United States: Nutter Bank Report, June 2013

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 Issues Rules on Mandatory Mortgage Loan Modifications
2. Federal Banking Agencies Provide Guidance on Swap Clearing Requirements
3. New Rules on Garnishment of Accounts Containing Federal Benefit Payments
4. Division of Banks Issues Guidance on Approvals for Interactive Teller Machines
5. Other Developments: Lending Limits, Usury and OCC Appeals Policy

1. Division of Banks Issues Rules on Mandatory Mortgage Loan Modifications

The Massachusetts Division of Banks has released final amendments to its foreclosure prevention regulation that prohibit mortgage lenders, including banks, from foreclosing on certain types of home mortgage loans if modifying the mortgage is less expensive to the institution than foreclosing. The amendments became effective on June 21, and the use of the regulation's form of "Right to Request a Modified Mortgage Loan" notice will become mandatory on September 18, 2013. The final regulation establishes a process for mortgage lenders and servicers to deliver a loan modification notice to certain borrowers along with the right-to-cure notification as required by Chapter 244, Sections 35A and 35B of the General Laws of Massachusetts. Creditors are also required to file a copy of the "Right to Request a Mortgage Loan Modification" notice with the attorney general's office concurrent with the delivery of the notice to the borrower. The loan modification notice requirements apply to home mortgage loans with features such as a teaser rate, interest-only payments (other than an open-end home equity line of credit), negative amortization, limited or no documentation of the borrower's income or assets, certain prepayment penalties or loans meeting certain loan-to-value criteria. If an eligible borrower requests a loan modification in response to the notice, the regulation requires the creditor to assess whether the borrower can afford a lower monthly payment and whether the modification would be in the interests of the creditor. The regulation provides that a modified mortgage loan is considered to be in the interests of the creditor in any case where the net present value of the modified mortgage loan equals or exceeds the anticipated net recovery from foreclosure and provides for an affordable monthly payment for the borrower.

     Nutter Notes: The final amendments supplement the Division's existing foreclosure prevention regulation, 209 C.M.R. 56.00, which implements a 2010 Massachusetts law that provides a 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 was amended by Chapter 194 of the Acts of 2012 to require mortgage lenders to determine whether the value of modifying certain types of home mortgage loans would outweigh the likely value of foreclosure and, if so, the lender must make the loan modification. The Division's revised regulation sets forth the process for borrowers to request a mortgage loan modification and details the actions that represent a lender's and a borrower's good faith participation in the process to develop a mortgage loan modification. The revised regulation includes requirements for how and when lenders should communicate with borrowers, how and when borrowers should respond to lenders, and sets standards to determine whether a lender has met the requirements of the foreclosure prevention law. The revised regulation also clarifies that certain streamlined refinances of mortgage loans insured by the Federal Housing Administration, or originated in accordance with Fannie Mae's or Freddie Mac's underwriting standards, are not subject to the foreclosure prevention regulation even though such refinance loans may have relied on limited documentation of a borrower's income or assets.

2. Federal Banking Agencies Provide Guidance on Swap Clearing Requirements

The Federal Reserve, FDIC and OCC each have issued guidance reminding depository institutions and holding companies about new mandatory clearing requirements for certain interest rate and credit default swap transactions. The rules of the Commodity Futures Trading Commission ("CFTC") that implement the clearing requirements became effective on June 10 for banks and other financial institutions that are not swap dealers or major swap participants. Section 723 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") amended the Commodity Exchange Act to authorize the CFTC to determine whether particular types or categories of swaps should be submitted for clearing to a registered derivatives clearing organization ("DCO"). The CFTC has determined that certain interest rate and credit default swaps must be cleared by a DCO. Mandatory clearing of these types of swaps began on March 11 for swaps between swap dealers, major swap participants and private funds active in the swaps market. There are exceptions to the mandatory clearing requirement for banks with total assets of $10 billion or less, and for swaps with affiliates. A bank wishing to use a clearing exception must first satisfy the terms and conditions applicable to the exception. For example, a bank that is a public company or a subsidiary of a public company must have the appropriate committee of the bank's board of directors review and approve the decision to use a clearing exception. Each of the federal banking agencies recommends that a bank intending to use a clearing exception review the CFTC's rules and guidance carefully.

     Nutter Notes: The exception to the mandatory clearing requirement for banks with total assets of $10 billion or less is commonly referred to as the end-user exception. Where the counterparty to the swap is a swap dealer or major swap participant, the parties to a swap may avoid the mandatory clearing requirement if the small bank meets the CFTC's end-user exception eligibility requirements under the swap clearing rules. The end-user exception under the Dodd-Frank Act provides that the clearing requirements do not apply to a swap if one of the counterparties to the swap is not a "financial entity," is using the swap to hedge or mitigate commercial risk and notifies the CFTC how it generally meets its financial obligations associated with entering into non-cleared swaps. The CFTC's swap clearing rules exempt depository institutions with total assets of $10 billion or less from the definition of "financial entity," making such small institutions eligible for the end-user exception. To implement the notification requirement, the CFTC's swap clearing rules require that notice of the election to rely on the exception and certain information that verifies the electing counterparty's eligibility for the end-user exception be reported to a swap data repository ("SDR") (or if no SDR is available, directly to the CFTC) for each swap for which the end-user exception is elected. The electing counterparty (i.e., the small institution) is responsible for filing (or causing to be filed) the electing counterparty information, and may do so in an annual filing or on a swap-by-swap basis. If the electing counterparty information is reported by an annual filing, the report is effective for 365 days, but the electing counterparty must amend the report as necessary to reflect any material changes.

3. New Rules on Garnishment of Accounts Containing Federal Benefit Payments

The U.S. Treasury Department and the federal agencies that oversee certain federal benefit payments have jointly adopted final amendments to the rules governing the garnishment of federal benefit payments that are directly deposited to accounts at depository institutions. The final amendments published on May 29 establish procedures that institutions must follow when they receive a garnishment order against an account holder who receives certain types of federal benefit payments by direct deposit. The amended regulation requires depository institutions that receive a garnishment order to first determine if the federal government or a state child support enforcement agency has attached or included a Notice of Right to Garnish Federal Benefits with the order. If so, the regulation requires the depository institution to follow its customary procedures for handling the order. If the garnishment order does not include a Notice of Right to Garnish Federal Benefits, the regulation requires the depository institution to review the account history for the prior 2-month period to determine whether, during this "lookback period," one or more exempt federal benefit payments were directly deposited to the account. Such payments include Social Security benefits, Supplemental Security Income payments, VA benefits, Federal Railroad retirement benefits, Federal Railroad unemployment and sickness benefits, Civil Service Retirement System benefits and Federal Employees Retirement System benefits. The institution must determine the sum of the exempt federal benefit payments deposited to the account during the lookback period and ensure that the account holder has access to an amount equal to that sum or to the balance of the account on the date of the account review, whichever is lower. The final amendments become effective on June 28.

     Nutter Notes: The amended regulation also requires the depository institution to notify the account holder that the institution has received a garnishment order. The regulation requires that the notice briefly explain what a garnishment is and include other information regarding the account holder's rights. The regulation does not require such a notice if the balance in the account is zero or negative on the date of the account review. Depository institutions may use a model notice contained in the regulation. Use of the model notice is not mandatory, but use of the model provides a safe harbor for compliance with the notice content requirements. For an account containing a protected amount of federal benefit payments, the financial institution may not collect a garnishment fee from the protected amount. The depository institution generally may only charge a garnishment fee against funds in the account in excess of the protected amount and may not charge or collect a garnishment fee after the date of account review. However, if funds other than a benefit payment are deposited into the account at any time within 5 business days following the date of the account review, the institution may retroactively charge or collect a garnishment fee from the additional funds. The amended regulation also includes guidance and examples of how the account balance should be computed when conducting an account review and establishing a protected amount. Depository institutions that comply with the regulation's requirements are protected from various sources of liability, including liability for failing to honor a garnishment order.

4. Division of Banks Issues Guidance on Approvals for Interactive Teller Machines

The Division of Banks has issued a legal opinion that provides guidance on the regulatory approval process for the installation of an Interactive Teller Machine ("ITM") at a location other than an existing banking office. According to the June 7 opinion letter, an ITM would be considered an "electronic branch," as are Automated Teller Machines ("ATMs") under Chapter 167B of the General Laws of Massachusetts and the Division's regulations at 209 C.M.R. 31.00. The application process for an ITM therefore would follow the existing procedure for an application to establish an ATM, which is to submit a notice to the Division within 30 days after opening the ATM location. As described in the opinion letter, an ITM generally has the functionality of an ATM, but with an additional interactive video component. The video component allows the customer to interact with a bank employee, allowing the bank to deliver typical call center services to the customer through an ITM. These are services that customers can typically access over the telephone, such as placing a stop on a debit card, verifying account history and ordering checks. ITMs also allow customers to initiate a stop payment order, request reissue of a debit card, make reports of loss of a money order or treasurer's check, and notify the bank of a change of address, each of which requires the customer to return a form to the bank by mail.

     Nutter Notes: The Division also considered whether the interactive features of ITMs would make them "manned electronic branches," which are prohibited under Chapter 167B, Section 3 of the General Laws of Massachusetts unless located at a banking office. The Division concluded that ITMs are not manned electronic branches but instead are automated machines operated by the customer because there is no bank employee onsite to operate the ITM on the customer's behalf. According to the opinion letter, each of the transactions available through an ITM are initiated by a customer, certain of which require the customer to return a signature form by mail to complete the transaction. The opinion letter also noted that the OCC has considered whether devices similar to ITMs, called remote service units ("RSUs"), were bank branches, concluding in a 1997 interpretive letter that RSUs are not branches. In 1999, the OCC adopted a regulation defining an RSU as an "automated facility, operated by a customer of a bank, that conducts banking functions, such as receiving deposits, paying withdrawals, or lending money," and may be equipped with a telephone or video component that allows contact with a bank employee. The OCC regulation also provides that RSUs are not subject to state geographic or operational restrictions or licensing laws.

5. Other Developments: Lending Limits, Usury, and OCC Appeals Policy

  • OCC Adopts Final Rule Implementing DFA Lending Limit Requirements

The OCC issued a final rule on June 20 that amends its lending limits regulation to implement section 610 of the Dodd-Frank Act, which added certain credit exposures arising from derivatives and securities financing transactions to the statutory definition of loans and extensions of credit for purposes of federal lending limits. Under the final rule, a temporary exception period is extended for 3 months so that compliance with Section 610 will not be required until October 1.

     Nutter Notes: The OCC had earlier extended from January 1, 2013 to July 1, 2013 the temporary exception under an interim final rule implementing the application of federal lending limits to certain credit exposures arising from derivative transactions and securities financing transactions. The OCC's lending limit regulation applies to both national banks and savings associations.

  • Appeals Court Overturns Ruling that Interest Rates Above 18% Are Unconscionable

The Massachusetts Appeals Court on May 17 overturned a lower Massachusetts court ruling which held that credit card interest rates above 18% are unconscionable as a matter of law and a contract allowing such rates cannot be enforced. The lower court ruling was handed down on January 4, 2011 in a case involving a bank's attempt to collect delinquent credit card payments.

     Nutter Notes: The Massachusetts Appeals Court held that the lower court was mistaken when it applied Massachusetts common law in its determination that the interest rate applied by the bank was unconscionable. The bank, a national bank, was located in South Dakota and both parties agreed that the law of South Dakota, which permitted the interest rate charged by the bank, controlled all aspects of their relationship, the appeals court said.

  • OCC Revises Policy by Which Banks May Appeal Agency Decisions and Actions

The OCC issued guidance on appealable matters in a revised policy permitting national banks and federal savings associations to appeal supervisory decisions and actions. The June 7 guidance clarifies that appealable matters include but are not limited to examination ratings, adequacy of allowance for loan and lease loss methodology, individual loan ratings and violations of law, among other matters.

     Nutter Notes: The guidance also listed certain matters that may not be appealed under the revised policy, including preliminary examination conclusions communicated to the bank before a final report of examination or other written communication from the OCC is issued, and any formal enforcement-related actions.

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." 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 Lisa M. Jentzen. The information in this publication is not legal advice.

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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