The OCC issued two advisory letters providing guidance for national banks in guarding against "predatory" or "abusive" lending practices in their loan origination and purchasing operations. Concurrently, the OCC published a request for comments on a letter it had received urging it to decide that the Georgia Fair Lending Act (an anti-predatory lending law) was preempted as it might apply to national banks. The advisory letters and the request for comments cover overlapping but slightly different subjects:
Advisory Letter 2003-2, Guidelines to Guard Against Predatory and Abusive Lending Practices.
The OCC emphasizes that national banks need to establish policies and procedures that deal with underwriting standards, the risk of abusive practices, and the appropriateness of transactions, in order to ensure that neither they nor their subsidiaries engage in any practices that could be considered predatory or abusive. Among those practices, the OCC characterizes that of extending credit to a consumer without due regard to the borrower’s ability to pay the loan as the "heart of predatory lending." The OCC also identifies loan "flipping," using balloon payments to conceal the burden of financing, and other practices as being of concern. The OCC asserts that these practices threaten safety and soundness, may violate the FTC Act, and may adversely affect bank CRA evaluations and ratings.Advisory Letter 2003-3, Guidelines on Avoiding Predatory and Abusive Lending Practices in Brokered and Purchased Loans.
The OCC considers the risks to a national bank associated with predatory or abusive brokered or purchased loans to include both credit risk and legal risk primarily associated with violations of the Home Ownership and Equity Protection Act, the FTC Act and fair lending laws. The OCC recommends that national banks take affirmative steps that include establishment of purchase policies and procedures, thorough due diligence (including background checks), use of broker and originator agreements specifically addressing banks’ lending policies, quality control reviews, the establishment of monitoring and management information systems, and prompt corrective action including termination of broker and originator agreements, if necessary. This guidance applies equally to traditional broker transactions, "table funded" loans, and loan purchase transactions where the loan is initially made and funded by a third party and sold to the bank in an arm’s-length transaction.Notice of Request for Preemption Determination.
The OCC submitted for publication in the Federal Register a notice that National City Bank, N.A. ("National City") has requested a determination that the Georgia Fair Lending Act, which became effective October 1, 2002, is preempted in its application to national banks by the National Bank Act. The Georgia Fair Lending Act restricts the ability of creditors to charge certain fees and engage in certain practices for "home loans," "covered loans," and "hig h-cost home loans," all of which are characterized by the annual percentage rate and the amount of points and fees charged. National City takes issue with the Georgia law given that 12 U.S.C. 371 vests in the OCC comprehensive authority to regulate and restrict the real estate lending activities of national banks. The notice reprints the complete text of National City’s request.Comments on the preemption determination can be submitted up to thirty days after publication in the Federal Register.
SEC Adopts Amendments to Rule Governing Custody of Investment Company Assets with a Securities Depository
The SEC adopted amendments to Rule 17f-4 under the Investment Company Act of 1940 ("Rule 17f-4") that update the conditions on using a depository and eliminate a number of specific custodial compliance requirements. Many of the changes in the amended rule are designed to align Rule 17f-4 with the 1994 amendments to Article 8 of the Uniform Commercial Code ("UCC"), which governs the ownership and transfer of investment securities under state law. Several critical terms in the amended rule are defined by reference to parallel terms in Article 8 of the UCC. The amendments revise the definition of "securities depository" so that it no longer restricts the functions that a depository may perform. The amended rule also permits a fund’s custodian to maintain assets with a depository through a sub-custodian. The amendments eliminate certain conditions currently imposed on custodians, namely those which require a custodian to: (1) maintain a separate account at the depository for a custodian’s customers; (2) identify a fund’s securities on the custodian’s books; and (3) send confirmations of transfers to and from a fund’s account. Instead, the amended rule requires a fund’s contract with its custodian to provide, at a minimum, that the custodian will exercise due care in accordance with reasonable commercial standards in discharging its duty as a "securities intermediary" to obtain and thereafter maintain financial assets. The custodian must also furnish the fund, upon request, with available reports on the custodian’s internal accounting controls and financial strength. Similar requirements apply if a fund deals directly with a depository. The amended rule also eliminates the current requirement that fund directors approve arrangements with a depository. The amendments become effective March 28, 2003.
FRB Adopts Revisions to Regulation B, Including New Data Collection Rules
The FRB amended Regulation B, which imp lements the Equal Credit Opportunity Act ("Reg. B"). Among other changes, the final rule adopts in a modified form a highly controversial proposal addressing the collection of applicant ethnicity, race and gender data (data collection) in non-mortgage transactions.
In 1999, the FRB had proposed to alter the long-standing prohibition against data collection in non-mortgage credit transactions by permitting, but not requiring, creditors to engage in data collection for such transactions. The comments on the proposal from industry representatives were very negative. The final rule permits creditors to do data collection in non-mortgage credit transactions in connection with "self-tests," as permitted by and in accordance with the standards set forth in Reg. B. The FRB takes the position that the data collection will then be privileged. Creditors that request data from consumers would have to disclose that providing the information is optional, that it is being used to monitor compliance with the ECOA, and that the data may, when applicable, be collected based on visual observation or surname.
Among other changes to Reg. B adopted this week are the following:
- Creditors will be required to retain criteria used for prescreened credit solicitations for 25 months;
- The exception to adverse action requirements when a creditor takes action that affects all or a substantial portion of accounts has been narrowed to require the action to affect "substantially all" of a creditor’s accounts;
- The definition of "creditor" has been expanded to include all persons who "regularly participate in a credit decision," such as assignees that set the terms under which credit will be extended;
- A request for preapproval that results in the issuance of a written commitment to extend credit up to a designated amount will be considered an "application" for purposes of Reg. B.
The revised Reg. B will have an effective date of April 15, 2003, but compliance with the new requirements will become mandatory on April 15, 2004. The FRB also adopted related and other revisions to the Official Staff Commentary to Regulation B and plans to issue further proposed changes to the Commentary in the near future.
DOL Provides Guidance On Overdraft Protection Services by Banks
The Department of Labor (the "DOL") issued Advisory Opinion 2003-02A under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). This advisory opinion addresses whether the provision of overdraft protection services to an ERISA plan, including the inherent extension of credit incident to such services and the payment of any related overdraft charges, by banks or other financial institutions, constitutes a prohibited transaction under ERISA. The DOL stated that, as a general matter, where the bank or other financial institution providing the overdraft protection services to an ERISA plan, or an affiliate thereof, does not exercise investment discretion over the ERISA plan assets, such overdraft protection services may constitute a "necessary service" and therefore not result in a prohibited transaction, provided the bank providing such services complies with the requirements of the statutory exemption under Section 408(b)(2) of ERISA, including the requirement that the arrangement be reasonable and that no more than reasonable compensation is paid for such services. In addition, the DOL stated that, as a general matter, whether or not the bank or other financial institution providing the overdraft protection services to an ERISA plan, or an affiliate thereof, exercises investment discretion over the ERISA plan assets, such overdraft protection services may constitute an "ancillary bank service" and therefore not result in a prohibited transaction, provided the bank providing such services complies with the requirements of the statutory exemption under Section 408(b)(6) of ERISA, including the requirements that the service be consistent with sound banking and financial practice and subject to guidelines designed to monitor and limit the duration and usage of overd raft services. It should be noted that the advisory opinion states that a plan fiduciary should consider the circumstances under which services will be rendered and the charges for such services, the basis for such charges and the ability of the fiduciary to limit such charges.
U.S. Court of Appeals Dismisses Massachusetts Plea to Set Aside OCC Preemption Ruling
The U.S. Court of Appeals for the First Circuit (the "Court") issued an opinion in Bowler v. Hawke, No. 02-1738, 2003 WL 299294 (1 st Cir. Feb. 13, 2003), dismissing the petition filed by the Commonwealth of Massachusetts and its Commissioners of Insurance and Banks ("Massachusetts"), which requested that the Court vacate an opinion of the OCC. The OCC opinion at issue determined that the Gramm-Leach-Bliley Act of 1999 (the "GLBA") preempted three provisions of a Massachusetts consumer protection statute relating to sales, solicitation, and cross-marketing activities. The Court’s decision turned on its determination that the petition sought an advis ory opinion from the Court because the OCC’s opinion letter did not "appear to carry the force of law, presage imminent coercive conduct, or seemingly otherwise bind Massachusetts." This led the Court to conclude that the petition failed to describe a justiciable "regulatory conflict" between state and federal regulators amounting to a case or controversy. The Court reasoned that the OCC’s opinion letter constituted only "informal agency guidance" to banks and other interested parties.
The Court conceded that informal agency action can give rise to a case or controversy where it meets the test for ripeness articulated in Abbott Laboratories, Inc. v. Gardner, 387 U.S. 136, 148-49 (1967). According to the Court, "Abbott requires a showing that the informal action somehow imposes a legal or practical constraint on the party seeking to invoke federal Court jurisdiction." Although both parties argued that the OCC’s opinion letter impaired Massachusetts’ ability to enforce its laws, the Court disagreed, statin g that because the letter only constituted informal agency guidance, it "fail[ed] to see how the letter circumscribes Massachusetts’s ability to enforce its laws in any meaningful way." Absent such constraint, the Court held that no case or controversy existed, and thus no "regulatory conflict" existed within the meaning of the GLBA. The Court also justified its conclusion by stating that "a contrary construction would raise grave concerns about its constitutionality as applied here."
Moreover, it sugges ted that the questions raised by Massachusetts’s petition would be best resolved in the United States District Court, because "Courts are going to have to make judgment calls about the extent to which the laws hinder the ability of depository institutions to engage in sales, solicitation, and cross-marketing activities, as a factual matter."
FRB Rules on Foreign Banks Distributing Securities into the U.S.
The FRB issued an interpretation (211.605) concerning the ability of foreign banks to participate as co-managers in the underwriting of securities to be distributed in the U.S. The U.S. offices of the foreign banks do not distribute the securities but assist in the underwriting and are compensated for those activities by the foreign banks. The foreign banks had taken the position that so long as any underwriting obligation is booked outside the U.S. they are not engaged in any activity in the U.S. because FRB Regulation K considers a foreign bank to be "engaged in activities" in the U.S. if it conducts the activity through an office in the U.S. The interpretation rejects this position, however, citing an existing interpretation (225.124) for the proposition that a foreign bank engaged in an underwriting activity only will not be deemed engaged in that activity in the U.S. if the shares are distributed exclusively outside the U.S. As a result, the interpretation concludes that "any banking organization that wishes to engage in [underwriting, with distribution into the U.S.] must either be a financial holdin g company under the GLB Act or have authority to engage in underwriting activity under Section 4(c)(8) of the BHC Act."
Other Item of Note
SEC Adopts Research Analyst Certification and Disclosure Requirements
The SEC adopted Regulation AC, which will generally require research analysts employed by a broker/dealer to certify that each report they prepare for circulation by the broker/dealer relating to a specific security or issuer accurately reflects their personal views. These analysts will also have to disclose whether they receive compensation or other payments in connection with their specific recommendations or views. Analysts will need to meet similar certification and disclosure requirements on a quarterly basis with respect to public appearances in which they make a recommendation concerning a security or issuer. Regulation AC will become effective on April 14, 2003.
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