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Nutter Bank Report, March 2008

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1.  Federal Reserve Opens the Discount Window to Investment Banks
2.  FDIC Issues Warning About CRE Concentrations
3.  OCC Issues Rule on Emergency Exemptions from Lending Limits
4.  Revised Guidance Issued on Massachusetts Subprime ARM Requirements
5.  Other Developments: RESPA Proposal and FHLB Investments in Mortgage-Backeds

Full Reports

1.  Federal Reserve Opens the Discount Window to Investment Banks

The Federal Reserve has authorized the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary securities dealers to provide financing to participants in securitization markets.  The Primary Dealer Credit Facility, which became available on March 17, will be in place for at least six months and may be extended if conditions warrant.  The Primary Dealer Credit Facility differs from primary credit provided to depository institutions at the discount window in a number of ways, the Federal Reserve said.  Currently, the primary credit facility for eligible depository institutions offers overnight as well as term funding for up to 90 calendar days at the primary credit rate secured by discount window collateral.  The Primary Dealer Credit Facility, in contrast, is an overnight facility that will be available to primary dealers (rather than depository institutions) for a period of 120 business days.  The Primary Dealer Credit Facility is subject to a frequency-of-usage fee, and the loans will be secured by a different basket of securities than those eligible for pledging at the discount window; in particular, only priced securities will be accepted in the Primary Dealer Credit Facility.  Primary dealers will participate through their clearing banks.

Nutter Notes:  The authority cited by the Federal Reserve for its action in opening the discount window to primary dealers is Section 13(3) of the Federal Reserve Act, which provides that, “[i]n unusual and exigent circumstances,” the Federal Reserve may authorize any Federal Reserve Bank, to lend to any individual, partnership, or corporation, when such loans are secured to the satisfaction of the Federal Reserve Bank, provided that the Federal Reserve Bank has “evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions.”  Loans made to primary dealers will increase the amount of reserves in the banking system as other discount window loans do.  To offset the increase, the Federal Reserve Open Market Trading Desk plans to use a number of tools, including outright sales of Treasury securities, reverse repurchase agreements, redemptions of Treasury securities, and changes in the sizes of conventional reverse repurchase transactions.

2.  FDIC Issues Warning About CRE Concentrations

The FDIC has issued a letter to financial institutions emphasizing the importance of strong capital and loan loss allowance levels, along with robust credit risk management practices, for banks with significant concentrations of commercial real estate loans, and construction and development loans.  The March 17 letter is intended to complement the principles articulated in the December 6, 2006, interagency statement titled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices.”  FDIC Chairman Sheila Bair said “it is a good time to re-emphasize the 2006 guidance” because a number of banks have “significant” CRE concentrations, and “the weakness in housing across the country may have an adverse effect on those institutions.”  The letter advises institutions with significant CRE concentrations to maintain or implement processes to maintain strong capital levels and increase capital, if necessary, ensure that loan loss allowances are at appropriate levels, manage CRE and C&D loan portfolios closely, maintain updated financial and analytical information, and bolster the loan workout infrastructure.  The FDIC encouraged institutions to continue making CRE and C&D credit available in their communities using prudent lending standards.

Nutter Notes:  The FDIC’s letter says that institutions with significant CRE and C&D loan exposure may require more capital because of uncertainty about market conditions, which increases the risk of unexpected losses.  The letter recommends that institutions analyze the collectibility of CRE and all other exposures at least quarterly and maintain an ALLL at a level that is appropriate to cover estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated credit losses in the remainder of the loan portfolio.  In reviewing their ALLL methodology, institutions should consult recent supervisory guidance, including the December 13, 2006 interagency statement titled “Interagency Policy Statement on the Allowance for Loan and Lease Losses.”  The FDIC letter indicates that management information systems should provide an institution’s board and management with effective data on concentration levels and market conditions, and that a strong credit review and risk rating system that identifies deteriorating credit trends early should be implemented.  The letter also reminds institutions to ensure they have sufficient staff with the skills to properly manage an increase in problem loans and workouts.

3.  OCC Issues Rule on Emergency Exemptions from Lending Limits

The OCC has amended its rules on lending limits by adding a special lending limit for temporary funding arrangements involving loans and extensions of credit that the OCC determines are essential to address emergency situations.  The interim final rule, which was effective on March 20, enables the OCC to give a national bank temporary authority to lend to one borrower in an amount in excess of the otherwise applicable lending limit in an emergency situation, which would include critical financial markets instability.  With the written approval of the OCC, an eligible national bank is permitted to make loans and extensions of credit to one borrower subject to the special temporary lending limit where the OCC determines that such loans and extensions of credit are essential to address an emergency situation, will be of short duration, will be reduced in amount and in a timeframe and manner acceptable to the OCC, and do not present unacceptable risk to the lending bank.  In granting approval for a special temporary lending limit, the OCC will impose supervisory oversight and reporting measures that it determines are appropriate to monitor compliance with these standards.  Although the interim final rule is already effective, the OCC will accept comments on it through April 21.

Nutter Notes:  The release accompanying the interim rule said that it would “provide the OCC with an additional tool that will help ensure the safety and soundness of national banks and liquidity to the credit markets.”  The special temporary lending limit is in addition to the amount a national bank may lend to one borrower under the combined general lending limit (15 percent of the bank’s capital and surplus, plus an additional 10 percent secured by readily marketable collateral).  The new emergency lending limit is based on the OCC’s existing authority to approve and exempt from the general lending limit loans or extensions of credit by a national bank to another financial institution when an emergency situation exists.  Recent market conditions “have highlighted that . . . temporary exemptions from the lending limits may be appropriate for loans . . . to other types of parties” besides financial institutions.  Only national banks that are “well capitalized” and have a composite rating of 1 or 2 under the Uniform Financial Institutions Rating System in connection with the most recent examination, with at least a rating of 2 for asset quality and management, are eligible for the emergency lending authority under the interim rule. 

4.  Revised Guidance Issued on Massachusetts Subprime ARM Requirements

The Massachusetts Division of Banks has modified and re-issued Regulatory Bulletin 1.3-104, which provides guidance on whether a variable or adjustable rate mortgage loan to a first-time home loan borrower qualifies as “subprime” for the purposes of Section 17B½ of Chapter 184 of the General Laws.  The revised Regulatory Bulletin, released on March 12, also implements the consumer counseling and affirmative opt-in requirements contained in General Laws Chapter 184, Section 17B½. Substantive changes include revisions to the rate thresholds for identifying when a first lien mortgage loan qualifies as subprime.  The Division adjusted the interest rate spread to three percentage points above the yield on U.S. Treasury securities with comparable maturities for conforming loan amounts and four percentage points above the yield on U.S. Treasury securities with comparable maturities where the loan amount exceeds the Fannie Mae or Freddie Mac limits.  The modified Regulatory Bulletin can be found on the Division's web site at under “News and Updates” as well as under the link provided for “Legal Resources.”

Nutter Notes:  In the initial published version of the bulletin, an adjustable rate mortgage loan secured by a first lien that was within Fannie Mae’s or Freddie Mac’s conforming loan limit but that failed for any reason to meet their underwriting guidelines was defined to be a “subprime” loan.  That provision has been eliminated from the revised Regulatory Bulletin.  The revisions also include a clarification of the definition of the fully indexed rate and clarification that a lender must obtain written certification that the borrower has received counseling and an opt-in statement at or before the loan closing.  An industry letter announcing the original publication of the Regulatory Bulletin, which became effective on January 30, invited comment from interested parties through February 20.  The technical and substantive changes implemented by the Division were based on the public comments it received.

5.  Other Developments: RESPA Proposal and FHLB Investments in Mortgage-Backeds

  • HUD Proposes Revisions to RESPA Regulation

The Department of Housing and Urban Development has proposed rules to improve consumer disclosures and the closing process in home mortgage loan transactions.  The proposed revisions to HUD’s rules implementing the Real Estate Settlement Procedures Act, published on March 14, include a provision that would require that mortgage lenders and brokers provide a new form of Good Faith Estimate to prospective borrowers.  Comments on the proposal are due by May 24. 

Nutter Notes:  The new GFE would disclose interest rate and monthly payment information, consolidate closing costs into major categories, specify the charges that can and cannot change at settlement, and disclose yield-spread premiums paid to mortgage brokers.  HUD also proposed that settlement agents read a closing script to borrowers at closing to ensure that the settlement agent compares the estimated and actual settlement charges and discusses key terms of the loan.

  • FHLBs Permitted to Expand Investments in Mortgage Backed Securities

The Federal Housing Finance Board will allow the Federal Home Loan Banks to increase their investments in mortgage-backed securities.  Under the temporary authority, which will expire on March 31, 2010, the FHLBs can double the amount of their purchases of mortgage backed securities from the current 300 percent of capital to 600 percent of capital by buying only Fannie Mae and Freddie Mac securities, including certain collateralized mortgage obligations or real estate mortgage investment conduits. 

Nutter Notes:  If the FHFB determines that a FHLB’s market risk management is not adequate or appropriate, the FHLB will not be permitted to purchase the securities until it addresses the FHFB’s concerns.  The FHFB stated that its goal is to increase the demand for newly created Fannie Mae and Freddie Mac mortgage backed securities to add liquidity to the mortgage market and, ultimately, lower mortgage rates and increase home purchases.

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 in the 2007 Chambers and Partners U.S. rankings.  The “well known and well-versed” Nutter team “excels” at corporate and regulatory banking advice, according to the 2007 Chambers Guide.  Visit the 2007 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:

Gene A. Blumenreich 
Tel: (617) 439-2889 

Kenneth F. Ehrlich 
Tel: (617) 439-2989 

Michael K. Krebs
Tel: (617) 439-2288


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