United States: Nutter Bank Report, December 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. Congress Expands Opportunities for Small Bank Holding Companies
  2. Massachusetts High Court Rules Springfield Foreclosure Ordinances Invalid
  3. CSBS Issues Cybersecurity Resource Guide for Bankers
  4. CFPB Proposes Several Changes to New Mortgage Servicing Rules
  5. Other Developments: Proposed Rules on Annuities and Prepaid Cards

1. Congress Expands Opportunities for Small Bank Holding Companies

The President has signed into law a bill that directs the Federal Reserve to amend its Small Bank Holding Company Policy Statement on Assessment of Financial and Managerial Factors (the "Small BHC Policy Statement") to expand its coverage of small bank holding companies from those with less than $500 million of pro forma consolidated assets to those with less than $1 billion of pro forma consolidated assets, and to cover savings and loan holding companies with less than $1 billion of pro forma consolidated assets. The bill, which was signed into law on December 18, makes a conforming change to a key exemption from the new regulatory capital requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). As a result, bank holding companies and savings and loan holding companies with less than $1 billion in total consolidated assets that satisfy the requirements of the Small BHC Policy Statement will not be subject to the new regulatory capital requirements mandated by the Dodd-Frank Act. The exemption does not apply to any depository institution subsidiary of either a small bank holding company or a small savings and loan holding company. The Small BHC Policy Statement, which is Appendix C to Part 225 of the Federal Reserve's regulations, currently allows qualifying bank holding companies with less than $500 million of pro forma consolidated assets that are not engaged in significant nonbanking activities, do not conduct significant off-balance sheet activities and do not have a material amount of outstanding debt or equity securities registered with the SEC to incur comparatively greater amounts of debt than larger holding companies in acquiring other banks, and to follow relaxed regulatory processing procedures in connection with acquisitions of banks and nonbanking companies. The proposed amendments must be published by the Federal Reserve by June 18, 2015.

Nutter Notes: Currently, the Small BHC Policy Statement only applies to bank holding companies with pro forma consolidated assets of less than $500 million and does not cover savings and loan holding companies. Section 171(b)(5)(C) of the Dodd-Frank Act originally exempted small bank holding companies that were subject to the Small BHC Policy Statement as in effect on May 19, 2010 from the new leverage and risk-based regulatory capital requirements imposed under Section 171 of the Dodd-Frank Act. The Dodd-Frank Act contained no similar exemption for small savings and loan holding companies. The new law provides for a transition period that allows qualifying small bank holding companies and small savings and loan holding companies with pro forma consolidated assets of less than $500 million to be excepted from the new regulatory capital requirements under the provisions of Section 171 of the Dodd-Frank Act until the amendments to the Small BHC Policy Statement issued by the Federal Reserve become effective.

2. Massachusetts High Court Rules Springfield Foreclosure Ordinances Invalid

The Massachusetts Supreme Judicial Court ("SJC") has ruled that two City of Springfield foreclosure ordinances are preempted by state law. In the December 19 decision, the SJC also upheld a monetary charge imposed on foreclosing lenders to register property with the city as a lawful fee, and not a tax. The foreclosure ordinances were adopted by Springfield in response to a wave of foreclosures triggered by the economic downturn of 2008. One ordinance establishes a program requiring mandatory pre-foreclosure mediation between borrowers and lenders where residential property is involved. The other ordinance requires owners of residential buildings that are vacant or undergoing foreclosure to register with the city and specifies minimum maintenance requirements. The lawsuit was brought in state court by six banks holding mortgages on residential properties in Springfield. The city removed the case to a federal district court, which entered summary judgment in favor of the city. On appeal, the First Circuit concluded that the case centered on unresolved questions of state law better suited for resolution by the SJC, which ruled that both ordinances conflict with and are preempted by state law. In light of the SJC's holding that the Springfield ordinances are preempted, similar ordinances enacted by other Massachusetts municipalities may also be of questionable validity.

Nutter Notes: One of the Springfield foreclosure ordinances imposes a charge on foreclosing lenders to register the property with the city, which the SJC upheld. That ordinance requires "owners" (a term defined to include a mortgagee who has initiated the foreclosure process) of residential buildings that are vacant or undergoing foreclosure to register with the city and specifies the minimum maintenance requirements. The SJC held that the maintenance requirements were preempted by Chapter 21E of the General Laws, the Massachusetts Oil and Hazardous Material Release Prevention Act, and by Sections 127A-127N of Chapter 111 of the General Laws, the State Sanitary Code, and are therefore invalid. The Springfield mediation ordinance requires a lender and borrower to make a good faith effort to renegotiate the terms of the mortgage that was the subject of a foreclosure notice or otherwise to resolve the pending foreclosure. If the parties make a good faith effort but cannot resolve the issue, the lender is permitted to obtain a certificate from the city stating that the lender has satisfied its obligations under the ordinance and can then proceed to foreclose under Chapter 244 of the General Laws of Massachusetts (the "Foreclosure Statute"). The SJC held that the mediation ordinance is preempted by the Foreclosure Statute, reasoning that the foreclosure process is appropriately regulated at the state level only.

3. CSBS Issues Cybersecurity Resource Guide for Bankers

The Conference of State Bank Supervisors ("CSBS") has issued Cybersecurity 101: A Resource Guide for Bank Executives, to provide bankers with tools to better understand the information security threats banks face and how to prepare for them. The guide, released on December 17, is a non-technical resource on cybersecurity directed at community bank CEOs, senior executives and board members. The guide summarizes industry-recognized standards and current cybersecurity risk management best practices. The guide is organized according to the five core cybersecurity functions of the Cybersecurity Framework of the National Institute of Standards and Technology ("NIST"): identify, protect, detect, respond and recover. The guide includes mobile banking security recommendations, such as real time application monitoring. The guide also describes some more common cybersecurity threats that the CSBS recommends bank management understand, including distributed denial of service attacks and corporate account take-over attacks. The cybersecurity resource guide was issued as part of CSBS's Executive Leadership of Cybersecurity initiative, which began earlier this year. Electronic copies of the guide are available through the CSBS website and the Division of Banks' website.

Nutter Notes: According to the guide, identifying cybersecurity risks requires a risk assessment to determine the amount of risk posed by a financial institution's activities, connections, and operational procedures. The guide recommends that risk assessments classify critical information assets, identify threats and vulnerabilities, measure the risks and communicate the determinations to the bank's senior management and board of directors. Protecting against cybersecurity risks requires ensuring that the bank has appropriate safeguards or controls in place to mitigate the various threats identified by the risk assessment, according to the guide. The guide recommends that banks use publicly developed and supported security benchmarks, security guides or checklists as a starting point, such as the Center for Internet Security Benchmarks Program and the NIST National Checklist Program. Detection requires monitoring the bank's networks, systems and applications to establish a baseline measure for "normal" operations and then monitoring for deviations from that normal state of activity, according to the guide. The guide recommends that each bank develop an incident response plan to prepare for a cybersecurity incident, and develop a recovery plan that includes processes and procedures for management intended to restore confidence in recovered systems and data following a security breach.

4. CFPB Proposes Several Changes to New Mortgage Servicing Rules

The CFPB has issued proposed amendments to several mortgage servicing rules issued in 2013, including loss mitigation requirements, prompt payment crediting requirements and modifications to periodic statements under certain circumstances. The proposed amendments announced on December 15 focus primarily on clarifying, revising or amending rules for force-placed insurance, early intervention and loss mitigation requirements under the Regulation X ("Real Estate Settlement Procedures Act") mortgage servicing rules, and periodic statement requirements under the Regulation Z ("Truth in Lending Act") mortgage servicing rules. The proposed amendments also clarify supervisory expectations for compliance with certain mortgage servicing requirements when a consumer is a potential or confirmed successor in interest, is in bankruptcy, or sends a cease communication request under the Fair Debt Collection Practices Act. For example, the proposed amendments to the force-placed insurance rule would require disclosures when a servicer wishes to force-place insurance in circumstances where the borrower has insufficient, rather than expiring or expired, hazard insurance coverage on the property. The proposed rule would also require servicers to provide written early intervention notices to certain borrowers who are in bankruptcy or who have invoked their cease communication rights. Comments on the proposed amendments are due by March 16, 2015.

Nutter Notes: The proposed amendments would impose a number of new loss mitigation requirements, such as a requirement that mortgage loan servicers follow mandatory loss mitigation procedures more than once in the life of a loan for borrowers who become current after a delinquency. The proposed amendments would also clarify that servicers must take affirmative steps to delay a foreclosure sale even where the sale is conducted by a third party, clarify the servicer's duty to instruct foreclosure counsel to take steps to comply with the dual-tracking prohibitions, and indicate that a servicer who has not taken, or has not caused counsel to take, all reasonable affirmative steps to delay the sale, is required to dismiss the foreclosure action if necessary to avoid the sale. The proposed amendments would clarify how servicers must treat periodic payments made by consumers who are performing under either temporary loss mitigation programs or permanent loan modifications. Periodic payments made pursuant to temporary loss mitigation programs would continue to be credited according to the loan contract and could be credited as partial payments, while periodic payments made pursuant to a permanent loan modification would be credited under the terms of the permanent loan modification agreement, according to the proposal. The proposed amendments would also require servicers to modify periodic statements sent to consumers who have filed for bankruptcy, subject to certain exceptions, with the content varying depending on whether the bankruptcy is a Chapter 7 or Chapter 13 case.

5. Other Developments: Proposed Rules on Annuities and Prepaid Cards

DOI Proposes Changes to Consumer Protection Rules for Sales of Annuities

The Massachusetts Division of Insurance on December 16 released proposed amendments to its rules that provide consumer protections in connection with the sales of annuities (211 C.M.R. 96.00). The proposed amendments would update the DOI's rules to reflect changes to the National Association of Insurance Commissioners Model regulation, including added training requirements.

Nutter Notes: The DOI has scheduled a public hearing on the proposed changes to the annuity sales rules for January 15 at 10:00 A.M. Any person who wishes to testify at the hearing must file a Notice of Intent to Comment with the DOI Docket Clerk no later than 4:00 P.M. on January 14, 2015.

CFPB Proposes New Consumer Protections for Prepaid Cards

The CFPB on December 23 issued proposed amendments to Regulation E ("Electronic Fund Transfer Act") and Regulation Z that would create comprehensive consumer protections for prepaid financial products. The proposed amendments would generally cover prepaid accounts, which would include cards, codes or other devices capable of being loaded with funds and usable at unaffiliated merchants or for person-to-person transfers, and that are not gift cards.

Nutter Notes: The proposal would require financial institutions to provide certain disclosures to consumers prior to and after the acquisition of a prepaid account. The proposal would also apply Regulation E's limited liability and error resolution provisions to prepaid accounts, and require prepaid account issuers to provide the CFPB with terms and conditions for prepaid accounts, among other requirements. Comments on the proposed amendments are due by March 23, 2015.

Originally published December 30, 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.

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