United States: Nutter Bank Report, June 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. New Method Proposed for Calculating Insurance Assessments for Small Banks

2. Banking Agencies Issue Standards for Assessing Diversity Policies and Practices

3. Failure to Satisfy HUD Face-to-Face Meeting Rule Could Invalidate Foreclosure

4. CFPB Proposes Delayed Roll-Out of Integrated Mortgage Disclosure Forms

5. Other Developments: Flood Insurance and Reserve Requirements

1. New Method Proposed for Calculating Insurance Assessments for Small Banks

The FDIC is seeking public comments on a proposed rule that would change the way small banks are assessed for deposit insurance. Under the June 16 proposal, assessments for banks with less than $10 billion in assets that have been insured by the FDIC for at least 5 years (referred to as "established small banks") would be based on a statistical model that estimates the probability of failure over 3 years. The proposal would eliminate risk categories for established small banks and use the new method to determine assessment rates for all such banks, subject to minimum or maximum initial assessment rates based upon a bank's CAMELS composite rating. According to the FDIC, the proposed assessment method would be revenue neutral, so that the total assessment revenue collected from established small banks would be approximately the same as it would have been without changing the assessment method. The proposal would not change the range of assessment rates that will apply once the Deposit Insurance Fund reserve ratio reaches 1.15%. Under current FDIC regulations, the range of initial deposit insurance assessment rates will fall once the reserve ratio reaches 1.15%. To illustrate how the proposed new method would affect assessment rates for a particular bank, the FDIC has made an online assessment calculator available through its website that will allow banks to estimate their assessment rates under the proposed new method. Public comments on the proposed change in deposit insurance assessments will be due 60 days after publication in the Federal Register, which is expected shortly.

Nutter Notes: Since 2007, the FDIC has determined assessment rates for small banks by placing each bank into one of four risk categories: Risk Categories I, II, III, and IV. The four risk categories are based on two criteria: capital levels and supervisory ratings. According to the FDIC, Risk Category I includes most small banks. To further differentiate risk within Risk Category I, the FDIC uses the financial ratios method, which combines supervisory CAMELS component ratings with current financial ratios to determine a small bank's initial assessment rate. The FDIC said that the financial ratios used to determine assessment rates come from a statistical model that predicts the probability that a Risk Category I bank will be downgraded from a composite CAMELS rating of 1 or 2 to a rating of 3 or worse within a year. The proposal would revise the financial ratios method so that it is based on a statistical model estimating the probability of failure over 3 years and update the financial measures used in the financial ratios method consistent with the statistical model. The proposal would also eliminate risk categories for all established small banks and use the financial ratios method to determine assessment rates for all such banks. CAMELS composite ratings would be used to place a maximum on the assessment rates that CAMELS composite 1- and 2-rated banks could be charged, and minimums on the assessment rates that CAMELS composite 3-, 4- and 5-rated banks could be charged under the proposal.

2. Banking Agencies Issue Standards for Assessing Diversity Policies and Practices

The federal bank agencies together with the CFPB and two other federal financial regulators have issued a final interagency policy statement establishing joint standards for assessing the diversity policies and practices of the institutions they regulate. The June 9 policy statement was issued under Section 342 of the Dodd-Frank Act, which required the federal financial regulators to establish an Office of Minority and Women Inclusion ("OMWI") at each agency to be responsible for all matters relating to diversity in management, employment, and business activities. The Dodd-Frank Act also instructed each OMWI director to develop standards for assessing the diversity policies and practices of the agencies' regulated institutions, including banks. The standards described in the policy statement provide a framework for financial institutions to establish and strengthen diversity policies and practices, including "an organizational commitment to diversity, workforce and employment practices, procurement and business practices, and practices to promote transparency of organizational diversity and inclusion within the [institution]'s U.S. operations." Regulated institutions will be responsible for assessing their own compliance with the diversity and inclusion standards. The policy statement also encourages institutions to disclose their diversity policies and practices, and information related to their self-assessments, to their primary federal regulators and to the public. The policy statement became effective on June 10.

Nutter Notes: The policy statement recommends, among other things, that a regulated institution include diversity and inclusion considerations in both employment and contracting as part of its strategic plan for recruiting, hiring, retention and promotion. The policy statement recommends that the institution have a diversity and inclusion policy that is approved and supported by senior leadership, including senior management and the board of directors, and that regular progress reports are made to the board and senior management on diversity and inclusion. The policy statement also recommends that the institution regularly conduct training and provide educational opportunities on equal employment opportunity and on diversity and inclusion. The institution should have a senior level official, preferably with knowledge of and experience in diversity and inclusion policies and practices, who is responsible for overseeing and directing the institution's diversity and inclusion efforts, according to the policy statement. The policy statement provides that the institution's primary federal regulator may use diversity and inclusion self-assessment information to monitor progress and trends in the industry and to identify and highlight those policies and practices that have been successful. Institutions may request confidential treatment for self-assessment information provided to regulators.

3. Failure to Satisfy HUD Face-to-Face Meeting Rule Could Invalidate Foreclosure

A Massachusetts court has ruled that a lender cannot proceed with an eviction in connection with a residential foreclosure while questions remain about whether a brief counseling session for distressed borrowers held at a stadium satisfied the face-to-face meeting requirement in HUD regulations. The May 19 Massachusetts appeals court decision came in a case in which the co-borrowers had fallen behind on payments under an FHA-insured mortgage loan. The co-borrowers met with a representative of the lender for approximately 15 minutes at a workshop for distressed borrowers held by the lender at Gillette Stadium. The borrowers claimed that they attempted to make a payment at the event to cure their default, but the representative said he was not allowed to accept any payments at the event. After the event, the co-borrowers received an offer from the lender to enter into a forbearance agreement, which they accepted. The forbearance agreement provided that once the co-borrowers met a payment schedule, their loan would be reviewed for a modification. After accepting payments under the forbearance agreement, the lender rejected the final payment, stating that the amount due was greater than the payment tendered by the co-borrowers. The lender then declared the loan in default, accelerated the payments due, and conducted a foreclosure sale. The lender purchased the property at the foreclosure auction and later began eviction proceedings in the Boston Housing Court. Because the home mortgage loan was FHA-insured, HUD regulations were expressly incorporated into the mortgage as a limit on the mortgagee's right to accelerate the loan and foreclose on the property. The borrowers claimed that the 15-minute meeting at the stadium workshop did not satisfy HUD's requirements. The Massachusetts appeals court ruled that the foreclosure would be invalid if the lender did not comply with this aspect of HUD's face-to-face meeting requirement and remanded the case to the Boston Housing Court to make that determination.

Nutter Notes: HUD regulations require, among other things, that a mortgagee have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting, before the borrower becomes delinquent on 3 full monthly installments on a home mortgage loan. According to the HUD handbook, the face-to-face meeting rule requires that the lender representative "have the authority to propose and accept reasonable repayment plans . . . [because] [t]he interview has little value if the mortgagee's representative must take proposals back to a superior for a decision." The co-borrowers claimed that the lender representative told them he was not able to accept payments at the event and that he did not propose a loss mitigation solution at the meeting. The court held that there was an unresolved question of fact about whether the lender representative had sufficient authority to satisfy HUD requirements. The court also found that "a recurring theme throughout the regulations and HUD Handbook is that face-to-face interviews should involve personalized consideration of the mortgagors." The court found in this case that no such personalized consideration appeared to have taken place during the counseling session at the stadium event. If the lower court ultimately decides that the counseling session was insufficient, the lender could be found to be in noncompliance with HUD's regulation and, as a result, the mortgage terms. In that case, the foreclosure could be deemed invalid.

4. CFPB Proposes Delayed Roll-Out of Integrated Mortgage Disclosure Forms

The CFPB has proposed to delay the effective date of its new integrated mortgage disclosure rule under Regulation X (Real Estate Settlement Procedures Act) and Regulation Z (Truth in Lending Act) from August 1 to October 3, 2015. According to the CFPB, the June 24 proposal to delay the roll-out of the new integrated mortgage disclosure forms is due to an administrative error on the CFPB's part in complying with an administrative requirement under the Community Reinvestment Act that would have prevented the rule from becoming effective until August 15 at the earliest. The CFPB said that delaying the effective date until October 3, which is a Saturday, may allow for a smoother roll-out of the new disclosure forms. The integrated mortgage disclosure rule requires a lender to deliver a Loan Estimate form to a consumer no later than 3 business days after the consumer applies for a home mortgage loan. The Loan Estimate form replaces the Good Faith Estimate form originally designed by the Department of Housing and Urban Development ("HUD") under RESPA and the early Truth in Lending disclosure statement originally designed by the Federal Reserve under TILA. The new rule requires a lender to deliver a Closing Disclosure form so that the consumer receives it at least 3 business days before the consumer closes on the loan. The Closing Disclosure form replaces the HUD-1, which was originally designed by HUD under RESPA, and the Truth in Lending disclosure statement, which was originally designed by the Federal Reserve under TILA. Public comments on the proposed delay are due by July 7.

Nutter Notes: The CFPB's new Loan Estimate and Closing Disclosure forms contain new disclosures required by the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). The Dodd-Frank Act transferred responsibility for administering TILA and RESPA from the Federal Reserve and HUD, respectively, to the CFPB, and directed the CFPB to integrate the mortgage loan disclosures required to be delivered to consumers under TILA and RESPA. The final rule and the new mortgage disclosure forms reconcile the differences between the existing forms and combine other required disclosures, such as the appraisal notice under the Equal Credit Opportunity Act and the servicing application disclosure under RESPA. The final rule also provides explanations of how the forms should be filled out and used. Under the final rule, a mortgage broker may provide the Loan Estimate form to a consumer upon receipt of an application. However, even if the mortgage broker provides the Loan Estimate, the lender will remain responsible for complying with all requirements concerning the disclosure. The final rule allows lenders and others to provide consumers with written loan estimates prior to application, provided that any such written estimates contain a disclaimer to prevent confusion with the Loan Estimate form. This disclaimer also is required for advertisements. The final rule will allow lenders to use a settlement agent to provide the Closing Disclosure form on behalf of the lender.

5. Other Developments: Flood Insurance and Reserve Requirements

  • Banking Agencies Release Joint Final Rule on Flood Insurance Escrow Requirements
  • The federal banking agencies released a joint final rule on June 22 that requires regulated lending institutions, including banks, to escrow flood insurance premiums and fees for loans secured by residential improved real estate or mobile homes that are made, increased, extended or renewed on or after January 1, 2016, unless the loan qualifies for a statutory exception.

    Nutter Notes: The final rule implements provisions of the Homeowner Flood Insurance Affordability Act of 2014 relating to the escrowing of flood insurance payments and the exemption of certain detached structures from the mandatory flood insurance purchase requirement. Certain regulated lending institutions that have total assets of less than $1 billion are exempt from the escrow requirement.

  • Federal Reserve Changes Calculation of Interest on Excess Reserve Balances
  • The Federal Reserve on June 18 released a final rule that amends Regulation D (Reserve Requirements of Depository Institutions) to make changes to the calculation of interest payments on excess reserve balances maintained at Federal Reserve Banks. The final rule bases interest payments to banks with excess balances on the interest on required reserves ("IOER") rate in effect each day and the level of balances held each day, rather than on the average IOER rate and average level of excess balances over the maintenance period.

    Nutter Notes: Under the former rule, if the rate of interest paid on excess balances (the IOER rate) had changed in the middle of a two week reserve maintenance period, the change would not have been fully reflected in the interest payments to depository institutions until the beginning of a new maintenance period. The final rule will become effective on July 23.

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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