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Nutter Bank Report: February 2020

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  1. Federal Reserve Revises Framework for Determining Control of a Banking Organization
  2. Federal Financial Regulators Propose Easing Restrictions on Volcker Rule Covered Funds
  3. FFIEC Revises HMDA Reporting Guidance to Incorporate Recent CFPB Rulemaking
  4. CFPB Modifies Proposed Rule on Collection of Time-Barred Debt
  5. Other Developments: Mortgage Loan Seller/Servicers and CRA

1. Federal Reserve Revises Framework for Determining Control of a Banking Organization

The Federal Reserve has adopted a final rule to simplify and clarify its regulations for determining control of a banking organization for purposes of the Bank Holding Company Act (“BHC Act”) and the Home Owners’ Loan Act (“HOLA”). The final rule issued on January 30 expands the number of presumptions for use in control determinations by the Federal Reserve under the so-called “controlling influence” test. The amended regulatory framework uses several factors to determine whether a company is presumed to have control over a banking organization, including the company’s total voting and non-voting equity investment in the banking organization; director, officer, and employee overlaps between the company and the banking organization; and the scope of business relationships between the company and the banking organization. The final rule describes how different combinations of these factors would or would not result in a presumption of control. The Federal Reserve published a chart along with the final rule that illustrates how control determinations are made under various combinations of the presumptive factors. The final rule also includes a rebuttable presumption of noncontrol, pursuant to which a company will be presumed not to control a banking organization if the company controls less than 10% of every class of voting securities of the banking organization and is not presumed to control the banking organization under any of the presumptions of control. The rule will become effective on April 1, 2020. Click here for a copy of the final rule.

Nutter Notes: If a company has control over a banking organization, the company generally becomes subject to regulation by the Federal Reserve as a bank holding company or savings and loan holding company, as applicable. Under the BHC Act, control of a banking organization is determined by a three-pronged test under which a company is deemed to have control if: (i) the company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25% or more of any class of voting securities of the banking organization; (ii) the company controls in any manner the election of a majority of the directors or trustees of the banking organization; or (iii) the company directly or indirectly exercises a controlling influence over the management or policies of the banking organization HOLA includes a substantially similar definition of control. While the first two prongs of the test are relatively bright-line standards, the third prong requires a facts and circumstances determination by the Federal Reserve. The final rule is meant to provide greater clarity to an investor that does not meet either of the first two prongs of the control test in determining whether the investor will be deemed to control a banking organization under the third prong, and therefore will be required to register as a holding company with the Federal Reserve. As with the current rule, a company that triggers a presumption of control under the final rule will have the ability to contest the preliminary determination of control by filing a response describing the facts and circumstances in support of its position that no control exists, and the company may request a hearing on the matter.

2. Federal Financial Regulators Propose Easing Restrictions on Volcker Rule Covered Funds

The federal banking agencies along with the SEC and CFTC have issued a proposal to amend the regulations that implement section 13 of the BHC Act, also known as the Volcker Rule, which generally prohibits a banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with, a hedge fund or private equity fund (each a “covered fund”). The proposed amendments released on January 30 are intended to address compliance uncertainty and relax limits on certain banking services and activities that the covered fund provisions of the Volcker Rule were not intended to restrict. For example, the exclusions in the implementing regulations have inhibited banks’ relationships with credit funds, according to the regulators, and the proposed rule would create a new exclusion from the definition of covered fund for certain credit funds. The proposed rule would allow banks more flexibility in sponsoring funds that provide loans to companies, such as allowing investments in qualifying venture capital funds. The regulators expect that this change would allow banks to allocate resources to a more diverse array of long-term investments in a broader range of geographic areas, industries, and sectors than they may be able to access directly. The proposed rule would not allow banks to engage in any activity that is not currently permissible if conducted on their balance sheets, and would restrict banks from conducting certain transactions with covered funds. Public comments on the proposed rule are due by April 1, 2020. Click here for a copy of the proposed rule.

Nutter Notes: The proposed rule would add new exclusions from the definition of covered fund that would allow banks to provide certain traditional financial services through a fund structure, subject to certain safeguards. For example, the proposal would exclude from the definition of covered fund certain wealth management vehicles that manage the investment portfolio of a family, and certain other persons, allowing a bank to provide integrated private wealth management services. In addition, the proposed rule would permit a bank to engage in a limited set of covered transactions (as defined in section 23A of the Federal Reserve Act with respect to an affiliate of a bank) with a covered fund that the bank sponsors or advises or with which the banking entity has certain other relationships. The current regulations that implement the Volcker Rule generally prohibit all covered transactions between a covered fund and its bank sponsor or investment adviser. According to the regulators, the current restrictions have prevented banks from providing certain traditional banking services to covered funds, such as standard payment, clearing, and settlement services to related covered funds.

 3. FFIEC Revises HMDA Reporting Guidance to Incorporate Recent CFPB Rulemaking 

The FFIEC has published an updated version of its Home Mortgage Disclosure Act (“HMDA”) reporting compliance guidance, “A Guide to HMDA Reporting Getting It Right!,” for HMDA-related data collected in 2020 and reported in 2021. The updated guidance released on February 13 presents information to aid HMDA compliance in the event of a merger or acquisition, and updates certain appendices to reflect recent amendments to the CFPB’s regulations that implement HMDA, Regulation C. The CFPB’s amendments to Regulation C implemented and clarified partial exemptions from reporting established by the Economic Growth, Regulatory Relief, and Consumer Protection Act. These exemptions are available to certain depository institutions that are eligible based on the number of mortgages they originate and their Community Reinvestment Act ratings. The amendments to Regulation C also extended a temporary increase in the HMDA coverage threshold for open-end lines of credit—at least 500 lines of credit in each of the preceding two calendar years—which remains in effect for 2020 and 2021. Click here for a copy of the updated guidance.

Nutter Notes: In May 2019, the CFPB issued two alternative proposals to amend Regulation C that would permanently increase the current 25-loan coverage threshold for reporting data about closed-end mortgage loans so that depository institutions originating fewer than either 50 or, alternatively, 100 closed-end mortgage loans in either of the two preceding calendar years would not have to report HMDA data for those transactions. In connection with the proposed amendments, the CFPB requested comments from the public about whether either of the two proposed alternative closed-end coverage thresholds, or some other alternative, would more appropriately balance the benefits and burdens of covering institutions based on their closed-end lending. The May 2019 proposal also proposed to adjust the coverage threshold for reporting data about open-end lines of credit by setting the permanent coverage threshold at 200 open-end lines of credit upon the expiration of the temporary increase in the HMDA coverage threshold for open-end lines of credit. Commenters expressed concern to the CFPB that the national loan level dataset for 2018 and the CFPB’s annual overview of residential mortgage lending based on that data would not be available until after the close of the comment period for the May 2019 proposal. Therefore, the CFPB extended the comment period on certain aspects of the May 2019 proposal and announced that it will issue a separate final rule in 2020 addressing the permanent thresholds for closed-end mortgage loans and open-end lines of credit.

4. CFPB Modifies Proposed Rule on Collection of Time-Barred Debt

The CFPB has released a Supplemental Notice of Proposed Rulemaking (“Supplemental NPRM”) that modifies a May 2019 proposal to add new consumer protections to regulatory requirements governing the collection of time-barred debt in Regulation F, which implements the Fair Debt Collection Practices Act (“FDCPA”). The Supplemental NPRM issued on February 21 proposes to prohibit third-party debt collectors from using non-litigation means (such as phone calls) to collect on time-barred debt unless debt collectors disclose to consumers during the initial contact and on any required validation notice that the debt is time-barred. The proposed rule would apply to a bank collecting debts on behalf of an unaffiliated third-party or using another name when collecting its own debts. The Supplemental NPRM proposes model language and forms that debt collectors could use to comply with the proposed disclosure requirements. The Supplemental NPRM also proposes to require disclosures only if a debt collector knows or should know that the debt is time-barred. Public comments on the Supplemental NPRM will be due within 60 days after it is published in the Federal Register, which is expected shortly. Click here for a copy of the Supplemental NPRM.

Nutter Notes: While a bank that is collecting its own debt in its own name is not considered a debt collector under the FDCPA, the federal banking agencies generally expect banks to avoid abusive collection practices and comply with the spirit of the FDCPA. In addition, the federal banking agencies generally expect banks to establish internal controls and on-going monitoring to determine whether third-party debt collectors acting on a bank’s behalf are complying with the FDCPA and Regulation F. The Supplemental NPRM would require a debt collector collecting a debt that the debt collector knows or should know is time-barred to disclose that the law limits how long the consumer can be sued for a debt and that, because of the age of the debt, the debt collector will not sue the consumer to collect it. The Supplemental NPRM also would require the debt collector to disclose whether the debt collector’s right to bring a legal action against the consumer to collect the debt can be revived under applicable law, the fact that revival can occur, and the circumstances in which it can occur. The May 2019 proposal would prohibit debt collectors from threatening to sue on debts they know or should know are time-barred.

 5. Other Developments: Mortgage Loan Seller/Servicers and CRA

  • FHFA Proposes New Eligibility Requirements for GSE Mortgage Loan Seller/Servicers

The Federal Housing Finance Agency (“FHFA”) issued a proposal on January 31 to update the minimum financial eligibility requirements for Fannie Mae and Freddie Mac Seller/Servicers. The proposal would also address the risk factors related to servicing Ginnie Mae mortgages. For example, the proposal would increase the current Seller/Servicer minimum net worth requirement of $2.5 million plus 25 basis points (“BP”) of unpaid principal balance (“UPB”) for total loans serviced to $2.5 million plus 35 BP of UPB for Ginnie Mae servicing plus 25 BP of UPB for all other 1-4 unit residential mortgage loans serviced.

Nutter Notes: According to the FHFA, the updated minimum financial requirements will further strengthen the Seller/Servicer requirements and provide transparency and consistency of capital and liquidity required for Seller/Servicers with different business models. The FHFA is accepting public comments on the proposed changes to the financial eligibility requirements through March 31, 2020 at Click here for the FHFA’s summary of the proposal.

  • FDIC and OCC Extend Comment Period on Proposed CRA Rule Changes

The FDIC and OCC announced on February 19 that they are extending the public comment period for proposed changes to the regulations implementing the Community Reinvestment Act (“CRA”) until April 8, 2020. According to the agencies, the proposed changes to the CRA regulations originally released on December 12, 2019 are intended to increase bank activity in low- and moderate-income communities where there is significant need for credit, more responsible lending, and greater access to banking services.

Nutter Notes: The December 2019 proposed amendments would clarify what activities qualify for credit under the CRA and provide a process for confirming whether an activity would receive CRA credit. The agencies also propose to publish an illustrative list of CRA-qualifying activities. Click here for a copy of the December 2019 proposed amendments, and here for a copy of the FDIC’s fact sheet on the proposed amendments.

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 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

Tel: (617) 439-2087

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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