United States: Nutter Bank Report, April 2015

Headlines

  1. Agencies Respond to Frequently Asked Questions about Regulatory Capital Rules
  2. OCC Updates Guidance on Subordinated Debt for National Banks and Federal Thrifts
  3. Federal Reserve Issues Final Small Bank Holding Company Rule
  4. FFIEC Issues Guidance on Malware and Cyber Attacks Targeting User Credentials
  5. Other Developments: Consumer Complaints and Housing Counselors

1. Agencies Respond to Frequently Asked Questions about Regulatory Capital Rules

The federal banking agencies have issued guidance in the form of answers to frequently asked questions (FAQs) about the agencies' regulatory capital rules. The FAQs released on April 6 clarify the definitions of capital and high-volatility commercial real estate (HVCRE), and address issues concerning other real estate and off-balance-sheet exposures, and separate account and equity exposures to investment funds, among other topics. For example, the FAQs clarify that a banking organization's investments in common stock or other capital instruments issued by the Federal Reserve Banks and the Federal Home Loan Banks are not considered investments in the capital of unconsolidated financial institutions that would be subject to the regulatory capital rules' requirement that certain investments in the capital of unconsolidated financial institutions in excess of 10% of common equity tier 1 capital must be deducted from common equity tier 1 capital. The FAQs also advise that certain modifications of a residential mortgage loan, such as lowering the interest rate for customer retention purposes, would cause the risk-weighting applicable to the loan to change from 50% to 100%. However, according to the FAQs, a banking organization could retain the 50% risk-weighting by performing additional underwriting on the loan to ensure that the credit quality of the borrower has not deteriorated. The FAQs further clarify that a banking organization's investment in a bank-owned life insurance (BOLI) hybrid product may qualify as a "separate account" which must be treated as if it were an equity exposure to an investment fund for purposes of the regulatory capital rules if the gains and losses on the pool of assets are reflected in the cash surrender value of the BOLI recorded on the banking organization's balance sheet. The agencies plan to periodically update the FAQs with additional guidance about the regulatory capital rules.

Nutter Notes: The FAQs provide significant guidance on the application of the definition of HVCRE under the regulatory capital rules. The FAQs clarify that acquisition, development or construction (ADC) loans made prior to the effective date of the regulatory capital rules are not grandfathered from the definition of HVCRE. Therefore, ADC loans made before the effective date of the rules must be treated as HVCRE loans unless such loans meet the criteria for an exemption provided in the definition of HVCRE. The FAQs advise that an additional contribution of capital by the borrower to an existing HVCRE loan, after the banking organization has already advanced funds to the borrower, cannot be used to meet the 15% contributed capital requirement for an exemption from the HVCRE definition. In such a case, the loan remains an HVCRE loan because any contribution of cash or land must be made before a loan's funds are advanced for a loan to be considered a CRE loan rather than an HVCRE loan. Similarly, a banking organization must consider the loan-to-value (LTV) ratio at origination when evaluating whether an ADC loan qualifies as an HVCRE exposure according to the FAQs. Therefore, an updated appraisal or valuation after origination of an HVCRE loan results in an LTV ratio that no longer exceeds the relevant maximum LTV ratio, the loan must remain classified as an HVCRE exposure until it converts to permanent financing. In addition, cash contributions to an ADC project from sources other than the borrower, such as a grant from a community development authority or another loan secured by the same real estate, cannot be used to meet the 15% contributed capital requirement for an exemption from the HVCRE definition. Such sources of capital are not considered to be capital contributed by the borrower according to the FAQs.

2. OCC Updates Guidance on Subordinated Debt for National Banks and Federal Thrifts

The OCC has updated its guidance on subordinated debt issued by national banks, replacing Appendix A of the Subordinated Debt booklet of the Comptroller's Licensing Manual with new Guidelines for Subordinated Debt. The new guidelines issued on April 3 apply to all subordinated debt issued by national banks and federal savings associations, regardless of whether the subordinated debt is included in regulatory capital. The guidelines provide clarification about whether a subordinated debt instrument qualifies as tier 2 capital under the regulatory capital rules and points out that all subordinated debt issued by a national bank or federal savings association must satisfy the minimum requirements in 12 C.F.R. § 5.47 or 12 C.F.R. § 163.80, as applicable, regardless of whether the subordinated debt instrument qualifies as tier 2 capital. The guidelines describe the OCC's supervisory views on representations and warranties, affirmative covenants, negative covenants, events of default, contemporaneous loan agreements, and novel or extraordinary provisions in subordinated debt instruments. For example, any representation or warranty that would require acceleration and repayment of a subordinated debt note because of a technical violation that does not reflect underlying credit issues could be contrary to safety and soundness according to the guidelines. The guidelines recommend that any representation or warranty be worded to avoid unreasonable operation of any default clause when a default would be based on a change in the bank's status, default on any other agreement, or any violation of charter or by-laws. The updated guidelines are effective for subordinated debt issued on or after April 3, 2015.

Nutter Notes: The OCC also replaced the Sample Subordinated Note at Appendix B of the Subordinated Debt booklet of the Comptroller's Licensing Manual with two sample notes for national banks. The first note provides sample language for a subordinated debt note that is meant to be included in tier 2 capital, and the second provides sample language for a subordinated debt note that is not meant to be included in tier 2 capital. The sample notes include required disclosures that must appear all in capital letters on the face of the note, the amount and date of the note, and a paragraph identifying the parties to the instrument, the amount due, and the rate of interest. The sample notes also include a paragraph specifying repayment terms, a provision that describes the order and level of subordination, and a provision that describes the OCC's regulatory authority with respect to national banks. The sample notes apply only to subordinated debt issued by a national bank because there is no pre-existing sample note for federal savings associations. The OCC said that it is developing sample notes for federal savings associations and expects to publish the sample notes in the near future.

3. Federal Reserve Issues Final Small Bank Holding Company Rule

The Federal Reserve has issued a final rule to expand the applicability of its Small Bank Holding Company Policy Statement and to apply the Policy Statement to certain savings and loan holding companies. The final rule released on April 9 implements a law passed by Congress in December 2014 requiring the Federal Reserve to increase the asset threshold under the Policy Statement to $1 billion and extend its application to savings and loan holding companies that meet qualifying criteria similar to those for small bank holding companies. The final rule raises the asset threshold of the Policy Statement from $500 million to $1 billion in total consolidated assets and expands the application of the Policy Statement to savings and loan holding companies that meet certain qualitative requirements applicable to small bank holding companies, including those pertaining to nonbanking activities, off-balance sheet activities, and publicly-registered debt and equity. The Policy Statement allows qualifying holding companies of small community banks and savings associations to operate with higher levels of debt than would normally be permitted. Holding companies that qualify for the Policy Statement are excluded from consolidated capital requirements, though their subsidiary depository institutions continue to be subject to minimum capital requirements. The Federal Reserve retains the right to exclude any bank holding company or savings and loan holding company, regardless of size, from the Policy Statement if the Board determines that it is necessary for supervisory purposes. The final rule becomes effective on May 15.

Nutter Notes: The expansion of the Policy Statement to savings and loan holding companies required certain modifications to the Policy Statement to take into account the status of savings associations under the Bank Holding Company Act of 1956 (BHC Act). For example, the first qualitative requirement under the Policy Statement is that the holding company must not be engaged in significant nonbanking activities either directly or through a nonbank subsidiary. Under the BHC Act, however, control of a savings association by a bank holding company is considered a nonbanking activity. Because savings and loan holding companies control savings associations, all activities of savings and loan holding companies, including the control of savings associations would be considered nonbanking activities under the old Policy Statement. The Federal Reserve pointed out that this outcome would be inconsistent with Congressional intent to apply the Policy Statement to savings and loan holding companies. Under the final rule, the Federal Reserve will treat subsidiary savings associations of savings and loan holding companies as if they were banks for purposes of applying the Policy Statement. As is the case with bank holding companies, whether a savings and loan holding company engages in "significant" nonbanking activities will depend on the scope of the activities of the savings and loan holding company, the nature and level of risk of the activities, the condition of the savings and loan holding company, and other relevant criteria according to the Federal Reserve.

4. FFIEC Issues Guidance on Malware and Cyber Attacks Targeting User Credentials

The FFIEC has published two statements that provide guidance for financial institutions on identifying and mitigating two types of cyber attacks: destructive malware attacks and cyber attacks that compromise user credentials. The Joint Statement on Destructive Malware released on March 30 advises financial institutions and their technology service providers to enhance their information security programs to ensure they are able to identify, mitigate, and respond to destructive malware introduced into systems through a variety of mechanisms, such as employees downloading attachments in phishing or spear-phishing emails, connecting external devices like USB drives, or visiting compromised web sites, or through unauthorized parties using stolen credentials to install malware directly on systems. Federal banking agencies expect an institution's management to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption, and maintenance of the institution's operations after a cyber attack involving destructive malware according to the statement. Those expectations include development of appropriate processes that enable recovery of data and business operations and that address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to a malware attack. The statement recommends that business continuity planning and testing activities should incorporate response and recovery capabilities and test resilience against cyber attacks involving destructive malware, including the ability to protect offline data backups from destructive malware.

Nutter Notes: The Joint Statement on Cyber Attacks Compromising Credentials also released on March 30 discusses the growing trend of cyber attacks designed to obtain online credentials for theft, fraud, or business disruption and recommends risk mitigation techniques. That statement advises financial institutions to address this threat by reviewing their risk management practices and controls related to information technology networks and authentication, authorization, fraud detection, and response management systems and processes. The statement warns that user credentials can be stolen in many ways, including phishing and spear-phishing, malvertising, watering holes, and web-based attacks. Stolen credentials are often sold in cyber-criminal forums and then used to commit fraud through account takeovers and identity theft according to the FFEIC. The statement also warns that users may significantly increase exposure by creating usernames and passwords that are easy to guess or using the same usernames and passwords to access accounts on multiple web sites. The statement advises financial institutions to design multiple layers of security controls to establish several lines of defense and ensure that their risk management processes also address the risk posed by compromised credentials, consistent with the risk management guidance contained in the FFIEC IT Examination Handbook, specifically the Information Security, Outsourcing Technology Services, and the Retail Payment Systems booklets.

5. Other Developments: Consumer Complaints and Housing Counselors

OCABR Reports Top Consumer Issues of 2014

The Office of Consumer Affairs and Business Regulation (OCABR) on March 19 announced its top consumer complaint topics of 2014, which is an indication of the consumer protection issues on which the OCABR may focus in the near future. Insurance was the first topic on the list, followed by Banking & Non-Depository Licensing, Telecommunications, Cable Services, and Lemon Law/Auto Issues. The Massachusetts Division of Insurance, which is part of the OCABR, received a total of 12,898 complaints and inquiries from consumers by telephone and e-mail in 2014.

Nutter Notes: The Division of Insurance reported that 898 of the 2014 consumer complaints and inquiries it received were formal complaints resolved by the Division. Of those formal complaints, 281 involved auto insurance, 190 involved health insurance, 102 involved homeowners insurance, 88 involved life insurance and 237 pertained to other issues. At the same event, the Massachusetts Attorney General's office announced that its top consumer complaint topics included Auto Financing and Sales, Pre-Paid Cards, Debt Collection and Data Privacy.

CFPB Issues Guidance on Providing Lists of Homeownership Counselors

The CFPB issued a final interpretive rule on April 15 that provides guidance to mortgage lenders, including banks, about how to provide mortgage applicants with a list of local homeownership counseling organizations. The interpretive rule restates guidance the CFPB issued in 2013, and provides further guidance for lenders who are building their own lists of housing counselors.

Nutter Notes: The regulation that implements the federal Truth in Lending Act (Regulation Z) provides that a creditor may not extend a high-cost mortgage loan to a consumer unless the creditor receives written certification that the consumer has obtained counseling on the advisability of the mortgage from an approved counselor. The regulation that implements the Real Estate Settlement Procedures Act (Regulation X) requires lenders to provide federally related mortgage loan applicants with a list of certified homeownership counselors.

Originally published April 30, 2015

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.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.