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11.26.2008 | Legal Update

Headlines

1.  FDIC Makes Final Changes to Temporary Liquidity Guarantee Program
2.  Treasury Releases Capital Purchase Terms for Non-Public Stock “C” Corps
3.  HUD’s Final RESPA Rule Requires New Good Faith Estimate Form
4.  FDIC Proposes Sharing Losses with Lenders Under Loan Modification Program
5.  Other Developments:  Data Security and Interagency Appraisal Guidelines

Full Reports

1.  FDIC Makes Final Changes to Temporary Liquidity Guarantee Program

The FDIC on November 21 adopted a final rule implementing the Temporary Liquidity Guarantee Program (TLG Program), which guarantees newly issued senior unsecured debt of banks, savings associations, and certain holding companies (the Debt Guarantee Program), and provides full deposit insurance coverage of non-interest bearing deposit transaction accounts, such as business payroll accounts, regardless of dollar amount (the Transaction Account Guarantee Program). By December 5, all eligible institutions must take action with respect to both the Transaction Account Guarantee Program and the Debt Guarantee Program. All such institutions must complete an election form to either opt-out of one or both components of the TLG Program or provide data to the FDIC to determine each participating institution’s debt guarantee limit and agree to certain terms. The TLG Program election form is available via FDICconnect. Institutions that remain in the Debt Guarantee Program must also execute and transmit to the FDIC a Master Agreement. All members of a holding company’s consolidated group must make the same election with respect to each component of the TLG Program. A decision by one member of a holding company group to opt-out will be irrevocable and binding on all other group members.

Nutter Notes: All eligible institutions were automatically enrolled in both components of the TLG Program as of October 14 under the FDIC’s interim rule. The final rule makes several significant changes to the program. The deposit insurance coverage has been expanded to include NOW accounts with interest rates no higher than 0.50%. Under the interim rule, the FDIC’s obligation to pay on its debt guarantee was triggered by receivership or bankruptcy, but it will be triggered by any payment default under the final rule. Short-term debt issued for one month or less will no longer be included in the TLG Program. The FDIC originally planned to charge eligible institutions 75 basis points on an annualized basis for guaranteed debt. The final rule imposes a sliding scale fee structure: 50 basis points for debt maturing within 180 days, 75 basis points for debt maturing between 181 and 364 days, and 100 basis points for debt with maturities of one year or longer, on an annualized basis. If a participating institution had no senior unsecured debt as of September 30, 2008, or had only federal funds, its debt guarantee limit is 2% of its total liabilities as of September 30, 2008. Otherwise, the debt guarantee limit will remain at 125% of senior unsecured debt outstanding as of September 30, 2008 that is scheduled to mature on or before June 30, 2009.

2.  Treasury Releases Capital Purchase Terms for Non-Public Stock “C” Corps

The Treasury Department has published terms for the investment of equity capital in non-public Subchapter C corporations in stock form under the Capital Purchase Program (CPP). The Treasury has not yet determined how mutual institutions, including mutual holding companies, or Subchapter S corporations will be eligible to participate in the CPP. The term sheet released on November 17 applies to institutions which are not subject to periodic reporting requirements under the federal securities laws or those which do not have any class of securities traded on a national securities exchange. The terms for private banking companies to sell senior preferred stock to the Treasury are substantially similar to the terms for public financial institutions.  (Click here for the October 16, 2008 Nutter Bank Report Special Edition.) However, the Treasury requires each publicly traded CPP participant to issue a warrant that entitles the Treasury (or its transferee) to purchase common stock having an aggregate market price equal to 15% of the senior preferred investment. By comparison, the term sheet for private institutions provides for a warrant to purchase preferred stock having an aggregate liquidation preference equal to 5% of the amount of senior preferred stock sold to the Treasury. Private institutions must apply to participate in the CPP by December 8. 

Nutter Notes: Institutions will be required to obtain the Treasury’s consent for any increase in dividends on common stock for three years and any increase thereafter greater than 3% per annum until the tenth anniversary of the date of the Treasury’s investment.  From and after the tenth anniversary, no dividend on common stock may be paid and no equity securities may be redeemed unless all securities held by the Treasury have been redeemed. The preferred stock warrants will be exercisable for 10 years. The initial exercise price will be $.01 per share or such greater amount as the institution’s charter requires as the par value of each share of preferred stock. The Treasury has stated that it will immediately exercise all such warrants. The preferred stock issuable upon exercise of the warrants will be subject to the terms described above for the senior preferred stock initially purchased by the Treasury, except that the warrant preferred will pay dividends at a rate of 9% per annum and may not be redeemed until all other senior preferred stock purchased by the Treasury has been redeemed. The securities issued by private institutions will not be subject to contractual restrictions on transfer except that the Treasury (and its transferees) will not be permitted to transfer the securities if it would cause the institution to become subject to periodic reporting requirements under the federal securities laws. If a private institution becomes subject to such reporting requirements, it will be required to file a shelf registration statement covering the preferred stock.

3.  HUD’s Final RESPA Rule Requires New Good Faith Estimate Form

The Department of Housing and Urban Development (HUD) issued a final rule that implements significant changes to its regulations under the Real Estate Settlement Procedures Act (RESPA). The amendments to HUD’s RESPA rules published on November 17 will require, for the first time, that mortgage lenders and brokers including banks provide consumers with a standard form of Good Faith Estimate (GFE) to disclose key loan terms and closing costs. Disclosures on the new GFE form include the term of the loan, whether the interest rate is fixed or adjustable, and whether there is a pre-payment penalty if the borrower chooses to refinance at a later date. The GFE form must also disclose any balloon payment, total closing costs and the cost of homeowner’s insurance. Yield spread premiums paid to mortgage brokers must be disclosed on the GFE as “credit or charge for the interest rate chosen.” The final rule also requires lenders to use a revised form of HUD-1 Settlement Statement that allows borrowers to compare their final closing costs and loan terms with those listed on the GFE. The final rule becomes effective on January 16, 2009, but compliance with the new GFE and revised Settlement Statement requirements is not required until January 1, 2010.

Nutter Notes: The new GFE includes a “tradeoff table” to describe how a borrower may lower the interest rate on a loan by paying increased closing costs, or lower settlement charges by paying interest at a higher rate.  While the proposed amendments to the RESPA rule released in March would have required lenders and brokers to fill out the tradeoff table, its completion is optional under the final rule. The GFE form is also shorter than the form proposed in March. The proposed rule would have required that closing agents read and provide a “closing script” to borrowers. The final rule eliminates the closing script but requires lenders to deliver a new page on the HUD-1 Settlement Statement that allows consumers to compare their final closing costs and loan terms with those listed on the GFE. While HUD considered proposals to harmonize GFE disclosures with the Federal Reserve’s Regulation Z disclosure requirements under the Truth in Lending Act, the GFE form provides for disclosure of the interest rate on the loan, not the annual percentage rate that Regulation Z requires lenders to disclose. The final rule includes limitations on third-party costs based on the GFE disclosures. Originators must adhere to their own stated fees and estimates of certain third-party fees must be within 10% of the sum of those fees actually paid at closing.  Under the final rule, lenders will have 30 days from the date of closing to cure disclosure errors or tolerance violations by reimbursing borrowers for any overcharges.

4.  FDIC Proposes Sharing Losses with Lenders Under Loan Modification Program

The FDIC has proposed a systematic loan modification program to reduce first lien mortgage payments based on the program the FDIC implemented at IndyMac Federal Bank.  Under the proposal released on November 14, the FDIC would serve as contractor to the Treasury Department and manage a program offering incentives to lenders and servicers to modify loans. The government would pay servicers $1,000 to cover the expenses associated with each loan modified according to the required standards and would guarantee loans for up to half of the lender’s losses incurred on modified loans that subsequently re-defaulted.  Modifications would involve interest rate reductions, term extensions, and principal forbearance. Loan payments would be reduced to as low as 31% of the borrower’s gross monthly income. The program would be available only on loans secured by owner-occupied residences. Government loss sharing would be available only after the borrower has made six payments on the modified loan. Participating servicers would be required to undertake a systematic review of all of the loans under their management applying a standard net present value test to determine whether each loan is a suitable candidate for modification, and to modify all loans that satisfy the test.

Nutter Notes: On November 20, the FDIC published a package of information to give servicers and lenders the materials necessary to implement their own systematic loan modification programs based on the IndyMac model. The program guide, called “Mod in a Box,” is available through the FDIC’s website (www.fdic.gov/consumers/loans/loanmod) and includes marketing materials, workout program guidelines, a sample offer letter, a sample modification agreement and investor reporting tools. While institutions could use the model materials to implement a loan modification program now, the Treasury has not announced any action on the FDIC’s proposal and it is not certain whether loans modified before any government program is initiated would be eligible for the loss sharing the FDIC proposed.  A large financial holding company agreed to implement the Mod in a Box program in connection with a package of financial support announced by the FDIC, the Federal Reserve and the Treasury on November 23. The Federal Housing Finance Agency announced on November 11 that Fannie Mae and Freddie Mac will implement their own versions of a program to modify loans that are at least 90 days overdue, which includes elements of the IndyMac model. Fannie Mae and Freddie Mac announced on November 20 that they will suspend foreclosures until January 9, 2009 while the loan modification program is implemented.

5.  Other Developments: Data Security and Interagency Appraisal Guidelines

• Massachusetts Extends Time for Compliance with New Data Security Rule

Massachusetts’ businesses have been given an extension of time to comply with the new enhanced data security requirements issued by the Office of Consumer Affairs and Business Regulation (OCABR). The regulations require all businesses, including banks and savings associations, to develop an information security program that is consistent with OCABR’s new data security standards and to be in compliance by May 1, 2009.

Nutter Notes: The regulations were originally to take effect on January 1, 2009, but OCABR extended the general compliance deadline to May 1, 2009. The deadlines for obtaining written certifications of compliance from third-party service providers and for ensuring encryption of certain portable media other than laptops were extended to January 1, 2010. Compliance guidance is available on OCABR’s website, www.mass.gov/ocabr.

• Federal Banking Agencies Propose New Interagency Appraisal Guidelines

The federal banking agencies jointly issued proposed Interagency Appraisal and Evaluation Guidelines for comment on November 13. The proposed guidance builds on the existing federal regulatory framework to clarify risk management principles and internal controls in order to ensure that financial institutions’ real estate collateral valuations (both appraisals and evaluations) are reliable and appropriately support their real estate-related transactions. Comments are due by January 20.

Nutter Notes: The proposed guidance includes an expanded discussion of portfolio management techniques and circumstances in which an institution should update or replace a collateral valuation. The proposed guidance, which reflects changes in industry practice, appraisal standards and available technologies, would replace the 1994 Interagency Appraisal and Evaluation Guidelines.

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 the practice co-chairs:

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