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10 Years of BankBCLP.com

10 Years of BankBCLP.com

October 29, 2018

Authored by: Robert Klingler

A little over 10 years ago, at the wise encouragement of Walt Moeling, we launched this blog.  From day one, the response from clients, referral sources, regulators and competitors has been amazing.

All in, we’ve published over 1,000 blog posts, authored by almost 100 different attorneys with the firm.  From BankPogo.com to BankBryanCave.com to BankBCLP.com, the site has evolved with the evolution of the firm, but has always been focused on providing usable advice to financial institutions across the country.

I’m thrilled with what we were able to build, but also refuse to just rest on our past accomplishments.  We are always on the lookout for areas of interest to our client, where we can partner with the financial institution industry to create value for all.  I think we all hope that such assistance will never again involve assistance with government investments in our depository institutions, but if it does, we look forward to building upon the expertise gained in the great recession.

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10 Year Anniversary of the TARP Capital Purchase Program

Ten years ago, on October 13, 2008, the U.S. Treasury Secretary Henry Paulson effectively locked the CEO’s of the nine largest banks in the United States in a conference room and demanded that they accept an investment from the U.S. Government. Although we had front row seats for much of the activity over the ensuing years, reading the New York Times summary of that meeting from the following day still provides a sense of just how shocking all of this was.

While the U.S. Treasury simultaneously announced its intention to also provide the possibility of investments in other banks, it was a long wait for details, particularly for privately held and Subchapter S Banks.  Ultimately, over the course of the next 15 months, the U.S. Treasury invested $199 billion in 707 financial institutions across 48 states.  As of October 1, 2018, the Treasury has received over $226 billion back in dividends, repayments, auction proceeds, and warrant repurchases.

Of the $199 billion in investments in 707 institutions, as of October 1, 2018, only three investments, reflecting $24 million in original investments, remain in Treasury’s portfolio.  264 institutions repaid in full and another 165 refinanced into other government programs.  (The SBLF and CDFI funds were similar to the TARP CPP program, but were ultimately done under different congressional mandates.  While not necessarily representative of an ultimate cash return on the Treasury’s investment, each of these funds has also provided a strong return to the Treasury.)

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11th Circuit Rejects Reverse Mortgage Foreclosure Statute-Based Defense

The Eleventh Circuit recently rejected a defense to foreclosure based on a federal statute governing insurance of reverse mortgages by the Department of Housing and Urban Development (“HUD”).

HUD administers a mortgage-insurance program designed to induce lenders to offer reverse mortgage loans to elderly homeowners.  If the loan meets certain conditions, HUD insures against any outstanding balance owed on the loan.  One condition, contained in 12 U.S.C. § 1715z-20(j), provides:

The Secretary may not insure a home equity conversion mortgage under this section unless such mortgage provides that the homeowner’s obligation to satisfy the loan obligation is deferred until the homeowner’s death, the sale of the home, or the occurrence of other events specified in regulations of the Secretary. For purposes of this subsection, the term “homeowner” includes the spouse of a homeowner.

Borrowers and their estates have argued the statute prevents lenders from seeking repayment of a loan subject to a reverse mortgage until either the sale of the home, or the death of both the borrower and his or her non-borrowing spouse – even if the loan documents provide to the contrary.   The Court in Estate of Caldwell Jones, Jr. v. Live Well Financial, Inc., No. 1:17-cv-03105-TWT (decided Sept. 5, 2018) rejected this argument.

In Estate of Caldwell Jones, Jr., former NBA star, Caldwell Jones, Jr., obtained a reverse mortgage secured by his home.  Jones lived in the home with his wife and his minor daughter, until he passed away in 2014.  Jones’s wife was not a co-borrower.

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10 Years of Troubled Asset Relief Program

October 3, 2018

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10 Years ago today, on October 3, 2008, President George W. Bush signed the Emergency Economic Stabilization Act of 2008, creating the Troubled Asset Relief Program (TARP) and authorizing the expenditure of up to $700 billion.  Pursuant to its obligations under TARP, the Treasury still publishes regular reports on its investments and activities thereunder.  The Treasury has also published a TARP Tracker that provides an interactive and chronological history of TARP.

The various components of TARP were not developed (and then further streamlined) over the next year or so, but the 10-year anniversary of the overall program seems like an appropriate time to look at the overall results of the program.  (In fact, the very thought that TARP would become primarily a program of investments in banks 10 years ago would probably have been laughed at… everyone felt it was going to focus on purchasing toxic assets.)  Over the next several months, we’ll periodically look back on the developments (with the benefit of hindsight), including looking at the launch of this blog.

While $700 billion was initially authorized, the authorization was subsequently reduced to $450 billion.  Based on the latest Monthly Update published by Treasury, just over $440 billion was disbursed and only $70 million remains outstanding today.  Overall, the U.S. Treasury has received just over $443 billion in cash back as a result of its expenditures under TARP.

While overall TARP was actually profitable for the U.S. Treasury, when you break down TARP into categories of programs, one can see that the bank investment component (which is generally thought to be the most controversial aspect) was actually the most profitable.

Looking specifically at the various bank investment programs, the government invested a total of $245.1 billion.  Of that investment, it did recognize write-offs and realized losses of over $5.2 billion.  However, it also recognized over $35.7 billion in income (primarily dividends and profits on sold investments), resulting in a total cash return of $275.5 billion on its $245.1 billion investment.

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Acronym Soup: A Discussion of Regulatory Reform

On September 28th, Jonathan and I recorded a brief podcast on the impact of regulatory reform on community banks in 2018.  Before turning to substance, I first congratulated Jonathan on his ability to combine two of our shared passions: college football and mergers & acquisitions.  Jonathan’s post on a Football Fan’s Guide to M&A Transactions is an excellent application of college football coaching strategies that can be applied in any strategic planning discussions by boards of directors of any organization.  His further exploration of some of the principles that other SEC teams bring to bear on M&A thinking on Twitter is also something I encourage everyone to read.

On substantive issues, we primarily focused on reforms enacted under The Economic Growth, Regulatory Relief, and Consumer Protection Act, or EGRRCPA, but also touched on the modernization of the Georgia banking code. Specific topics discussed include:

  • the expansion of the Small Bank Holding Company Policy Statement;
  • the relaxation of the reciprocal brokered deposit rules;
  • Volcker Rule relief;
  • the upcoming regulatory off-ramp (or at least rest stop, if not fully an off-ramp); and
  • the increased threshold for the 18-month examination cycle and short-form call reports.
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Blockchain Technology Will Not Disrupt Financial Services Anytime Soon

Twenty venture capitalists gathered in Silicon Valley last week to discuss the impact of blockchain technology, including digital currency, on financial services and venture capital. The 20 VCs represent an equal number of funds, which invest–or are looking for investment opportunities–all over the world, including the third world. They represented a diverse group of perspectives, with some having regulatory experience, some having experience with conventional payment mechanisms and some with innovative mechanisms such as PayPal. Even their disagreements were instructive of the uncertain future of blockchain technology and its various potential applications.

The consensus is that digital currency is entering a nuclear winter. A majority of Initial Coin Offerings made in 2017–perhaps as much as 75%–turned out to be fraudulent and have no value today. Not coincidentally, the vast majority of Initial Coin Offerings originated in Eastern European countries that are home to spam and bot farms…and where there is little, if any, regulatory oversight.

To the extent bitcoins may become a viable, commercial technology for B2B transactions, it is likely to occur in a technology hub in the U.S. or Europe. Those hubs have the talent, the infrastructure and the robust regulatory structures that can be adapted to ICOs and create the trust necessary to make digital currency a positive, viable alternative to government currencies. In fact, the centralization of technology talent in the U.S. is depriving the rest of the world of talent.

The attempts of island states, like Bermuda, Malta, Cyprus, the Isle of Mann, and even Singapore to draft regulations that facilitate the creation of bitcoin issuers on their soil is unlikely to have a significant impact. Nobody who is experienced and seriously intends to build a global digital technology company and change the financial services industry on a global scale will think one can create the necessary large organization on these islands. These islands do not have an ecosystem of sophisticated VCs and do not have a critical mass of talented engineers. The island states are going for broke because they have so little to lose. When and if the technology matures, U.S. companies will step in and crush competitors based in these islands.

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The Football Fan’s Guide to M&A Transactions

With both college and professional (not to mention fantasy) football in full swing, we find many conversations with clients drifting to topics from the
gridiron at this time of year.  Given that many of us are devoting a significant amount of our personal time to following our favorite teams, many times business points are best illustrated at this time of year by using football analogies.

Certain sports agents have posited that the highest achieving football coaches could easily run Fortune 500 companies but instead chose to coach football for a living.  While that point is debatable, we can certainly draw from the talking points of today’s best coaches in setting a framework for approaching a merger transaction.  While we can’t deliver Nick Saban, Bill Belichick, or Kirby Smart to your boardroom, use these sound bites to your advantage in setting the tone for how your board addresses an M&A transaction.

    1. Trust the process. “The Process” has become a hallmark of the University of Alabama’s championship dynasty.  Coach Saban focuses on the individual elements that yield the best results by the end of the season.  Similarly, a well-planned process can be trusted to yield the best long-term results.  This simple point is among the easiest for boards to miss.  We are often concerned when clients engage in “opportunistic” M&A activity.  Instead, we prefer to see a carefully planned process that includes the following fundamental elements:
      * Parameters around the profile that potential partners should have, including market presence, lines of business, and size;
      * Clearly defined financial goals and walkaway points; i.e., those metrics beyond which no deal can be justified;
      * For sellers, the forms of consideration that will be acceptable (i.e., publicly-traded stock, privately-held stock, or cash); and
      * Selection of qualified advisors.
    2. Self-scout. Great football teams have an honest self-awareness of their strengths and weaknesses and grasp them on a deeper level than their opponents.  Buyers and sellers should also have a frank assessment of their shortcomings.  In planning for the M&A process, those weaknesses should be addressed in advance to the extent possible.  To the extent they cannot be fixed in advance of embarking on an M&A process, parties should provide a transparent assessment of their weaknesses to potential partners.  Doing so enhances credibility and builds trust in the other facets of due diligence.
    3. Know the tendencies of your opponent. On the other side of self-scouting is a great team’s ability to understand and address the weaknesses of its opponents.  While we never advise clients to think of M&A partners as adversaries, advance due diligence of a potential partner to identify their needs can certainly help lead to a successful transaction.  At its core, a good M&A transaction is about giving a potential partner something it does not have and cannot build for itself.  To the extent that parties can identify the needs of potential partners in advance of their initial conversations, they can speak directly to those needs at the outset, thus positioning themselves as an optimal partner in a crowded M&A field.
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FinCEN Grants Permanent Relief for Autorenewals

Exercising “exceptive” relief authority, FinCEN has extended permanent relief from the beneficial ownership requirements of its new Customer Due Diligence (CDD) rule to existing autorenewing CDs and safe deposit boxes, as well as existing autorenewing commercial lines of credit and credit cards that do not require underwriting review and approval.  FinCEN reasoned that these products pose such a low risk for money laundering and terrorist financing activity that the benefits of requiring the collection of this information does not outweigh the impacts of compliance on financial institutions and their customers.  Specifically, institutions need not treat rollovers or renewals of such products as “new accounts” requiring the collection of the beneficial ownership elements of the CDD rule, whether or not the initial accounts were established prior to the rule’s May 11, 2018 effective date.

FinCEN previously issued temporary relief to autorenewing CDs and loan products established prior to May 11, 2018, and in a second release extended this relief through September 9, 2018.  The new release both extends this treatment indefinitely and expands it to include certain safe deposit box rentals, such that the exception applies now to any of the following occurring on or after May 11, 2018:

  • A rollover of a CD, defined as a deposit account that has a specified maturity date, prior to which funds cannot be withdrawn without the imposition of a penalty, and which does not permit the customer to add funds;
  • A renewal, modification, or extension of a loan (e.g., setting a later payoff date) that does not require underwriting review and approval;
  • A renewal, modification, or extension of a commercial line of credit or credit card account (e.g., setting a later payoff date) that does not require underwriting review and approval; and
  • A renewal of a safe deposit box rental (e.g., upon the automatic deduction of the rental fee as agreed-upon between a bank and its customer).

FinCEN is careful in this September 7, 2018, release to explain that it does not relieve institutions of the obligation to collect and verify the identity of beneficial owners of legal entity customers where the initial account opening of such accounts occurs on or after May 11, 2018.  It does mean, however, that institutions need not collect beneficial ownership information for certain older accounts of the types described above (those opened prior to May 11, 2018) solely because they are rolled over or renewed.

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A Litigator’s KISS Takeaways from CFPB’s Summer 2018 Supervisory Highlights

KISS. An acronym first utilized in military equipment design in the 1960’s, “Keep it Simple Stupid.” Litigators rely on KISS in formulating trial themes and presentations to juries. Simple messages resonate. In that vein, I offer three KISS takeaways from the Bureau of Consumer Financial Protection’s Supervisory Highlights, Issue 17, Summer 2018.

KISS #1: Details Matter. 

On two key levels: (a) your business compliance operations and consumer interactions, and (b) in the Bureau’s supervision and examination conclusions. Taking these in reverse order, the Bureau’s Introduction (p. 2) provides important guardrails:

[L]egal violations described in this and previous issues of Supervisory Highlights are based on the particular facts and circumstances reviewed by the Bureau as part of its examinations. A conclusion that a legal violation exists on the facts and circumstances described here may not lead to such a finding under different facts and circumstances.

This is critical to your supervision and examination preparedness and your interactions with the Bureau.  If the Bureau spots a concern, consider providing a fulsome explanation of the analysis that went into the policy formulation, how your organization believed it was operating in good faith under applicable laws and believed that the practice would not harm or mislead consumers, what steps your organization has done in monitoring and addressing any consumer concerns regarding the policy or practice. This may sound basic, but the Bureau’s statement matters and can be referenced. The Bureau should, in my view, consider such information in assessing whether any violation has occurred, whether any consumers actually were harmed and whether any remediation is necessary. Sometimes the conclusion may be that the practice presents a risk of potential confusion or harm and simply should be modified going forward. Present your best case; the Bureau appears to be open to considering all the facts and circumstances.

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Two Key EGRRCPA Provisions Now Effective

As of the end of August 2018, two key provisions of The Economic Growth, Regulatory Relief, and Consumer Protection Act (aka the Crapo bill, S.2155, or increasingly, EGRRCPA) have become effective: the increase in the small bank holding company policy statement threshold and the increase in the expanded examination cycle threshold.  Before looking at those provisions, I have to acknowledge the fabulous Wall Street Journal story by Ryan Tracy, “Can You Say EGRRCPA? Tongue-Twister Banking Law Confuses Washington.”  Personally, I’m now leaning towards “egg-rah-sip-uh.”

On July 6, 2018, the federal banking agencies released an Interagency statement regarding the impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act that provided guidance as to which provisions were immediately effective versus which provisions would require further regulatory action.  Included in this guidance was confirmation that the banking regulators would immediately implement EGRRCPA’s changes to the Volcker Rule, freeing most institutions with total assets of less than $10 billion from the constraints of the Volcker Rule.  The regulators noted that they “will not enforce the final rule implementing section 13 of the BHC Act in a manner inconsistent with the amendments made by EGRRCPA to section 13 of the BHC Act.”

Unfortunately, two of the more significant areas of regulatory relief for community banks, the respective increases in thresholds for the small bank holding company policy statement and the expanded examination cycle were not granted such immediate effectiveness.  While EGRRCPA required the Federal Reserve to act on the expansion of the policy statement within 180 days, anyone familiar with the deadlines set forth in the Dodd-Frank Act for regulatory action would not be holding their breath.

Small Bank Holding Company Policy Statement Expansion.  On August 30, 2018, the Federal Reserve published an interim final rule implementing the revisions to the small bank holding company policy statement.  The Federal Reserve’s small bank holding company policy statement generally exempts such institutions from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level.  The small bank holding company policy statement was first implemented in 1980, with a $150 million asset threshold.  In 2006, it was increased to $500 million, and in 2015, it was increased to $1 billion.  Section 207 of EGRRCPA called for the Federal Reserve to increase the threshold to $3 billion, and the interim final rule implements this change.

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