Vol. 2 No. 9
Goodwin, Procter & Hoar LLP, a firm of over 350 lawyers, has one of the largest financial services practices in the United States. We have created the Financial Services Alert as a service to advise our clients and other financial services institutions to news of importance to the industry in a timely manner. Some issues of the Alert, such as this one, will principally summarize significant recent developments in financial services law and regulation. Other issues will provide more indepth analysis about specific areas of financial services law. We hope that you will find the Financial Services Alert to be helpful. We welcome your suggestions for future topics of interest.
Developments of Note
Banking Agencies Adopt Year 2000 Standards for Safety and Soundness
The member banking agencies of the FFIEC, including the FRB, FDIC, OCC, and OTS, have jointly adopted new interim rules pertaining to safety and soundness standards under Section 39 of the Federal Deposit Insurance Act to incorporate previously published interagency Year 2000 ("Y2K") guidances. While imposing no new substantive requirements on insured depository institutions, the rules effectively elevate the enforceability of standards earlier announced by the agencies. Failure of an insured institution to meet the prescribed safety and soundness standards now will subject it to prompt corrective actions by the agencies and formal sanctions. The newly prescribed guidelines establish "minimum standards for safety and soundness" that are consistent with the principles contained in earlier issued guidance papers. Consistent with FFIEC guidance papers, the new guidelines prescribe certain essential steps that each insured institution must take to become Y2K ready, including: ensure the involvement of the board of directors and management in the Y2K efforts; adopt a written project plan; renovate its mission-critical systems; complete tests of the renovated mission-critical systems by specified deadlines; plan for contingencies; and manage customer risks. The new guidelines became effective October 15, 1998, although the agencies are soliciting public comments until December 14, 1998.
FFIEC Modifies Uniform Trust Rating System
The FFIEC finalized changes to its Uniform Interagency Trust Rating System (the "Rating System"), which applies to all entities with trust powers that are subject to federal bank regulatory supervision, to make its numerical ratings conform more closely to those of the Uniform Financial Institution Rating System. Moreover, the Rating System replaces the previous Account Administration and Conflicts of Interest components of the Rating System with a single Compliance component. Despite this consolidation, however, the FFIEC emphasized that self-dealing and conflicts of interest continue to be areas of great importance and concern. The Rating System only requires institutions with over $100 million of total trust assets, and nondepository institutions, to receive a component rating based on earnings. The Rating System also places more emphasis on risk management, and includes a list of certain specific types of risks that must be considered for each component. The Rating System became effective October 13, 1998.
Mortgage Servicer Denied Right to Represent Mortgagor's Interests in Bankruptcy
A U.S. Bankruptcy Court in New York held that a mortgage servicer that objects to a mortgagee's Chapter 13 bankruptcy plan or moves for a modification of the automatic stay in order to foreclose on a mortgage is operating as a middleman for the provision of legal services to the investor, thereby engaging in the unauthorized practice of law. The court interprets the "party in interest" requirement of the Bankruptcy Code to require the moving party to have a "personal stake" in the outcome of the proceeding. The court reasoned that because only the mortgagee and the mortgagor (or their successors in interest) have a personal stake in the mortgage, the servicer must be acting as an agent of the mortgagee in making and arguing a motion in a bankruptcy proceeding. When a mortgage servicer retains legal counsel to represent the interests of the creditor, the court held that this always constitutes providing legal services by one not properly licensed to practice law, "[r]egardless of how the attorney/servicing agent/mortgagee relationship is structured[.]" The court's opinion thus leaves no room for anyone but the investor's own attorneys to protect its interests in court. Although this case raises significant questions regarding the ability of servicers to represent investor interests in litigation, particularly in bankruptcy courts, the court's failure to take into account two important facts -- the servicer's record ownership of the security interest and the servicer's personal stake in some of the amounts listed in the proof of claim (e.g., late fees) -- renders this decision less alarming. In re Morgan.
Basle Committee Proposes Guidance on Bank Loan Accounting and Credit Risk Disclosure Practices
The federal bank regulatory agencies notified banks that the Basle Committee issued a proposal on sound practices for loan accounting, credit risk disclosure, and related matters. The proposal declares that banks should adopt a sound system for managing credit risk pursuant to which judgments by management relating to recognition and measurement of loan impairment should be made in accordance with documented policies and procedures which conform with fundamental accounting concepts. The guidance also provides extensive discussion of public disclosure, including the recommendation that a bank disclose: information about the accounting policies and methods followed to account for loans and the allowance for impairment; the methods used to determine specific and general allowances and key assumptions used; risk management and control policies; balances of loans, impaired loans, and past due loans by major categories of borrowers and the amount of specific and general allowances established against each category; significant concentrations of credit risks; and balances of and other information about loans that have been restructured during the year. Comments on the proposal are due by March 15, 1999.
OCC Warns National Banks About Erroneous CRA Data
The OCC warned national banks about errors found during examinations of the collection and reporting of required Community Reinvestment Act ("CRA") lending data. Some of the most common errors cited include: reporting renewals of small business loans as originations; not reporting gross annual revenues, even if known, for a business receiving a small business loan; with respect to increases in lines of credit, reporting the total amount of the line rather than the increase; and reporting loans as both small business loans and community development loans. Examiners also cited activities listed as qualifying investments for purposes of the CRA rules did not qualify for that classification, as well as improper characterizations of activities as community development loans and services. The OCC notes that errors in data that adversely affect an examiner's ability to evaluate CRA performance will result in the data being excluded from the examination, and that other supervisory actions may be taken.
E.U. Member Delays in Privacy Directive Facilitate Transatlantic Discussions
The October 25th deadline for implementation of the data privacy standards directive adopted by the 15-member European Union is unlikely to cause widely anticipated immediate disruptions in transatlantic data flows. Although the subject of intense discussions between U.S. and E.U. officials, delayed implementation of the E.U. directive will result from failure of most member states as yet to adopt the directive. Reportedly, Austria, the United Kingdom, France, Ireland and Luxembourg will not adopt the standards for another couple of months. U.S. Commerce Secretary William Daley recently told Congress that the most important issue threatening worldwide electronic commerce is the policy stalemate between the E.U. and the U.S. over online consumer privacy protection. Essentially, the E.U. directive acknowledges a right of individuals to access and review personal data, correct it, and limit its use. Moreover, E.U. countries will be required to block transmission of data to other countries -- notably the U.S. -- whose laws do not provide a similar level of privacy protection, including individual redress in cases of violation. In contrast, U.S. government policy favors industry self-regulation in providing notice as to online collection and usage of personal data. No comprehensive statutory standards or privacy protection regime to provide redress to individuals is provided for by federal law. Secretary Daley has nevertheless expressed optimism that the U.S. will adopt timely measures to meet the standard of adequate protection of privacy contemplated by the E.U. directive.
Other Items of Note
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