On December 29, 2011, the FDIC filed suit against seven former directors of the Bank of Asheville in the Western District of North Carolina seeking to recover over $6.8 million in losses suffered by the bank prior to receivership. All of the directors named as defendants were members of the bank’s Loan Committee, the committee responsible “for the amplification, implementation and administration of the loan policy” and “management of the lending function”. The Complaint cites 30 specific commercial real estate and business loans approved by the defendants between June 26, 2007 and December 24, 2009 as causing loss to the bank and those loans form the subject matter of the Complaint. A copy of the FDIC’s complaint is available here.
In the Complaint, the FDIC as Receiver essentially cites the Bank’s rapid growth strategy concentrated in what it characterizes as “higher risk, speculative commercial real estate loans”. The Complaint alleges that the defendants had virtually no previous banking or commercial real estate lending experience, failed to implement even the most basic prudent lending controls, and neglected to adequately supervise inexperienced and under qualified lending personnel. The complaint further alleges that the defendants failed to heed warnings by State and Federal regulators as well as outside auditors of the increasing risk associated with the bank’s highly concentrated commercial real estate loan portfolio. The complaint alleges that once those risks began to manifest themselves, the defendants “took actions that masked the bank’s mounting problems” by approving additional loss loans and renewing and making additional advances on other non-performing loans, as well as replenishing interest reserves which allowed borrowers to pay interest with more borrowed funds.
In mid-November 2011, the FDIC filed a complaint against eleven former directors and officers of Westsound Bank (Bremerton, WA), which was closed in May 2009. The lawsuit is the FDIC’s seventeenth action against former D&Os of failed banking institutions since the advent of the Great Recession. A copy of the FDIC’s complaint is available here.
The FDIC’s core allegations resemble those asserted in its prior D&O lawsuits. Specifically, it alleges that the Westsound board embarked on a “reckless” business strategy focused on high-risk ADC and CRE lending. The FDIC further contends that the board and the Directors Loan Committee (“DLC”): (i) failed to properly manage and supervise the bank’s lending function; (ii) approved loans in violation of and without regard to the bank’s loan policy; (iii) ignored regulators’ warnings about excessive loan concentrations and lax oversight of the lending function; and (iv) approved additional loans and loan renewals and advances to mask non-performing credits.
The FDIC seeks to recover damages in excess of $15 million on claims for gross negligence (under FIRREA), and state law claims for negligence and breach of fiduciary duty. Its alleged damages are tied to 35 specific credits, including seven ADC/CRE loans, and seven other loans to insiders allegedly made without board approval in violation of Reg. O.
Looking back at 2011, on Wednesday, January 25, 2012, from 2:00 to 3:30 pm EST, the Bryan Cave Payments Team has prepared a “Prepaid Card in Review” webinar for Bryan Cave clients and friends. In addition to an overview of major legal and regulatory events impacting both open and closed loop cards, the Team will offer their views on likely future developments.
We will provide an overview of major legal and regulatory events impacting both open and closed loop cards and other emerging payments, including:
- The “Durbin Amendment” and the subsequent FAQs from the Fed
- Prepaid Access AML regulations
- The CFPB – Current activity and the recess appointment of Richard Cordray
- Abandoned Property – the implications of the New Jersey abandoned property legislation and the recent Third Circuit Opinion
- Consumer Protection Laws – Life after the CARD Act.
- Remote Deposit Capture – Check Cashing or Deposit Taking? Current Views.
- Preemption post Dodd-Frank – recent decisions. Is preemption “dead”?
- Money Transmitter Licensing – Why so many new payment companies are getting licensed: The pros, the cons, and the risks.
- Privacy and Data Security – Are Prepaid & Emerging Payments riskier or safer than traditional payment products?
- Mergers & Acquisitions in the Payments Area – Risks and rewards from acquisitions of licensed money transmitters.
The Consumer Financial Protection Bureau has created an ombudsman’s office to help resolve individual and systemic problems that banks, nonbanks and consumers have with the bureau. The announcement states that depository or non-depository entity that the CFPB supervises may use the Ombudsman’s Office when they have not had success with the existing CFPB processes, or to achieve an informal resolution. Further information may be found at http://www.consumerfinance.gov/ombudsman/#FAQ.
The CFPB is requesting suggestions for streamlining the regulations it has inherited from other agencies pursuant to the Dodd-Frank Act.
In particular, the bureau is asking the public to identify provisions of such regulations that it should make the highest priority for updating, modifying or eliminating because they are outdated, unduly burdensome or unnecessary, including:
- Certain definitions in Reg E, Reg P, Reg Z
- Annual privacy notices under Reg P
- ATM fee disclosures under Reg E
- Coverage and scope of Reg Z
- Electronic disclosures required under Reg E and Reg Z
Publication of the CFPB’s notice in the Federal Register is available at http://www.gpo.gov/fdsys/pkg/FR-2011-12-05/pdf/2011-31030.pdf. Comments are due by March 5, 2012; commenters will have until April 3, 2012, to respond to other comments.
The CFPB recently issued guidance on the treatment of confidential supervisory information. CFPB Bulletin 12-01 states that once the bureau issues a request for information, supervised financial institutions (i.e., those with total assets of more than $10 billion) are required to provide all documents and other information responsive to the request. The bulletin adds:
Supervised institutions may not selectively withhold responsive documents based on their judgment that such materials are not necessary to the Bureau’s execution of its responsibilities or that other materials would be sufficient to suit the Bureau’s needs. The supervisory process is based on the supervisor’s full and unfettered access to information, and the supervisor is entitled – indeed, duty bound–to ensure that it thoroughly understands the institution in question and has access to all information that, in its independent judgment, may bear on its supervisory responsibilities.
The Bulletin argues that providing requested information to the bureau will not result in a waiver of any privilege that may attach to such information, and thus it will not consider waiver concerns to be a valid basis for withholding information from the agency. However, the agency will give “due consideration to … requests to limit the form and scope of any supervisory request for privileged information.”
Finally, the Bulletin reiterates that all information obtained in the supervisory process will be treated as confidential and privileged, other than in cases when the exchange of such information with other regulators that share supervisory jurisdiction over a supervised institution is prudent, as determined by the CFPB’s general counsel.
The CFPB is republishing regulations for which it is assuming authority from other agencies pursuant to the Dodd-Frank Act and making technical and conforming changes to reflect the transfer of authority and other changes required by the act. Among others, the CFPB issued interim final rules with request for public comment for the Federal Reserve’s Regulation E (Electronic Fund Transfers, Regulation P (Privacy of Consumer Financial Information) and Regulation Z (Truth in Lending).
The preambles to the interim final rules state that the regulations do not impose any new substantive obligations on persons subject to the existing regulations as published by the Federal Reserve.
The interim final rules became effective Dec. 30, 2011. The Reg E interim final rule is available at http://www.gpo.gov/fdsys/pkg/FR-2011-12-27/pdf/2011-31725.pdf; comments are due by Feb. 27, 2012. Reg P is available at http://www.gpo.gov/fdsys/pkg/FR-2011-12-21/pdf/2011-31729.pdf; comments are due by Feb. 21, 2012. Reg Z is available at http://www.gpo.gov/fdsys/pkg/FR-2011-12-22/pdf/2011-31715.pdf; comments are due by Feb. 21, 2012.
President Obama recently announced his recess appointment of former Ohio Attorney General Richard Cordray to head the CFPB. This came despite the fact that the Senate held a series of “pro forma” sessions held over the congressional recess in an attempt to preclude a recess appointment. In response, the President dismissed the procedural requirements of a recess appointment, calling the pro forma sessions ‘gimmicks.’
Insiders have speculated some consequences of the recess appointment, including retaliation by Republicans in holding up the nominations of other agency heads. But more importantly, litigation is likely to stem from Cordray’s appointment, calling into question whether the specific requirements for a recess appointment were met. There is also the technical issue of whether the Dodd-Frank Act requirement of a “Senate-confirmed director” is met, which is key in establishing the CFPB’s authority over nonbanks. Despite Cordray’s appointment, it is unclear whether the bureau can legally exercise its full powers over nonbanks.
On January 6, 2012, the Advisory Committee on Small and Emerging Companies established by the Securities and Exchange Commission (“SEC”) recommended that the SEC take immediate action to permit general solicitation and general advertising in private offerings of securities under Rule 506 of Regulation D where securities are sold only to accredited investors. Relaxing the current restrictions on general solicitation and advertising would facilitate the ability of companies to raise capital from accredited investors, who are generally viewed as able to fend for themselves. For example, relaxing these restrictions would make it easier for companies to publicize their financing plans and seek funding from investors without any pre-existing relationship.
Rule 506 of Regulation D provides a widely-used safe harbor from the registration requirements of the Securities Act of 1933 for qualifying private offerings. Under current Rule 506, neither the issuer nor any person acting on the issuer’s behalf may offer or sell securities by any form of “general solicitation or general advertising,” and securities sold pursuant to Rule 506 may only be sold to “accredited investors” or persons who, either alone or with a representative, have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of a prospective investment.
The Advisory Committee is of the view that the restrictions on general solicitation and advertising prevent many privately held small businesses and smaller public companies from gaining sufficient access to capital sources and thereby materially limit their ability to raise capital through private offerings. The Advisory Committee noted that the investor protections afforded by the existing restrictions on general solicitation and general advertising are not necessary in private offerings where the securities are sold solely to accredited investors. Because the concepts of general solicitation and advertising are vague, the prohibition increases compliance and diligence costs for issuers of securities who seek to avoid potential activities that might be deemed to constitute general solicitation or advertising and thereby destroy the availability of the Rule 506 safe harbor.
Effective January 1, 2012, Bryan Cave LLP elected 14 new lawyers to partnership in the firm. Bryan Cave’s strength and depth in advising community banks is further enhanced by the election of Rob Klingler and Kim Civins to the partnership.
Rob Klingler is in our Atlanta office and is a partner in our Financial Institutions group. Rob regularly counsels financial institutions, with an emphasis on regulatory compliance, mergers and acquisitions, and securities law issues. Rob has advised community banks, as well as their officers and directors, concerning issues related to the current difficult financial and regulatory environment. Rob is a frequent public speaker about federal and state banking regulations, the Troubled Asset Relief Program (TARP), and the Dodd-Frank Wall Street Reform and Consumer Protection Act. Prior to joining the firm, he was an assistant coach of the University of Florida Speech and Debate Team. In addition, Rob is the founder and primary writer for BankBryanCave.com.
Kim Civins is also in our Atlanta office and is a partner in our Private Client service group. In addition to advising individuals and families in the areas of estate planning and estate administration, Kim regularly advises trust and wealth management departments of banks of all sizes with regard to compliance with federal and state laws. Prior to attending law school, Kim worked for seven years for a national sports marketing company.