United States: Nutter Bank Report, February 2014

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. Examiners Will Review Implementation Plans for Dodd-Frank Mortgage Rules
  2. FinCEN Issues Due Diligence and Reporting Requirements for Marijuana Businesses
  3. OCC Provides Guidance on the Treatment of Secured Loans in Bankruptcy Proceedings
  4. FDIC Issues Guidance on Recordkeeping and Confirmation in Securities Transactions
  5. Other Developments: Comptroller's Handbook and Unresponsive Securityholders

1. Examiners Will Review Implementation Plans for Dodd-Frank Mortgage Rules

The FDIC has released revisions to several sections of its Compliance Examination Manual that have been updated for the mortgage rules issued under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). Financial Institution Letter 9-2014 (February 25, 2014) indicates that, during initial examinations for compliance with the new mortgage rules, examiners will expect banks to be familiar with the requirements of the new rules and have an appropriate plan in place to implement the new requirements. Implementation plans should contain explicit timeframes and benchmarks for making necessary changes to compliance management systems and relevant programs, according to the agency. The FDIC also said that examiners will consider management's overall compliance efforts and take into account progress that has been made on the implementation plan. Banks should expect examiners to ask about the implementation plan and actions taken to train bank staff and adjust systems, processes, policies and procedures to comply with the new mortgage rules. FIL-9-2014 includes a summary of the mortgage rules covered in the updated Compliance Examination Manual.

Nutter Notes: The CFPB issued several final rules in 2013 to implement various provisions of the Dodd-Frank Act related to residential mortgage lending. The FDIC, jointly with other federal agencies, also issued regulations on appraisals for higher-priced mortgage loans in 2013 to implement various provisions of the Dodd-Frank Act. Most of the final rules issued in 2013 became effective in January 2014. The new rules include the Ability-to-Repay/Qualified Mortgage Rule ("ATR Rule"), the loan originator compensation rule, mortgage servicing rules, the higher-priced mortgage loan ("HPML") escrow and appraisal rules and the high-cost mortgage and homeownership counseling rule. The ATR Rule, under Regulation Z, requires that creditors make a reasonable and good faith determination that a consumer has a reasonable ability to repay a mortgage loan according to its terms. The rule also defines several categories of Qualified Mortgages, which entitle the creditor to a presumption of compliance with the ATR Rule. The loan originator compensation rule implements Dodd-Frank Act amendments to the Truth in Lending Act that restrict loan originator compensation based on loan terms, dual compensation and steering, among other requirements. The mortgage servicing rules implement Dodd-Frank Act amendments to the Truth in Lending Act and the Real Estate Settlement Procedures Act, including requirements to correct errors, promptly credit mortgage payments, provide protections to borrowers in connection with force-placed insurance, provide information about loss mitigation options and provide interest-rate adjustment notices for adjustable-rate mortgages. The escrow and appraisal rules and certain counseling requirements only apply to mortgage loans that cross certain HPML or high-cost mortgage price thresholds.

2. FinCEN Issues Due Diligence and Reporting Requirements for Marijuana Businesses

The Financial Crimes Enforcement Network ("FinCEN") has issued guidance that clarifies customer due diligence expectations and reporting requirements under the Bank Secrecy Act ("BSA") for financial services provided to marijuana-related businesses. The February 14 guidance was coordinated with additional guidance from the U.S. Department of Justice ("DOJ") related to enforcement of marijuana-related crimes under the federal Controlled Substances Act ("CSA"). The FinCEN guidance outlines a risk-based approach to a bank's decision to open, close or refuse any particular account or relationship with a marijuana-related business in connection with the consideration of the CSA enforcement priorities described by the DOJ. The FinCEN guidance lists seven due diligence procedures that must be performed, at a minimum, when assessing the risk of providing services directly to a marijuana-related business, and identifies 23 red flags that should be incorporated into a bank's ongoing monitoring program. Because federal law prohibits the distribution and sale of marijuana, banks are required to file Suspicious Activity Reports ("SARs") on activity involving any marijuana-related business even if it is licensed under state law. The FinCEN guidance establishes a special SAR filing framework for banks reporting marijuana-related activity: "Marijuana Limited" SARs (filed when a bank determines to provide financial services to a marijuana-related business operating in compliance with state law and not implicating any of DOJ's CSA enforcement priorities), "Marijuana Priority" SARs (filed when a bank believes that a marijuana-related business implicates one of DOJ's CSA enforcement priorities or violates state law) and "Marijuana Termination" SARs (filed when a bank terminates a relationship with a marijuana-related business).

Nutter Notes: On November 6, 2012, Massachusetts voters approved a ballot initiative legalizing the use of marijuana for medical purposes, which has been implemented by regulations issued by the Massachusetts Executive Office of Health and Human Services. Nevertheless, it is a federal crime under the CSA to manufacture, distribute or dispense marijuana. On August 29, 2013, Deputy Attorney General James M. Cole issued a memorandum (the "Cole Memo") to all United States Attorneys clarifying the DOJ's CSA enforcement priorities for marijuana-related crimes in light of state laws that legalize the possession of small amounts of marijuana and provide for the regulation of marijuana production, processing and sale. The Cole Memo lists eight enforcement priorities (the "Cole Priorities") to guide decisions by federal law enforcement authorities about whether to prosecute marijuana-related violations of the CSA regardless of state law. Activities that do not implicate one or more of the Cole Priorities are less likely to become subject to federal CSA enforcement action. However, the Cole Priorities are described in broad terms that encompass a wide range of potential conduct that may result in federal enforcement of the CSA. As a result, a bank that reasonably determines that a marijuana-related business does not implicate one of the Cole Priorities or violate state law, based on the performance of due diligence in compliance with the FinCEN guidance, is still at risk for civil or criminal enforcement of the CSA if the bank provides financial services to that business. In addition, while the FinCEN guidance is meant to clarify how a bank can provide services to a marijuana-related business consistent with the bank's BSA obligations, the FDIC, Federal Reserve and OCC have not provided any guidance as to whether compliance with the seven FinCEN-recommended due diligence procedures and monitoring for the 23 FinCEN red flags would provide any sort of safe harbor from examination criticism or regulatory enforcement action for providing financial services to a marijuana-related business.

3. OCC Provides Guidance on the Treatment of Secured Loans in Bankruptcy Proceedings

The OCC has issued guidance to clarify supervisory expectations for national banks and federal savings associations in situations where secured consumer debt is discharged under Chapter 7 bankruptcy proceedings. The guidance issued on February 14 in OCC Bulletin 2014-4 describes the analysis necessary to "clearly demonstrate and document that repayment is likely to occur" to avoid the charge-off that would otherwise be required by the OCC's Uniform Retail Credit Classification and Account Management Policy. That policy requires that loans in bankruptcy be written down to collateral value (less costs to sell) within 60 days of notification from the bankruptcy court, unless the bank can clearly demonstrate and document that repayment will likely occur. According to the guidance, when full payment of principal and interest is not expected, the bank should place the loans on nonaccrual or follow other acceptable methods to ensure that revenue recognition is not overstated. Any balance not charged off should be classified substandard, according to the guidance. In terms of analyzing whether repayment is likely to occur, the OCC said that banks should consider all facts and circumstances and three specific factors. The first factor in the analysis is the existence of orderly repayment terms without the existence of undue payment shock or the need to refinance a balloon amount. The second is a history of payment performance that demonstrates the debtor's ongoing commitment to satisfy the debt before and through the bankruptcy proceeding. The third is the consideration of post-discharge capacity that indicates that the debtor can make future required payments from recurring, verified income.

Nutter Notes: The guidance also describes when a bank may consider post-discharge payment performance as evidence of collectability and when this performance demonstrates both capacity and willingness to repay the full amounts due. A nonaccrual asset may be restored to accrual status if the loan meets certain return-to-accrual conditions, including a reasonable expectation of repayment, that may be based on post-discharge payment performance. According to the guidance, a bank's analysis may be performed at a pool or individual loan level, as long as the bank considers monthly payments of both principal and interest that fully amortize the remaining debt, sustained performance and collateral levels. The guidance advises that payment performance that consists of interest-only payments or terms that require balloon amounts raise questions about whether collection of loan principal is reasonably assured. Sustained performance means that the debtor's post-discharge payment performance clearly demonstrates ongoing capacity and willingness to repay after the bankruptcy discharge, according to the guidance. Timely post-discharge payments for a minimum of 6 months are required to provide evidence of willingness and ability to repay under applicable call report instructions. Finally, the value of collateral must support the likelihood that the bank will recover the full amount due even if payments cease, according to the guidance. The OCC said that a bank that has prudently considered and documented these factors and any other relevant facts and circumstances and concluded that full repayment of the remaining principal and interest (including any previously charged-off amounts) will occur may return the loan to accrual status.

4. FDIC Issues Guidance on Recordkeeping and Confirmation in Securities Transactions

The FDIC has issued guidance applicable to all FDIC-supervised banks and thrifts on recordkeeping and confirmation requirements for securities transactions. The February 4 guidance, FDIC FIL-7-2014, reminds banks that recent amendments to 12 C.F.R. Part 344 apply the same recordkeeping and confirmation requirements to state savings associations and to state nonmember banks. 12 C.F.R. Part 390, Subpart K (formerly 12 C.F.R. Part 551 of the rules and regulations of the OTS), which governed recordkeeping and confirmation requirements for securities transactions effected by state savings associations, has been rescinded. The primary difference between Part 344 and Part 390, Subpart K was the number of transactions permitted under each rule's respective small transactions exception, which exempts qualifying institutions from certain recordkeeping requirements and requirements to establish certain written policies and procedures relating to securities transactions effected for customers. Specifically, the threshold for Part 390, Subpart K's small transactions exception was an average of 500 or fewer transactions for customers per year over the prior three calendar years, while the threshold under Part 344 was fewer than an average of 200 transactions during the same period. The FDIC amended Part 344 to increase the threshold for the small transactions exception applicable to all FDIC-supervised institutions from an average of 200 transactions to 500 transactions per calendar year over the prior three calendar year period. The amendments to Part 344 became effective on January 21, 2014.

Nutter Notes: Under the small transactions exception under Part 344, an FDIC-supervised institution that effects an average of 500 securities transactions for customers per year over the prior three year period is exempt from the requirement to keep account records for each customer reflecting purchases and sales of securities, receipts and deliveries of securities, receipts and disbursements of cash and other debits and credits pertaining to transactions in securities. The small transactions exception also exempts qualifying institutions from the requirements to maintain a separate memorandum (order ticket) of each order to purchase or sell securities (whether executed or canceled), and a record of all broker/dealers selected by the institution to effect securities transactions and the amount of commissions paid or allocated to each broker/dealer during the calendar year. Institutions that qualify for the small transactions exception under Part 344 are also exempt from the requirements to establish written policies and procedures providing for (1) assignment of responsibility for supervision of all officers or employees who transmit orders to or place orders with broker/dealers or execute securities transactions for customers, (2) assignment of responsibility for supervision of and reporting for all officers or employees who process orders for notification or settlement purposes, or perform other back office functions with respect to securities transactions effected for customers, and (3) the fair and equitable allocation of securities and prices to accounts when orders for the same security are received at approximately the same time and are placed for execution either individually or in combination.

5. Other Developments: Comptroller's Handbook and Unresponsive Securityholders

OCC Updates the Comptroller's Handbook

The OCC has issued revised Mortgage Banking and Retirement Plan Products and Services booklets of the Comptroller's Handbook. The revised Mortgage Banking booklet issued on February 7 provides updated guidance on assessing the quantity of risk associated with mortgage banking and the quality of mortgage banking risk management. The revised booklet also addresses recent amendments to Regulation X and Regulation Z issued by the CFPB and other regulatory changes.

Nutter Notes: The revised Retirement Plan Products and Services booklet issued on February 12 provides updated guidance to national banks and federal savings associations on the risks inherent in retirement plan products and services offered to customers and provides a framework for managing those risks. With the issuance of the revised booklet, the OCC has made certain related guidance to national banks applicable to federal savings associations, and rescinded OTS Trust and Asset Management Handbook, section 160, Introduction to Individual Retirement Accounts.

SEC Paying Agent Rule Requires Notice to Unresponsive Securityholders

On January 23, 2014, a Securities and Exchange Commission ("SEC") rule went into effect that requires "paying agents" to send a one-time notification to unresponsive securityholders stating that the agent has sent the securityholder a check that has not yet been negotiated. Unresponsive securityholders must be notified by the earlier of the date of the next regularly scheduled check or 180 days after the check was sent. The final rule, issued on January 23, 2013, implements Section 929W of the Dodd-Frank Act.

Nutter Notes: The SEC's final rule defines the term "paying agent" to include any issuer of a security, which would include, for example, a bank holding company that has issued equity or debt securities, whether or not the banking organization is publicly traded. For example, a bank holding company that pays an annual dividend by check on its common stock would be required to notify any stockholder whose check has not been negotiated 180 days after the check was sent.

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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