervisory cycle to develop an understanding of the SLHC’s business profile; prepare an institutional overview, risk assessment, and supervisory plan; and begin initial discovery reviews and assessments, the guidance states.

3. Agencies Release Counterparty Credit Risk Management Guidance

The federal banking regulators have issued guidance on effective counterparty credit risk management, including supervisory expectations for an effective counterparty credit risk management framework. The June 29 guidance, issued by the Federal Reserve, the FDIC, the OCC and the OTS, is intended for use by all banking organizations, but particularly those with large derivatives portfolios, in setting their risk management practices, as well as by examiners as they assess institutions’ management of counterparty credit risk. The agencies advise institutions that do not have large derivatives portfolios to apply the guidance as appropriate for the size, nature and complexity of each institution’s counterparty credit risk profile. Counterparty credit risk is described in the guidance as the risk that the counterparty to a transaction defaults or deteriorates in creditworthiness before the final settlement of the transaction. The guidance emphasizes that banking organizations should use appropriate reporting metrics and exposure limits systems, have well-developed and comprehensive stress testing, and maintain systems that facilitate measurement and aggregation of counterparty credit risk across the organization. The guidance also includes sound practices for risk control functions including, but not limited to, validating models and systems, ensuring independent risk management and internal audit processes, and managing legal and operational risks.

      Nutter Notes: The guidance suggests that examiners expect the board of directors, or a designated board-level committee, to clearly articulate an institution’s risk tolerance for counterparty credit risk by approving relevant policies, including a framework for establishing limits on individual counterparty exposures and concentrations of exposures. The guidance recommends that senior management establish and implement a comprehensive risk measurement and management framework consistent with the risk tolerance articulated by the board that provides for the ongoing monitoring, reporting, and control of counterparty credit risk exposures. According to the guidance, counterparty exposures should be reported to the board and senior management at a frequency commensurate with the materiality of exposures and the complexity of transactions. Such reports should include concentration analysis and counterparty credit risk stress testing results that address exposures and potential losses under severe market conditions. The reports should also include an explanation of any measurement weaknesses or limitations that may influence the accuracy and reliability of the counterparty credit risk measures, according to the guidance. The guidance includes an appendix detailing model validation and systems evaluation considerations.

4. Agencies Issue Credit Score and Other Consumer Protection Rules

The Federal Reserve and the Federal Trade Commission (FTC) jointly issued final rules to implement the credit score disclosure requirements of the Dodd-Frank Act, and the FTC separately issued a new rule that bans deceptive claims about consumer mortgages in advertising or other types of commercial communications. The credit score disclosure rules released on July 6 implement a requirement under the Dodd-Frank Act that creditors disclose credit scores and related information to consumers in notices under the Fair Credit Reporting Act (FCRA) if a credit score is used in setting material terms of credit or in taking adverse action. The final rules amend the Federal Reserve’s Regulation V (Fair Credit Reporting) to revise the content requirements for risk-based pricing notices, and to add related model forms that reflect the new credit score disclosure requirements. The FTC is placing the final rules and model forms in the part of its regulations implementing FCRA. The final rules also amend certain model notices in the Federal Reserve’s Regulation B (Equal Credit Opportunity), which combine the adverse action notice requirements under Regulation B and FCRA, to reflect the new credit score disclosure requirements. The amendments to Regulations V and B are effective on August 15.

      Nutter Notes:  The FTC’s new mortgage advertising rule issued on July 19 applies to mortgage lenders, brokers and servicers, real estate agents and brokers, advertising agencies, home builders, lead generators, rate aggregators and other entities within the FTC’s jurisdiction that commonly do business with depository institutions. While the rule does not apply to banks and thrifts, the examples of prohibited deceptive claims provided by the rule could serve as guidance to state attorneys general or other governmental authorities about types of advertising practices that are generally considered unfair or deceptive in the enforcement of state consumer protection laws against depository institutions, such as Chapter 93A of the General Laws of Massachusetts. Examples of prohibited deceptive claims under the new FTC rule include misrepresentations about the existence, nature, or amount of fees or costs to the consumer associated with a mortgage; the terms, amounts, payments, or other requirements relating to taxes or insurance associated with a mortgage; and the variability of interest, payments, or other terms of a mortgage. The rule provides for the assessment of civil penalties among other remedies for violations of the prohibition against deceptive mortgage advertising. The Consumer Financial Protection Bureau (CFPB) and state law enforcement authorities also may bring actions to enforce the rule, which becomes effective on August 19.

5. Other Developments: Thrift Regulation and Foreclosure Activities

    •    OCC and Federal Reserve Assume Rulemaking Authority from the OTS

The OCC issued an interim final rule with request for comments that republishes regulations issued by the OTS that the OCC has authority to promulgate and enforce as of July 21. The rule re-numbers and re-issues former OTS regulations as new OCC regulations, with nomenclature and other technical amendments to reflect OCC supervision of federal savings associations. The rule is effective on July 21 and the comment period will close on October 11.    

      Nutter Notes:  The Federal Reserve also issued a notice that outlines the regulations previously issued by the OTS that the Federal Reserve will continue to enforce after assuming supervisory responsibility for SLHCs. The comment period on the notice will close on August 31. The Federal Reserve said that it will issue an interim final rule soon that will address the transfer of supervisory authority for SLHCs effective as of July 21.

    •    OCC Directs National Banks to Assess Foreclosure Management Practices

The OCC on June 30 released guidance on expectations for the oversight and management of mortgage foreclosure activities by national banks. The guidance directs national banks that have not already done so, to conduct self-assessments of foreclosure management practices to ensure that their practices conform to the expectations outlined in the guidance.   

      Nutter Notes:  According to the new guidance, the self-assessments should include testing and file reviews and be appropriate in scope, considering the level and nature of the bank’s mortgage servicing and foreclosure activity. The OCC expects each national bank to conduct a self-assessment of foreclosure management practices by no later than September 30.

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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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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