Thursday, April 18, 2024

September 2010 Legal Update

Final Guidance on Sound Incentive Compensation Policies

Interim Rule Requires New Disclosures for Consumer Mortgage Loans; Compliance Deadline January 30, 2011

New TILA Requirement of Notice When Mortgage Has Been Sold or Transferred; Compliance Mandatory January 1, 2011
Department of Justice Final Rule on ADA Standards for Accessible Design and New Proposed Rules Will Affect Banks

Compliance Dates Roundup

Final Guidance on Sound Incentive Compensation Policies

Byron’s Quick Hit: New guidance has been published by all federal regulators in an effort to require banks to appropriately balance risk to the bank with rewards to the bank associated with employee incentive compensation policies. All banks should initiate a review of employee compensation arrangements for all employees who receive incentive compensation to ensure that these plans adequately address risk associated with employee activities.
                Many in Washington perceive that the financial crisis that began in 2007 was caused in large part by financial institutions failing to adequately gauge and assess the risks associated with loans that ended up becoming bad loans. Certainly, one of the reasons for the financial crisis had to do with a huge amount of poorly underwritten loans. We could argue until we are blue in the face about whether regulated banks, or other unregulated entities, should be the focus of this discussion. Nevertheless, as a result of this concern, all of the federal bank regulators (the FDIC, the Federal Reserve Board, the OCC, and the OTS) jointly issued their “Final Guidance on Incentive Compensation” on June 21, 2010 (the “Final Guidance”). The Final Guidance became effective upon its publication on June 25, 2010, at 75 F.R. 36395. It is issued under the regulators’ authority to protect the safety and soundness of banking institutions, provided by 12 U.S.C. § 1818(b).
Key Principles Underlying the Final Guidance
                The Final Guidance notes that there are three key principles that are embodied within it:
(1)   Incentive compensation arrangements at a banking organization should provide employees incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risk;
(2)   Incentive compensation arrangements should be compatible with effective controls and risk management; and
(3)   Incentive compensation arrangements should be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.
Stated another way, these principles are concerned with the possibility that compensation arrangements, if structured improperly, can give employees incentives to take imprudent risks.
What Employees Are Covered?
                The Final Guidance applies to “all … employees who, either individually or as part of a group, have the ability to expose the organization to material amounts of risk.” Subgroups that are specifically included within this definition are:
·         Senior executives and others who are responsible for oversight of the organization’s firm-wide activities or material business lines. At a minimum, this category includes “executive officers,” within the meaning of Reg O (see 12 C.F.R. § 215.2(e)(1)) and, for publicly traded companies, “named officers” within the meaning of the Securities and Exchange Commission’s rules on disclosure of executive compensation (see 17 C.F.R. § 229.402(a)(3)).
·         Individual employees, including non-executive employees, whose activities may expose the organization to material amounts of risk. One example is a trader with a large position limit relative to the organization’s overall risk tolerance.
·         Groups of employees who are subject to the same or similar incentive compensation arrangements and who, in the aggregate, may expose the organization to material amounts of risk. An example is loan officers, who, as a group, originate loans that account for a material amount of the organization’s credit risk. 
Examples of employees who will generally not fall within the definition of “covered employees” include tellers, bookkeepers, couriers, and data processing personnel.
Principles of a Sound Incentive Compensation System
1.     Balanced Risk-Taking Incentives
Under the first principle outlined in the Final Guidance, incentive compensation systems should “balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risks.” According to the Final Guidance:
An incentive compensation arrangement is balanced when the amounts paid to an employee appropriately take into account the risks (including compliance risk), as well as the financial benefits, from the employee’s activities and the impact of those activities on the organization’s safety and soundness. As an example, under a balanced incentive compensation arrangement, two employees who generate the same amount of revenue or profit … should not receive the same amount of incentive compensation if the risks taken by the employees in generating that revenue or profit differ materially. The employee whose activities create materially larger risks for the organization should receive less than the other employee, all else being equal.
                In relation to the balancing of risk and reward, the Final Guidance provides as follows:
·         A bank should consider the full range of risks associated with an employee’s activities, as well as the time horizon over which those risks may be realized. Risks that should be considered include credit, market, liquidity, operational, legal, compliance and reputational risks, as well as other risks to the viability or operation of the organization. Some risks or combination of risks may have a low probability of occurring, but if realized, may have a highly adverse effect on the organization (a “bad tail risk”). Special attention should be focused on such risks, which often are overlooked. Where possible, reliable quantitative measures of risk and risk outcomes should be used in developing and assessing balanced compensation arrangements.
·         An unbalanced arrangement can be moved toward balance by adding or modifying features that cause the amounts ultimately received by employees to appropriately reflect risk and risk outcomes. Suggested methods of accomplishing this goal include (i) risk-adjusting payments to employees; (ii) deferral of payments to account for the full range of risks associated with the activities; (iii) lengthening performance periods; and (iv) reducing sensitivity to short-term performance.
·         Incentive compensation arrangements should be tailored to account for the differences between employees, including the substantial differences between senior executives and other employees, and between different banking organizations. The Final Guidance recognizes that equity-based compensation may be particularly effective for senior executives, while it may be less so for employees who feel like their activities are unlikely to affect the stock price of the organization. Also, banks differ significantly in terms of the complexity of their activities and business strategies. Each bank should evaluate itself according to its own activities.
·         Use of “golden parachutes” should be used sparingly and carefully. Arrangements where senior executives receive benefits upon their departure from the organization or a change in control of the organization, without regard to risk or risk outcomes can provide the employee significant incentives to expose the bank to undue risk. Banks should review both existing and potential “golden parachutes” and their potential impact on the bank’s safety and soundness. Banks should consider “balancing features,” such as risk adjustment or deferral requirements that extend past the employee’s departure.
·         Banks should effectively communicate to employees the ways in which incentive compensation award and payments will be reduced as the bank’s risks increase.
2.     Compatibility with Effective Controls and Risk-Management
The second principle outlined in the Final Guidance provides that a bank’s risk-management processes and internal controls should reinforce and support the development and maintenance of balanced incentive compensation arrangements. Specific guidance under this second principle includes:
·         Banks should have strong controls to ensure that their processes for achieving balanced compensation arrangements are followed and to maintain the integrity of their risk-management and other functions. Banks should create and maintain sufficient documentation to permit an audit of the bank’s processes for establishing, modifying and monitoring incentive compensation arrangements.
·         Risk-management personnel and any other appropriate personnel should have input into the bank’s processes for designing incentive compensation arrangements and assessing their effectiveness in restraining imprudent risk taking.
·         Compensation for employees in risk-management and control functions should be sufficient to attract and retain qualified personnel. Further, conflicts of interest for risk-management and control functions should be avoided. Thus, compensation for such personnel should not be substantially based on the profitability of the business units they review. Rather, their performance measures should be based primarily on the adherence to internal controls.
·          Banks should monitor the performance of their incentive compensation arrangements and should revise the arrangements as needed if payments to not appropriately reflect risk.
3.     Strong Corporate Governance
The third principle reflected in the Final Guidance requires that banks should have strong and effective corporate governance to help ensure sound compensation practices, including active and effective oversight by the board of directors. Among the specific guidance related to this principle is:
·         The board of directors should monitor the performance, and regularly review the design and function, of incentive compensation arrangements. The board should directly approve incentive compensation arrangements for senior executives. Directors should stay abreast of significant emerging changes in incentive compensation plans in the marketplace, as well as regulatory advice regarding incentive compensation policies.
·         The organization, composition, and resources of the board of directors should permit effective oversight of incentive compensation. The board should either have directly through training and experience, or should have access to experience in risk-management and compensation practices in the financial services industry that is appropriate for the nature, scope, and complexity of the organization’s activities. While the retention and use of outside parties may be helpful, the board retains the ultimate responsibility for ensuring that the bank’s incentive compensation arrangements are consistent with safety and soundness requirements.
·         A bank’s disclosure practices to shareholders should support safe and sound incentive compensation arrangements. Sufficient disclosures to shareholders should be made to allow the shareholders to monitor and take action to restrain the potential for imprudent risks. Such information should relate to both senior executives and other employees.
·         Large banking organizations, especially, should follow a systematic approach to developing a compensation system that has balanced incentive compensation arrangements. Such a systematic approach should include:
o    Identifying employees who are eligible to receive incentive compensation and whose activities may expose the organization to material risks.
o    Identifying the types and time horizons of risks to the organization from the activities of these employees.
o    Assessing the potential for the performance measures included in the incentive compensation arrangements for covered employees to encourage the employees to take imprudent risks.
o    Inclusion of balancing elements, such as risk adjustment or deferral periods, within the incentive compensation arrangements for covered employees that are reasonably designed to ensure that the arrangement will be balanced in light of the size, type, and time horizon of the inherent risks of the employees’ activities.
o    Communicating to the employees the ways in which their incentive compensation awards or payments will be adjusted to reflect the risks of their activities to the bank; and
o    Monitoring incentive compensation awards, payments, risks taken, and risk outcomes for covered employees and modifying the relevant and risk outcomes.
                Each bank’s regulator may take enforcement action against the bank if its incentive compensation arrangements are not in compliance with the Final Guidelines. Although the Final Guidelines apply to all banks, large bank organizations will be expected to adhere to “systematic and formalized” policies, procedures and processes. To the extent that a bank does not use incentive compensation policies to a significant extent, the Guidelines will largely not apply. Further, the Final Guidelines specifically note that a bank-wide profit-sharing or bonus plan based upon the bank’s profitability will not cause a smaller bank to be considered a significant user of incentive compensation arrangements.
                All banks should immediately take steps to evaluate their incentive compensation arrangements and related risk-management, control, and corporate governance processes.
Interim Rule Requires New Disclosures for Consumer Mortgage Loans;  Compliance Deadline January 30, 2011
Byron’s Quick Hit: A new interim rule published by the FRB amends Reg Z to require revised disclosures in tabular format for consumer mortgage loans (secured by real property and/or a dwelling). In addition, the new disclosures require a statement to the consumer that there is no guarantee the consumer will be able to refinance the loan. Compliance with the new provisions of 12 C.F.R. § 226.18 (s) and (t) is mandatory for loan applications received on or after January 30, 2011.
                On August 16, 2010, the Federal Reserve Board (the “FRB”) adopted an interim rule (the “Interim Rule”) for implementation of certain requirements of the Mortgage Disclosure Improvement Act of 2008 (“MDIA”). While the FRB is seeking comments regarding the Interim Rule for 60 days, compliance with the Interim Rule will nevertheless become mandatory for loan applications received on or after January 30, 2011. 
Background to MDIA and the Interim Rule
                MDIA amends the Truth in Lending Act (TILA). Generally, MDIA requires transaction-specific TILA disclosures within 3 business days after an application is received and before the consumer has paid a fee (other than a fee for obtaining a credit history report). Also, MDIA requires creditors to deliver early TILA disclosures at least 7 business days before consummation, and if necessary, provide corrected disclosures if the disclosed APR varies in excess of specified tolerances. Any corrected disclosures must be received at least 3 business days prior to closing. The MDIA changes also expanded coverage to loans secured by any dwelling, as opposed to loans secured by the consumer’s principal dwelling. The prior changes required under MDIA are described in more detail in the July 2009 Legal Update.
                The Interim Rule is designed to address compliance with provisions of MDIA having an effective date of January 30, 2011 (or earlier if established by the FRB). Specifically, the Interim Rule addresses disclosures that are required if the loan’s interest rate or payments can change. As described below, disclosures are required in a tabular format describing possible changes. In addition, the Interim Rule addresses the MDIA requirement that consumers be given a statement that there is no guarantee the consumer will be able to refinance the loan transaction in the future.
New Disclosure Requirements for Consumer Transactions Secured by Real Property or a Dwelling
                Existing Section 226.18(g) (part of Reg Z) applies to closed-end consumer credit transactions and requires the disclosure of a current payment schedule. The Interim Rule revises Section 226.18(g), exempting out from its application consumer transactions secured by real property or a dwelling (other than interests in a timeshare plan). The new disclosure requirements for such transactions are contained within a new provision, Section 226.18(s).
                Section 226.18(s)(1) requires that the new disclosures for transactions secured by real property or dwelling must be in the form of a TABLE, having no more than 5 columns, and with headings and format substantially similar to new examples provided in Appendix H to Reg Z. Further, the information that may be included in the table is specifically limited to the information required by Section 226.18(s). It must be placed in a “prominent location” and must use a minimum 10-point font.
                Information that must be included in tabular format includes:
1.             Interest Rate Information – For FIXED RATE loans, the table must show the interest rate at consummation. For ADJUSTABLE-RATE or STEP-RATE mortgages, the table must reflect (i) the interest rate at consummation and the period of time until the first interest rate adjustment may occur, labeled as the “introductory rate and monthly payment”; (ii) the maximum interest rate that may apply during the first five years after consummation and the earliest date on which that rate may apply, labeled as the “maximum during first five years”; and (iii) the maximum interest rate that may apply during the life of the loan and the earliest date that the rate may apply, labeled as “maximum ever”. If the loan provides for rate increases without regard to a base interest rate adjustment, the interest rate disclosure must reflect the interest rate that will be in effect at the time the first payment increase is scheduled to occur and the date on which the increase will occur, labeled as “first adjustment” if the loan is an adjustable-rate mortgage or, otherwise, labeled as “first increase”. For NEGATIVE AMORTIZATION loans, the table must reflect (i) the interest rate at consummation, and if the interest rate will be adjusted, the length of time until it will be adjusted, and the label “introductory” or “intro”; (ii) the maximum interest rate that could apply when the consumer must begin making fully amortizing payments; (iii) if the minimum payments will increase before the consumer must begin making fully amortizing payments, the maximum interest rate that could apply at the time of the first payment increase and the date the increase is scheduled; and (iv) if a second increase in the minimum required payment may occur before the consumer must begin making fully amortizing payments, the maximum interest rate that could apply at the time of the first payment increase and the date the increase is scheduled. For an amortizing ADJUSTABLE RATE MORTGAGE WITH AN INTRODUCTORY RATE, if the interest rate at consummation is less than the fully-indexed rate, the disclosures must contain a separate box directly beneath the table required by the new Section 226.18(s) (formatted substantially similar to Model Clause H-4(I)), showing: (i) the interest rate at consummation and the period of time for which it applies; (ii) a statement that, even if market rates do not change, that the interest rate will increase at the first adjustment and designation of when the rate adjustment will occur; and (iii) the fully-indexed rate.
2.             Payments for Amortizing Loans. If all periodic payments will be applied to principal and interest, for each interest rate disclosed as required above, the table must reflect (i) the corresponding principal and interest payment, labeled as “principal and interest”; (ii) if the P & I payment may increase without an interest-rate adjustment, the payment that corresponds to the first such increase and the earliest date on which the increase could occur; (iii) if applicable, that an escrow account is required and an estimate of the amount of taxes and insurance, including any mortgage insurance; and (iv) for each interest rate or increase that may apply, a sum of all amounts that are expected to be owed, labeled as “total estimated monthly payment.”
3.             Payments for Interest-Only Loans. For interest-only loans, for each interest rate disclosed, the table must reflect (i) the corresponding periodic payment; (ii) if the payment will be applied only to accrued interest, the amount applied to interest, labeled as “interest payment,” and a statement that none of the payment is being applied to principal; (iii) if the payment will be applied to accrued interest and principal, the earliest date that such payments will be required and an itemization of the amount applied to accrued interest and the amount applied to principal, labeled as “interest payment” and “principal payment”; (iv) if applicable, that an escrow account is required and an estimate of the amount of taxes and insurance, including any mortgage insurance; and (v) for each payment that may apply, a sum of all amounts that are expected to be owed, labeled as “total estimated monthly payment.”
4.             Payments for Negative Amortization Loans. For negative amortizing loans, the table must reflect (i) the minimum initial periodic payment required until the first increase or interest rate increase; (ii) the minimum periodic payment that would be due at the first payment increase, and second, if any; (iii) a statement that the minimum payment pays only some interest, does not repay any principal, and will cause the loan amount to increase. In addition, the table for a negative amortizing loan must reflect the fully amortizing periodic payment at the earliest time when such a payment must be made. Finally, for each interest rate disclosed, the table should show the amount of the fully amortizing periodic payment, labeled as “full payment option,” and a statement that these payments pay all principal and all accrued interest.
5.             Payments for Loans with Balloon Payments. If the loan transaction will require a balloon payment (defined as a payment that is more than two times a regular periodic payment), the balloon payment must be disclosed separately from the other periodic payments. It should be shown outside of the table and in a manner substantially similar to Model Clause H-4(J) in Appendix H to Reg Z. If a balloon payment is scheduled to occur at the same time as a regular payment required to be disclosed in the table, then the balloon payment must be disclosed in the table as well.
6.             Additional Disclosures for Loans with Negative Amortization. For negative amortizing loans, in addition to the table required by Section 226.18(s), the following information must be included in close proximity to the table in a format substantially similar to Model Clause H-4(G) in Appendix H: (i) the maximum interest rate, the shortest period of time in which such interest rate could be reached, the amount of estimated taxes and insurance included in each payment disclosed, and a statement that the loan offers payment options, two of which are shown; and (ii) the dollar amount of the increase in the loan’s principal balance if the consumer makes only the minimum required payments for the maximum possible time and the earliest that the maximum interest rate can be reached.
“No-Guarantee-to-Refinance” Statement
                In addition to the new table and other requirements above, the Interim Rule revises Section 226.18 by adding a new Section 226.18(t). Like the new provisions of 226.18(s), Section 226.18(t) applies to closed-end consumer transactions secured by real property or a dwelling, other than a consumer’s interest in a timeshare plan. Section 226.18(t) provides that the creditor disclose a statement that “there is no guarantee the consumer can refinance the transaction to lower the interest rate or periodic payments.” This statement must be in a form substantially similar to Model Clause H-4(K), contained in Appendix H to Reg Z.
New TILA Requirement of Notice When Mortgage Has Been Sold or Transferred; Compliance Mandatory January 1, 2011
Byron’s Quick Hit: The Helping Families Save Their Homes Act of 2009 amends the Truth In Lending Act and applies to all banks. It requires notice to be given to a consumer by the TRANSFEREE of a residential mortgage loan. If your bank does not acquire or receive rights to previously-originated mortgage loans, this Act will not require action of you. The FRB has adopted a new final rule affecting banks under its jurisdiction. Compliance with the new final rule is mandatory on or before January 1, 2011.
                Congress passed the Helping Families Save Their Homes Act of 2009 (the “2009 Act”) on May 20, 2009. Effective immediately, this Act required the purchaser or assignee that acquires a residential mortgage loan to provide disclosure to the mortgagor within 30 days from the acquisition of the loan. This requirement was covered in the August 2009 Legal Update. On August 16, 2010, the Federal Reserve Board published a final rule to provide compliance guidance and greater certainty on the new requirements. The Federal Reserve Board previously published an interim rule on the same issue in November 2009 (the “Interim Rule”). Banks that are regulated by the Federal Reserve Board may continue to act under the Interim Rule published in 2009. However, compliance with the final rule is mandatory on January 1, 2011. It should also be noted that the provisions of the 2009 Act apply to all banks, not just those with the FRB as their regulator.
Application of the Final Rule
                The Final Rule applies to all banking institutions governed by the Federal Reserve Board, i.e., all national banks and state-chartered banks that participate in the Federal Reserve system. The 2009 Act amended the Truth in Lending Act (“TILA”) by adding a new provision contained in TILA Section 131(g) [15 U.S.C. § 1641(g)]. This provision applies to all consumer credit transactions secured by the principal dwelling of a consumer. Thus, the disclosure requirements apply to both closed-end mortgage loans and open-end home equity lines of credit. The requirements of the final rule apply to the party ACQUIRING THE LOAN, not to the seller of the loan.
Mortgage Transfer Disclosures (12 C.F.R. § 226.39)
                Under the Interim Rule, the disclosure requirements of Section 226.39 apply to any “covered person” with certain specified exceptions. “Covered person” includes any person that acquires more than one existing mortgage loan in any 12-month period. For purposes of the Interim Rule, any mortgage loan transactions secured by the principal dwelling of a consumer is covered, whether a closed-end mortgage loan or an open-end plan (home equity line of credit).
                Generally, TILA and Reg Z apply to parties that regularly extend consumer credit. However, the 2009 Act is not limited to persons that extend credit by originating loans. Rather, the disclosure requirements of the 2009 Act applies to the owner of the consumer debt following the sale, transfer or assignment, regardless of whether that party would be a “creditor” for other purpose under TILA or Reg Z. To recognize this distinction, the Interim Rule referred to “covered persons” as opposed to “creditors”. 
                Under the Interim Rule, in order to become a “covered person,” a party had to become the OWNER of an existing mortgage loan by acquiring legal title to the debt obligation. As such, “covered person” does not include a person who only acquires a beneficial interest of security interest in the loan. “Covered person” also does not include investors who purchase an interest in a pool of loans (e.g., mortgage-backed securities, etc.) who do not acquire legal title in the underlying mortgage loans. However, the Interim Rule would require disclosures where ownership is transferred as a result of a corporate merger, etc. Further, the Interim Rule WOULD NOT apply to mortgage servicers, even if legal title is transferred to the mortgage servicers, if the servicer holds legal title to the loan solely for administrative convenience. The Final Rule adopts the same definition of “covered person” as used in the Interim Rule.
Disclosure Required
                Consistent with the 2009 Act, the Interim Rule provides that the required disclosures must be mailed or delivered to the consumer on or before the 30th calendar day following the date that the covered person acquires the loan. The date the loan is acquired is the acquisition date recognized within the books and records of the acquiring person. Where there is more than one covered person as to any particular loan, only one disclosure may be given on behalf of all covered persons. If there is more than one consumer as to any particular loan, the disclosures may be mailed or delivered to any consumer who is primarily liable on the obligation. 
                The disclosure requirements of Section 226.39 apply any time the acquiring party is a separate legal entity from the transferor, even where the parties are affiliated entities. Where there are multiple transfers, the regulation provides that disclosures may be combined into a single disclosure to the consumer, provided that each covered person must meet the requirement as applicable to it. Thus, for example, where a covered person acquires a loan on March 15 with the intent to assign it to another entity on April 30, the covered person may mail a single disclosure on or before April 14, providing information for both entities, and indicating when the subsequent transfer is expected to occur. Further, in the above example, if the covered entity does not know the subsequent transfer date with certainty, it may use an estimate of the date and provide the estimated date.
                The Final Rule adds to these requirements by clarifying that the disclosure must be provided clearly and conspicuously and in writing, in a form the consumer can keep. Like other Reg Z disclosures, electronic disclosures are allowed provided the consumer has given his prior consent to receive disclosures in electronic form. Further, the Final Rule clarifies that the new disclosures can be combined with other materials or disclosures (including the transfer of servicing notices required by RESPA).
                The Final Rule varies from the Interim Rule in that instead of referring to the acquisition date, as recognized on the books of the acquiring entity, the Final Rule provides that the disclosures must be provided within 30 days of the “date of transfer,” which may be either the acquisition date recognized by the transferor or the transferee.
Exceptions to the Disclosure Requirements
                The Interim Rule contains two exceptions to the disclosure requirements. The Final Rule retains these two exceptions and adds a third. The three exceptions are:
1.     A covered person does not have to provide the disclosures if it transfers or assigns the loan to another party on or before the 30th calendar date that it acquired the loan. For example, if a loan originates on March 1 and the original creditor sells the loan to a covered person on March 15, the covered person is not required to make disclosures if the loan is subsequently sold to a third party on or before April 14.
2.     If the original creditor transfers a loan with the obligation to repurchase it, and does not recognize the transaction as a sale of the loan on its books and records, the acquiring party does not have to make disclosures. HOWEVER, if the transferor does not repurchase the mortgage loan, the acquiring party must make disclosures within 30 days after the date the transaction is recognized as an acquisition on its books and records.
3.     In addition to the two exceptions above, the Final Rule adds a third exception for covered persons that acquire only a partial interest in the loan, so long as the party authorized to receive the consumer’s right to rescind and resolve issues concerning the consumer’s payments on the loan does not change as a result of the transfer.
Content of the Disclosures
                Under both the Interim and Final Rules, the required disclosures must contain (1) the identity, address, and telephone number of the covered person that owns the mortgage loan; (2) the date of the acquisition or transfer; (3) contact information that the consumer can use to reach an agent or party having authority to act on behalf of the covered person; and (4) the location of the place where the transfer of the ownership of the debt is recorded (or will be recorded if it has not been as of the date of the disclosure).
Department of Justice Final Rule on ADA Standards for Accessible Design and New Proposed Rules Will Affect Banks
                An area of legal compliance that bank compliance officers may not think of as often is compliance with the Americans with Disabilities Act (ADA). Although not yet effective, recent publications of the Department of Justice (“DOJ”) serve to remind us all of this important area of the law. 
Background and History of the ADA
                The ADA is broken down into several titles. The primary titles that affect banks are Title I, regarding employment practices and Title III, governing access to public facilities, products and services. Compliance with Title I is under the authority of the Equal Employment Opportunity Commission (“EEOC”), while the DOJ is the government agency with authority to write rules and investigate violations of Title III. July 26, 2010 represented the twentieth anniversary of the passage of the ADA. To “celebrate” the DOJ published a new final rule, adopting revised ADA Standards for Accessible Design (the “New ADA Standards”). 
The New ADA Standards have not yet been published in the Federal Register, and compliance with the New ADA Standards will not be mandatory until six months after their publication in the Federal Register. Further, banks will generally not be required to have taken positive steps toward facilitating access for disabled within six months. Rather the New ADA Standards initially require each institution to implement a compliance plan within that period. The new final rule can be accessed at This final rule affects accessibility standards and requirements for certain existing, as well as new construction of commercial facilities and places of public accommodation (including banks). The New ADA Standards replace the accessibility standards that have been in place since 1991. 
Although banks are generally subject to the same provisions contained in Article III as all other businesses open to the public, of special concern is the application of the ADA, and the New ADA Standards in particular, to Automatic Teller Machines (ATMs). In general, banks will need to conform to the new requirements for all new ATMs constructed. Generally, unless they are altered, existing ATMs will not be required to be modified as it relates to the height and reach and other physical access requirements. However, banks may be forced to modify ATMs to comply with communication-related elements of the New ADA Standards, depending on a number of factors applicable to each bank. Examples of upgrades that may be required include speech output requirements that are designed to aid those with hearing, vision or speech disabilities. Such upgrades will be required unless it is an “undue burden” to the bank. “Undue burden” is a subjective determination on a case-by-case basis of whether the particular accommodation requires “significant difficulty or expense.” Factors that are to be considered in making this determination include (i) the nature and cost of the action; (ii) the number of persons employed; (iii) the effect on expenses and resources; (iv) legitimate safety requirements; (v) the proximity and other relationships to any parent entity; and (vi) the financial resources of any parent entity.
Although there remains many months before action will be required, banks should consider taking action immediately to determine what upgrades may be feasible for existing ATMs and possible additional expenses that may be required for new ATM purchase. If your bank does not already do so, you should also plan on revisiting these issues periodically, probably at least annually.
Compliance Dates Roundup
6/25/2010 – Final Guidance on Incentive Compensation Policies Published (See discussion above)
7/1/2010 – Deadline to comply with new Reg E Opt-in Requirement for Overdraft Protection for ATM and One-Time Debit Card Transactions (See December 2009 Legal Update and June 2010 Legal Update)
7/1/2010 – Deadline to comply with new Reg Z Changes to Open-End Credit (See March 2010 Legal Update)
7/1/2010 – Deadline to comply with new regulations under Fair and Accurate Credit Transactions Act (“FACT Act”) (See March 2010 Legal Update)
8/22/2010 – Certain TILA/Reg Z Credit Card Act Provisions Become Effective (including reasonableness/proportionality of penalty fees/charges and re-evaluation of rate increases) (See January 2010 Legal Update)
8/22/2010 – EFTA/Reg E Credit Card Act Provisions Restricting Certain Fees for Prepaid Gift Cards and Prohibiting Expiration Dates of Less than 5 Years Become Effective (See January 2010 Legal Update)
10/1/2010 – Deadline to Escrow for HPML Loans on Manufactured Housing (See September 2009 Legal Update)
10/1/2010 – Deadline to Adopt Policies and Procedures Required for Compliance with the S.A.F.E. Act (See August 2010 Legal Update)
12/31/2010 – FDIC TAG Program Expires (for banks that did not opt out in April 2010, unless program is further extended by FDIC) (See May 2010 Legal Update)

1/1/2011 – Deadline to Comply with New Final Rule for Notice of Transfer of Mortgage (See discussion above)

1/30/2011 – Deadline to Comply with New Reg Z Disclosures (§ 226.18(s) and (t)) (See discussion above)