Developments of Note
IRS Provides Favorable Treatment to Banks and Depositors for Small, Non-Cash Premiums
The IRS has announced favorable treatment for banks offering "de minimis" non-cash premiums to depositors for opening or adding to accounts. In Rev. Proc. 2000-30 (July 10, 2000), the IRS indicated that it will not require financial institutions to report de minimis premiums as interest nor will depositors who receive such premiums be required to include the value of such premiums in gross income. In order to qualify for beneficial treatment, the value of the item cannot exceed $10 for a deposit of less than $5,000 or $20 for a deposit of $5,000 or more. The value of the item is measured by the actual cost of the premium to the financial institution. This favorable treatment is available for de minimis premiums provided after December 31, 1999.
OTS Introduces New Strategy Regarding Mutuals, Mutual Holding Companies and Mutual-to-Stock Conversions; Amends Rule Regarding Stock Repurchases
The OTS issued a Notice of Proposed Rulemaking (the "Proposed Rule" OTS 2000-57) under which the OTS proposes to implement a new comprehensive regulatory strategy with respect to mutual institutions, mutual holding company ("MHC") reorganizations and the mutual-to-stock conversion process. The stated purpose of the OTS strategy is to help retain the attractiveness of the mutual form of ownership. Currently, mutually-held entities represent approximately 40% of the entities (but only 7% of the assets) regulated by the OTS. According to the Proposed Rule the OTS strategy will involve: (1) new policy and examination guidance; (2) proposed regulations governing reorganizations into MHCs and the mutual-to-stock conversion process; (3) new final interim regulations (discussed below) concerning stock repurchases and dividend waivers; and (4) revised application forms. Comments on the Proposed Rule, which will be discussed further in a future issue of the Alert, are due to the OTS no later than October 10, 2000.
In a companion final interim rule (OTS 2000-56 the "Final Interim Rule"), the OTS addresses the items in (3) above, amending OTS regulations governing repurchases of stock and MHC waivers of dividends, and revising, in accordance with the Gramm-Leach-Bliley Act of 1999 ("GLB"), the scope of activities in which an MHC may engage. The Final Interim Rule is effective July 12, 2000 and comments must be received by the OTS prior to October 10, 2000. The Final Interim Rule makes it significantly easier for thrifts to repurchase stock. Prior to the Final Interim Rule, mutual thrifts that converted to stock form were not permitted to repurchase stock during the first year following conversion. In each of the second and third years following conversion, thrifts were limited to repurchasing 5% of their outstanding shares. The Final Interim Rule eliminates restrictions during the second and third years following conversion and permits thrifts to repurchase outstanding shares even during the first year following conversion, provided that the thrift files a notice with the OTS, can demonstrate "extraordinary circumstances," and the OTS determines not to object to the planned repurchase. This change brings OTS regulations in line with requirements of the FDIC and other federal bank regulatory agencies. Moreover, the Final Interim Rule amends the OTS’s rule concerning MHC dividend waivers to eliminate shareholder dilution in connection with conversions. Under OTS regulations, an MHC that wishes to waive dividends may do so only after notifying the OTS. The waiver of dividends permits the MHC to avoid the payment of corporate taxes on the dividend and leaves the capital in the thrift subsidiary, which has a greater need then the MHC for the cash to meet, e.g., operating expenses. Prior to the Final Interim Rule, dilution occurred if the OTS required an MHC which was in the process of converting to stock form to decrease the number of shares the minority shareholders of the converting thrift would receive in an exchange of their shares for shares in the fully converted to stock institution to reflect the amount of dividends waived by the MHC. As part of the Final Interim Rule, the OTS has concluded that it will no longer require dilution for any waived dividends in a subsequent conversion to stock form. Furthermore, the Final Interim Rule, in accordance with GLB, provides MHCs with expanded authority to engage in all activities permissible for financial holding companies.
OCC Urges National Banks to Validate the Accuracy of Computer-Based Financial Models They Use to Measure Risk
The OCC issued a Bulletin (2000-16) which urges national banks to test and validate the accuracy of computer-based financial models that banks are using increasingly for credit scoring, asset-liability management, trading-risk management, and "valuation estimates of financial investments, such as securitization retained interests." The OCC expects that banks will, in the future, expand their overall use of financial models to manage credit risk, allocate capital and measure profitability. The OCC warns banks that errors may arise in any of the three components of a model: (1) putting information in and delivering assumptions and data to a model; (2) processing, which "transforms inputs into estimates using computer models," and (3) reporting, "which translates the mathematical estimates into useful business information." The OCC states that model validation requires both technical expertise and subjective business judgment, and bank decision-makers are expected by the OCC to understand both the meaning and limitations of a model’s results, as well as to audit input and process, and to test the models’ results against actual outcomes. The OCC concludes that a bank’s best defense against the use of inaccurate models and of incorrect interpretations of model results is "implementation of a sound model validation framework that includes a robust validation policy and appropriate independent review."
OTS Issues Opinions Preempting State Payoff Statement Fee Limits and Permitting Thrift Receipt of Referral Fees
Payoff Statement Fees. The OTS issued an Opinion (P-2000-6) declaring that federal law preempts the application to thrifts of a New York law that limits the imposition of fees for providing mortgage loan payoff statements. The Opinion states that the OTS regulations are clear that the federal law preempts state laws that restrict loan-related fees. The Opinion notes that on prior occasions the OTS has interpreted this type of preemption broadly, preempting state laws regarding certain ATM fees, appraisal and credit insurance fees, and late payment charges. In this case, the OTS determined that charges for faxing loan payoff statements are loan-related fees, and thus state limits on such fees are subject to preemption.
Referral Fees.
In another Opinion (P-2000-7) the OTS determined that, subject to certain conditions, a thrift may collect referral fees for referring its small business customers to a registered investment adviser for investment management services. The thrift would inform its customers of the investment advisory services through personal contacts, sponsorship of small business seminars and events, and mailings. The thrift also would provide a disclaimer to customers describing, among other things, that the thrift does not warrant or guarantee satisfactory performance of the investment adviser, that the investment adviser will pay the thrift a referral fee should the customer establish a business or relationship with the investment adviser, and that the referral fee will not cause the referred customer to pay a higher or greater fee to the investment adviser than non-referred customers pay. The thrift also would comply with the privacy provisions of GLB. The OTS permitted the receipt of the referral fee as an incidental power of federal savings banks. However, given that the referral fee arrangement had the potential to continue over a number of years (i.e. so long as the investment adviser receives fees from the referred customer), as a condition of approval the thrift would have to obtain an opinion of counsel stating that the activity would not cause the thrift to be deemed an investment adviser subject to registration with the SEC or under state law. Moreover, because the referral fees involve ERISA plans, the OTS also required an opinion of counsel that the thrift’s proposed activities would not violate any provisions of ERISA.OTHER ITEMS OF NOTE
OCC Issues Guidance on Internet Banking
The OCC published a survey based on information drawn from national bank examiners discussing the projected extent of internet banking in the near future, as well as how national banks (including de novo banks) offering internet banking perform relative to other national banks with respect to profitability, cost efficiency, and other characteristics. A copy of the article is available upon request.
The contents of this publication are intended for informational purposes only and should not be construed as legal advice or legal opinion, which can be rendered properly only when related to specific facts. This document may be considered advertising under rules of the Supreme Judicial Court of Massachusetts. ©GPH LLP 2000.
