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

For a uniquely focused discussion on making these types of loans in light of the CFPB’s new mortgage regulations, join attorneys John ReVeal and Barry Hester for the latest installment of Bryan Cave’s webinar partnership with compliance training leader BAI Learning & Development.  This free presentation will be held on Wednesday, May 8, from 3-4 pm Eastern.  More information and registration are available here.  Participants should walk away with a solid roadmap for managing existing portfolio balloons and ARMs now and for originating these types of mortgages once the CFPB’s rules take effect in 2014.

Related posts:

1. CFPB’s Ability to Repay, Qualified Mortgages, Escrow, and HOEPA Rules Provide Clarity and Certain Opportunities
2. John ReVeal and Barry Hester Continue 2013 BAI Webinar Series on CFPB Mortgage Rules on March 19
3. CFPB’s Final Rule on Escrow Requirements for Higher-Priced Mortgages Reinforces Its View of the Big Lender-Small Lender Divide

The 126 institutions originally represented $2.75 billion in investments in U.S. depository institutions, ranging from investments as small as $430,000 to as large as $267 million.  When you combine the dividends that have been paid to the U.S. Treasury by these institutions, the Treasury has received a gross profit of approximately $110 million.  The fact that Treasury has recovered, in the aggregate, a profit on these investments is fairly remarkable, considering that 27 of the auctioned institutions had each missed four or more quarterly dividend payments.

As shown in the chart below (click on the chart for a larger version), the volatility of the discounts has increased significantly in the later auction rounds.

One item to keep in mind when looking at auctions results is the amount, if any, of outstanding unpaid dividends or interest.  While the intitial TARP CPP auctions included institutions that were current in their payment of dividends/interest (and purchasers were obligated to pay Treasury 100% of any accrued but unpaid dividends/interest at the time of purchase), subsequent auctions have included 27 institutions in which the institution has missed at least four quarterly dividend or interest payments.  In these instances, Treasury has not required the purchaser to pay to Treasury any amount for these unpaid dividends and interest payments, and purchasers will be entitled to retain any payments subsequently made.  Accordingly, in measuring the discount on these auctions, it is important to factor the unpaid dividends into the equation, either by adding the unpaid dividends/interest to the denominator (reflecting additional amounts owed to the holder) or subtracting the unpaid dividends from the numerator (assuming repayment in full of any unpaid dividends/interest).  Although Treasury has frequently insisted on 100% payment of unpaid dividends in the restructuring context, we believe adding the amount of unpaid dividends to the numerator more appropriately measures the potential returns to purchasers.

(We also note that the Treasury, as well as press, frequently gives equal weight to the auctions of the “warrant” preferred or debentures.  These “warrant” instruments were the initial 5% kicker provided to Treasury at no additional cost in connection with the TARP CPP investments (in lieu of warrants to purchase common stock of the institution).  These “warrant” instruments have paid the higher dividend/interest rate since issuance, and thus reasonably command a small premium vis-a-vis the primary investment vehicle.  However, they also represent only a small portion of the overall portfolio, and make tracking more difficult.  For our purposes, we have included the proceeds received by Treasury in the auction of these “warrant” instruments in our aggregate calculations (so that any return on the “warrant” instruments reduces the discount Treasury experienced from its original investment), but otherwise excluded.)

The auctions have included fourteen Subchapter S institutions, who received TARP CPP  investments in the form of subordinated debt.  The Treasury has recognized a discount of between 1.5% and 40% on these investments.   For those that were current in their interest payments at the time of the auction, the discounts were between 1.5% and 27%.  For the give institutions in deferral, the discounts ranged from 7.5% to 40%.  (Ten of the fourteen received discounts between 1.5% and 10%.)

The auctions have also included fourteen institutions without a holding company, and thus where the TARP CPP investment took the form of non-cumulative preferred stock.  All but one of these institutions was current on their dividend payments at the time of the auction, and discounts have ranged from 1.9% to 35%.   (Eight of the fourteen received discounts between 10% and 18%.)

As previously mentioned, 27 institutions were in deferral at the time of their auction.  Based solely on par/principal amount outstanding, the auctions ranged from a premium of 10% to a discount of 82%.  However, if you include unpaid dividends in the denominator, the auctions for these 27 institutions created discounts ranging from 5% to 85%.  Eleven of the institutions in deferral (ranging from 4 to 13 missed quarters) received discounts of less than 20%, while five institutions in deferral (ranging from 9 to 14 missed quarters) received discounts in excess of 50%.

Related posts:

1. TARP CPP Auctions: The First Three Rounds and What’s Next
2. Rounds 32 and 33 of TARP Capital Infusions – TARP Map and List of Recipients Updated
3. Treasury Commences Auction of TARP Preferred Stock of Six Institutions

• The first lawsuit was filed against the former senior officers of Riverside National Bank of Florida (Ft. Pierce, FL). The bulk of the FDIC’s complaint in that case focused on failed loans that had been secured by stock of Riverside’s affiliated holding company. We previously summarized the lawsuit in our April 24, 2013 blog post.
• Later on April 15^th, the FDIC sued two former senior officers of City Bank (Lynwood, WA). According to the FDIC’s complaint, City Bank’s president and CEO alone had loan approval authority of up to $42 million, which was equal to the legal lending of the Bank. The complaint seeks the recovery of $41 million arising from the failure of 26 separate loans.
• The FDIC’s lawsuit against the former directors and officers of Bank of Wyoming is an interesting one. Here, the D&O carrier, BancInsure, apparently denied coverage for the FDIC’s pre-suit claim. Prior to the filing of the FDIC’s complaint, the former D&Os negotiated a settlement with the FDIC that provided for: (i) a “confession of judgment” in the amount of $2.5 million; and (ii) an assignment of the D&Os’ coverage claims against BancInsure in favor of the FDIC. The filing of the lawsuit on April 23^rd was a mere formality to allow the court to enter the judgment.
• On April 25^th, the FDIC sued the former D&Os of Peninsula Bank of Florida. The lawsuit was filed in the Middle District of Florida, which as we reported in our September 13, 2012 blog post, has held that Florida’s statutory version of the Business Judgment Rule insulates corporate directors from claims for ordinary negligence. Consistent with that ruling, the FDIC sued the former directors of Peninsula Bank for gross negligence, but sued the former officers for ordinary negligence. The complaint seeks the recovery of $48 million.
• The FDIC took a similar approach in its lawsuit against the former directors and officers of Frontier Bank (Everett, WA). It sued the former officers for ordinary negligence and the former directors for gross negligence, presumably because of the protections afforded by Washington State’s Business Judgment Rule. The complaint seeks the recovery of $46 million in connection with 11 loans.
• The FDIC’s complaint against the former directors of Eurobank is the third such suit filed in connection with the failure of a bank in Puerto Rico. As it did in the previous two suits, the FDIC took advantage of a Puerto Rican statute which permits it to also assert a direct action against the directors’ D&O carrier. The complaint seeks the recovery of more than $55 million in connection with 12 failed credits.
• The FDIC sued the former D&Os of Champion Bank (Creve Coeur, MO) on April 29^th. The bulk of the FDIC’s complaint centers on seven out-of-state loan participations that Champion Bank had purchased from a lead bank for real estate projects in Nevada, Arizona and Idaho. According to the FDIC’s complaint, one of the former officers negligently represented that the lead bank would repurchase the participations upon Champion Bank’s request. The other D&O defendants negligently relied on that representation, as there was no such agreement with the lead bank. The lawsuit seeks the recovery of $15.56 million in damages.
• Finally, on April 30^th, the FDIC filed a complaint against the former D&Os of Midwest Bank and Trust Company (Elmwood Park, IL). This lawsuit has two very distinct sets of legal theories. The first set of claims is asserted against the former D&Os in connection with their approval of six failed loans that resulted in damages of at least $62 million. The second set of claims is asserted against the former directors in connection with their alleged violation of the Bank’s investment policy. Specifically, the FDIC alleges that the former directors failed to sell preferred stock of Fannie Mae and Freddie Mac that it held for investment purposes, despite its auditor’s adverse classification of the stock. The FDIC seeks a separate award of damages in the amount of $66 million in connection with this set of claims.

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

The rationale for the conclusion in the Area Counsel Memorandum is that the bank clearly acquired the foreclosed property for resale since the federal and state regulations generally restrict the period that OREO may be held by a bank (although extensions can be granted) and also require that banks make good faith efforts to dispose of the OREO. The Area Counsel Memorandum reached this conclusion even though federal and state regulations would not have allowed the bank to otherwise acquire and deal in such property as a business carried on to make a profit. The Chief Counsel Memorandum takes a different view of the activities that generally must be carried on in order for a taxpayer to fall under the capitalization provisions of §263A, which is whether the bank is acquiring property with a view to re-sell it at a profit as part of the bank’s normal business activities. The Chief Counsel Memorandum concludes that the bank is acting in its capacity as a lender and not a traditional reseller of real property. The bank is economically compelled to acquire the property as a last resort to recover funds that it originally loaned in order to minimize its losses.

The Chief Counsel Memorandum concludes that the foreclosure activities and subsequent sale of the OREO are properly viewed as simply an extension of the bank’s lending activities, which are generally exempted from the provisions of §263A by the underlying Treasury regulations. Accordingly, OREO acquired under facts consistent with those set forth in the Chief Counsel Memorandum (i.e., OREO acquired in connection with a loan originated by the bank) will not be subject to the provisions of §263A, and legal fees and other costs incurred to acquire the OREO through foreclosure, as well as costs incurred while carrying the OREO prior to sale, should be fully deductible either when paid or incurred depending on the bank’s method of accounting.

Banks that have capitalized costs incurred to acquire OREO through foreclosure or costs incurred while carrying the OREO prior to sale (or both) should consider filing a claim for refund of income taxes prior to the expiration of the statute of limitations for the tax year or years in which such costs were capitalized.

Related posts:

1. Rescission of Foreclosure Sales in Georgia
2. Making Home Affordable – Program Updates
3. New Regulatory Framework for the Supervision of Bank Holding Companies and their Subsidiaries

The Consumer Financial Protection Bureau (“CFPB”) recently published a final determination regarding whether the unclaimed property laws of Maine and Tennessee relating to unredeemed gift cards (“Applicable State Law”) are inconsistent with and preempted by the gift card provisions of the  Electronic Fund Transfer Act and Regulation E (“Federal Law”).  The applicable laws of Maine and Tennessee are quite similar for the issues at hand.  In its ruling, the CFPB determined that Maine’s unclaimed property law as applied to gift cards is not inconsistent with Federal Law, and therefore no preemption was found.  However, with respect to Tennessee’s unclaimed property law, the CFPB ruled in favor of preemption but only with respect to the provision permitting issuers to choose whether to honor an unclaimed gift card after the underlying funds have been escheated to the state.  (A Print Version of this Alert is available.)

Background

The specific issue involves Federal Law vis à vis the abandoned property laws of Maine and Tennessee.  Federal Law prohibits a gift card from containing an expiration date that is less than five years from the date of issuance or date of last load, whichever is later; Applicable State Law, however, generally requires escheatment of unused balances on certain types of gift cards after two years of card inactivity.

A potential conflict arises when a bank or retail gift card issuer remits the unclaimed funds from a gift card to a state as required by the applicable abandoned property law, but then is subsequently faced with having to honor the card because it has not expired.  Issuers have to decide whether to honor the card and seek reimbursement directly from the state or whether to instruct the consumer to seek reimbursement directly from the state.

In August 2012, the CFPB published a notice of intent to make a preemption determination, seeking public comment regarding whether Federal Law relating to gift card expiration dates preempts the unclaimed property laws of Maine and Tennessee.  The CFPB received 20 comments in response to the Notice, including two comments from consumer advocacy groups and 18 comments from gift card issuers and trade associations.  All of the comments supported federal preemption.

However, one comment letter from the National Consumer Law Center (“NCLC”) stood out and provided a basis for the Bureau’s ultimate determination.  In its letter, the NCLC specifically argued that the CFPB should preempt state escheat laws only to the extent that they permit gift card issuers to fail to honor cards before the cards may expire under Federal Law.  The letter argued that it would be less burdensome for issuers to request reimbursement from the state after transferring the unused value than it would be for consumers to retrieve their unclaimed property directly from the state.  The letter added that issuers could request reimbursement at regular intervals (e.g. annually) and that issuers would have “little difficulty” establishing their right to reimbursement.

Maine

The CFPB first considered Maine’s abandoned property law, ultimately ruling against federal preemption since there was no basis for concluding that Maine’s law as applied to gift cards is inconsistent with Federal Law.  The CFPB’s determination relied heavily on the position by  Maine’s Office of the State Treasurer (“Maine Treasurer”) that Maine’s unclaimed property law requires issuers to indefinitely honor a gift card even after it has been presumed abandoned pursuant to Maine’s Uniform Unclaimed Property Act.  This finding was supported by the CFPB despite the fact that section 1961(2) of the Act provides that the state assumes custody of and responsibility for the property after escheatment, and a business that has transferred the unclaimed funds to the state is relieved of all liability arising thereafter with respect it.  The Maine Treasurer added that it does not fulfill a consumer’s direct request to claim unclaimed funds.  Rather the Maine Office re-directs the consumer to the gift card issuer, and informs the issuer that it is obligated to honor the card.  For these reasons, the CFPB found that Maine’s law does not interfere with the ability of consumers to use their gift cards at the point-of-sale for at least as long as they are guaranteed by Federal Law, and thus, no preemption applies.

Tennessee

The CFPB’s determination with respect to Tennessee focused on section 66-29-116 of the  Uniform Disposition of Unclaimed Property Act (“Tennessee Provision”), which provides that a gift card issuer is relieved of all liability with respect to a gift card after the unused value is transferred to the state and to the extent of the value transferred for any claim that may later arise with respect to the gift card.  The CFPB treated Tennessee law differently than Maine’s law, finding that despite the extensive similarities in statutory language, Tennessee’s unclaimed property law does not require an issuer to honor an abandoned gift card after transferring the card’s unused value to the state.  Rather, section 66-29-116 provides that a person that has transferred a gift card’s unused value to Tennessee has the option of (i) honoring the cards and then requesting reimbursement from the state or (ii) not honoring the cards because the funds have already escheated to the state.

In its analysis, the CFPB decided that the Tennessee Provision effectively acts as an expiration date to what should otherwise be easy point-of-sale access to a gift card’s underlying funds.  The CFPB acknowledged that complying with both Federal Law and Applicable State Law imposes “possibly burdensome” obligations on gift card issuers.  Yet above all else, the CFPB was concerned with consumers’ ability to use their gift cards.  The fact that issuers “may face an increased burden or cost to comply with both Federal law and [Applicable State Law]” did not bear any weight in the CFPB’s decision.  For these reasons, the CFPB determined that Applicable State Law permitting issuers to decline to honor gift cards as soon as two years after issuance and relieving them of liability conflicts with Federal Law.

Conclusion

The CFPB’s determination serves as an official staff interpretation of Federal Law with respect to the laws of Tennessee and Maine, and does not constitute a determination with respect to the laws of any other states.  However, given the fact that many other states have provisions similar to the Tennessee Provision, the CFPB’s ruling likely has much broader implications for gift card issuers.

Related posts:

1. CFPB Seeks Comments on Preemption of State Gift Card Escheat Laws
2. Federal Reserve Board Issues Final Gift Card Rules
3. Third Circuit Issues Opinion in New Jersey Abandoned Property Litigation

According to the bureau’s press release, the revised rule makes optional the requirement to disclose foreign taxes and recipient institution fees (unless the recipient institution is the remittance transfer provider’s agent). It also makes clear that a remittance transfer provider does not bear the cost of funds deposited into the wrong account because the sender provided the wrong account number or routing number and certain other conditions are satisfied, although the provider is required to attempt to recover such funds.

The final rule will become effective October 28, 2013.

We are reviewing the full text of the revisions and will provide a more detailed analysis in the coming days.

The revised rule is available here.

Related posts:

1. CFPB International Remittance Transfer Rules Create Substantial Compliance Hurdles
2. CFPB Proposes Amendments to Remittance Transfer Rules
3. CFPB to Amend Remittance Transfer Rules

Riverside National Bank of Florida (“RNB”) was opened in 1982, and it grew to 60 branches in 10 counties before it was put into receivership on April 16, 2010. The FDIC estimates that the material loss to the Deposit Insurance Fund arising from RNB’s failure is approximately $492 million.

According to the FDIC, RNB was affiliated with at least two other non-public bank holding companies, one of which owned a Florida bank that had failed in 2009. This corporate affiliation is a central theme in the lawsuit, as the FDIC focuses exclusively on the defendants’ approval of eight loan transactions that were secured by the holding company stock for either RNB’s parent or one of its affiliated holding companies, all allegedly in violation of RNB’s loan policy. Several of these loans were made to family members of one or more of the defendants. With the acceleration of the economic downturn in 2007, the holding company stock securing these loans lost value, and the loans quickly became non-performing and under-collateralized. The FDIC is seeking damages of approximately $8 million, which is the amount of losses attributable to the eight loan transactions at issue.

To our knowledge, this is the first FDIC lawsuit that focuses on failed loans secured by affiliate holding company stock. Since most community banks are not affiliated with multiple bank holding companies, this is not likely to signal a trend in FDIC litigation theory.

Related posts:

1. FDIC Sues Former Directors and Officers of Omni National Bank
2. FDIC Sues Former Directors of Florida Community Bank (Immokalee, FL)
3. FDIC Sues Former Directors and Officers of Corn Belt Bank & Trust