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Nutter Bank Report, March 2016

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The Nutter Bank Report is a monthly publication of the firm's Banking and Financial Services Group.

Headlines
1. FDIC Issues Final Rule to Assess Large Banks a Deposit Insurance Surcharge
2. Regulators Clarify the Capital Treatment of Qualifying TruPS CDOs
3. New Guidance Clarifies When Banks May Use Property Evaluations Rather than Appraisals
4. FDIC Issues Guidance on Supervisory Expectations for Abandoned Foreclosures
5. Other Developments: Customer Identification Programs and UDAP Rules 

1. FDIC Issues Final Rule to Assess Large Banks a Deposit Insurance Surcharge

The FDIC has approved a final rule to increase the Deposit Insurance Fund (“DIF”) to the minimum Deposit Reserve Ratio (“DRR”) of 1.35% as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The final rule approved on March 15 will impose on banks with at least $10 billion in assets a surcharge of 4.5 cents per $100 of their assessment base, after making certain adjustments. The FDIC expects the DRR will likely reach 1.35% after about 2 years of payments of the surcharges. The Dodd-Frank Act increased the minimum DRR—the ratio of the amount in the DIF to insured deposits—from 1.15% to 1.35% and required that the DRR reach that level by September 30, 2020. The Dodd-Frank Act also made banks with $10 billion or more in total assets responsible for the increase from 1.15% to 1.35%. The final rule will become effective on July 1. If the DRR reaches 1.15% before that date, the surcharges will begin on July 1. If the DRR has not reached 1.15% by that date, surcharges will begin the first quarter after the DRR reaches 1.15%. The FDIC reported that the DRR at the end of 2015 was 1.11%. Click here for a copy of the FDIC’s final rule.

    Nutter Notes: The FDIC currently operates under a Restoration Plan for the DIF, required by the Federal Deposit Insurance Act and originally adopted in 2008, while the DRR remains below 1.35%. According to the FDIC, the Restoration Plan is designed to ensure that the DRR will reach 1.35% by the September 30, 2020 deadline. In February 2011, the FDIC adopted a final rule that contained a schedule of deposit insurance assessment rates that apply to the regular assessments that all banks pay. When it adopted those rates in 2011, the FDIC said that assessment rates applicable to all banks only need to be high enough to reach 1.15% before the September 30, 2020 deadline because of the Dodd-Frank Act requirement that banks with $10 billion or more in assets are responsible for increasing the reserve ratio from 1.15% to 1.35%. The February 2011 final rule deferred the decision about how to assess banks with $10 billion or more in assets for the amount needed to reach 1.35%. In the February 2011 final rule, the FDIC also adopted a schedule of lower regular assessment rates that will go into effect for all banks’ regular assessments once the DRR reaches 1.15%. As a result, regular assessment rates for all banks will decline once the DRR reaches 1.15%, which the FDIC said is expected to occur in the first half of 2016. The FDIC said that the assessments paid at the lower rates are intended to raise the DRR gradually to the long-term goal of 2%.

2. Regulators Clarify the Capital Treatment of Qualifying TruPS CDOs

The federal banking agencies along with the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission have updated their joint guidance, in the form of answers to frequently asked questions (“FAQs”), to clarify the capital treatment of certain Collateralized Debt Obligations backed by Trust Preferred Securities (“TruPS CDOs”). Section 619 of the Dodd-Frank Act, also known as the “Volcker Rule,” permits a banking organization to retain its interest in certain qualifying TruPS CDOs. The FAQs released on March 4 clarify that the Volcker Rule does not require a banking organization to deduct from its Tier 1 capital an investment in a qualifying TruPS CDO retained pursuant to the Volcker Rule and its implementing regulations. According to those implementing regulations, a qualifying TruPS CDO is a TruPS CDO for which the issuer was established, and the CDO was issued, before May 19, 2010, the banking organization reasonably believes that the offering proceeds received by the issuer were invested primarily in Qualifying TruPS Collateral (as defined in the regulations), and the banking organization’s interest in the issuer was acquired on or before December 10, 2013 (or was acquired in connection with a merger or acquisition of a banking organization that acquired the interest on or before December 10, 2013). Click here for a copy of the updated FAQs.

    Nutter Notes: The agencies have previously released a non-exclusive list of issuers that meet the requirements to be considered qualifying TruPS CDOs. According to the updated FAQs, a banking organization holding an interest in a TruPS CDO that is a covered fund under the Volcker Rule but is not a qualifying TruPS CDO would be subject to all of the applicable limits and restrictions on interests in such covered funds, including the requirement to deduct the investment from its Tier 1 capital for purposes of determining compliance with applicable regulatory capital requirements. The updated FAQs do not affect regulatory capital requirements contained in the federal banking agencies’ general minimum capital requirements and overall capital adequacy standards. According to the updated FAQs, a bank or bank holding company may still be required to deduct investments in the capital of unconsolidated financial institutions, including issuers of qualifying TruPS CDOs, if the total of those investments exceed applicable thresholds.

3. New Guidance Clarifies When Banks May Use Property Evaluations Rather than Appraisals

The federal banking agencies have issued new guidance to clarify supervisory expectations for the use by banks of property evaluations rather than appraisals in estimating the market value of real property securing real estate-related loan transactions. According to the Interagency Advisory on Use of Evaluations in Real Estate-Related Financial Transactions released on March 4, three types of loan transactions do not require an appraisal, but do require a property evaluation under the agencies’ appraisal regulations: loans in which the transaction value (generally, the loan amount) is $250,000 or less; certain renewals, refinances or other transactions involving existing extensions of credit; and commercial real estate loans with a transaction value of $1,000,000 or less in which the sale of, or rental income derived from, real estate is not the primary source of repayment for the loan. Generally, the agencies’ appraisal regulations require banks to obtain an appraisal completed by a competent and qualified state-licensed or state-certified appraiser that complies with the Uniform Standards of Professional Appraisal Practice for any real estate-related financial transaction, unless an exception applies. However, the new guidance advises that there may be instances in which it would be prudent or necessary for a bank to obtain an appraisal even if the agencies’ appraisal regulations do not require it. Click here for a copy of the advisory.

    Nutter Notes: The advisory describes the agencies’ existing guidance set forth in the Interagency Appraisal and Evaluation Guidelines for the use of an evaluation rather than an appraisal to estimate market value for real estate securing certain loan transactions. Unlike an appraisal, an evaluation does not have to be developed by a state-licensed or state-certified appraiser. The advisory suggests that bankers and third-party real estate professionals that have access to local market information may be qualified to prepare evaluations for a bank in some smaller communities. The advisory also provides examples of when it may be appropriate to use an alternative valuation approach and other information to develop an evaluation in areas with few or no recent comparable sales in reasonably close proximity to the property securing the loan transaction. The advisory recommends that every property evaluation should contain sufficient information and analysis to support the estimated market value and the bank’s decision to extend credit, regardless of the method used to reach the estimated market value of the property.

4. FDIC Issues Guidance on Supervisory Expectations for Abandoned Foreclosures

The FDIC has released new guidance clarifying supervisory expectations in connection with decisions to discontinue foreclosure proceedings after initiating a foreclosure. The guidance entitled Discontinuation of Foreclosure Proceedings, published with FDIC Financial Institution Letter no. FIL-14-2016 on March 2, advises banks that examiners expect them to have appropriate policies and procedures in place that address certain issues in connection with decisions to abandon a foreclosure, including obtaining and assessing current information about the property’s market value and criteria for determining when a bank’s lien should be released. The guidance also advises that examiners expect such policies and procedures to address notifying local authorities (such as tax authorities, courts, or code enforcement departments) of a decision to abandon a foreclosure, and notifying the borrower of the discontinuance of a foreclosure action. According to the guidance, notices to the borrower should indicate that the mortgage holder is no longer pursuing foreclosure, whether the lien has been released and that the borrower has the right to occupy the property until a sale or other title transfer action occurs. Notices to the borrower should also state, according to the guidance, that the borrower remains financially obligated for the outstanding loan balance, real estate and other applicable taxes, homeowner association dues, and insurance premiums, and that the borrower is responsible for maintaining the property in accordance with all state and local laws, codes, and ordinances. Click here for a copy of Financial Institution Letter no. FIL-14-2016.

    Nutter Notes: According to the foreclosure abandonment guidance, banks should expect examiners to review banks’ policies and practices related to foreclosure proceedings, including determinations to discontinue a foreclosure action. The guidance advises that, during safety and soundness examinations, examiners will review banks’ analyses supporting any decisions to initiate, pursue or discontinue foreclosure actions, decisions to release liens, and management reports on these activities. The guidance advises that, during consumer protection examinations, examiners will review the actions taken by banks to contact the borrower and whether notices to the borrower and local authorities regarding their decision to discontinue a foreclosure proceeding include the information described above and comply with applicable state or local government notification requirements. Consumer protection examiners also will review whether banks’ consumer inquiry and complaint processes adequately address concerns raised regarding abandoned foreclosures, according to the guidance.

5. Other Developments: Customer Identification Programs and UDAP Rules 

  • Interagency Guidance on CIP Requirements for Holders of Prepaid Payment Cards

The federal banking agencies on March 21 released joint guidance clarifying the applicability of the Customer Identification Program (“CIP”) rule to prepaid cards issued by banks. According to the guidance, a bank’s CIP should apply to the holders of certain prepaid cards issued by the bank as well as holders of such prepaid cards purchased under arrangements with third parties that sell, distribute, promote, or market prepaid cards on behalf of the bank.

    Nutter Notes: According to the guidance, a bank should determine whether the issuance of a prepaid card to a purchaser results in the creation of an “account” (as defined in the CIP rule) and, if it does, the bank should determine the identity of the bank’s “customer” (also defined in the CIP rule). A bank’s CIP requirements should be applied to that customer. Click here for a copy of the Interagency Guidance to Issuing Banks on Applying Customer Identification Program Requirements to Holders of Prepaid Cards. 

  • Massachusetts Division of Banks Proposes Amendments to UDAP Rules

The Massachusetts Division of Banks on March 16 published proposed amendments to its Unfair and Deceptive Practices in Consumer Transactions rule (209 CMR 40.00) that would provide that compliance with specific provisions of certain CFPB regulations constitutes compliance with the Division’s rule.

    Nutter Notes: The proposed amendments also incorporate future changes to federal regulations while preserving certain differences under Massachusetts law that the Division deems to be more advantageous to consumers, including the definition of high cost home loan or high cost mortgage and the method of calculating points and fees. Click here for a copy of the proposed amendments. 

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 Bridget L. Vellucci. The information in this publication is not legal advice. For further information, contact:

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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