On May 20, 2013, the Georgia Supreme Court issued a unanimous opinion in the You v. JP Morgan Chase case (Case No. S13Q0040). The You Opinion addresses several questions that the United States District Court for the Northern District of Georgia had certified to the Supreme Court regarding the operation of Georgia’s law governing non-judicial foreclosures.
First, the Supreme Court addressed the question: “Can the holder of a security deed be considered a secured creditor, such that the deed holder can initiate foreclosure proceedings on residential property even if it does not also hold the note or otherwise have any beneficial interest in the debt obligation underlying the deed?” The Supreme Court answered “Yes” to this first question.
Second, the Supreme Court addressed the question “Does O.C.G.A. § 44-14-162.2 (a) require that the secured creditor be identified in the notice described by the statute?” The Supreme Court answered “No” to this second question.
As of May 3, 2013, the U.S. Treasury has completed auctions for TARP CPP investments in 126 financial institutions, representing an original principal investment of $2.7 billion. The Treasury continues to hold TARP CPP investments in 159 financial institutions, representing an original principal investment of $4.9 billion. (Note, the Treasury has already received over $17 billion more in repayments then it originally invested as part of the TARP CPP program; even if Treasury receives zero return on the remaining investments, it will still be a profitable investment for the Treasury.)
Out of the 53 investments that Treasury identified in December 2012 as having opted out of a pooled auction process, 17 remain in the possession of Treasury. The Treasury provided another opportunity for participating institutions to opt-out of a pooled auction process through April 30, 2013. While that deadline has passed, we do not sense any urgency to move forward with a pooled auction, particularly so long as the individual auctions continue to deliver good results for the Treasury.
Community bank lenders have responded to the CFPB’s Ability-to-Repay and Qualified Mortgage rules with questions about adjustable-rate mortgages (ARMs), balloon-payment qualified mortgages, and non-standard mortgage refinances. The CFPB’s implementation of Dodd-Frank’s balloon-payment qualified mortgage concept, for example, turns on a narrow definition of the types of lenders that qualify to make such loans. ARMs may be a viable alternative to balloon mortgages, but these loan products pose compliance and operational risks of their own. Finally, lenders may still be considering the types of transactions that qualify for the special “non-standard mortgage” refinancing exemption from the general Ability-to-Pay rule.
For a uniquely focused discussion on making these types of loans in light of the CFPB’s new mortgage regulations, join attorneys John ReVeal and Barry Hester for the latest installment of Bryan Cave’s webinar partnership with compliance training leader BAI Learning & Development. This free presentation will be held on Wednesday, May 8, from 3-4 pm Eastern. More information and registration are available here. Participants should walk away with a solid roadmap for managing existing portfolio balloons and ARMs now and for originating these types of mortgages once the CFPB’s rules take effect in 2014.
In April, the U.S. Treasury completed its sixteenth round of individual auctions of TARP CPP securities. By my calculations, Treasury has now completed auctions of its investments in 126 financial institutions, with auction sales totaling approximately $2.4 billion at an aggregate discount of approximately 15%.
The 126 institutions originally represented $2.75 billion in investments in U.S. depository institutions, ranging from investments as small as $430,000 to as large as $267 million. When you combine the dividends that have been paid to the U.S. Treasury by these institutions, the Treasury has received a gross profit of approximately $110 million. The fact that Treasury has recovered, in the aggregate, a profit on these investments is fairly remarkable, considering that 27 of the auctioned institutions had each missed four or more quarterly dividend payments.
As shown in the chart below (click on the chart for a larger version), the volatility of the discounts has increased significantly in the later auction rounds.
One item to keep in mind when looking at auctions results is the amount, if any, of outstanding unpaid dividends or interest. While the intitial TARP CPP auctions included institutions that were current in their payment of dividends/interest (and purchasers were obligated to pay Treasury 100% of any accrued but unpaid dividends/interest at the time of purchase), subsequent auctions have included 27 institutions in which the institution has missed at least four quarterly dividend or interest payments. In these instances, Treasury has not required the purchaser to pay to Treasury any amount for these unpaid dividends and interest payments, and purchasers will be entitled to retain any payments subsequently made. Accordingly, in measuring the discount on these auctions, it is important to factor the unpaid dividends into the equation, either by adding the unpaid dividends/interest to the denominator (reflecting additional amounts owed to the holder) or subtracting the unpaid dividends from the numerator (assuming repayment in full of any unpaid dividends/interest). Although Treasury has frequently insisted on 100% payment of unpaid dividends in the restructuring context, we believe adding the amount of unpaid dividends to the numerator more appropriately measures the potential returns to purchasers.
The pace of FDIC lawsuits against former bank directors and officers picked up considerably in the second half of April. Between April 15th and the end of the month, the FDIC filed eight D&O lawsuits. Each of the lawsuits relate to bank failures allegedly arising from an overconcentration in CRE and ADC loans. In six of the eight cases, the FDIC’s complaint was filed only days before the expiration of the 3-year limitations period. Here is a short synopsis of each new case:
- The first lawsuit was filed against the former senior officers of Riverside National Bank of Florida (Ft. Pierce, FL). The bulk of the FDIC’s complaint in that case focused on failed loans that had been secured by stock of Riverside’s affiliated holding company. We previously summarized the lawsuit in our April 24, 2013 blog post.
- Later on April 15th, the FDIC sued two former senior officers of City Bank (Lynwood, WA). According to the FDIC’s complaint, City Bank’s president and CEO alone had loan approval authority of up to $42 million, which was equal to the legal lending of the Bank. The complaint seeks the recovery of $41 million arising from the failure of 26 separate loans.
- The FDIC’s lawsuit against the former directors and officers of Bank of Wyoming is an interesting one. Here, the D&O carrier, BancInsure, apparently denied coverage for the FDIC’s pre-suit claim. Prior to the filing of the FDIC’s complaint, the former D&Os negotiated a settlement with the FDIC that provided for: (i) a “confession of judgment” in the amount of $2.5 million; and (ii) an assignment of the D&Os’ coverage claims against BancInsure in favor of the FDIC. The filing of the lawsuit on April 23rd was a mere formality to allow the court to enter the judgment.
- On April 25th, the FDIC sued the former D&Os of Peninsula Bank of Florida. The lawsuit was filed in the Middle District of Florida, which as we reported in our September 13, 2012 blog post, has held that Florida’s statutory version of the Business Judgment Rule insulates corporate directors from claims for ordinary negligence. Consistent with that ruling, the FDIC sued the former directors of Peninsula Bank for gross negligence, but sued the former officers for ordinary negligence. The complaint seeks the recovery of $48 million.
- The FDIC took a similar approach in its lawsuit against the former directors and officers of Frontier Bank (Everett, WA). It sued the former officers for ordinary negligence and the former directors for gross negligence, presumably because of the protections afforded by Washington State’s Business Judgment Rule. The complaint seeks the recovery of $46 million in connection with 11 loans.
- The FDIC’s complaint against the former directors of Eurobank is the third such suit filed in connection with the failure of a bank in Puerto Rico. As it did in the previous two suits, the FDIC took advantage of a Puerto Rican statute which permits it to also assert a direct action against the directors’ D&O carrier. The complaint seeks the recovery of more than $55 million in connection with 12 failed credits.
- The FDIC sued the former D&Os of Champion Bank (Creve Coeur, MO) on April 29th. The bulk of the FDIC’s complaint centers on seven out-of-state loan participations that Champion Bank had purchased from a lead bank for real estate projects in Nevada, Arizona and Idaho. According to the FDIC’s complaint, one of the former officers negligently represented that the lead bank would repurchase the participations upon Champion Bank’s request. The other D&O defendants negligently relied on that representation, as there was no such agreement with the lead bank. The lawsuit seeks the recovery of $15.56 million in damages.
- Finally, on April 30th, the FDIC filed a complaint against the former D&Os of Midwest Bank and Trust Company (Elmwood Park, IL). This lawsuit has two very distinct sets of legal theories. The first set of claims is asserted against the former D&Os in connection with their approval of six failed loans that resulted in damages of at least $62 million. The second set of claims is asserted against the former directors in connection with their alleged violation of the Bank’s investment policy. Specifically, the FDIC alleges that the former directors failed to sell preferred stock of Fannie Mae and Freddie Mac that it held for investment purposes, despite its auditor’s adverse classification of the stock. The FDIC seeks a separate award of damages in the amount of $66 million in connection with this set of claims.
The Office of Associate Chief Counsel (Income Tax & Accounting) recently released a memorandum (the “Chief Counsel memorandum) that holds that a bank that acquires OREO through foreclosure proceedings (either through actual proceedings or by deed-in-lieu of foreclosure) with respect to a loan originated by the bank is not considered to acquire the OREO for resale within the meaning of §263A of the Internal Revenue Code and the applicable Treasury Regulations thereunder. This Chief Counsel Memorandum contradicts, at least in part, a memorandum issued last June by Associate Area Counsel (Detroit) (Large Business & International) (the “Area Counsel Memorandum”) that concluded that certain OREO acquired through foreclosure, which was held solely for resale and not for the production of rental or investment income, was considered to be acquired by a bank for resale within the meaning of §263A and the underlying regulations. Accordingly, the previously issued Area Counsel Memorandum concluded that acquisition costs incurred in connection with the foreclosure proceedings, such as legal fees and other direct costs incurred in connection with the foreclosure, as well as certain production costs incurred while holding the property for resale, including real estate taxes, insurance, repairs, maintenance, capital improvements, and utilities, had to be capitalized in whole or in part and in effect recovered as part of the basis of the OREO when computing gain or loss on the sale of the OREO. (Print Version of this Alert Available.)
The rationale for the conclusion in the Area Counsel Memorandum is that the bank clearly acquired the foreclosed property for resale since the federal and state regulations generally restrict the period that OREO may be held by a bank (although extensions can be granted) and also require that banks make good faith efforts to dispose of the OREO. The Area Counsel Memorandum reached this conclusion even though federal and state regulations would not have allowed the bank to otherwise acquire and deal in such property as a business carried on to make a profit. The Chief Counsel Memorandum takes a different view of the activities that generally must be carried on in order for a taxpayer to fall under the capitalization provisions of §263A, which is whether the bank is acquiring property with a view to re-sell it at a profit as part of the bank’s normal business activities. The Chief Counsel Memorandum concludes that the bank is acting in its capacity as a lender and not a traditional reseller of real property. The bank is economically compelled to acquire the property as a last resort to recover funds that it originally loaned in order to minimize its losses.
CFPB Finds Limited Preemption; Gift Card Issuers Must Honor Cards
Even After Funds Have Escheated to the State
The Consumer Financial Protection Bureau (“CFPB”) recently published a final determination regarding whether the unclaimed property laws of Maine and Tennessee relating to unredeemed gift cards (“Applicable State Law”) are inconsistent with and preempted by the gift card provisions of the Electronic Fund Transfer Act and Regulation E (“Federal Law”). The applicable laws of Maine and Tennessee are quite similar for the issues at hand. In its ruling, the CFPB determined that Maine’s unclaimed property law as applied to gift cards is not inconsistent with Federal Law, and therefore no preemption was found. However, with respect to Tennessee’s unclaimed property law, the CFPB ruled in favor of preemption but only with respect to the provision permitting issuers to choose whether to honor an unclaimed gift card after the underlying funds have been escheated to the state. (A Print Version of this Alert is available.)
The specific issue involves Federal Law vis à vis the abandoned property laws of Maine and Tennessee. Federal Law prohibits a gift card from containing an expiration date that is less than five years from the date of issuance or date of last load, whichever is later; Applicable State Law, however, generally requires escheatment of unused balances on certain types of gift cards after two years of card inactivity.
The Consumer Financial Protection Bureau has just released its much anticipated revisions to the Regulation E provisions governing international remittance transfers.
According to the bureau’s press release, the revised rule makes optional the requirement to disclose foreign taxes and recipient institution fees (unless the recipient institution is the remittance transfer provider’s agent). It also makes clear that a remittance transfer provider does not bear the cost of funds deposited into the wrong account because the sender provided the wrong account number or routing number and certain other conditions are satisfied, although the provider is required to attempt to recover such funds.
The final rule will become effective October 28, 2013.
We are reviewing the full text of the revisions and will provide a more detailed analysis in the coming days.
The revised rule is available here.