United States: Nutter Bank Report, July 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.

Headlines

  1. Federal Banking Agencies Approve New Regulatory Capital Rules
  2. CFPB Amends Qualified Mortgage and Mortgage Servicing Rules
  3. Banking Agencies Propose Exemptions to Higher Priced Mortgage Rules
  4. Massachusetts Enacts Changes to the UCC Affecting Secured Transactions
  5. Other Developments: Supplementary Leverage Buffer, and Stress Testing

1. Federal Banking Agencies Approve New Regulatory Capital Rules

The Federal Reserve, OCC and FDIC have approved final rules to implement a new regulatory capital framework that incorporates the most recent regulatory capital reforms developed by the Basel Committee on Banking Supervision ("Basel III") and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The new regulatory capital framework will apply to all U.S. banks and thrifts, and all top-tier U.S. bank holding companies and savings and loan holding companies ("SLHCs"), other than certain SLHCs that are substantially engaged in insurance underwriting or commercial activities (all such banks, thrifts, bank holding companies and SLHCs together are referred to as "banking organizations"). The new framework imposes on all banking organizations a new minimum common equity tier 1 capital requirement, a capital conservation buffer requirement, an increase in the minimum tier 1 capital requirement, changes to the capital elements that constitute tier 1 and tier 2 capital, and changes to the methodologies for determining risk-weighted assets. The agencies have also approved amendments to the prompt corrective action ("PCA") rules to incorporate the changes to the regulatory capital framework. For a complete summary of the new regulatory capital rules, please see our Client Advisory here.

Nutter Notes: The final rules issued by the Federal Reserve on July 2 and the OCC on July 9 consolidate three separate notices of proposed rulemaking that the OCC, Federal Reserve and FDIC published jointly on August 30, 2012. The Federal Reserve's and the OCC's final rules codify the agencies' regulatory capital framework, which have previously resided in various appendices to their respective regulations, into an integrated regulation. On July 9, the FDIC adopted the three notices of proposed rulemaking that the banking agencies proposed last year as an interim final rule, with revisions that make the FDIC's interim final rule identical in substance to the final rules issued by the Federal Reserve and the OCC. The FDIC said that the measure allows it to implement the new regulatory capital framework in concert with the Federal Reserve and the OCC while considering the interactions between the revised risk-based capital regulations and a separate interagency proposal issued on July 9 that would require the largest and most systemically significant banking organizations to maintain a tier 1 capital leverage buffer of at least 2% above the new minimum supplementary leverage ratio.

2. CFPB Amends Qualified Mortgage and Mortgage Servicing Rules

The CFPB has adopted amendments to its ability-to-repay rule that change certain factors used to determine a consumer's debt-to-income ("DTI") ratio and clarify the temporary eligibility standards for certain qualified mortgages. The amendments released on July 10 also provide clarification of provisions in the CFPB's mortgage servicing rules related to preemption of state law and certain exemptions for small servicers. The definition of qualified mortgage under the ability-to-repay rule requires a creditor to satisfy statutory underwriting criteria, including a requirement that the creditor confirm that the consumer has a total DTI that is less than or equal to 43%. To determine whether the consumer meets the DTI requirement, a creditor must determine, among other things, whether the income used in the calculation of DTI is stable. The amendments eliminate requirements that a creditor determine the "probability of continued employment" by considering a consumer's "qualifications for the position" and "previous training and education" for purposes of the income stability analysis. The amendments also provide clarification on the calculation of various sources of income used in the DTI analysis, including overtime, bonuses, Social Security income, trust income and rental income. The amendments become effective when the ability-to-repay rule becomes effective on January 10, 2014.

Nutter Notes: Under the ability-to-repay rule, a loan can be a qualified mortgage on a temporary basis if it is eligible for purchase, guarantee or insurance by a GSE or certain federal agencies, provided the loan meets other, more limited qualifying criteria. The amendments to the ability-to-repay rule clarify the standards applicable to the temporary category of qualified mortgages based on GSE or federal agency guidelines. For example, if a loan meets the criteria for the temporary category of qualified mortgage loan, the amendments clarify that the creditor does not need to satisfy the types of procedural and technical underwriting requirements that are unrelated to the consumer's ability to repay. The amendments to the CFPB's mortgage servicing rules add an official comment to clarify the CFPB's position that its authority to regulate mortgage servicing, granted by the Real Estate Settlement Procedures Act ("RESPA"), does not preempt the field of possible mortgage servicing regulation by states. The mortgage servicing rules issued in January 2013 include an exemption from some requirements for small servicers. The amendments clarify which mortgage loans will be considered in determining whether a loan servicer qualifies as a small servicer. For example, loans serviced on a charitable basis will not be considered in making that determination.

3. Banking Agencies Propose Exemptions to Higher Priced Mortgage Rules

The federal banking agencies have issued a proposed rule that would create exemptions from certain appraisal requirements for a subset of higher-priced mortgage loans. The exemptions proposed on July 10 would provide that three types of higher-priced mortgage loans would be exempt from the appraisal requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). The exemptions would apply to higher-priced mortgage loans of $25,000 or less, certain "streamlined" refinancings, and loans secured by existing (used) manufactured housing and not land. According to the agencies, the exemptions are intended to save borrowers time and money and to promote the safety and soundness of creditors. The exemption for streamlined refinances would apply where the owner or guarantor of the refinance loan is the current owner or guarantor of the existing loan. To qualify for the proposed exemption for streamlined refinances, periodic payments under the refinance loan could not result in negative amortization, interest-only payments or balloon payments. In addition, the proceeds from the refinance loan could only be used to pay off the outstanding principal balance on the existing loan and to pay closing costs. Comments on the proposed rule are due by September 9, 2013.

Nutter Notes: The appraisal requirements for higher-priced mortgages were imposed by the Dodd-Frank Act. Under the Dodd-Frank Act, a residential mortgage loan is considered to be higher-priced if it has an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by 1.5 percentage points or more for a non-jumbo first lien residential mortgage loan, by 2.5 percentage points or more for a jumbo first lien residential mortgage loan, or by 3.5 percentage points or more for a subordinate lien residential mortgage loan. A final rule implementing the new Dodd-Frank Act appraisal requirements was issued by the federal banking agencies in January 2013. The final rule requires a creditor in a higher-priced mortgage loan transaction to use a licensed or certified appraiser who prepares a written appraisal report based on a physical visit of the interior of the property, provide consumers with a free copy of the appraisal report, disclose to applicants information about the purpose of the appraisal and obtain an additional appraisal at no cost to the consumer under certain circumstances. Compliance with the final rule will become mandatory on January 18, 2014.

4. Massachusetts Enacts Changes to the UCC Affecting Secured Transactions

Governor Patrick has signed into law amendments to the Massachusetts Uniform Commercial Code ("UCC") that enact changes to the UCC that have been adopted in a majority of states. The amendments, which became effective on July 1, revise Article 1, which covers general provisions of the UCC, Article 7, which covers documents of title (such as warehouse receipts and bills of ladings), and Article 9, which covers secured transactions (credit secured by an interest in personal property, such as equipment, inventory or accounts receivable). The amendments to Article 9 address the name of the debtor that should be used on the UCC-1 financing statement, the consequences if a debtor moves or merges, and changes to the forms used to make UCC filings. A UCC financing statement that was effective prior to July 1 generally will not be rendered ineffective as of July 1 if it does not conform to the amendments, but must be amended to conform to the new UCC requirements if the secured party wishes to continue the financing statement prior to its expiration.

Nutter Notes: For financing statements filed against an individual debtor, the amendments to Article 9 of the UCC provide that, if the debtor has an unexpired driver's license or state-issued identification card, then the financing statement must use the name on the unexpired license or identification card, even if that name is incorrect or has changed since the license or identification card was issued. The amendments also provide that, if the debtor does not have an unexpired driver's license or identification card, then the financing statement may use the debtor's first name and surname. For registered organizations, such as corporations, limited liability companies and limited partnerships, the amendments to Article 9 require that a financing statement use the legal name of the debtor set forth on the most recent charter document filed with or issued by the debtor's state of organization, such as certified copies of the debtor's articles of organization, certificate of limited partnership or articles of amendment. In addition, the 4-month grace period to re-file after a debtor moves to another state or merges with another entity now also applies to after-acquired property.

5. Other Developments: Supplementary Leverage Buffer, and Stress Testing

  • New Supplementary Leverage Buffer Proposed for the Largest Banking Organizations

Concurrent with the approval of the new regulatory capital rules, the federal banking agencies have proposed a rule to require bank holding companies with more than $700 billion in consolidated total assets or $10 trillion in assets under custody to maintain a tier 1 capital leverage buffer of at least 2 percentage points above the minimum supplementary leverage ratio requirement of 3%. Comments on the proposal will be due 60 days after it is published in the Federal Register, which is expected shortly.

Nutter Notes: Failure to exceed the 2% supplementary leverage buffer would subject covered bank holding companies to restrictions on discretionary bonus payments and capital distributions similar to those imposed for failure to exceed the capital conservation buffer. In addition, the proposed rule would require insured depository institution subsidiaries of covered holding companies to meet a 6% supplementary leverage ratio to be considered "well capitalized" for prompt corrective action purposes. The proposed rule would currently apply to the 8 largest U.S. banking organizations.

  • Proposed Guidance for Stress Testing by Medium-Sized Banking Organizations

The federal banking agencies issued proposed guidance on July 30 that describes supervisory expectations for stress tests conducted by banking organizations with total consolidated assets between $10 billion and $50 billion. The Dodd-Frank Act and its implementing regulations require these medium-sized organizations to conduct annual stress tests beginning this fall. Comments on the proposed guidance will be due 60 days after it is published in the Federal Register, which is expected shortly.

Nutter Notes: The stress test rules allow flexibility to accommodate different approaches by medium-sized banking organizations. According to the agencies, the proposed guidance is intended to help medium-sized banking organizations scale stress tests appropriately to their size, complexity, risk profile, business mix and market footprint. The proposed guidance includes examples of practices that would be consistent with supervisory expectations.

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 by Lisa M. Jentzen. The information in this publication is not legal advice. For further information, contact:

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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