March 2009


From the editors of CCH’s Banking and Finance publications, this update describes significant developments covered in our products in recent reports, as well as product enhancements.

Market Crisis Resources, included below, provides links to vital information on the current market crisis.

A Hot Topic is included below to provide guidance on researching an issue of current interest.

Past issues of the Banking and Finance Update can be viewed on the Banking and Finance Web page at: http://business.cch.com/updates/bankingFinance.

If you have questions or comments concerning the information provided below, please contact the Banking and Finance Update editor at Serena.Lynn@wolterskluwer.com

 

Federal Banking Law Reporter

 

Stimulus Act Enhances EESA Executive Compensation Requirements
The American Recovery and Reinvestment Act of 2009, the stimulus legislation, contained three amendments to the Emergency Economic Stabilization Act of 2008 (EESA)—Sections 1608, 7001 and 7002. Section 1608 amends 12 USC 5217 dealing with contracting. Section 7001 amends 12 USC 5221 dealing with executive compensation. Section 7002 amends 12 USC 5219 dealing with application of the executive compensation requirements to loan modifications. All of these amendments were included in Report 2307, Feb. 26, 2009, at ¶7102Q (ip access user), ¶7102S (ip access user) and ¶7102U (ip access user).

Obama Unveils Mortgage Foreclosure Prevention Plan
President Obama has unveiled his administration's mortgage foreclosure prevention plan, which seeks to help between seven and nine million families restructure or refinance their mortgages so they can stay in their homes. At an event in Phoenix, Ariz., Obama stated in prepared remarks that "all of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to deepen." He noted that the Homeowner Affordability and Stability Plan will help not only those homeowners most at risk, but also those who are seeing their home values plummet as neighborhood foreclosures increase. The plan is at ¶95-762 (ip access user).

Bernanke Sees "Reasonable Prospect" of 2010 Recovery
If actions taken by the administration, Congress and the Federal Reserve Board are successful in restoring some measure of financial stability, there is a "reasonable prospect" that the current recession will end in 2009 and that 2010 will be a year of recovery, Federal Reserve Board Chairman Ben Bernanke told Congress on Feb. 24, 2009. This story appears in report no. 2307, Feb. 26, 2009 (ip access user).

Fed to Expand TALF, Change Terms
The Federal Reserve Board is planning a "substantial" expansion of the Term Asset-Backed Securities Loan Facility (TALF). The expansion could increase the size of the TALF to as much as $1 trillion and broaden the eligible collateral to encompass other types of newly issued AAA-rated asset-backed securities, such as commercial mortgage-backed securities, private-label residential mortgage-backed securities and other asset-backed securities (ABS). The Fed's release is at ¶95-745 (ip access user). The TALF term sheet and FAQs are at ¶95-740 (ip access user).

Treasury Department Sets New Executive Pay Limits
The Treasury Department has issued new restrictions on the executive compensation that can be paid by financial institutions that have received targeted assistance—assistance to institutions such as AIG, Bank of America and Citibank that made individual agreements with the federal government. Similar restrictions have been proposed for all financial institutions receiving cash infusions under general capital access. The Treasury also plans to develop and impose long-term model compensation strategies for all public financial institutions, even those not receiving government assistance. These strategies will apply to all employees, not just top executives, and will seek to encourage proper management of risk and an emphasis on long-term value and growth through long-term stock awards. The Treasury Department's guidelines are at ¶63-777 (ip access user).

Fed Announces Policy to Help Avoid Preventable Foreclosures
The Federal Reserve Board has adopted a policy intended to help avoid preventable foreclosures on some residential mortgage assets held, owned or controlled by the Federal Reserve Banks. Possible modifications include reduction of the interest rate, extension of the loan term and deferral or reduction of the outstanding loan balance. The Fed policy is reported at ¶95-726 (ip access user).

FDIC Adopts Rule on Processing Failed Banks' Deposit Accounts
The Federal Deposit Insurance Corp. has issued a final rule on processing deposit accounts in the event of a bank's failure. The final rule establishes the FDIC's practices for determining deposit and other account balances at a failed depository institution for deposit insurance and receivership purposes. FIL-9-2009 and the FDIC's notice are at ¶95-725 (ip access user).

Market Crisis Resources

This section provides links to vital information on the current market crisis. We offer a compendium of product coverage, including report letter stories, white papers, primary source documents (for example., agency issuances and legislative developments) and other information to help track and understand the recent market upheavals and ensuing regulatory response.

Congress

Legislative Materials

Federal Housing Finance Agency

  • Interim Regulation Issued to Govern the Portfolio Holdings of Fannie Mae and Freddie Mac, Jan. 30, 2009, ¶95-722 (ip access user)
  • Criteria Established Based on the Amount and Type of Capital Held by a Federal Home Loan Bank, Jan. 30, 2009, ¶95-721 (ip access user)
  • FHFA Rules on Golden Parachute Limits, Jan. 29, 2009, ¶95-717 (ip access user)

Federal Reserve Board

Agency Issuances

Government Accountability Office

Office of the Comptroller of the Currency

Agency Issuances

Office of Thrift Supervision

Agency Issuances

Securities and Exchange Commission

Releases

  • Financial Planner Charged With TARP Fraud, Litigation Release No. 20873, Jan. 28, 2009, ¶95-734 (ip access user)

Staff Guidance and No-Action Letters

Treasury Department

Agency Issuances

FEDERAL BANKING NEWS SOURCES

  • Advance Release Documents, provides federal banking highlights of significant current events and regulatory activity (See, for example, Feb. 2, 2009 (ip access user)).
  • The Federal Banking Law Report Summary provides the news of the week (See, for example, Federal Banking Report No. 2307, Feb. 26, 2008 (ip access user)).
  • The Federal Banking QuickChart for Current Developments can be used to find and track regulatory action and legislation (See for example, under Agency Guidance—Capital, an Oct. 14, 2008, announcement that the Treasury Department, Fed and FDIC announced a plan to purchase up to $250 billion of preferred shares in financial institutions).
  • Bank Digest Online is a comprehensive daily journal of current events and regulatory activity providing an abstract and the full text of the day’s releases (See, for example, Feb. 27, 2009 (ip access user) which includes a legislative update)
  • Subprime, Mortgage and Securitization Law Update is a monthly newsletter, with frequent Current Developments updates on the CCH Internet Research NetWork, providing coverage of regulatory, legal and industry developments involving subprime lending, securitization reform and the financial crisis (See, for example. Feb. 27, 2009 (ip access user)).

Subprime, Mortgage and Securitization Law Update

Agencies Announce Start of Economic Assessments, Treasury Provides CAP Terms
The federal banking agencies will begin conducting forward-looking economic assessments of large U.S. banking organizations under the Capital Assistance Program (CAP). The assessments will be done on an interagency basis to ensure they are conducted in a timely and consistent manner. Supervisors will work with institutions to estimate the range of possible future losses and the resources to absorb such losses over a two-year period. The CAP is intended to ensure that major U.S. banking organizations have sufficient capital to perform their role in the financial system on an ongoing basis and can support economic recovery, even in more severe economic environments. Feb. 27, 2009 (ip access user).

Geithner Issues Statements on Fannie Mae, Freddie Mac and GM, Chrysler
Secretary of the Treasury Timothy Geithner released a statement on the Treasury Department's commitment to Fannie Mae and Freddie Mac. The Treasury has increased its funding to the government sponsored entities (GSEs). Geithner also released a statement on the restructuring reports the Treasury received from Chrysler LLC and General Motors Corporation. The reports were required under the terms of the loans made available to these companies in December 2008 to assist the domestic auto industry in becoming financially viable. Feb. 20, 2009 (ip access user).

House Bill Would Tax Securities Transactions to Pay for TARP
A House bill would impose a securities transfer tax to pay for the cost of the troubled asset relief program (TARP). The Let Wall Street Pay for Wall Street's Bailout Act of 2009 (HR 1068) would add a new Section 4475 to the Internal Revenue Code to impose a tax on each covered securities transaction in an amount equal to the applicable percentage of the value of the security involved in the transaction. The tax would be paid by the trading facility on which the transaction occurs. The transfer tax would be broadly applied to the sale and purchase of financial instruments such as stock, options, and futures. Feb. 19, 2009 (ip access user).

Bernanke Testifies on Strengthening Credit Markets and the Economy
In testimony before the House Financial Services Committee on Feb. 10, 2009, Federal Reserve Board Chairman Ben S. Bernanke reviewed the Fed's credit programs, including those taken with the Fed's emergency authority under Sec. 13(3) of the Federal Reserve Act. Bernanke said that in addition to the Federal Open Market Committee's setting a range of 0 to 25 basis points for the target federal funds rate, the Fed has used at least three other tools to support the economy. Feb. 12, 2009 (ip access user).

SEC Charges Financial Planner with TARP Fraud
The Securities and Exchange Commission has charged Nashville, Tenn.-based investment advisor Gordon B. Grigg and his firm ProTrust Management, Inc. with securities fraud and obtained a court order freezing their assets. According to the SEC's complaint, Grigg and his firm allegedly misrepresented to clients that their money was invested in the Troubled Asset Relief Program as well as in securities that do not exist. Since 2007, 27 clients allegedly were defrauded out of $6.5 billion dollars, according to the complaint. Feb. 5, 2009 (ip access user).

Consumer Credit Guide

Bank’s Undisclosed Intent Not Relevant Under Regulation Z
A credit card lender's undisclosed intent to rely on a universal default clause to increase a consumer's interest rate after the consumer accepted a balance transfer offer would not have made the lender's disclosures inaccurate under the Truth in Lending Act or Reg. Z --Truth in Lending (12 CFR 226), according to the U.S. Court of Appeals for the Ninth Circuit. TILA and Reg. Z imposed only disclosure requirements and did not regulate the terms of credit, the court said. They required only that the disclosures accurately reflect the legal relationship at the time they were made. An undisclosed intent to change those terms at a later date was irrelevant to whether the disclosures were accurate when they were made, according to the court. However, if the credit card company knew or should have known of the late payments when it made its disclosures and had an intent to raise the consumer's interest rate after he transferred his balance, state laws on unfair business practices and false advertising could have been violated. Hauk v. JP Morgan Chase Bank, USA (9thCir), ¶52,223 (ip access user).

Bankruptcy Code Precludes FDCPA Claim, Preempts State Law
The U.S. Bankruptcy Appellate Panel of the Ninth Circuit reviewed a debtor's claims against a debt collector for alleged violations of the federal Fair Debt Collection Practices Act (FDCPA) and the Washington Consumer Protection Act within the framework of the debtor's bankruptcy proceeding. The court ruled that the FDCPA claim was precluded by the Bankruptcy Code, and the state law claim was preempted by the Code. The debtor alleged that the debt collector's proofs of claim in the bankruptcy proceeding because the claims were barred by the statute of limitations. The court noted that the unavoidable confusion and conflicts resulting from an attempt to reconcile the Bankruptcy Code with the FDCPA supported its finding that Congress intended the FDCPA to be precluded in bankruptcy proceedings in most instances. In Re Chaussee (B-Real, LLC v. Chaussee) (BAP 9thCir), ¶52,225 (ip access user).

Bank’s Investigation Must be “Reasonable” Under FCRA
Dissatisfied with a satellite television system that he had purchased with his credit card, a consumer notified his credit card bank that he was disputing the charges for the system. Ultimately, the bank reported to various credit reporting agencies that the consumer's credit card account was "charged off." When the credit reporting agencies sent the bank notices of dispute concerning the consumer's complaints and asked the bank to verify its account records, the bank conducted an investigation. The bank informed the agencies that the account delinquency was not an error. The consumer sued the bank, claiming that the bank, as a furnisher of information to the credit reporting agencies, had violated the federal Fair Credit Reporting Act (FCRA) and various California laws. The Ninth Circuit examined each of the four types of notices the bank received and determined that the bank's investigation was reasonable. Gorman v. Wolpoff & Abramson, LLP (9thCir), ¶52,221 (ip access user).

State Law Update

Maryland: The Maryland Insurance Administration is proposing to adopt new regulations requiring notice of payment options when premium financing is offered in connection with property and casualty insurance policies. The purpose of the proposed regulations is to protect consumers by requiring insurance producers to inform consumers of additional financing options when consumers are purchasing a property and casualty insurance policy. Consumer Credit Guide Report No. 1061, Feb. 24, 2009, (ip access user).

Secured Transactions Guide

Defense Against Preferential Transfers Did Not Apply
Payments made to a creditor within 90 days of filing a bankruptcy petition were avoidable as preferential transfers. The creditor was not entitled to the "new value" defense to preferential transfers, because he did not have a valid security interest. The creditor had argued that the payments the corporation made to the creditor within 90 days preceding the petition were not avoidable because they fell under the “new value” exception to the rule against preferential transfers. The defense applies to transfers that are intended as and resulted in a contemporaneous exchange for new value. However, no new value was exchanged, because the creditor did not have a valid security interest. In re Omega Door Co., Inc.: Belfance v. Buonpane (BAP 6thCir) appears at ¶56,175 (ip access user).

Debtor Liable for Remaining Deficiency Balance
In accordance with Article 9 of the Tennessee UCC, a debtor could not avoid paying the deficiency balance that remained after his creditor repossessed and sold its secured collateral. Article 9 of the Tennessee UCC provides that if the notice and sale of repossessed collateral are proper, a debtor remains responsible for any balance that remains after the sale. Because the debtor did not dispute that the sale and notice were appropriate, the debtor remained liable for the deficiency balance remaining. Caterpillar Financial Services Corp. v. Giles (WDVa) appears at ¶56,176 (ip access user).

Release of Guarantors Was Not a Preferential Transfer
Guarantors that were released from a debt within 90 days of a debtor's filing for bankruptcy did not receive an avoidable preferential transfer, because they received no greater benefit than if their claim had proceeded through bankruptcy. Two principals of a corporation personally guaranteed a bank loan that was fully secured by the corporation's assets. Within 90 days of the filing of the corporation’s involuntary bankruptcy petition, the bank applied a set off from the corporation’s depository account, which released the guarantors. Although the guarantors were creditors of the corporation that benefited from the transfer to the bank, had they waited for the liquidation and distribution of corporation’s assets in the bankruptcy proceedings, the proceeds from the sale would have been applied to the debt owed and the guarantors would have been released. In re Tilton Corporation: Swope v. Tilton. (Bankr NDOhio) appears at ¶56,178 (ip access user).

Financial Privacy Guide

Proof of Fax Contents Required for TCPA Violations
A recipient of unsolicited facsimile advertisements from a special events company could prevail against the company for violations of the Telephone Consumer Protection Act (TCPA) only as to the facsimiles the recipient was able to produce, a federal district court has held. Although evidence of receipt was not required, evidence of the facsimiles' contents was necessary to establish that the facsimiles were "advertisements" as defined by the TCPA. Hinman v. M and M Rental Center, Inc. (NDIll) appears at ¶100-424 (ip access user).

BNY Mellon Settles Connecticut Data Breach
The Connecticut Department of Consumer Protection, the Connecticut Department of Banking, and Bank of New York Mellon (BNY Mellon) have reached an agreement settling a 2008 identity breach that affected more than 600,000 Connecticut residents. "This settlement puts closure on an issue that brought to light the crucial need for improved data security among businesses and organizations that collect, store and manage personal information," Consumer Protection Commissioner Jerry Farrell Jr. said. A story on the settlement appears in Report No. 92, February 18, 2009 (ip access user).

Supreme Court Hears Aggravated Identity Theft Issue
The U.S. Supreme Court will decide whether to be convicted of the federal crime of aggravated identity theft a defendant must have actual knowledge that the false identity the defendant assumed belonged to an actual person. In oral arguments held Feb. 25, 2009, a convicted identity thief challenged the ruling of the U.S. Court of Appeals for the Eighth Circuit confirming his sentence for aggravated identity theft, despite the fact that there was no proof that the thief knew that the identification belonged to another individual. A story on the petition for writ of certiorari in Flores-Figueroa v. United States (Docket No. 08-108) appears in Privacy Extra, February 27, 2009 (ip access user).

State Law Update

Massachusetts: The amendment of identity theft regulations requiring the encryption of information stored on portable devices or transmitted wirelessly or on public networks extends the effective date of existing rules to Jan. 1, 2010. A story on the amended rules appears in Privacy Extra, February 27, 2009 (ip access user).

Bankruptcy Law Reporter

Fourth Circuit Reverses Ruling on Natural Gas Contracts
In an issue of first impression, the Fourth Circuit has found that, in deciding whether the expanded definition of “swap agreement” to include “forward agreements” would preempt an avoidance action, a bankruptcy court erred in holding that the commodity supply contracts at issue were not “swap agreements.” The bankruptcy court construed “commodity forward agreements” too narrowly by requiring that they be traded on an exchange and not involve physical delivery of the commodity. National Gas Distributors, LLC (4th Cir) will be published at a future date.

Private Disability Insurance Benefits Constitute Income
Chapter 7 debtors were required to include the debtor-wife’s private disability insurance benefits in their calculation of current monthly income, (CMI). After examining the plain language of the Bankruptcy Code, the U.S. Court of Appeals for the Ninth Circuit determined that Congress intended for such benefits to be included and did not want to apply the Internal Revenue Code’s method of determining taxable income to the calculation of CMI. Blausey v. U.S. Trustee (9thCir) ¶81,405 (ip access user)

Reaffirmation Agreements Part of Attorneys' Core Services
An attorney’s attempt to exclude negotiation of reaffirmation agreements from his services was an impermissible limitation on his representation of the debtor. The decision to reaffirm an otherwise dischargeable debt plays a critical role in the bankruptcy process—so critical, that assistance with the decision must be counted among the necessary services that make up competent representation of a Chapter 7 debtor. The Bankruptcy Code lays the responsibility for advising a debtor about the reaffirmation process and evaluating the effect of each agreement at the feet of the debtor’s counsel, and the court refused to relieve the attorney of that responsibility. Minardi (BankrNDOkla) ¶81,406 (ip access user)

Supreme Court to Address Bankruptcy Court’s Authority to Block Private Law Suits
Despite the creation of a trust created to compensate those injured by a company’s asbestos products in exchange for protection from future claims, lawsuits were filed in several states seeking recovery from the insurer because of its alleged misconduct in its investigation, defense and settlement of the asbestos claims against its policyholder. The U.S. Supreme Court has agreed to determine whether a bankruptcy court had jurisdiction to enjoin such suits. The U.S. Circuit Court of Appeals for the Second Circuit found that the bankruptcy court lacked jurisdiction to enjoin suits against the insurer. The suits were predicated on an independent duty owed by the insurance company to several claimants who were not a party to the settlement agreements. The Travelers Indemnity Company v. Bailey, Docket No. 08-295.

Individual Retirement Plans Guide

Guidance to Financial Institutions on 2009 RMDs Issued
The IRS has issued guidance on the reporting of required minimum distributions (RMDs) for 2009 with regard to pertinent provisions of the Worker, Retiree, and Employer Recovery Act of 2008 (P.L. 110-458). Generally, the IRS imposes an excise tax of 50 percent to the extent a RMD in the proper amount is not made. Under the Act, that excise tax is waived on all 2009 RMD underpayments ordinarily distributed to retirees. Thus, the Act effectively waives RMDs for 2009. However, the Act does not waive any 2008 RMDs. IRS Notice 2009-9 is reported at ¶6114 (ip access user).

Hot Topic of the Month

This month’s Hot Topic of the Month is conversion of non-bank financial institutions into bank holding companies. In recent months, finance companies and securities firms have sought to become bank holding companies as part of the reshaping of the financial services industry resulting from the economic crisis. Coverage of Federal Reserve Board action on bank holding company applications is found in the Federal Banking Law Reporter and Bank Digest.

The Bank Holding Company Act defines a bank holding company as any company that has control over a bank. Control is defined to included ownership or the power to vote 25 percent or more of any class of voting securities, as well a controlling influence over management or policies. Bank holding companies are regulated by the Federal Reserve Board under Regulation Y. The text of the Bank Holding Company (12 USC 1841—12 USC 1850) is reproduced in Federal Banking Law Reporter Laws at ¶3501—¶3510 (ip access user). The text of Regulation Y (12 CFR 225.1—12 CFR 225.28) is reproduced in Federal Banking Law Reporter Regulations at ¶13-701—¶13-728 (ip access user).

CCH explanations and interpretive agency issuances relating to bank holding companies are found in the Federal Banking Law Reporter Researcher in the division “Holding Companies—Affiliate Transactions.” For example, in October 2008, the Federal Reserve Board issued enhanced guidance that refined its programs for the consolidated supervision of bank holding companies and the combined U.S. operations of foreign banking organizations. The agency noted that, although this initiative predated the recent period of considerable strain in the financial markets, the enhanced approach emphasizes several elements that should support a more resilient financial system. The text of SR 08-9 is reproduced at ¶59-538 (ip access user).

The Bank Holding Company Act sets forth the factors that the Federal Reserve Board must consider when reviewing the formation of a bank holding company or the acquisition of banks. These factors are the competitive effects of the proposal in the relevant geographic markets; the financial and managerial resources and future prospects of the companies and banks involved in the proposal; and the convenience and needs of the community to be served.

Comprehensive coverage of applications to become a bank holding company is found in Bank Digest. The filing of applications and the subsequent approvals or disapprovals are found in the listing of Federal Reserve Board Applications and Orders reported each day. For example:

  • The Fed approved the applications and notices under sections 3 and 4 of the Bank Holding Company Act by American Express Company and American Express Travel Related Services Company, Inc., both of New York, N.Y., to become bank holding companies on conversion of American Express Centurion Bank, Salt Lake City, Utah, to a bank, and to retain certain nonbanking subsidiaries, including American Express Bank, FSB, Salt Lake City, Utah. Bank Digest, Nov. 12, 2008 (ip access user).

Significant Federal Reserve Board orders on applications to become bank holding companies are published Federal Banking Law Reporter Cases. For example:

  • The Federal Reserve Board approved the applications of Goldman Sachs and Morgan Stanley to change their status from investment banks to bank holding companies under the Bank Holding Company Act. The move places the firms under supervision by bank regulators, allows them to establish commercial banks and exposes them to a wider availability of credit. The order approving Goldman Sachs' application is reported at ¶101-046 (ip access user). The order approving Morgan Stanley's application is reported at ¶101-047 (ip access user).