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Nutter Bank Report, September 2014

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The Nutter Bank Report is a monthly electronic publication of the firm’s Banking and Financial Services Group and contains regulatory and legal updates with expert commentary from our banking attorneys.

1. Division of Banks Considers Rules to Implement New Flood Insurance Law
2. FDIC, OCC and CFPB Order Money Penalties and Restitution for UDAP Violations
3. Federal Banking Agencies Propose Swap Margin Requirements
4. CFPB Announces Enforcement Action for Mortgage Servicing Violations
5. Other Developments: CRA and Basel III 

1. Division of Banks Considers Rules to Implement New Flood Insurance Law

The Division of Banks held an informational hearing on September 11 in connection with flood insurance rules it will be issuing that would require creditors, including banks, to deliver certain disclosures to home mortgage loan borrowers if a borrower is required to purchase flood insurance. The rules would implement Chapter 177 of the Acts of 2014, An Act Further Regulating Flood Insurance, which was signed into law by Governor Patrick on July 23. The new flood insurance law, which goes into effect on November 20, 2014, prohibits a creditor from requiring flood insurance in an amount greater than the balance of the mortgage on a 1- to 4-family residential property. The law also prohibits a creditor from requiring flood insurance coverage with less than a $5,000 deductible or that includes coverage for contents. The law requires that a disclosure of certain requirements of the law be provided if a borrower is required to purchase flood insurance on such a residential property and directs the Commissioner of Banks to adopt regulations to implement the law. Public comments submitted to the Division of Banks have sought to clarify whether the law applies only to residential (i.e., owner-occupied) properties or to investment properties that may be underwritten as commercial mortgages and how often flood insurance coverage amounts would need to be reassessed, among other things. The Division of Banks has not yet released a proposed rule to implement the new flood insurance requirements.

    Nutter Notes: The Flood Disaster Protection Act of 1973 (“FDPA”), as amended by the National Flood Insurance Reform Act of 1994, requires the federal banking agencies to adopt regulations prohibiting regulated lending institutions from making, increasing, extending or renewing a loan secured by improved real estate or a mobile home located or to be located in a special flood hazard area (“SFHA”) of a community participating in the National Flood Insurance Program (“NFIP”), unless the property securing the loan is covered by flood insurance. Under the FDPA and its implementing regulations, the amount of insurance must be at least equal to the lesser of the outstanding principal balance of the loan or the maximum limit of coverage available for the particular type of property under the National Flood Insurance Act of 1968 (the “NFIA”). Flood insurance coverage under the NFIA is limited to the overall value of the property securing the designated loan minus the value of the land on which the property is located. The federal rules also require the lender to deliver a written notice to the borrower if the property is located in an SFHA about whether or not flood insurance is available under the NFIA for the collateral securing the loan. The federal flood insurance requirements are applicable to any loan secured by a building or mobile home that is located or to be located in an SFHA in which flood insurance is available under the NFIA. In addition, government guaranteed or insured loans (secured or unsecured) cannot be made if the community has been mapped for SFHAs by the Federal Emergency Management Agency but the community does not participate in the NFIP.

2. FDIC, OCC and CFPB Order Money Penalties and Restitution for UDAP Violations

The FDIC, OCC and CFPB have each recently taken enforcement actions against banks for unfair or deceptive acts or practices (“UDAPs”) in violation of Section 5 of the Federal Trade Commission Act (“FTC Act”). The OCC and the CFPB both announced on September 25 that each agency has entered into consent orders with the same bank for unfairly billing consumers for identity protection and credit monitoring services that the consumers did not receive. According to the agencies, the services were marketed and administered by third-party service providers as add-on products to credit cards and other bank products, including mortgage loans and checking accounts, under a joint marketing agreement with the bank. The bank will pay a $5 million civil money penalty to the CFPB and a $4 million penalty to the OCC, in addition to about $48 million in restitution to more than 420,000 consumer accounts. The consent orders also require the bank to improve its management of third-party vendor relationships and to submit to increased oversight by the OCC and CFPB of the bank’s third-party vendor management program. Section 5 of the FTC Act prohibits UDAPs in or affecting commerce and grants the federal banking agencies authority to enforce Section 5 for the institutions they supervise. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) granted similar – but broader – authority to the CFPB to take enforcement action against financial services providers for UDAPs – as well as “abusive” practices – in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.

    Nutter Notes: The FDIC announced on September 29 that it has entered into a consent order with a state-chartered bank for UDAPs related to marketing and servicing of credit card add-on products in violation of Section 5 of the FTC Act. Under the consent order, the bank will pay a civil money penalty of $1.1 million to the FDIC, and will pay restitution to consumers of approximately $15 million. The consent order also requires the bank to improve its compliance management and third-party vendor oversight programs. In this case, the bank was involved in marketing a payment protection credit card add-on product administered by a third-party vendor that provided a benefit payment toward a consumer’s monthly credit card payment following certain life events such as involuntary unemployment, disability or hospitalization. The FDIC determined that the bank violated Section 5 of the FTC Act by, among other things misrepresenting that the monthly benefit of the add-on product would equal the consumer’s minimum monthly payment, misrepresenting that the product would protect the consumer’s credit rating, and misrepresenting that payments would be made automatically. The FDIC also determined that the bank failed to adequately disclose to consumers material conditions and restrictions of the product and the terms and conditions for accessing the product’s hospitalization benefit. The FDIC, OCC and CFPB UDAP enforcement actions follow last month’s release of Interagency Guidance Regarding Unfair or Deceptive Credit Practices by the CFPB and the federal banking agencies, which announced that the agencies would continue to enforce UDAPs involving consumer credit products and services despite the repeal of the agencies’ credit practices rules for banks and savings associations.

3. Federal Banking Agencies Propose Swap Margin Requirements

The federal agencies along with the Farm Credit Administration and the Federal Housing Finance Agency are seeking public comment on a proposed rule that would establish margin requirements for swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants (referred to as “swap entities”) as required by the Dodd-Frank Act. The proposed rule released on September 3 would establish minimum requirements for the exchange of initial and variation margin between the swap participants subject to the rule, including banks that are swap entities, and their counterparties to non-cleared swaps and non-cleared security-based swaps. The proposed swap margin rule would distinguish among four separate types of swap counterparties: counterparties that are themselves swap entities; counterparties that are financial end users with a material swaps exposure; counterparties that are financial end users without a material swaps exposure; and other counterparties, including nonfinancial end users, sovereigns, and multilateral development banks. The swap margin requirements would vary between these types of swap counterparties. The proposed rule’s initial and variation margin requirements generally would apply to the posting, as well as the collection, of minimum initial and variation margin amounts by a swap entity from and to its counterparties. Comments on the proposed rule are due by November 24, 2014.

    Nutter Notes: According to the agencies, the proposed swap margin rule builds on a proposed rule originally released in April 2011 and includes some modifications that were made in light of public comments, such as an expansion of the types of collateral eligible to be posted as initial margin. The proposed margin requirements would apply to non-cleared swaps and non-cleared security-based swaps entered into after the proposed rule’s applicable compliance dates. The amount of margin that would be required under the proposed rule would vary based on the relative risk of the counterparty and of the non-cleared swap or non-cleared security-based swap. The proposed rule does not require a swap entity to collect specific or minimum amounts of initial margin or variation margin from nonfinancial end users, but leaves that decision to the swap entity consistent with its overall credit risk management policies and procedures. The agencies said that the proposal seeks to promote global consistency by generally following the final framework for margin requirements on non-cleared derivatives that the Basel Committee on Banking Supervision and the International Organization of Securities Commissions adopted in September 2013.

4. CFPB Announces Enforcement Action for Mortgage Servicing Violations

The CFPB has announced its first enforcement action for violations of the CFPB’s new mortgage servicing rules. The CFPB said on September 29 that it has entered into a consent order with a bank that the CFPB determined was blocking home mortgage loan borrowers’ attempts to avoid foreclosure in violation of the mortgage servicing rules that went into effect in January 2014. Under the consent order, the bank will pay a civil money penalty of $10 million to the CFPB, and will pay restitution to consumers of approximately $27.5 million. The CFPB determined that the bank took excessive time to process borrowers’ applications for foreclosure relief, failed to tell borrowers when their applications were incomplete, denied loan modifications to qualified borrowers, and delayed finalizing permanent loan modifications. The bank was engaged in administering foreclosure relief programs provided by the owners of home mortgage loans serviced by the bank. Specifically, the bank was responsible for soliciting borrowers for these programs, collecting their applications, determining eligibility, and implementing loss mitigation programs for qualified borrowers. The CFPB found that the bank had failed to devote sufficient resources, including staff, to administering the loss mitigation programs for distressed homeowners. Although the CFPB’s new mortgage servicing rules have only been in effect since January, the CFPB found that certain of the bank’s foreclosure relief practices predating the effective date of the rules nevertheless constituted UDAPs under the Dodd-Frank Act.

    Nutter Notes: The CFPB’s mortgage servicing rules require mortgage servicers, including creditors servicing their own loans, to notify borrowers about their loss mitigation options after borrowers have missed two consecutive payments. The servicer must deliver a written notice to the borrower that includes examples of options that might be available as alternatives to foreclosure and instructions on how to obtain more information. The new rules also restrict so-called dual-tracking, in which the servicer moves forward with foreclosure while simultaneously working with the borrower to avoid foreclosure. The rules prohibit servicers from starting a foreclosure proceeding if a borrower has already submitted a complete application for a loan modification or other alternative to foreclosure and the application is still pending. Servicers cannot make the first notice or filing required in the foreclosure process until a home mortgage loan account is more than 120 days delinquent under the rules. The rules require servicers to implement policies and procedures to provide delinquent borrowers with direct, ongoing access to employees responsible for helping them. Such personnel are responsible for alerting borrowers of any missing information on their loss mitigation applications, telling borrowers about the status of any application, and expediting application processing. In this case, the CFPB found that, among other things, the bank took excessive time to review loss mitigation applications, often causing application documents to expire, closed applications due to expired documents even if the documents had expired because of the bank’s delay, and delayed approving or denying loss mitigation applications.

5. Other Developments: CRA and Basel III 

  • Federal Banking Agencies Propose New CRA Guidance

The Federal banking agencies requested comment on September 4 on proposed revisions to the Interagency Questions and Answers Regarding Community Reinvestment to address alternative systems for delivering retail banking services. The proposed questions and answers would add examples of innovative or flexible lending practices and provide guidance on community development-related issues. Comments on the proposed questions and answers are due by November 10, 2014.

    Nutter Notes: Among other things, the proposed CRA questions and answers would describe the factors considered by examiners when evaluating the effectiveness of an institution’s systems for delivering retail banking services. Such factors include convenient access to full-service branches and effective alternatives, such as ATMs, online banking and mobile banking. The proposed questions and answers would also provide guidance on how examiners evaluate the responsiveness and innovativeness of an institution’s loans, qualified investments, and community development services. 

  • Federal Banking Agencies Adopt Liquidity and Capital Rules for Large Banks

The Federal banking agencies on September 3 announced the adoption of a final rule that implements a quantitative liquidity requirement consistent with the liquidity coverage ratio (“LCR”) under the Basel III standards. The LCR will apply to all banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure. U.S. banking organizations subject to the LCR will be required to comply by January 1, 2017.

    Nutter Notes: The federal banking agencies also announced on September 3 that they have adopted a final rule that modifies the methodology for including off-balance sheet items, including credit derivatives, repo-style transactions and lines of credit, in the denominator of the supplementary leverage ratio to conform to Basel III capital standards. The supplementary leverage ratio rule applies only to banking organizations that are subject to the agencies’ advanced approaches risk-based capital rules. The revised supplementary leverage ratio capital requirements become effective on January 1, 2018.

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. The 2012 Chambers and Partners review says that a “broad platform” of legal expertise in the practice “helps clients manage challenges and balance risks while delivering strategic solutions,” while the 2013 Chamber and Partners review reports that Nutter’s bank clients describe Nutter banking lawyers as “proactive” in their thinking, “creative” in structuring agreements, and “forward-thinking in terms of making us aware of regulation and how it may impact us,” which the clients went on to describe as “indicative of a true partner.” The 2014 Chamber and Partners review describes us as “great – very knowledgeable, very responsive and very nice.” 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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