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Nutter Bank Report, November 2009

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1.  Overdraft Protection Fees Will Be Restricted under Regulation E
2.  FDIC Requires Prepayment of Deposit Insurance Assessments
3.  Federal Guidance Issued on Commercial Real Estate Loan Workouts
4.  Legislative Round-Up
5.  Other Developments: Notice of Transfer of Mortgage Loans and Privacy Notices

Full Reports

1.  Overdraft Protection Fees Will Be Restricted under Regulation E

Financial institutions will be prohibited from charging fees to consumers for paying overdrafts on ATM and one-time debit card transactions unless consumers opt in to overdraft protection services for those types of transactions, according to final rules approved by the Federal Reserve. The rules announced on November 12 amend the Federal Reserve’s Regulation E, which implements the Electronic Fund Transfer Act. The rules become effective on July 1, 2010. Financial institutions will be required to provide consumers with disclosures that explain the financial institution’s overdraft services, including the fees associated with the services, and the consumer’s options. The disclosures must be provided before a consumer opts in to the overdraft service. The final rules include a model disclosure and opt-in form. After a consumer opts in, the institution must send the consumer a confirmation that informs the consumer of his or her right to revoke the consent to pay for the overdraft service. The final rules also prohibit financial institutions from discriminating against consumers who do not opt in to overdraft services, and require institutions to provide consumers who do not opt in with the same account terms, conditions, and features (including pricing) that they provide to consumers who do opt in. Financial institutions may not condition the payment of overdrafts for checks and other types of transactions on a consumer opting in to the overdraft service for ATM and debit card transactions.

Nutter Notes: The final rule defines “overdraft service” as a service for which a fee is charged to a consumer’s account for paying a transaction of any kind when the consumer has insufficient funds in the account to cover the transaction. For purposes of the rule, overdraft services do not include lines of credit subject to the Federal Reserve’s Regulation Z, a service that transfers funds from another account held by the consumer into the overdrawn account, or transactions in securities or commodities accounts in which credit is extended by a registered broker-dealer. Financial institutions will have to comply with the notice and opt-in requirements for new consumer accounts opened on or after July 1, 2010.  For accounts opened prior to July 1, 2010, institutions may not assess overdraft fees for ATM or debit card transactions on or after August 15, 2010 unless the institution has complied with the notice and opt-in requirements.

2.  FDIC Requires Prepayment of Deposit Insurance Assessments

The FDIC has approved a final rule that requires insured banks and thrifts to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. According to the rule announced on November 12, the payment of each institution’s prepaid assessments will be due on December 30, 2009 along with the regular quarterly risk-based deposit insurance assessment for the third quarter of 2009. The FDIC will begin to draw down an institution’s prepaid assessments on March 30, 2010, representing payment for the regular quarterly risk-based assessment for the fourth quarter of 2009. Institutions will book the payments at the end of each quarter. For purposes of estimating an institution’s assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, an institution’s assessment rate will be its total base assessment rate in effect on September 30, 2009. To account for the 3-basis point increase in assessment rates (see Nutter Note below), an institution’s total base assessment rate for purposes of estimating the institution’s assessment for 2011 and 2012 will be increased by an annualized 3 basis points beginning in 2011. For purposes of calculating the amount that an institution will prepay on December 30, 2009, an institution’s third quarter 2009 assessment base will be increased quarterly at an imputed 5% annual growth rate through the end of 2012.

Nutter Notes:  On September 29, the FDIC increased annual assessment rates uniformly by 3 basis points beginning in 2011 and at the same time adopted an amended capital restoration plan to allow the Deposit Insurance Fund (DIF) to return to a reserve ratio of 1.15% within eight years, as required by law. While the amended restoration plan and higher assessment rates address the need to return the DIF reserve ratio to 1.15%, the FDIC projected that, if it took no action under its existing authority to increase its liquidity, the FDIC’s liquidity needs would exceed its liquid assets on hand beginning in the first quarter of 2010. The prepaid assessments will strengthen the FDIC’s cash position in anticipation of the need for cash to fund projected near-term bank failures. In a related development, the House Financial Services Committee approved an amendment to its regulatory restructuring bill on November 19 that would change the assessment base for the calculation of the payment of FDIC deposit insurance premiums from an institution’s domestic deposits to its total assets minus the amount of its tangible capital. The amendment would also create transition reserve ratio requirements to reflect the new assessment base.  Under the transition requirements, the FDIC’s minimum reserve ratio for any year would be set at no less than 1.15% of estimated insured deposits or the comparable percentage of the new asset assessment base.

3.  Federal Guidance Issued on Commercial Real Estate Loan Workouts

The federal financial institution regulatory agencies have jointly issued guidance for lenders that are working with distressed commercial real estate (CRE) borrowers who may nevertheless be creditworthy customers with the willingness and capacity to repay their debts. The Policy Statement on Prudent Commercial Real Estate Loan Workouts was released on October 30 by the Federal Reserve, FDIC, OCC, OTS and NCUA to provide guidance for workouts involving CRE borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged sales and rental absorption periods. The policy statement reviews risk-management practices for loan workouts that support prudent credit and business decision-making as well as financial accuracy, transparency, and timely loss recognition.  According to the policy statement, the federal agencies have found that prudent CRE loan workouts are often in the best interest of the lender and the borrower. The policy statement includes examples of CRE loan workouts that reflect examiners’ analytical processes for credit classifications and assessments of institutions’ accounting and reporting treatment of various restructured loans.

Nutter Notes:  The policy statement provides that renewed or restructured loans to borrowers who have the ability to repay their debts according to reasonable modified terms will not be subject to adverse classification solely because the value of the underlying collateral has declined to an amount that is less than the loan balance. The policy statement reiterates existing guidance that examiners are expected to take a balanced approach in assessing an institution’s risk-management practices for loan workout activities. According to the policy statement, institutions will not be criticized for engaging in loan workout arrangements that result in an adverse classification so long as the institution has a prudent workout policy that establishes appropriate loan terms and amortization schedules, a realistic analysis of the borrower’s overall debt service, and the ability to monitor the ongoing performance of the borrower and any guarantor under the terms of the workout. A workout program should also include a grading system that accurately and consistently reflects the risk in the workout arrangement, and an allowance for loan and lease losses methodology that recognizes credit losses in a timely manner including credit losses in the restructured loan (estimated in accordance with GAAP).

4.  Legislative Round-Up

The U.S. Congress continues to actively consider a number of legislative proposals that would affect the banking and financial services industries. On November 19, the Senate Banking, Housing and Urban Affairs Committee began debate on the Restoring American Financial Stability Act, which is Committee Chairman Christopher Dodd’s version of financial regulatory reform legislation. Senator Dodd’s bill would consolidate the consumer protection responsibilities currently handled by the federal banking agencies and the Federal Trade Commission into a single new agency, would establish a new federal agency responsible for identifying, monitoring and addressing systemic risks posed by large, complex companies and products and activities that can spread risk across the system, would eliminate the federal thrift charter and would combine into a single agency the regulatory and supervisory functions of the federal banking agencies. The House Financial Services Committee continued its consideration of the House version of a comprehensive systemic risk and regulatory restructuring bill.  In addition to an amendment to expand the deposit insurance assessment base (see Report #2 above), the Committee approved an amendment that strikes a section in the legislation that would have imposed the national bank per-borrower lending limits on state-chartered banks and an amendment under which secured creditors of failed systemically risky financial institutions would be treated as unsecured creditors for up to 20% of their claim.

Nutter Notes:  On November 4, the House Financial Services Committee approved H.R. 3817, the Investor Protection Act, which included an amendment that would permanently exempt companies with market capitalizations of less than $75 million from the audit requirements of Section 404(b) of the Sarbanes Oxley Act, which requires an auditor attestation of the assessment of a public company’s internal controls. The Securities and Exchange Commission announced the fourth, and last, extension of the Section 404(b) compliance deadline for the smallest public companies on October 2. Under the SEC’s rule, that extension will expire beginning with the annual reports of companies with fiscal years ending on or after June 15, 2010 unless the law is amended by Congress. Separately, the President on November 6 signed legislation that extends the first-time homebuyer tax credit and the net operating loss (NOL) carryback period. Those provisions are part of the Worker, Homeownership, and Business Assistance Act of 2009 which also extends unemployment benefits to out-of-work Americans. The law extends the NOL carryback period from two years to five years for either 2008 or 2009 NOLs, though it limits NOL carrybacks to 50%of a company’s taxable income in the fifth year.  Companies that have received capital under the Emergency Economic Stabilization Act of 2008, including institutions that participate in the Capital Purchase Program (CPP), are not eligible for the extension of the NOL carryback period. The law also extends the $8,000 first-time homebuyer tax credit to borrowers who sign sales contracts by the end of April 2010.

5.  Other Developments: Notice of Transfer of Mortgage Loans and Privacy Notices

  • Federal Reserve Rule Requires Notice of Transfer of Mortgage Loans

An interim final rule approved by the Federal Reserve on November 16 requires the purchaser or assignee of a residential mortgage loan to provide certain disclosures to the borrower in writing no later than 30 days after the date on which the loan is sold or otherwise transferred or assigned.

Nutter Notes:  The interim final rule—which amends Regulation Z (the regulation that implements the Truth in Lending Act)—became effective immediately upon its publication on November 20. To allow time for any necessary operational changes, compliance with the interim final rule is optional for 60 days. Comments on the rule are due by January 19, 2010.

  • Federal Regulatory Agencies Issue Model Privacy Notice

Eight federal regulatory agencies, including the Federal Reserve, FDIC, OCC and OTS, released a final model privacy notice form under the Gramm-Leach-Bliley Act (GLB Act) on November 17. The GLB Act required the agencies to develop a model form that allows consumers to easily compare the privacy practices of different financial institutions.

Nutter Notes:  The release of the model form was accompanied by a final rule that provides a safe harbor for financial institutions that use the model form. Institutions that use the form will be deemed to comply with the GLB Act, which requires institutions to notify consumers of their information-sharing practices and inform consumers of their right to opt out of certain sharing practices.

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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