Financial Services Alert

Developments of Note

FRB Requests Comments on Proposed Changes to HMDA Rules
The FRB proposed amendments to Regulation C, implementing the Home Mortgage Disclosure Act (“HMDA”). Regulation C requires depository and certain nondepository institutions to collect, report and disclose data about home mortgage and home improvement loans, including refinancings. Data reported include the type, purpose and amount of the loan; the race or national origin, gender, and income of the loan applicant; and the location of the property. The two most significant changes in the proposed amendments would require lenders to:

Report Requests for Preapproval. Lenders would be required to report requests for preapproval that are deemed “applications” for credit. The term “application” is proposed to be changed to include requests for preapproval in which a creditor issues creditworthy persons a written commitment to extend credit that may be limited in three ways: (1) the lender specifies the maximum amount of credit that it commits to extend; (2) the lender specifies the time period during which the commitment remains valid; and (3) the commitment may be subject to conditions. The proposed rule would not cover informal prequalification programs in which the underwriting may be less rigorous and the lender makes no binding, written commitment.

Report Additional Data. Lenders would be required to report the following additional items of data: (1) the annual percentage rate (“APR”) of the loan and whether the loan is subject to the Home Owners Equity Protection Act; and (2) whether the loan or application involves a manufactured home. The FRB believes that collecting APR data will assist it in identifying the incidence of subprime lending and practices that potentially raise fair lending concerns.

In addition, the proposed changes would require lenders to report home equity lines of credit, simplify the definition of a reportable home improvement loans, expand coverage of nondepository lenders, and simplify the definition of a “refinancing.” The current definition gives lenders several options for deciding which refinancings to report; the recommended simplification would establish a definition of “refinancing” applicable to all lenders. Comments to the proposed rule are due by March 9, 2001.

SEC Grants No-Action Relief to Brokers’ Credit Card Affiliate to Facilitate Fund Investment Program Using Excess Balances

A credit card company received no-action relief (the “No-Action Letter”) from the SEC to permit it to participate in a program that allows a cardholder to hawve excess account balances invested in mutual funds sold by brokers affiliated with the credit card company. Under the terms of the program, any amount paid by a cardholder in excess of the outstanding balance on the credit card would, absent other instructions from the cardholder, be forwarded for investment in previously designated funds within 2 to 3 business days, with the credit card company keeping the float. The card company was concerned that its receipt of an amount destined for investment in a fund would trigger Rule 22c-1 under the Investment Company Act of 1940 (“Rule 22c-1”). Were Rule 22c-1 to apply, a cardholder investor would be entitled to receive the share price next calculated after the credit card company’s receipt of an amount to be invested in a fund. The SEC staff advised the card company in the No-Action Letter that the card company’s program would not be subject to Rule 22c-1.

Massachusetts Adopts Final Regulations on Predatory Lending

The Massachusetts Division of Banks (the “Division”) adopted final amendments (the “Amendments”) to the Division’s truth in lending regulations (209 CMR 32.00) and to the regulations governing the licensing of mortgage lenders and mortgage brokers (209 CMR 42.00). The Amendments become effective January 22, 2001. The Amendments, among other things, would: (1) trigger the special disclosure and other requirements when the loan interest rate is 8% over comparable Treasuries (instead of 10%) and 9% over comparable Treasuries for junior mortgages and when loan fees (excluding bona fide loan discount points) exceed 5% (instead of 8%) of the total loan amount; (2) extend the high cost mortgage loan regulations to apply to all types of first and junior mortgage loans, including purchase money mortgage loans and open-end and closed-end home equity lines of credit; (3) add a new disclosure advising applicants to seek less costly financing alternatives, which disclosure must be in at least 12 point type directly above the signature line on the application; (4) add a new disclosure to be given at or prior to taking an application stating that the high cost home loan may increase the aggregate number of monthly debt payments and the aggregate amount paid over the term of the loan (if such consequences are likely); (5) prohibit balloon payment mortgage loans with terms of less than 7 years (as opposed to the current 5-year maximum term); (6) reduce from 5 years to 3 years the period of time in which a prepayment penalty may be imposed; (7) require independent or extended verification of borrowers’ income for purposes of analyzing debt-to-income ratio; (8) prohibit a creditor from making any high cost home loan unless the creditor reasonably believes the obligor will be able to make the scheduled payments, with a presumption that the borrower will be able to do so if the monthly payment does not exceed 50% of gross monthly income; (9) restrict the financing of points, fees and other charges; (10) prohibit “loan flipping;” (11) require an “informed consent” by the borrower before a creditor may sell, receive compensation and finance credit life, accident and health, disability or unemployment insurance products or other goods or services in connection with a high cost home loan; (12) prohibit unconscionable rates and fees or rates and fees that significantly deviate from industry standards and require the creditor to bear the burden of proving the rates and fees are justified; (13) prohibit “oppressive” mandatory arbitration clauses or waivers of participation in class action suits; (14) prohibit failing to report credit histories; (15) prohibit the sale of single premium credit insurance; and (16) require a financial consulting disclosure, including a list of counselors, and require all applicants that elect not to seek credit counseling to sign a waiver that they were informed of their rights.

The Amendments also remove the “pattern or practice” of making improper high cost loans as a basis for violation of the regulations. In response to those who commented that the elimination of the “pattern or practice” standard created an undue burden on lenders, the Division added a narrow exception for a bona fide error. Also, in response to comments, the Division eliminated the mandatory counseling requirement for applicants over 60 years of age set forth in the revisions to the regulations as originally proposed, and instead is requiring (upon the effective date of the Amendments) that all applicants for a high cost loan that elect not to seek credit counseling sign a waiver that they were informed of their rights.

OCC Proposes that a Federal Branch or Agency of a Foreign Bank be Authorized to Establish or Control an Operating Subsidiary in the Same Manner as a National Bank

The OCC proposed to authorize a Federal branch or agency of a foreign bank to establish or control a US operating subsidiary in generally the same manner as a national bank may establish or control an operating subsidiary. The proposed regulation describes application and notice procedures applicable to national banks in connection with engaging in activities through an operating subsidiary. A national bank that is well capitalized and well managed may acquire or establish an operating subsidiary, or perform a new activity in an existing operating subsidiary, by filing a notice with the OCC within 10 days of establishing or acquiring the operating subsidiary or commencing the activity (if the activity or activities are included in a broad list of permissible activities contained in 12 CFR 5.34 (e)(5) (v)). Accordingly, a Federal branch or agency can take a comparable action if it is well capitalized and well managed. Under the proposed regulation a Federal branch or agency will be considered well capitalized if its Tier 1 Capital is at least 6% and its Total Risk-Based Capital is at least 10% or if the Federal branch or agency has maintained on a daily basis for the past 3 quarters eligible assets equal to at least 108% of the preceding quarter's average third party liabilities and sufficient liquidity to meet obligations to third parties. Moreover, under the proposed regulation, a Federal branch or agency is deemed well managed if it has a composite Risk Management, Operational Controls, Compliance and Asset Quality ("ROCA") supervisory rating of 1 or 2 or (if not yet examined) has and uses managerial resources deemed satisfactory by the OCC. Comments are due by February 5, 2001.

Other Items of Note

Recent Goodwin, Procter & Hoar LLP Employee Benefits Newsletter

The ERISA/Employee Benefits Department at GPH has prepared a client newsletter regarding: (1) new IRS regulations that permit elimination of some distribution options; (2) IRS regulations concerning participant loans; (3) audits by the DOL’s Boston Office that have focused upon plan eligibility of rehired or transferred employees; (4) DOL positions concerning payment of administrative expenses; (5) a holding by the U.S. Court of Appeals for the Third Circuit that the use of different retiree medical benefits for older retirees may violate the federal age discrimination statute; and (6) the implications of new SEC rule 10b5-1 for employee stock purchase plan and 401(k) stock fund administrators. A copy of the newsletter is available upon request.

The contents of this publication are intended for informational purposes only and should not be construed as legal advice or legal opinion, which can be rendered properly only when related to specific facts. This document may be considered advertising under rules of the Supreme Judicial Court of Massachusetts.