United States: Nutter Bank Report, October 2015

1. CFPB Issues RESPA Compliance Guidance on Marketing Services Agreements

The Consumer Financial Protection Bureau ("CFPB") has issued a new compliance bulletin that provides guidance to banks and other mortgage settlement service providers on marketing services agreements ("MSAs") that may violate the prohibitions against kickbacks and unearned fees under the Real Estate Settlement Procedures Act ("RESPA"). CFPB Compliance Bulletin 2015-05, issued on October 8, describes the legal and compliance risks arising from MSAs and provides examples of MSAs that the CFPB believes are designed to illegally evade RESPA's prohibition on the payment and acceptance of kickbacks and referral fees. According to the bulletin, the CFPB believes that MSAs create opportunities for parties to pay or accept illegal kickbacks for referrals of settlement service business. The bulletin also warns that it is inherently difficult for mortgage industry participants to adequately monitor activities under MSAs, in part because such activities may be performed by a wide range of individuals, which creates significant legal and compliance risks for a settlement service provider involved in an MSA arrangement. The bulletin suggests that the CFPB has not seen evidence that the use of MSAs benefits either consumers or the mortgage industry and that the use of MSAs and related arrangements will be subject to heightened scrutiny by the CFPB. The bulletin encourages mortgage industry participants to consider whether the risks and complexity of designing and monitoring MSAs for RESPA compliance outweigh the benefits of entering into such arrangements.

     Nutter Notes: Section 8(a) of RESPA prohibits the giving and accepting of "any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person." RESPA does not prohibit the payment of "a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed" in connection with a mortgage loan. According to the bulletin, MSAs typically provide for payments by a settlement services provider (such as a mortgage lender or broker, real estate agent, or a title company) to another party for advertising or promotional services, but in some cases the payments may be actually disguised compensation for referrals. According to the bulletin, the CFPB has had enforcement experience with settlement service providers entering into MSAs where fees paid under the MSAs were based, in part, on how many referrals a settlement service provider received from the other party to the MSA and the revenue generated by those referrals. Other cases that have led to CFPB enforcement actions have involved settlement service providers keeping payments received from other providers under MSAs without actually performing the contractually-obligated services, according to the bulletin.

2. U.S. Supreme Court Orders Massachusetts High Court to Revisit Excise Tax Decision

The U.S. Supreme Court has vacated a decision by the Massachusetts Supreme Judicial Court ("SJC") regarding the application of the Massachusetts financial institution excise tax and has ordered the SJC to review the facts of the case in light of a more recent Supreme Court ruling involving taxation of income derived from out-of-state activities. The October 13 Supreme Court ruling involved a dispute between a non-bank lender domiciled in Massachusetts and the Massachusetts Commissioner of Revenue about the proper apportionment of the lender's income derived from out-of-state lending under the Massachusetts financial institution excise tax. The financial institution excise tax also applies to banks, and the Supreme Court's ruling could lead to a reduction of Massachusetts state tax liabilities for out-of-state activities by banks and other financial institutions. In the case, the Massachusetts Appellate Tax Board applied the Massachusetts apportionment rules to determine that certain out-of-state student loans should be assigned to Massachusetts for purposes of calculating the lender's financial institution excise tax liability. The SJC essentially determined that because the lender's income was not actually subject to double taxation, the apportionment under the Massachusetts rules was fair. The Supreme Court issued a ruling in a Maryland case involving similar interstate tax issues a few months after the SJC's ruling, in which the Supreme Court ruled that Maryland's personal income tax statutes were unfair because there hypothetically would be double taxation if every other state imposed the same tax structure. The Supreme Court has ordered the SJC to review the facts of the Massachusetts case and perform the hypothetical analysis of whether the lender would be double taxed if every other state imposed the same apportionment rules as used by the Commissioner of Revenue.

     Nutter Notes: In its original ruling, the SJC said that both the U.S. Supreme Court and the SJC have held that the Due Process and Commerce Clauses of the U.S. Constitution require fairness in apportioning the income of a multistate business. The SJC said in its ruling that the constitutional analysis of the fairness of a state tax formula has two components: internal and external consistency. The SJC's ruling said that internal consistency requires that "the formula must be such that, if applied by every jurisdiction, it would result in no more than all of the [business's] income being taxed." The SJC said that external consistency requires that "the factor or factors used in the apportionment formula must actually reflect a reasonable sense of how income is generated." The Supreme Court held that the SJC did not properly perform the internal consistency analysis because it only considered whether the lender had been double-taxed, and not whether the lender could hypothetically be double-taxed if other states used the Massachusetts apportionment rules. The SJC must now apply the Supreme Court's hypothetical analysis for internal consistency to determine whether the Massachusetts apportionment rules could unfairly result in double taxation in violation of the Due Process and Commerce Clauses of the U.S. Constitution.

3. CFPB Overhauls HMDA Reporting Requirements

The CFPB has adopted a final rule that amends the reporting requirements of Regulation C, which implements the Home Mortgage Disclosure Act ("HMDA"). The final rule released on October 15 changes the types of data that financial institutions, including banks, are required to provide, the types of financial institutions and transactions that are subject to the HMDA reporting requirements, and the information that such covered institutions are required to collect, record and report. The final rule also changes the processes for reporting and disclosing HMDA data. The final rule narrows the scope of depository institutions subject to HMDA reporting requirements beginning in 2017. Under the final rule, a bank, savings association or credit union will not be subject to HMDA reporting requirements in 2017 unless it meets the asset-size threshold (adjusted annually for inflation), location, and federally related loan and activity tests currently applicable under Regulation C and it originates at least 25 home purchase loans, including refinances, in both 2015 and 2016. Covered financial institutions will be required to report more information about mortgage loan underwriting and pricing, such as an applicant's debt-to-income ratio, the interest rate of the loan, and the discount points charged for the loan. The CFPB said that the amended reporting requirements are meant to align more closely with established industry data standards used by financial institutions for their own processing, underwriting and pricing of loans, or to facilitate the sale of loans on the secondary market. The CFPB also is developing a new web-based submission tool for reporting HMDA data, which is expected to be in use by 2018. The amendments to Regulation C will be phased in over several years beginning on January 1, 2017.

     Nutter Notes: The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") directed the CFPB to update Regulation C by requiring lenders to report specific new information that is meant to improve public understanding of market conditions and could help identify emerging risks and potential discriminatory lending practices in the marketplace. This new information includes the property value, term of the loan, and the duration of any teaser or introductory interest rates. Information reported under the final rule about mortgage loan underwriting and pricing, such as an applicant's debt-to-income ratio, interest rate and discount points, will be used to monitor for possible fair lending violations. This information also is meant to help regulators and market participants monitor developments in specific markets, such as multifamily housing, affordable housing and manufactured housing. The rule also requires that covered lenders report, with some exceptions, information about all applications and loans secured by dwellings, including reverse mortgages and open-end lines of credit. Beginning in 2018, the final rule will require covered financial institutions to permit loan applicants to self-identify their ethnicity and race. Those covered financial institutions will be required to report the ethnicity and race information applicants provide.

4. Massachusetts Division of Insurance Issues Flood Insurance Compliance Guidance

The Massachusetts Division of Insurance ("DOI") has issued a new regulatory bulletin to notify insurance producers licensed in Massachusetts of new requirements applicable to the sale of flood insurance on properties located in Massachusetts. DOI Bulletin 2015-07, issued on September 16, provides guidance on compliance with the requirements of Chapter 177 of the Acts of 2014, which became effective on November 20, 2014, and its implementing regulation, 209 CMR 57.00, which became effective on September 11, 2015. Chapter 177 prohibits creditors and creditors' representatives from requiring flood insurance coverage in an amount greater than the balance of a residential mortgage loan, or that includes coverage for contents, or that includes a deductible of less than $5,000. The law applies to residential first mortgage loans, subordinate liens, home equity lines of credit and home equity loans. The law also requires creditors, creditors' representatives and insurance producers to provide borrowers with a notice about flood insurance coverage before it is purchased. According to the DOI's bulletin, the insurance producer must have the applicant sign an acknowledgement indicating that the applicant received the required disclosure information and the insurance producer must retain a copy of the signed acknowledgement form. Producers must use the DOI's "Flood Insurance Notice and Acknowledgement Form," which is attached to the bulletin and is available at the DOI's website here. The bulletin also clarifies that a producer is not required to obtain an acknowledgement signature from the purchaser or owner when the producer is providing the Notice Form prior to the forced placement of flood insurance under the new regulation.

     Nutter Notes: The Massachusetts flood insurance law requires that licensed insurance producers must provide to the owner or purchaser of the property a notice regarding the flood insurance coverage requirements at the time the purchaser or owner submits an application for flood insurance. The disclosure requirements apply when an owner or a purchaser of residential property is required by a creditor or creditor's representative to purchase or pay for flood insurance on the property. While the Massachusetts flood insurance law prohibits a lender from requiring an owner or purchaser of residential property to purchase flood insurance coverage over the amount of the outstanding principal mortgage balance, purchase contents coverage, or require a deductible of less than $5,000, the bulletin explains that the DOI expects all insurance producers to explain fully to all prospective purchasers of flood insurance the potential risks of underinsuring a property, failing to purchase contents coverage and the impact of a high deductible. According to the bulletin, the failure of producers to comply with the requirements of the law may subject a producer to fines and other enforcement proceedings by the DOI.

5. Other Developments: Swaps, Deposit Insurance Assessments and CRA

  • New Margin Requirements for Swaps Not Cleared through a Clearinghouse

The Federal Banking Agencies joined other financial regulators in issuing a joint final rule on October 22 to establish margin requirements for swaps that are not cleared through a clearinghouse. The rule will apply to entities supervised by the OCC, FDIC, Federal Reserve and other agencies and that register with the Commodity Futures Trading Commission or Securities and Exchange Commission as a dealer or major participant in swaps.

     Nutter Notes: The Dodd-Frank Act required the agencies to impose margin requirements to help ensure the safety and soundness of swap dealers in light of the risk to the financial system associated with non-cleared swaps activity. The rule will become effective in phases beginning in September 2016. 

  • FDIC Proposes Changes to Large Bank Assessments to Recapitalize the Deposit Insurance Fund

The FDIC proposed a rule on October 22 that would amend the deposit insurance assessment formula to require banks with over $10 billion in assets to recapitalize the Deposit Insurance Fund to 1.35% of insured deposits after it reaches a 1.15% reserve ratio. Comments on the proposal must be submitted within 60 days after publication in the Federal Register, which is expected shortly.

     Nutter Notes: The Dodd-Frank Act increased the minimum for the Deposit Insurance Fund reserve ratio (the amount in the fund as a percentage of all insured deposits) from 1.15% to 1.35% and requires that the ratio reach 1.35% by September 30, 2020. The Dodd-Frank Act also requires banks with $10 billion or more in total assets to be responsible for funding the increase. 

  • Opportunity for Charitable Contribution with Community Reinvestment Act Credit

A tax incentive offered by Massachusetts provides banks, among others, with the opportunity to obtain a 50% state tax credit for any contributions to Community Development Corporations in Massachusetts. According to a June 6, 2013 Division of Banks opinion, such contributions are also eligible for credit under the Massachusetts Community Reinvestment Act.

     Nutter Notes: The United Way would like banks to be aware that it is a Community Development Corporation partner, and that contributions to the United Way designated for funding Community Development Corporations in Massachusetts are eligible for both the 50% state tax credit and Community Reinvestment Act credit.

Originally published October 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.

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