Nutter Bank Report, April 2015

Headlines

Agencies Respond to Frequently Asked Questions about Regulatory Capital Rules OCC Updates Guidance on Subordinated Debt for National Banks and Federal Thrifts Federal Reserve Issues Final Small Bank Holding Company Rule FFIEC Issues Guidance on Malware and Cyber Attacks Targeting User Credentials Other Developments: Consumer Complaints and Housing Counselors 1. Agencies Respond to Frequently Asked Questions about Regulatory Capital Rules

The federal banking agencies have issued guidance in the form of answers to frequently asked questions (FAQs) about the agencies' regulatory capital rules. The FAQs released on April 6 clarify the definitions of capital and high-volatility commercial real estate (HVCRE), and address issues concerning other real estate and off-balance-sheet exposures, and separate account and equity exposures to investment funds, among other topics. For example, the FAQs clarify that a banking organization's investments in common stock or other capital instruments issued by the Federal Reserve Banks and the Federal Home Loan Banks are not considered investments in the capital of unconsolidated financial institutions that would be subject to the regulatory capital rules' requirement that certain investments in the capital of unconsolidated financial institutions in excess of 10% of common equity tier 1 capital must be deducted from common equity tier 1 capital. The FAQs also advise that certain modifications of a residential mortgage loan, such as lowering the interest rate for customer retention purposes, would cause the risk-weighting applicable to the loan to change from 50% to 100%. However, according to the FAQs, a banking organization could retain the 50% risk-weighting by performing additional underwriting on the loan to ensure that the credit quality of the borrower has not deteriorated. The FAQs further clarify that a banking organization's investment in a bank-owned life insurance (BOLI) hybrid product may qualify as a "separate account" which must be treated as if it were an equity exposure to an investment fund for purposes of the regulatory capital rules if the gains and losses on the pool of assets are reflected in the cash surrender value of the BOLI recorded on the banking organization's balance sheet. The agencies plan to periodically update the FAQs with additional guidance about the regulatory capital rules.

Nutter Notes: The FAQs provide significant guidance on the application of the definition of HVCRE under the regulatory capital rules. The FAQs clarify that acquisition, development or construction (ADC) loans made prior to the effective date of the regulatory capital rules are not grandfathered from the definition of HVCRE. Therefore, ADC loans made before the effective date of the rules must be treated as HVCRE loans unless such loans meet the criteria for an exemption provided in the definition of HVCRE. The FAQs advise that an additional contribution of capital by the borrower to an existing HVCRE loan, after the banking organization has already advanced funds to the borrower, cannot be used to meet the 15% contributed capital requirement for an exemption from the HVCRE definition. In such a case, the loan remains an HVCRE loan because any contribution of cash or land must be made before a loan's funds are advanced for a loan to be considered a CRE loan rather than an HVCRE loan...