Iowa Banking Law Blog

Fed Approves Energy Managment and Tolling

The Royal Bank of Scotland submitted an application with the Board of Governors to engage in physical commodity trading, energy management services, and energy tolling.  The Board stated that it had previously found physical commodity trading and energy management services to be complementary to the financial activity of engaging in commodity derivatives transactions and investment advisory services.  The Board had not considered energy tolling before.  it found that energy tolling is an outgrowth of the financial activity of commodity derivatives transactions and allows the Financial Holding Company to hedge its energy positions and those of its clients.  The vague "complementary to a financial activity" standard has seemingly been interpreted broadly; it will be interesting to see where the lines will be drawn.      

Federal Reserve Pronouncement on Confidentiality Agreement Provisions

In a recent Supervisory Letter, the Federal Reserve Board clarified its expectations concerning confidentiality agreements between a banking organization and its counterparties and other third parties.  The Fed stated that applicable regulations and policies prohibit provisions in confidentiality agreements that would in any way restrict a banking organization from providing Fed supervisory staff with information, require or permit, without prior Fed approval, disclosure to a counterparty or third party that information will be or was provided to the Fed or that would require or permit, without prior Fed approval, a banking organization to inform a counterparty or third party of a current or upcoming Fed examination or other nonpulic supervisory initiative or action.

In light of the Fed's position, consideration should be given to including in confidentiality agreements provisions that expressly allow a banking organization to provide supervisory staff access to the agreement and related information provided by a counterparty or third party and expressly relieve the banking organization of any obligation to inform the other party when the banking organization is asked to or has furnished such information to supervisory staff.

A copy of the Fed's letter is available at http://www.federalreserve.gov/boarddocs/srletters/2007/SR0179.htm.

Federal Reserve Releases New Fee Schedules

Effective January 2, 2008, the Federal Reserve will apply new fee schedules for depository institutions’ payment services.  The price level for priced services will generally increase about 3 percent under the new fee schedules.  Check service fees increased approximately 5 percent while electronic payment services decreased about 8 percent.  Fees for Check 21 deposits decreased by about 3 percent while fees for paper check deposits increased by about 12 percent.

Please see http://www.frbservices.org/FeeSchedules/index.html for more information on the updated fee schedules.

Federal Reserve Announces Consumer Help Website

On the heels of the OCC's helpwithmybank.gov website, the Federal Reserve has started a consumer help website.  www.federalreserveconsumerhelp.gov answers common consumers questions and allows consumers to submit complaints electronically.  For the Federal Reserve's release click here.

AMENDMENTS TO REGULATIONS ISSUED

In response to a request for comment issued in April, the Federal Reserve recently announced amendments to Regulations B, E, M, Z, and DD.  Regulation B implements the Equal Credit Opportunity Act, Regulation E implements the Electronic Fund Transfer Act, Regulation M implements the Consumer Leasing Act, Regulation Z implements the Truth in Lending Act, and Regulation DD implements the Truth in Savings Act.  The amendments for each of these regulations would withdraw certain unnecessary portions of the March 2001 interim final rules that restate the E-Sign Act and impose burdens on e-banking that are unnecessary for consumer protection.  The new amendments also adopt provisions that would guide the use of electronic disclosures.

A copy of the Federal Reserve press release can be found here. 

November Chicago Fed Letters

The Federal Reserve Bank of Chicago has released two Chicago Fed letters.

The Mixing of Banking and Commerce: a conference summary discusses ILC's and the debate over the separation between banking and commerce. 

The Role of Securitization in Mortgage Lending discusses (and defines) MBS's, CDOs, SIVs and the process by which mortgage loans are sold to investors. 

Reform of Financial Services Regulation, Long Rumored, Now Questioned

The U.S. Treasury today has begun the long anticipated review of the regulation of financial services in the United States. The U.S. Treasury will be seeking comment and pose a series of questions to determine whether the current system of regulation is working. The agency apparently intends to conduct an in depth inquiry as to whether the federal oversight can be streamlined with the obvious implication that the number of regulatory agencies needs to be reduced. For example, should the Office of Thrift Supervision and the Office of the Comptroller of Currency be combined? What role should the Federal Reserve have in the bank regulation? Should the FDIC serve as both insurer and regulator? No industry is immune from revisiting its regulation. Banking, insurance, securities and commodities are all at issue. These questions should ignite a spirited and vested debate.  A monumental proposal for a changing of the guard may be on the horizon.

The formal notice and request for public comment from the Department of Treasury is available here: Review by the Treasury Department of the Regulatory Structure Associated with Financial Institutions.

When Federal and State Law Collide in Garnishment Procedures

The Agencies have issued a proposed guidance concerning garnishment orders received by financial institutions.

Generally, federal law protects certain federal benefits – such as Social Security, Supplemental Security income, Veterans’ benefits, Federal Civil Service retirement benefits, and Federal Railroad retirement benefits – from inclusion in garnishment orders.  Unfortunately, however, when garnishment orders are sought in state court by creditors and debt collectors, either some orders may not provide that certain funds are exempt from garnishment due to federal law or the customer’s account is a commingled mixture of exempt and non-exempt funds.  Financial institutions, in an effort to comply with the state court order, typically put a freeze on the account until the issue can be resolved but because these exempt federal benefits are sometimes the only source of income for individuals, even a temporary freeze on the account can wreak havoc on an individual’s financial security. 

The proposed guidance is intended to solicit comments regarding how to comply with both federal and state laws.  The proposed guidance also proposes best practices, such as promptly notifying the customer of a garnishment order, determining whether accounts contain only exempt funds, notifying the creditor that the account may contain exempt funds, minimizing the cost to the customer by refraining from charging certain fees, and lifting the freeze as soon as permissible.

Comments can be made via the Federal Reserve’s website or by email, fax, or snail mail.

For further information contact Mary Zambreno.

Regulators Issue Statement on Avoiding Losses Associated with Securitized Mortgages

The federal banking regulators (the FDIC, Federal Reserve, OCC, OTS, and NCUA), along with the Conference of State Bank Supervisors (CSBS) issued a statement encouraging regulated institutions that service mortgage loans to employ certain "loss mitigation techniques" that would preserve homeownership.  The statement is a follow-up to the April 2007 Statement on Working with Mortgage Borrowers and the July 2007 Statement on Subprime Mortgage Lending.  Unlike these previous statements, which urged prudent workout arrangements, the new statement is focused on mortgage loans that have been transferred into securitization trusts. 

The regulators state that when faced with an increased risk of default, servicers of loans should: contact the borrower and assess their ability to repay, assess whether default is reasonably foreseeable, and explore, where appropriate, a loss mitigation strategy that avoids foreclosure, such as loan modifications, payment deferral, conversion into fixed rate, and capitalization of delinquent amounts.

In considering loss mitigation techniques, the statement urges services to consider the borrower's income, debt, and housing related expenses.  Servicers are also urged to refer borrowers to government programs, non-profits, and counseling services that could assist the borrower.  The statement claims that "loss mitigation techniques" that preserve homeownership are less costly than foreclosure. 

This guidance was issued as political pressure to address the mortgage industry mounts.  Presidential candidates have increasingly integrated mortgage and foreclosure issues into their agendas.  President Bush threw his hat in the ring last week by announcing that his administration would put forth proposals to prevent some expected defaults over the next two years.

Unfortunately, this regulatory statement may not stem the congressional tide to over-regulate the industry.

Federal Reserve Creates Exception to Regulation E

Effective August 6, 2007, financial institutions are no longer required to make a receipt available for electronic fund transfers of $15 or less. 

Previously, under Regulation E, the Electronic Fund Transfer Act required financial institutions to make receipts available for all electronic fund transfers at electronic terminals, regardless of how nominal the transaction.  The Board of Governors of the Federal Reserve System (“Board”) noted in its notice of proposed rulemaking, issued on December 1, 2006, that such a requirement may be impractical for small-dollar environments, such as vending machines or mass transit systems that accept debit cards for payment.  The costs associated with installing and servicing equipment to generate receipts at these terminals for these types of transactions would have been burdensome.  The Board additionally noted that consumers are less likely to retain receipts for small-dollar transactions, and consumers would still be able to contest errors with their financial institutions upon receipt of their periodic statements.

In carving out this exception to the Electronic Fund Transfer Act, the Board reviewed approximately 56 comment letters from financial institutions, consumer groups, and individuals.  Generally, the financial institutions actually desired the Board to increase the dollar threshold from $15 to $25 to be more consistent with current rules regarding waiving of personal identification numbers and signature authorization for certain merchants, while consumer group advocates desired the Board to decrease the dollar threshold to $5 in order to protect consumers who may have to challenge their financial institutions about these transactions and are unable to produce a receipt as proof.  Ultimately, the Board determined that the $15 threshold amount was a good balance between the needs of the industry and of consumers.

The full text of the final rule and official staff interpretation can be found here:  http://www.ots.treas.gov/docs/8/86393.pdf.

For more information contact Mary A. Zambreno of Dickinson, Mackaman, Tyler & Hagen, P.C.

Agencies Issue Proposed Illustrations on Subprime Mortage Lending

          The federal agencies this week issued proposed illustrations contemplated by last month's jointly issued Statement on Subprime Mortgage Lending (Subprime Statement).  Triggered by the agencies' concerns over subprime mortgage lending practices for certain adjustable-rate mortgage (ARM) products, the illustrations aim to improve communications between lenders and consumers by providing examples of the types of communications anticipated by July's Subprime Statement. 

          The Subprime Statement encourages lenders to provide consumers clear, balanced, and timely information to help consumers more effectively weigh the costs and benefits of certain ARM products.  The illustrations both:

• explain some important features and hazards identified in the Subprime Statement (such as payment shock), and
• provide a chart of potential implications of payment shock in a specific, easy-to-understand fashion.

          Use of the illustrations is completely voluntary.  Institutions are free to tailor the illustrations to reflect their product offerings, current market conditions, and a consumer's particular loan requirements.  Whether institutions choose to use the illustrations or not, they should review their statements to consumers regarding subprime lending to ensure that they are clear, balanced, and full explain the terms and risks of such loans.

         The agencies seek public comment on the proposed illustrations.  Comments are due 60 days from the Federal Register publication.  The proposed illustrations are available here on the OTS website.

          For more information on ensuring that your institution is making the necessary disclosures, contact Megan Erickson of Dickinson, Mackaman, Tyler & Hagen, P.C. at 515-244-2600. 

OTS Issues Notice of Proposed Rulemaking on Unfair and Deceptive Practices

On August 3, 2007, the Office of Thrift Supervision (OTS) issued an Advance Notice of Proposed Rulemaking seeking comments not only about defining unfair and deceptive practices but also about whether the OTS should expand current prohibitions against unfair or deceptive acts.  The OTS seeks comment on various issues, including:

• Should the OTS consider further rulemaking on unfair and deceptive practices that would cover products and services in addition to consumer credit? 
• Should the rulemaking cover non-savings institution entities that are related to a savings institution? 
• What principles should OTS consider in defining an act or pratice as unfair and deceptive? 
• Is the FTC guidance on unfair and deceptive practices appropriate for the OTS?
• Should the OTS expand its advertising regulation?

The OTS's proposal does not commit the agency to any particular course of action, if merely seeks comment on the most effective course of action.  Nonetheless, it is a strong indication that the OTS intends to strengthen its unfair and deceptive practices regualtions.  Many analysts think that, at the very least, any OTS rule or guideline will address issues related to unfair mortgages due to the increasing delinquency and foreclosure rates on home loans.

As a bit of background, the Federal Trade Commission Act shields depository institutions from FTC enforcement, leaving unfair and deceptive practices to the Federal Reserve, OTS, and NCUA to deal with.  In June, Rep. Barney Frank threatened the Federal Reserve, stating that if it does not use its rulemaking authority to address unfair and deceptive pratices, and subprime lending specifically, then Congress may take away the Federal Reserve's rulemaking authority on the issue and give it back to the FTC. 

By taking this step, the OTS has put further pressure on the Federal Reserve to take action.  To date, the Federal Reserve has expressed a preference for using its supervisory authority on a case-by-case basis, as opposed to writing proscriptive regulations.  (link to article on Federal Reserve Governor Kroszner's statements in House hearing). 

The full text of the proposed rulemaking can be found here:  http://www.ots.treas.gov/docs/7/73373.pdf

For further information contact Mary A. Zambreno and Jeffrey J. Andersen of Dickinson, Mackaman, Tyler & Hagen, P.C.

Federal Reserve Issues Proposed Amendments to Regulation Z (Truth in Lending)

The proposed revisions apply only to open-end credit and would change the format, timing, and content requirements of: 1) credit card applications and solicitation disclosures, 2) account-opening disclosures, 3) periodic statement disclosures, 4) change in term notices, and 5) advertising provisions.  You can view a summary of the proposed changes and a section-by-section analysis at the Federal Reserve website, here.  Comments are being accepted until June 29, 2007 and can be submitted here.

Is Your Bank in Compliance with the National Flood Insurance Act?

On May 16, 2007 the Federal Reserve Board assessed a civil monetary penalty against Orrstown Bank of Shippensburg, Pennsylvania for violating the National Flood Insurance Act, 42 U.S.C. §4012a(f).  Link.  The bank was fined $385 for each violation, for a total of $1,665.  The banking community should be on notice that federal bank examiners are looking for National Flood Insurance Act violations and that the Federal Reserve will assess civil penalties for violations. 

The National Flood Insurance Act basically states that a lender subject to federal regulation cannot make or extend any loan secured by either real estate or a mobile home located in an area identified as having special flood hazards and in which flood insurance is available unless the principal balance of the loan is covered by flood insurance for the term of the loan.  If the relevant area is identified as having special flood hazards after origination of the loan the lender must give the borrower notice that he or she should obtain flood insurance.  If the borrower fails to do so within 45 days, the lender is required to purchase flood insurance and may charge the borrower for the cost of the premium.  The Act also has provisions regarding escrow of flood insurance payments and the placement of flood insurance by the lender. For the complete text of the relevant statute see 42 U.S.C. 4012a.   

UPDATE:  Since this was originally posted, the Federal Reserve has assessed civil penalties against East West Bank (Link), and First Sentinel Bank (Link) for violations of the National Flood Insurance Act.

For further information contact Jeffrey J. Andersen.