Nutter Bank Report, August 2017

by Nutter McClennen & Fish LLP


1. Federal Reserve Issues Proposed Guidance on Board Duties and Responsibilities

2. CFPB Publishes Proposed New Overdraft Protection Disclosure Forms

3. OCC Issues New Guidance on Higher-Loan-To-Value Mortgage Loan Programs

4. CFPB Temporarily Raises HMDA Reporting Threshold for Smaller Institutions

5. Other Developments: Mortgage Escrow Accounts and Regulatory Capital

1. Federal Reserve Issues Proposed Guidance on Board Duties and Responsibilities

The Federal Reserve has issued proposed supervisory guidance on the duties of boards of directors of institutions supervised by the Federal Reserve including, among others, domestic bank holding companies, savings and loan holding companies, and state member banks. The proposed guidance issued on August 3 is divided into two sections–guidance applicable to institutions with $50 billion or more in total consolidated assets (which the guidance labels “larger firms”) and institutions with less than $50 billion in total consolidated assets (which the guidance labels “smaller firms”). Under the proposed guidance to smaller firms, supervisory expectations would be “revised to align with” the supervisory expectations set forth in the Federal Reserve’s June 8, 2016 Supervisory Guidance for Assessing Risk Management at Supervised Institutions with Total Consolidated Assets Less than $50 Billion. The 2016 guidance describes the Federal Reserve’s supervisory expectations for the roles and responsibilities of a board of directors for an institution’s risk management, such as approving the institution’s overall business strategies and significant policies; understanding the risks the institution faces and having access to information to identify the size and significance of the risks; providing guidance regarding the level of acceptable risk exposures to the institution; and overseeing senior management’s implementation of the board-approved business strategies and risk limits. Comments on the proposed guidance are due by October 10. Click here for a copy of the proposed guidance.

     Nutter Notes: The Federal Reserve said that the proposed supervisory guidance follows a multi-year review of practices of boards of directors. The review assessed, among other things, the practices that make boards effective, the challenges boards face, and how boards influence the safety and soundness of their firms and promote compliance with laws, and compared these with expectations contained in existing supervisory guidance. The Federal Reserve said that the results of the review “suggest that supervisory expectations for boards of directors and senior management have become increasingly difficult to distinguish.” The review also indicated that boards “often devote a significant amount of time satisfying supervisory expectations that do not directly relate to the board’s core responsibilities” which include guiding the development of the firm’s strategy and the types and level of risks it is willing to take, overseeing senior management, and holding them accountable for effective risk management and compliance (among other responsibilities), supporting the stature and independence of the firm’s independent risk management and internal audit functions, and adopting effective governance practices. In the first phase of its review, focusing on holding company boards, the Federal Reserve said it has preliminarily identified 27 prior supervisory letters for “potential elimination or revision” which collectively include more than 170 supervisory expectations for holding company boards. The Federal Reserve also proposed guidance on the ways supervisory findings – such as Matters Requiring Immediate Attention and Matters Requiring Attention – would be communicated to boards of directors consistent with the overall guidance.

2.  CFPB Publishes Proposed New Overdraft Protection Disclosure Forms

The CFPB has published four prototype overdraft protection disclosure forms that it is testing for use by banks to explain to consumers the costs and risks of opting in to overdraft coverage. The prototype model disclosure forms, published on August 4 as part of the CFPB’s Know Before You Owe program, are meant to make it easier for consumers to understand the costs of overdraft coverage and to evaluate the risks and benefits of overdraft coverage. Each of the model forms disclose the amount of overdraft protection fees and when they can be charged. They also explain that the decision to opt-in to overdraft coverage applies only to one-time debit card and ATM transactions, and that it does not affect overdraft on checks and other electronic transactions. The CFPB is considering changes to mandatory overdraft protection disclosures in part because of the results of a study the agency conducted about frequent overdrafters—consumers who attempted to overdraw their accounts more than 10 times in a 12-month period. Among the results of the study reported on August 4, the CFPB found that 79 percent of all overdraft fees are generated by 9 percent of consumer accounts and that people who frequently attempt to overdraw their checking accounts typically pay almost $450 more in fees if they opted in to overdraft coverage. Click here for a copy of the prototype model disclosure forms that the CFPB is currently testing and here for a copy of the report on the overdraft study.

     Nutter Notes: The CFPB’s Regulation E, which implements the Electronic Fund Transfer Act, began requiring depository institutions to obtain a consumer’s consent in advance before charging overdraft fees on most debit card transactions and ATM withdrawals in 2010. The regulations generally prohibit banks and other depository institutions from charging a fee to a consumer for paying an ATM or one-time debit card overdraft unless the institution first provides the consumer with a notice in writing describing the overdraft service and obtains the consumer’s affirmative consent, or opt-in, to the overdraft service. While Regulation E provides model disclosures that institutions may use to comply with the overdraft disclosure requirements, the use of the Regulation E model forms is not required. The CFPB stated that it would make any new Know Before You Owe model overdraft disclosure form, if adopted, available on its website. 

 3. OCC Issues New Guidance on Higher-Loan-To-Value Mortgage Loan Programs

The OCC has issued new guidance for national banks and federal savings associations on prudent higher-loan-to-value mortgage lending programs in areas targeted by government agencies for community revitalization. The guidance published on August 21 as OCC Bulletin 2017-28, Risk Management Guidance for Higher-Loan-to-Value Lending Programs in Communities Targeted for Revitalization, interprets existing regulations and sets out principles for managing risks associated with the origination of certain residential mortgage loans where the loan-to-value ratio at origination exceeds 100 percent (referred to as “higher-LTV loans”). The new guidance sets out parameters for institutions that establish programs for originating owner-occupied residential higher-LTV loans in eligible communities. The new guidance describes provisions that should be included in bank policies and procedures related to loan portfolio management, underwriting, consumer notices, and other relevant matters. The new guidance also describes how the OCC will consider programs that fall outside of the scope of the policy announced by the bulletin that are consistent with safe and sound lending practices, promote fair access to credit and fair treatment of borrowers, and comply with applicable laws.  Click here for a copy of the bulletin.

     Nutter Notes: According to the OCC’s new guidance, an eligible community would be one that has been officially targeted for revitalization by a federal, state, or municipal government agency, or by a government-designated entity such as a land bank. National banks and federal savings associations may establish programs for making higher-LTV loans that exceed supervisory loan-to-value limits to finance the purchase of, or purchase and rehabilitation of, an owner-occupied residential property located in such eligible communities in accordance with the new guidance. A program loan should be a permanent first-lien mortgage with an LTV ratio at the time of origination that exceeds 100 percent, and without mortgage insurance, readily marketable collateral, or other acceptable collateral. The OCC stated that it will actively monitor and evaluate the programs established under the new guidance, including the performance of higher-LTV loans. The OCC also plans assess at least annually the extent to which banks’ programs collectively are contributing to the revitalization of eligible communities and whether banks are adequately controlling the risks associated with originating higher-LTV loans.

 4. CFPB Temporarily Raises HMDA Reporting Threshold for Smaller Institutions

The CFPB has adopted a final rule that temporarily amends reporting requirements under the Home Mortgage Disclosure Act (“HMDA”) for home equity lines of credit that apply to smaller banks and other home mortgage lenders. The amended rule adopted on August 24 temporarily increases the threshold for collecting and reporting data with respect to home equity lines of credit for lenders from 100 to 500 open-end lines of credit in either of the preceding two years. Under the amended rule, lenders that originated fewer than 500 open-end lines of credit during either of the preceding two years will not be required to begin collecting the required HMDA data until January 1, 2020. Under HMDA rules that are scheduled to take effect in January 2018, lenders would have been required to report home-equity lines of credit if they made 100 such loans in each of the last two years. The CFPB stated that it will consider whether to make a permanent adjustment to the reporting threshold for home-equity lines of credit. The amendment to the reporting threshold will become effective on January 1. Click here for a copy of the amended rule.

     Nutter Notes: As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB amended Regulation C, the rule that implements HMDA, in 2015 to improve the quality and type of data reported by financial institutions. Most of the updated requirements take effect in January 2018. In addition, the 2015 amendments to Regulation C established transactional thresholds that determine whether financial institutions are required to collect data on open-end lines of credit or closed-end mortgage loans. The closed-end threshold was set at 25 loans in each of the two preceding calendar years, and the open-end threshold was set at 100 open-end lines of credit in each of the two preceding calendar years. The amended rule adopted this month also contains a number of clarifications, technical corrections, and minor changes to Regulation C. These include clarifying certain key terms, such as “temporary financing” and “automated underwriting system.”

5. Other Developments: Mortgage Escrow Accounts and Regulatory Capital

  • New Minimum Interest Rate on New Hampshire Mortgage Escrow Accounts Announced

The New Hampshire Bank Commissioner announced that, effective as of August 1, the minimum interest rate payable on moneys on deposit in escrow accounts maintained for the payment of taxes or insurance premiums related to loans on property secured by real estate mortgages is 0.00 percent.

     Nutter Notes: The new minimum interest rate of 0.00 percent will remain in effect until the next rate announcement on February 1, 2018. The Bank Commissioner’s announcement is available on the New Hampshire Banking Department’s website here.

  • Federal Banking Agencies Propose to Retain Certain Capital Rule Transition Provisions

The federal banking agencies on August 22 proposed a joint rule that would extend the existing transitional capital treatment for certain regulatory capital deductions and risk weights. The extension would apply to banking organizations that are not subject to the agencies’ advanced approaches capital rules. Comments on the proposed rule will be due within 30 days after publication in the Federal Register, which is expected shortly.

     Nutter Notes: The agencies are proposing to extend the existing transition provisions for a targeted set of items—mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions, and minority interests—while they consider changes that would simplify the capital rules to reduce regulatory burden, particularly for community banks. Click here for a copy of the proposed rule.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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