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FDIC Extends Transaction Account Guarantee until June 30, 2010

Update: On April 13, 2010, the FDIC granted a further extension until December 31, 2010.

On August 26, 2009, the FDIC extended the Transaction Account Guarantee (TAG) portion of the Temporary Liquidity Guarantee Program for six months, through June 30, 2010.  In addition to extending the expiration date of the TAG program, the FDIC’s final rule (1) increases the assessment fee for participation; and (2) provides an opportunity for participating institutions to opt out of the program as of January 1, 2010 (and thereby avoid the additional assessments).

All currently participating institutions have until November 2, 2009 to determine whether to continue in the program (at increased cost) or opt out of the program.  Attorneys in Bryan Cave’s financial institutions practice can discuss the advantages and disadvantages of opting out for particular financial institutions.

Six-Month Extension

Funds held in non-interest bearing demand deposit accounts (as well as NOW accounts that are obligated to pay less than 50 basis points and IOLTA accounts) will be fully guaranteed by the FDIC for participating entities through June 30, 2010.

The FDIC received comments supporting no extension, as well as supporting extensions for up to three years.  The FDIC determined a six-month extension of the TAG program “will provide the optimum balance between continuing to provide support to those institutions most affected by the recent financial and economic turmoil and phasing out the program in an orderly manner.”

Increased Assessment

Beginning January 1, 2010, participants in the TAG program will be subject to increased quarterly fees.  The amount of the assessment will depend on the institution’s Risk Category rating assigned with respect to regular FDIC assessments.  The fee will continue to be assessed only on the amount of deposits that exceed the existing deposit insurance limits.

Institutions in Risk Category I (generally well-capitalized institutions with composite CAMELS 1 or 2 ratings) will pay an annualized assessment rate of 15 basis points.  Institutions in Risk Category II (generally adequately capitalized institutions with composite CAMELS 3 or better) will pay an annualized assessment rate of 20 basis points.  Institutions in Risk Category III or IV (generally under capitalized or composite CAMELS 4 or 5) will pay an annualized assessment rate of 25 basis points.  (Through December 31, 2009, the fee will remain an annualized 10 basis point assessment for all participating institutions.)

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Reminder Regarding Inclusion of Trust Preferred Securities in Tier 1 Capital

Although the trust preferred securities (“TPS”) market has been quiet (or non-existent) for the past few years, many bank holding companies have issued TPS in the past to take advantage of the hybrid capital treatment afforded to TPS by the Federal Reserve.  In 2005, the Federal Reserve revised its rules permitting the inclusion of a limited amount of TPS in the Tier 1 capital to provide stricter quantitative limits. Under the 2005 rule, which became effective on March 31, 2009, bank holding companies may include TPS in Tier 1 capital in an amount up to 25% of all core capital elements less goodwill and any associated deferred tax liability. Core capital elements include common shareholders’ equity, noncumulative perpetual preferred stock (including preferred stock issued pursuant to the Troubled Asset Relief Program (TARP)), and minority interests directly issued by a consolidated U.S. depository institution or foreign bank subsidiary. Any TPS issued in excess of this limit may be included in Tier 2 capital.

Prior to March 31, 2009, bank holding companies were permitted to calculate the limit for TPS without deducting goodwill and associated deferred tax liability from Tier 1 capital. The regulators are now taking note that some bank holding companies with outstanding TPS have not revised their Tier 1 calculations to comply with the newly-effective rule. If your bank has a holding company with outstanding TPS, be sure that you are limiting the TPS component of Tier 1 capital to 25% of core capital elements less goodwill and any associated deferred tax liability.

In addition, in the current economic environment, many bank holding companies are experiencing deterioration in capital. When the core capital elements of Tier 1 capital decline, the amount of TPS that may be included in Tier 1 capital also declines, thereby further reducing a bank holding company’s leverage ratio. When calculating capital ratios, bank holding companies must remember to re-evaluate the inclusion of TPS in Tier 1 capital as capital declines.

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COMPLIANCE REMINDER – Red Flag Rules Delayed to November 1

The FTC has delayed the compliance date for the Red Flag Rules, the federal bank regulatory agencies and the National Credit Union Administration, to November 1, 2009 to give companies greater time to prepare their systems and protocols.  The Rules have not changed.  Companies should still take proper steps to ensure compliance by the November deadline.  Click here for help on steps your company can take.

Although the FTC intends to publish sample Plans for “low-risk” and “high-risk” companies (terms that are still somewhat hazy at this point), it has not done so as of yet (although it has published a helpful FAQs website).  Therefore, many companies are seeking outside business and legal counsel to better understand the Red Flag Rules and to ensure their plan addresses the requirements of these new regulations.

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Georgia DBF Clarifies Guidance on Loan Renewals

Georgia Department of Banking and Finance Commissioner Rob Braswell has advised us that the Department’s announcement last week was intended to provide relief only in the context of “loan stacking” under the Department’s proposed new Rule 80-1-5-.11.  Accordingly, the Department will permit renewals of loans which had originally been made in conformity to the loan to one borrower, but would otherwise not be in conformity with the loan to one borrower rule solely due to the the Department’s proposed new “loan stacking” rules.

Renewals and extensions of loans where the loan to one borrower issues arises solely because of capital losses since the loan was originally made are NOT covered by the Department’s announcement.  We are continuing to pursue this issue with the Department, but in the meantime, our recommendation is that banks should NOT extend or renew loans to borrowers where the extension or renewal would violate the loan to one borrower rule as a result of reductions in the limit resulting from capital losses.

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Georgia DBF Provides Guidance on Legal Lending Limits for Loan Renewals

The Georgia Department of Banking and Finance (“DBF”), announced today a significant change in the way in which the legal lending limit will be applied in the context of loan renewals.  Due to a shrinking capital base, a large number of banks have been struggling with the issue of what to do with loans whose renewal would cause a violation of the legal lending limit.  These were loans that met the requirements when the loan was made but could not be made today due to the bank’s smaller capital position. The position of the DBF has been that a bank should not renew such a loan.  In the current economic environment this places banks in an untenable situation because borrowers are unable to pay off the loans due to a lack of liquidity and no other financial institutions are willing to take over the credits.  The only option left for a bank in such a situation is to enter into some sort of forbearance agreement with the borrower.  The result of that, however, is that after 90 days the loan will need to be downgraded to substandard, regardless of whether the borrower is able to keep interest payments current.

Following direct discussions among GBA President Joe Brannen, GBA counsel Walt Moeling and Jerry Blanchard, Commissioner Rob Braswell, and the DBF Staff dealing with this issue, the DBF announced today that it shall be the position of the DBF that if loans are modified or renewed by the bank without any additional extension of credit outstanding, such loans will not be cited for a violation of the new rules of the Department contained in Rule 80-1-5-.11.  The DBF goes on to note, however, that the fact that a violation of the lending limit rule is not being cited should not be interpreted as a finding of creditworthiness by the DBF. A decision to classify a credit or credit relationship is an independent process from the application of statutes and rules.

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Additional FDIC Guidance on Modification of Repurchase Agreements

On July 6, 2009, the FDIC published a set of Frequently Asked Questions relating to the Sweep Account Disclosure Requirements which recently went into effect.   One of the issues addressed was what does the FDIC consider to be a perfected interest in a security.   This issue first came up earlier this year when the FDIC took the position that many repurchase agreements were defective and that in a failed bank situation the FDIC would take the position that the funds subject to such an agreement never left the deposit account.   One of the primary defects which the FDIC pointed out was the right of substitution found in many such agreements.  This announcement caused many banks to modify their master repurchase agreements to delete that right.

The FAQ clarifies the FDIC’s position in several respects.  It first addresses the basic question of when is a security interest perfected in a security.  The FDIC generally considers three elements in determining whether the customer has a perfected security interest in a security subject to a repo sweep: (1) the particular security in which the customer has an interest has been identified, and this identity is indicated in a daily confirmation statement; (2) the customer has “control” of the particular security; and (3) there is no substitution of the security during the term of the repurchase agreement even if the agreement allows for substitution with the customer/buyer’s consent.

Identification of Securities

The element of identification is met by a confirmation identifying the security (i.e., CUSIP or mortgage-backed security pool number) and also specifying the issuer, maturity date, coupon rate, par amount and market value. Fractional interests in a specific security must be identified, if relevant.  Importantly, the FDIC takes the position that an arrangement where bulk segregation or pooling of repurchase collateral without identification of specific securities does not result in the buyer receiving an identified interest in specifically identifies securities.

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Missouri Joins The Ranks of Notification-Requiring States for Data Breaches

Missouri recently enacted a law which made it the 45th state to adopt data breach notification regulations. The law goes into effect August 28, 2009.  Similar to other states’ laws, Missouri’s law applies to any persons and companies who have personal information of a Missouri resident, regardless of size, nature of business or other factors.

What Type of Information is Covered? Missouri’s law defines “personal information” expansively to include:

  • social security numbers;
  • driver’s license numbers or similar unique identification numbers created by a government body;
  • financial account numbers (with a required security code, access code or password which would permit access to the account);
  • credit card or debit card numbers (with a required security code, access code or password which would permit access to the account);
  • unique electronic identifiers or routing codes (with a required security code, access code or password which would permit access to the account);
  • medical information; and
  • health insurance information.

What You Must Do After a Breach. If a breach occurs, you must provide notice to the Missouri resident that a breach has occurred without any unreasonable delay. That notice must include, at minimum:

  1. a description of the incident in general terms;
  2. the type of information that was obtained in the breach;
  3. a contact number for the person or company for further assistance; and
  4. contact information for consumer reporting agencies.

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Overcoming the National Deposit Interest Rate Presumption

As we’ve previously discussed, the FDIC has revised the brokered deposit/interest rate restrictions to create a presumption in favor of a “national deposit interest rate” starting January 1, 2009.  Less than well-capitalized institutions will be then barred from paying in excess of 75 basis above the national rate, unless the institution is successful in convincing the FDIC that the institution’s local deposit rate market is above the national rate.

We have had several conversations with FDIC staff over the last few weeks regarding the FDIC’s intentions with respect to the new national deposit rate structure and how FDIC in Atlanta would approach it, given that the apparent average rate in Atlanta is already higher than 75 basis points more than the national rate.  FDIC staff stated that this was a very difficult and very sensitive issue, and that the local office of FDIC anticipated that most banks would, and would be permitted to, use a local rate basis.  That was the good news.

The bad news is that the burden of proof is going to become very high for any bank attempting to demonstrate the local rates.  The FDIC has subscribed to a service called “RateWatch” that they were going to use, he believed, as a reference point.  The  FDIC will analyze carefully the definition of the local market and the computation of the average from that market.  We understand that the analysis will have to be done on a branch by branch basis within the chosen market area (using newspaper quotes is apparently not enough).

Banks seeking to support a higher local rate would need to define its “local market” — i.e., counties in which the bank has branches, or perhaps another standard that the bank can support — and then calculate the local rate paid by each bank and branch in its local market.  For this purpose, each branch is given the same weight as a single-office bank; for example, if Bank of America has 5 branches in your market, the rate paid by each of those branches is counted individually and weighted equally.  This will likely cause the large national retail banks to have a significant and disproportionate influence on local rates, especially if they are not competing for the same local deposits sought by community banks.

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COMPLIANCE REMINDER – Red Flag Rules Apply August 1, 2009

Although some questioned if the day would arrive, the Red Flag Rules issued by the FTC, the federal bank regulatory agencies and the National Credit Union Administration go into effect August 1, 2009. The Rules are drafted broadly and will apply to many different companies, including “financial institutions and creditors with covered accounts.” Essentially, if you offer any form of loan or maintain any form of money account, you will have to comply the Red Flag Rules.

Preparing for August 1

The biggest step you should take is to prepare a Red Flag Plan. Although the Rules stress that each program should be tailored to the individual entity, some central elements should be present:

  • IDENTIFICATION – Make sure your plan identifies what constitutes a “red flag” (i.e. what could reasonably indicate identify theft).
  • DETECTION – Make sure you have a written procedure for how you will detect, understand and process any red flags.
  • RESPONSE – Make sure you adequately define how you will respond, making sure that you include enough flexibility to respond adequately to different levels of threat.
  • MAINTENANCE – Make sure you have a set process for reviewing, updating and revising your Red Flag Plan.
  • OVERSIGHT – Make sure the plan is properly approved by the Board of Directors, Managers or similar management positions, and include explicit designations of power as to who in management (either the Board or a senior officer) will oversee the Plan and its execution.
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Obama Proposes Comprehensive Regulatory Reform

On June 17, 2009, the Obama administration publicly announced its vision of regulatory reform.  Among the key points for community banks and thrifts:

  • Combine the Office of the Comptroller of the Currency (OCC) and Office of Thrift Supervision (OTS) into a new federal agency, the National Bank Supervisor, which would remain an office of the Treasury Department.  The National Bank Supervisor would have all the powers of the OCC and the OTS.  The Federal Reserve and FDIC would retain their respective roles with respect to state banks.
  • Eliminate the federal thrift charter, subject to “reasonable” transition arrangements.
  • Eliminate restrictions on interstate branching by national and state banks.  States would not be allowed to prevent de novo branching into the state, or to impose a minimum age requirement of in-state banks that can be acquired by an out-of-state banking firm.
  • Thrift holding companies and Industrial Loan Company (ILC) holding companies would both be required to become Bank Holding Companies supervised by the Federal Reserve.
  • Create a new federal Consumer Financial Protection Agency (CFPA).  The CFPA is proposed to have sole authority to promulgate and interpret regulations under existing consumer financial services and fair lending statutes, including TILA, HOEPA, RESPA, CRA, and HMDA.  The CFPA is also proposed to assume from the federal prudential regulators all responsibilities for the supervision, examination and enforcement of consumer financial protection regulations.
  • States would have the authority to adopt and enforce stricter laws, and federally chartered institutions would be subject to nondiscriminatory state consumer protection and civil rights laws to the same extent as other financial institutions.

As a reminder, we are the very beginning of regulatory reform; the final reforms are undoubtedly not going to be exactly as laid out in the President’s current proposal.

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