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Nutter Bank Report, May 2012

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1. CFPB Considering New Rules to Regulate Mortgage Loan Origination
2. Final Stress-Testing Guidance Issued with Clarification for Community Banks
3. U.S. Supreme Court Overturns 2001 HUD Interpretation of RESPA Fee-Splitting Restriction
4. SEC Provides Guidance on Accounting Policy Disclosures by Smaller Financial Institutions
5. Other Developments: Security Corporations and DOB Regulatory Bulletins

1. CFPB Considering New Rules to Regulate Mortgage Loan Origination
The Consumer Financial Protection Bureau (CFPB) recently outlined proposed rules it is considering that would place new restrictions on mortgage points and fees and loan originator compensation practices. The proposals released on May 9 would also establish standard qualifications and screening requirements for mortgage loan originators that would apply to banks and non-bank mortgage lenders and brokers. Specifically, the proposed rules would require that any discount point must be “bona fide,” which would mean that consumers must receive at least a certain minimum reduction of the interest rate in return for paying the point. The proposed rule would implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that generally prohibit consumers from paying certain points or fees where a mortgage loan originator is being compensated by the lender or mortgage brokerage firm. The proposed rules would also require that mortgage lenders offer a no-discount-point loan option to enable consumers to better compare competing offers from different lenders. The proposed rules would ban origination fees or origination points that vary with the size of a loan. Instead, the proposed rules would allow only flat origination fees. The CFPB said that it expects to issue a formal notice of proposed rulemaking based on the outline this summer and finalize the new rules by January 2013.

    Nutter Notes: In addition to regulating points and fees, the proposals the CFPB is considering would also set standards for mortgage loan originators’ qualifications and prohibit compensation practices that provide incentives to steer consumers to certain mortgage loans. The rules would require that all loan originators meet minimum qualification standards, and standards for character, fitness, and financial responsibility. The proposed rules would also require that loan originators be screened for felony convictions and that loan originators undertake training to ensure they have the knowledge necessary for the types of loans they originate. In addition, the CFPB’s proposed rules would reaffirm a Federal Reserve rule that bans the practice of varying loan originator compensation based on interest rates or certain other loan terms that create incentives to steer consumers into more profitable or higher-cost mortgages and away from lower-cost or other mortgages for which they qualify. The proposal would also clarify certain issues in the Federal Reserve rule that may cause confusion, such as the application of the rule to retirement plans, profit-sharing plans, and pricing concessions. The CFPB said that it plans to engage in discussions with consumers and the industry through a Small Business Review Panel that will meet with a group of representatives of small financial services providers to provide feedback on the proposals.

2. Final Stress-Testing Guidance Issued with Clarification for Community Banks
The Federal Reserve, FDIC and OCC have issued final supervisory guidance setting forth principles to be followed by banking organizations with total consolidated assets of more than $10 billion when conducting stress-testing and to clarify expectations for stress testing by community banks. The joint guidance for community banks issued by the three agencies on May 14 applies to banks, savings associations, bank holding companies and savings and loan holding companies with $10 billion or less in total assets. The joint guidance clarified that community banks are not required or expected to conduct the types of stress testing required of larger organizations. However, the guidance emphasizes that the agencies expect all banking organizations, regardless of size, to have the capacity to analyze the potential impact of adverse outcomes on their financial condition. The guidance points out that certain portions of existing interagency guidance applicable to all banking organizations discuss how banking organizations should address potential adverse outcomes as part of sound risk management practices, such as guidance on interest rate risk management, commercial real estate concentrations, and funding and liquidity management.

    Nutter Notes: The final supervisory guidance on stress-testing practices at large banking organizations, also issued on May 14, builds upon previously issued supervisory guidance that discusses the uses and merits of stress testing in specific areas of risk management. The guidance for banking organizations with total consolidated assets of more than $10 billion outlines general principles for a satisfactory stress testing framework and describes various stress testing approaches and how stress testing should be used at various levels within an organization. The guidance also discusses the importance of stress testing in capital and liquidity planning and the importance of strong internal governance and controls as part of an effective stress-testing framework. The guidance does not implement the stress testing requirements of the Dodd-Frank Act or those in the Federal Reserve’s capital plan rule. However, the agencies said that they expect large banking organizations to follow the principles set forth in the guidance when conducting stress testing in accordance with the Dodd-Frank Act, the Federal Reserve’s capital plan rule, and other statutory or regulatory requirements.

3. U.S. Supreme Court Overturns 2001 HUD Interpretation of RESPA Fee-Splitting Restriction
The United States Supreme Court ruled that a provision of the Real Estate Settlement Procedures Act (RESPA) that prohibits giving or accepting a portion of a charge made or received for a real estate settlement service other than for services actually performed applies only to fees shared between two or more settlement service providers, contrary to a 2001 policy statement issued by the Department of Housing and Urban Development (HUD). The May 24 decision of the Supreme Court resolved cases brought by borrowers who had obtained mortgage loans from the same lender where the borrowers later claimed that the lender violated RESPA’s fee-splitting restriction by charging fees for which no services were provided. The fees involved in each of the claims included loan discount fees, a loan processing fee, and a loan origination fee. The lower federal court had ruled that this provision of RESPA does not prohibit the collection of an unearned charge by a single settlement service provider, but only prohibits transactions in which a provider shares a part of a settlement service charge with another person who did nothing to earn that part. The Supreme Court unanimously agreed, holding that RESPA’s fee-splitting restriction does not apply to a single settlement service provider’s retention of an unearned fee, and therefore does not provide a basis for a borrower to challenge a lender’s fee on grounds that the fee was unreasonably high.

    Nutter Notes: The RESPA fee-splitting restriction addressed by the Supreme Court’s decision is found at 12 U.S.C. § 2607(b). The borrowers’ claims were based in part on a 2001 policy statement issued by HUD, which says that Section 2607(b) “prohibit[s] any person from giving or accepting any unearned fees, i.e., charges or payments for real estate settlement services other than for goods or facilities provided or services performed.” The policy statement specifically interprets Section 2607(b) “as not being limited to situations where at least two persons split or share an unearned fee.” On July 21, 2011, HUD’s consumer-protection functions under RESPA were transferred to the CFPB by the Dodd-Frank Act. The CFPB issued a notice that day stating that it would apply HUD’s policy statements regarding RESPA. RESPA provides a private right of action for consumers to enforce violations of Section 2607 by suing any person who violates the prohibitions or limitations of Section 2607. Section 2607(a) contains RESPA’s anti-kickback provision. A consumer may recover from the settlement service provider an amount equal to three times the charge paid for the settlement service at issue.

4. SEC Provides Guidance on Accounting Policy Disclosures by Smaller Financial Institutions
The SEC’s Corporation Finance Division has issued guidance drawn from its experience with smaller financial institutions’ Management’s Discussion and Analysis and accounting policy disclosures, particularly those disclosures related to impaired loans. The guidance published on April 20 describes additional disclosures the SEC often requests on the topics of the allowance for loan losses, charge-off and nonaccrual policies, commercial real estate, loans measured for impairment based on collateral value, credit risk concentrations, troubled debt restructurings, other real estate owned, and FDIC-assisted transactions. For example, the guidance points out that the SEC often asks banking organizations to provide more disclosure about how they calculate the allowance for loan losses and its two components (allocations for individually evaluated impaired loans, and allocations for all other loans that are not individually identified as impaired). The guidance suggests that a banking organization consider explaining, depending on the circumstances, why its allowance ratios or the components of the allowance have fluctuated, the basis for any large unallocated allowance, the rationale for changes in methodologies for determining the allowance, or the details of any geographic or higher-risk loan type concentrations.

    Nutter Notes: With respect to disclosures about charge-off and nonaccrual policies, the SEC’s guidance recommends that, when a banking organization appears to have a material amount of loans on nonaccrual status or charged off in a period, the banking organization should consider describing its nonaccrual and charge-off policies in its public disclosures. For example, banking organizations should consider disclosing the relevant thresholds they use to place loans on nonaccrual status or charge off past due loans, explaining why a loan was not charged off at a specific past-due threshold, and discussing the reasons for changes in charge-off policies. For banking organizations with significant concentrations of CRE loans, the SEC suggests that disclosures explain, if applicable, why there are large fluctuations in charge-offs or nonperforming CRE loans, the workout strategies uses to address collectability concerns and the dollar amount of loans modified under each strategy, and how guarantees or other collateral impacted conclusions regarding whether a CRE loan whose term has been extended at or near the loan’s original maturity is impaired. The SEC noted that the guidance may not be applicable to all reporting companies or address all of the material disclosure issues applicable to each company’s circumstances.

5. Other Developments: Security Corporations and DOB Regulatory Bulletins 

  • Massachusetts Department of Revenue Releases Final Security Corporation Directive

The Massachusetts Department of Revenue (DOR) on May 25 released the final text of a new directive, Directive 12-2, which clarifies that the pledge by a shareholder of shares of stock of a security corporation as security or collateral for a loan to the shareholder, in and of itself, will not preclude classification of the corporation as a security corporation or result in revocation of a corporation’s existing security corporation classification.

    Nutter Notes: The final directive also includes examples of restrictive covenants in loan agreements that the DOR says would result in revocation of security corporation classification, such as a covenant requiring the shareholder to withdraw securities from the security corporation and pledge those securities to the lender or a covenant directing the security corporation’s investments to securities of the shareholder, the pledgee or their respective affiliates. 

  • Massachusetts Division of Banks Repeals Several Regulatory Bulletins

As part of a comprehensive review of all bank Regulatory Bulletins and regulations, the Massachusetts Division of Banks (DOB) announced on May 6 that certain Regulatory Bulletins have been repealed, including Regulatory Bulletin 1.3-101 (Adjustable Rate Mortgage Loans), and Regulatory Bulletin 1.3-102 (Truth in Lending Reimbursement Guidelines).

    Nutter Notes: The DOB’s announcement said that a summary of the Truth in Lending Reimbursement Guidelines will be incorporated into Regulatory Bulletin 1.1-101 (Examination Policies). The DOB also announced that is has revised certain bulletins, including Regulatory Bulletin 1.3-104 (Counseling and Opt-In Requirements for Adjustable Rate Mortgage Loans Made to First Time Home Loan Borrowers), and Regulatory Bulletin 2.1-101 (Audit Policy). 

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

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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