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Loan Originator Compensation Rule Delayed
The United States Court of Appeals for the District of Columbia has stayed the implementation of certain amendments to Reg. Z outlining compensation rules for mortgage loan originators. The final rule was supposed to go into effect today, April 1, 2011. The final rule prohibits payments to mortgage loan originators (including brokers and loan officers) based on the terms or conditions of the loan other than the amount of the loan.
The Court of Appeals is taking expedited action and is expected to schedule a hearing and make a ruling in short order.
APRIL 5 UPDATE: The Court of Appeals ruled that the National Association of Mortgage Brokers and National Association of Independent Housing Professionals had not “satisfied the stringent standards required for a stay pending appeal,” and dissolved its administrative stay of the rule. The new loan originator compensation rules go into effect immediately. We do note that while the Court of Appeals lifted the stay, the case brought by the NAMB and NAIHP will continue through the appellate process.
Judge Declares Missouri Law Unconstitutional
Stinson Filed Suit Challenging Law on behalf of Missouri Bank
Cole County Circuit Judge Daniel R. Green ruled today that a Missouri campaign finance law is unconstitutional. Stinson Morrison Hecker LLP attorneys Chuck Hatfield and Khris Heisinger filed a lawsuit Dec. 6, 2010 on behalf of Legends Bank and its president, John Klebba, who is also chairman of the Missouri Bankers Association, to block Missouri Senate Bill 844. The suit claimed the law was invalid based on violation of the State’s Constitution requirement requiring that a piece of legislation contain only one subject (known as Hammerschmidt challenges) as well as violations of free speech and free association.
In the ruling, Judge Green said the bill “contains matters that do not fairly relate to ethics, have a natural connection to ethics or are a means to accomplish the law’s purpose as enacted.” Judge Green also struck the provision preventing state-chartered banks from contributing to political action committees, which he said violated banks’ First Amendment rights. The enforcement of all provisions except those dealing with purchasing, the original purpose of the bill, were also halted.
Stinson’s lawsuit sought to invalidate the law based on a “Hammerschmidt” challenge. The state constitution prohibits bills from containing multiple subjects and from departing too far from the original purpose of the bill. Those constitutional provisions are designed to ensure that changes to the law are thoroughly debated and to prevent “logrolling” where popular provisions of law are grouped together with unpopular provisions limiting the options of law makers to vote on each one separately. SB 844 started out in the General Assembly as a one page procurement bill that allowed elected officials to seek advice on the purchasing of services. At its passage, it had ballooned to 69 pages and now contained the procurement provisions, revisions to campaign finance law, a provision governing who has access to the Capitol dome, provisions regulating lobbyists and other sections relating to investigations by the Ethics Commission.
“The law prevented banks from participating in the political process, and it placed an unreasonable restriction on speech and freedom of association,” said Hatfield, who serves as chair of Stinson’s Government Solutions Practice and as the managing partner for the firm’s Jefferson City, Mo., office. “Judge Green’s ruling was spot on and acknowledged that the legislature must follow Constitutional requirements when enacting legislation.”
It’s unclear what the immediate impact of this decision will be. However, we encourage our clients to remain cautious because we anticipate that this case will end up in the Missouri Supreme Court.
If you have questions regarding the implications of this ruling, please contact a member of Stinson Morrison Hecker’s Government Solutions Group.
Condominium-Unit Financing
Special Thanks to Hal Tzinberg in our Real Estate Group for preparing the following article, which we at BankinBits think will be useful information for your bank. Give us a call if you would like more information about new rules and requirements of condo financing.
Since the mortgage meltdown and being confronted with numerous loans on units in partially completed condominiums, the United States Department of Housing and Urban Development, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (the “Agencies”) adopted new rules which have had the practical effect of requiring many existing condominiums to amend their Declarations and By-Laws, so their unit owners and prospective unit purchasers can refinance or procure financing to purchase their units. Some of the changes include the following:
- At least 10% of the Condominium Association’s annual budget must be allocated to funding replacement reserves for capital expenditures and deferred maintenance, and the budget must provide funding for any deductible payable under the Association’s property and liability insurance policies.
- Eligible First Mortgage Lenders (“Lenders”) must be given notice of, and at least 51% of the Lenders holding mortgages on units in the condominium must approve, any “Material Amendment” to the Condominium Declaration or Plat or the By-Laws of the Condominium Association, and the approval of Lenders holding mortgages encumbering units to which at least 67% of the allocated interests are assigned is required for certain other actions. The Declaration must incorporate the Agencies’ insurance guidelines.
- Although rights of first refusal are permitted, provided they do not violate the Fair Housing Act, the Declaration must exempt Lenders from any requirement to first offer to the Association units they acquire in the exercise of their remedies. Further, any Lender who obtains title to a condominium unit through foreclosure will not be liable for more than 6 months of the unit’s unpaid regularly budgeted dues or charges incurred before acquisition.
In addition to documentary compliance, the following are conditions precedent to the Agencies’ approval of a condominium project:
- No more than 10% of the units may be owned by one investor. For projects with 10 or fewer units, no single entity may own more than 1 unit.
- All units, common elements and facilities within the project must be 100% complete.
- No more than 15% of the total units can be more than 30 days past due in payment of their condominium association fees.
- At least 50% of the units must be owner-occupied or sold to owners who intend to occupy the units.
Additional rules apply to projects under development.
If you are contemplating purchasing or refinancing a condominium and would like us to review the project documents, please contact a member of Stinson Morrison Hecker LLP’s Real Estate Group.
New ATM Accessibility Standards
Are your ATMs ADA compliant? The United States Department of Justice recently issued new regulations under the Americans with Disabilities Act (“ADA”) relating to ATM accessibility. The new regulations became effective on March 15, 2011, but compliance with the new regulations will be phased into effect over the next 12 months. Your financial institution should be familiar with the new regulations to determine whether you need to take action to update your ATMs.
What do the new regulations require?
The new regulations require voice guidance capabilities for the visually-impaired and physical accessibility requirements for all disabled users. The physical accessibility standards include height and reach requirements, display screen visibility requirements, function keys must contrast visually, Braille instructions to initiate voice guidance feature, and input controls must be discernable by touch. Depending on your particular machine, the required changes may be as simple as a software update, or as extensive as a total machine replacement.
Who’s covered by the regulation?
Under the ADA, “covered entities” include places of public accommodation or commercial facilities such as financial institutions, hotels, restaurants, hospitals, grocery stores, retail stores, etc.
Timeframe for compliance.
What is required as of March 15, 2011?
As of March 15, 2011, all existing ATMs should comply with the 1991 regulations and be equipped with a voice guidance system for visually-impaired users unless compliance creates an “undue burden” on the financial institution. Proving an “undue burden” is subjective and determined on a case-by-case basis. The factors include the overall resources of the financial institution or the institution’s holding company, (ii) the cost of upgrades, and (iii) availability of alternatives to serve the disabled. Additionally, ATMs need only comply with the physical access requirements if they did not comply with the 1991 Standards, and if it is readily achievable to do so. “Readily achievable” means easily accomplishable with little expense or effort. Finally, any newly-installed ATMs must at least comply with the 1991 regulations and be equipped with voice guidance capabilities. Moreover, as of March 15, 2011, the ADA requires that all covered entities institute a compliance plan for eventually achieving ATM accessibility as required under the new regulations.
What is required between March 15, 2011 and March 15, 2012?
For existing ATMs that comply with the 1991 regulations and have voice guidance capabilities, no further compliance is necessary unless an alteration is made to the machine. When an alteration is made, the alteration must comply with the 2010 regulations. “Alternations” include renovations, rehabilitation, and reconstruction but do not include normal maintenance. All new ATM installations have the option of complying with the new 2010 regulations or the 1991 regulations plus the voice guidance features.
What is required after March 15, 2012?
After this date, all newly-installed ATMs must comply with the new 2010 regulations. All existing ATMs that comply with the 1991 regulations and have voice guidance capabilities require no further compliance until the machine is altered or replaced. When the machine is altered or replaced, the alteration or replacement must comply with the 2010 regulations.
What should I do?
• Contact your compliance officer/legal counsel to assist in the interpretation of the new regulations and to help assess whether your ATMs are compliant with the new regulations.
• Contact your ATM vendor to determine whether your ATMs need an upgrade and the cost of such upgrade.
• Using the information from your vendor, you should establish and institute a compliance plan for achieving ATM accessibility under the 2010 Standards.
Click here to view a full text of the new regulations.
Please Join Us For A Banking Seminar On April 8th (Omaha, Nebraska)
The banking and financial services industry has been under a hail storm of significant regulatory reform and change. Amidst all this change, a major revision to Article 9 of the Uniform Commercial Code has recently been introduced in the Nebraska Unicameral. In addition, recent case law along with provisions of the Dodd-Frank Act have thrown into doubt the enforceability of consumer arbitration clauses and class action waivers.
Please join us on Friday, April 8, when we will address these topics as well as:
- Key payment systems issues for banks, including treasury management products and corporate takeovers
- Rights of secured parties against garnishing judgment creditors with respect to deposit accounts and banks’ set off rights
- Recent bankruptcy decisions on preference and fraudulent transfer issues
- Avoiding key secured loan documentation pitfalls
Is someone else in your organization interested in attending?
forward the invitation
If you are unable to attend the seminar, but would like to receive a copy of the handouts, please click here.
RSVP
Please respond by Friday, April 1, via
e-mail or call us at 402.930.1722.
WHEN
Friday, April 8
7:30 a.m.
Registration and Continental Breakfast
8 a.m. Program
11 a.m. Q&A
WHERE
Magnolia Hotel
1615 Howard Street
Omaha, NE 68102
directions
The Magnolia Hotel will provide free valet parking for seminar attendees.
Is someone else in your organization interested in attending?
forward the invitation
If you are unable to attend the seminar, but would like to receive a copy of the handouts, please click here.
For more information, please e-mail Jim Pfeffer or call him at 402-930-1735.
New ALTA Survey Standards
The new ALTA/ACSM survey standards will become effective on February 23, 2011. It doesn’t appear that there are major changes to the existing survey standards, but there are a couple of important items to note.
First, the new standards set forth a mandatory form of surveyor certification. If your bank is one of the many banks that currently uses its own non-standard form certification, then you will want to check out the new language. The new ALTA/ACSM standards require surveyors to use the ALTA form, not yours. Here’s how the new certification reads:
To (name of insured, if known), (name of lender, if known), (name of insurer, if known), (names of others as negotiated with the client):
This is to certify that this map or plat and the survey on which it is based were made in accordance with the 2011 Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys, jointly established and adopted by ALTA and NSPS, and includes Items of Table A thereof. The field work was completed on ___________.
Date of Plat or Map:_____ (Surveyor‟s signature, printed name and seal with Registration/License Number)
Second, Table A, which contains a list of optional survey responsibilities and specifications, contains a new Item 21. Item 21, if selected, would require the surveyor to obtain professional liability insurance coverage for that particular survey project. Checking Item 21 would provide some additional protection to the person ordering the survey, but would likely increase the cost of that particular survey.
For you hard core ALTA/ACSM junkies, we include a link to the new survey standards: www.alta.org/forms/download.cfm?formID=338&type=word
Overdraft Programs: What You Need to Know About the FDIC Guidance and Posting Order Litigation
On November 24, 2010, the FDIC issued final supervisory guidance relating to the implementation and ongoing oversight of automated overdraft payment programs. The final guidance was virtually unchanged from the proposed guidance on which we reported last August. The final guidance was targeted at automated overdraft programs. In addition, although the guidance only applies to FDIC regulated institutions, other institutions should consider the FDIC’s expectations as the guidance will likely have an effect on other regulators’ views of overdraft programs.
The guidance requires banks to make significant changes to the operation of their automated overdraft programs by July 1, 2011. The most significant of these changes are as follows:
- Monitor Overdraft Program for “Excessive Use.” Banks must monitor their overdraft programs for excessive use (defined as seven overdrafts in a rolling 12 month period) and undertake meaningful and effective follow-up action,” including (i) contacting the customer to discuss alternatives to automatic overdraft protection, or (ii) giving the customer an opportunity to opt out or choose another alternative. This could require a bank to contact frequent users of overdraft programs several times a year.
- Impose Daily Limits. The FDIC also expects its banks to institute daily limits on overdraft charges, although it does not provide any guidance as to what a reasonable limit might be. This limit could be in the form of a limit on the number of transactions that would be subject to a fee or a dollar limit on total fees that may be imposed in a day.
- Ensure that Posting Order Does Not Maximize Overdrafts. The guidance requires banks to review check-clearing procedures to ensure that they “operate in a manner that avoids maximizing customer overdrafts and related fees through the clearing order.” Examples of appropriate procedures include “clearing items in the order received or by check number.” Oddly, although the FDIC Guidance explicitly mentions checks, it does not address electronic transactions, such as ATM and debit card transactions, although it is unclear whether this omission was intentional. In addition, although the FDIC Guidance does not specifically mention high-to-low posting (with respect to checks or any other items), the FDIC will likely criticize banks with automated overdraft programs for posting checks or any other items in high to low order.
Posting Order and Other Overdraft Litigation
Following the $203 million ruling against Wells Fargo Bank over “high-to-low” (HTL) posting that was issued on August 10, 2010, we are seeing a proliferation of class-action lawsuits challenging financial institutions’ overdraft practices.
Gutierrez v. Wells Fargo Bank. In a 90-page opinion, a federal district court judge in California found that Wells Fargo manipulated its processing of debit card transactions to maximize overdraft fees in violation of California law. In 2001, Wells Fargo changed its debit processing order from low-to-high to HTL posting. The switch to HTL posting was followed by two other practices that the court determined were intended to amplify the overdraft multiplying effect of HTL posting: Wells Fargo (1) switched to commingling of debit-card purchases with checks and ACH transactions and (2) deployed a secret “shadow line” to authorize transactions into overdraft. The opinion explained that posting debit-card transactions in HTL order confers no benefit upon Wells Fargo customers because they are “must pay” items, unlike checks or ACH transactions, which the bank can return unpaid.
The court found that Wells Fargo’s account agreement was inadequate. The account agreement described the bank’s posting order as follows:
We may pay Items presented against your account in any order we choose, unless a particular order is either legally required or prohibited. In particular, we may choose to pay Items in the order of highest dollar amount to lowest dollar amount (unless such a practice is specifically prohibited by an applicable state or federal law, rule or regulation). We may change the order of posting Items to your account anytime without notice to you.
According to the court, by informing the customer that the bank “may” use HTL posting, the bank was not reserving complete discretion to do so. The California court concludes that the term “may” suggests that HTL would only be used occasionally. The court found that Wells Fargo’s overdraft maximizing practices as described above were “unfair” and “fraudulent” under California law. The case is currently being appealed.
More Litigation Is Expected. There are currently dozens of pending federal cases, for which the pretrial proceedings have been consolidated in the multidistrict litigation in Florida. In addition, there are numerous lawsuits in state courts throughout the country. Fifth Third Bank recently agreed to pay $9.5 million in a proposed settlement involving its HTL posting practices.
Another theory under which financial institutions are being sued is that the overdraft fee imposed by a financial institution for paying an electronic transaction into overdraft is usurious under state law. We have seen a recent increase in the number of HTL and state usury lawsuits, and expect that trend to continue. We are representing a number of financial institutions involved in class action litigation over their overdraft programs, both on HTL posting and state usury issues.
What does the Wells Fargo case mean to you? If your institution currently engages in any of the activities criticized in the Wells Fargo case, it could be the target of a class action lawsuit. Your institution should consult with legal counsel and review the institution’s account disclosures and practices in light of the recent litigation. Bankers should also be familiar with the ever-expanding types of practices, products and services that may constitute “unfair and deceptive acts or practices” to avoid any potential liability under those laws.
Is the Small Business Lending Fund Right For My Bank?
On December 21, 2010, the U.S. Treasury (“Treasury”) released the application form and instructions, preferred stock terms and other guidance on the $30 billion Small Business Lending Fund (“SBLF”). The goal of the SBLF is to stimulate small business lending by qualified community banks with assets of less than $10 billion. The SBLF was created, in part, to provide community banks access to Tier 1 capital that many have been unable to tap in recent years. Dividend rates for SBLF participants can be as low as 1%.
Most of you have already been overloaded with information on eligibility requirements, dividend rates and application procedures, so we are not regurgitating those to you here. The Treasury’s program website (available by clicking here) contains most of the specific business points you need; we have also embedded links to some of the core documents below. While the SBLF’s goals are admirable and the prospect of cheap capital is undeniably attractive, it is our view that banks should go beyond the terms and strategically consider whether participation is right for them. Having waded through many of the available details so you don’t have to, below are some issues your bank might consider before diving headfirst into SBLF.
Is the SBLF Right for My Bank?
- Small business lending exclusion of participations and guarantees. The Treasury’s interpretation of what constitutes small business lending is critical to your ability to obtain low dividend rates. Under SBLF, “qualified small business lending” includes loans of less than $10 million to borrowers with less than $50 million in revenues who fall in one of the following four categories: (1) commercial and industrial loans, (2) loans secured by owner-occupied nonfarm, nonresidential real estate, (3) loans to finance agricultural production and other loans to farmers and (4) loans secured by farmland. However, if any portion of the loan is guaranteed by the U.S. Government or if a third party has assumed an economic interest in any part of the loan, that portion is subtracted from the calculation of your bank’s small business lending and will not factor into your ability to obtain a reduced dividend rate. Keep this in mind as you compile your small business lending projections and estimate your future cost of capital.
- Dividend rates—they can increase too. One of the more publicized portions of the SBLF is the potential for dividend rates as low as 1%. For most banks, the initial dividend rate will be 5%, followed by 9 quarters of adjustments based upon the extent to which a bank’s small business lending increases—down to as low as 1% for banks that increase small business lending over 10% and to between 2% and 4% for many others. But remember that the dividend rate can increase as well. If a bank has not increased its small business lending after 8 quarters, the rate will increase to 7%. The dividend rate kicks up to 9% for all banks that have not repaid SBLF funds within 4.5 years from the date received (without regard to small business lending levels). In addition, TARP recipients who replace CPP with SBLF funds will be subject to an added 2% quarterly lending incentive fee if the bank’s small business lending has not increased in the 8th quarter after SBLF funding is received.
- What does the reduced Dividend Rate apply to? Less famous is that the potential lower dividend rates will only apply to the amount by which your bank’s small business lending has increased. For example, say a bank initially obtains a 5% dividend rate on $50 million in SBLF funds. The bank thereafter increases qualified lending by $10 million, representing a 5% increase over its small business lending baseline and decreasing its dividend rate from 5% to 3%. The 3% dividend rate, however, only applies to $10 million—the amount by which the bank’s small business lending increased—and the 5% rate continues to apply to the remaining $40 million.
- 90% Downstream Requirement and CPP Participants. Holding company recipients of SBLF funds are required to contribute at least 90% of the funds they receive to insured depository institution subsidiaries that originate the small business loans. At the same time, the Treasury appears to permit CPP participants to use SBLF funds to refinance CPP securities. However, the Treasury has not provided an exception for TARP recipients from the 90% downstream requirement; such recipients are still required to contribute 90% of SBLF funds received to subsidiary bank(s). Our expectation, and likely that of many bankers’, was that the SBLF funds could be used to refinance CPP and that CPP recipients would not be required to look beyond SBLF for funds to repay CPP (one clear rule is that participants in SBLF cannot have both CPP and SBLF securities outstanding). While that may be the Treasury’s intent, it is far from clear in the guidance released thus far. We have inquired with the Treasury on this point and will post on our blog when a definitive answer is provided.
- Dividend Restrictions. SBLF recipients may only make dividend payments or share repurchases if, after such repayment or repurchase, its Tier 1 capital is at least 90% of the amount existing at the time immediately after the closing date. After 2 years, the 90% requirement decreases by an amount equal to 10% of the bank’s SBLF funding for every 1% increase in small business lending over the baseline level. There are additional restrictions for recipients who miss dividend payments on their SBLF shares.
- Look Backs. The amount of your bank’s increase in small business lending is measured by your loans outstanding each quarter versus the average amount outstanding in the four quarters ending June 30, 2010. Thus, institutions that have increased qualified small business lending since then may already qualify for an initial dividend rate of less than 5%. For those institutions who will be required by Treasury to raise “matching” funds, they are allowed to include capital raises consummated after September 27, 2010.
- Is there an untapped market in Small Business Lending? As part of your application process, you will be required to submit a small business lending plan to your primary state and federal regulators. In connection with the SBLF, the FDIC recently issued guidance reminding SBLF participants that qualified small business loans must be made in accordance with safe and sound lending practices. Can you adequately grow your small business lending with creditworthy borrowers over the next two years? Is your primary regulator cautioning you about increasing agricultural lending? If your management does not foresee an opportunity in the small business lending markets, are the dividend rates still attractive? Will you be able to earn your way to a repayment in 4.5 years (when the dividend rate ticks up to 9% for all SBLF participants) or will you be required to hit the capital markets?
Please contact one of our financial services attorneys if you would like to consider in more detail whether the SBLF program is right for you, or if you otherwise have any questions on eligibility requirements, the application process or the terms of the program. Note that Treasury is still developing terms and guidance for mutuals, Subchapter S corporations and community development loan funds.
Relevant Treasury links regarding the SBLF program:
Stinson Files Lawsuit Challenging Missouri Ethics Law
Bill prevents state chartered banks from contributing to Political Action Committees
Stinson Morrison Hecker LLP attorneys Chuck Hatfield and Khris Heisinger filed a lawsuit Dec. 6 on behalf of Legends Bank to block a Missouri bill passed in 2010. The suit claims the law is invalid based on violation of the State’s Constitution (known as Hammerschmidt challenges) as well as violations of free speech and free association.
Missouri Senate Bill 844, which passed on the final day of the 2010 session and became effective in August, prevents state-chartered banks from contributing to political action committees, which they previously were allowed to do. The bill identified which specific entities were allowed to donate to PACs, but it failed to include state chartered banks in the language.
”The law prevents banks from participating in the political process, and it places an unreasonable restriction on speech and freedom of association,” said Hatfield, who serves as chair of Stinson’s Government Solutions Practice and as the managing partner for the firm’s Jefferson City, Mo., office.
The lawsuit also seeks to invalidate the law based on a “Hammerschmidt” challenge. The state constitution prohibits bills from containing multiple subjects and from departing too far from the original purpose of the bill. SB 844 started out in the general assembly as a procurement bill. At its passage, it contained the procurement provision, but also many campaign finance and ethics provisions.
Hatfield anticipates the litigation will eventually end up before the Missouri Supreme Court.
“We believe the Constitution is very clear that legislation cannot be passed in a way that lumps unrelated subjects together in a haphazard fashion. We will be moving this suit as quickly as possible.”
Federal Reserve Release: Expansion of Consumer Protection Regulations
The Federal Reserve Board on December 13th proposed two rules that would expand the coverage of consumer protection regulations to credit transactions and leases of higher dollar amounts.
The proposed rules would amend Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing) to implement a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Effective July 21, 2011, the Dodd-Frank Act requires that the protections of the Truth in Lending Act (TILA) and the Consumer Leasing Act (CLA) apply to consumer credit transactions and consumer leases up to $50,000, compared with $25,000 currently. This amount will be adjusted annually to reflect any increase in the Consumer Price Index.
TILA requires creditors to disclose key terms of consumer loans and prohibits creditors from engaging in certain practices with respect to those loans. Currently, consumer loans of more than $25,000 are generally exempt from TILA. However, private education loans and loans secured by real property (such as mortgages) are subject to TILA regardless of the amount of the loan.
The CLA requires lessors to provide consumers with disclosures regarding the cost and other terms of personal property leases. An automobile lease is the most common type of consumer lease covered by the CLA. Currently, a lease is exempt from the CLA if the consumer’s total obligation exceeds $25,000.
A link to the notices that will be published in the Federal Register are below. Comments on the proposals must be submitted by the later of 30 days after publication in the Federal Register or February 1, 2011.
Regulation M notice: http://edocket.access.gpo.gov/2010/pdf/2010-31530.pdf
Regulation Z notice: http://edocket.access.gpo.gov/2010/pdf/2010-31529.pdf
(Press Release of the Federal Reserve)
December 17, 2010 at 10:13 pm stinsonbanking Leave a comment
