The OCC recently issued a Notice of Proposed Rulemaking (NPRM) on integration of the OTS into the OCC and other Dodd-Frank Act implementation matters, including changes to national bank preemption and the OCC’s visitorial authority. Per Dodd Frank, the OCC will assume responsibility for the ongoing examination, supervision and regulation of federal savings associations on July 21, 2011.
The NPRM revises OCC rules related to internal agency functions and operations (and integrates references to the OTS and federal thrifts, where applicable), including those related to OCC organization, availability of information under FOIA, release of non-public OCC information and post-employment restrictions for senior examiners. The NPRM also amends the OCC’s assessment fee rule to include federal savings associations and to synchronize payment due dates. In addition, the NPRM implements the Dodd Frank three-year moratorium on changes in control of credit card banks, industrial banks and trust banks, where the change would result in direct or indirect control by a commercial firm.
Perhaps most significant, however, are the changes made to the OCC regulations governing preemption and the OCC’s visitorial authority. As mandated by Dodd Frank, these changes will:
- Eliminate preemption of state law for national bank operating subsidiaries, agents and affiliates.
- Remove language permitting field preemption (that is, preemption over an entire body of law, even if there is no conflict, because federal law “occupies the field”).
- Implement statutory changes made by Dodd Frank as to when state consumer financial laws may be preempted, based in part on the Barnett standard for conflict preemption.
- Revise the OCC’s visitorial powers rule to conform to the Supreme Court’s Cuomo decision, recognizing the ability of state attorneys general to bring enforcement actions in court to enforce non-preempted state laws against national banks.
- Apply the national bank and national bank subsidiary preemption and visitorial powers standards to federal thrifts and their subsidiaries. (The affected OTS preemption regulations will be repealed.) (more…)
The FDIC continues to work on its processes for liquidating a nonbank financial company whose failure is deemed to pose a significant risk to the financial stability of the United States. The bank holding companies of the largest 50 banks in the US are automatically included in that group. Final rules on what other companies will be included in that group are still being developed. There is currently a great deal of lobbying going on before the Federal Reserve by large mutual funds, hedge funds and insurance companies all of whom are trying to explain why they are not so important after all. A designation of systematically important carries with it significant consequences including the fact that such companies must develop a regulator approved “resolution plan” that outlines how the company could be liquidated in an orderly manner, federal regulators can preempt the use of bankruptcy by such entities and finally, the fact that a FDIC resolution effectively shuts out interested parties (management, shareholders and creditors) from a seat at the table during the resolution process.
One aspect of the proposed rules being developed by the FDIC concerns Section 210(s) of the Dodd-Frank Act dealing with recoupment of compensation from senior executives and directors of a failed nonbank financial company who were substantially responsible for the failed condition of the company. Section 201(s) provides that the FDIC may seek to recover “any compensation” paid to those parties in the previous two years. This would include salaries, bonuses, deferred compensation, golden parachute payments, stock option plans and profits realized from the sale of securities in the covered company. The proposed rule builds on this anti-incumbent theme by creating a presumption that a senior officer or director is substantially responsible for the company’s failure if they served as chairman of the board, CEO, president, CFO or any other position where they had responsibility for the strategic, policymaking, or company-wide operational decisions of the company. The presumption is rebuttable by providing evidence that the person did in fact perform their duties with the requisite skill and care.
It is unclear whether the FDIC position concerning the presumption of culpability will survive as the final rules are developed and whether it will stand up to legal scrutiny if it remains in the rules. For example, the Dodd-Frank Act itself does not appear to move the evidentiary burden to the directors and officers. It is also difficult to understand the interplay of the FDIC proposed rule with state laws that provide gross negligence standards for liability for officers and directors as well as defenses based on the business judgment rule. Moving the burden of proof to the directors and officers upends our normal understanding of how the government normally pursues parties against whom it is seeking to impose a monetary penalty. The issue for defendants in such actions will be whether the imposition of the sanction by the FDIC can be opposed as a practical matter.
After a long and divisive lobbying fight, retailers defeated the banking industry Wednesday as the Senate narrowly defeated legislation to delay new caps on debit-card swipe fees.
The legislation was offered by Sens. Jon Tester (D-Mont.) and Bob Corker (R-Tenn.) and failed on a 54-45 vote, falling just six votes shy of the 60 needed for passage and clearing the way for a provision in last year’s Dodd-Frank Wall Street reform law to take effect July 21.
The provision, often referred to as the “Durbin Interchange Amendment” required the Federal Reserve to establish fair and reasonable interchange fees for many debt and prepaid card transactions. Last Fall, the Federal Reserve proposed new rules which (among other things) would limit to 12 cents per transaction the fee that large banks (with more than $10 billion in assets) can charge merchants every time a consumer uses a debit card or a prepaid gift card. These proposed rules garnered significant critcism and final rules, which are now overdue from the Federal Reserve, are expected shortly.
Senators Tester and Corker initially proposed delaying the Durbin amendment from taking effect for 24 months. The final version of the Tester-Corker plan was to cut the delay in half to 12 months and called for a six-month study of the costs associated with debit transactions and their impact on consumers and small, community banks.
The OCC recently sent a letter to Sen. Tom Carper (D-Dela.) in response to his request for the OCC to clarify how it would interpret particular aspects of the preemption provisions of the Dodd-Frank Act. Among other things, the letter states that federal preemption of state consumer protection laws would continue even under Dodd-Frank, in accordance with the “Barnett” standard. Of particular interest, the OCC letter noted that Dodd-Frank did not overrule or reverse any pre-existing judicial decisions that were based on the Barnett standard and which found that the state law conflicted with bank powers.
The Dodd-Frank Act restricts the ability of national banks and federal savings associations to assert preemption from state consumer protection laws. For example, the ability to assert “field preemption” over an entire body of law (even if there is no conflict) no longer exists. However, contrary to some assertions, preemption is not “dead.” One way preemption would apply is when the state consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers, as established by the Supreme Court in the Barnett case.
In its letter, the OCC declares that this preemption standard as statutorily referenced in the Dodd-Frank Act is a “directive to apply the conflict preemption standard articulated in the Barnett decision.” However, the letter further adds that the OCC “recognizes that going forward, after the transfer date, the Dodd-Frank Act imposes new procedures and consultation requirements with respect to how [the OCC] may reach future preemption determinations, including the case-by-case requirement…” and specifically mentions that the OCC will be required to first consult with the Consumer Financial Protection Bureau prior to making its determination.
Section 165(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires each nonbank financial company supervised by the Federal Reserve and each bank holding company having assets of $50 billion or more (a “Covered Company”) to develop what has commonly become referred to as a “living will,” essentially a plan of orderly liquidation (the “Resolution Plan”). The Federal Reserve and the FDIC published a proposed rule on March 29, 2011, to implement this provision. The proposed rule requires a Covered Company to provide its initial plan within 180 days from the effective date of the final rule or the date the entity becomes a Covered Company. Each Covered Company will then be required to submit an updated plan within 90 days of the end of each calendar year. Interim updates are required if an event occurs that might have a material impact on the Resolution Plan. The Resolution Plan must be submitted the Federal Reserve and the FDIC for their approval. The Plan must take into account what type of distress in the world financial markets might result in failure of the Covered Company and, most importantly, it must assume that the government will not provide any extraordinary support. The Resolution Plan must provide for the “rapid and orderly liquidation” of the Company and should include provisions that protect any FDIC insured institutions from risks created by nonbank subsidiaries of the Covered Company. It should also assess the feasibility of the Covered Company’s plan, including timelines, for executing any sales, divestitures, restructurings or other similar actions.
Editorial Comment: When the credit markets freeze and it is impossible to value financial assets, how exactly will a huge financial company liquidate itself in a “rapid and orderly” manner? A dearth of buyers in such a situation will make the liquidation impossible to accomplish in a short period of time and if it is accomplished it will likely be a very messy affair. An orderly liquidation really presumes that the credit markets are working normally and that the financial distress a large bank is suffering is restricted to it alone. In such a situation there would be willing buyers for the assets and the liquidation would not trigger a broader crisis. One suspects that any Resolution Plan will be much more aspirational in nature than a true blueprint for what to do in a financial panic.
On November 15, 2010, the Federal Deposit Insurance Corporation (FDIC) issued a final rule to implement Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). Section 343 of the Act provides for unlimited deposit insurance for “noninterest-bearing transaction accounts” through December 31, 2012.
In the months since the FDIC issued its final rule, we have observed some confusion in the banking industry as to exactly what kinds of accounts will be considered to be “noninterest-bearing transaction accounts.” It is not the case, as some seem to have believed, that the definition covers only accounts offered to businesses. Consumer accounts can qualify for the unlimited deposit insurance, if properly structured. For some banks, this may mean a change to their existing deposit agreement terms.
FDIC regulation now defines “noninterest-bearing transaction account” as any deposit or account maintained at an FDIC insured bank or other depository institution with respect to which all three of the following are true:
(i) no interest may be paid or accrued on the account;
(ii) the depositor must be able to make withdrawals by using a negotiable or transferable payment instrument, payment order of withdrawal, telephone or other electronic media, or other similar items for the purpose of making payments or transfers to third parties; and
(iii) The depository institution may not reserve the right to require advance notice of intended withdrawal.
On March 18, 2011, the FDIC hosted a roundtable discussion on core and brokered deposits as part of a study required by Section 1506 of the Dodd-Frank Act. All members of the FDIC Board of Directors were present. Panelists included former FDIC Chairman Bill Isaac, a cross section of bankers, a university professor, consultant Randy Dennis, vendor representatives such as Mark Jacobsen of Promontory Interfinancial Network, LLC, and one state bank regulator, Sara Cline of the West Virginia Division of Banking.
The roundtable discussion primarily centered on the continued relevance of the current statutory meaning of “brokered deposit” and the policy behind restrictions on the use of such deposits. It was clear from the FDIC’s comments and their choice of speakers that they continue to believe that brokered deposits raise significant policy concerns. Bill Isaac discussed the “massive abuse” of brokered deposits by many of the failed banks and savings associations in the late 1980s, and noted that curbing these abuses was even more important today given the higher FDIC insurance coverage. Likewise, Dr. Haluk Unal, from the University of Maryland, cited statistical evidence that high levels of brokered deposits reduce a bank’s franchise value and make it less likely the bank, if it fails, will be acquired by a healthy bank. While other participants argued that these statistics are skewed by a small percentage of failed banks, FDIC Chairman Sheila Bair noted that the use of brokered deposits can be costly to the taxpayer and reduce franchise values.
With regard to the effect of brokered deposits on liquidity, the FDIC suggested that the primary question is whether the deposits are volatile or stable. FDIC Deputy Director Diane Ellis said that the FDIC had identified three characteristics that affect stability—customer relationship, the depositor’s location, and interest rates—and asked the panel to comment on each of these characteristics.
Several participants suggested that although the term “brokered” has come to be synonymous with “volatile” and contrasted by “core,” the statutory definition has been simultaneously read very broadly. As a result, the regulatory result has been the prohibition of a wide variety of funding sources as “brokered deposits” that, in the view of several bankers on the panel, are in fact stable funds. The panel focus was on what attributes truly make a deposit stable, what retention record banks have actually had with particular deposit types, and just how much more costly these various funding sources have been. Panelists discussed business practices and technological advances to which they felt the statutory meaning of brokered deposit was not attuned.
On February 18, 2011, Rob Klingler gave the 2011 Regulatory and Legislative Update for the annual Banking and Finance Law presented by the Institute of Continuing Legal Education in Georgia. A copy of the slides used in the presentation is available online.
Jerry Blanchard served as the program chair and gave an update on recent case law developments. BT Atkinson also moderated a panel on Bank Acquisitions and Mergers in Non-Loss Share Transactions. The seminar will also be available on the ICLE’s website as an archived online course, and is eligible for 6 Georgia CLE hours, including 1 trial practice hour.
New Truth in Lending Act (TILA) rules effective April 1 make dramatic changes to the ways in which loan officers and brokers can be compensated for loan origination services. In addition, these rules were proposed prior to the enactment of the Dodd-Frank Act but were finalized afterwards. Changes to the rules made during the interim—and the overlapping Dodd-Frank provisions—could make interpreting and complying with the new restrictions a challenge.
To aid institutions in understanding and dealing with these changes, the Georgia Bankers Association will host a telephone briefing entitled “Loan Officer and Broker Compensation” from 2-4 p.m. on February 16. Join Bryan Cave partner Kalee Vargo and Steve Greene, Managing Member of Helms & Greene, LLC as they discuss how the new TILA rules affect your organization, what your bank needs to be doing now and the best HR and compensation practices going forward. Some of the topics to be covered include what originator compensation is permissible and what is not, safe harbor provisions, the interplay with Dodd-Frank and with wage and hour laws, what steps banks should be taking now and much more. The registration fee is $49 per line and registration is available online. If you have questions about the briefing, contact the GBA’s Courtenay Pope at 404.420.2015 or Susie McGehee at 404.420.2010.
Under current law, brokers are generally permitted to be paid yield spread premiums (YSP) and other incentives on loans they originate. The new TILA rules at 12 CFR § 226.36 prohibit the payment of compensation, direct or indirect, to any “loan originator” in connection with a home mortgage loan that is based on any of the loan’s terms (e.g., interest rate, APR), except payment may be made as a fixed percentage of the loan amount (and a creditor may subject such an arrangement to a minimum or maximum fee amount).
Under the new regulations, a “loan originator” is any person in a particular transaction who for compensation or other monetary gain, or in expectation thereof, arranges, negotiates, or otherwise obtains an extension of consumer credit for another person. Significantly, this includes an employee of the lender if the employee meets this definition. A lender is a “loan originator” as well as a creditor in a particular transaction if it does not provide the funds for the loan at consummation out of its own funds or deposits (i.e., if it “table-funds” the loan) and imposes and retains any direct charge on the consumer for the transaction. Thus, a creditor that is a loan originator by virtue of making a table-funded transaction is subject to these new prohibitions as well as Regulation Z’s creditor requirements.
Like Dodd-Frank, the new rules also target the practice of “steering” consumers to loans deemed less favorable to the consumer than others under the new regulatory structure. Dodd-Frank’s Section 1403, however, enacts a new TILA Section 129B(c) that imposes similar restrictions on “mortgage originators,” for which the statute provides a lengthy and distinct definition. The Fed has acknowledged that it will need to follow up its April 1 regulations with rules that implement this part of Dodd-Frank.
In October through December, 2010, Bryan Cave attorneys will be presenting a four-part series that explains the key provisions of the Dodd-Frank Act under the BAI umbrella. The BAI Regulatory Reform Webinar Series will uncover Dodd-Frank’s operational and revenue impact on financial institutions.
The BAI Regulatory Reform Webinar Series includes the following webinars:
- The Dodd-Frank Act: From A to Z – October 28, 2010 – Rob Klingler
- The Impact of Dodd-Frank on the Future of Bank Operations – November 17, 2010 – Walt Moeling & Jerry Blanchard
- The Consumer Finance Protection Bureau: How it Affects You – December 1, 2010 – John ReVeal
- The Durbin Amendment Impact on Credit, Debit, and Prepaid Cards – December 16, 2010 – Judie Rinearson