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On the BB&T/SunTrust Merger…

On the BB&T/SunTrust Merger…

February 7, 2019

Authored by: Jonathan Hightower

Many of us who are native Southerners sat with mouths agape as we read the announcement of the $66 billion (!) all-stock merger of equals between super regional banks BB&T and SunTrust. Few of us who grew up in Georgia have not been personally impacted by these banks in some way or another. For me, my aunt worked at Trust Company Bank when I was a kid, and BB&T bought a local thrift (Carrollton Federal), making its way into our home market where it remains today. After college, law school barely beat out an offer to work in SunTrust’s commercial lending training program, and BB&T currently holds the mortgage on my home. With all of those ties, I feel somewhat nostalgic when reading that the bank will be rebranded as a part of the merger.

With that said, the real time business implications for all of us are even larger. The day before the merger, my friend Jeff Davis wrote a smart piece ($) detailing the virtues of merger of equals transactions in today’s world. BB&T recently discussed on its earnings call that it was accelerating cost savings initiatives in order to invest more in its digital offerings. With the announced merger, one can assume that the lab for digital innovation of the combined bank (to be based in Charlotte, a bit of a disappointment to the Atlanta community) will make a massive effort to transform the banking experience of the bank’s customers, a truly meaningful segment of the market. We have recently commented that the transformation of the Atlanta banking market is now a reality, and this combination promises further evolve how many banking customers think of and interact with their banks.

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Lender’s Non-Liability for a Servicer’s RESPA Violation

February 7, 2019

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In a first, a federal circuit court rules a lender cannot be held liable for a servicer’s RESPA violation.

A borrower who took out a home equity loan from Bank of America alleged the Bank is vicariously liable for the failure of its loan servicer to comply with the Real Estate Settlement Procedures Act (RESPA), particularly 12 C. F. R. § 1024.41(c)(1). That regulation imposes duties on servicers who receive a complete loss mitigation application more than 37 days before a foreclosure sale to–within 30 days of receipt–evaluate the borrower for all loss mitigation options available to the borrower and provide the borrower with a notice stating which options, if any, it will offer the borrower.

The Fifth Circuit, which is apparently the first circuit to address the issue, held banks cannot be held vicariously liable for the alleged RESPA violations of servicers. Christiana Trust v. Riddle, — F. 3d — (2018) (2018 WL 6715882, 12/21/18). The Court had three related reasons.

First, “[b]y its plain terms the regulation at issue here imposes duties only on servicers” as it states a “servicer shall.” 12 C. F. R. § 1024.41(c)(1)

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2019 Fintech Legal and Regulatory Discussion

You’re Invited – Join the Atlanta Chapter of the BayPay Forum on February 19 for a 2019 Fintech Legal and Regulatory Panel Discussion

On Tuesday, February 19, from 6-8:30 pm, the Atlanta chapter of the BayPay Forum will meet at Bryan Cave Leighton Paisner’s offices in Midtown Atlanta for a networking reception and panel discussion on the state of fintech regulation.

Start 2019 on solid footing with an engaging panel discussion reflecting on regulatory responses to faster payments, open banking/APIs, blockchain applications and ICOs, and other innovations.  Panelists will include Dick Fraher, Vice President and Counsel to the Retail Payments Office at Federal Reserve Bank of Atlanta; C. Ryan Germany, General Counsel and Assistant Commissioner of Securities & Charities, Office of Georgia Secretary of State Brad Raffensperger; Ben Robey, BSA/AML Compliance Specialist at MSB Compliance, Inc.; and Ken Achenbach, Partner at Bryan Cave Leighton Paisner.  The panel will be moderated by Barry Hester, Counsel at Bryan Cave Leighton Paisner.  Details and free registration are available here using the passcode BRYANCAVE. 

Participants will take away product and service design implications and a better understanding of the consumer protection, safety and soundness, jurisdictional, other policy issues at play.  Discussion will address, among other issues:

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Roleplaying as Chief Strategy Officers

On January 25th, Jonathan and I returned to the studio to record the latest podcast for The Bank Account. We’re trying to live up to our commitment to podcast more often in 2019 then we did in 2018; nothing like setting a low bar!

We first briefly discuss the latest IRS regulations for the taxation of Subchapter S banks and the reactions that we’ve seen from our clients on tax reform. Generalization appears virtually impossible, as we’ve seen reactions ranging from terminating Subchapter S elections, doing transactions and forgoing Subchapter S elections, sticking with the status quo, and, as Jonathan puts it, “Sub S or Die.”

We then turn to a hypothetical scenario that both Jonathan and I think about from time to time; what if we decided to cease providing legal services and instead attempted to become bank officers. What would our first steps be as a new Chief Strategy Officer of a hypothetical depository institution. Jonathan suggests beginning with the question of whether the institution is a true “community bank,” with a provocative definition for the term. Per Jonathan, a “community bank” is one whose existence is self-justified, as an irreplaceable benefit to the community it serves. (Jonathan than proceeds with an approach that even he admits might be better suited for a visual presentation.)

I suggest instead that the first question should be what is expected/desired by the institution’s shareholders. Depending on the shareholder base and their expectations for the institution, different strategic approaches are called for.

Please click to subscribe to the feed on iTunes, Android, Email or MyCast. It is also now available in the iTunes and Google Play searchable podcast directories.

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Volcker Rule Impact When Crossing $10 Billion

Under the Economic Growth, Regulatory Reform and Consumer Protection Act, depository institutions and their holding companies with less than $10 billion in assets are excluded from the prohibitions of the Volcker Rule. Accordingly, institutions under $10 billion may, so long as consistent with general safety and soundness concerns, engage once again in proprietary trading and in making investments in covered funds.

On December 21, 2018, the federal regulatory agencies proposed rules implementing this EGRRCPA provision. However, as previously noted, even pending finalization of these regulations, the regulatory agencies have also noted that they will not enforce the Volcker Rule in a manner inconsistent with EGRRCPA.

EGRRCPA, and the proposed rule, effect the exclusion of smaller institutions from the Volcker Rule by modifying the scope of the term “banking entity” for purposes of the Volcker Rule. The proposed rule excludes from being a “banking entity” any institution that has (i) $10 billion or less in assets and (ii) trading assets of 5% or less.

Neither EGRRCPA nor the proposed rule, however, addresses the impact on an institution when it goes over $10 billion in assets, either as a result of organic growth or via merger. The proposed rule does not even apply the tests on a quarter-end or other reporting period basis, much less an average balance or consecutive quarter requirement. The proposing release notes that they believe that insured depository institutions “regularly monitor their total consolidated assets” for other purposes, and therefore do not believe this ongoing test requirement would impose any new burden.

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Did Congress Release Nearly All Banks from the Volcker Rule?

Yes.  

The Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA) provided significant regulatory relief for community banks, including broad relief from the Volcker Rule’s prohibition on proprietary trading and investments in covered funds. As previously discussed, Section 203 of EGRRCPA provided an exemption from the Volcker Rule for institutions that are less than $10 billion and whose total trading assets and liabilities are not more than 5% of total consolidated assets. The exemption provides complete relief from the Volcker Rule by exempting such depository institutions from the definition of “banking entity” for purposes of the Volcker Rule.

On December 21, 2018, the financial regulatory agencies invited public comments on a proposal to implement the EGRRCPA changes to the Volcker Rule. The proposed rule provides that an insured depository institution is exempt from the Volcker Rule if “it has, and every company that controls it has, total consolidated assets of $10 billion or less and total trading assets and trading liabilities, on a consolidated basis, that are 5% or less of total consolidated assets.” While the proposed rule is not yet effective, the Federal Reserve has previously confirmed that it would not enforce the Volcker Rule in a manner inconsistent with EGRRCPA, so the proposed rule is effectively already in place.

Based on September 30, 2018 call report data, this change to the Volcker Rule exempted approximately 97.5% of the 5,486 U.S. depository institutions. (The actual number is probably slightly less, as some of those exempted depository institutions are affiliated with larger and/or foreign banks, each of which would remain subject to the Volcker Rule.) Of note, the $10 billion asset threshold is by far the most relevant determinant of the eligible relief. Based on that call report data (which necessarily excludes any trading assets and liabilities held by a parent company), only 0.15% of depository institutions had trading assets equal to at least 5% of their total assets (and only 0.16% of the institutions had trading assets equal to 3% or more of their total assets).

While few community banks ever engaged in proprietary trading before the Volcker Rule, EGRRCPA still provides meaningful relief from the compliance obligations of the Volcker Rule, the risk of inadvertently being deemed to engage in proprietary trading, or the prohibition from investing in covered funds (or the need to ensure that vehicles that were invested in qualified for an exemption from the covered fund definition).

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Statute of Limitations on Reverse Mortgages

January 8, 2019

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In Hayes v. Reverse Mortgage Solutions, Inc., No. 3D17-1603 (Fla. 3d DCA Nov. 21, 2018), a case of first impression, the Florida Third District Court of Appeals considered whether the statute of limitations for enforcing reverse mortgage loans begins on the date the note matures or upon the death of the borrower.

Defendant contended that the foreclosure action, filed in 2014, was time-barred by the Florida statute of limitation because the cause of action accrued on the date the borrower died in 2008, or alternatively, upon the mortgagee’s acceleration of the reverse mortgage when a prior foreclosure action was filed in 2009. Finding that the language in the reverse mortgage at issue (“[l]ender may require immediate payment in full of all sums secured by this Security Instrument if: (i) A Borrower dies …”) confers upon the mortgagee the right, but not the obligation, to accelerate payment of the debt, the Court held acceleration of the debt based on the death of the borrower is optional and therefore does not automatically amount to accrual of the cause for purposes of the statute of limitations.

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2018 Bank M&A Statistics

2018 Bank M&A Statistics

January 7, 2019

Authored by: Robert Klingler

2018 was only the fourth most active year over the last five years in terms of the number of insured institutions that agreed to sell. However, perspective is also important, as 2018 was also the fourth most active year over the last ten years, and the most active if measured as a percentage of institutions available to sell. 2018’s 262 bank and thrift deals ended up slightly lower than 2017’s 267 transactions. Based on the 6,670 insured banks and thrifts outstanding as the beginning of the year, 4.6% exited through a business combination.

Until and unless we see significantly more de novo activities, it seems unlikely that we will return to 300 transactions in any given year, as we last saw in 2014.  However, on an annualized basis, the second quarter of 201 saw 336 transactions!  Similarly, looking at a four quarter rolling total, we had more than 280 deals announced both between Q3 ’17 and Q2 ’18 and between Q4 ’17 and Q3 ’18. Each institution’s decision to sell remains subject to a number of unique considerations, but, all else equal, we would expect the percentage of institutions selling in any given year would likely decline rather than increase going forward.

We are strong proponents of the proposition that “banks are sold, not bought.”  The fact that there remain a number of institutions looking to grow by completing acquisitions is thus unlikely to fundamentally change the number of transactions in any particular year.  Conversely, the age and stage of banks in the industry (and that of their management teams) remains a critical component of many sale determinations.  As we continue to see a shrinking universe of financial institutions, it stands to reason that we will also continue to see a decline in the number of institutions that decide a sale is the right strategic decision in any particular year.

2018 reflected, consistent with recent trends – although perhaps not yet reflecting the year-end stock declines – a continued increase in the average price-to-book multiple paid in bank transactions.  While the average price-to-book multiple in 2014, 2015 and 2016 were each approximately 1.3 times book, average pricing in 2017 and 2018 has risen to 1.6x book, with 2018 slightly higher than 2017.  This level of pricing likely continues to serve as a negative deterrent to de novo formation, as it’s much easier to build a broadly attractive investment model if it includes a sale for 3x book in 5 years (or less). 

2018 marks the seventh straight year with over 240 transactions announced during the year, and the fifth straight year in which more than 4% of the institutions at the beginning of the year sold. Based on these trends, and without attempting to identify how the financial sector’s market decline will impact M&A activity, this would point to between 217 and 250 deals to be announced in 2018.

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Rescission Requests under TILA

Rescission Requests under TILA

January 4, 2019

Authored by: Jim Goldberg

In a case of first impression, the Ninth Circuit begins to unravel the mystery of when a claim to enforce a rescission request under the Truth in Lending Act (TILA) may be time-barred. An action by a Washington state borrower to enforce a request for rescission of a loan under TILA is analogous to an action to enforce a contract and must be brought within the Washington state statute of limitations for such a contract claim, given that TILA itself does not provide a limitations period. Hoang v. Bank of America, N.A., 2018 WL 6367268 (9th Cir. December 6, 2018).

To effect rescission of a loan under TILA, the borrower must notify the lender of her intent to rescind within three days, or if required disclosures are not given, three years of the loan’s consummation date; but the borrower need not bring a lawsuit to enforce its rescission request within that three-year period. TILA does not specify when the borrower must bring the enforcement lawsuit.

So, to what limitations should a borrower, her lawyer and the court look when the borrower has not brought the rescission suit within the three years? “Without a statute of limitations in TILA, courts must first borrow the most analogous state law statute of limitations and apply that limitation period to TILA rescission enforcement claims.” Id. at *1. “Only when a state statute of limitations would ‘frustrate or significantly interfere with federal policies’ do we turn instead to federal law to supply the limitations period” to look for an analogous statute of limitations. Id. at *4.

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A Holiday Buffet of Banking News

A Holiday Buffet of Banking News

December 28, 2018

Authored by: Robert Klingler

On December 27th, Jonathan and I returned to the studio to record the latest podcast for The Bank Account. We haven’t discussed New Year’s Resolutions, but we’ll try to return to a little more normalcy in 2019!

For those that have missing our voices, (a) please seek help… that’s not normal and (b) we were also recently guests on the ABA Banking Journal Podcast. In a lively conversation with Evan Sparks and Shaun Kern, Jonathan and I discussed our 2019 M&A Outlook for the ABA Banking Journal. For those of you who have missed that podcast (or article), I encourage you to listen/read before listening to this podcast, as we follow-up on some of these themes.

Our first substantive conversation on this podcast is a look at some of the transactions announced in the Metro Atlanta market in 2018. With State Bank’s merger with Cadence, Fidelity Bank with Ameris Bank, and National Commerce with CenterState, the Atlanta banking market, and particularly the M&A market, will look radically different in 2019 and beyond.

Following the M&A discussion, our attention turned to the newly proposed Community Bank Leverage Ratio. While it is solely a proposed rule and, if adopted in its current structure, will be an entirely optional framework for banks under $10 billion in assets, it also provides the potential for significant regulatory relief for those institutions that can take advantage of the capital (particularly risk-based) relief.

Please click to subscribe to the feed on iTunes, Android, Email or MyCast. It is also now available in the iTunes and Google Play searchable podcast directories.

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