United States: Nutter Bank Report - November 2015

1. DOB Revises Guidance on Branch and Main Office Notices and Applications

The Massachusetts Division of Banks has issued revised guidance on the procedures for a bank to establish, relocate or close a branch office or to redesignate a main office. The Division's revised Regulatory Bulletin 2.3-104, released on November 15, also includes a new section on establishing, closing or relocating a branch outside of Massachusetts. According to the new guidance, a bank must file an application with the Division to establish, close or relocate a branch located outside of Massachusetts following the same procedures required for an application for a branch located inside Massachusetts. Such applications may be made using the Uniform Bank Interstate Application available on the Division's website. According to the guidance, the Division also will accept an application that is submitted electronically through any program offered by a federal banking agency. The notice procedures available for eligible banks to establish a branch within Massachusetts are not available for a branch to be established outside of Massachusetts. The new guidance also includes procedures for an out-­of-­state bank to establish, relocate or close a branch within Massachusetts.

Nutter Notes: The procedures for filing notices and applications for branch offices within Massachusetts are generally unchanged from the previous version of the Division's Regulatory Bulletin 2.3-104. Banks that meet certain eligibility standards may submit a notice to the Division rather than a full application to establish a branch within Massachusetts. According to the Division's guidance, a bank is eligible to submit a notice if the bank received a "Satisfactory" or higher Community Reinvestment Act ("CRA") rating at its most recent CRA examination by the Division or federal banking agency, the bank is adequately capitalized as defined under the prompt corrective action provisions of the Federal Deposit Insurance Act and the FDIC's Capital Adequacy Regulations (12 C.F.R. § 325.103), and the bank has not been notified that it is in troubled condition by the Division or any federal regulator. Banks that do not meet the eligibility criteria for a notice must submit an application. In addition to the information required on the application form, a bank must indicate whether the deed or lease on the proposed branch will contain any exclusive lease provisions or restrictive covenants that would preclude the sale or lease of the proposed site or related space to a competing institution, and, if the application involves the relocation or redesignation of the bank's main office, the bank must state the reasons for the change.

2. FDIC Updates Frequently Asked Questions Guidance on Brokered Deposits

The FDIC has issued updated guidance providing answers to frequently asked questions on identifying, accepting and reporting brokered deposits (the "FAQs"). The updated FAQs, issued on November 13 with FDIC Financial Institution Letter no. FIL-51-2015, include new guidance on whether insurance agents, lawyers, or accountants that refer clients to a bank are considered to be deposit brokers and how the FDIC treats government funds disbursed to beneficiaries of government programs through debit cards or prepaid cards. According to the FAQs, when referring clients to a bank, insurance agents, lawyers and accountants may be considered deposit brokers because they are facilitating the placement of deposits and the deposits could be brokered deposits. However, the guidance says that the FDIC recognizes that many business professionals conduct business with a particular bank, and due to that banking allegiance, often refer their clients to that bank on an informal basis for deposit products. According to the updated FAQs, the deposits produced by those types of informal deposit referrals would generally not be considered brokered and the professionals would not be considered deposit brokers under those circumstances. On the other hand, deposits would be considered brokered deposits where there are "more formal, programmatic arrangements" between the bank and the business professional, such as where the professional has entered into a written agreement with the bank for the referral of depositors or the professional receives a fee from the bank. Examples given in the FAQs include programs where bank customers can earn bonuses in the form of cash, merchandise or a higher interest rate on a deposit for referring depositors.

Nutter Notes: The updated FAQs also clarify how the FDIC treats federal or state agency funds in cases where an agency uses debit cards or prepaid cards issued by a bank to deliver funds to the beneficiaries of government programs. According to the guidance, where the program is structured so that each beneficiary will own a separate deposit account (with the account being accessible by the beneficiary through the use of a debit card), or where multiple beneficiaries will own a commingled deposit account with "per beneficiary" or "pass-through" deposit insurance coverage, the agency may be "facilitating the placement of deposits" that will belong to the beneficiaries. In those cases, the guidance advises that the agency would be considered a deposit broker, and the funds considered brokered deposits, unless the agency is covered by one of the exceptions to the definition of deposit broker. The FAQs indicate that the "primary purpose exception" may be available in these circumstances. According to the FAQs, the FDIC would apply this exception if the agency is mandated by law to disburse the funds to the beneficiaries, the agency is the sole source of funding for the deposit accounts, and the deposits owned by the beneficiaries do not produce fees payable to the agency. The satisfaction of these criteria would indicate that the primary purpose of the agency in establishing the accounts is to discharge the government's legal obligations to the beneficiaries rather than to provide the beneficiaries with a deposit-placement service or to assist the bank in expanding its deposit base according to the FAQs. The application of the primary purpose exception means that the deposits would not be classified as brokered deposits.

3. FASB Approves Final Mark to Market Accounting Standard for Equity Investments

The Financial Accounting Standards Board ("FASB") has recently approved a final accounting standard for mark to market accounting for financial instruments and has announced that its proposed standard for impairment of loans and debt securities will become effective starting in 2019 for public companies and in 2020 for all others. At its November 12 board meeting, FASB gave final approval to an accounting standard that requires banks and other businesses to treat all equity investments as trading securities, with changes in fair value recorded through earnings, beginning in 2018. However, the final accounting standard for the classification and measurement of financial instruments does not require mark to market accounting for loans or debt securities. FASB had been debating whether to require mark to market accounting for all financial assets and liabilities. Banking organizations that are public companies (i.e., registered with the Securities and Exchange Commission) will no longer be required to disclose the fair value of all assets and liabilities in footnotes to financial statements when the new standard becomes effective in 2018. Banking organizations that are public companies will be required to disclose the value of their loans at the "exit price"—the fair value of financial assets and liabilities measured at amortized cost, except for receivables and payables due within one year and demand deposit liabilities—beginning in 2018.

Nutter Notes:Also on November 12, FASB agreed that its proposed accounting standard for impairment of loans and debt securities will become effective in 2019 for banking organizations and other businesses that are public companies, and in 2020 for all other companies. Under current accounting standards, a credit loss is recognized when it is probable or actually has been incurred. According to FASB, the proposed revisions to the accounting standard for impairment of loans and debt securities would use more forward-looking information to "provide financial statement users with more decision-useful information about the expected credit losses on financial assets and other commitments to extend credit" held by banks and other reporting entities. The proposed accounting standard, according to FASB, would replace the current impairment model with a model that recognizes expected credit risks and by requiring consideration of a broader range of "reasonable and supportable" information about credit loss estimates. The proposed standard also would replace a number of existing impairment models. FASB is expected to finalize the current expected credit loss accounting standard early next year.

4. FDIC Revises Guidance on Risk Management for Loan Participations

The FDIC has issued an advisory to banks on purchased loans and loan participations emphasizing the importance of underwriting and administering purchased credits as if they were originated by the purchasing institution. The FDIC Advisory on Effective Risk Management Practices for Purchased Loans and Purchased Loan Participations, issued on November 6 with FDIC Financial Institution Letter no. FIL 49-2015, updates information contained in the FDIC's Advisory on Effective Credit Risk Management Practices for Purchased Loan Participations originally released in 2012. The updated guidance advises that banks should not rely on lead or originating institutions or non-bank third parties to perform risk management functions when purchasing loans and loan participations or when making loans to industries or loan types unfamiliar to the bank. The updated guidance also advises banks that arrangements with third-party service providers to facilitate the purchase of loans and loan participations should be managed by an effective third-party risk management process. In particular, the updated guidance warns banks against reliance on proprietary underwriting models that limit the ability of the purchasing bank to assess underwriting quality, credit quality and adequacy of loan pricing. The updated guidance recommends that a bank's loan policy should outline procedures for purchased loans and loan participations, define loan types that are acceptable for purchase, establish concentration limits, require independent credit and collateral analyses, and require an assessment of the bank's rights, obligations and limitations.

Nutter Notes: The FDIC's updated guidance on purchased loans and loan participations generally recommends that a bank should understand the loan type, the obligor's market and industry, and the credit models relied on to make credit decisions. The guidance also recommends that, before purchasing a loan or participation or entering into a third-party arrangement to purchase or participate in loans, a bank should ensure that loan policies address such purchases, understand the terms and limitations of agreements, perform appropriate due diligence, and obtain necessary board or committee approvals. According to the guidance, a bank should assess its ability to transfer, sell or assign the purchased loan or loan participation, including an assessment of whether contractual terms or market conditions limit the ability to dispose of the purchased credit and an assessment of the liquidity and marketability of the interest. The guidance recommends that any such limitations on the ability to dispose of a purchased credit should be considered in the bank's liquidity management function and when managing credit concentration limits. The guidance also reminds banks to ensure compliance with BSA/AML requirements when purchasing loans and loan participations, and to consider purchased credit portfolios for the bank's BSA/AML risk assessment.

5. Other Developments: Condo Loans and Cyber Threats

  • FHA to Temporarily Ease Restrictions on Certain Condo Loans

The Federal Housing Administration ("FHA") issued a mortgagee letter on November 13 announcing that the FHA will ease restrictions for one year on FHA-backed condo loans while the FHA considers longer-term rules. The FHA's Mortgagee Letter 2015-27 expands the definition of owner-occupied units to include second homes that are not investor-owned and increases the number of condominium projects that are eligible for FHA insurance.

Nutter Notes: The changes under the mortgagee letter are applicable to all FHA Title II programs including the Home Equity Conversion Mortgage insurance program. The mortgagee letter became effective on the date it was issued for all condominium project approvals, recertification applications, annexations or reconsideration submissions submitted for review. 

  • FFIEC Warns of Cyber Attacks Involving Extortion

The Federal Financial Institutions Examination Council ("FFIEC") issued a statement on November 3 warning banks of the increasing frequency and severity of cyber attacks to extort payment in return for the release of sensitive information. The statement describes steps financial institutions should take to respond to these attacks and highlights resources institutions can use to mitigate the risks posed by such attacks.

Nutter Notes: The FFIEC recommends that banks conduct ongoing cybersecurity risk assessments and monitoring of controls and information systems to counter the threat. In addition, financial institutions should have effective business continuity plans to respond to this type of cyber attack to ensure resiliency of operations.

Originally published November 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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