If I should call a sheep’s tail a leg, how many legs would it have?
According to Abe Lincoln, “only four, for my calling the tail a leg would not make it so.” So begins the Eleventh Circuit’s opinion holding the motion to reschedule a foreclosure sale was not a motion for an order of sale within the meaning of the RESPA regulation governing loss-mitigation procedures.
The language of 12 C.F.R. 1024.1(g) prohibits a loan servicer from moving for an order of foreclosure sale after a borrower has submitted a complete loss-mitigation plan. Under the plain language of the regulation, a motion to reschedule a previously ordered foreclosure sale is no more a motion for an order of sale than a sheep’s tail is a leg!
This conclusion is reinforced by the construction canon favored by Justice Scalia, known as the “associated word cannon” in English, but more commonly referred to by learned colleagues as the “noscitur a sociis canon.” (Thank god for high school Latin helping me pass the bar!)
Financial institutions continue to develop products to encourage Corporate Social Responsibility (CSR) goals. The Loan Market Association has recently published Sustainability Linked Loan Principles to guide the use of loan instrument terms to promote the achievement of the borrower’s sustainability goals. As with disclosure and measurement associated with corporate disclosures intended to appeal to socially responsible investors, the success of such Sustainability Linked Loans in promoting better sustainability performance will largely depend on the borrower’s ability to set ambitious but realistic goals that are measurable and verifiable by third parties.
Companies who have a deep and thorough understanding of their products life cycle (from all the raw material inputs through the end of the products useful life with the customer) will have the best chance of working with their lender to design sustainability performance targets that will actually move the needle. As more of these loans are created, it will then be interesting to see how financial institutions report to their investors on how these lending products are improving the sustainability of their loan portfolios.
In case you didn’t get it from the title of this blog post, I think the answer is absolutely, 100 percent, yes! Bank Directors should not be approving individual loans, and Banks should not be asking their Directors to approve individual loans.
77 percent of executives and directors say their board or a board-level loan committee plays a role in approving credits, according to Bank Director’s 2019 Risk Survey. And Boards of smaller banks are even more likely to be involved in the loan approval process. According to the survey, almost three quarters of banks over $10 billion in assets do not have their directors approve loans, but over 80% of banks under $10 billion in assets continue to have board-approval of certain loans.
These survey results generally conform to our experience. Two weeks ago, Jim McAlpin and I had the pleasure of leading five peer group exchanges on corporate governance at the 2019 Bank Director Bank Board Training Forum. The issue of board approval of loans came up in multiple peer groups, but the reaction and dialogue were radically different based on the size of the institutions involved. In our peer group exchange involving the chairmen and lead directors of larger public institutions, one of the chairman phrased the topic along the lines of “is anyone still having their directors approve individual loans?” Not one director indicated that they continued to do so, and several agreed that having directors vote on loans was a bad practice.
A few hours later, we were leading a peer group exchange of the chairman and lead directors of smaller private institutions. Again, one participant raised the issue. This time the issue was raised in an open manner, with a chairman indicating that they’d heard from various professionals that they should reconsider the practice but so far their board was still asking for approval of individual loans. A majority of the directors in attendance indicated concurrence.
In light of the continued merger activity within the state, including the blockbuster SunTrust/BB&T merger, we’ve seen a renewed focus on the enforceability of non-compete provisions – from banks looking to hire, from banks hoping to retain, and bank employees considering a change.
Apparently, we’re not alone. On May 1, 2019, the American Banker published a story titled “What ruling on non-compete clauses means for banks — and job hunters.” The article looks at the potential impact of the the Georgia Court of Appeals’s decision in Blair v. Pantera Enters., Inc. (2019 Ga. App. LEXIS 114). Among other things, the article posits that “if BB&T and SunTrust want to enforce non-compete agreements with all their loan officers and wealth management experts stationed in Georgia, some of those contract provisions might not pass legal muster, according to legal experts.” While the enforceability of non-compete agreements is always subject to legal uncertainty, with the specific facts at play and the trial judge potentially playing a significant role, we think this vastly overstates the impact of Blair v. Pantera, particularly in the bank context.
Blair v. Pantera involved the enforceability of a non-compete provision against a backhoe operator. The court found, correctly and consistently with the Georgia Restrictive Covenants Act (O.C.G.A. § 13-8-50 et seq.), that he was not an employee under the statute against whom a non-compete could be enforced. Under the Georgia Restrictive Covenants Act, non-competes may generally only be enforced against employees that: manage the business, regularly direct the work of two or more other employees, can hire or fire other employees, are regularly engaged in the solicitation of customers or with making sales or taking orders, or meet the definition of a “key employee” under the statute. Under the statute, an employee must fit in one of these categories to sign a valid non-compete. See O.C.G.A. § 13-8-53.
The SEC recently published final rules that allow publicly traded bank holding companies and banks to simplify their public disclosures and provide more meaningful information to investors. Most of the rules become effective on May 2, 2019, which allow many registrants to benefit from them on their Form 10-Q filings for the quarter ended March 31, 2019.
Most registrants provide three years of MD&A narrative. The new rule allows such registrants to omit discussion of the earliest of the three years if such discussion was previously filed, so that the 10-K MD&A will address only the year being reported and the previous year. Smaller reporting companies are only required to provide two years of financials and MD&A (and emerging growth companies are allowed to omit periods prior to their IPO), so these registrants will not see any benefit from this change.
The revisions to the MD&A requirements also eliminate the requirement that issuers provide a year-to-year comparison. In the related commentary in the adopting release, the SEC characterizes this change as providing registrants flexibility to tailor their presentation. Hopefully, over time, the SEC’s expressed purpose will encourage creative approaches to this area.
Exhibits – Material Contracts
Previously, a two year “lookback” applied, such that material contracts entered into in the two years prior to the filing were required to be disclosed on the exhibit index even if the contracts had been fully
performed. A common example is merger agreements—companies are currently required to continue to file merger agreements as exhibits even after closing. The new rule eliminates this requirement (other than for newly public companies), such that material contracts that have been fully performed are no longer required to be disclosed.
The public comment period for the banking agencies’ capital simplification rules for qualifying community banking organizations (i.e. the Community Bank Leverage Ratio proposal) are due on Tuesday, April 9th.
As previously discussed, the regulators have proposed a new, alternative, simplified capital regime for qualifying institutions that will deem an institution to be well-capitalized so long as it maintains a leverage ratio of at least 9% and adequately capitalized so long as it maintains a leverage ratio of at least 7.5%. While initially proposed last November, publication in the Federal Register was delayed until February of this year. As a result the comment period for the rule ends on Tuesday, April 9, 2019. Comments can be submitted online through Regulations.gov.
Through the publication of this blog post, the primary comments online appear to be the appropriate threshold for the new Community Bank Leverage Ratio. As background, EGRRCPA, the statutory basis for the reforms, obligates the regulators to apply a threshold of between 8% and 10%, and the regulators proposed 9%. Most of the submitted comments, including several from community bankers, comments from the Kansas Bankers Association and the Independent Bankers Association of Texas argue for a lower 8% ratio. Conversely, the Mercatus Center has submitted a comment supporting a 10% ratio.
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.
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.
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).
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.
On November 21, 2018, the Federal Reserve, Office of Comptroller of the Currency and the FDIC jointly published a notice of proposed rulemaking (the “NPR”) to provide an alternative capital system for qualifying banking organizations. Specifically, the regulators have proposed a new, alternative, simplified capital regime for qualifying institutions that will deem an institution to be well-capitalized so long as it maintains a leverage ratio of at least 9% and adequately capitalized so long as it maintains a leverage ratio of at least 7.5%.
The NPR seeks to implement the community bank leverage ratio (CBLR) mandated by Section 201 of the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”). EGRRCPA requires the regulatory agencies to develop a CBLR of not less than 8 percent and not more than 10 percent for qualifying community banking organizations, and provides that organizations that meet such CBLR will deemed well capitalized for all purposes. EGRRCPA further provides that a qualifying community banking organization to be a depository institution or depository institution holding company with total consolidated assets of less than $10 billion.
Summary of the NPR
The NPR establishes five criteria for an depository institution or holding company to be deemed a Qualifying Community Banking Organization:
Total consolidated assets of less than $10 billion;
Total off-balance sheet exposures of 25% or less of total consolidated assets;
Total trading assets and trading liabilities of 5% or less of total consolidated assets;
MSAs of 25% or less of CBLR tangible equity; and
Temporary difference DTAs of 25% or less of CBLR tangible equity.
Under the NPR, the numerator of the CBLR would be CBLR tangible equity. CBLR tangible equity would be equal to total equity capital, determined in accordance with Call Report or Form Y-9C instructions, prior to including any minority interests, less (i) accumulated other comprehensive income (AOCI), (ii) all intangible assets (other than MSAs) including goodwill and core deposit intangibles, and (iii) DTA’s arising from net operating loss and tax credit carryforwards.
The CBLR denominator would be average total consolidated assets, calculated in accordance with Call Report or Form Y-9C instructions, less the items deducted from the CBLR numerator, except AOCI. The NPR notes that the calculation is similar to the one used in determining the denominator of the tier 1 leverage ratio.
Under the NPR, a Qualifying Community Banking Organization may elect to use the CBLR framework at any time, so long as it has a CBLR greater than 9% at the time of the election. Under the CBLR framework, the Qualifying Community Banking Organization will be considered well capitalized so long as it has a CBLR greater than 9%. A qualifying depository institution that previously elected to use the CBLR framework but has fallen below 9% will not be required to convert back to the regular capital system. Instead, the following CBLR leves will serve as proxies for the PCA categories:
Adequately Capitalized – CBLR of 7.5% or greater;
Undercapitalized – CBLR of less than 7.5%; and
Significantly Undercapitalized – CBLR of less than 6%.
The framework for Critically Undercapitalized would remain unchanged at a ratio of tangible equity to total assets of 2% or below. Any institution that would be deemed Significantly Undercapitalized under the CBLR framework would be required to promptly provide its appropriate regulators sufficient information to calculate the PCA tangible equity ratio.
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