P. O. BOX 19999, RALEIGH, NC / 800/ / FAX: 919/ Regulatory Review

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1 FINAL RULE P. O. BOX 19999, RALEIGH, NC / 800/ / FAX: 919/ Regulatory Review RR OCTOBER 14, 2010 ***************IN THIS ISSUE*************** Revisions to Rules Implementing the Community Reinvestment Act...1 FINAL GUIDANCE Guidance Reverse Mortgage Products...2 PROPOSED RULES Deposit Insurance Coverage Noninterest-bearing Transaction Accounts...3 Regulation Z Escrow Requirement...4 * FINAL RULE * REVISIONS TO RULES IMPLEMENTING THE COMMUNITY REINVESTMENT ACT * Summary/Details: The Federal Reserve Board, FDIC, OCC, and OTS have issued a joint final rule that incorporates two statutory requirements into the rules implementing the Community Reinvestment Act (CRA). The first revision implements section 1031 of the Higher Education Opportunity Act (Public Law ). The provision requires the agencies to consider low-cost education loans provided by a financial institution to lowincome borrowers as a factor when assessing the institution s record of meeting community credit needs. The second revision incorporates 12 U.S.C. 2903(b), which allows the agencies to consider capital investment, loan participation, and other ventures undertaken by nonminority-owned and nonwomen-owned financial institutions in cooperation with minority- and women-owned financial institutions and low-income credit unions as a factor when assessing an institution s CRA record. The rulemaking announcement also notes that the agencies intend to issue for comment in the near future interagency CRA guidance addressing primarily the new provision on low-cost education loans made to low-income borrowers. The agencies will also revise existing guidance to

2 Page 2 reflect the regulatory provisions on activities in cooperation with minority- and womenowned financial institutions and low-income credit unions and to indicate that such activities outside of the majority-owned institution s assessment area(s) will not compensate for poor lending performance within its assessment area(s). A copy of the final rule is available in Vol. 75, No. 191 of the Federal Register, beginning on page (October 4, 2010; It is effective November 3, FINAL GUIDANCE GUIDANCE REVERSE MORTGAGE PRODUCTS * Summary/Details: The Federal Reserve Board, FDIC, OTS, and OCC have issued a final guidance entitled Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risk (Guidance). Noting that reverse mortgages can be highly complex loan products and that financial institutions must effectively manage the compliance and reputation risks associated with reserve mortgages, the agencies published a proposed guidance in December, 2009, to address concerns about such products. Upon reviewing comments with respect to the proposed guidance, the agencies have adopted a final guidance governing reverse mortgages. Institutions under the agency s supervision currently provide two basic types of reverse mortgage products: lenders own proprietary reverse mortgage products and reverse mortgages offered under the Home Equity Conversion Mortgage (HECM) program. Both types of reverse mortgages enable eligible borrowers to remain in their homes while accessing the home equity in order to meet emergency needs, supplement their incomes, or, in some cases, purchase a new home, without subjecting borrowers to ongoing repayment obligations during the life of the loan. The use of reverse mortgages is expected to expand significantly in the coming years as the U.S. population ages. The final guidance amends the 2009 guidance consistent with comments made to the Board regarding proposed changes. The final guidance clarifies anti-tying and conflict avoidance provisions so that they more clearly address applicable federal rules. The final guidance amends the 2009 guidance to address concerns regarding the requirements that consumers seeking a reverse mortgage product should consult a qualified independent counselor. The guidance now provides that lenders may provide borrowers with a list of reverse mortgage counselors consistent with HUD guidelines for HECM counseling and may provide borrowers with a substantial array of materials, including information about proprietary products, before the borrower meets with a reverse mortgage counselor. It is also clarified that institutions are not expected to supervise or monitor the activities of qualified independent counselors. The guidance clarifies the agencies expectation that institutions policies and procedures will be designed to ensure that brokers with whom they do business with as agents also will not condition or vary the price of a reverse

3 Page 3 mortgage loan on the consumer s obtaining some additional product or service (other than a traditional banking product). The final guidance stresses that institutions must comply with relevant anti-tying rules and should consider other appropriate measures necessary to guard against improper incentives or potential conflicts of interest. The final guidance is effective on October 18, PROPOSED RULES DEPOSIT INSURANCE COVERAGE NONINTEREST-BEARING TRANSACTION ACCOUNTS * Summary/Details: In October, 2008, the FDIC adopted the Temporary Liquidity Guarantee Program (TLGP) to assist in the stabilization of the nation s financial system. Of the TLGP s two principal components, the Transaction Account Guarantee Program (TAGP) set forth an FDIC guarantee of all funds held at participating insured depository institutions in qualifying noninterest-bearing transaction accounts. Under the TAGP, a noninterest-bearing transaction account is a transaction account with respect to which interest is neither accrued nor paid and on which the depository institution does not reserve the right to require advance notice of an intended withdrawal. The definition of noninterest-bearing transaction accounts specifically includes low-interest negotiable order of withdrawal (NOW) accounts and Interest on Lawyers Trust Accounts (IOLTA). Originally set to expire on December 31, 2009, the deposit insurance coverage under the TAGP was extended through December 31, In response to amendments made by the Dodd-Frank Wall Street Reform and Consumer Protection Act to the deposit insurance provisions of the Federal Deposit Insurance Act, the FDIC has published a proposed rule which would extend deposit insurance coverage to all funds held in noninterest-bearing transaction accounts, without limit. Such unlimited coverage would be separate from, and in addition to, the coverage provided to depositors with respect to other accounts held at an insured depository institution. Funds held in a noninterest-bearing transaction account thus will not be counted for purposes of determining the amount of deposit insurance on deposits held in other accounts, and in other rights and capacities, at the same insured depository institution. Under the TAGP, depository institutions could choose not to participate in the program. Because the Dodd- Frank Act mandated full insurance coverage of noninterest-bearing accounts, depository institutions are not required to take any action to obtain separate coverage for noninterestbearing transaction accounts. From December 31, 2010, through December 31, 2012, noninterest-bearing transaction accounts at all depository institutions will receive temporary deposit insurance coverage. Unlike the separate assessment, or premium, that is imposed on depository institutions that currently participate in the TAGP, the FDIC does not plan to charge an assessment

4 Page 4 for the insurance of noninterest-bearing transaction accounts after the expiration of the TAGP program. The proposed rule provides for notice and disclosure requirements to ensure that depositors are aware of and understand what types of accounts will be covered by the deposit insurance coverage for noninterest-bearing transaction accounts. There are three notice and disclosure requirements: (1) depository institutions must post a prescribed notice in their main office, each branch, and, if applicable, on their Web site; (2) institutions currently participating in the TAGP must notify NOW account depositors and IOLTA depositors, that, beginning January 1, 2011, such accounts will no longer be eligible for unlimited protection; and (3) institutions must notify customers individually of any action they take to affect deposit insurance coverage held in noninterest-bearing transaction accounts. The proposed rule contains a copy of the notice that must be posted in the lobby of an institution s main office, branches, and Web site. Currently, lowinterest NOW accounts and all IOLTA accounts are protected in full under the TAGP. However, under the Dodd-Frank amendments, such accounts are not eligible for unlimited deposit insurance coverage. Thus, starting January 1, 2011, all NOW accounts and IOLTA accounts will be insured under the general deposit insurance rules and no longer be eligible for unlimited protection. The proposed rule contains a requirement similar to that currently contained in the TAGP regulations. Such provision provides that if a depository institution offers an account product in which funds are automatically transferred, or swept, from a noninterestbearing transaction account to another account (such as a savings account) or bank product that does not qualify as a noninterest-bearing transaction account, it must inform those customers that, upon such transfer, the funds will be no longer fully protected. REGULATION Z ESCROW REQUIREMENT * Summary/Details: The 1994 Home Ownership and Equity Protection Act (HOEPA) amended the Truth-in-Lending Act to provide substantive protection for consumers obtaining mortgage loans with the annual percentage rates (APRs) or total points and fees exceeding prescribed thresholds. In July, 2008, the Federal Reserve Board adopted final rules to prohibit unfair and deceptive acts and practices in connection with mortgage loans subject to HOEPA. The final rule defined a class of higher-priced mortgage loans and prohibited certain unfair and deceptive lending and servicing practices in connection with such transactions. One requirement of the Federal Reserve Board s HOEPA rule prohibits a lender from extending a higher-priced mortgage loan secured by a first lien unless an escrow account is established before consummation for payment of property taxes and premiums for mortgage-related insurance coverage required by the creditor. The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010, substantially codified the requirement that escrow accounts for taxes and insurance be established for first lien higher-priced mortgage loans. The Dodd-Frank Act expressly

5 Page 5 imposes the escrow requirement on first-lien transactions having an APR that exceeds the average prime offer rate for a comparable transaction by 1.5 or more percentage points. The Dodd-Frank Act incorporates such coverage test into the Truth-in-Lending Act only for loans that do not exceed the current, maximum original principal obligation for mortgages eligible for purchase by Freddie Mac. For loans that exceed the Freddie Mac maximum principal balance, the Truth-in-Lending Act provides that the escrow requirement applies only if the APR exceeds the applicable average prime offer rate by 2.5 or more percentage points. In the 2008 HOEPA rule, the Federal Reserve Board defined a class of higher-price mortgage loans and applied special consumer protections to such loans. As noted previously, one protection is a requirement to establish an escrow account for first-lien higher-price mortgage loans. A higher-price mortgage loan is one for which the APR exceeds the average prime offer rate for a comparable transaction as of the date the loan s interest rate is set, by 1.50 percentage points for first lien loans and 3.50 percentage points for subordinate-lien loans. The Board s proposed rule would require escrow for a first-lien, jumbo loan if the loan s APR exceeds the average prime offer rate for a comparable transaction as of the date of the loan s interest rate is set by 2.5 or more percentage points. The Federal Reserve Board solicits comment with respect to when creditors will be allowed to use the new coverage threshold after a final rule is adopted. Comments must be received by the Federal Reserve Board by October 25, Edmund D. Aycock Senior Vice President and Regulatory Counsel Nathan R. Batts Associate Counsel *************** The Regulatory Review is intended to provide a concise summary rather than complete analysis of the regulations covered. Reference should be made to the regulation itself for a determination of its application to your particular circumstances.