United States: Bank Report (January 2012)

Headlines

1. Final Massachusetts Rules Require Right-to-Cure Mortgage Default Notification
2. Federal Banking Agencies Issue Answers to FAQs on Interest Rate Risk Advisory
3. FDIC Moves Forward with New Dodd-Frank Requirements for Large Banks
4. New CFPB Rule Implements Dodd-Frank Consumer Protections for Remittance Transfers
5. Other Developments: Loan Participations and Information Security

1. Final Massachusetts Rules Require Right-to-Cure Mortgage Default Notification

The Division of Banks issued final rules to implement a Massachusetts law enacted in 2010 that provides a standardized process for lenders and servicers to inform a borrower of a mortgage default and to disclose repayment options in order to prevent a foreclosure. The law, Chapter 258 of the Acts of 2010, requires that notice be provided to residential borrowers in default of a right to cure the default. The right-to-cure regulation, 209 CMR 56.00, establishes the mandatory form of the right-to-cure notice as well as the information required to be included in the notice, procedures to determine whether a 150-day notice or a 90-day notice is required and the method of delivery of the notice. The regulation also allows a borrower to request from the entity foreclosing on the mortgage documentation evidencing that it is the holder of the mortgage or is authorized by the holder of the mortgage to foreclose. The regulation becomes effective on February 3, but use of the form of right-to-cure notice contained in the regulation will be voluntary until April 23, 2012. Use of the right-to-cure notice will become mandatory on April 23, 2012.

Nutter Notes: Chapter 258 of the Acts of 2010 amended the existing right-to-cure provisions of Chapter 244, Section 35A of the General Laws of Massachusetts to provide a mortgagor of a residential property with 150 days to cure a default of a required payment by full payment of all amounts that are due without acceleration of the maturity of the unpaid balance of the mortgage. The law provides that a creditor may begin foreclosure proceedings after a right-to-cure period lasting only 90 days if the creditor has engaged in a good faith effort to negotiate a commercially reasonable alternative to foreclosure, including at least one meeting with the borrower in person or by telephone. The law also requires that, to establish that a creditor has made a good faith effort to negotiate a commercially reasonable alternative to foreclosure, the creditor must consider, among other factors, an assessment of the borrower's current circumstances, and the net present value of receiving payments pursuant to a modified mortgage loan as compared to the anticipated net recovery following foreclosure. The creditor is required to provide documentation of that effort to the borrower 10 days prior to meeting the borrower.

2. Federal Banking Agencies Issue Answers to FAQs on Interest Rate Risk Advisory

The federal banking agencies have issued interpretive guidance on interest rate risk management through the Federal Financial Institutions Examination Council ("FFIEC"). The January 12 guidance responds to frequently asked questions ("FAQs") about the Interagency Advisory on Interest Rate Risk published on January 11, 2010. According to the guidance, interest rate risk management processes and measurement systems should be capable of capturing, reporting and controlling the risks being taken including risks arising from major new initiatives by a banking organization. The guidance recommends that institutions stress test interest rate risk exposures using scenarios that include meaningful interest rate shocks. According to the Federal Reserve, the advisory and the FAQs are intended for use by depository institutions, holding companies and the agencies' examiners as they assess an institution's management of interest rate risk. While the questions and answers are applicable to all institutions, the Federal Reserve noted that many of the questions originated from community banking organizations. According to the FFIEC, examiners will take into account a banking organization's size, nature, and balance sheet complexity when applying the guidance.

Nutter Notes: For stress testing, the guidance suggests that "meaningful" interest rate shocks in a low-rate environment would be +300 and +400 basis points. The guidance recommends that institutions test more severe scenarios if conditions warrant. Stress testing should ensure that interest rate risk exposures are within risk tolerance levels. According to the guidance, examiners will expect institutions to measure the potential effect of changes in market interest rates on earnings and capital. The guidance states that most institutions should use income simulations when measuring risk-to-earnings and that the economic-value-of-equity and similar models generally are used to measure risk-to-capital. The guidance also says that long-term simulations, which can supplement capital measures, generally are not necessary for community institutions. The guidance recommends that management perform simulations for one- and two-year time horizons, conduct model measurements that do not include new business growth, develop reasonable assumptions reflecting the institution's experience, and perform appropriate back-testing.

3. FDIC Moves Forward with New Dodd-Frank Requirements for Large Banks

The FDIC has issued a final rule requiring certain large insured depository institutions to submit periodic contingency plans for resolution in the event of the institution's failure and proposed a rule that would require certain large insured depository institutions to conduct annual capital-adequacy stress tests. The final and proposed rules announced on January 17 were adopted under Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). The resolution plan requirements under Section 165(d) of the Dodd-Frank Act apply to institutions with $50 billion or more in total assets. According to the FDIC, the purpose of the plans is to put the FDIC in a position, as receiver, to resolve large institutions in a manner that ensures that depositors receive access to their insured deposits within one business day of an institution's failure (or within two business days if the failure occurs on a day other than a Friday), maximizes the net-present-value return from the sale or disposition of its assets, and minimizes the amount of any loss to be realized by the institution's creditors. The FDIC said that it will use the plans to supplement but not replace the FDIC's own resolution planning. The final rule for insured depository institutions was preceded by an interim final rule adopted in September 2011. The interim final rule became effective on January 1, 2012 and will remain in effect until it is superseded by the final rule, which becomes effective on April 1, 2012.

Nutter Notes: The proposed stress testing rule would implement Section 165(i)(2) of the Dodd-Frank Act, which requires certain large insured depository institutions to conduct annual capital-adequacy stress tests. The OCC has issued a companion proposal with the FDIC, and the proposed rules would apply to national banks, state nonmember banks, and federal and state savings associations with total consolidated assets of more than $10 billion. The stress tests would provide forward-looking information that the FDIC and OCC would use to assess the capital adequacy of the banks covered by the rule. The FDIC said that the banks subject to the stress testing requirements also are expected to benefit from improved internal assessments of capital adequacy and overall capital planning. The proposed rules define "stress test" as a process to assess the potential impact of economic and financial conditions on the consolidated earnings, losses and capital of the bank over a set planning horizon, taking into account the current condition of the bank and its risks, exposures, strategies, and activities. The proposed rules also describe the content of the reports the institutions are required to publish, and the timeline for conducting the stress tests and producing the required reports. Comments on the FDIC's proposed rule are due by March 23, 2012. Comments on the OCC's proposed rule are due by March 26, 2012.

4. New CFPB Rule Implements Dodd-Frank Consumer Protections for Remittance Transfers

The Consumer Financial Protection Bureau ("CFPB") has issued a final rule amending Regulation E (Electronic Fund Transfers) to increase protections for consumers who transfer money internationally. Under the new rule announced on January 20, remittance transfer providers, including banks, will generally be required to disclose the exchange rate and all fees associated with a transfer so that consumers know how much money will be received by the recipient of the transfer. The rule implements Section 1073 of the Dodd-Frank Act, which creates a comprehensive new system of consumer protections for remittance transfers sent by consumers in the United States to individuals and businesses in foreign countries. The rule also requires remittance transfer providers to investigate disputes and remedy errors. Disclosures must generally be provided when the consumer first requests a transfer and again when payment is made. Consumers will generally have 30 minutes after payment is made to cancel a transaction. The final rule will become effective one year after the date it is published in the Federal Register, which is expected shortly.

Nutter Notes: The CFPB said that consumers transfer tens of billions of dollars from the United States to recipients in other countries each year, but that these transactions were generally excluded from existing federal consumer protection regulations in the United States until the Dodd-Frank Act expanded the scope of the Electronic Fund Transfer Act ("EFTA"), which is implemented by the Federal Reserve's Regulation E. The Dodd-Frank Act transferred authority to implement new rules under the EFTA and Regulation E from the Federal Reserve to the CFPB in July 2011. The Dodd-Frank Act required that the remittance transfer regulations be issued by January 21, 2012. The Federal Reserve issued a proposed rule addressing remittance transfers in May 2011. In issuing the final rule, the CFPB said that it considered the Federal Reserve's proposed rule and comments that were received. The CFPB also announced a notice of proposed rulemaking to further refine application of the final rule to certain transactions and remittance transfer providers. The CFPB said that it expects to complete any further rulemaking before the end of the one-year implementation period of the final rule.

5. Other Developments: Loan Participations and Information Security

• OCC Confirms Lending Limit Relief for a Loan Participation That Is Not a GAAP Sale

Nutter Notes: Under the OCC's lending limit participation rule, lending banks may obtain relief from the lending limit upon the sale of loan participations provided that the participations meet certain requirements set forth in the rule, including that there be a pro rata sharing of credit risk between the selling and participant banks.

• Grandfathering for Vendor Agreement Information Security Requirements to Expire

Nutter Notes: The Massachusetts information security regulations, 201 C.M.R. 17.00, became effective on March 1, 2010. The regulations temporarily grandfathered vendor agreements entered into before the effective date from the contractual requirements for a two-year period to allow time for the agreements to be amended in compliance with the regulations or superseded by contracts that include the required compliance provisions.

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