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Nutter Bank Report, November 2012

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1. Agencies Provide Guidance on Standards of Creditworthiness for Investment Securities
2. Division of Banks Proposes New Mortgage Servicing and Debt Collection Rules
3. Interagency Statement Explains New Procedures for Troubled Bank Charter Flips
4. FFIEC Revises Guidance on Supervision of Technology Service Providers
5. Other Developments: Regulatory Capital, Deposit Insurance and Mortgage Disclosures

1. Agencies Provide Guidance on Standards of Creditworthiness for Investment Securities

The FDIC and the Federal Reserve have issued guidance letters to remind depository institutions that, effective January 1, 2013, they may no longer rely solely on credit ratings issued by nationally recognized statistical rating organizations to determine whether a particular security is permissible for investment. The letters, Federal Reserve Supervision and Regulation Letter No. SR 12-15 (November 15, 2012) and FDIC Financial Institution Letter No. FIL-48-2012 (November 16, 2012), provide guidance on due diligence requirements that apply to a determination that a security is an eligible investment under recent OCC amendments to its investment securities regulation. The OCC issued a final rule and related guidance on June 4 that removes references to credit ratings in OCC regulations for national banks pertaining to investment securities, as required by Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). The OCC investment securities regulation also applies to federal and state savings associations and state banks. State banks are subject to the same limitations and conditions with respect to the purchasing, selling, underwriting, and holding of investment securities as national banks under part 362 of the FDIC’s regulations for insured state banks, and under the Federal Reserve’s Regulation H for state member banks. Investments in corporate debt securities by federal and state savings associations are subject to the requirements of a final rule adopted by the FDIC on July 18, which is largely consistent with the OCC final rule and related guidance regarding due diligence considerations and creditworthiness standards for investment securities.

    Nutter Notes: Section 939A of the Dodd-Frank Act requires each federal banking agency to remove references to, and requirements of reliance on, external credit ratings in any regulation issued by the agency that requires the assessment of the creditworthiness of a security or money market instrument. The OCC revised its rule governing securities eligible for investment by removing references to external credit ratings and generally requiring national banks to make assessments of a security’s creditworthiness to determine whether it is “investment grade.” Under the revised OCC rule, a security meets the investment grade test only if the issuer has an adequate capacity to meet its financial commitments under the security for the projected life of the asset or exposure. The OCC rule provides that the issuer has an adequate capacity to meet financial commitments if the risk of default by the obligor is low and the full and timely repayment of principal and interest is expected. The OCC said that it expects national banks to consider a number of factors in making the determination that a security is investment grade under the new standard. While a national bank may continue to take into account external credit ratings and assessments as a valuable source of information, the bank is expected to supplement these ratings with due diligence processes and additional analyses appropriate for the bank’s risk profile and for the size and complexity of the instrument. Investments in securities by federal and state savings associations and state banks are required to comply with the revised OCC rule and should also meet the supervisory expectations set forth in the OCC investment guidance, according to the FDIC and the Federal Reserve.

2. Division of Banks Proposes New Mortgage Servicing and Debt Collection Rules

The Massachusetts Division of Banks (“DOB”) has proposed amendments to its debt collection and loan servicing regulation to address unfair mortgage loan servicing practices. The proposed amendments released on November 8 would require mortgage servicers to explore loss mitigation options to avoid foreclosure. Though exempt from debt collector and loan servicer licensing and registration requirements, banks are subject to the provisions of the DOB’s regulation governing fair debt collection and loan servicing practices, which would include the proposed mortgage loan servicing standards. According to the DOB, the amended regulations were proposed in coordination with the foreclosure prevention law signed by Governor Patrick in August, which amended Chapter 244, Section 35A of the General Laws of Massachusetts to require creditors to take reasonable steps to avoid foreclosure for certain mortgage loans. The proposed amendments would expand the limitations on debt collection contacts with a consumer to include cellular telephone and text messaging, amend the definition of “debt collector” to include so-called active debt buyers, and clarify the definition of net worth for debt collectors. The DOB held a public hearing on the proposed amendments on November 29, and written comments on the proposed amendments may be submitted to the DOB until December 6, 2012.

    Nutter Notes: The proposed amendments would provide additional consumer protections in mortgage loan servicing by requiring loan servicers, including banks engaged in third-party loan servicing, to investigate all available loss mitigation options prior to foreclosure, follow detailed loan modification procedures requiring timely communication with borrowers, and identify a single point of contact for borrowers. The proposed amendments would also require loan servicers to maintain procedures to ensure accuracy and timely updating of borrowers’ account information, ensure that all foreclosure-related documents are properly prepared and executed based on personal knowledge and that the foreclosing party has the right to foreclose, and provide adequate oversight of third-party service providers, such as law firms. The proposed amendments would prohibit loan servicers from initiating foreclosure proceedings when an application by a borrower for any loss mitigation program is pending. The proposal defines a new unfair debt collection practice that would prohibit causing expense to any consumer in the form of collect telephone calls, text messaging, download fees, data usage fees, or similar charges, without the express permission of the consumer to communicate in that manner. However, the proposed regulations would allow non-collect telephone calls to a consumer’s cellular telephone or other telephone number provided by the consumer as his or her personal telephone number.

3. Interagency Statement Explains New Procedures for Troubled Bank Charter Flips

The federal banking agencies, in conjunction with the Conference of State Bank Supervisors, have issued guidance to explain the procedures that the agencies will follow to implement Section 612 of the Dodd-Frank Act, which places restrictions on certain bank charter conversions. As explained in the Interagency Statement on Section 612 of the Dodd-Frank Act Restrictions on Conversions of Troubled Banks, released on November 26, Section 612 of the Dodd-Frank Act generally prohibits charter conversions by a national bank, state bank, or federal or state savings association while the institution is subject to a cease and desist order (or other formal enforcement order) issued by, or a memorandum of understanding entered into with, its current federal banking agency or state bank supervisor with respect to a significant supervisory matter (collectively referred to as a “significant enforcement action”). The agencies interpret Section 612 to cover all formal enforcement actions—orders, agreements, directives, or other documents—that are enforceable under Section 8 of the Federal Deposit Insurance Act (or the equivalent in the case of actions by a state bank supervisor). For state banks and state savings associations that wish to convert to a national bank, the charter conversion is also prohibited if the state bank or state savings association is subject to a final enforcement action by a state attorney general. The statute contains an exception to the prohibition that permits approval of a charter conversion if certain specified conditions are satisfied.

    Nutter Notes: The guidance on Section 612 of the Dodd-Frank Act discusses notice and information-sharing requirements between an institution’s current and post-conversion federal banking regulators. Section 612 provides that, at the time an insured depository institution files a conversion application with the prospective chartering authority, the institution must also send a copy of the conversion application to both its current federal banking agency and its prospective federal banking agency. In cases when a proposed conversion would be subject to the prohibition in Section 612, the prospective federal banking agency will determine whether to consider an exception and inform the institution, the current federal banking agency and, if applicable, the state bank supervisor. The prospective federal banking agency may request additional information from the current federal banking agency and, if applicable, state bank supervisor. Once the prospective federal banking agency determines that a conversion is acceptable, it will develop a proposed plan to address the significant supervisory matter in a manner that is consistent with the safe and sound operation of the institution and submit it to the current federal banking agency and, if applicable, state bank supervisor. The current federal banking agency or state bank supervisor that issued the enforcement action will have 30 days after receipt of the plan to object to the conversion or the plan. If the current federal banking agency or state bank supervisor objects, the conversion remains prohibited. If the current federal banking agency or state bank supervisor does not object, the conversion is not prohibited, provided the other requirements in Section 612 are satisfied.

4. FFIEC Revises Guidance on Supervision of Technology Service Providers

The Federal Financial Institutions Examination Council (“FFIEC”) has issued an updated Supervision of Technology Service Providers Booklet that provides guidance to examiners, financial institutions, and technology service providers on the supervision of technology service providers. The revised booklet released on October 31 is part of the FFIEC Information Technology Examination Handbook. Concurrently, the federal banking agencies issued related guidance entitled Administrative Guidelines - Implementation of Interagency Programs for the Supervision of Technology Service Providers. The booklet addresses the federal banking agencies’ statutory authority to supervise third-party service providers that enter into contractual arrangements with regulated financial institutions. The booklet outlines the agencies’ risk-based supervisory program and emphasizes that a financial institution’s management and board of directors have the ultimate responsibility for ensuring that outsourced activities are conducted in a safe and sound manner and in compliance with applicable laws and regulations. The guidelines describe the process that the agencies follow to implement the interagency supervisory programs and include the reporting templates examiners use.

    Nutter Notes: Federal bank examiners are required to follow the Risk Based-Examination Priority Ranking Program to determine overall levels of risk that technology service providers present to their client financial institutions, and to prioritize and establish the frequency of technology service provider examinations. One of the supervisory goals of technology service provider examination is to communicate findings, recommendations, and corrective actions to the client financial institutions. Federal examiners also are required to use the Uniform Rating System for Information Technology to evaluate a financial institution’s or a technology service provider’s overall risk exposure and risk management performance and to determine the degree of supervisory attention necessary to ensure that weaknesses are addressed and risks are properly managed. The revised booklet includes an appendix describing the rating system. The FFIEC also discusses managing outsourced relationships in its Outsourcing Technology Services Booklet, which has also been updated. The Outsourcing Technology Services Booklet details engagement criteria and examination procedures a financial institution should use when outsourcing information security management to a third-party service provider.

5. Other Developments: Regulatory Capital, Deposit Insurance and Mortgage Disclosures

  • Implementation of Basel III Regulatory Capital Rules Delayed

The federal banking agencies announced on November 9 that the agencies do not expect that any of the three proposed regulatory capital rules published earlier this year would become effective on January 1, 2013, as previously planned. The agencies did not announce a new projected effective date for the proposed rules, which would implement portions of the Basel III capital accords, but said that they are working as expeditiously as possible to complete the rulemaking process.

    Nutter Notes: The public comment period for the proposed regulatory capital rules ended on October 22. The agencies said that many commenters expressed concern that financial institutions would become subject to new capital requirements on January 1, 2013 without sufficient time to understand the rules or to make necessary systems changes. The agencies said that they “will take operational and other considerations into account when determining appropriate implementation dates and associated transition periods.”

  • Temporary Unlimited Noninterest-Bearing Transaction Account Coverage Set to Expire

The FDIC announced on November 5 that the temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts, including Interest on Lawyer Trust Accounts, is scheduled to expire on December 31, 2012 under Section 343 of the Dodd-Frank Act. Absent a change in law, the FDIC no longer will provide separate, unlimited deposit insurance coverage for those accounts beginning January 1, 2013.

    Nutter Notes: The FDIC encouraged depository institutions to take reasonable steps to provide adequate advance notice to depositors with noninterest-bearing transaction accounts of the changes in FDIC insurance coverage so that they may consider the impact of any change in coverage in their management of those accounts.

  • CFPB to Delay Effective Date of New Dodd-Frank Truth in Lending Disclosures

The Consumer Financial Protection Bureau (“CFPB”) announced on November 16 that it will amend Regulation Z to delay the effective date of certain new home mortgage loan disclosures required under the Dodd-Frank Act in order to integrate them with other mortgage disclosures that have been proposed by the CFPB. The new mortgage disclosure requirements would have taken effect on January 21, 2013 under the Dodd-Frank Act.

    Nutter Notes: The new disclosure requirements subject to the delay include disclosures on cancellation of escrow accounts, the consumer’s liability for debt payment after foreclosure, and the creditor’s policy for accepting partial payment. The new disclosures will not be required until after the CFPB’s previously proposed mortgage disclosure rules that will combine certain disclosures required by the Truth in Lending Act and the Real Estate Settlement Procedures Act are finalized.

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 2012 Chambers and Partners review says that a “broad platform of legal expertise and experience” in the practice “helps clients manage challenges and balance risks.” Clients praised Nutter banking lawyers as “very responsive and detail-oriented.” 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 Melissa Maichle. 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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