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07.31.2008 | Legal Update

Headlines

1.  Omnibus GSE Reform and Foreclosure Prevention Bill Signed into Law
2.  Amendments to Reg. Z Create New Category of “Higher-Priced Mortgages”
3.  Merger of No-Stock MHC with Partially Public MHC Approved by OTS
4.  Communications with Borrowers at Risk of Foreclosure May Violate FDCPA
5.  Other Developments: SEC/FRB Information Sharing and FDIC OREO Guidance

Full Reports

1.  Omnibus GSE Reform and Foreclosure Prevention Bill Signed into Law

The President has signed into law the American Housing Rescue and Foreclosure Prevention Act (H.R. 3221), which reforms regulation of the government sponsored enterprises and includes sweeping provisions intended to ease the current residential mortgage foreclosure crisis.  The Act consolidates and reforms regulation and supervision of Fannie Mae, Freddie Mac and the Federal Home Loan Banks by establishing the Federal Housing Finance Agency, an independent agency, to oversee them, and provides authority to the U.S. Treasury to temporarily increase existing lines of credit for Fannie Mae and Freddie Mac in an effort to stabilize the housing markets.  The Act also creates a new permanent affordable housing trust fund to be financed by the GSEs that will fund the construction, maintenance and preservation of affordable rental housing for low and very low-income individuals and families in both rural and urban areas.  In addition, the Act includes amendments to modernize the Federal Housing Administration, improve residential mortgage loan disclosures, tax provisions to help expand refinancing opportunities and encourage home buying, and it allocates $180 million for financial counseling and legal assistance to help families avoid foreclosure.

Nutter Notes:  The new law amends the federal Truth in Lending Act to require new mortgage disclosures to consumers, particularly for adjustable rate mortgage loans, and to expand certain disclosure requirements currently applicable to purchase money loans to all home mortgage loans.  Among other requirements, the Truth in Lending Act amendments provide that good faith estimates must be delivered at least 7 business days before closing any extension of credit that is secured by a home mortgage.  In addition, the law establishes and sets minimum standards for a nationwide mortgage licensing and registration system for mortgage brokers and bank loan officers.  The loan originator licensing and registration system will include minimum standards for loan originator licensing, including standards applicable to bank loan officers.  The FHFA, established to oversee the GSEs, will have enhanced authority to set higher capital requirements, set stricter prudential standards, including standards relating to internal controls and audits, and to enforce the new standards and take prompt corrective action against Fannie Mae, Freddie Mac and the Federal Home Loan Banks.  The FHFA will oversee, and will be able to directly restrict, executive compensation at Fannie Mae and Freddie Mac.  The Act will raise the GSE loan limits for single family homes to create affordable mortgage loans for moderately priced homes by allowing GSE loans up to 115% of the local area median home price, and to make GSE loans effective in high cost areas by raising the permanent loan limit from $417,000 to $625,500.

2.  Amendments to Reg. Z Create New Category of “Higher-Priced Mortgages”

The Federal Reserve has created a new category of “higher-priced mortgage loan” that will be subject to heightened consumer protections under Regulation Z, which implements the federal Truth in Lending Act.  The final amendments to Regulations Z issued on July 15 define loans that qualify as “higher-priced mortgage loans” by reference to a new index to be published by the Federal Reserve called the “average prime offer rate” (offer rates for the lowest-risk prime mortgage to be derived from the Freddie Mac Primary Mortgage Market Survey).  Residential mortgage loans with an annual percentage rate that exceeds the average prime offer rate for comparable loans by 1.5 percentage points for first liens, or by 3.5% for subordinate liens, will qualify as “higher-priced.”  Loans to finance the initial construction of a home, bridge loans of 12 months or less, reverse mortgages and home equity lines of credit are excluded from the new category.  A lender making a higher-priced mortgage loan may not extend credit without regard to the borrower’s ability to repay from sources other than the collateral and must verify income and assets the lender relies on to determine the borrower’s ability to repay.  The new rules also significantly restrict prepayment penalties that may be charged on higher priced mortgages and require escrow accounts for property taxes and insurance.  The amendments to Regulation Z are generally effective on October 1, 2009.  The requirement to establish an escrow account for taxes and insurance for higher-priced mortgages is effective on April 1, 2010, but for higher-priced mortgages secured by manufactured housing, the requirement is effective on October 1, 2010.

Nutter Notes:  Lenders in Massachusetts must also comply with Chapter 140D of the General Laws of Massachusetts, which is the state consumer credit cost disclosure law, its implementing regulations, and other Massachusetts laws and regulations that have special rules applicable to certain categories of high priced mortgage loans.  In certain cases, the criteria defining high cost loans under the Massachusetts rules differ from the federal rules under Regulation Z.  For example, particular disclosure requirements apply under Regulation Z to certain refinancing transactions where the annual percentage rate exceeds the yield on Treasury securities with comparable maturities by more than 8 percentage points for first-lien loans, or more than 10 percentage points for subordinate-lien loans, or where the total points and fees will be 8% of the total loan amount, or $400 (as adjusted for inflation), whichever is greater.  Substantially the same disclosure requirements apply under Massachusetts regulations at 209 C.M.R. § 32.32, but the thresholds for annual percentage rates are 8 percentage points for first-lien loans and 9 percentage points for subordinate-lien loans, and the thresholds for total points and fees are 5% of the total loan amount or $400, whichever is greater, excluding either a conventional prepayment penalty or up to 2 bona fide discount points.  Massachusetts also has special requirements applicable to subprime residential mortgage loans made to first-time home loan borrowers under Chapter 184, Section 17B½ of the General Laws of Massachusetts.  The criteria defining a subprime loan under Section 17B½ are described in Massachusetts Division of Banks Regulatory Bulletin 1.3-104.  Yet another category of high cost home mortgage loan and the special requirements applicable to them are set forth in Chapter 183C of the General Laws of Massachusetts.

3.  Merger of No-Stock MHC with Partially Public MHC Approved by OTS

A mutual holding company with a subsidiary stock holding company that has no minority stockholders may be merged into a mutual holding company with a subsidiary stock holding company that has public stockholders, and the banks they control may also be merged, as long as the ownership interest of the minority stockholders in the surviving subsidiary stock holding company is diluted to prevent a windfall to them resulting from the merger of the two banks, according to a recent OTS order permitting such a merger.  The order published on June 4 involved a federally-chartered mutual holding company that owned all of the stock of its federally-chartered subsidiary holding company.  The federally-chartered mutual holding company proposed to merge into a state-chartered mutual holding company, with the state-chartered mutual holding company surviving the merger.  The state-chartered mutual holding company owned more than 50% of the stock of its state-chartered subsidiary holding company.  The remaining minority interest in the state-chartered subsidiary holding company was held by investors.  The proposal also called for the merger of the subsidiary holding companies, with the state-chartered subsidiary holding company surviving, and the merger of their respective subsidiary savings banks, with the state-chartered savings bank surviving.

Nutter Notes:  The merger of the savings banks owned by the subsidiary holding companies would result in a significant increase in the value of the interest in the state-chartered subsidiary holding company held by its minority stockholders.  The potential windfall to the minority stockholders of the state-chartered subsidiary holding company was avoided by causing the surviving subsidiary holding company to issue more stock to its mutual holding company parent in connection with the mergers in order to dilute the interest held by the minority investors.  The amount of stock issued to the surviving mutual holding company was calculated to cause the value of each share of stock in the state-chartered subsidiary holding company to be worth about the same amount immediately after the merger as each such share was worth immediately before the merger based on an independent appraisal of the value of the federally chartered mutual holding company.  Under Massachusetts laws governing mutual holding companies, there are no rules specifically governing mergers of no-stock mutual holding companies with mergers of partially public mutual holding companies, but it would be expected that a transaction similar to the one approved by the OTS would be approved on similar grounds and with similar conditions.

4.  Communications with Borrowers at Risk of Foreclosure May Violate FDCPA

A recent lawsuit has raised the question of whether certain communications made to borrowers at risk of foreclosure may violate the Fair Debt Collection Practices Act.  Some home mortgage lenders and servicers have engaged third party vendors that specialize in contacting hard-to-reach borrowers in an attempt to open lines of communication between the at-risk borrowers and lenders, thus enabling the parties to develop solutions to avoid foreclosure.  A borrower who was contacted by one of these third party vendors initiated a lawsuit against her loan servicer alleging that the communication violated the FDCPA.  The borrower had received a form letter from one of these companies inquiring about her personal financial information, including information about any bankruptcy filings, monthly income, monthly expenses and assets, and seeking copies of her most recent pay stubs or federal income tax returns.  The complaint alleged that the loan servicer cooperated with the third party in violating the law.  According to the complaint, the servicer employed the third party vendor in an attempt to trick the borrower into providing personal financial information and to assist the servicer with the collection of debt.  The plaintiff alleged that the servicer therefore engaged in false, misleading and deceptive practices under the FDCPA.  The lawsuit was filed on June 3 in the U.S. District Court for the Northern District of Illinois and the plaintiff is seeking class action status.  While the case is pending, lenders and servicers should consider whether any communications made with borrowers on their behalf may run afoul of the FDCPA and its implementing regulations.

Nutter Notes:  Home mortgage lenders and servicers which use third party vendors to initiate contact with at-risk borrowers should be aware that the results of this lawsuit will have implications for determining who may be subject to liability under debt collection laws and regulations in the future.  A key issue will be whether a company hired by a lender or servicer such as the one in this case fits the definition of a “debt collector” under the FDCPA.  The FDCPA generally governs the collection of debts by third parties on behalf of creditors.  Congress intended the FDCPA to eliminate abuses in the collection of consumer debts and to promote fair debt collection.  Under the FDCPA, a “debt collector” is defined as “any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.”  The Massachusetts Debt Collection Law, Chapter 93, Sections 24 through 28 of the General Laws, governs debt collection in the commonwealth.  The statute was modeled after the FDCPA and its definitions of “debt” and “debt collector” are substantially the same as the definitions under the FDCPA.  Under this statute, Massachusetts debt collectors are licensed by the Division of Banks.  Another Massachusetts statute, Chapter 93, Section 49 of the General Laws, prohibits a creditor or an attorney or assignee of a creditor from collecting or attempting to collect a debt in an unfair, deceptive or unreasonable manner.

5.  Other Developments: SEC/FRB Information Sharing and FDIC OREO Guidance

• The SEC and Federal Reserve Plan to Share Information about Regulated Entities

The Securities and Exchange Commission and the Federal Reserve agreed to share additional information about bank holding companies and so-called consolidated supervised entities that own securities firms under the terms of a memorandum of understanding between the two agencies signed on July 7.  The agencies will share information and analysis regarding the financial condition, risk management systems, internal controls, and capital, liquidity and funding resources of certain commonly regulated entities.

Nutter Notes:  The SEC and the Federal Reserve will share information and cooperate across a number of important areas of common regulatory and supervisory interest, including anti-money laundering, bank brokerage activities under the Gramm-Leach-Bliley Act, clearance and settlement in the banking and securities industries, and the regulation of transfer agents.

• FDIC Summarizes Requirements for Real Estate Acquired by Foreclosure

The FDIC recently published guidance highlighting safety and soundness issues and accounting standards and requirements related to other real estate (ORE).  Financial Institution Letter 62?2008, issued on July 1, reminds institutions of the need to establish policies and procedures that address the acquisition, ownership and disposition of ORE that reflect proper accounting for initial and updated values of ORE and federal and state legal and regulatory requirements applicable to ORE.

Nutter Notes:  The ORE guidance points out that accounting and regulatory reporting requirements differ at acquisition, during the holding period and on the disposition of ORE acquired through foreclosure.  The guidance also emphasizes the FDIC’s policy that banks should mitigate the impact of foreclosed property on the value of surrounding properties.  In some municipalities, like Boston, foreclosed property must be registered, and information about who is responsible for its maintenance must be posted at the site. 

Nutter Bank Report

Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP.  Chambers and Partners, the international law firm rating service, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation in the 2007 Chambers and Partners U.S. rankings.  The “well known and well-versed” Nutter team “excels” at corporate and regulatory banking advice, according to the 2007 Chambers Guide.  Visit the 2007 U.S. rankings at ChambersandPartners.com.  The Nutter Bank Report is edited by Matthew D. Hanaghan.  Assistance in the preparation of this issue was provided by Lisa M. Jentzen.  The information in this publication is not legal advice.  For further information, contact:

Gene A. Blumenreich  
gblumenreich@nutter.com 
Tel: (617) 439-2889 

Kenneth F. Ehrlich  
kehrlich@nutter.com 
Tel: (617) 439-2989 

Michael K. Krebs
mkrebs@nutter.com
Tel: (617) 439-2288