In December 2017, the FDIC published a written history of the financial crisis focusing on the agency’s response and lessons learned from its experience. Crisis and Response: An FDIC History, 2008–2013 reviews the experience of the FDIC during a period in which the agency was confronted with two interconnected and overlapping crises—first, the financial crisis in 2008 and 2009, and second, a banking crisis that began in 2008 and continued until 2013. The history examines the FDIC’s response, contributes to an understanding of what occurred, and shares lessons from the agency’s experience.

In April 2019, the FDIC followed up on the written summary with a “podcast” covering the same. While I am a huge fan of podcasts, as at least partially reflected in hosting The Bank Account, one of my pet peeves is when someone calls an audio download a podcast, without providing any convenient way to download that audio to a podcast application so that it can easily be listened to in the car, at the gym, or on a walk.

(Full disclosure: I listen to most podcasts, including banking podcasts, while running.  I certainly can’t say that discussions of banking law motivate me to run any faster or farther, but I do at least listen to them at 1.5x speed.)

Rather than just complain (or ignore it), I decided to take action and created an rss feed for the FDIC’s podcast. Anyone should now be able to paste/enter https://bankbclp.com/fdic-podcast.xml into their podcast app of choice to subscribe to the FDIC’s Crisis and Response podcast. I’ve also published additional instructions on how to subscribe to the FDIC podcast with particular podcast applications.

Last week, Bank Director published a piece titled “77 Percent of Bank Boards Approve Loans. Is That a Mistake?”

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.

Does the death of the borrower automatically accelerate a reverse mortgage? In a decision that is good news for reverse mortgage lenders, a recent New York appellate court answered no. In Mortgage Solutions v. Fattizzo, _ AD3d_, (2d Dep’t, May 1, 2019), the New York Supreme Court, Appellate Division, Second Department, considered whether the statute of limitations for enforcing reverse mortgage loans begins to run upon the death of the borrower. Defendant contended that the foreclosure action, filed August 6, 2014, was time-barred by the six year New York Statute of Limitations because the cause of action accrued on the date the borrower died, February 19, 2008.

The Court focused on the language in the reverse mortgage at issue – “[l]ender may require immediate payment in full of all outstanding principal and accrued interest if …” (emphasis added) – and noted that it confers upon the holder of the note and mortgage the option, but not the obligation, to accelerate payment of the debt. The Court held that an affirmative act by the lender was needed to accelerate the debt.

Accordingly, in New York, absent different language in the mortgage, the death of the borrower does not automatically amount to accrual of a cause of action for purposes of the statute of limitations. This is a departure from prior New York case law, although the same conclusion recently reached under Florida law.

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Last week, Kevin Strachan joined me in the podcast studio to discuss the ability of privately held banks to use their securities as consideration to acquire another institution.

Sadly, since the last time we recorded a podcast, the patriarch of our banking practice, Walt Moeling, passed away.  Our previously posted memorial included several links to remember Walt, but of particular relatedness to the podcast, we encourage everyone to listen again to two earlier podcasts with Walt sharing his wisdom.  In December 2016, Walt joined us on the podcast to discuss, among other things, the future of the banking industry and what one regulatory change he would make if given unlimited power. Then, in March 2017, Walt spoke about establishing a sustainable sales culture.

Somehow, I was able to read the notes I had scribbled about Walt, and we then continued to discuss two common (and contradictory) misconceptions on private company merger and acquisition activity. 

The first misconception is that privately held companies can’t issue stock as merger consideration.  The second misconception is that privately held companies can issue stock without restriction as merger consideration.  We regularly hear both of these misconceptions when advising private companies on a potential merger transaction where they are looking to issue (or receive) private company stock.  While neither of these ideas are correct, the truth is messy and usually requires further discussion.

Among the topics covered with Kevin in this episode of The Bank Account are:

• the additional flexibility of banks without holding companies (and the limitations of that flexibility);
• SEC registration via merger;
• Regulation A+ in mergers;
• the state Fairness Hearing exemption; and
• using Rule 506 of Regulation D to issue securities to the target shareholders.

For private companies considering an acquisition of another institution, further conversations with investment bankers and lawyers are almost certainly going to be needed, but this episode of The Bank Account can give you a head start in understanding some of the potential options that may be out there.

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.

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.

This post is the fourth and final in a series discussing Open Banking, its implementations, and its implications. The start of the series is here, and all of the posts in the series are available here.

In the United States, “open banking” does not yet mean that bank account and transaction data can be freely accessed on standardized terms—though it may in the future. For now, those who allow financial data to be accessed through APIs can impose their own conditions on that access. As we have described in this blog series, without further regulatory invention, in the U.S. API access is principally a contractual matter. For these purposes, we will refer to “providers” as those making API data available and “users” as those intermediaries accessing that data in order to deliver services to consumers or other clients. Although bank partnerships are subject to established contract standards, we will focus in this post on key issues that arise specifically in the course of the API licensing and access process.

APIs made available for free may be provided pursuant to “licenses” or may alternatively be provided pursuant to a “terms of use” document that sets forth the conditions under which use is permitted. Under either approach, if the user refuses to accept the terms, then use is barred. APIs made available for a fee may also be governed by “terms of use” but these terms may be negotiated as a license or service agreement. There, traditional assumptions about bargaining power often play out, with the dominant players typically demanding conformity.

Gating Considerations for API Access Terms

Particularly when the API license is presented as a take-it-or-leave-it agreement, the terms are often written to protect the provider from any liability for an offering from which the provider derives no or limited direct financial benefit. Users that will be paying for access may do so on a “per transaction,” “per user,” or some other basis; when the user pays money, the user understandably has more leverage over other contract terms. Either way, prospective users need to consider at least the following:

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.

This post is intended to highlight those changes that we expect to be most significant to registrants in the banking industry. BCLP has also produced a more thorough summary of the final rules as applicable to all registrants. The complete, 252-page adopting release is available here.

MD&A

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.

In a case of first impression, the Fifth Circuit held that a defendant is not required to plead as an affirmative defense under the Real Estate Settlement Procedures Act that it had complied with Section 1024.41 of the Code of Federal Regulations by responding properly to a borrower’s loss mitigation application. Germain v. US Bank National Association, — F. 3d — (2019 WL 146705, April 3, 2019). It affirmed the dismissal of the borrower’s RESPA claim on a summary judgment motion, based on the following facts.

After repeated defaults beginning in 2009, the borrower Plaintiff filed three or four loss mitigation applications, asking for loan modifications in 2012, 2013 and 2014, in addition to filing bankruptcy in 2013. Each time, the loan servicer responded to the application properly. When the lender accelerated the loan and scheduled it for foreclosure in 2015, Plaintiff filed a lawsuit. It alleged the Defendants violated RESPA by failing to comply with Section 1024.41(d). That regulation section requires that a servicer who denies a loss mitigation application must notify the applicant of the reason he was denied any trial or permanent loan application option available pursuant to the regulation.

In their Answer to the complaint, the Defendants denied the allegation that they had failed to comply with Section 1024.41(d). The unstated basis for the Answer’s denial was that the loan servicer had complied Section 1024.41(i), which states: “A servicer is only required to comply with the requirements of this section for a single complete loss mitigation application for a borrower’s mortgage loan account.” The Court of Appeals ruled that the denial, without the detail, was sufficient, and affirmed the district court’s determination that the Defendants were not required to plead Section 1024.41(i) as an affirmative defense.

In previous posts in our BankBCLP.com series on this topic, we’ve attempted to define “open banking” and the ways in which it is attracting increasing industry attention through open APIs.  As our series continues, we describe how open banking is or may be regulated, as well as its critical licensing and intellectual property implications in practice.

As we have previously described, at least in the United States, “open banking” is more of a sweeping term of art than a distinct practice or product.  As a result, its legal and regulatory implications are potentially wide-ranging.    

In the United Kingdom, “Open Banking” is a more precise legal term for a sharing framework that the Competition and Markets Authority (CMA) has introduced for the stated purposes of increasing competition and expanding customer control over financial data.  In 2017, the CMA began to implement this framework by requiring the nine largest banks and building societies in the U.K. to begin sharing certain customer information with registered third-party providers (with customer consent).  In its earliest stages, this data sharing requirement was limited to data specific to the institution, as opposed to its customers, such as branch and ATM locations.  Subsequent stages have focused on transaction histories and even payments APIs.  These stages provide an early look at some of the more tangible consumer-oriented use cases for open banking.  For example, third-party applications can facilitate real-time bank location or price comparison shopping.

Importantly, under Financial Conduct Authority (FCA) implementing rules, the providers to whom this access is granted must be approved as a form of payments business or specialty service provider in the U.K. or in another jurisdiction under certain passporting provisions.  In any case, this will subject the provider to direct supervision and examination by a U.K. or EU regulator.  This framework dovetails with the European Union’s revised Payment Services Directive (PSD2) data security regulation in that these registered providers must specifically demonstrate PSD2 compliance.  The CMA is touting Open Banking as a secure, transparent means of providing consumers with more control over their finances. 

Other jurisdictions are taking a similar, top-down approach to open banking.  Australia is mandating that its four largest banks make certain banking information available on a “read only” API basis beginning July 2019.  India’s Unified Payments Interface (introduced August 2016) is an open API-based platform for real-time payments.  It ties to the government’s policy goals of minimizing the use of cash, promoting digital identity, and leveraging mobile devices in a rapidly developing economy.  Hong Kong published an open API framework in July 2018.  On the other end of the spectrum, China and Singapore are taking a more industry-driven approach.  China’s extensively cashless and mobile economy is incorporating open banking as a market response, rather than by regulatory mandate.

Bank merger activity is reducing the number of U.S. banks at a rate of about 5% per year. It’s unclear how long this pace of industry consolidation will continue. Investment bankers, who have an interest in the level of activity continuing, are often quick to counsel bank boards of directors that the merger market may never be better than it is right now. Each year, the boards of hundreds of banks decide to heed the advice of those suggesting it’s time to sell.

A decision to sell a bank is one of the two most important decisions a board addresses (the other being selection of the CEO in a succession process). The strength of a board lies in the manner in which it approaches such a decision. Some boards will have gone through a lengthy process of reaching consensus before exploring potential merger opportunities. Others will find themselves considering unexpected merger offers without first having reached consensus. Vigorous debate can be healthy and productive in the process of a board reaching the best decision for the bank and its shareholders. Regardless of the circumstances in which a potential sale or merger of a bank is being considered, it is critical that all board members have access to the same level of information and be able to provide input throughout the process.

When board members believe they have been kept out of the loop on information flow, or they haven’t been adequately involved in considering a course of action, the strength of a board is undercut. Decision making is often adversely impacted as a result. This is particularly true in connection with consideration of the sale of a bank. Throughout the process of a board investigating options and considering strategic alternatives, the board members should have confidence that they are privy to all communications of importance with both professional advisers and potential merger partners.

We have seen far too many instances in which a director, on his or her own initiative and without authorization from the board as a whole, embarks on private outreach to potential merger partners. These directors usually feel justified in such action as a result of frustration with the pace at which the full board is moving or a sense that the CEO is resistant to the idea of selling the bank. Whatever the driving force, such independent action by a director can result in a breakdown in trust among the board and rarely results in a successful merger transaction.