Banking Law Bulletin

National Legislation/Regulations

CFPB Announces Final Ability to Repay Rule (Effective January 2014): On January 11, 2013, the Consumer Financial Protection Bureau ("CFPB") announced the final rule to implement laws requiring mortgage lenders to consider a consumer's ability to repay a home loan before extending them credit. CFPB also issued, at the same time, a proposal, seeking comment, on whether to make changes in the final rule for certain community based lenders and others. While space does not permit a full iteration of the final rule or the proposal, certain key provisions can be stated. (The rule and the proposal can be found at CFPB's website at http://www.consumerfinance.gov/regulations/ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in-lending-act-regulation-z/.

 

First, the final rules cover the entire mortgage market and not just sub-prime loans.

Second, in making the ability to repay determination, creditors will have to consider at least eight underwriting factors including a borrower's current income or assets, current/recent employment status, the monthly proposed loan payment, etc., all using reasonably reliable third party records to verify the information obtained. The rule provides guidance as to the application of these factors.

Third, the rule provides a safe harbor (creating a presumption that the loan satisfies the ability to repay requirement) if the loan is a "qualified mortgage". The general criteria for a "qualified mortgage" are (with some limited exceptions) as follows: cannot be a loan with negative amortization, interest only payments, a balloon payment, a term of more than thirty (30) years, have points or fees greater than three percent (3%) of the total loan or, after taking into account the monthly mortgage payment, result in the borrower having a total debt to income ratio of greater than forty-three percent (43%).

Finally, the proposal seeks comments on the creation of a new category of "qualified mortgages" that would apply to small creditors including most community banks. The additional classifications of qualified mortgages would include a safe harbor even if the customer could not meet the less than forty-three percent (43%) debt to income ratio test.

Avoidance of "Fiscal Clift", Includes Retention of Tax Benefits for "Short Sales". Most of the media attention on Congress "avoiding" the "Fiscal Clift" earlier this month focused on changes in income, dividend and capital gains tax rates. Under the radar was the extension of tax benefits on forgiveness of home loan indebtedness which helps many homeowners with "underwater" loans. More specifically, the new tax law includes a one (1) year extension on the exclusion from gross income of "discharge of qualified principal indebtedness". This provision facilitates short sales by allowing sellers to avoid the associated tax hit which might otherwise occur for debt discharged by a bank in connection with the sale. For instance, if a short sale nets $150,000 which the bank accepts in full discharge of a $200,000 home loan, the borrower would normally be taxed on the $50,000 forgiven. However, under the law, as extended, the $50,000 will continue not to be taxed at all. This extension should encourage banks to promote short sales knowing that debtors will not face substantial tax burdens for debt forgiven when the net proceeds are less than the debt discharged.

TAG Program Ends. The Transaction Account Guarantee (TAG) program which provided unlimited deposit insurance coverage on most non-interest bearing transaction accounts expired on December 31, 2012. The FDIC originated this unlimited coverage as a temporary rule in the wake of the 2008 financial crisis. It was later codified in the Dodd Frank Act with a sunset date of December 31, 2012. Despite some congressional efforts to extend TAG, 2012 passed without this program being extended. This leaves businesses and government customers uninsured for non-interest bearing demand deposit accounts above $250,000.

PRACTICE TIP: To mitigate against losing these deposits, banks should encourage customers to shift these uninsured deposits into repurchase agreements or to invest the funds through CDARS.

Recent Illinois Legislation

As 2013 begins, a handful of important new laws affecting banking in Illinois go into effect. A brief summary:

  • Revisions to Article 9 – Debtor's Name (Effective July 1, 2013): Creates, inter alia, new rules for an individual debtor's name in a financing statement. After July 1, 2013, an individual debtor's name on a financing statement will be sufficient if the name on the financing statement matches the name on one's driver's license. If the individual does not have a driver's license, then the financing statement is sufficient if it provides the individual name of the debtor or the surname and first personal name of the debtor. If the individual has multiple driver's licenses, then the name set out on the most recently issued driver's license is to be used.

  • PRACTICE TIP: In anticipation of this change, begin now to use the name that appears on an individual's driver's license.

  • Illinois Service Member Civil Relief Act (Effective January 1, 2013). Establishes a new Illinois Service Member Civil Relief Act and extends certain provisions of the Federal Act and Illinois Patriot Plan to service members on "state active duty". To be on state active duty, a service member must have a period of military service of more than twenty-nine (29) consecutive days. Also establishes a number of new rights applicable to all service members whether they have been called for federal or state active duty, including default judgment relief, mortgage foreclosure relief, retail installment rights and stays of administrative hearings.

  • PRACTICE TIP: Exercise caution when making a loan to a military serviceman and be aware, generally, of these rights.

  • Trust Decanting Act (Effective January 1, 2013). Authorizes trust "decanting" which essentially is a non-judicial method of modifying an irrevocable trust. The essential terms of the "decanted trust" may not be changed, but a new trust can be created for less than all of the beneficiaries if the original trust terms remain in place, certain original beneficiaries are no longer in being, and rights are not reduced for the remaining beneficiaries. "Decanting" a trust could be useful in cases where the trust instrument is very old and many of the beneficiaries either have died or have changed by operation of the trust instrument.

  • PRACTICE TIP: Trust portfolios should be reviewed and "decanting" of irrevocable trusts considered as appropriate.

  • Directed Trust (Effective January 1, 2013). Creates a new section (16.3) in the Trust and Trustees Act authorizing trust instruments to designate separate trustee and advisory functions. This will facilitate using trust advisors by insulating trustees from liability for the advisors actions when exercising investment, distribution or other powers pursuant to a trust instrument.

  • PRACTICE TIP: This change in the law should result in grantors/settlors increasing their use of "Trust Advisors" without increasing their fiduciaries risk.

  • Access to Sealed Felony Records (Effective January 1, 2013). Requires the Illinois State Police to furnish information to depository institutions requesting the same to "ascertain whether any employee of the requesting institution, an applicant for employment by the requesting institution or any officer, director, agent or any party who owns or controls, directly or indirectly, or participates directly or indirectly in the affairs of the requesting institution" has been convicted of a felony or of any criminal offense relating to dishonesty, breach of trust or money laundering.

  • PRACTICE TIP: Should facilitate a Bank's due diligence in complying with Section 19 of the Federal Deposit Insurance Act (See below).

Pending Laws/Regulations

  • Legislative Override of Crane Case. In the Crane case, the United States Bankruptcy Court for the Central District of Illinois held that a recorded mortgage was avoidable, i.e. could be set aside, by a trustee in bankruptcy, where the mortgage failed to include the maturity date and the interest rate on the note. Illinois Senate Bill 16 which has been sent to Governor Quinn for signing, would overrule this decision by making clear that the mortgage provisions set out in the Conveyance Act are permissive and not mandatory and that the failure to include the interest rate or the maturity date of the note in the mortgage does not affect the validity or priority thereof.
  • PRACTICE TIP: It is still advisable to describe the note in a mortgage as follows: "Promissory Note dated _____ in the principal amount of $______, with interest, maturing on _____."

  • Derivative Transactions – Where's the Rule/Law? A provision in the Dodd Frank Act, effective January 21, 2013, prohibits an insured state bank from engaging in derivative transactions unless the lending limit laws in the state where the bank is chartered "takes into consideration credit exposure for derivative transactions". In other words, state lending limit laws had to address derivatives by January 21, 2013 or state banks would be prohibited from engaging in derivative transactions thereafter. The Illinois Banking Act ("IBA") does not directly mention derivatives and no laws in Illinois were enacted to address this issue. As a result and in order to allow state banks to continue to engage in derivative transactions after January 21, 2013, the Illinois Department of Financial & Professional Regulation ("IDFPR") was expected to issue a final rule (that formalized the proposed rule issued last year) that would address derivatives. However, and somewhat contrary thereto, on January 17, 2013, IDFPR issued an interpretive rule concluding that the IBA meets the requirement of Dodd Frank on this issue.
  • PRACTICE TIP: If your bank issues derivatives, you may want to review the interpretive letter on IDFPR's website. In such letter, IDFPR states that Section 5(11) of IBA incorporates derivative transactions in the context of lending limits with cross reference to, and incorporation of, applicable provision of federal law. By this means, IDFPR concludes that state banks are able to continue to engage in derivative transactions.

Interesting Recent Case(s)

  • Issue: Can a financing statement that has been terminated by mistake be revived and reinstated by filing a corrective statement?
  • Held: No, a corrective statement cannot revive a terminated UCC. Once terminated, the same is final. To rule otherwise would create too much uncertainty in the commercial/banking world.
  • PRATICE TIP: When you terminate a UCC, make sure you mean it. There is no going back. In short, you're SOL.

Interesting Fact(s)

  • Problem Banks
    • The recent percentage of Illinois banks with CAMEL ratings of 3 through 5 is 26%.
    • National Trends:
      • 1987 – (height of the banking/savings and loan "crisis") – over 1,000 problem banks.
      • 1985 through 2008 (era of bank prosperity) – 200 problem banks in total (3, 4 or 5 CAMEL ratings)
      • 2010 – (manure hits the fan/fallout) - 400 problem banks
      • 2012 – (normalcy returns?) - less than 300 problem banks

  • TAG Dollars – As of September 30, 2012, there was $1.4 trillion in aggregate balances in non-interest bearing accounts in excess of the normal $250,000 FDIC insurance amount. The funds (or what remains of them) in these accounts are now uninsured.

Scary Facts

A person found guilty of knowingly violating Section 19 of the Federal Deposit Insurance Act, which prohibits a financial institution from hiring, without the prior written consent of the FDIC, any person convicted of any criminal offense involving dishonesty, breach of trust or money laundering can be sentenced to up to 30 years in jail. Even scarier, the law covers even hiring a consultant.

Fun Fact(s)/Fiction

A financially savvy but busy businessman walks by a bank that offers "24 hour banking". He does not go in - he doesn't have that much time.

PRACTICE TIP: Remember not all banking services appeal to all potential customers.




The foregoing is not intended to be legal advice, but rather, to provide accurate information regarding banking law and regulatory matters.  For more information regarding any of the foregoing items, please contact any member of our banking practice group:  Dennis W. Gorman (dgorman@srnm.com), William G. Keller, Jr. (bkeller@srnm.com), James A. Rapp (jrapp@srnm.com), William M. McCleery, Jr. (wmccleery@srnm.com), Ted M. Niemann (tniemann@srnm.com), Michael A. Bickhaus (mbickhaus@srnm.com) or Andrew K. Cashman (acashman@srnm.com), at (217) 223-3030 or visit us on the web at www.srnm.com.  We invite and welcome all questions and comments.







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