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Nutter Bank Report, September 2010
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1. Small Business Lending Fund Established
2. Basel III Capital Requirements Announced
3. Transaction Account Rule Proposed by FDIC
4. FDIC Issues Guidance on Privacy Notices
5. Other Developments: Overdraft Protection and SAFE Act Registration
1. Small Business Lending Fund Established
The President on September 27 signed into law the Small Business Jobs and Credit Act of 2010 (Act), which establishes the Small Business Lending Fund (Fund), a $30 billion fund intended to promote small business lending. Under the Program, Treasury is authorized to purchase preferred stock, debt instruments and certain other obligations issued by eligible depository institutions and depository institution holding companies with less than $10 billion in assets. Capital invested by Treasury is intended to result in an increase in small business lending. The initial dividend or interest rate will be 5%. The coupon rate may decline within the first 2 years to as low as 1% as the invested capital is deployed in small business loans and as the institution’s small business lending increases relative to pre-investment levels. The coupon rate will increase to 7% after 2 years if the institution has not increased its small business lending, and to 9% after 4½ years in any case. The invested capital must generally be repaid within 10 years. The Act also extends a Small Business Administration (SBA) recovery loan program for small businesses, increases the maximum loan size for SBA 7(a) and 504 loans from $2 million to $5 million and the maximum loan size for SBA 504 manufacturing related loans from $4 million to $5.5 million, and temporarily increases the maximum loan size for the SBA Express loan program. The Act also supports at least $15 billion in small business lending through a new State Small Business Credit Initiative and provides or extends eight small business tax cuts.
Nutter Notes: Tier 1 capital treatment for investments under the Fund is likely but not certain. Although Treasury is authorized under the Act to make “capital investments” in eligible institutions by purchasing preferred stock and “other financial instruments” under the Program, the Act does not expressly provide that the preferred stock and “other financial instruments” will be treated as Tier 1 capital. However, there were colloquies on the House and Senate floors during debate of the Act in which the authors of the Act exchanged comments in an attempt to make clear that they intend that Treasury’s investments in participating institutions under the program be treated as Tier 1 capital. An eligible institution with total assets equal to or less than $1 billion may apply for a capital investment in an amount not exceeding 5% of risk-weighted assets, less the amount of any Capital Purchase Program and Community Development Capital Initiative investments. An eligible institution with total assets of more than $1 billion but equal to or less than $10 billion may apply for a capital investment in an amount not exceeding 3% of risk-weighted assets, less the amount of any Capital Purchase Program and Community Development Capital Initiative investments. The Act provides that only the “top-tier” holding company is eligible to participate if there is a mid-tier holding company or multiple levels of holding companies. Credit unions are not eligible to participate in the Program. Please see the Special Edition of the Nutter Bank Report for a more detailed summary of the Act.
2. Basel III Capital Requirements Announced
The oversight body of the Basel Committee on Banking Supervision (Basel Committee) — the Group of Governors and Heads of Supervision — on September 12 announced the minimum capital ratios and transition periods that will apply under the new Basel III capital adequacy framework that was proposed in December 2009 and approved by the Basel Committee, with several modifications, in July 2010. Basel III calls for national jurisdictions to begin phasing in the new capital standards beginning January 1, 2013, and the U.S. federal banking agencies have issued public statements in support of the Basel III capital standards. Basel III increases the minimum requirement for the common equity component of Tier 1 capital from 2% of risk-weighted assets (RWA), which is measured before the application of capital deductions under the current framework, to 4.5% of RWA measured after the application of stricter capital deductions required under the Basel III framework. In addition, banks subject to the new standards will be required to hold a “capital conservation buffer” of 2.5% to withstand future periods of stress, bringing the total common equity requirement to 7%. Basel III increases the minimum Tier 1 capital requirement from 4% of RWA to 6% RWA. The minimum requirement for total capital under Basel III remains unchanged at 8% of RWA.
Nutter Notes: Member countries, including the United States, must translate the Basel III capital standards into national laws and regulations so that the minimum common equity and Tier 1 capital requirements will be phased in from January 1, 2013 to January 1, 2015. The capital conservation buffer requirement will be phased in beginning on January 1, 2016 and become fully effective on January 1, 2019. Certain elements of Basel III are in conflict with current U.S. banking laws and regulations, including some provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Perhaps the most important difference is that Basel III’s narrower definition of Tier 1 capital, which includes common equity and other qualifying financial instruments based on stricter criteria than the definition of Tier 1 capital under current U.S. capital adequacy guidelines, would entirely exclude trust preferred securities. In contrast, Dodd-Frank grandfathered existing trust preferred securities at banking companies with less than $15 billion in assets, and at mutual holding companies. Dodd-Frank also exempts from its capital requirements bank holding companies subject to the Federal Reserve’s Small Bank Holding Company Policy Statement. The Basel III framework calls for certain capital instruments that would no longer qualify as Tier 1 capital (such as trust preferred securities) to be phased out over a 10-year period beginning in January 2013. Many of the details of the Basel III capital framework have yet to be determined, and Basel III will not be formally approved until the G20 Leaders summit in Seoul in November.
3. Transaction Account Rule Proposed by FDIC
The FDIC has proposed a rule to implement provisions of the Dodd-Frank Act to provide depositors at all FDIC-insured institutions temporary, unlimited deposit insurance coverage on noninterest-bearing transaction accounts from December 31, 2010 through December 31, 2012. Under the proposal approved on September 27, the FDIC will create a new, temporary deposit insurance category for noninterest-bearing transaction accounts. The proposed temporary unlimited coverage for noninterest-bearing transaction accounts under the Dodd-Frank Act is similar to the protection for certain transaction accounts under the FDIC’s voluntary Transaction Account Guarantee (TAG) Program, but differs from the TAG Program in three significant ways. First, unlike the TAG program, the Dodd-Frank Act provisions apply coverage to all insured depository institutions. Institutions will not be required to opt-in to obtain coverage provided under the proposed rule. Second, there is no separate FDIC assessment or premium for the insurance of noninterest-bearing transaction accounts under the proposed rule. Third, the proposed rule covers only traditional noninterest-bearing deposits or checking accounts. The Dodd-Frank Act provisions do not include low interest consumer checking accounts (i.e., NOW accounts) or interest on lawyer trust accounts (IOLTAs), which are currently covered under the TAG Program. The FDIC will be accepting comments on the proposed rule through October 15, 2010.
Nutter Notes: The TAG Program will expire at the end of 2010. Starting on January 1, 2011, low-interest consumer checking accounts and IOLTAs will no longer be eligible for the unlimited guarantee. The proposed rule requires insured depository institutions to provide notice and disclosures to ensure that depositors are aware of and understand the types of accounts that will be covered by this temporary deposit insurance coverage. The disclosure requirements in the proposed rule are designed to emphasize the differences in coverage between the current TAG Program and the coverage provided by the Dodd-Frank Act provisions. To comply with the disclosure and notification requirements, each FDIC-insured depository institution must post a notice in its main office, each branch office and, if applicable, on its website. That posting will explain the Dodd-Frank unlimited 2-year coverage for noninterest-bearing transaction accounts and indicate the types of accounts eligible for that coverage. Depository institutions currently participating in the FDIC’s TAG Program must notify customers currently covered by the TAG Program that, beginning January 1, 2011, low-interest checking accounts and IOLTAs no longer will be eligible for the unlimited guarantee. Finally, depository institutions must notify customers individually of any action they take that will affect the deposit insurance coverage of funds held in noninterest-bearing transaction accounts.
4. FDIC Issues Guidance on Privacy Notices
The FDIC has issued guidelines for compliance by depository institutions with the privacy notice provisions of the Gramm-Leach-Bliley (GLB) Act. The Small Entity Compliance Guide for the Model Privacy Notice Form released on September 27 (FIL-60-2010) provides instructions to help smaller institutions take advantage of the safe harbor under Part 332 of the FDIC's rules. The FDIC issued amendments to Part 332, which implements the privacy provisions of the GLB Act, on December 1, 2009 and adopted a new model privacy notice form. Part 332 requires state nonmember banks to notify consumers of their information-sharing practices and inform consumers of the right to opt out of certain sharing practices. Use of the model privacy notice form is voluntary. However, a state nonmember bank that chooses to provide the model form to consumers in a manner consistent with the form’s instructions will be deemed to be in compliance with the disclosure requirements for privacy notices under the GLB Act and Part 332.
Nutter Notes: Currently, the Appendix to Part 332 of the FDIC's Rules contains language (sample clauses) that state nonmember banks may use in their privacy notices and be considered in compliance with the privacy provisions of the GLB Act. These sample clauses and the associated compliance safe harbor will be eliminated from Part 332 following a transition period. Use of the sample clauses will continue to provide a safe harbor only until December 31, 2010. As a result, financial institutions will not be able to rely on the safe harbor for the sample clauses incorporated into notices delivered to consumers on or after January 1, 2011. The sample clauses will be removed entirely from Part 332 on January 1, 2012. To rely on the compliance safe harbor after December 31, 2010, state nonmember banks should use the new model privacy notice form, which became effective on December 31, 2009. An online model privacy notice form builder is available at http://www.federalreserve.gov/bankinforeg/privacy_notice_instructions.pdf. State nonmember banks may download and complete the form builder to create a customized privacy notice.
5. Other Developments: Overdraft Protection and SAFE Act Registration
- OTS Issues Guidance on Compliance with Overdraft Protection Rules
The OTS issued a memorandum to chief executive officers on September 14 describing revisions to its procedures for examining thrift institutions for compliance with Regulation DD, which implements the Truth in Savings Act. The revisions update the OTS’s examination procedures to encompass recent amendments to Reg. DD that address overdraft protection disclosure practices, including balances disclosed to consumers through automated systems.
Nutter Notes: The amendments to Reg. DD include a requirement that depository institutions use the term “Total Overdraft Fees” on periodic statements provided to consumers effective October 1, 2010. The amendments also require that periodic statements include the aggregate fee disclosure for overdraft services, if applicable, regardless of whether the institution promotes the payment of overdrafts.
- NMLS Not Ready for Registration of Loan Originators
Earlier this year, the federal banking agencies issued jointly developed final rules that require mortgage loan originators to register with the Nationwide Mortgage and Licensing System and Registry (NMLS) as required by the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act). The SAFE ACT final rules become effective on October 1, but the NMLS will not be available for federal registrations until January 2011, at the earliest.
Nutter Notes: The registration requirement will not become effective until the NMLS has been modified to accept registrations from agency-regulated institutions and their employees. The federal banking agencies will make an advance public announcement of the date when the NMLS will begin accepting federal registrations, and these institutions and their mortgage loan originators will then have 180 days to comply with the initial registration requirements.
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
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