United States: Nutter Bank Report, January 2015

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. Governor Signs Bank Modernization Bill into Law
2. Supreme Court: Lawsuit Not Necessary to Exercise TILA Rescission Right
3. New Guidance on Identifying, Accepting and Reporting Brokered Deposits
4. Division of Banks Updates Massachusetts Truth in Lending Rules
5. Other Developments: Capital Rules and Mortgage Disclosures

1. Governor Signs Bank Modernization Bill into Law

Governor Patrick signed a bill into law at the end of his term that overhauls the Massachusetts banking laws. Chapter 482 of the Acts of 2014, "An Act Modernizing the Banking Laws and Enhancing the Competitiveness of State Chartered Banks," was signed into law on January 7 and becomes effective on April 7. The new law will, among other provisions, grant new powers to institutions to engage in strategic transactions including mergers and acquisitions, broaden the authority of state chartered banks to engage in activities permissible for national banks, federal savings associations and out-of-state banks, and allow for more flexibility in the governance of banking organizations. For example, the new law will eliminate certain conditions under the existing Massachusetts parity law to the exercise of powers granted to competing institutions. Currently, Massachusetts law allows a state-chartered bank to engage in any power or activity authorized for a federal bank, federal savings association or bank chartered by another state if the power is identified in regulations of the Commissioner of Banks that have been approved by the Legislature. The new law amends the parity provisions to eliminate the requirement that such powers be previously identified in the Commissioner's regulations.

     Nutter Notes: As mentioned above, the new law will also expand the authority of institutions to engage in certain strategic transactions including mergers and acquisitions. For example, under the new law, a Massachusetts mutual holding company will be permitted to merge with an out-of-state mutual holding company or mutual holding company organized under federal law; a subsidiary bank of a Massachusetts mutual holding company will be able to acquire by merger Massachusetts or federal credit unions, federal mutual banks, and out-of-state mutual banks; and a mutual holding company will be permitted to merge with a stock bank holding company, provided that the mutual holding company is the surviving entity in the merger. The new law also creates more flexibility for mutual banks to reorganize into the mutual holding company form, permits mutual holding companies to be unwound, grants express authority for Massachusetts banking organizations to form interim subsidiary banks for the purpose of facilitating merger transactions, and streamlines the regulatory application and approval process for certain transactions. The new law will provide additional flexibility in the governance of banks and holding companies, allowing a subsidiary bank to elect to follow the governance procedures under the Massachusetts business corporation law (Chapter 156D of the General Laws of Massachusetts) or the provisions applicable to its parent holding company. The new law provides similar flexibility in the governance of mutual holding companies. Nutter's Banking and Financial Services Group will issue a detailed summary of the new law by February 25. Please see related information in Report #4 below.

2. Supreme Court: Lawsuit Not Necessary to Exercise TILA Rescission Right

The U.S. Supreme Court recently held that a home mortgage loan borrower need only provide written notice to the lender in order to exercise the right to rescind under the federal Truth in Lending Act (TILA) within the 3-year rescission period. The January 13 decision reversed a judgment of the Eighth Circuit Court of Appeals, which had held that TILA requires a borrower to file a lawsuit within the 3-year rescission period to exercise the right to rescind. The case involved a refinancing transaction in which the co-borrowers delivered a letter purporting to rescind the home mortgage loan within three years after the closing date. The lender responded by refusing to acknowledge the rescission's validity. The co-borrowers filed a lawsuit in federal court seeking a declaration of rescission and damages, but the lawsuit was filed more than three years after the closing date of the refinancing transaction. The federal district court granted the lender's motion to dismiss the case because the co-borrowers had not filed a lawsuit seeking rescission within three years of the closing date of the loan. The Eighth Circuit upheld the decision on appeal, following its holding in a 2013 case in which the court concluded that failure to file a suit for rescission within three years of the closing date extinguishes the right to rescind under TILA. The Supreme Court disagreed, deciding that a rescission is effected under TILA when the borrower notifies the lender of his intention to rescind.

     Nutter Notes: The Court noted that TILA, at 15 U.S.C. § 1635(a), describes how the right to rescind is to be exercised. Section 1635(a) provides that a borrower "shall have the right to rescind . . . by notifying the creditor, in accordance with regulations of the Board, of his intention to do so." The Court said that this provision leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind. TILA grants borrowers an unconditional right to rescind for three days, after which they may rescind only if the lender has failed to satisfy TILA's disclosure requirements. In this case, the lender did not dispute that a borrower may rescind by delivering notice to the lender during the 3-day period immediately after the loan closing. However, the lender argued that 15 U.S.C. § 1635(f), which provides that the "right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever comes first," requires a borrower to file a lawsuit within three years seeking rescission if the parties dispute the adequacy of the disclosures provided by the lender under TILA. The Court's ruling means that a rescission notice delivered within three years after the closing will be effective to rescind the loan if it is determined that the lender has failed to satisfy TILA's disclosure requirements.

3. New Guidance on Identifying, Accepting and Reporting Brokered Deposits

The FDIC has issued new guidance in the form of answers to frequently asked questions (FAQs) on identifying, accepting and reporting brokered deposits. The FAQs were released with the FDIC's Financial Institutions Letter no. FIL-2-2015 on January 5, and expands on guidance for identifying and accepting brokered deposits provided in certain published advisory opinions and the FDIC's Study on Core Deposits and Brokered Deposits issued in July 2011. The FAQs acknowledge that the definition of a "deposit broker," on which the identification of brokered deposits is dependent, is very broad. According to the FAQs, a deposit broker is any person, company or organization engaged in placing deposits belonging to others, or facilitating the placement of deposits belonging to others, at an insured depository institution, subject to certain exceptions. As a result, according to the FAQs, a brokered deposit may be "any deposit accepted by an insured depository institution from or through a third party, such as a person or company or organization other than the owner of the deposit." As a result of the FDIC's broad interpretation of the term "facilitating the placement of deposits", a third party could be considered a deposit broker even when it does not open bank accounts on behalf of depositors or directly place funds into bank accounts, and even if it receives no fees or other direct compensation from the depository institution where the funds are placed, according to the FAQs.

     Nutter Notes: Banks must distinguish brokered deposits from other deposits in order to comply with Section 29 of the Federal Deposit Insurance Act (FDI Act), and to accurately report brokered deposits in their Call Reports. Under Section 29 of the FDI Act and its implementing regulations, a bank is prohibited from accepting deposits by or through a deposit broker unless the institution is well capitalized. The FDIC may waive this prohibition if the bank is adequately capitalized, but not if the institution is undercapitalized. Section 29 and its implementing regulations also impose restrictions on the interest rates that a bank may pay on brokered deposits if the institution is not well capitalized. Since any deposit accepted by a bank through a deposit broker qualifies as a brokered deposit, identifying whether a third party qualifies as a deposit broker is key to compliance with Section 29 and its implementing regulations and accurate reporting on a bank's Call Report. The payment of a fee by a bank to a third party for placing a deposit is only one factor used by the FDIC in determining whether a particular party is a deposit broker, and the absence of direct compensation from the bank for the deposit placement is not determinative. Other factors according to the FAQs include the nature of any compensation to the third party (for example, whether the amount is connected to the amount of deposits placed), the purpose of the compensation (whether it is intended to reward the third party for placing deposits as opposed to compensation for providing some other service), and the degree of involvement by the third party in placing the deposits.

4. Division of Banks Updates Massachusetts Truth in Lending Rules

The Division of Banks has released final amendments to 209 C.M.R. 32.00, Disclosure of Consumer Costs and Terms, which implements Chapter 140D of the General Laws of Massachusetts, the state Truth in Lending statute. The amendments, which became effective on January 2, provide that compliance with certain provisions of the regulations of the Consumer Financial Protection Bureau (CFPB) implementing TILA constitutes compliance with certain provisions of 209 C.M.R. 32.00, including the CFPB's Ability to Repay and Qualified Mortgage standards. The Massachusetts Truth in Lending statute and regulations are applicable to Massachusetts-chartered banks, credit unions, licensees and other creditors doing business in Massachusetts. The Division amended 209 C.M.R. 32.00 to incorporate future changes to TILA and the CFPB's Truth in Lending regulations while preserving certain Massachusetts requirements that are more advantageous to consumers. Specifically, the amended rule provides that compliance with any provisions of TILA, the CFPB's Regulation Z and the Official Staff Commentary, which does not conflict with Chapter 140D, 209 C.M.R. 32.00 or an advisory ruling of the Commissioner of Banks, will be deemed to be compliance with Chapter 140D. However, certain differences between TILA and Chapter 140D that provide more protection to consumers are preserved. For example, the rescission period during which a borrower may exercise his or her right to rescind certain home mortgage loans if the lender fails to satisfy applicable disclosure requirements is four years under Chapter 140D, as opposed to three years under TILA.

     Nutter Notes: The Massachusetts bank modernization law (please see Report #1 above) also provides a mechanism intended to reduce conflicts between the Massachusetts and federal Truth in Lending regimes. In cases where future amendments to TILA or its implementing regulations conflict with existing provisions of Chapter 140D or 209 C.M.R. 32.00, lenders that comply with the federal law and regulations will be deemed to be in compliance with Massachusetts law unless and until the Commissioner of Banks adopts regulations that are substantially similar to or afford more protection to consumers than federal law and regulations. The new law also gives the Commissioner of Banks authority to waive requirements of Chapter 140D and 209 C.M.R. 32.00 under certain circumstances. Specifically, the bank modernization law provides that, if a provision of TILA, the CFPB's Regulation Z, the Official Staff Commentary or a disclosure or model disclosure form is in conflict with a provision of Chapter 140D or 209 CMR 32.00 and if the Commissioner determines that the federal provision is not substantially less protective of consumers, then the Commissioner may issue a written waiver of that provision of Chapter 140D or 209 CMR 32.00 applicable to Massachusetts-chartered banks, credit unions, licensees and other creditors doing business in Massachusetts.

5. Other Developments: Capital Rules and Mortgage Disclosures

  • OCC and Federal Reserve Amend Capital Rules to Address New ISDA Protocol

The OCC and the Federal Reserve issued interim final rules on December 30, 2014 that amend certain provisions of their respective capital, liquidity and lending limit rules to ensure that the treatment of over-the-counter derivatives, eligible margin loans and repo-style transactions is unaffected by the International Swaps and Derivatives Association Resolution Stay Protocol (ISDA Protocol) or by implementation of special resolution regimes in foreign jurisdictions. The amendments became effective on January 1.

     Nutter Notes: The agencies' rules currently recognize netting of collateral agreements for over-the-counter derivatives and certain securities financing transactions, as long as the banking organization may terminate its positions upon an event of default of its counterparty. For parties that adhere to the ISDA Protocol, the protocol limits the default and early termination rights in their ISDA master agreements to make the agreements subject to the stay provisions of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the FDI Act, and other similar special resolution regimes, such as the European Union Bank Recovery and Resolution Directive. Absent the amendments under the interim final rule, many exposures that are currently netted would be disqualified from netting under the agencies' rules when the ISDA Protocol becomes effective.

  • CFPB Modifies New Integrated Mortgage Disclosure Rules

The CFPB issued a final rule on January 20 amending its new integrated mortgage disclosure rules under Regulation X (Real Estate Settlement Procedures Act) and Regulation Z (TILA) to require lenders to provide a revised Loan Estimate within three business days after a consumer locks in a floating interest rate. The original rule required creditors to provide the revised Loan Estimate on the date the rate is locked. The change becomes effective when the new integrated mortgage disclosure rules become effective on August 1.

     Nutter Notes: The final rule also makes a minor addition to the Loan Estimate form for loans that involve new home construction. The amendment creates a space on the Loan Estimate form where creditors would include language informing consumers that they may receive a revised Loan Estimate for a construction loan that is expected to take more than 60 days to settle, because construction loans sometimes take longer to settle than other loans and the estimated charges can change.

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." The 2014 Chamber and Partners review describes us as "great – very knowledgeable, very responsive and very nice." 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.

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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