United States: Nutter Bank Report, October 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. New Debt Collection Rules Bar Foreclosure if a Modification Is Pending

2. Agencies Provide Guidance on Fair Lending Risks Related to Qualified Mortgages

3. FDIC Issues Guidance on Significant Risk Management Issues

4. CFPB Clarifies Fair Debt Collection Practices under Mortgage Servicing Rules

5. Other Developments: TDRs, Diversity Guidance, Municipal Advisors, and Insurance Fees

1. New Debt Collection Rules Bar Foreclosure if a Modification Is Pending

The Massachusetts Division of Banks has adopted amendments to its debt collection and loan servicing rules that prevent third-party mortgage servicers, including banks, from foreclosing on mortgaged property if an application for a loan modification is in process. The amended rules, which became effective on October 11, are meant to complement the recently adopted foreclosure prevention rules that require home mortgage lenders and servicers to modify certain mortgage loans if the cost of modification is less than the cost of foreclosure, according to the Division. The foreclosure prevention rules were adopted under the foreclosure prevention law signed by Governor Patrick in August 2012, which amended Chapter 244, Section 35A of the General Laws of Massachusetts to require creditors to take reasonable steps to avoid foreclosure on certain mortgage loans. Under the amended debt collection and loan servicing rules, third-party mortgage servicers are required to consider options to avoid foreclosure and third-party mortgage servicers are prohibited from initiating a foreclosure when an application for a loan modification is in process, a practice also known as "dual tracking." The amended rules require third-party loan servicers to provide a single point of contact for each borrower, follow specified loan modification procedures and communicate with borrowers in a timely manner. The amended rules also modify the definition of "debt collector" to include active debt buyers who purchase loans in default and then directly collect that debt. The amended rules reflect many of the loss mitigation standards created in the 2012 national mortgage servicer settlement between the U.S. Attorneys General and 49 state attorneys general with the five largest national mortgage servicers.

Nutter Notes: Among the new obligations imposed by the amendments, the debt collection and loan servicing rules now require third-party loan servicers to certify in writing the basis for asserting that the foreclosing party has the right to foreclose. The certification includes the chain of title and ownership of the note and mortgage from the date of the recording of the mortgage being foreclosed on. Third-party loan servicers are required to provide the certification to the borrower along with the notice of intent to foreclose that must be delivered under Chapter 244, Section 35A of the General Laws of Massachusetts, and must also include a copy of the note with all required endorsements. The Division's amendments to its debt collection and loan servicing rules also modified the loan servicing standards to specifically incorporate the CFPB's loss mitigation standards under recent amendments to Regulation X, the regulation that implements the Real Estate Settlement Procedures Act ("RESPA"). Tying the Massachusetts loss mitigation standards to the CFPB's loss mitigation standards means that a violation of the Regulation X requirements will also constitute a violation of the Massachusetts consumer protection statute, Chapter 93A of the General Laws. The Division's amendments expressly provide that failure to comply with the debt collection and loan servicing rules, including the loss mitigation standards incorporated from Regulation X, will be considered a violation of Chapter 93A. The CFPB's loss mitigation rules become effective in January 2014. It is not clear whether the Division will require third-party mortgage servicers in Massachusetts to comply with the new loss mitigation standards incorporated from Regulation X into the Massachusetts debt collection and loan servicing rules before the new provisions of Regulation X become effective in January. 

2. Agencies Provide Guidance on Fair Lending Risks Related to Qualified Mortgages

The federal banking agencies and the CFPB have issued a joint policy statement that clarifies that the agencies do not expect that a depository institution's decision to offer only Qualified Mortgages would, absent other factors, increase the institution's fair lending risk. The Interagency Statement on Fair Lending Compliance and the Ability-to-Repay and Qualified Mortgage Standards Rule released on October 22 addresses lenders' concerns about whether the disparate impact test applied under the Equal Credit Opportunity Act ("ECOA") and its implementing regulation, Regulation B, would allow lenders to originate only Qualified Mortgages. ECOA makes it illegal for a creditor to discriminate in any aspect of a credit transaction based on characteristics including race, religion, marital status, color, national origin, sex and age. The policy statement advises that the agencies believe that the decisions lenders will make about loan products in response to the Ability-to-Repay Rule are similar to decisions lenders have made in response to other significant regulatory or market changes, such as the decision by many lenders not to offer higher-priced mortgage loans following the adoption of the 2008 amendments to Regulation Z. The policy statement recommends that creditors continue to evaluate fair lending risk as they would for other types of product selections, including by carefully monitoring policies and practices and implementing effective compliance management systems. According to the policy statement, the agencies believe that the same principles apply in determining compliance with the Fair Housing Act and its implementing regulation.

     Nutter Notes: The term Qualified Mortgage refers to a home mortgage loan that meets certain standards under the CFPB's Ability-to-Repay Rule, which was added by the CFPB to Regulation Z, the regulation that implements the Truth in Lending Act. The Ability-to-Repay Rule implements provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") that amended the Truth in Lending Act to require lenders to make a reasonable, good faith determination that a consumer has the ability to repay a home mortgage loan before extending credit to the consumer. Lenders are presumed to have complied with the ability-to-repay requirement if they issue Qualified Mortgages, which must satisfy criteria that prohibit or limit features considered by the CFPB to be risky to consumers. There are several ways to satisfy the Ability-to-Repay Rule, including by making responsibly underwritten loans even if they do not satisfy the criteria for Qualified Mortgages. However, the Ability-to-Repay Rule provides a compliance safe harbor for loans that satisfy the Qualified Mortgage criteria and are not higher-priced mortgage loans, as defined by Regulation Z. The Ability-to-Repay Rule also provides a rebuttable presumption of compliance for higher-priced mortgage loans. 

3. FDIC Issues Guidance on Significant Risk Management Issues

The FDIC has recently issued three financial institution letters ("FILs") that provide advice and discuss supervisory expectations for banks in addressing certain significant risk management issues. The FILs address payment processing services for merchants engaged in higher-risk activities, management of sensitivity to interest rate risk and coverage exclusions contained in director and officer liability ("D&O") insurance policies. 

  • FIL-43-2013: FDIC Supervisory Approach to Payment Processing Relationships With Merchant Customers That Engage in Higher-Risk Activities. This FIL issued on September 27 clarifies the FDIC's policy that banks that properly manage relationships and risks are neither prohibited nor discouraged from providing payment processing services to higher-risk merchant customers operating in compliance with applicable law. 
  • FIL-46-2013: Managing Sensitivity to Market Risk in a Challenging Interest Rate Environment. This FIL issued on October 8 reviews elements of prudent interest rate risk oversight practices and effective risk management processes necessary to ensure that a bank is prepared for a period of rising interest rates. 
  • FIL-47-2013: Advisory Statement on Director and Officer Liability Insurance Policies, Exclusions, and Indemnification for Civil Money Penalties. This FIL issued on October 10 reviews information about D&O insurance coverage that the FDIC recommends each board member and executive officer understand, particularly when considering renewals and amendments of existing policies. This FIL also makes it illegal to purchase D&O coverage that provides for payment by the insurer of the amount of any civil money penalty assessed against any institution-affiliated party including a director or officer. 

Nutter Notes: According to FIL 43-2013, the FDIC expects banks that provide payment processing services directly or indirectly through a third party for higher-risk merchants to perform proper risk assessments, conduct due diligence to determine merchant customers are operating in accordance with applicable law, and maintain systems to monitor relationships over time. The FIL emphasizes the importance of ensuring that the bank is not facilitating fraudulent or other illegal activity. The FIL also states that FDIC examinations will focus on assessing whether banks are adequately overseeing activities and transactions they process and appropriately managing and mitigating risks. According to FIL 46-2013, the FDIC warns that, due to a significantly liability-sensitive balance sheet position, a number of banks are at risk for material securities depreciation relative to capital in a rising interest rate environment. The FDIC said that its examiners will continue to consider the amount of unrealized losses in investment portfolios and the degree to which banks are exposed to the risk of realizing losses from depreciated securities when qualitatively assessing capital adequacy and liquidity and assigning examination ratings. The FIL encourages boards of directors and management to analyze on- and off-balance sheet exposure to interest rate volatility and take action as necessary to mitigate potential financial risk. The FIL also reminds banks that net unrealized losses on available-for-sale debt securities flow through to equity capital as reported under U.S. generally accepted accounting principles ("GAAP"). Adverse trends in a bank's GAAP equity can result in negative market perception and liquidity, according to the FIL. 

4. CFPB Clarifies Fair Debt Collection Practices under Mortgage Servicing Rules

The CFPB recently released a bulletin and an interim final rule to clarify the obligations of mortgage loan servicers, including banks, under the Fair Debt Collection Practices Act ("FDCPA") when a borrower is in bankruptcy or sends a cease communication request. The guidance issued on October 15 responds to questions arising from the CFPB's new mortgage servicing rules that become effective in January 2014. The FDCPA generally allows borrowers to prevent debt collectors from communicating with them. The cease communication provision of the FDCPA, to the extent that it applies to a mortgage loan servicer's activities, has caused some uncertainty about whether a servicer will be liable under the FDCPA for carrying out certain communications required by the CFPB's new mortgage servicing rules that require disclosures to and communications with a borrower who has defaulted on mortgage loan payments when the borrower has instructed the servicer to cease communications. The CFPB has concluded that the FDCPA "cease communication" provision does not generally make servicers that are debt collectors liable under the FDCPA if they comply with certain provisions of Regulation X (12 C.F.R. §§ 1024.35 (error resolution), 1024.36 (requests for information), 1024.37 (force-placed insurance), and 1024.41 (loss mitigation)) and Regulation Z (12 C.F.R. §§ 1026.20(d) (adjustable-rate mortgage initial interest rate adjustment) and 1026.41 (periodic statement)).

Nutter Notes: The new mortgage servicing rules require servicers to attempt to contact borrowers each time they miss a payment to provide information to help the borrow get current, including information about forbearance plans and trial modifications. The CFPB bulletin clarifies that this requirement may be met through other contact that servicers have with borrowers, for example, when evaluating them for loss mitigation or during collection calls. The new mortgage servicing rules also require mortgage servicers to have policies and procedures in place to ensure that, if a borrower dies, the servicer will promptly identify and communicate with family members, heirs or other parties who have a legal interest in the home. The CFPB bulletin provides examples of these servicer policies and procedures, including allowing for continued payment on the mortgage as well as evaluating the heir (or whomever the legal interest in the home passes to) for assumption of the mortgage and, if appropriate, for loss mitigation measures. The interim final rule issued by the CFPB amends provisions in Regulation Z and the CFPB's new mortgage servicing rules, which, among other things, require that consumers receive counseling before obtaining high-cost mortgages and that servicers provide periodic account statements and rate adjustment notices to mortgage borrowers, as well as engage in early intervention when borrowers become delinquent. The amendments clarify the specific disclosures that must be provided before counseling for high-cost mortgages can occur, and proper compliance regarding servicing requirements when a consumer is in bankruptcy or sends a cease communication request under the FDCPA. 

5. Other Developments: TDRs, Diversity Guidance, Municipal Advisors, and Insurance Fees 

  • Federal Banking Agencies Issue Joint Supervisory Guidance on TDRs

The federal banking agencies have jointly issued supervisory guidance clarifying issues related to the accounting treatment and regulatory classification of commercial and residential real estate loans that have undergone troubled debt restructurings ("TDRs"). The guidance released on October 24 reiterates key aspects of previously issued guidance and discusses the definition of a collateral-dependent loan and the classification and charge-off treatment for impaired loans, including TDRs.

Nutter Notes: According to the joint guidance, a loan in nonaccrual status that is modified in a TDR need not be maintained for its remaining life in nonaccrual status, but can be restored to accrual status if it meets the return-to-accrual conditions in the call report instructions. The joint guidance also encourages banks to work constructively with borrowers and to view prudent loan modifications as positive actions when banks mitigate credit risk. 

  • Federal Banking Agencies Propose Joint Diversity Standards

The federal banking agencies along with the CFPB and SEC on October 23 issued proposed joint standards for assessing the diversity policies and practices of the institutions they regulate as required by Section 342 of the Dodd-Frank Act. According to the agencies, the proposed standards are intended to promote transparency and awareness of diversity policies and practices within financial institutions. Comments on the proposal are due within 60 days after it is published in the Federal Register, which is expected shortly.

Nutter Notes: The assessment standards cover four key areas: organizational commitment to diversity and inclusion, workforce profile and employment practices, procurement and business practices and supplier diversity, and practices to promote transparency of organizational diversity and inclusion. The standards account for variables including asset size, number of employees, governance structure, income, number of members or customers, contract volume, location and community characteristics. 

  • SEC Adopts Final Rule to Implement Municipal Advisor Registration Requirements

The SEC adopted a final rule on September 20 that establishes a permanent registration regime for municipal advisors as required by the Dodd-Frank Act. The rule requires a municipal advisor to permanently register with the SEC if it provides advice on the issuance of municipal securities or about certain "investment strategies" or municipal derivatives. The new rule will become effective 60 days after it is published in the Federal Register, which is expected shortly.

Nutter Notes: The final rule provides a limited exemption from municipal advisor registration requirements for a bank that provides advice with respect to any investments that are held in a deposit account, savings account, certificate of deposit, or other deposit instrument issued by a bank, any extension of credit by a bank to a municipal entity, any funds held in a sweep account, or any investment made by a bank acting in the capacity of an indenture trustee or similar capacity. 

  • Division of Insurance Allows Producers to Charge Fees on Top of Commissions

The Massachusetts Division of Insurance issued guidance on October 4 (Bulletin 2013-09) to licensed insurance producers, including licensed banks, clarifying that producers may charge the purchaser of an insurance product a fee in addition to the policy premium established by the insurance company, provided that the producer makes certain disclosures. In addition, the fee must not be included in the policy premium.

Nutter Notes: The Division's guidance requires that a producer charging a fee in addition to a sales commission disclose the purpose and amount of the fee in writing to the purchaser prior to the time of sale. The guidance also requires the producer to separately itemize the fee on the policy declarations page, billing statement or other documentation provided to the purchaser setting forth the cost of the policy. 

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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