STANLEY RAGALEVSKY
Few ‘drawbacks’

Things will get a whole lot easier for state-chartered banks at the end of March. Because of a recodification law titled “An Act Relative to Banks and Banking,” such financial institutions now have a user-friendly statute to abide by.

In December, Chapter 461 was signed into law, streamlining archaic banking laws last revised in 1982. The process began in 2001, when Sen. Andrea F. Nuciforo Jr., D-Pittsfield, and the Massachusetts Division of Banks each filed bills to recodify Chapter 167E of the Massachusetts General Laws, which was mainly a mortgage lending statute. The two bills ultimately were combined into a single bill.

One key requirement – and what many industry players are actually terming a benefit – of the new Chapter 167E is that a bank must adopt its own comprehensive written loan policy.

According to Stanley Ragalevsky, partner at Boston-based law firm Kirkpatrick & Lockhart Nicholson Graham, the law allows each bank to determine its lending authority by adopting a comprehensive written loan policy, subject to safety and soundness.

This change creates an open door for banks to review their current policies, Ragalevsky said.

“Now is not a bad time to pull out the lending policy and look at its adequacy,” Ragalevsky said. “They should take a look at what works best for them.”

He said he suspects that smaller banks could have more work to do in updating their lending policies because smaller institutions don’t necessarily have the loan process review procedures that larger banks have.

“This will give them an impetus” to create comprehensive policies, Ragalevsky said.

For banks planning to review their lending policies, Ragalevsky suggests having an expert from outside the bank evaluate it. Ragalevsky said banks should establish prudent underwriting standards that specify basic loan product terms, collateral and appraisal requirements, applications and loan approval requirements, and loan administration procedures.

While the law enables creation of a streamlined process, Kenneth F. Ehrlich, partner at Nutter, McClennen & Fish in Boston, said banks will have some work to do.

“They’ve got to conduct a major review and overhaul of their loan policies,” Ehrlich said. “The blueprint is going to exist in [their] bank.”

But the loan policy requirement also means good news for banks. Ragalevsky said that because institutions will be able to draft their own guidelines, they will have to worry less with the new law.

“They don’t have to spend a lot of time finding a statutory cubbyhole to fit [into],” he said.

Ragalevsky said that inadvertent failure to satisfy statutory conditions relating to maximum loan amounts, maximum loan terms and other requirements has “long been a fertile source of violation of law citations by examiners.”

John O’Connor, president of Rockland-based South Coastal Bank, said the law is good for banks because it makes lending simpler. O’Connor said banks should take the opportunity to revisit policies to assure it is a “living, breathing document.”

Unlike many other regulatory requirements, this one has few critics within the banking community.

“I don’t see any drawbacks and that is one thing that makes it unique,” Ragalevsky said.

The only trap, he said, is if banks are not careful with exceptions to the policy. The law gives a bank limited flexibility to make loans that are exceptions from its policy, but Ragalevksy warns this should not be abused.

“They should do it sparingly,” Ragalevsky said, adding that banks should only grant exceptions with good cause.

A bank loan policy’s parameters should be set with the typical loan of a particular class in mind, he said. If there is good reason to waive the loan policy requirements, it may be permissible to make the loan as an exception to the policy. Ragalevsky said approvals of exceptions should be documented in writing and reported quarterly to the bank’s board of directors. Ragalevsky also suggests that banks keep a separate list of all such loans in the bank’s files. A bank’s loan policy also should contain an internal limit on the total amount of exceptions and describe the reasons for authorization.

The new law tackles other issues besides lending. It allows for limited-purpose trust companies to operate in Massachusetts. Before this law, an entire bank had to be formed in order to do any trust business. This could require between $8 million to $10 million in capital, according to Ehrlich. Because limited-purpose trust companies are now legal in Massachusetts, the capital requirement is expected to be between $1 million to $2 million, he said.

This is good news, Ehrlich said.

“A lot of major financial services companies like to have a trust company under the corporate umbrella,” Ehrlich said.

Building Trust

With the authorization of such trust companies, Massachusetts is now on par with other states allowing them, he said.

But Ehrlich doubts there will be a huge influx of limited-purpose trust companies moving into the Bay State.

“A lot of [companies] that wanted them got them,” he said.

Companies could operate as a trust company in Massachusetts by getting a national charter or getting a limited-purpose trust charter outside of the state.

But Ehrlich said he suspects there will not be an “insignificant number” of limited-purpose trust charters issued in Massachusetts in years to come.

The banking industry will enjoy other benefits stemming from the new law. Ehrlich points to more relaxed rules on branching. Banks no longer will need to demonstrate “net new benefits” when establishing a new branch.

The law also eliminates the requirement that the bank commissioner determine the amount which a bank or financial institution may invest in the purchase, establishment, installation, operation, lease, use or sharing of an off-premises ATM.

The bank commissioner also is empowered through the new law with discretion to determine if banks should receive Community Reinvestment Act credit for electronic banking activities.

While banks get set to review their policies, the commissioner of banks also has work to do. Banking attorney Kevin Handly of New Hampshire-based Gallagher, Callahan & Gartrell said the new law gives the commissioner of banks greater authority and discretion. He said he hopes the commissioner honors the spirit of the bill by not replacing one detailed set of specifications with another.

Ehrlich said the law is now updated to reflect many of the Division of Bank’s existing regulations.

“This law involves the Legislature catching up to where the commissioner already was,” Ehrlich said.

The Division of Banks does have plans to take action on certain aspects of the bill.

“The Division of Banks is going to be undertaking a number of initiatives,” said David Cotney, senior deputy commissioner at the DOB.

Those include revising “Parity with National Banks” regulations for technical amendments, repealing the “Maximum Loan Limitations for Certain Classes of Mortgage Loans” and revising “Adjustable Rate Mortgage Loans” and “Insider Transactions” regulatory bulletins for technical amendments.

The division is also taking several actions regarding limited-purpose trust companies, such as developing an application process, including minimal capitalization requirements; developing an examination program for both trust and safety and soundness risks; and determining applicability of the CRA and other specified laws to limited-purpose trust companies.

Because the law changes the process for the establishment of a new branch, the commissioner plans to revise its regulatory bulletin “Expedited Branch Office Application Procedures” for necessary amendments and eliminate numerous branch applications and replace them with a uniform notice procedure.

The commissioner also plans to reexamine other regulatory guidelines that may be affected by the new law, such as CRA and school bank programs.

Jennifer Jope may be reached at jjope@thewarrengroup.com.