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Nutter Bank Report, October 2011
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1. New Regulations Proposed to Implement the Volcker Rule
2. Foreclosure Sale Invalidated by Supreme Judicial Court
3. Federal Banking Agencies Update Q&A on Flood Insurance
4. OCC Revises Examination Guidance on Electronic Funds Transfers
5. Other Developments: Reverse Mortgage Loans and Reserve Requirements
1. New Regulations Proposed to Implement the Volcker Rule
The FDIC, OCC, Federal Reserve and SEC have jointly issued proposed regulations that would implement the so-called “Volcker Rule”—Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The proposal issued on October 11 clarifies the scope of the Volcker Rule’s restrictions on proprietary trading and other activities, and provides certain exemptions. The Volcker Rule generally prohibits “banking entities” from engaging in short-term proprietary trading of any security, derivative, and certain other financial instruments for a banking entity’s own account, subject to certain exemptions. It also prohibits banking entities from owning, sponsoring, or having certain other relationships with a hedge fund or private equity fund, subject to certain exemptions. For purposes of the Volcker Rule, the term “banking entity” includes insured depository institutions, bank holding companies, and their subsidiaries or affiliates. The proposed regulations would require banking entities that engage in activities covered by the law to establish an internal compliance program that is designed to ensure and monitor compliance with the Volcker Rule. The proposal would also require certain banking entities with significant trading operations to report to their primary federal regulator certain quantitative measurements of their trading activities. Comments on the proposed regulations are due by January 13, 2012.
Nutter Notes: Transactions in certain instruments, including obligations of the U.S. government or a U.S. government agency, government-sponsored enterprises, and state and local governments, are exempt from the Volcker Rule’s prohibitions on short-term proprietary trading. Exempt activities also include market making, underwriting, and risk-mitigating hedging. The proposed regulations would impose certain requirements that must be met in order for a banking entity to rely on a statutory exemption. For example, the exemption for risk-mitigating hedging would be available only if the transaction hedges or otherwise mitigates one or more specific risks, including market risk, counterparty or other credit risk, currency or foreign exchange risk, interest rate risk, basis risk, or similar risks, arising in connection with and related to individual or aggregated positions held by the banking entity. The banking entity also would be required to have written policies and procedures in place to comply with the requirements of the exemption that address techniques and strategies that may be used for hedging, internal controls and monitoring procedures, and independent testing. The proposed regulations include official commentary that provides guidance on distinguishing permitted market making and related activities from prohibited proprietary trading activities. The proposal also includes certain exemptions to reduce the regulatory burden on smaller, less complex banking entities. For example, proposed reporting and recordkeeping requirements would vary depending on the scope and size of covered trading activities, and would apply only if the banking entity has trading assets and liabilities greater than or equal to $1 billion.
2. Foreclosure Sale Invalidated by Supreme Judicial Court
The Massachusetts Supreme Judicial Court has held in a recent case that a foreclosing lender could not transfer valid title to a bona fide purchaser of a residential property where a transfer of the mortgage to the foreclosing lender was not recorded until after the foreclosure sale. The October 18 decision came in a case brought by the person who purchased the property from the foreclosing lender against the previous owner in an attempt to either force the previous owner to enforce any rights he may have in the property or forever bar him from challenging the purchaser’s title. The purchaser acquired the property by quitclaim deed from the foreclosing lender after the foreclosing lender executed a foreclosure deed purporting to transfer title to itself. However, at the time the lender executed the foreclosure deed, it was not the assignee of the mortgage it purported to foreclose. The assignment of the mortgage to the foreclosing lender was recorded about one month after the foreclosure sale. The Supreme Judicial Court held that, because the mortgage had not been assigned to the lender before the foreclosure, the lender had no authority to carry out a foreclosure and the foreclosure was void. Since the foreclosure was void, the court held that the purchaser did not hold a valid title to the property.
Nutter Notes: The purchaser made several alternative arguments to support his claim to the property. The purchaser argued that the chain of grants coupled with his quitclaim deed is sufficient to establish record title. However, as indicated above, the court held that, because the lender was not the assignee of the mortgage at the time it foreclosed on the property, its sale to the purchaser was invalid and the purchaser’s title was defective. The purchaser’s next argument was that he became the assignee of the mortgage. The court noted that it has held that a foreclosure deed may operate as an assignment of a mortgage in cases where the foreclosure deed itself is ineffective due to noncompliance with the power of sale. But the court held that the foreclosure deed could not be construed as an assignment of the mortgage because the lender was not the assignee at the time it executed the foreclosure deed. Finally, the purchaser argued that he was a bona fide purchaser of the property for value and could not have known of the title problem, and therefore must be recognized as the record title owner. The court noted that the law often protects the title of a purchaser for value who has no notice or knowledge of a defect of the seller’s power to sell the property. However, the court held that the foreclosure sale in this case was wholly void so title never left the possession of the prior owner.
3. Federal Banking Agencies Update Q&A on Flood Insurance
The federal bank regulatory agencies have issued revisions to the Interagency Questions and Answers Regarding Flood Insurance that were most recently published on July 21, 2009. The guidance released on October 14 includes two new questions and answers. The first, Question and Answer 9, relates to insurable value. The second, Question and Answer 61, relates to force placement of flood insurance. Question and Answer 9 provides guidance on calculating the “insurable value” of a property for purposes of determining the required amount of flood insurance under the National Flood Insurance Program (“NFIP”). The guidance clarifies that the full insurable value of a building is the same as 100% replacement cost value (“RCV”) of the insured building. Lenders have a certain amount of flexibility in determining the RCV of a building. According to the guidance, a lender (either alone or in consultation with a flood insurance provider or other professional) may consider permissible methods, such as the RCV used in a hazard insurance policy (recognizing that replacement cost for flood insurance will include the foundation), an appraisal based on a cost-value (not market-value) approach before depreciation deductions, and/or a construction cost calculation. The guidance emphasizes that, when calculating the minimum amount of insurance that is required to be purchased, the insurable value is only relevant to the extent that it is lower than either the outstanding principal balance of the loan or the maximum amount of insurance available under the NFIP.
Nutter Notes: Question and Answer 61 provides guidance on how soon lenders have to force place flood insurance after the end of the 45-day notice period that must be observed before a lender may force place insurance. The regulations that implement the NFIP provide that the lender or its servicer must purchase insurance on the borrower’s behalf if the borrower fails to obtain flood insurance within 45 days after notification that such insurance is required. The final guidance does not establish a specific number of days after the end of the 45-day notice period as a “safe harbor” for completion of the force placement process. The agencies said that they expect the lender to have policies and procedures in place to allow force placement generally to commence when the 45-day notice period has expired. However, the guidance also recognizes that the process of force placing flood insurance may not always occur immediately on the 46th day and that a brief delay in force placing the required insurance is acceptable if the lender can provide a reasonable explanation for the delay. Finally, the agencies have withdrawn another question from the 2009 proposal regarding insurable value and have issued three additional proposed updates to questions and answers relating to force placement of flood insurance for public comment. Comments on the proposed questions and answers are due by December 1, 2011.
4. OCC Revises Examination Guidance on Electronic Funds Transfers
The OCC has issued a new booklet entitled Electronic Fund Transfer Act–Regulation E in the Comptroller’s Handbook that updates examination procedures and incorporates recent changes that the Federal Reserve has made to Regulation E regarding overdraft services, gift cards, and electronic signatures. The new examination guidance replaces the sections of the “Depository Services” booklet in the Comptroller’s Handbook that addressed Regulation E and the Electronic Fund Transfer Act. The overdraft services rule limits the ability of a financial institution to assess overdraft fees for paying automated teller machine and one-time debit card transactions that overdraw a consumer’s account unless the consumer affirmatively consents, or opts in, to the institution’s payment of overdrafts for those transactions. The rule also prohibits financial institutions from discriminating against consumers who do not opt in. The overdraft services rule requires institutions to provide consumers who do not opt in with the same account terms, conditions, and features (including pricing) that they provide to consumers who do opt in. The final overdraft rules became effective on July 1, 2010 for new account holders and on August 15, 2010 for existing account holders.
Nutter Notes: The gift card rule prohibits dormancy, inactivity, and service fees on gift cards unless the consumer has not used the gift certificate or card for at least one year, no more than one such fee is charged per month, and the consumer is given clear and conspicuous disclosures about the fees. In addition, the gift card rule prohibits the sale or issuance of gift certificates and cards if they are subject to an expiration date earlier than five years from the date of issuance, for gift certificates, or five years from the date on which the funds were last loaded to a store gift card or general-use prepaid card. The final gift card rule became effective on August 22, 2010. The new OCC examination guidance also addresses changes made to Regulation E that simplify and clarify requirements regarding e-communication and the relationship of the regulation to the Electronic Signatures in Global and National Commerce Act.
5. Other Developments: Reverse Mortgage Loans and Reserve Requirements
• Division of Banks Issues Final Regulations on Reverse Mortgage Loans
The Division of Banks on September 30 issued final regulations that clarify the opt-in and counselor certification requirements for reverse mortgage loans established by Chapter 258 of the Acts of 2010. The law prohibits a lender from making a reverse mortgage loan unless the mortgagor has affirmatively opted in and has received counseling from an approved counselor.
Nutter Notes: The final regulations, 209 C.M.R. Part 55.00, also establish the eligibility, procedures and disclosure requirements for a reverse mortgage program, which includes a mandatory form of opt-in disclosure document that the lender must obtain from each borrower. The regulations became effective on October 14.
• Federal Reserve Proposes Changes to Reserve Requirements
The Federal Reserve on October 11 issued proposed amendments to its Regulation D that are intended to simplify the administration of reserve requirements and reduce administrative and operational costs for both depository institutions and the Federal Reserve Banks. Comments on the proposed amendments are due by December 19, 2011.
Nutter Notes: The proposed amendments would, among other things, create a common 2-week maintenance period for all depository institutions, create a penalty-free band around reserve balance requirements in place of carryover and routine penalty waivers, discontinue as-of adjustments related to deposit revisions, and eliminate the contractual clearing balance program.
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. The 2009 Chambers and Partners review says that a “real strength of this practice is its strong partners and . . . excellent team work.” Clients praised Nutter banking lawyers as “practical, efficient and smart.” Visit the 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:
Kenneth F. Ehrlich
kehrlich@nutter.com
Tel: (617) 439-2989
Michael K. Krebs
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Tel: (617) 439-2288
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.
