Iowa Banking Law Blog

Eight Circuit Confirms Blanket Bankers Bond Does Not Cover Bank's Losses

In a recent case, Ohio Savings Bank (“OSB”) sought indemnity for losses under a bankers blanket bond issued by Progressive Casualty Insurance Co. (“Progressive”).  OSB incurred losses after buying loans which went into default as the result of the actions of the party who had sold the loans to OSB.    The Eighth Circuit confirmed this month that the blanket bond did not cover the losses.

The bond did not cover losses resulting from normal lending activities, but there were two exceptions to the exclusion.  OSB argued that the losses were covered under a rider entitled, “Fraudulent Mortgages Insuring Agreement (‘FMIA’),” and that the losses were covered by “Insuring Agreement (E).”  The Eighth Circuit rejected both arguments.

Regarding FMIA, the Eighth Circuit limited application of FMIA to cover losses from a mortgage “defective by reason of the signature thereon,” which failed to provide a security interest because the mortgagor was tricked or defrauded as to the nature of the document signed.  As the borrowers admitted that they understood they were signing mortgages to encumber their property, the mortgages were not defective.  Thus, OSB was not covered for losses which resulted simply by the borrowers’ refusal to pay their mortgage notes.

With regard to Insuring Agreement (E), this provision was held to cover losses resulting when an instrument is lost or stolen from its rightful owner and then used to persuade a bank to extend credit.  As the mortgages in question were the borrowers’ mortgages, and the original documents were not lost until after OSB relied on what was assigned in extending credit to the borrowers, OSB’s losses were not covered.  The Eighth Circuit held that losing collateral documents after a loan was made is precisely the sort of practice that is excluded from coverage by a bankers blanket bond.

FDIC Home Ownership Preservation Loan Proposal

The FDIC has recently proposed that Congress allow the Treasury Department to make loans to borrowers with unaffordable mortgages to pay down up to 20% of principal, with the repayment and financing costs to be borne by mortgage investors and borrowers in an effort to stabilize mortgage and home prices and reduce foreclosures.

Under the proposal, borrowers would have to repay their restructure mortgage and the loan made under the program.  Mortgage investors would pay Treasury's financing costs and agree to certain concessions on the mortgage.  Treasury would have a superior lien to the mortgage investor's interest for the amount of its loan from any proceeds.

Also, mortgages in the program would be restructured into fully-amortized, fixed rate loans for the balance of the original term and the new interest rate would be capped at Freddie's 30-year fixed rate.  A maximum 35% debt-to-income ratio for all housing related expeneses would have to be met, and prepayment penalties, deferred interest, or negative amortization would not be allowed.  For the first five years, interest due on the loans would be paid by the mortgage investors, and thereafter borrowers would begin repaying at fixed Treasury rates.  Servicers would be required to agree to period special audits by bank regulators.

To fund the program, Treasury would offer $50 billion in public debt, which Treasury believes would fund modifications of approximately 1,000,000 loans.

The program would apply o those owner-occupied residential loans that had front-end debt-to-income ratios that exceeded 40% at origination, are below the FHA conforrming loan limit and were originated between January 1, 2003 and June 30, 2007.

For further information, contact Allyn Dixon at 515.246.4520.

State Bank Acquistion of Interest in Wind Energy

On May 1, 2008, the Governor signed Senate File 2405 into law.  SF 2405 provides for state bank acquisition of an equity interest in wind energy production facilities and eligibility for production tax credits.  It also permits manufacturing facilities to acquire such credtis for on-site consumption of wind energy.  The new Act will amend Chapter 476B and 476C of the Iowa Code.

A bank's ability to take a financial position in a wind facility is subject to some conditions: 1) creditworthiness review; 2) the bank may not participate in the operation of the facility or the production or sale of energy; 3) if the facility does not perform as projected the bank may sell its interest or liquidate; 4) the bank may not share in any appreciation in value of its interest or in the customer's assets; 5) at the end of the maximum 10 year holding period, the bank must sell at book value. 

In Interpretive Letters 1048 and 1048a the OCC approved a bank's acquisition of an equity interest with similar conditions.  The OCC concluded that a bank's acquisition of such interests was an integral part of an authorized banking activity.

For a copy of S.F. 2405, click here (redirect to Iowa Legislature site).

If you have any questions regarding this law, contact Paul Horvath at Dickinson Mackaman Tyler & Hagen, P.C.

OTS Authorizes Establishment of Foreign Subsidiary; Employment Articles

I neglected to post a link to the January / February Community Bank Brief.  Click here for a pdf of the newsletter, which contains an article on the OTS's approval of a federal savings bank's application to establish an operating subsidiary in China, among others. 

Also, here is a link to the labor and employment law newsletter, Hire Perspectives.  It contains articles on email policies, pre-employment testing, and FMLA absences for substance abuse treatment. 

Iowa LLC Blog

As you may know, Iowa is one of the first states to adopt the Revised Uniform Limited Liability Company Act.  Effective January 1, 2009 the new Iowa Code Chapter 489 will take effect.  Marc Ward, who chaired the LLC Committee of the Iowa State Bar Association, has started a blog with insights into the new law.  The new law will have implications on how banks handle LLC customers and how banks handle their own LLC subsidiaries.  Visit the site here: www.iowallcblog.com. 

Uk Rules that Overdraft Fees Can be Judged for Fairness

Overdraft fees have been a point of contention for consumer groups in the U.S. for some time now.  There have been claims that overdraft fees are not adequately disclosed at the time accounts are opened, and claims that debit transaction should be rejected at the point of purchase instead of charging an overdraft.  The UK has similar issues.  In a recent case, a UK judge decided that the Office of Fair Trading can rule on the fairness of overdraft charges and hold UK bank liable for unfair charges.  The OFT claims that many banks charge overdraft fees of up to 39 pounds when the cost to the bank for the overdraft is 2 pounds or less.  This could put UK banks on the hook for hundreds of millions of dollars in overdraft charges.  It could also open the door to high consequential damages claims -- [you charged me an improper overdraft which caused me to miss my rent payment which caused me to have to incur credit card debt to cover bills which caused me to incur thousands in interest.  Because of the $15 overcharge, you caused me $10,000 in damages].  UK banks generate 3.5 billion pounds from overdraft charges a year. 

Banking law in the UK is very different from banking law in the US so there is no cause for panic.  It is nonetheless an interesting issue and decision that could have some impact in the U.S.  See BBC article for more.   

Is LIBOR Accurate?

The Banking Law Prof Blog has a brief discussion and link to a Wall Street Journal article suggesting that LIBOR (the London inter-bank offered rate) may be artificially low.  Banks in trouble may have been reporting lower rates for inter bank borrowing because they don't want to own up to their actual financial condition.  See Banking Law Prof Blog Article.  So, consumers had been puffing their credit to get home loans, if they are even asked.  Unregulated mortgage brokers puffed, or neglected to fully explain, the financial terms of mortgages they were handing out left and right.  These loans were then securitized and sent down the line.  Now, after those loans went south, partially causing our current economic "slow down," institutions are puffing the interest rate they are getting?  Is the state of the economy being puffed to us?  Let's hope all the huffing and puffing doesn't blow this house down.   

Fed Approves Energy Managment and Tolling

The Royal Bank of Scotland submitted an application with the Board of Governors to engage in physical commodity trading, energy management services, and energy tolling.  The Board stated that it had previously found physical commodity trading and energy management services to be complementary to the financial activity of engaging in commodity derivatives transactions and investment advisory services.  The Board had not considered energy tolling before.  it found that energy tolling is an outgrowth of the financial activity of commodity derivatives transactions and allows the Financial Holding Company to hedge its energy positions and those of its clients.  The vague "complementary to a financial activity" standard has seemingly been interpreted broadly; it will be interesting to see where the lines will be drawn.      

Subpoena Scam

If you get an email purporting to be a Subpoena in a Civil Case in California Federal Court do not open the attachment and do not click on any links in the email.  There is a virus going around that is masked as a subpoena.  We were forwarded such an email from an Iowa financial institution client today and want to make sure no banks fall victim.  Out of state subpoenas are generally not enforceable unless they go through an Iowa court first and they would probably not be sent via email.  Nonetheless, we have encountered out of state subpoenas that appear to be bogus and were merely faxed to a client, but turned out to be linked to a real case.  If you have any questions as to whether a subpoena or email is for real, contact your legal counsel.  Let them open it. 

The case number on the bogus subpoena we encountered was 28-913-FRG.  The purported issuing officer and address was:  O'Mevely & Meyers LLP; 400 South Hope Street, Los Angeles, CA 90071. 

Hiatus Over -- Legal Advice

The Iowa Banking Law Blog has admittedly been sleeping on the job lately.  The blogging job, not the practice of law job.  Anyway, the hiatus is over, you can expect more regular posts from now on.  We return with some legal advice.  You can ignore the disclaimer on this one--and only on this one.  Ready.  Here it is.  Do not act like this CEO of a subprime mortgage company in a deposition.  Warning, the excerpts from the deposition transcript does contain some foul language.  The CEO and his attorney were fined $29,000 for the behavior, which included dropping the F-word 73 times.  I found this article on the Bank Lawyer's Blog.

That will be the last instance of legal advice you can rely on here.  Back to substantive banking law news from here on out.