United States: Nutter Bank Report - December 2011

Last Updated: January 6 2012
Article by Kenneth F. Ehrlich and Michael K. Krebs

Headlines

1. OCC Issues Guidance on Risks Associated with Residential Foreclosures
2. Federal Reserve: Asset Exchanges Raise Safety and Soundness Concerns
3. Stricter Supervisory Standards Proposed for Systemically Important Institutions
4. CFPB Releases Prototype Consumer Credit Card Agreement
5. Other Developments: Market Risk Capital Rules and SLHC Reporting

1. OCC Issues Guidance on Risks Associated with Residential Foreclosures
The OCC recently issued guidance to national banks and federal savings associations on obligations and risks related to foreclosed residential property. The December 14 guidance, entitled Guidance on Potential Issues with Foreclosed Residential Properties (OCC Bulletin No. 2011-49), summarizes certain legal, safety and soundness, and community impact considerations related to residential foreclosures. The guidance addresses the conduct of a bank or savings association in cases where the institution is the owner of a foreclosed property, is the servicer or property manager, or is the securitization trustee. The OCC's guidance also emphasizes the importance of understanding requirements imposed by Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development (HUD) on servicers. An institution should have robust policies and procedures in place to address risks associated with foreclosed (or soon to be foreclosed) properties, according to the OCC's guidance. The guidance states that institutions should identify all risks arising from acquiring title to properties through foreclosure, or from acting as a servicer, property manager, or securitization trustee, and ensure that policies and procedures for monitoring and controlling those risks have been implemented. The OCC said in its guidance that while the standards focus primarily on residential foreclosed properties, many of the same principles apply to commercial properties.

Nutter Notes:  Earlier this year, the OCC directed national banks to conduct self-assessments of foreclosure management practices to ensure that such practices conform to OCC expectations. However, that directive did not specifically focus on risk management activities. The OCC guidance issued this month addresses certain specific foreclosure risks that management and the board of directors should consider when implementing risk management policies and procedures. Those specific risks include assuming the primary responsibilities of an owner, such as maintenance, security, property taxes, acting as landlord, and maintaining appropriate insurance. The guidance recommends that foreclosing institutions communicate with localities, including homeowner associations, to learn about any specific requirements applicable to foreclosed residential properties, such as property upkeep, maintenance, and security requirements, and local foreclosure registration requirements. In terms of risks and obligations related to acting as servicer or manager of a foreclosed property, the guidance notes that Fannie Mae and Freddie Mac each have detailed servicing guides setting forth servicer obligations and responsibilities for foreclosed properties or vacant properties in the process of foreclosure. In the case of private securitizations, the guidance recommends that institutions consider the obligations detailed in the applicable pooling and servicing agreement or its equivalent. The guidance also recommends that an institution acting as a securitization trustee consider risks such as potential reputation and litigation risks if a servicer undertakes foreclosure actions in the trustee's name as the secured party.

2. Federal Reserve: Asset Exchanges Raise Safety and Soundness Concerns
In recent supervisory guidance, the Federal Reserve staff expressed concerns that so-called "asset exchange" transactions used by financial institutions to dispose of or reduce nonperforming assets and other real estate owned (OREO) may present significant risks and could compromise safety and soundness. The December 21 guidance, entitled Disposal of Problem Assets through Exchanges (Supervision and Regulation Letter No. 11-15), highlights certain risks specific to asset exchange transactions that are designed to reduce problem assets in the short term. According to the guidance, asset exchanges involve third parties or marketing agents who offer to purchase problem assets from an institution and replace them with performing assets. The guidance warns that a lack of appropriate due diligence may result in heightened risks over the longer term and that incorrect or other inappropriate assumptions used in determining the fair value of purchased assets may result in loss recognition shortly after closing an asset exchange. The supervisory guidance applies to all state member banks, bank holding companies and their nonbank subsidiaries, and savings and loan holding companies that engage in asset exchange transactions. The guidance outlines certain risks specific to asset exchange transactions, relevant risk management considerations for institutions, and the supervisory considerations examiners will use when reviewing such transactions.

Nutter Notes:  The guidance recommends that management assess relevant risk exposure before entering into asset exchange transactions. Specifically, management should determine an asset exchange's long-term effect on the institution's balance sheet and loss exposure, according to the guidance. The guidance also recommends that management determine how these risks align with the institution's overall risk management strategy. The guidance indicates that examiners typically will not include a specific review of these transactions in routine examination and inspection activities, particularly where there is no evidence that a bank has engaged in such transactions. However, examiners will be looking for indications of possible asset exchange transactions as part of their routine monitoring between examinations. Institutions can expect examiners to discuss asset exchanges with management as part of the supervision process if examiners become aware that the institution is considering these types of transactions. According to the guidance, supervisory monitoring activities will focus on financial statement changes commonly associated with asset exchanges, internal risk management reports, and other documents received on a routine basis. Any review of asset exchanges by examiners will consider whether appropriate risk management measures have been considered and whether management has used appropriate valuations in accordance with GAAP.

3. Stricter Supervisory Standards Proposed for Systemically Important Institutions
The Federal Reserve has proposed a number of regulations intended to strengthen regulation and supervision of large bank holding companies and systemically important non-bank financial institutions. The proposed regulations released on December 20 would implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The new rules would address capital, liquidity, credit exposure, stress testing, risk management, and early remediation requirements, among other things. The proposed regulations would generally apply to all U.S. bank holding companies with consolidated assets of $50 billion or more and any non-bank financial institution that may be designated by the Financial Stability Oversight Council as a systemically important financial institution. Savings and loan holding companies ("SLHCs") would be subject to certain stress test requirements under the proposal, but otherwise would not be subject to the proposed regulations. The Federal Reserve announced that it plans to issue a separate proposal to address the applicability of the enhanced standards to SLHCs and to address similar issues for foreign banking organizations. Financial institutions subject to the proposed regulations would need to comply with certain of the enhanced standards within one year after they are finalized. The requirements on stress testing for bank holding companies would take effect shortly after the regulations are finalized. Comments on the proposal are due by March 31, 2012.

Nutter Notes:  Included among the proposed regulations are enhanced risk-based capital and leverage requirements for large bank holding companies and systemically important non-bank financial institutions that would be implemented in two phases. First, covered financial institutions would be subject to the Federal Reserve's capital plan rule, which was issued in November 2011. That rule requires covered institutions to develop annual capital plans, conduct stress tests, and maintain adequate capital, including a tier one common risk-based capital ratio greater than 5%, under both expected and stressed conditions. Second, the Federal Reserve would implement a risk-based capital surcharge based on the framework and methodology developed by the Basel Committee on Banking Supervision. Stress testing would be conducted annually under the proposal using three different economic and financial market scenarios. A summary of the results, including company-specific information, would be made public. Certain liquidity requirements would also be implemented in multiple phases under the proposal, including standards that would require companies to conduct internal liquidity stress tests and set internal quantitative limits to manage liquidity risk. The proposed regulations would also limit credit exposure of a covered financial institution to a single counterparty as a percentage of the institution's regulatory capital, and credit exposure between the largest financial institutions would be subject to a narrower limit.

4. CFPB Releases Prototype Consumer Credit Card Agreement
The Consumer Financial Protection Bureau ("CFPB") has developed a model form of consumer credit card agreement as part of its Know Before You Owe project that the agency said is shorter, clearer and more consistent. The model agreement was released on December 7 for public comment, and the CFPB said that it would also begin a pilot test of the prototype through a federal credit union. The industry average for a credit card agreement is about 5,000 words, according to the CFPB. The CFPB's model agreement is about 1,100 words. According to the CFPB, the model credit card agreement also has an easy-to-read layout and is written in plain language. The model agreement is organized into three sections: costs, changes, and additional information. The model credit card agreement would also establish standard definitions for certain terms like "authorized charges," "card," "balance transfer," and "default." The model agreement identifies defined terms by underlining them, but the definitions would be provided either in a separate document or on a website that is accessible by consumers. The model form of credit card agreement is available on the CFPB's website. 

Nutter Notes:  In addition to introducing the model form of consumer credit card agreement, the CFPB announced that it will host an online database of existing credit card agreements where the public can compare existing agreements with the CFPB's prototype. The Credit Card Accountability Responsibility and Disclosure Act of 2009 required credit card issuers to provide copies of their credit card agreements to the Federal Reserve so it could maintain a database for consumers. The Dodd-Frank Act transferred responsibility for that database to the CFPB. The Dodd-Frank Act granted authority to the CFPB to prescribe rules to ensure that the features of any consumer financial product or service, both initially and over the term of the product or service, are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service. In connection with its mandate under the Dodd-Frank Act, the CFPB initiated the Know Before You Owe project to improve the transparency of information about consumer financial products, including residential mortgage loans and student loans. The CFPB has not addressed whether use of the final form of consumer credit card agreement by credit card issuers would be voluntary or subject to future CFPB rulemaking.

5. Other Developments: Market Risk Capital Rules and SLHC Reporting

  • Federal Banking Agencies Request Comment on Market Risk Capital Rules
The federal bank regulatory agencies released a notice of proposed rulemaking on December 7 that would amend an earlier market risk capital proposal announced in December 2010 to modify the agencies' market risk capital rules for banking organizations with significant trading activities. The amended proposal would include alternative standards of creditworthiness in place of credit ratings to determine the capital requirements for certain debt and securitization positions.


     Nutter Notes:  The proposed creditworthiness standards include the use of country risk classifications published by the Organization for Economic Cooperation and Development for sovereign positions, company-specific financial information and stock market volatility for corporate debt positions, and a supervisory formula for securitization positions. Comments on the proposal are due by February 3, 2012.

  • Federal Reserve Announces Phase-In Period for SLHC Reports
The Federal Reserve on December 23 issued a final notice for a two-year phase-in period for most SLHCs to file Federal Reserve regulatory reports, and an exemption for some SLHCs from initially filing Federal Reserve regulatory reports. Earlier this year, the Federal Reserve requested comment on proposals to require SLHCs to submit the same reports as bank holding companies, beginning with the March 31, 2012 reporting period.


     Nutter Notes:  Under the final notice, a limited number of SLHCs will be exempt from most regulatory reporting using the Federal Reserve's existing regulatory reports. Exempt SLHCs would continue to submit Schedule HC, which is currently a part of the Thrift Financial Report, and the OTS H-(b)11 Annual/Current Report. However, exempt SLHCs will file annual reports on the Federal Reserve's form FR Y-6 (or FR Y-7 for foreign banking organizations).

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 2009 Chambers and Partners review says that a "real strength of this practice is its strong partners and . . . excellent team work." Clients praised Nutter banking lawyers as "practical, efficient and smart." Visit the U.S. rankings at ChambersandPartners.com. 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.

www.nutter.com

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.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Kenneth F. Ehrlich
 
In association with
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.