Iowa Banking Law Blog

Some Takeaways from the Policy Statement on Prudent Commercial Real Estate Loan Workouts

2009-11-09T10:00:05-05:00

On October 30, 2009, the FDIC and other financial regulators released a 33-page Policy Statement on Prudent Commercial Real Estate Loan Workouts describing how examiners should evaluate the efforts of financial institutions to renew or restructure loans to commercial real estate (“CRE”) borrowers. Some key points contained in this policy statement that should be of interest to lenders are set forth below:

The policy statement applies to borrowers who “continue to be creditworthy customers who have the willingness and capacity to repay their debts” and is intended, among other objectives, to “ensure that supervisory policies and actions do not inadvertently curtail the availability of credit to sound borrowers.”
Examiners are to take “a balanced approach” in assessing risk management in CRE workout situations.
CRE workout arrangements that are “prudent” and that are based on a “comprehensive review of the borrower’s financial condition” should not be criticized “even if the restructured loans have weaknesses that result in adverse credit classification.”
Such renewed or restructured loans that involve “reasonable modified terms” and “prudent underwriting standards” are not to be the subject of adverse classification solely because the collateral value has become less than the loan balance, and they “should not be adversely classified or criticized unless well-defined weaknesses exist that jeopardize repayment.”
In connection with such renewed or restructured loans it may be necessary to obtain a new or updated appraisal that reflects “current project plans and market conditions that were considered in the development of the workout plan.”
Assumptions that were recently made by qualified appraisers (and, as appropriate, by the lender) that are reasonable under the circumstances should be given a reasonable amount of deference by examiners.
It may be permissible to enter into a “multiple note structure in which, for example, a troubled loan is restructured into two notes.” A note that is “reasonably assured of repayment and performance according to prudently modified terms...may be placed back on accrual status in certain situations.” A note “that is not reasonably assured of repayment (i.e., the second note) should be adversely classified and charged-off as appropriate.”
Such renewed or restructured loans “need not be maintained in nonaccrual status” if “supported by a well-documented credit assessment of the borrower’s financial condition and prospects for repayment under the revised terms.”

Each bank’s situation is unique and the policy statement should be reviewed carefully as to its applicability to specific loans. In some instances, it may be necessary to confer with your primary federal bank regulator.

If you have questions, please contact Howard O. Hagen at 515-246-4543 or hhagen@dickinsonlaw.com or Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

FDIC Provides Guidance on Interest Rate Caps

2009-11-04T15:49:13-05:00

The Federal Deposit Insurance Corporation (“FDIC”) has issued a notice entitled “Weekly National Rates and Rate Caps” in which it reminded less than well capitalized FDIC-insured institutions that they can use the redefined national rate to determine their compliance with interest rate restrictions under Part 337.6 of the FDIC Rules and Regulations. The notice lists the national rate and rate cap for various products as updated November 2, 2009. Although the rule redefining the national rate does not become effective until January 1, 2010, such institutions are free to choose between using the national rate or continuing to use the local market approach until that date. After January 1, only the redefined national rate may be used in making such determinations. The rule redefines the national rate to mean a simple average of rates paid by depository institutions as calculated by the FDIC. The rule also limits rates paid on deposits solicited by less than well capitalized FDIC-insured institutions to prevailing rates in the applicable market area plus 75 basis points. Unless an institution seeks and receives a determination from the FDIC that it is operating in a high-rate area, the prevailing rate in all markets will be deemed to be the national rate after January 1. The notice refers to Financial Institutions Letter FIL-25-2009. These documents, as well as related Questions and Answers, are available at http://www.fdic.gov. National rates and national rate caps are posted weekly at http://www.fdic.gov/regulations/resources/rates/index.html.

If you have any questions, please contact Howard O. Hagen at 515-246-4543 or hhagen@dickinsonlaw.com, or Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

Shelia Bair’s Istanbul Attack on the “Too-Big-to-Fail” Doctrine

2009-10-09T18:01:10-04:00

Speaking on October 4 at the International Institute of Finance meeting in Istanbul, Turkey, FDIC Chairman Shelia Bair proposed that the “first task” of financial regulatory reform should be to scrap the “too big to fail” doctrine with a view to ending bailouts. Some highlights of her speech, which is available in full text at the FDIC’s website, are set forth below:

Effective market resolution processes for failing large firms will foster real market disciple
Firms that pose systemic risks should be required to hold larger capital and liquidity cushions
There is a need for disincentives for unbridled growth and complexity
Off balance sheet assets should count as on balance sheet risks
Necessary reforms include limits on leverage, minimum securitization requirements, better oversight of derivatives and reform of rating agencies
Firms that are no longer viable ought to fail and actions that prevent firms from failing ultimately distort market mechanisms
A resolution regime should provide for the orderly wind-down of failing enterprises without imposing costs on the taxpayers
The basic rule applicable to the failure of an insured bank should be that its holding company and its non-bank affiliates should also be subject to resolution
Limiting resolution authority to only large and complex bank holding companies is inappropriate because it would reinforce the “too big to fail” doctrine
Receivers should have broad authority including the power to operate bridge financial companies
Consideration should be given to legislation that would modify the current priority scheme by limiting the claims of secured creditors to encourage them to monitor risk of financial firms
Funding needed to avoid a disorderly collapse could be generated from risk-based assessments imposed on large bank holding companies
Greater harmonization of national laws may be needed to resolve failures of cross-border institutions
Consideration should be given to requiring that wind-down plans be developed and posted on each institution’s website
It may be appropriate to apply the resolution process to hedge funds and insurance companies

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

Dealing with the Unresolved "Too-Big-to-Fail" Problem

2009-09-21T10:48:58-04:00

Articles that appeared recently in The Financial Times and on Bloomberg.com highlighted the systemic problems that arise when financial entities are deemed too big to allow to fail. As the first anniversary of the failure of Lehman Brothers Holdings, Inc. is being observed, there seems to be no plan to address this aspect of the financial crisis. Ironically, the financial crisis has resulted in even greater concentration. There is a danger that the new motto of market participants will become “Being too-big-to-fail means never having to say you’re sorry. . . and never having to admit you were wrong.”

In their opinion article in The Financial Times, John McFall (Chairman of the Commons Treasury Committee) and Philip Augar (a former investment banker and the author of Chasing Alpha) advocate breaking up “a defective business model,” which they described using the following colorful language:

"Conflict of interest is embedded and this is unfair on other market users. It is 'heads we win, tails you lose' as the banks make off like bandits in the good times and become pious onlookers as the taxpayer foots the bill when it all goes wrong."

The article in Bloomberg.com is entitled “Lehman Monday Morning Lesson Lost with Obama Regulator-in-Chief," and it points out that the Obama Administration’s Plan for a financial regulatory overhaul would not force the largest financial entities “to shrink or simplify their structure.” The article includes the following interesting quotations:

Niall Ferguson, a professor of history at Harvard University, is quoted as follows: “The system is essentially unchanged, except that post-Lehman, the survivors have ‘too big to fail’ tattooed on their chests.”
Simon H. Johnson, a former chief economist at the IMF, described the Obama Administration’s proposal as follows: “The biggest problem is it doesn’t deal with too-big-to-fail. It doesn’t say anything. You have to make things a lot smaller.”
Former Federal Reserve Chairman Paul A. Volcker argued in a speech delivered on April 8, 2008, that a “demonstrably fragile financial system that has produced unimaginable wealth for some, while repeatedly risking a cascading breakdown of the system as a whole, needs repair and reform.”
FDIC Chairman Sheila Bair told the Senate Banking Committee in May of 2009 that a financial system “characterized by a handful of giant institutions with global reach and a single regulator is making a huge bet that those few banks and their regulator over a long period of time will always make the right decisions.”
Camden R. Fine, President of the Independent Community Bankers of America, asked “Does anyone think it’s a coincidence that less than 10 years after they repealed Glass-Steagall, the financial markets collapsed?”

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

FDIC Issues New Guidance for Private Equity Investors

2009-08-29T22:48:32-04:00

New guidance for private equity investors is contained in the Final Statement of Policy on Qualification for Failed Bank Acquisitions (the “Final Policy Statement”) issued by the FDIC on August 26, 2009. The Final Policy Statement includes significant changes in response to numerous comments concerning the FDIC’s initial proposal published on July 9, 2009. The changes incorporated into the Final Policy Statement will make transactions involving failed banks somewhat more attractive to private equity investors, although not all of the proposed restrictions on private equity investors were eliminated. FDIC Chairman Sheila Bair said that the Final Policy Statement “strikes a thoughtful balance” between the policy objectives of attracting non-traditional investors and maintaining necessary safeguards to protect the interests of taxpayers.

The need to attract additional investors seems clear. There were 416 banks on the FDIC’s problem bank list at the end of June with combined assets of approximately $300 billion. At that date the FDIC’s deposit insurance fund had a remaining balance of $10.4 billion.

Set forth below is a partial list of restrictions contained in the initial proposal that were reduced or eliminated in the Final Policy Statement:

Provisions for retroactive effect of the Final Policy Statement were eliminated
Restrictions will not apply to investors holding certain minority interests
The 15% Tier 1 leverage ratio was changed to a 10% Tier 1 common equity ratio
The higher capital commitment can no longer be extended beyond 3 years
The requirement that investors serve as a source of strength was eliminated
A cross guarantee would be required only when there is common 80% ownership
A 30-day ownership provision was added to restrictions on affiliate transactions
A provision for protection of confidential business information was added

Set forth below is a partial list of restrictions applicable to private equity investors that are contained in the Final Policy Statement:

A 10% Tier 1 common equity ratio must be maintained for 3 years
Common 80% ownership would require a cross-guarantee
Transactions with affiliates owned for more that 30 days would be restricted
Ownership structures must meet the FDIC’s disclosure standards
Investors from bank secrecy jurisdictions would be ineligible
Investors must maintain continuity of ownership for three years after acquisition

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

Some Unfinished Business of the 2008 Financial Crisis

2009-08-26T11:59:17-04:00

Now that Warren Buffett has opined in The New York Times that a meltdown was avoided and the economy is now out of the emergency room, it may be a good time to consider how many issues remain unresolved in the aftermath of the economy’s near death experience last fall. An overview of these issues was provided earlier this year in Jamie Dimon’s letter to shareholders of JPMorgan Chase & Co. (available at www.jpmorganchase.com). Set forth below is a partial list of the issues identified by Jamie Dimon, all of which, to one degree or another, could fuel a future crisis:

· Poor underwriting standards that expanded the housing bubble

· Use of poorly designed financial products (like option ARMs)

· Poorly constructed securitizations

· Unrealistic ratings provided by rating agencies

· Dishonesty by some participants in mortgage markets

· Excessive use of leverage by various market participants

· Unbalanced reliance on short-term financing to support illiquid, long-term assets

· Money market funds problems in responding to unforeseen demands for liquidity

· Lax terms for the financing of liquid assets

· Lack of regulation of mortgage brokers

· Lack of regulation of excessive derivatives activities by insurers

· Inadequate regulation of Fannie Mae and Freddie Mac

· An inadequate resolution process for failure of investment banks

· Pro-cyclical regulatory policies

· Excessively low interest rates and risk premiums

· Compensation practices that rewarded bad behavior

· Lack of a sound energy policy leading to high energy prices

The Obama Administration has delivered to Congress a comprehensive package of financial regulatory reform legislation that addresses many of these issues. As was pointed out in an earlier article here, the reforms involved are politically difficult because of the interests of market participants, regulators and Congressional committees in preserving existing regulatory jurisdictions and objectives. Whatever legislation ultimately emerges from Congress is unlikely to fully cure all the imbalances in our economy and our financial system. Although such major reforms require careful deliberation, there is a risk that the 2008 financial crisis could recede into history with little being done to protect against a repetition of the kind of events that placed the financial system and the economy at risk of collapse.

Is Your Bank Complying with the MDIA?

2009-08-04T10:26:01-04:00

The Mortgage Disclosure Improvement Act of 2008 requires lenders to give transaction-specific estimates of mortgage loan costs within three business days after receiving a consumer mortgage loan application. These early disclosures must be given prior to collecting any fees from the consumer other than a credit report fee. The MDIA also provides for a waiting period of seven days between the mortgage cost disclosures and the closing of the loan. The MDIA was effective beginning July 20, 2009. Click here for a more detailed description of the MDIA, and contact a member of Dickinson's Banking Law Group if you have questions about compliance with the MDIA.

Sheila Bair on Financial Regulatory Reform

2009-07-24T14:16:09-04:00

Sheila Bair is one of the most powerful voices on financial regulatory reform. In this statement, the FDIC CChairman outlines the regulatory gaps that currently exist and outlines her take on how to best fill those gaps. This is worth printing off and reading, I will not try to summarize. Some interesting excerpts:

"A strong case can be made for creating incentives that reduce the size and complexity of financial institutions. A financial system characterized by a handful of giant institutions with global reach and a single regulator is making a huge bet on the performance of those banks and that regulator."

"Under the new resolution regime, Congress should raise the bar higher than existing law and eliminate the possibility of open assistance for individual failing entities. The new resolution powers should result in the shareholders and unsecured creditors taking losses prior to the government, and consideration also should be given to imposing some haircut on secured creditors to promote market discipline and limit costs potentially borne by the government."

RE Consumer Protection Proposal: "The proposal would eliminate regulatory gaps between insured depository institutions and non-bank providers of financial products and services by establishing strong, consistent consumer protection standards across the board. It also would address another gap by giving the CFPA authority to examine non-bank financial service providers that are not currently examined by the federal banking agencies. In addition, the Administration's proposal would eliminate the potential for regulatory arbitrage that exists because of federal preemption of certain State laws. By creating a floor for consumer protection and by allowing more protective State consumer laws to apply to all providers of financial products and services operating within a State, the CFPA should significantly improve consumer protection."

The Mighty Sword of Preemption Sheathed; State AGs Can Enforce State Lending Laws

2009-07-02T16:23:25-04:00

The battle between federal banking regulation and state regulation of national banks has been brewing for years. It has been primarily a one-sided battle; the OCC has wielded the mighty sword of preemption and consistently vanquished state regulators, with their consumer protection warhorn around their neck, in courtrooms across the country. The OCC has aggressively maintained its power to preempt state laws that affect national banks’ federally authorized activities. State regulators have argued that the broad preemption endorsed by the OCC weakens state consumer protection and fair lending laws. In Cuomo v. Clearing House Association, LLC, the Supreme Court ruled in favor of state regulation, at least partially, forcing the OCC to sheath its mighty sword in state judicial enforcement actions.

In Cuomo, the New York Attorney General sent letters to various national banks requesting nonpublic information regarding their lending practices. The AG was investigating the banks' residential lending practices for violations of the state fair lending laws. The OCC and a trade group for the banks brought suit to enjoin the request claiming that the National Bank Act preempts the enforcement of state fair lending laws against national banks. The Court held that the NBA does not prohibit the ordinary enforcement of state law. The Court clearly delineated between any purported state “visitorial powers” or general oversight of national banks, which is preempted by the NBA, and the “prosecution enforcement actions,” which is not preempted. When the state sues to enforce a state law against a national bank, it is not exercising visitorial or oversight powers; it is exercising its power to enforce state law. Thus, the New York Attorney General could not simply request nonpublic lending information from national banks, but could bring suit or get a judicial search warrant and obtain the information though legal channels. Under the Court’s ruling, only the OCC can exercise administrative visitorial oversight of national banks. Substantive state law, on the other hand, can be enforced judicially by state authorities.

This decision levels the playing field between state and national banks. National banks now must clearly abide by the same fair lending and consumer protection laws as state banks. The decision also will likely increase the regulatory burden on national banks, as they will have to be sure to comply with the differing consumer protection and lending laws of individual states. It is unclear at this time how this decision will fit into the Obama administration's planned reform of the banking system. For the time being, however, the mighty sword of preemption has lost a bit of its shine, and the warhorns of state attorney generals are sounding across the nation.

If you have questions, please contact Jeff Andersen at 515-246-4503 or jandersen@dickinsonlaw.com.

Turf Battles May Impede Financial Regulatory Reform

2009-06-09T11:15:07-04:00

The global credit crisis, the global recession, the decline in real estate values and the negative effects of these events on the banking industry have stimulated interest in regulatory reform of the financial sector. The existence of complex interactions among participants and products in the global financial markets has become more apparent. Unprecedented measures have been taken to address frozen credit markets, the collapse of massive financial firms and the spreading contagion associated with “toxic” assets. Questions have been raised about the adequacy and effectiveness of many existing regulatory structures and about whether regulation should be extended to activities that currently are unregulated. There are perceived advantages and risks associated with concentrating regulatory authority in a single regulator. There has been discussion of the possibility of having a panel of regulators deal with systemic risk issues. Such an approach would be similar to the proposed European Systemic Risk Council, which would include the president of the European Central Bank and central bank governors from the European Union’s 27 member countries.

Although there is general recognition that disruptions in financial markets cannot be eliminated, the need for more effective safeguards against systemic risk is clear. Despite statements that something must be done, there is considerable disagreement about the exact nature of the changes that should be made. Reform will be politically difficult because of the interests of market participants, regulators and Congressional committees in preserving existing regulatory jurisdictions and objectives. Any financial industry regulatory reform raises questions about who should be performing particular kinds of regulation and how that regulation should be performed. Set forth below are some of the more contentious issues:

Should there be one or more than one systemic risk regulators?
Should hedge funds be regulated?
Should currently unregulated derivatives be regulated?
Should there be increased regulation of the mortgage industry?
Should there be regulation of the sale of securitized assets?
Should there be federal regulation of the insurance industry?
Should some or all federal bank regulatory agencies be consolidated?
Should failing non-bank financial companies be placed into receivership?
Should there be a reallocation of jurisdiction between the SEC and the CFTC?
Should there be a clearinghouse for over-the-counter derivatives?
Should credit default swaps be regulated?
Should short selling be more tightly regulated?
Should there be more countercyclical capital requirements?
Should the use of leverage be more tightly regulated?
Should there be more regulation of money market funds?
Should the role of state banking regulation be diminished?
Should there be more robust enforcement of consumer protection laws?
Should there be more disclosure of positions of larger market participants?
Should regulatory changes extend to compensation and corporate governance?

Whether or not all of these issues are resolved in the near future, it seems clear that substantial changes in the operation of financial market regulation lie ahead. What is also clear is that the outcome of turf battles will have a major role in determining the future of the financial regulatory structure.

Recent news reports highlight some of the problems that can arise in the context of turf disputes. According to a recent article in The Economist, “The stiffest resistance to change is coming not from Wall Street but from Washington, DC, where government officials, regulators and congressional leaders are locked in turf wars and ideological battles.” Bloomberg reports that because of “resistance on Capitol Hill” and “pushback from entrenched interests,” a merger of the SEC and the CFTC may not be pursued. An article in The Wall Street Journal comments on the FDIC’s “increasingly tough position” toward the management of Citigroup Inc. leading to “a bitter clash between regulators” about the speed and adequacy of efforts to improve the firm’s capital position. In an earlier article The Wall Street Journal reported on Congressional committee disputes over jurisdiction of the regulation of over-the counter derivatives. As the most traumatic aspects of the financial crisis pass into memory, it seems increasingly likely that bureaucratic infighting will play a major role in limiting the scope of any reform of the financial sector.

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.