May 4, 2015 – May 5, 2015
The Ritz-Carlton, Atlanta
181 Peachtree Street Northeast
Atlanta, GA 30303
Sponsor(s): Hosted by Bryan Cave LLP, OTC Markets Group, Banks Street Partners, and Stock Cross Financial Services
We are pleased to announce the inaugural Financial Institutions Stock Liquidity Conference in Atlanta, Georgia. The conference will begin with a cocktail reception on Monday evening, May 4th from 6:00 – 9:00 p.m., at the College Football Hall of Fame, where interactive and personalized tours will be offered to conference attendees. The conference will continue on Tuesday, May 5th from 8:00 a.m. – 4:00 p.m., with a full day of presentations and panel discussions that will explore the universe of liquidity options available to financial institutions and opportunities to access the capital markets.
On October 28, 2014, the Consumer Financial Protection Bureau (“CFPB”) issued a final rule amending Regulation P (the “Amendment”), which implements the consumer privacy provisions of the Gramm-Leach-Bliley Act (“GLBA”). In most cases prior to the amendment, Regulation P required financial institutions to mail paper copies of the annual privacy disclosure, which many in the financial industry felt was overly costly and needlessly burdensome. The new rule permits covered institutions to publish privacy notices electronically on their websites, but only after satisfying the following conditions:
- The financial institution does not disclose nonpublic personal information to nonaffiliated third parties other than for the exception purposes that do not allow for consumer opt-outs, such as for servicing or processing the consumer’s account;
- The financial institution’s information sharing practices do not trigger opt-out rights pursuant to Regulation P or Section 603 of the Fair Credit Reporting Act (“FCRA”);
- The requirements of the affiliate sharing provisions of FCRA Section 624, as applicable, were previously satisfied or the annual privacy notice is not the only notice provided to satisfy those requirements;
- The information contained in the privacy notice has not changed since the customer received the previous notice, except for changes to eliminate categories of information the institution disclosures or categories of third parties to whom the information is disclosed;
- The financial institution uses the model form provided in Regulation P as its annual privacy notice;
- The financial institution must make its customers aware that its privacy notice is available on its website, that it will mail a paper copy of the notice to customers who request it by calling a specific number, and that the notice has not changed since the prior year’s version. The financial institution can satisfy this requirement by inserting, at least once per year, a clear and conspicuous statement on an account statement, a coupon book, or on a notice or disclosure required by any provision of law. The statement must include a specific URL that can be used to access the website;
- The financial institution must continuously post the annual privacy notice in a clear and conspicuous manner on a page of its website, without requiring a login or similar steps or agreement to any conditions to access the notice; and
- The financial institution must mail, within ten days of a request, a paper copy of the notice to any customer who makes such request by telephone.
Importantly, if the financial institution changes its privacy practices or engages in information-sharing activities for which customers have a right to opt-out, it must use one of the permissible delivery methods that predated the rule change (paper notices or electronic with E-Sign consent).
In connection with the effectiveness of BASEL III, most banks are required to decide whether to elect to opt-out of the inclusion of Accumulated Other Comprehensive Income (“AOCI”) in their Common Equity Tier 1 Capital. All non-advanced approaches institutions (i.e. banks less than $250 billion in total assets with less than $10 billion in on-balance sheet foreign exposure) will need to indicate whether they are making the AOCI opt-out in their March 31, 2015 Call Reports. This is a one-time election and generally irrevocable, except in the limited cases of subsequent mergers between institutions with different elections.
As a reminder, AOCI includes such items as unrealized gains and losses on certain securities.
For institutions that opt out, most AOCI items will not be included in the calculation of Common Equity Tier 1 Capital (and thus Tier 1 Capital generally). In other words, most AOCI items will be treated, for regulatory capital purposes, in the same manner in which they were prior to BASEL III. (Unrealized gains and losses on available-for-sale debt securities will continue to be excluded from regulatory capital; unrealized losses on available-for-sale equity securities will continue to be recognized in regulatory capital; and up to 45% of unrealized gains on available-for-sale equity securities will continue to be recognized in Tier 2 capital.)
For institutions that do not opt out, most AOCI items will be included in the calculation of Common Equity Tier 1 Capital (and thus Tier 1 Capital generally). (Unrealized gains and losses on available-for-sale debt and equity securities will be recognized in Common Equity Tier 1 Capital.)
With many U.S. markets experiencing slow loan growth, some boards of directors looking to increase the size of their institutions have turned to acquisitions to capture greater scale and efficiencies. While asset growth is important, directors should also consider the deposits acquired as part of a merger. Many banks have found that a careful evaluation of the deposits of the selling bank can spot unexpected issues and also drive earnings for the combined institution. The issues and opportunities raised by the liability side of the balance sheet have implications for both buyers and sellers going forward, particularly as they seek to maximize the scope and franchise value of their institutions.
Gaining Deposit Share and Margin
With many growth opportunities centered in more densely-populated areas, some financial institutions plan to use an acquisition to establish a “beachhead” in a growing market. Unfortunately, many have found that a beachhead may not be enough, particularly with ferocious competition for quality loans in many metro markets. Other banks have taken a different approach by either consolidating market share in their home or adjacent markets, or by acquiring banks in rural areas that have solid earnings performance. For these banks, acquiring lower-cost deposits in slower-growth markets may help generate earnings that can fund loan growth in more competitive markets. What’s more, some banks have been able to diversify their CRE-heavy loan portfolio by picking up agricultural and other types of lending products through these acquisitions.
State and federal law enforcement agencies are now taking aim, on both the consumer protection and fraudulent loan securitizations fronts, at what they consider to be questionable practices by automobile lenders.
On the consumer protection front, the Consumer Financial Protection Bureau (CFPB) initially dipped a toe into this area through a bulletin in May 2013, claiming that lenders that offer auto loans through dealerships are responsible for unlawful, discriminatory pricing. According to the CFPB, the main culprits are indirect auto lenders that allow the dealer to charge a higher interest rate than the rate the lender offers the dealer, with the result that the lender shares a portion of this markup with the dealer. Under the Dodd Frank Act, such a practice would be illegal if it involved payments to mortgage brokers that sell their customers into higher rate mortgage loans. The auto lending industry, however, was not similarly regulated by Dodd Frank. The CFPB suggests it will seek to attack such practices in the auto loan industry as illegal discrimination if it finds that protected minorities have been charged higher rates as a result.
In September 2014, the CFPB proposed rules that would extend its supervision authority to the larger participants of the nonbank auto finance market. The proposal would allow the CFPB to supervise finance companies with respect to federal consumer financial laws if those companies make, acquire, or refinance 10,000 or more loans or leases in a year. The CFPB estimates 38 auto finance companies, which originate about 90 percent of nonbank auto loans and leases, would be subject to this new jurisdiction.
On the securitization front, subprime auto lender Consumer Portfolio Services disclosed earlier this month that it had received a subpoena from the U.S. Department of Justice (DOJ) requesting documents relating to its auto lending and securitization activities. In December 2014, Ally Financial Inc. had received a similar request from the DOJ, and in October, the Securities and Exchange Commission (SEC) began an investigation into Ally’s lending and securitization practices. GM Financial announced in November that it had received document requests from the SEC relating to its securitization practices. Santander Consumer USA Holdings Inc. announced in August that it also was under DOJ investigation, and in November the New York Department of Consumer Affairs announced that it was looking into Santander’s lending practices.
It appears that these investigations, which include potential criminal enforcement, are looking into whether these lenders are securitizing and packaging loans for sale to investors without ensuring the quality of loans or fully disclosing their risks. If so, this would suggest that they may be engaging in some of the same practices that were alleged against the mortgage industry. Those ultimately led to numerous settlements between prosecutors and many of the large mortgage lenders.
Auto loan quality and risks could be impacted by lending discrimination, failure to comply with consumer protection regulations, or lax underwriting standards. If these risks are not being appropriately disclosed to investors, auto lenders could face the same enforcement liability as were a number of the mortgage lenders.
The risks to the global economy of risky auto loan securitizations may not be as high as they were for mortgage loan securitizations, given that it is easier to repossess a car than it is to foreclose on a mortgage, and given the generally smaller dollar amounts involved. This time, however, it appears that federal regulators will not be waiting until an economic crash before attempting to address the problems the problems they suspect, and costly criminal and civil actions may be more aggressive and occur more quickly.
Bryan Cave’s Data Privacy and Security Team will hold a teleconference on Friday, February 6, to discuss the impact of the Anthem Data Breach on firm clients. Topics include:
- What information is known,
- What information is not known,
- How the breach might impact employees, and
- What steps companies should consider taking.
The teleconference will be held tomorrow, Friday, February 6, 2015, at 1 ET / 12 CT / 11 MT / 10 PT, and is open to any firm client.
If you would like to join the conference, please send an email to Audrey.Brekel@bryancave.com and she will provide the dial-in information.
David Zetoony is the leader of the firm’s Data Privacy and Security Team.
Back in the days when “phishing” was just something your spell checker changed back to “fishing,” everyone thought they understood how the risk of loss was apportioned between a bank and its customers if a third party fraudulently obtained money from someone’s deposit account. With few exceptions, the risk of loss was born by someone else besides the bank customer. Fast forward to today when there are so many different ways for bank customers to move money in and out of their accounts besides just a paper check. Several years ago the drafters of the UCC adopted a brand new Article 4A to address the dramatic increase in wire and other electronic transfers between commercial accounts.
Article 4A continues the traditional risk allocation framework in that unless certain exceptions exist, the bank bears the risk of loss for fraudulent transfers from a commercial deposit account. The major exception is where the bank and its customer have agreed upon certain commercially reasonable security procedures. In that instance the risk of loss for fraud will reside with the customer if the bank proves that it accepted a fraudulent payment order (1) in good faith, and (2) in compliance with the security procedure and any written agreement or instruction of the customer restricting acceptance of payment orders issued in the name of the customer. Further, if a bank has established security procedures that a customer has declined to use, and the customer instead agrees in writing to be bound by payment orders issued in its name and accepted by the bank in accordance with another security procedure, then the customer will bear the risk of loss from a fraudulent payment order if the declined procedure was commercially reasonable.
A recent decision from the 8th US Circuit Court of Appeals, Choice Escrow and Land Title, LLC v. Bancorp South Bank, applied the provisions of Article 4A to what is becoming a common occurrence today. An employee of Choice clicked on an attachment to an email, which then placed a computer virus on their computer system. Over a period of time the virus gave an unknown third party access to the employee’s username and password and allowed the third party to mimic the computer’s IP address and other characteristics. The thieves wired out $440,000 to an account in the Republic of Cyprus. Suffice it to say that when money is fraudulently transferred to an account in the Republic of Cyprus, it never comes back. The customer demanded that the bank reimburse it for the loss and the bank refused. The matter ended up in litigation in federal court.
An opinion from the Second Circuit Court of Appeals in In re Motors Liquidation Company, relying on the Delaware Supreme Court’s answer to a certified question highlight the need to focus on the details when dealing with financing statements and terminations under Article 9 of the Uniform Commercial Code. Because the parties in that case did not pay attention to the details, a $1.5 billion secured term loan became unsecured loan.
General Motors had two separate credit facilities led by JPMorgan Chase Bank, N.A., as agent for the different lender groups: a $300 million synthetic lease financing and a $1.5 billion secured term loan. Two UCC-1 financing statements were filed in connection with the synthetic lease and a separate UCC-1 was filed with respect to the term loan.. All three financing statements identified JPMorgan, as agent, as the secured party.
In 2008, General Motors told its counsel on the synthetic lease to prepare documents to unwind the synthetic lease. The partner at GM’s counsel delegated some of the work to an associate who further delegated the UCC work to a paralegal. The paralegal ran a UCC search that revealed the 3 UCC-1 filings and the paralegal prepared termination statements for all three filings including one for the term loan that was not being repaid. JPMorgan and its counsel reviewed the draft termination statements, did not catch the mistake and authorized the filing. All three terminations were filed and no one noticed the term loan’s financing statement was terminated until after GM filed for bankruptcy protection.
Have you thought about offering your customers wealth management services? The fee opportunities are attractive and the regulatory issues are more manageable than you might think.
Why should a bank’s board directors consider entering the wealth management business? For one, several of your competitors are already doing so. Wells Fargo already employs over 15,000 financial advisors and is looking to serve an even broader swath of the mass market than it already does. And, according to the American Banker, approximately 25% of all banks plan to offer wealth management services by the end of 2016, according to a survey conducted by that publication. If that survey data is representative across the banking industry, your board would not be in the leading edge if you are not considering the risks and rewards of building or acquiring a wealth management division.
This article assumes that U.S. community banks are not looking to compete directly with the largest private banks in advising billionaires on anything from buying a private jet to investments in complex derivatives. Instead, most community banks will offer basic wealth management services, including administering retirement assets held in 401(k) plans and IRAs, advice in setting up educational and health savings plans and perhaps basic trust services to assist in administering family trusts. Other service offerings, such as insurance, securities custody, securities lending, securities clearing and settlement, are sometimes considered part of wealth management or trust services, but this article does not discuss those other services because they are generally not a good fit for community banks, at least in the early stages of launching a wealth management division. Basic wealth management services are, at least in theory, a natural complement to the business of offering deposit services and loans to wealthier bank customers.
Ten years ago, business was booming for community banks—profitability driven by a hot real estate market, a wave of de novo banks receiving charters, and significant premiums paid to sellers in merger transactions. Once the community bank crisis took root in 2008, however, the same construction loans that once drove earnings caused significant losses, merger activity slowed to a trickle, and only one new bank charter has been granted since 2008. But as market conditions improve and with Federal Deposit Insurance Corporation’s (FDIC) release of a new FAQ that clarifies its guidance on charter applications, there are some indications that an increase in de novo bank activity may not be far away.
To understand the absence of new bank charters in the last six years, one must look to the wave of bank failures that took place between 2009 and 2011, which involved many de novo banks. Many of these banks grew rapidly, riding the wave of construction and commercial real estate loans, absorbing risk to find a foothold in markets saturated with smaller banks. This rapid growth also stretched thin capital and tested management teams that often lacked significant credit or loan work-out experience. When the economy turned, these banks were not prepared for a historic decline in real estate values, leading to a wave of FDIC enforcement actions and bank failures.