With attorneys and staff worldwide, Bryan Cave attorneys are often quoted in the news. Recent Media Mentions of Financial Institutions Group attorneys include:
Katherine Koops in Western Independent Banker
Atlanta Counsel Katherine Koops authored an article for the November/December edition of Western Independent Banker regarding the Federal Reserve Board of Governors’ approval of a final rule implementing the Basel III higher minimum capital standards for most banking organizations. Click here to read her full article on the new capital rules.
Walt Moeling in American Banker
Atlanta partner Walt Moeling was quoted Nov. 27 by American Banker concerning the recent acquisition of Freedom Bank by Heartland Financial USA. Executives at Heartland have remained vague about their reason for the acquisition, but observers say it seems like a trade-off. River Valley Bancorp, the former owner of Freedom, may have used it as payment of a debt to Heartland. If Heartland did take a bank as payment, it may have been a good move because it is dealing with a multibank holding company rather than stakeholders like the Treasury Department or the holders of trust-preferred securities. “It can be an easy way to resolve a debt,” Moeling said. “But when you are dealing with a one-bank holding company, that is all there is, so there is not a lot of room to negotiate. … This also sounds like a cleaner situation – when you throw in Tarp or trups and try to strike a three- or four-way settlement, oh my God, it gets difficult.”
Michael Shumaker in Bank Safety & Soundness Advisor
Atlanta Associate Michael Shumaker was quoted Nov. 4 by the Bank Safety & Soundness Advisor on new third-party vendor guidance from the Office of the Comptroller of the Currency (OCC). The OCC recently published a detailed overhaul of its 12-year-old guidance on third-party relationships, significantly raising expectations for community banks and other institutions while reflecting heightened regulatory concern over the risks that the relationships pose. “The sound of this tome hitting the desk should alert banks and thrifts to the increased regulatory expectations for vendor management,” Shumaker said. “Banks should understand the increased diligence required to manage their third party risk in a safe and sound manner. “Regulators have seen bad performances by vendors during the crisis that increased the risk profile of banks. Now, banks should take a more critical look at their vendor relationships and work to move or re-negotiate the related contracts, when up for renewal, to comply with the guidance.”
On October 30th, the OCC issued new guidance on third-party relationships and associated risk management. The Bulletin, OCC 2013-29, rescinded and replaced prior guidance on this subject (OCC Bulletin 2001-47 and OCC Advisory Letter 2000-9) but specifically retained numerous other OCC and interagency issues on third-party relationships as listed in Appendix B to the Bulletin.
The Bulletin states that the OCC expects a bank to have risk management processes that are commensurate with the level of risk and complexity of the relationship. It details the expected management of all aspects of third-party relationships and is more specific than prior guidance about the responsibility of a bank’s board of directors for overseeing the management processes. For example, the board must ensure an effective process is in place, approve the bank’s risk-based policies governing third-party management, review and approve plans for using third parties, approve contracts with third parties, review management’s ongoing monitoring of the relationships and hold accountable those employees who manage the relationships.
While the Bulletin focuses on third-party relationships that involve “critical activities,” a bank’s judgment of what is critical could be subject to second guessing, particularly if the bank experiences difficulties with consumers or the examiner otherwise believes that the bank’s risk management process is weak.
A recent opinion by the Fourth Circuit Court of Appeals is a good reminder that lenders and lending lawyers must be aware of Regulation B’s limitations on requiring spousal guarantees when underwriting and documenting commercial loan transactions. Regulation B implements the Equal Credit Opportunity Act and, among other things, prohibits creditors from using credit approval and underwriting practices that discriminate on the basis of marital status.
On October 30, 2013, the Fourth Circuit, in Ballard vs. Bank of America, upheld the lower court’s dismissal of a wife’s claims against the bank. The opinion provides a detailed discussion of Regulation B’s requirements and, in dicta, suggests that the bank may very well have violated Regulation B in requiring the wife, Mrs. Ballard, to guaranty a loan to her husband’s business. The court, however, finds the dismissal was proper because Mrs. Ballard waived her claims against the bank.
After the loan was originally made, defaults occurred and the borrower and guarantors waived and released claims against the bank in connection with restructuring agreements. The court found those subsequent waivers and releases were sufficient to waive any claims Mrs. Ballard may have had against the bank for violating Regulation B. This is an interesting (and some may say unfair) conclusion because the only reason Mrs. Ballard had signed the release is because she was a guarantor. Had the bank not required the guaranty in the first place (a supposed violation of Regulation B), Mrs. Ballard would not have been included in the release agreement. Nevertheless, the court did not agree that the initial violation which started the chain of events prevented the release from being effective.
On September 30th, the FDIC released updated deposit data as of June 30, 2013. As many community banks are now regaining their footing after the financial crisis began in 2008, we wanted to take a look at how the deposit data has changed over the past five years within the Atlanta MSA.
Perhaps the most obvious trend seen in the deposit data relates to the decreasing number of banks and branches serving the Atlanta MSA. Overall, Atlanta is down from 167 banks and thrifts in 2008 to 104 in 2013, a 38% decrease over the past five years, and the number of branches has decreased 8% to 1,337 in 2013. Not surprisingly, much of the consolidation has occurred among the smaller banks. Although there are now 15 banks in the Atlanta MSA with $1 billion or more in deposits (up from 10 in 2008), the number of banks in the Atlanta MSA with less than $1 billion has fallen to 74, down from 122 in 2008, a decrease of almost 40% in just five years. With some industry observers believing that many community banks will need to be at least $500 million in assets in order to have enough scale to thrive in today’s regulatory environment, only five banks in the Atlanta MSA have between $500 million and $1 billion in deposits, down from eleven in 2008. The Atlanta MSA is particularly top heavy, with 13 banks controlling over 85% of the MSA’s deposits.
Although there are now fewer banks and branches in Atlanta, the number of banks with either a regional or national footprint has increased from six in 2008 (Bank of America, Wachovia, Washington Mutual, Regions, SunTrust, and BB&T) to eight in 2013 (Fifth Third and PNC are new additions, with Wells Fargo and JP Morgan Chase replacing Wachovia and Washington Mutual, respectively). These new entrants into the market have 94 offices located within the market, but, on average, each office location maintains less than $23 million in deposits each, well below the average of approximately $147 million per office location for the three largest banks in Atlanta. While there may be some inflation of these “home market” deposits depending on where the bank’s brokered deposits are counted, there is still an apparent performance gap for these branches as their deposits per office averages in the Atlanta MSA are also well below their per office averages in their home markets. For example, PNC Bank averages approximately $41 million in deposits per office in their “home” market of Pittsburgh, Pennsylvania, while averaging only $21 million in deposits per office in the Atlanta MSA.
In January of 2013, the Consumer Financial Protection Bureau (“CFPB”) issued the new Mortgage Servicing Rules (the “Rules”), which go into effect on January 10, 2014. The Rules establish extensive protections for borrowers, particularly delinquent borrowers who are facing foreclosure.
On October 15, 2013, the CFPB issued new guidance on the Rules in order to resolve certain issues of interpretation regarding servicer communications with borrowers. The bulletin (CFPB Bulletin 2013-12) and interim final rule issued on October 15, 2013 clarify three main issues: (1) how mortgage servicers should communicate with family members of a deceased borrower; (2) how mortgage servicers should contact delinquent borrowers under the Early Intervention Rule; and (3) how certain provisions of the Rules interact with the “cease communications” requirement of the Fair Debt Collection Practices Act.
1. Communications with Family Members of a Deceased Borrower
The Rules require mortgage servicers to implement policies and procedures for identifying and communicating with the successor in interest of a deceased borrower regarding the property securing the deceased’s mortgage loan. (See 12 CFR 1024.38(b)(1)(vi)). The CFPB designed the successor in interest requirement in response to consumer complaints that servicers were refusing to speak with successors or were requesting documents that may not exist from a deceased borrower’s successor, thus potentially preventing successors from assuming the loan or pursuing a loan modification. The CFPB’s guidance is intended to help servicers implement the policies and promote home retention by the successors in interest.
One of the ironic issues for failing banks has been the fact that banks that they have had to continue to deal with their borrowers and depositors in the ordinary course of business even though they are already in the queue for resolution by the FDIC. So for example, loans continue to get renewed and documents executed. What happens if you renew a loan shortly before the bank fails, do you have some sort of defense to enforcement of the loan when the successor bank or the FDIC makes demand on you? The Georgia Court of Appeals recently dealt with a set of facts like these in the case of CSS Real Estate Development I, LLC v. State Bank & Trust. CSS Real Estate had entered into a credit relationship with The Buckhead Community Bank d/b/a The Alpharetta Community Bank in February of 2007 to obtain funding to purchase land and construct a hotel. There were three guarantors on the loan. In October of 2008 the borrower and the guarantors (the “obligors”) agreed to sell the project to Enville, Inc. but they all remained liable as guarantors. A year later the loan came up for renewal and the parties executed new guaranties two days before the bank failed. The FDIC was appointed receiver and sold the assets, including the loan in question, to State Bank & Trust. In July of 2011 that bank sent default letters after payments on the loan were not made and later filed suit to collect the loan.
The borrower and the guarantors responded by claiming that The Buckhead Community Bank had engaged in fraud and breached a fiduciary duty by concealing the fact that it was about to fail. The trial court granted State Bank & Trust’s motion for summary judgment for judgment on the note and the guarantees. On appeal the obligors asserted that they had been fraudulently induced into renewing the loan and reaffirming the guarantees. They argued that they would have waited to negotiate directly with the FDIC or the successor bank and that their guarantees should be voided due to “bad acts” by The Buckhead Community Bank in failing to keep them informed about the impending receivership of the bank.
The court of appeals began its legal analysis by noting that once a bank has established the facts that a party signed what appears to be a valid guaranty, the guarantors must establish a defense to payment to avoid liability. Fraud is one of the types of defenses that would be sufficient if proven. Under Georgia law fraud requires that a party prove that the defendant knowingly made a false statement to cause the complaining party to act or refrain from acting. The party must also show that it was reasonably justified in relying upon the statement and that it suffered damages as a result. Each of the elements must be established.
Congratulations to the Bryan Cave Payments Team on launching BryanCavePayments.com.
We’ll continue to post payments-related items from time-to-time on BankBryanCave.com, but the team will also be keeping BryanCavePayments.com up-to-date with the latest payments-related regulatory, legislative and legal issues.
Examples of the type of content that will be featured on BryanCavePayments.com include:
- Should your Bank do Business with Bitcoin?
- CFPB Consent Order Cites Bank Violations Related to “Add-On Products” — Required “Vendor Management Policies”
- Managing Social Media Risk: New Guidance From Regulators
On October 8, 2013, the FDIC published Financial Institution Letter FIL-46-2013 to re-emphasize the importance of prudent interest rate risk management. The FDIC’s tone was sharper than in the Advisory on Interest Rate Risk Management collectively published by the financial regulators over three years ago on January 6, 2010.
The FDIC identifies the nationwide trend of institutions reporting “a significantly liability-sensitive balance sheet position” and says in the letter that it “is increasingly concerned that certain institutions may not be sufficiently prepared or positioned for sustained increases in, or volatility of, interest rates.” That is strong language! The FDIC is clearly signaling its intent to focus intensely on the issue in upcoming examinations.
Some of the FDIC’s specific concerns about banks with a liability-sensitive balance sheets in a rising rate environment include:
- Decline in net interest income;
- Run-off of deposits;
- Rate sensitive liabilities (e.g., deposits) re-pricing faster than earning assets.
- Severe depreciation in a bank’s holdings of long-duration bonds;
- Liquidity shortfalls resulting from dependence on a long duration bond portfolio for liquidity;
- Decline in regulatory and equity capital due to investment portfolio depreciation; and
- Negative publicity from drops in GAAP equity.
One of the asset-liability management practices the FDIC expects banks to use is the consideration of risk management strategies. The FDIC reminds banks of the full array of interest rate risk management options, including:
- rebalancing earning asset and liability durations,
- proactively managing non-maturity deposits,
- increasing capital, and
DC Partner John ReVeal, New York Partner Judith Rinearson and Santa Monica Partner Brette Simon will provide insight at the Money2020 Expo. The conference promises to bring together a global community of innovators in payments and financial services with 400-plus speakers spanning more than 100 sessions and workshops. More than 4,000 attendees are expected.
October 6, 2013 – October 10, 2013
Aria Resort and Casino
3730 Las Vegas Blvd.
Las Vegas, NV 89158
On Oct. 6, ReVeal will moderate a panel on the risks and rewards of credit-based emerging payment products. In addition to discussing what people need to know when launching or distributing credit-based products, this panel will address the current consumer group and regulatory pressure to restrict or prohibit credit as part of emerging payments and financial services solutions.
Later in the afternoon, Rinearson will moderate the panel “Money Transmitter Licensing: Kafka Revisited,” which will offer insight on how to manage the ambiguities of state money transmitter licensing laws.
Simon then will join a panel on how to prepare in advance of raising capital from institutional investors. Topics will include getting your legal and business house in order to maximize value upon a capital raise and avoid the “10% valuation haircut;” due diligence and the risks of having the wrong investors; and structuring investment to avoid “change of control” regulatory issues.
While Employers Can Mandate Electronic Direct Deposit, Employers Are Prohibited From Requiring the Use of a Specific Payroll Card Selected by the Employer.
On September 12, 2013, the Consumer Financial Protection Bureau (“CFPB”) published Bulletin 2013-10 (“Bulletin”) establishing that any “financial institution or other person” is prohibited from requiring that an employee receive wages only on a payroll card issued a particular financial institution of the employer’s choosing, based on the application of federal law to payroll card accounts. In particular, the Bulletin affirms that the Electronic Fund Transfer Act (“EFTA”) and its implementing regulation Regulation E (“Reg E”), prohibit mandatory payment of wages through a payroll card issued by a particular financial institution. Although “Regulation E permits an employer to require direct deposit of wages by electronic means,” the employee must be “allowed to choose the institution that will receive the direct deposit.” The CFPB explicitly states, however, that employers may offer employees “the choice of receiving their wages on a payroll card or receiving it by some other means.” (emphasis added). According to the Bulletin, “payroll card accounts” refer to those “accounts that are established directly or indirectly through an employer, and to which transfers of the consumer’s salary, wages, or other employee compensation are made on a recurring basis.”
The CFPB’s Bulletin was issued following reports that New York State Attorney General Eric Schneiderman was investigating some of the nation’s largest employers in connection with their payroll card programs.