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Nutter Bank Report, September 2011
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1. Massachusetts High Cost Home Loan Law Is Preempted By TILA, Court Rules
2. FDIC Adopts New Assessment Rate Adjustment Guidelines
3. Foreclosure-Related Eviction Blocked by Supreme Judicial Court
4. Department of Labor Reconsidering Proposed Fiduciary Rule
5. Other Developments: Electronic SARs and OCC Enforcement Policy
1. Massachusetts High Cost Home Loan Law Is Preempted By TILA, Court Rules
The U.S. Bankruptcy Court for the District of Massachusetts ruled that the Massachusetts Predatory Home Loan Practices Act, Chapter 183C of the General Laws of Massachusetts, is preempted by the high cost home loan provisions of the federal Truth in Lending Act (“TILA”) for federally chartered depository institutions. The July 27 ruling came in a case brought by Massachusetts residents who had jointly received a home mortgage loan from a national bank. The borrowers claimed that the bank failed to obtain certification that the borrowers had received counseling on the advisability of the loan as required by Chapter 183C. Failure to obtain the counseling certification for a high cost home mortgage renders the loan unenforceable under Chapter 183C. The joint borrowers claimed that their loan qualified as a high cost home mortgage loan, and was therefore subject to Chapter 183C, because the total points and fees associated with the loan totaled 6.6% of the total loan amount, which would exceed the 5% threshold established by Chapter 183C. The bank argued that TILA establishes an 8% threshold for high cost home loans, and that TILA preempts Chapter 183C. The court, relying on a 2003 OCC preemption determination, held that Chapter 183C defines high cost home loans in a manner inconsistent with the thresholds established by TILA and is preempted for federally chartered institutions.
Nutter Notes: The court determined that Chapter 183C was preempted by TILA only with respect to federally chartered institutions. The Federal Reserve issued an order in 1982 providing that consumer credit transactions that are subject to the Massachusetts consumer credit cost disclosure statute, Chapter 140D of the General Laws of Massachusetts, are exempt from chapters 2 and 4 of TILA, which includes the general disclosure requirements and special provisions for certain high cost home loans. However, the Federal Reserve’s 1982 order also provided that the exemption does not apply where the lender is a federally chartered institution. Notably, the court’s decision did not address the preemption provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act codified the legal standard for preemption set forth in a landmark 1996 U.S. Supreme Court decision and applies that standard to both national banks and federal savings associations. The OCC issued final rules implementing the preemption provisions of the Dodd-Frank Act in July.
2. FDIC Adopts New Assessment Rate Adjustment Guidelines
The FDIC has issued new guidelines describing the process that it will follow to determine whether to make an adjustment to the score used to calculate the deposit insurance assessment rate for a large or highly complex institution, to determine the size of any adjustment, and to notify an institution of an adjustment. The assessment rate adjustment guidelines adopted on September 13 apply only to depository institutions with $10 billion or more in assets. Under the new guidelines, two types of information will be most significant in determining whether to make an adjustment. The first is information indicating that a scorecard factor is too high or too low. The second is information not directly captured in the scorecard, including complementary quantitative risk measures and qualitative risk considerations. The FDIC said that it will consult with an institution’s primary federal regulator and state banking supervisor, if applicable, before making or removing an adjustment, and that institutions will have an opportunity to respond before a score is increased or a decrease is removed. The FDIC said that it will focus on identifying institutions for which a combination of risk measures and other information suggests either materially higher or lower risk than their total scores indicate.
Nutter Notes: The FDIC established a new methodology for calculating deposit insurance assessment rates for highly complex and other large insured institutions in a final rule adopted on February 7, 2011. The new methodology combines CAMELS ratings and financial measures to produce a score that is converted into an institution’s assessment rate. The rule allows the FDIC to adjust an institution’s total score by 15 points, up or down. The FDIC began using the new methodology for quarters beginning on or after April 1, 2011. According to the new guidelines, an institution subject to the new methodology may request that the FDIC adjust its assessment rate by submitting a written request supported by evidence of a material risk or risk-mitigating factor that is not adequately accounted for in the institution’s scorecard. The guidelines also provide examples of circumstances that might give rise to an adjustment. Any request for an adjustment should be delivered to the FDIC no later than 35 days after the end of the quarter for which the adjustment is requested. Requests received after the deadline may not be considered until the following quarter.
3. Foreclosure-Related Eviction Blocked by Supreme Judicial Court
The Massachusetts Supreme Judicial Court has ruled that a 2010 Massachusetts law that prevents eviction without just cause is applicable to no-cause summary process cases that were already pending when the law went into effect. The September 6 decision came in a case brought by a foreclosing owner to evict a residential tenant. The eviction notice did not state any cause and the owner conceded that it did not have just cause for the eviction. After the tenant refused to move out, the owner filed a summary process complaint to obtain possession of the premises. The summary process complaint was filed before Chapter 186A of the General Laws of Massachusetts, established by Chapter 258 of the Acts of 2010, became effective on August 7, 2010. Chapter 186A provides certain protections to tenants of foreclosed properties and prohibits institutional lenders and certain financial institutions that own foreclosed properties from evicting a tenant without just cause. There is an exception in the statute for eviction after a foreclosing owner has entered into a binding agreement to sell the property to a bona fide third party. The court ruled that the provision of Chapter 186A that prevents eviction without just cause applies to protect all residential tenants on foreclosed properties who, on or after August 7, 2010, had yet to vacate or be removed from the premises by an eviction.
Nutter Notes: The Supreme Judicial Court ruled that the tenant protections under Chapter 186A apply to pending summary process claims even where the owner foreclosed on the property before the act’s effective date and initiated a summary process action before that date. The court rejected an argument that application of the statute to owners that had foreclosed before the act’s effective date would be an improper retroactive application of the law. The court noted that the statute’s impact on the fair market value of a property in foreclosure would be modest because the foreclosing owner may evict a tenant without just cause once a binding agreement for the sale of the house or apartment has been executed. The court likened the burden to a new property tax, zoning regulation, or other statute that merely upsets the reasonable expectations of the acquirer of the property. In addition to the provisions prohibiting eviction without just cause, Chapter 186A requires that tenants in foreclosed residential properties be informed of the name, address, and telephone number of the foreclosing owner and the building manager, and the address to which rent should be sent, no later than 30 days after the foreclosure. The notice must be provided in 3 ways: by posting in a prominent location in the building, by first class mail to each unit, and by sliding the information under the door of each unit. A foreclosing owner may not evict a tenant, even for just cause, until the notice is posted and delivered, or until 30 days after the posting and delivery of the notice, depending on the nature of the eviction.
4. Department of Labor Reconsidering Proposed Fiduciary Rule
The U.S. Department of Labor will re-propose its rule that defines when a person providing investment advice becomes a fiduciary under the Employee Retirement Income Security Act (“ERISA”). According to the Department of Labor, the decision to re-propose the regulation, announced on September 19, was made in part in response to requests from the public and members of Congress for the agency to provide more opportunity for comments on the revised rule. The agency announced that the revisions to the proposed rule would clarify that the concept of fiduciary advice is limited to advice directed to specific individuals, which responds to concerns about the potential application of the rule to routine appraisals of assets. The revisions are also expected to clarify the limits of the rule’s application to arm’s length transactions, such as swap transactions, between a benefit plan and a third party. In addition, the agency said it expects to revise the proposed rule to provide exemptions that address concerns about the impact of the new rule on the current fee practices of brokers and advisers, and to clarify the continued applicability of existing exemptions that allow brokers to receive commissions in connection with purchases and sales of mutual funds, stocks and insurance products.
Nutter Notes: The Department of Labor announced a proposal on October 21, 2010 to more broadly define the term “fiduciary” for ERISA purposes. The proposed definition sparked concerns among financial professionals that it was too broad, would subject many individuals to fiduciary duties who were not intended to be ERISA fiduciaries, and cause a reduction in services for benefit-plan participants and IRA investors, among others. ERISA requires employee benefit plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries, prohibits self-dealing, and provides for remedies if the fiduciary standards are violated. ERISA defines a fiduciary to include any person who gives investment advice for a fee or other compensation with respect to any money or other property of an employee benefit plan that is subject to ERISA, or has any authority or responsibility to do so. The Department of Labor’s current rule, issued in 1975, uses a 5-part test for the term “investment advice” to determine when a person can be held to ERISA’s fiduciary standards with respect to advice the person provides. The new proposed rule is expected to be issued in early 2012.
5. Other Developments: Electronic SARs and OCC Enforcement Policy
• FinCEN Requests Comments on Mandatory Electronic Filing of BSA Reports
On September 14, the Financial Crimes Enforcement Network issued a proposal to require Bank Secrecy Act (“BSA”) reports, including Suspicious Activity Reports (“SARs”) and Currency Transaction Reports (“CTRs”), to be filed electronically starting on June 30, 2012. Comments on the proposal are due by November 15.
Nutter Notes: Electronic filing of BSA reports is currently optional, and is available through a free, web-based electronic filing system. The technical specifications for electronic CTRs and SARS were recently made available to assist programmers to prepare their systems to perform large-batch filings of the reports electronically.
• OCC’s Enforcement Policy Extended to Federal Savings Associations
The OCC has revised the scope of its enforcement policy under its Policies & Procedures Manual for taking action in response to violations of law, rules, regulations, final agency orders and unsafe and unsound practices or conditions to include federal savings associations. The OCC said that the revised enforcement will provide consistent enforcement standards for national banks and federal savings associations.
Nutter Notes: The revised enforcement policy was adopted on September 9 pursuant to the OCC’s authority under section 316 of Dodd–Frank Act. The new policy supersedes OTS Examination Handbook Section 080, Enforcement Actions, and any OTS policies and guidance that relate to issues addressed by that section of the OTS Examination Handbook.
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:
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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.
