The first deadline – June 30, 2013 – under Delaware’s new unclaimed property Voluntary Disclosure Agreement (VDA) program is fast approaching! This initial deadline offers the maximum program benefits to VDA participants: Prior to the new VDA program, holders were required to report and remit any past due unclaimed property starting in 1981. However, holders who enter into the new VDA program by June 30, 2013 qualify for a limited look-back period through 1996. Holders who sign up by June 30, 2014 qualify for a look-back period through 1993.
For those who may not be aware, Delaware’s new VDA program is an amnesty program primarily aimed at helping non-compliant companies become compliant under the law. The business-friendly program is run by the Department of State, and is designed so companies can “catch up” on their past due unclaimed property obligations, avoid interest and penalties, and significantly reduce their unclaimed property liability. Completion of the program also offers companies a full release of all past due unclaimed property liability in a reasonably short and efficient process.
As we have reported before, Georgia has the unfortunate distinction of leading the nation in bank failures since the onset of the late-2000s financial crisis. Georgia has also seen far more FDIC bank failure lawsuits than any other state: 15 of the 63 bank failure cases brought by the FDIC since 2010 involve Georgia banks and are currently pending in Georgia federal courts. While some allegations vary from case to case, the general thrust of all of these lawsuits is that the former directors and/or officers of the banks were negligent or grossly negligent in pursuing aggressive growth strategies, with these strategies usually involving a high concentration of risky and speculative speculative real estate and acquisition, construction and development loans. Here is a rundown of the most interesting and significant developments to date:
The most heavily litigated issue has been whether the business judgment rule insulates bank directors and officers from liability for ordinary negligence. Beginning with Judge Steve C. Jones’ decision in FDIC v. Skow, concerning the failure of Integrity Bank, the district courts have consistently dismissed ordinary negligence claims, citing the business judgment rule. As we previously reported in November, the Eleventh Circuit has agreed to hear an interlocutory appeal in the Skow case. That appeal has now been fully briefed by the parties. The FDIC’s briefs can be found here and here, while the Defendants/Appellees’ brief can be found here. The parties’ briefs all focus on the interplay between the business judgment rule and Georgia’s statutory standard of care, with the FDIC arguing that the statute’s expression of an ordinary care standard precludes the application of any more lenient standard, and the Defendants/Appellees arguing that Judge Jones correctly followed the Georgia appellate courts’ interpretation of the business judgment rule. Note: This firm represents the Georgia Bankers Association and Community Bankers Association of Georgia, who have been granted leave to appear as amici curiae in support of the Defendants/Appellees. The amicus brief can be found here.
All community banks that currently engage in interest rate swaps (or are considering doing so in the near future) should be aware of the June 10, 2013 deadline for compliance by all financial institutions with the clearing requirement for interest rate swaps.
As background, Section 723 of the Dodd-Frank Act added section 2(h) to the Commodity Exchange Act and thereby established a clearing requirement for interest rate swaps. (The term “clearing” refers to the process by which an intermediary is interjected between a bank and its swap counterparty. A cleared swap is subject to continuous collateralization of swap obligations, real time reporting, additional agreements and other regulatory constraints. It is generally a more cumbersome process than the typical “bilateral” swap directly between a bank and its counterparty, which is a purely private contractual arrangement.) Under Dodd-Frank, it is illegal for a bank to enter into a certain swaps without clearing it unless an exception or exemption applies.
Generally speaking, the types of interest rate swaps that are subject to clearing are “plain vanilla” fixed-to-floating interest rate swaps based on LIBOR. (Other types of derivatives are subject to clearing, but these are generally not relevant to the average community bank.) The “big players” (swap dealers, major swap participants and certain private funds active in the swaps market) became subject to clearing requirements on March 11, 2013.
On May 29, 2013, the Consumer Financial Protection Bureau (CFPB) issued a final rule amending the Ability-to-Repay (ATR) and Qualified Mortgage (QM) rules it issued on January 10, 2013. Within this final rule are two new categories of small creditor QMs. The first, for small creditor portfolio loans, was adopted exactly as proposed alongside the January ATR rule and permits small creditors in all markets to make portfolio loans that are QMs even though the borrower’s DTI ratio exceeds the general QM 43% cap. As a reminder, small creditors for these purposes are those with less than $2 billion in assets at the end of the preceding calendar year that, together with their affiliates, made 500 or fewer covered first-lien mortgages during that year.
The second new QM is a welcome even if only temporary category of balloon mortgages. Unlike the small creditor portfolio QM, this interim QM was not an express part of the so-called “concurrent proposal” issued in January. This is simply but significantly a QM that meets all of the existing rural balloon-payment QM requirements except the controversial limitation that the creditor operate primarily in “rural” or “underserved” areas.
As written, the new balloon QM category expires two years after the ATR rules take effect on January 10, 2014. The CFPB characterizes this two-year window as a “transition period” useful for two purposes: (1) it will give the CFPB time to consider whether its definitions of “rural” and “underserved” are in fact too narrow for the needs of the rural balloon-payment QM rule and (2) it will give creditors time to “facilitate small creditors’ conversion to adjustable-rate mortgage products or other alternatives to balloon-payment loans.” The CFPB took pains to argue that Congress “made a clear policy choice” not to extend QM status to balloon mortgages outside of rural and underserved areas, and the agency reiterated its belief that adjustable-rate mortgages pose less risk to consumers than balloons: “The Bureau believes that balloon-payment mortgages are particularly risky for consumers because the consumer must rely on the creditors’ nonbinding assurances that the loan will be refinanced before the balloon payment becomes due. Even a creditor with the best of intentions may find itself unable to refinance a loan when a balloon payment becomes due.” For these reasons, creditors may expect future CFPB scrutiny intended to bury, not save, balloon mortgages. (more…)
Notwithstanding the headlines in the press, more community banks thrived during the Great Recession than failed. A new study from the Federal Reserve Bank of St. Louis looks at The Future of Community Banks: Lessons from Banks That Thrived During the Recent Financial Crisis. While 417 banks and thrifts failed from the beginning of 2006 through the end of 2011 (and another 51 banks failed during 2012), the Federal Reserve Bank of St. Louis found that 702 community banks (total assets of less than $10 billion) retained a composite CAMELS 1 rating throughout the financial downturn.
The report confirms that community banks can continue to play a vital role in the U.S. economy by allocating credit and providing financial services in their communities – particularly to the small businesses in those communities. In general, the thriving banks were found to have strong commitments to maintaining standards for risk control in all economic environments and business plans that work for their individual markets. At a macro level, the thriving banks had lower total loans-to-total asset ratios (54% vs. 65%), lower concentrations in commercial real estate and construction and development lending, higher concentrations in consumer and agricultural loans, and were slightly more reliant on core deposits.
On May 23, 2013, the Eleventh Circuit upheld an Alabama federal court’s dismissal of a proposed class action brought by a mortgage holder who claimed the servicer violated the Truth in Lending Act (“TILA”) by failing to notify her of a transfer in ownership of her mortgage loan, as required by Section 1641(g). In an unpublished per curium opinion, a three-judge panel in Giles v. Wells Fargo Bank, N.A. (No. 12-15567) agreed with the lower court that, under TILA’s “administrative convenience” exception, the servicer, who was assigned an ownership interest in the mortgage loan prior to foreclosing on the loan, was not obligated to provide notice of the assignment.
Section 1641(g) of TILA provides that a creditor who is the new owner or assignee of an existing mortgage loan must provide written notice to the borrower within thirty days of the date on which the new creditor acquired the loan. See 15 U.S.C. § 1641(g). The 11th Circuit explained, “[b]ased on its plain language, section 1641(g)’s disclosure obligation is triggered only when ownership of the ‘mortgage loan’ or ‘debt’ itself is transferred, not when the instrument securing the debt (that is, the mortgage) is transferred.” The Giles case involved an assignment of the security deed to the servicer prior to foreclosure that was not disclosed to the borrower. The borrower argued that under Alabama law, the transfer of the security deed also transfers an interest in the note secured thereby implicating the disclosure requirements of Section 1641(g).
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.