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.

All 50 states and the District of Columbia have statutes that regulate unclaimed property. Under these statutes, property is presumed abandoned and subject to the custodial taking by a state if it remains unclaimed by its “owner” (i.e., the person or entity to whom the property belongs) after the statutorily set time period has elapsed. Thus, the person or entity that is a “holder” of property presumed abandoned is required to return such property to the applicable state, to be held by the state for the benefit of the owner.

Under Delaware law, holders are required to annually report and remit unclaimed property, which includes, but is not limited to, savings or checking accounts, uncashed checks or refunds, trust distributions, unredeemed money orders, insurance payments, refunds, CDs, customer overpayments, utility security deposits, royalty payments, and gift certificates. Delaware law does not have a business-to-business exemption, nor does it provide for exemptions for de minimus amounts.

Pursuant to the priority rules established by the U.S. Supreme Court, unclaimed property is required to be remitted to the holder’s state of organization in cases where the owner’s name and address is not known. Thus, those with the most to gain under the new VDA program are those companies domiciled in Delaware.

The decision to enter into Delaware’s VDA program warrants careful consideration. Above all, a company’s decision should not only focus on the risks associated with entering into the program, but more importantly the risks of not entering into the program.

More information about the new VDA program may be found here.

If you have any questions or would like more information about Delaware’s new program, please contact Margo Strahlberg at (312) 602-5094 or mhstrahlberg@bryancave.com.

Related posts:

1. Deadline Approaching – Opt-Out Deadline for Extended Transaction Account Guarantee is November 2, 2009
2. June 10 Deadline for Clearing Interest Rate Swaps
3. Clients Alert Update — June 10, 2009 to June 26, 2009

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.

Also at issue in the Eleventh Circuit appeal is whether bank directors and officers may assert state law-based affirmative defenses, such as mitigation of damages, that are based on the FDIC’s own conduct as receiver.  The FDIC asserts that under federal common law, it owes no duty to former directors of a failed bank.  Judge Jones denied an early motion for summary judgment by the FDIC, meaning that if the decision stands on appeal, the FDIC will be treated as any ordinary plaintiff would with regard to the duty to mitigate.  As the briefs indicate, Judge Jones’ decision depended on a rather complicated analysis of whether the “no duty” rule advanced by the FDIC was settled law in the Eleventh Circuit at the time FIRREA was passed.

The FDIC’s gross negligence claims have received less attention in the motions to dismiss, with the courts uniformly upholding such claims when challenged so far.  In Skow, the court held that Integrity Bank’s articles of incorporation, which purported to exculpate directors from liability to the bank or its shareholders in cases of gross negligence, did not apply to the present suit because it was not a derivative suit and the FDIC as receiver is not a shareholder.  In FDIC v. Blackwell, and again in FDIC v. Miller, the courts rejected challenges to the sufficiency of the FDIC’s allegations, holding that allegations that the defendants repeatedly violated and/or ignored internal loan policies were generally sufficient to defeat a motion to dismiss.

More recent decisions indicate that the FDIC may rely on a failure to supervise theory against former directors, although it is unclear what the FDIC would have to allege and prove to prevail on such a claim.  The leading decision on a director’s duty to supervise is the Delaware Court of Chancery’s 1996 decision in In re Caremark International Inc. Derivative Litigation, which until now had never been discussed, let alone recognized as viable, by a Georgia court.  Under Caremark, if a director “utterly fail[s]” to implement proper internal controls, or “consciously fail[s]” to monitor or oversee operations, the director may be liable for resulting losses or liabilities.  In the Miller case, the court held that a viable Caremark claim was stated against the former Chairman/CEO of Community Bank & Trust, Cornelia, Georgia for failure to monitor or oversee a loan officer who allegedly approved over 100 loans that violated internal policies.  Subsequently, in FDIC v. Adams, the court found that more generalized allegations of failure to supervise a loan officer, that lacked any allegations of a conscious failure on the directors’ part, failed to meet “the high threshold of Caremark claims.”

Finally, bank boards and their counsel should take note of Davis v. Bancinsure, Inc., a recent D&O insurance coverage decision from the Northern District of Georgia that drives home the importance of policy language in coverage disputes.  In Davis, the directors and officers of Southern Community Bank sent a notice of circumstances shortly after receiving a cease and desist order from the FDIC (attaching the order to their notice), and then sent a second notice of circumstances days before the bank was closed.  The policy in question contained fairly rigid notice requirements that, in the court’s view, required the insured parties to state with particularity the alleged wrongful acts, the potential defendants, the alleged injuries, and the reasons for anticipating suit, which the court held the notices in question had failed to do.  The court also found that the policy’s “insured vs. insured” exclusion applied to claims brought by the FDIC as receiver, even though the policy had deleted a regulatory exclusion by endorsement, because the insured vs. insured clause (which was not deleted and remained in effect) specifically included the word “receiver.”  An appeal to the Eleventh Circuit was voluntarily dismissed.

Related posts:

1. D&O Carrier Seeks Denial of Coverage Against Former Directors of Failed Bank
2. FDIC Files Lawsuit Against Directors and Officers of Failed Integrity Bank
3. FDIC Brings Suit Against Former Officers of Failed California Bank

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 June 10, 2013, all banks (as well as certain other entities predominantly engaged in financial activities) will become subject to mandatory clearing for swaps with each other, with the “big players” that became subject to clearing on March 11, 2013, and with any other entity that desires to clear.  Given that most community banks want to avoid clearing, those community banks should ensure that they can take advantage of the “end user” exception to the clearing requirement available for smaller banks.  Banks may also want to avail themselves of the exemption for certain inter-affiliate swaps, pursuant to an “inter-affiliate” exemption.  Both of these exceptions/exemptions have terms and conditions.

The end user exception is found in Commodity Exchange Act §2(h)(7) and CFTC Regulation 50.50.  To qualify for the end user exception, the community bank must either (a) self-certify on an annual basis under CFTC Regulation 50.50(b)(2) that it meets small bank requirements and other provisions of the end-user exception or (b) provide enough information to its swap dealer counterparty to permit the dealer to report this information on the community bank’s behalf.  Many swap dealers are requiring community banks to make the “annual 50.50 filing”, which is made using forms available on the DTCC’s website.  Whether as part of an annual 50.50 filing or as a certification to the dealer, the community bank must (1) confirm that it has less than $10 billion in assets and is thus exempt from the term “financial entity”, (2) describe how it meets its financial obligations on the swap (such as “available financial resources”), (3) confirm that the swap(s) in question are entered into to hedge or mitigate the bank’s underlying commercial risk (such as to mitigate the interest rate risk arising from entering into a fixed rate loan), and (4) if the community bank is a public company or its holding company is a public company, then an appropriate committee of the bank’s board of directors must review and approve the bank’s decision to use a clearing exception.  Although not a condition to the end user exception, a community bank engaging in swaps must obtain a Legal Entity Identifier // CFTC Interim Compliant Identifier, available at the www.ciciutility.org website.

If your bank is not currently entering into swaps on a regular basis and has no plans to do so, then these regulations and the deadline are not relevant to your bank.  However, if your bank is entering into swaps subject to clearing or considering doing so in the near future and you do not want to deal with the clearing process, then you should comply with the various conditions to claiming the end user exception from clearing.

Related posts:

1. Losing Good Loans to Larger Banks? Try an Interest Rate Swap
2. Interest Rate and Brokered Deposit Restrictions
3. Overcoming the National Deposit Interest Rate Presumption

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.   

This final rule also raises the small creditor QM average prime offer rate (APOR) threshold distinguishing safe harbor QMs from rebuttable presumption of compliance QMs (those that are “higher-priced covered transactions”) from 1.5 percent to 3.5 percent above APOR for first-lien loans (this threshold was already 3.5 percent for subordinate-lien loans).  This change also has consequences for underwriting balloons under the general ATR rule, where creditors must conclude that consumers have the ability to make any balloon payment scheduled to occur as part of a higher-priced covered transaction but only those scheduled to be made within the first 5 years of other balloons. 

Other QM changes unveiled as part of this final rule include, as clarifications, the following exclusions from the amounts counting toward the QM points and fees test:  loan originator compensation paid by a consumer to a mortgage broker when that payment has already been counted (as part of the finance charge); compensation paid by a mortgage broker to an employee of the mortgage broker (as it is already counted as loan originator compensation paid by the consumer or the creditor to the mortgage broker); and compensation paid by a creditor to its own loan officers (in light of the operational and other complexities this would pose).  Observers had expressed concern that, as issued, the QM rules would have double-counted some of these amounts.

Related posts:

1. The Ability-to-Repay Roadmap for ARMs, Balloon-Payment Qualified Mortgages, & Non-standard Mortgage Refinances
2. CFPB’s Ability to Repay, Qualified Mortgages, Escrow, and HOEPA Rules Provide Clarity and Certain Opportunities
3. The CFPB’s New Mortgage Rules: Themes and Responses

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.

It is clear that at least some of the thriving banks elected to forgo income in exchange for lowering the risk exposure experienced by the bank.  The low loan-to-total asset ratio resulted in lower returns.; almost 36% of the thriving banks were in the lowest quartile of their peers for interest income (although 42% were in the lowest quartile for interest expense).  Similarly, the thriving banks grew at a rate that was half that of non-thriving banks from 2004 through 2007.  That said, thriving banks provided an average return on assets of 1.5% and an average return on equity of 12.7% during the period from 2006 though 2011.  (The report also acknowledged the risks present in an aggressive investment portfolio, including a note that the thriving banks “either intentionally or serendipitously” avoided purchasing the preferred shares of Fannie Mae and Freddie Mac.) This aspect of the research may be the most important from understanding expected regulatory pressures, with continued regulatory scrutiny on above average growth.  A community bank can only outgrow the growth of its market by (a) increasing market share by stealing customers from competitors, (b) expanding outside of its market, or (c) expanding its lending practice into new categories of loans.  Each of these practices potentially moves the community bank up and out the risk curve.

However, the report also noted a great degree of variability amongst the community banks that thrived during the downturn; there was no one dominant business plan that was necessary to thrive.  Non-interest income was certainly in a number of thriving community banks, but overall almost 20% of the thriving banks were in the lowest quartile of their peers for non-interest income.  Similarly, maintaining a low efficiency ratio was important to many thriving banks, but over 10% of the thriving banks experienced non-interest expenses that placed them in the highest quartile of their peers.  Thriving banks tended to have higher capital ratios than their peers, but there was substantial diversity among the thriving banks with regard to capital ratios; 39 percent had a leverage ratio in the highest quartile, but 18 percent were in the lowest quartile.

While CRE concentrations were, on average, lower in the thriving group, the report also found that 16% of the thriving banks exceed the federal supervisory guidelines for commercial real estate at some during the 2006 through 2011 period, indicating that it is possible for community banks to successfully manage the risks inherent in CRE lending, particularly so long as management had a deep knowledge of these “concentrated” lines of business and had robust risk management controls in place in case their niche business line underperformed.

Weaknesses

While generally a strong study, I believe the report suffers from two weaknesses, only one of which is expressly acknowledged in the report.  First, as noted in the report, the results of the analysis were shaped by the economic environment of the Great Recession, namely a collapse of the real estate market.  While the report found that a concentration in agricultural lending had a statistically significant impact on whether a bank was a thriving bank, it did so in the context of an economic environment in which agricultural land and product prices increased.  As acknowledged by the study, if the same analysis were conducted with data from the 1980′s, they would ten to observe the opposite case; concentrations in agricultural lending would be a source of weakness.

The study also fails to fully address the importance that geography played in whether a community bank was able to thrive during the Great Recession.  The report notes that the West Coast and Southeast had the fewest thriving banks, and suffered some of the biggest declines in property values in the nation. While the report acknowledges that the geographic concentration found in the study appears to be related to the relative prosperity of the agricultural and energy sectors of the economy, by aggregating the thriving banks in successful geographical areas and comparing with the aggregated non-thriving banks in other areas, the report fails to explore either the relative importance of geography or how the relatively few community banks in economically depressed areas nonetheless managed to avoid CAMELS downgrades.  In our experience, community banks can rarely significantly over perform the communities they serve, no matter what risk controls are in place.  While community banks could attempt to diversify outside of the communities they serve, this out-of-market lending is equally (if not more) risky.  Similarly, particularly in states with significant economic distress, potentially thriving community banks (and community banks that may have otherwise qualified for the study if the CAMELS ratings were purely objective) may have been downgraded one or more CAMELS ratings merely because of the economic uncertainties of the region and regulator pressures on the individual examiner in charge to have justified why a particular community bank should not have been downgraded.  Two identical banks in different markets (or difference FDIC districts) can easily get different ratings.  The Report also did not analyze whether the “thriving” banks were able to play a dominant role in the local market they serve.  While dominance can be a difficult feature to quantify for study purposes, we believe that whether a community bank is the dominant bank in its local market plays a significant role in the bank’s ability to weather economic downturns.

Conclusion

We suspect that a survey of 2-rated banks may have been even more meaningful for many community bankers.  1-rated banks can be considered too conservative, and unwilling to move slightly out the risk curve in exchange for better expected returns (and may be operating below the efficient frontier of maximizing expected returns for any given level of risk).  The low loan-to-total asset ratios experienced by the “thriving” banks is a good example of the overall risk tolerances of these banks.  The Fed study briefly analyzes other potential definitions for “thriving” banks, and notes that 2-rated banks had an average total loan-to-total assets ratio of approximately 63%.  At least during the Great Recession, however, the conservativeness of the 1-rated banks vis-a-vis the 2-rated banks also led to higher average returns on assets (1.5% vs. 1.1%).

Notwithstanding its weaknesses, the St. Louis Fed study is worth a review by community bank management and directors.  While there is a strong future for well-run community banks, each bank must develop a business plan that works in its market… and that can be explained to regulators.

Related posts:

1. Commentary: NYTimes Recognizes Community Banks
2. TARP Extension – Capital for Community Banks?
3. State of the Union – TARP Money for Community Banks

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).

The 11th Circuit dismissed the argument and held that, even if that was the case, the Section 1641(g) disclosure requirement does not apply to servicers who acquire title to effectuate a foreclosure.   Section 1641(f) of TILA creates an exception where, a servicer of a mortgage loan who is assigned title to the loan shall not be treated as the owner if title was assigned to the servicer solely for “the administrative convenience” of the servicer in servicing the obligation.  See 15 U.S.C. § 1641(f); 12 C.F.R. § 226.39.   The Court held that when a beneficiary of a promissory note transfers its interest to the servicer for purposes of foreclosure, the assignment falls under the “administrative convenience” exception and the servicer is not required to disclose the transfer to the borrower.  In support of its opinion, the Court pointed out that the holder of the note, Freddie Mac, makes clear in its servicing guidelines “that such an assignment [is] temporary and made solely for the purpose of completing the foreclosure proceeding.”

The question of whether the servicer “administrative convenience” exception applies to mortgage loan transfers that have occurred to effectuate a foreclosure is currently heavily litigated in several states (e.g., Alabama, California, Florida, and Hawaii).  In issuing its opinion in Giles, the 11th Circuit has provided much needed guidance for the federal courts in Alabama, Georgia, and Florida to follow.  A copy of the Giles opinion is attached.

Related posts:

1. 11th Circuit Upholds Deposit Agreement Arbitration Provision
2. Georgia DBF Clarifies Guidance on Loan Renewals
3. Eleventh Circuit Will Hear Appeal on Scope of Georgia’s Business Judgment Rule

As previously discussed, many of the remaining TARP CPP recipients are currently deferring dividends.  Of the 154 institutions remaining, over two thirds, or 102 institutions, are currently in deferral.

A quick review of the states with remaining investments looks very similar to the states with the most bank receivership in the current economic cycle. Specifically, California, Georgia and Illinois are each in the top four of both lists. This is consistent with the maxim that a community bank cannot significantly outperform the communities that they serve; California, Georgia and Illinois were each hit very hard by the economic downturn, and the effect can be seen in both the number of bank receiverships and the number of institutions that have not yet exited TARP.

Related posts:

1. What do the Remaining TARP CPP Investments Look Like?
2. TARP Capital and Community Banks
3. Impact of TARP Capital on Community Banks

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.

The Supreme Court included a paragraph at the end of the You decision expressing its view on whether existing Georgia foreclosure statutory law adequately protects home owners in Georgia: “As members of this State’s judicial branch, it is our duty to interpret the laws as they are written. This Court is not blind to the plight of distressed borrowers, many of whom have suffered devastating losses brought on by the burst of the housing bubble and ensuing recession. While we respect our legislature’s effort to assist distressed homeowners by amending the non-judicial foreclosure statute in 2008, the continued ease with which foreclosures may proceed in this State gives us pause, in light of the grave consequences foreclosures pose for individuals, families, neighborhoods, and society in general. Our concerns in this regard, however, do not entitle us to overstep our judicial role, and thus we leave to the members of our legislature, if they are so inclined, the task of undertaking additional reform.” (citations omitted).

On May 20, 2013, the Supreme Court also issued its opinion in the Provident Funding Associates, L.P. v. Izell Reese case (Case No. S12C2028), in which a petition for certiorari had been filed related to the Court of Appeals’ decision that O.C.G.A. § 44-14-162.2 required that a notice of foreclosure identify the secured creditor.  In the Reese Opinion, the Supreme Court vacated the judgment of the Court of Appeals and remanded the case to the Court of Appeals for consideration in light of the You Opinion.  A copy of both the You Opinion and the Reese Opinion is attached.

Related posts:

1. Georgia Appellate Court Decisions Back Secured Lenders
2. Rescission of Foreclosure Sales in Georgia
3. Favorable Lender Ruling by Georgia Court of Appeals

As a reminder, Jacob Lew’s signature used to look like this:

Which would have made the dollar bill look something like this:

• “ridiculous” (New York Times)
• “a Slinky that has lost its spring” (New Yorker Magazine)
• “The best thing about a Treasury Secretary Jack Lew.” (Washington Post)

Unfortunately, it looks like Secretary Lew has gotten a new signature.

Related posts:

1. Revised TARP Capital Closing Documents
2. Revised Call Report for Transaction Account Guarantee
3. Around the Web

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.

The size of the average investment remaining in Treasury’s hands is just over $30 million, but consistent with prior holding periods (and the banking industry generally) the average size is increased by a few investments.  The median size of the remaining investment is only $7.7 million, and over 59% of the remaining investments are $10 million or less.  The five largest remaining investments constitute $2.8 billion (or over 58% of the remaining investments), and the ten largest constitute $3.3 billion (of over 68% of the remaining investment).

The remaining investment portfolio is generally not as strong as the original portfolio of investments.  104 of the remaining investments (or 65%) are currently in deferral on their dividend or interest payments, including 22 institutions that are in deferral on their non-cumulative preferred instruments.

Related posts:

1. What do the Remaining TARP CPP Investments Look Like?
2. Results of Sixteen TARP Auction Rounds
3. Treasury Updates TARP Wind-Down Plans