United States: Nutter Bank Report, July 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. Fed Publishes Examination Guidance on Loan Sampling for Community Banks
2. Banking Agencies Release Guidance for HELOCs Nearing Their End-of-Draw Periods
3. FDIC Clarifies Supervisory Approach to Third-Party Payment Processors Accounts
4. CFPB Proposes New HMDA Reporting Requirements
5. Other Developments: Borrower's Interest, Ability-to-Repay and CAMELS Guidance 

1. Fed Publishes Examination Guidance on Loan Sampling for Community Banks

The Federal Reserve has issued guidance that updates loan sampling expectations for examinations of community state member banks and clarifies when statistical sampling is expected to be used. The July 22 guidance, published as Supervision and Regulation Letter SR 14-7, also establishes minimum coverage expectations for judgmental samples for full-scope and asset quality target examinations. According to the guidance, Federal Reserve examiners are expected to select for review a sample of loans that is of sufficient size and scope to enable them to reach "sound and well-supported conclusions about the quality of, and risk management over, a community state member bank's lending portfolio." The guidance describes the criteria examiners should consider when selecting loan samples for review. For example, for community state member banks with composite and Asset Quality ratings of 1 or 2 that have not materially changed the composition of their loan portfolios or their credit administration practices, and whose most recent overall SR-SABR rating is not 1D, 1F, 2D or 2F, examiners are expected to use the statistical loan sampling procedures outlined in Supervision and Regulation Letter SR 02 19 for C&I and CRE loan samples. For all other community state member banks, examiners are expected to draw a judgmental sample that includes a selection of large, insider, problem, watch, renewed and new credits. The guidance includes a table that shows the percent coverage of loan samples as a factor of the Asset Quality component rating and whether the bank's credit risk management is rated as strong, acceptable or weak.

     Nutter Notes: The examination guidance, which applies to state member banks with $10 billion or less in total consolidated assets, also provides loan sample guidance for the examination of retail consumer loans. According to the guidance, the supervisory review and classification of retail consumer loans should be carried out in accordance with the procedures set forth in the Commercial Bank Examination Manual and Supervision and Regulation Letter SR 00-8, and should generally be limited to past due and nonperforming assets. The guidance requires that if a bank has a concentration (i.e., 25% percent or more of risk-based capital) in retail consumer loans, examiners should review the bank's underwriting standards and policies, and related risks and controls. In such cases, the guidance also directs examiners to consider sampling a portion of credits in those segments (for example, residential mortgages or HELOCs) of the bank's retail loan portfolio with a high concentration in order to assess risks and the adequacy of underwriting, internal controls and credit risk management practices. The guidance requires that examiners select a judgmental sample size that is "commensurate with concentration and credit risks and sufficient for the examiner to assess the quality and risks of the portfolio."

2. Banking Agencies Release Guidance for HELOCs Nearing Their End-of-Draw Periods

The federal banking agencies, the NCUA and the Conference of State Bank Supervisors have issued joint guidance that describes core operating principles that should govern the oversight of home equity lines of credit ("HELOCs") nearing their end-of-draw periods. The Interagency Guidance on Home Equity Lines of Credit Nearing Their End-of-Draw Periods released on July 1 encourages effective communication with borrowers about the pending reset of periodic payments to begin repayment of the principal amount of the HELOC, and provides broad risk management principles. According to the guidance, examiners will review financial institutions' HELOC end-of-draw risk management policies and procedures for provisions that address five risk management principles: prudent underwriting for renewals, extensions and rewrites; compliance with existing regulatory guidance; use of well-structured and sustainable modification terms; appropriate accounting, reporting and disclosure of troubled debt restructurings ("TDRs"); and appropriate segmentation and analysis of end-of-draw exposure in allowance for loan and lease losses estimation. For example, the risk management principles point out that existing regulatory guidance recommends that HELOC underwriting criteria should include debt service capacity standards, creditworthiness standards, equity and collateral requirements, maximum loan amounts, maturities and amortization terms. The guidance on modifications clarifies that TDR treatment is appropriate when a lender grants a concession to a borrower that it would not otherwise consider because of the borrower's financial difficulties. The agencies expect each institution to apply the HELOC end-of-draw guidance in a manner commensurate with the size and risk characteristics of its HELOC portfolio.

     Nutter Notes: The HELOC end-of-draw guidance also describes examiners' expectations for risk management policies and procedures specific to HELOCs nearing their end-of-draw periods. According to the guidance, examiners will generally expect institutions to generate reports that provide a clear understanding of end-of-draw exposures and identify higher-risk segments of the portfolio. The guidance recommends that such reports identify contractual draw period transition dates for all HELOCs, showing maturity schedules in the aggregate and by significant segments of performing and non-performing borrowers, and distinguishing between performing borrowers that are higher risk and those that are not. The guidance also recommends contacting borrowers through outreach programs. Examiners will generally expect management to begin contacting borrowers about the end-of-draw transition well before their payment reset date, to engage in periodic follow-up with borrowers and respond effectively to issues, according to the guidance. Examiners also expect management to have quality assurance, internal audit and operational risk management functions perform targeted testing, commensurate with the volume of the financial institution's HELOC exposure, of the full process for managing end-of-draw transactions, according to the guidance. The agencies expect that community institutions with smaller HELOC portfolios, few portfolio acquisitions or exposures with lower-risk characteristics may be able to use less-sophisticated processes for monitoring their portfolios. The guidance points out that when an institution outsources all or a portion of HELOC management, the institution remains responsible for ensuring that the vendor complies with applicable laws, regulations and supervisory guidance.

3. FDIC Clarifies Supervisory Approach to Third-Party Payment Processors Accounts

The FDIC has published guidance clarifying that account relationships with third-party payment processors ("TPPPs") which facilitate payment transactions for certain types of merchant clients are neither prohibited nor discouraged. The July 28 guidance published as Financial Institution Letter no. FIL-41-2014 addresses a misperception that the FDIC said arose from earlier FDIC guidance and an informational article on TPPPs which contained lists of examples of types of merchants that had been associated with higher-risk activity when the guidance and article were released. According to the new guidance, it is the FDIC's policy that banks that properly manage customer relationships are neither prohibited nor discouraged from providing services to any customer operating in compliance with applicable law. The FDIC announced that, as part of the clarification of its supervisory policy with respect to account relationships with TPPPs, the FDIC has removed the lists of examples of merchants associated with higher-risk activity from its prior guidance and informational article. The focus of the FDIC's supervisory approach, according to the new guidance, is to ensure that banks have adequate procedures for conducting due diligence, underwriting and ongoing monitoring of account relationships with TPPPS. The FDIC said that banks that follow the prior guidance will not be criticized for establishing and maintaining relationships with TPPPs.

     Nutter Notes: According to the new guidance, banks that establish accounts for TPPPs should assess their risk tolerance for this type of activity and develop an appropriate risk management framework, including policies and procedures that address customer due diligence, underwriting and ongoing monitoring. The lists of examples of merchant categories associated with higher risk activities in the FDIC's prior guidance and the article illustrated trends identified by the payments industry at the time. Those examples included activities that could be subject to complex or varying legal and regulatory environments, activities that may be prohibited for certain consumers, such as minors, and activities that may result in higher levels of complaints, returns, or chargebacks. Account relationships with TPPPs involved in the listed activities are not prohibited or discouraged according to the new guidance, provided that banks manage such account relationships in accordance with the prior guidance. The FDIC said that it will review and assess the extent to which a bank with TPPP accounts follows the prior guidance as part of the FDIC's regular safety and soundness examinations.

4. CFPB Proposes New HMDA Reporting Requirements

The CFPB has proposed a rule to amend the reporting requirements under the Home Mortgage Disclosure Act ("HMDA"), implemented by the CFPB's Regulation C, with an emphasis on information about consumers' access to mortgage credit. The July 24 proposed amendments to Regulation C are also intended to simplify reporting requirements for home mortgage lenders, including banks, according to the CFPB. The Dodd–Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") requires the CFPB to update HMDA reporting to include specific information that could help identify potential discriminatory lending practices and other issues in the home mortgage loan marketplace. That information includes, for example, property value, term of the loan, total points and fees, duration of any teaser or introductory interest rates and the applicant's or borrower's age and credit score. The proposed amendments would require lenders to report more information about underwriting and pricing, such as an applicant's debt-to-income ratio, the interest rate of the loan and the total discount points charged for the loan. The CFPB said that the additional information would help regulators determine how the Ability-to-Repay rule is affecting the market. The CFPB also believes that the additional information would help the CFPB monitor developments in certain markets, such as multi-family housing, affordable housing and manufactured housing. The proposed amendments would also require lenders to report most loans related to dwellings, including reverse mortgages and open-end lines of credit. Comments on the proposed amendments must be submitted to the CFPB by October 22, 2014.

     Nutter Notes: Currently, a bank that satisfies HMDA's general reporting requirements must report HMDA data even if the bank makes only a single home purchase or refinance loan in a given year, while non-bank mortgage lenders may be required to report only if they make at least 100 loans. Under the proposed amendments to Regulation C, all lenders, including banks, would generally be required to report HMDA data only if they make 25 or more closed-end loans or reverse mortgages in a year. The CFPB believes that the new reporting threshold would reduce the number of small banks required to report HMDA data by 25%. The proposal would also eliminate reporting requirements for certain home improvement loans. Under the proposed amendments, lenders that make a large number of reported transactions would be required to report HMDA data on a quarterly, rather than an annual, basis. The CFPB said that it hopes to better align HMDA data reporting requirements with industry standards for collecting and transmitting data on home mortgage loans and applications. For example, the proposed rule would incorporate certain Mortgage Industry Standards Maintenance Organization data standards into the HMDA reporting requirements. Finally, as part of the rulemaking process, the CFPB said that it will consider ways to improve public access to HMDA data and what new technological tools would make the reporting process more efficient, ease data formatting requirements and help lenders prevent reporting errors.

5. Other Developments: Borrower's Interest, Ability-to-Repay and CAMELS Guidance 

  • Amendments to Borrower's Interest Rule Creates Safe Harbor for Qualified Mortgages

The Massachusetts Division of Banks has issued final amendments to the Documentation and Determination of Borrower's Interest rule effective as of July 18 that establish a safe harbor for most home loans that meet the definition of a "Qualified Mortgage" under the regulations of the CFPB.

     Nutter Notes: Under the amended rule, any Qualified Mortgage other than a Qualified Mortgage that is also a "higher cost" home loan, would be deemed to be in the borrower's interest under the Massachusetts regulation. The safe harbor even applies to Qualified Mortgages under the CFPB's small creditor exemption. 

  • CFPB Exempts a Borrower's Heirs from the Ability-to-Repay Rule

The CFPB on July 8 issued an interpretive rule to clarify that, when a borrower dies, the name of the borrower's heir generally may be added to the mortgage without triggering the requirements of the CFPB's Ability-to-Repay rule. Because an heir has already acquired the title to the home, the creditor is not required to determine the heir's ability to repay the mortgage before formally recognizing the heir as the borrower, according to the interpretive rule.

     Nutter Notes: The CFPB said that the interpretive rule can also apply to effectively exempt other transfers from Ability-to-Repay rule requirements, including transfers to living trusts, transfers during life from parents to children, transfers resulting from divorce or legal separation, and other family-related transfers. 

  • OCC Issues Guidance for Federal Mutual Thrifts on CAMELS Ratings Factors

The OCC issued guidance on July 22 that clarifies the factors that examiners will consider in rating mutual federal savings associations for each component of the Uniform Financial Institutions Rating System (more commonly referred to as CAMELS). The guidance, published as OCC Bulletin 2014-35, also may be relevant for certain stock federal savings associations that are part of a mutual holding company structure.

     Nutter Notes: The guidance noted that the OCC's rescission of OTS executive compensation guidance has created some uncertainty for federal mutual savings associations. The new guidance in very general terms clarifies the OCC's expectations for executive compensation by federal mutual institutions, including those that might offset their inability to offer traditional equity incentives by offering alternatives such as phantom stock plans.

Originally published July 31, 2014

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.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions