Iowa Banking Law Blog

The Mighty Sword of Preemption Sheathed; State AGs Can Enforce State Lending Laws

The battle between federal banking regulation and state regulation of national banks has been brewing for years.  It has been primarily a one-sided battle; the OCC has wielded the mighty sword of preemption and consistently vanquished state regulators, with their consumer protection warhorn around their neck, in courtrooms across the country.  The OCC has aggressively maintained its power to preempt state laws that affect national banks’ federally authorized activities.  State regulators have argued that the broad preemption endorsed by the OCC weakens state consumer protection and fair lending laws.  In Cuomo v. Clearing House Association, LLC, the Supreme Court ruled in favor of state regulation, at least partially, forcing the OCC to sheath its mighty sword in state judicial enforcement actions. 

 

In Cuomo, the New York Attorney General sent letters to various national banks requesting nonpublic information regarding their lending practices.  The AG was investigating the banks' residential lending practices for violations of the state fair lending laws.  The OCC and a trade group for the banks brought suit to enjoin the request claiming that the National Bank Act preempts the enforcement of state fair lending laws against national banks.  The Court held that the NBA does not prohibit the ordinary enforcement of state law.  The Court clearly delineated between any purported state “visitorial powers” or general oversight of national banks, which is preempted by the NBA, and the “prosecution enforcement actions,” which is not preempted.  When the state sues to enforce a state law against a national bank, it is not exercising visitorial or oversight powers; it is exercising its power to enforce state law.  Thus, the New York Attorney General could not simply request nonpublic lending information from national banks, but could bring suit or get a judicial search warrant and obtain the information though legal channels.  Under the Court’s ruling, only the OCC can exercise administrative visitorial oversight of national banks.  Substantive state law, on the other hand, can be enforced judicially by state authorities. 

 

This decision levels the playing field between state and national banks.  National banks now must clearly abide by the same fair lending and consumer protection laws as state banks.  The decision also will likely increase the regulatory burden on national banks, as they will have to be sure to comply with the differing consumer protection and lending laws of individual states.  It is unclear at this time how this decision will fit into the Obama administration's planned reform of the banking system.  For the time being, however, the mighty sword of preemption has lost a bit of its shine, and the warhorns of state attorney generals are sounding across the nation.

 

If you have questions, please contact Jeff Andersen at 515-246-4503 or jandersen@dickinsonlaw.com.

Turf Battles May Impede Financial Regulatory Reform

The global credit crisis, the global recession, the decline in real estate values and the negative effects of these events on the banking industry have stimulated interest in regulatory reform of the financial sector.  The existence of complex interactions among participants and products in the global financial markets has become more apparent.  Unprecedented measures have been taken to address frozen credit markets, the collapse of massive financial firms and the spreading contagion associated with “toxic” assets.   Questions have been raised about the adequacy and effectiveness of many existing regulatory structures and about whether regulation should be extended to activities that currently are unregulated.  There are perceived advantages and risks associated with concentrating regulatory authority in a single regulator.  There has been discussion of the possibility of having a panel of regulators deal with systemic risk issues. Such an approach would be similar to the proposed European Systemic Risk Council, which would include the president of the European Central Bank and central bank governors from the European Union’s 27 member countries. 

 

Although there is general recognition that disruptions in financial markets cannot be eliminated, the need for more effective safeguards against systemic risk is clear.  Despite statements that something must be done, there is considerable disagreement about the exact nature of the changes that should be made.  Reform will be politically difficult because of the interests of market participants, regulators and Congressional committees in preserving existing regulatory jurisdictions and objectives. Any financial industry regulatory reform raises questions about who should be performing particular kinds of regulation and how that regulation should be performed. Set forth below are some of the more contentious issues:

• Should there be one or more than one systemic risk regulators?

• Should hedge funds be regulated?

• Should currently unregulated derivatives be regulated?

• Should there be increased regulation of the mortgage industry?

• Should there be regulation of the sale of securitized assets?

• Should there be federal regulation of the insurance industry?

• Should some or all federal bank regulatory agencies be consolidated?

• Should failing non-bank financial companies be placed into receivership?

• Should there be a reallocation of jurisdiction between the SEC and the CFTC?

• Should there be a clearinghouse for over-the-counter derivatives?

• Should credit default swaps be regulated?

• Should short selling be more tightly regulated?

• Should there be more countercyclical capital requirements?

• Should the use of leverage be more tightly regulated?

• Should there be more regulation of money market funds?

• Should the role of state banking regulation be diminished?

• Should there be more robust enforcement of consumer protection laws?

• Should there be more disclosure of positions of larger market participants?

• Should regulatory changes extend to compensation and corporate governance?

Whether or not all of these issues are resolved in the near future, it seems clear that substantial changes in the operation of financial market regulation lie ahead. What is also clear is that the outcome of turf battles will have a major role in determining the future of the financial regulatory structure.

 

Recent news reports highlight some of the problems that can arise in the context of turf disputes.  According to a recent article in The Economist, “The stiffest resistance to change is coming not from Wall Street but from Washington, DC, where government officials, regulators and congressional leaders are locked in turf wars and ideological battles.”  Bloomberg reports that because of “resistance on Capitol Hill” and “pushback from entrenched interests,” a merger of the SEC and the CFTC may not be pursued.   An article in The Wall Street Journal comments on the FDIC’s “increasingly tough position” toward the management of Citigroup Inc. leading to “a bitter clash between regulators” about the speed and adequacy of efforts to improve the firm’s capital position.  In an earlier article The Wall Street Journal reported on Congressional committee disputes over jurisdiction of the regulation of over-the counter derivatives.  As the most traumatic aspects of the financial crisis pass into memory, it seems increasingly likely that bureaucratic infighting will play a major role in limiting the scope of any reform of the financial sector.  

 

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

The Credit Crisis and Commercial Impracticability

The bankruptcy of Lehman Brothers Holdings Inc. in September of 2008 resulted in a global credit crisis.   It seems clear that this credit crisis has greatly exacerbated the current global recession and has been extremely damaging to developers of commercial real estate.   An unresolved issue is the extent to which problems associated with the credit crisis may excuse performance of contractual obligations on grounds of commercial impracticability. 

 

A high profile example is the litigation involving the Trump International Hotel and Tower project in Chicago.  In November, Donald Trump’s development company commenced litigation against Deutsche Bank AG and other lenders asserting the right to an extension of the maturity date of the first mortgage construction loan for the project until the abatement of the credit crisis.  In this litigation Trump asserted that the credit crisis constitutes a force majeure under the terms of their agreement.  On March 3, 2009, the parties announced that they have suspended this litigation, which should permit construction to be completed.  It is not clear whether the court will ever rule on the merits of Donald Trump’s assertion that the maturity date of the loan must be extended because of commercial impracticability resulting from the credit crisis. 

 

Courts normally will enforce a force majeure clause in accordance with its terms.  Commercial impracticability will not excuse performance when a court concludes that a party has assumed the risk of the event by the terms of the contract.  Therefore, the result in any particular situation may depend on the exact wording of the contract between the parties.    

 

Generally, courts in modern cases tend to require only a showing of impracticability rather than a showing of strict impossibility.  Courts often look to Restatement (Second) of Contracts § 261 which states:

 

Where, after a contract is made, a party’s performance is made impracticable without his fault by occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

 

The expansion of the legal defense of impossibility to include commercial impracticability has also been influenced by the provisions of Section 2-615 of the Uniform Commercial Code which deals only with the sale of goods and which provides in part as follows:

 

Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:  (a)  Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.  [emphasis added]

 

In general, a claim of commercial impracticability requires the absence of fault by the party seeking to be excused and an event that could not reasonably have been foreseen. Temporary impracticability merely suspends the duty of performance.  Temporary impracticability resulting from the credit crisis would raise additional difficult questions:  Has the credit crisis ended?  When did the credit crisis end?  What events marked the end of the credit crisis?

 

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

FDIC Forms Advisory Committee to Study Community Banks

The FDIC Board of Directors today approved establishing the FDIC Advisory Committee on Community Banking.  The Committee will provide the FDIC with advice and guidance on a broad range of important policy issues impacting small community banks throughout the country, as well as the local communities they serve, with a focus on rural areas.

"Community banks are the lifeblood of our nation's financial system, supplying much-needed credit to countless individuals, small businesses, nonprofit organizations and other entities in large and small towns around the country," said FDIC Chairman Sheila C. Bair. "Our committee will get direct and frequent input on many issues from a cross-section of community bankers nationwide, which is critically important."

The Advisory Committee is expected to study examination policies and procedures, credit and lending practices, deposit insurance assessments, insurance coverage issues, regulatory compliance matters, and obstacles to the continued growth and ability of community banks to extend financial services in their local markets in the current environment.

Government Oversight of the Use of TARP Funds

As funding provided by the Troubled Asset Relief Program (“TARP”) works its way through sectors of the economy, it is important for banks and their customers to have an awareness of the federal government’s program for investigation and criminal prosecution of misuse of TARP funds.  This potential exposure to criminal penalties is in addition to the potential exposure to treble damage claims for filing false reports discussed in an earlier article.  It is important, therefore, for banks and their customers to take care that their transactions involving TARP funds are fully defensible and to maintain accurate records of the use of such funds.  

 

Expansive Investigative Authority.  A troublesome aspect of this potential exposure to criminal penalties is that the scope of investigative authority is not clear.  Such exposure could apply to any impropriety in applying for or disbursing TARP funds and to any failure to properly implement the conditions applicable to recipients of TARP funds.  The Emergency Economic Stabilization Act of 2008 established a Special Inspector General for the Trouble Asset Relief Program (“SIGTARP”).  Neil M Barofsky, a former federal prosecutor, currently holds this office.  The SIGTARP has largely undefined investigative authority, subpoena power and authority to refer misuse of TARP funds for criminal prosecution.  The lack of clear legislative limitations on the investigative authority of the SIGTARP permits an expansive interpretation of the SIGTARP’s investigative role. 

 

Communicating with the SIGTARP.  The SIGTARP has requested information and documents from recipients of TARP funds and is expected to continue to do so as more parties receive TARP funding.  It is important to realize that responses to such requests for information and documents must be made with care and attention to detail.  Such responses and other communications with the SIGTARP are subject to the provisions of 18 U.S.C. § 1001 which creates criminal liability for knowingly and willfully making materially false statements to government officials. The review of SIGTARP requests and the preparation of communications with the SIGTARP should be given high priority.  Consideration should be given to seeking the assistance of legal counsel in the preparation of such communications.

False Claims Act Liability and the Economic Stimulus Package

The Federal Deposit Insurance Corporation (the “FDIC”) has received over 400 comment letters on its new program for the purchase of legacy loans (the “Legacy Loans Program”).  A review of several of these comments letters reveals the complexity of the issues that will be involved in the implementation of the Legacy Loans Program.  The comments address a large number of issues, including the role that would be played by the FDIC in making the Legacy Loans Program work. 

 

Some basic terms of the Legacy Loans Program are already rather clear. Under the Legacy Loans Program, the Department of the Treasury (“Treasury”) and private investors would contribute equity capital on a 1-for-1 basis to form Public-Private Investment Funds (“PPIFs”).  A PPIFs would purchase loan pools.  Such purchases would be funded using the PPIF’s equity capital and the proceeds of debt issued by the PPIF.  The PPIF could have a debt to equity leverage ratio of up to 6-to-1 with FDIC approval.  The FDIC would provide various managerial oversight services, including conducting auctions of the loan pools, and would guarantee the debt financing issued by the PPIF.  As currently proposed, the FDIC guarantee would be made on a non-recourse basis (secured only by the PPIF’s assets).  In connection with each completed transaction under the Legacy Loans Program, Treasury would receive warrants and the FDIC would receive an annual guarantee fee.  

 

Encouraging Participation.  A number of suggestions were made concerning the manner in which the FDIC could encourage participation in the Legacy Loans Program.  Some of these suggestions emphasized the importance of (1) promoting clarity and consistency with respect to the manner in which the Legacy Loans Program would operate and avoiding retroactive changes, (2) establishing reserve prices that would both encourage seller participation in auctions and assure potential buyers that if the reserve price were met there would be a commitment to complete the sale, (3) giving private investors as much flexibility as possible in deciding how to operate the PPIFs, (4) avoiding the imposition of executive compensation restrictions on private parties who participate in the Legacy Loans Program,  (5) minimizing certain regulatory issues relating to ERISA and the Investment Company Act of 1940, (6) the resolution of certain tax issues that may arise depending on the structure of each PPIF, and (7) using standardized documents to make participation more attractive to smaller financial institutions.

 

The Auction Process.   Suggestions were made concerning the manner in which the FDIC should conduct auctions for loan pools.  Among these suggestions were (1) requiring assurance that transactions (as opposed to mere pricing exercises) would result from the auctions by use of reserve prices or other means, (2) allowing bidding on separate sub-pools within a loan pool, (3) using an initial round of preliminary indication of interest bidding, (4) using sealed bidding, and (5) considering use of privately negotiated transactions in some situations. 

 

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

TARP Capital Purchase Program to Re-open for Small Banks

This morning in a speech to the Independent Community Bankers of America, Treasury Secretary Geithner said that, using the proceeds of the repayments expected from some of the larger banks that received TARP funds, the Treasury will re-open the Capital Purchase Program application window for banks with total assets under $500 million for six months.

Small banks may apply, or reapply, and the limit is being raised from 3% of risk-weighted assets to 5% of risk-weighted assets.  Geithner also indicated that there will be an expedited approval process.

For further information, contact Allyn Dixon at adixon@dickinsonlaw.com or at 246-4520 or Howard Hagen at hhagen@dickinsonlaw.com or at 246-4543. 

Deposit Insurance Limits Legislation Approved in Senate

On Wednesday, May 6, the US Senate passed legislation to help prevent home foreclosures and ease access to credit.

The Senate approved the "Helping Families Save Their Homes Act" sponsored by Senate Banking Committee Chairman Christopher Dodd on May 6, 2009.

The Act seeks to assist troubled homeowners amend loan terms and extends the increased deposit insurance limits for bank deposits of up to $250,000 through 2013.

The Act would also increase the FDIC's permanent borrowing authority to $100 billion while allowing it to temporarily seek up to $500 billion in certain instances.

The bill also contains some lender protections from investor lawsuits, where lenders amend mortgage terms.

The House-passed version, which was approved March 5, 2009, must now be reconciled before a final bill can be sent to the President.

ABC's of Carbon Markets

Following is a link to a booklet on carbon markets produced by the Green Business and Sustainability Practice Group of Dickinson Mackaman Tyler & Hagen.  ABCs of Carbon Markets

The booklet includes descriptions of the various carbon/emissions trading platforms as well as a glossary of terms commonly used in carbon markets.

If you have any questions or would like to request copies contact Jeff Andersen. 

Ideas About the FDIC's Role in the Legacy Loans Program

The Federal Deposit Insurance Corporation (the “FDIC”) has received over 400 comment letters on its new program for the purchase of legacy loans (the “Legacy Loans Program”).  A review of several of these comments letters reveals the complexity of the issues that will be involved in the implementation of the Legacy Loans Program.  The comments address a large number of issues, including the role that would be played by the FDIC in making the Legacy Loans Program work. 

 

Some basic terms of the Legacy Loans Program are already rather clear. Under the Legacy Loans Program, the Department of the Treasury (“Treasury”) and private investors would contribute equity capital on a 1-for-1 basis to form Public-Private Investment Funds (“PPIFs”).  A PPIFs would purchase loan pools.  Such purchases would be funded using the PPIF’s equity capital and the proceeds of debt issued by the PPIF.  The PPIF could have a debt to equity leverage ratio of up to 6-to-1 with FDIC approval.  The FDIC would provide various managerial oversight services, including conducting auctions of the loan pools, and would guarantee the debt financing issued by the PPIF.  As currently proposed, the FDIC guarantee would be made on a non-recourse basis (secured only by the PPIF’s assets).  In connection with each completed transaction under the Legacy Loans Program, Treasury would receive warrants and the FDIC would receive an annual guarantee fee.  

 

Encouraging Participation.  A number of suggestions were made concerning the manner in which the FDIC could encourage participation in the Legacy Loans Program.  Some of these suggestions emphasized the importance of (1) promoting clarity and consistency with respect to the manner in which the Legacy Loans Program would operate and avoiding retroactive changes, (2) establishing reserve prices that would both encourage seller participation in auctions and assure potential buyers that if the reserve price were met there would be a commitment to complete the sale, (3) giving private investors as much flexibility as possible in deciding how to operate the PPIFs, (4) avoiding the imposition of executive compensation restrictions on private parties who participate in the Legacy Loans Program,  (5) minimizing certain regulatory issues relating to ERISA and the Investment Company Act of 1940, (6) the resolution of certain tax issues that may arise depending on the structure of each PPIF, and (7) using standardized documents to make participation more attractive to smaller financial institutions.

 

The Auction Process.   Suggestions were made concerning the manner in which the FDIC should conduct auctions for loan pools.  Among these suggestions were (1) requiring assurance that transactions (as opposed to mere pricing exercises) would result from the auctions by use of reserve prices or other means, (2) allowing bidding on separate sub-pools within a loan pool, (3) using an initial round of preliminary indication of interest bidding, (4) using sealed bidding, and (5) considering use of privately negotiated transactions in some situations. 

 

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.