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Nutter Bank Report: November 2019

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11.26.2019 | Legal Update

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  1. OCC and FDIC Propose Interest Rate Fix for Loans Transferred to Non-Banks
  2. Federal Banking Agencies Issue Final Rule Modifying Treatment of HVCRE Exposures
  3. CFPB Clarifies Screening and Training Requirements for MLOs with Temporary Authority
  4. Federal Banking Agencies Allow Flexibility in Adoption Date for Capital Simplifications
  5. Other Developments: Tax Deductions and Truth in Lending

1. OCC and FDIC Propose Interest Rate Fix for Loans Transferred to Non-Banks

The FDIC and OCC have separately proposed rules that would codify the “valid-when-made” doctrine and clarify that when a bank sells, assigns, or otherwise transfers a loan, the interest rate permissible prior to the transfer continues to be permissible following the transfer. The proposed rule issued by the OCC on November 18 and the proposed rule issued by the FDIC on November 19 both address uncertainty created by a 2015 decision of the U.S. Court of Appeals for the Second Circuit, which called into question the enforceability of the interest rate terms of a loan following a bank’s assignment of the loan to a non-bank. The OCC’s proposed rule would provide that, when the interest rate on a loan made by a national bank or federal savings association is permissible under federal law, it will not be affected by the sale, assignment, or other transfer of that loan. The FDIC’s proposed rule would provide that the validity of the interest rate on a loan made by a state-chartered bank would be determined at the time the loan is made, and would not be affected by subsequent events, such as a change in state law, or the sale, assignment, or other transfer of the loan. Public comments on the proposed rules will be due within 60 days after they are published in the Federal Register, which is expected shortly. Click here for a copy of the OCC’s proposed rule and here for a copy of the FDIC’s proposed rule.

Nutter Notes: Federal law provides that a national bank or federal savings association may charge interest on a loan at the maximum interest that is permissible under the laws of the state where the institution is located, or 1% more than the 90-day commercial paper rate, whichever is greater, regardless of any state law purporting to limit the interest permitted on bank loans in the state where the borrower is located. Federal law similarly authorizes state-chartered banks to charge interest at the maximum rate permitted to any state-chartered or licensed lender in the state where the bank is located, or 1% more than the 90-day commercial paper rate, whichever is greater. The valid-when-made doctrine is a principle applied by courts when reviewing the validity of a loan, which provides that if the interest rate terms on a loan were permissible at origination, then the interest rate terms do not subsequently become impermissible when the loan is transferred simply because the buyer or assignee is not a bank able to rely on the federal statutory provisions summarized above. The 2015 federal appeals court decision did not apply the valid-when-made doctrine when it concluded that the provision of the National Bank Act authorizing national banks to charge interest at the rate permitted by the law of the state in which it is located, does not apply to non-bank assignees of loans. While this decision involved the assignment of a loan by a national bank, federal laws governing federal savings associations’ and state banks’ authority with respect to interest rates is substantially similar to the authority granted to national banks and interpreted in the same manner.

2. Federal Banking Agencies Issue Final Rule Modifying Treatment of HVCRE Exposures

The Federal Reserve, OCC, and FDIC have finalized a joint rule to modify the treatment of high volatility commercial real estate (“HVCRE”) exposures as required by Section 214 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “EGRRCPA”). The final rule released on November 19 conforms the definition of HVCRE exposure in the regulatory capital rules to the statutory definition of HVCRE acquisition, development, or construction (“ADC”) loans, as required by the EGRRCPA. ADC loans are a subset of all commercial real estate exposures which, according to the agencies, generally exhibit heightened risks relative to other commercial real estate exposure. The final rule imposes a 150% risk-weight under the standardized approach for calculating regulatory capital for any loan that meets the revised definition of an HVCRE exposure. Banking organizations using the advanced approaches for calculating regulatory capital also would refer to the definition of an HVCRE exposure in section 2 of the applicable regulatory capital rule for the purpose of identifying the appropriate wholesale exposure category for its ADC exposures. The final rule provides banking organizations with the option to maintain their current capital treatment for ADC loans originated between January 1, 2015 and April 1, 2020. The final rule becomes effective on April 1, 2020. Click here for a copy of the final rule.

Nutter Notes: The final rule provides guidance on the interpretation of certain aspects of the revised HVCRE exposure definition. Specifically, the revised definition of an HVCRE exposure includes a credit facility that is secured by real property, primarily finances or refinances acquisition, development, or construction of real property that will be income-producing property, and is dependent for repayment on future income or sales proceeds from, or refinancing of, the real property. The final rule excludes from the definition of HVCRE exposure loans that finance the acquisition, development, or construction of one-to-four family residential properties, community development projects, agricultural land, existing income-producing property securing permanent financings, real property where the loan has been reclassified as a non-HVCRE ADC loan, real estate where the loan was made before January 1, 2015, and certain other commercial real property projects. The final rule clarifies that the exclusion of loans that finance one- to four-family residential properties conforms to the definition of one- to four-family residential property loans used in the instructions to the Call Report and Federal Reserve form FR Y-9C, rather than the definition set forth in the interagency real estate lending guidelines.

3. CFPB Clarifies Screening and Training Requirements for MLOs with Temporary Authority

The CFPB has published an interpretive rule that clarifies the screening and training requirements for federally insured depository institutions that seek to employ mortgage loan originators with temporary authority. The interpretive rule issued on November 15 clarifies that an insured depository institution employing a mortgage loan originator acting with temporary authority is not subject to certain screening and training requirements that would otherwise apply to such loan originators under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “SAFE Act”). Mortgage loan originators with temporary authority are those who were previously registered or licensed, are employed by a state-licensed mortgage company, are applying for a new state loan originator license, and meet other criteria specified in the SAFE Act. Mortgage loan originators with temporary authority may act as a loan originator for a temporary period of time, as specified in the SAFE Act, while that state considers their application for a loan originator license. The interpretive rule became effective on November 24. Click here for a copy of the interpretive rule.

Nutter Notes: The EGRRCPA amended the SAFE Act to permit certain individuals who were previously registered or state-licensed for a certain period of time pursuant to the SAFE Act to act as a mortgage loan originator with temporary authority in a state, if they have applied for a loan originator license in that state. Generally, all mortgage loan originators must satisfy certain criminal history screening and training requirements under the SAFE Act. Before issuing a state mortgage loan originator license, the SAFE Act requires that a state ensure that the individual never has had a loan originator license revoked; has not been convicted of enumerated felonies within specified timeframes; demonstrated financial responsibility, character, and fitness; completed 20 hours of pre-licensing education; and passed state-specific testing requirements. Under Regulation Z, which implements the Truth in Lending Act, banks and other mortgage lenders must perform substantially the same screening of certain mortgage loan originators before permitting them to originate home mortgage loans. Banks and other mortgage lenders must also ensure that mortgage loan originators have received certain training. According to the interpretive rule, a state is required to ensure that screening and training has been performed for each mortgage loan originator acting with temporary authority as part of the state’s review of the individual’s application for a state loan originator license.

4. Federal Banking Agencies Allow Flexibility in Adoption Date for Capital Simplifications

The Federal Reserve, FDIC, and OCC have issued a final rule that revises the effective date of certain capital rule simplifications, permitting insured depository institutions and holding companies to elect to implement the capital rule simplifications on January 1, 2020, rather than April 1, 2020. The final rule issued jointly by the agencies on November 4 permits banking organizations using non-advanced approaches for calculating regulatory capital (generally, institutions with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure) to wait until the quarter beginning April 1, 2020 to implement certain simplifications to the regulatory capital rules issued by the agencies earlier this year, or opt to use the simplified calculation methods beginning on January 1, 2020. The EGRRCPA simplified the regulatory capital treatment of mortgage servicing assets (“MSAs”), certain deferred tax assets (“DTAs”) arising from temporary differences that an institution could not realize through net operating loss carrybacks (“temporary difference DTAs”), investments in the capital of unconsolidated financial institutions, and the calculation of minority interest. The agencies issued a final rule implementing those capital rule simplifications on July 22, 2019, which will become effective as of April 1, 2020. Non-advanced approaches banking organizations can implement the simplified capital calculations by completing their Call Report for either the first quarter or second quarter of 2020, as applicable, under the revised final rule. Click here for a copy of the revised final rule.

Nutter Notes: The transition provisions to the regulatory capital rules issued by the agencies in November 2017 will no longer apply to a non-advanced approaches banking organization in the quarter in which the banking organization adopts the simplifications rule. The simplifications rule is also applicable to non-advanced approaches banking organizations that qualify and elect to use the community bank leverage ratio framework. The simplifications rule streamlines the treatment of assets subject to common equity tier 1 capital threshold deductions, and limitations on capital issued by a consolidated subsidiary of a banking organization and held by third parties (also known as a minority interest). The rule increases the permitted amount of a non-advanced approaches banking organization’s investment in MSAs, temporary difference DTAs, and investments in the capital of unconsolidated financial institutions. Under the current capital rules, a banking organization must deduct from common equity tier 1 capital amounts of MSAs, temporary difference DTAs, and significant investments in the capital of unconsolidated financial institutions in the form of common stock that individually exceed 10% of the banking organization’s common equity tier 1 capital. In addition, the current rules require a banking organization to deduct from its common equity tier 1 capital the aggregate amount of these exposure categories not deducted under the 10% threshold deduction but that nonetheless exceed 15% of the banking organization's common equity tier 1 capital minus certain deductions from and adjustments to common equity tier 1 capital. The simplifications rule effectively raises the deduction threshold for each of these exposure categories in regulatory capital to 25% and eliminates the second-step 15% deduction threshold.

5. Other Developments: Tax Deductions and Truth in Lending

  • IRS Publishes Guidance on Certain Deductible Business Expenses

The IRS on November 14 issued guidance for taxpayers that updates the rules for using the optional standard mileage rates in computing the deductible costs of operating an automobile for business, charitable, medical, or moving expense purposes to reflect changes resulting from the 2017 Tax Cuts and Jobs Act (the “TCJA”). The guidance also provides rules to substantiate the amount of an employee’s ordinary and necessary travel expenses reimbursed by an employer using the optional standard mileage rates.

Nutter Notes: The TCJA suspended the miscellaneous itemized deduction for most employees with unreimbursed business expenses, including the costs of operating an automobile for business purposes. However, certain employees, such as Armed Forces reservists, qualifying state or local government officials, educators, and performing artists, may continue to deduct unreimbursed business expenses during the suspension. Click here for a copy of the new IRS guidance.

  • Agencies Release Updated Consumer Credit and Lease Exemption Thresholds

The CFPB and Federal Reserve on October 31 announced final rules revising the dollar thresholds in Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing) that will apply for determining exempt consumer credit and lease transactions effective as of January 1, 2020. The protections of the Truth in Lending Act and the Consumer Leasing Act generally will apply to consumer credit transactions and consumer leases of $58,300 or less in 2020. Click here for a copy of the final rule updating Regulation Z and click here for a copy of the final rule updating Regulation M.

Nutter Notes: The CFPB, the Federal Reserve, and the OCC also announced a final rule on October 31 increasing the threshold for exempting loans from special appraisal requirements for higher-priced mortgage loans during 2020 from $26,700 to $27,200 effective as of January 1, 2020. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 amended the Truth in Lending Act to add special appraisal requirements for higher-priced mortgage loans, subject to the exemption. Click here for a copy of the final rule.

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 Chambers.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Heather F. Merton. The information in this publication is not legal advice. For further information, contact:

Thomas J. Curry

tcurry@nutter.com

Tel: (617) 439-2087

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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