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MASSACHUSETTS AMENDS BANK LAWS
RELATIVE TO GOVERNANCE AND LOANS TO
OFFICERS
STANLEY V. RAGALEVSKY AND SEAN P. MAHONEY
A recent change in Massachusetts law provides opportunities for state chartered
banks there to revisit certain governance issues.
M
assachusetts Governor Mitt Romney recently signed into law
Chapter 221 of the Acts of 2006 — An Act Relative to State
Chartered Banks (“Chapter 221”). Chapter 221 makes several
changes relating to the committee structure and reporting obligations of
boards of Massachusetts savings banks, co-operative banks and trust companies. It also amends the Massachusetts banking statutes to increase the lending authority of state chartered banks on loans to senior officers and otherwise clarify reporting obligations with respect to insider loans. It took effect
on November 7, 2006.
The most significant reform made by Chapter 221 is to reduce the statutory autonomy of mutual savings bank boards of investment. The requirement that the board of investment approve all loans, rates of interest, purchases and sales of securities, and foreclosures has been eliminated. Such
Stanley V. Ragalevsky and Sean P. Mahoney are attorneys with K&L Gates.
Mr. Ragalevsky deals with the business and regulatory issues facing financial
institutions. Mr. Mahoney’s practice is focused in the areas of corporate law and
financial services regulation.
The authors can be reached at
stan.ragalevsky@klgates.com and sean.mahoney@klgates.com, respectively.
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duties may be delegated by the full board of trustees to the board of investment or one or more committees made up of trustees or officers of the bank.
By eliminating the statutory requirement that the board of investment
approve various enumerated items, the Legislature apparently intended to
limit its legal autonomy. This effectively makes the board of investment
function more like an executive committee of the board of trustees and not
as a separate board with independent statutory functions. It also gives the
board of trustees the authority to allocate loan, investment and deposit interest rate setting functions to other committees.
SECURITY COMMITTEES
Chapter 221 also makes significant changes to the statutory responsibilities of co-operative bank security committees by creating a requirement that
the security committee deliver a report relating to loans, investments, and
reserves to each meeting of the full board of directors. Although this appears
merely ministerial in nature, the contents of the report imply that the statutory role of the security committee has been expanded to that historically
associated with an executive committee. The new report is required to
address any changes in a co-operative bank’s investments and reserves,
implying that the committee has some degree of responsibility for those
areas. This is a significant modification from prior practice. Many co-operative banks may either delegate certain committee functions or use this
statutory change as an opportunity to revisit committee functions.
The statutory name of a co-operative bank finance committee has been
changed to “audit committee,” without any change to its duties. The committee name change may ultimately prove beneficial because it should
encourage the retitled audit committee at a co-operative bank to limit attention to critical audit and risk oversight functions and to assign other functions traditionally performed by co-operative bank finance committees to
“new” finance committees or elsewhere.
The content of, and responsibility for, the statutory reports required of
savings banks, co-operative banks and trust companies has also been modified by Chapter 221.
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MASSACHUSETTS AMENDS BANK LAWS
QUARTERLY REPORTS
The quarterly reporting previously performed by the board of investment
of a Massachusetts mutual savings bank to the full board of trustees has been
simplified. Under existing law, the board of investment is obligated to deliver
to the board of trustees a report for the period since the last trustees’ meeting
which included lists showing each loan in excess of $50,000 made to any borrower; each loan modification; all purchases of securities by the bank; all unrepaid tax escrow advances made to borrowers; all real estate acquired by foreclosure; all donations; all expenditures for memberships and services; all commissions paid by the bank to acquire loans; certain loan delinquencies (i.e., real
estate loans more than six months overdue or with more than twelve months’
unpaid taxes; time loans in excess of $25,000 overdue more than 90 days; debt
obligations more than 30 days overdue) and the rates of interest paid on
deposit accounts. Effective November 7, 2006, the chief executive officer,
chief financial officer or the board of investment of a mutual savings bank is
obligated to submit a less burdensome report to the trustees for a quarterly
meeting “summarizing loan activity, investment activity, loans in arrears, foreclosure actions, changes to reserve requirements and deposit activity” for the
period since the last regular trustees’ meeting.
But the treasurer or another officer designated by the board of investment of a mutual savings bank is obligated to submit a monthly financial
report to the board of investment. The monthly report generally should
include information that was previously required to be included in the
report of the board of investment to the full board. Some of the items which
must be reported may be difficult to assemble and are of marginal utility as
financial controls (e.g., unpaid tax escrow advances). The Commissioner of
Banks is, however, given the authority to waive or modify the lists of transactions to be included in the monthly officer’s report.
Co-operative bank — mutual or stock form — security committees have
been given the added responsibility of providing the full board of directors with
a report similar to that previously required of mutual savings bank boards of
investment. The statutory report must contain any changes in investments
made by the bank (presumably this means all investments including securities,
not just real estate loans), changes in reserves and lists of all non-real estate loans
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in excess of $50,000 more than 30 days overdue, real estate mortgages more
than 6 months in arrears, loans where advances to borrowers for unpaid taxes
have not been repaid, and loans made since the last report which bring the outstanding balance of all debt from a borrower over $100,000 (or $500,000 or
one percent of surplus if the bank has more than $1,000,000,000 in assets).
OTHER REFORMS
Chapter 221 provides other reforms with respect to certain stock banks.
First, the frequency of meetings of the board of directors for all stock banks
(including stock bank subsidiaries of MHCs) has been changed to require
that the board meet at least quarterly, not every two months as the statute
currently provides. Second, the treasurer or other officer designated by the
board of directors of a trust company or stock savings bank (but not a stock
co-operative bank) is obligated to prepare a report at least quarterly running
from the last board meeting to the date of the meeting on which the report
is submitted. The information to be provided with this report is similar to
that which a co-operative bank security committee must submit to its board
and which mutual savings bank officers must submit to the board of investment (i.e., a summary of changes in investments, changes in reserves and
contingencies, and lists of loans) with one significant modification — only
non-real estate loans in excess of $500,000 overdue more than 30 days need
be listed in the report. Mutual savings banks and co-operative banks —
stock or mutual — have a much lower $50,000 reporting threshold for nonreal estate loans overdue more than 30 days.
The limits on the maximum permissible loans which state chartered
banks may make to their senior officers (i.e., president, executive vice president, senior vice presidents, treasurer, and persons with policy making
authority) have been increased significantly. The increased loan limits are set
forth in the following table:
Loan Type
Personal/Other
Educational Loan
Home Mortgage
Old Limit
$35,000
$150,000
$500,000
New Limit
$100,000
$200,000
$750,000
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The new limits apply to loans made to senior officers on or after
November 7, 2006.
Chapter 221 also makes a minor clarification on how loans to senior
officers of state-charted banks are reported. A state-chartered bank is
required to make an annual report to the Commissioner of Banks relative to
any loans it makes to its senior officers and trustees. It is now clear that a
bank need complete the annual report of loans to insiders only for senior
officers, not all officers. Senior officers are defined as the president, executive vice president, senior vice presidents, treasurer and other persons with
policy making authority.
The changes made to bank governance by Chapter 221 provide banks
with another opportunity to revisit governance issues at their banks. Banks
should be able to use these changes to streamline governance to better ensure
the functionality of the board and its committees.
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