Iowa Banking Law Blog

Update on Community Development Financial Institution (CDFI) Initiative

Yesterday the Treasury Department released additional details regarding enhancements to the Community Development Financial Institution initiative that was announced last October.  Under the CDFI program, institutions the Treasury has certified as targeting underserved communities in more than 60 percent of their small business lending and other economic development activities would now be eligible to receive capital investments at a dividend rate of 2 percent, compared to the 5 percent rate that was offered under the Capital Purchase Program (CPP).  Key enhancements to the program that were announced yesterday include the following:

• An Increase in the Maximum Amount of Capital Available to CDFIs: The program as outlined in October 2009 limited the amount of capital for which CDFIs could apply to 2 percent of risk-weighted assets. The final terms will allow institutions to apply for Treasury investments of up to 5 percent of risk-weighted assets, significantly increasing the potential impact on lending in low-income communities. (Credit unions can apply for an equivalent amount of total assets.)
• The Program Will Expand the Number of Eligible Institutions by Allowing CDFIs to Receive Capital from the Treasury Matched to Private Investments: CDFIs will need approval from their regulator to participate in this program. For CDFIs that might not otherwise be recommended for participation by their regulator, the Treasury will offer matching capital investments, up to 5 percent of risk-weighted assets, against private investments on a dollar-for-dollar basis, provided that the combined amount would return the institution to a viable position. This enhancement will allow the program to reach a broader range of institutions serving vital needs in their communities while protecting taxpayer interests.

For further information, please contact L. Allyn Dixon, Jr. at 515-246-4520 or adixon@dickinsonlaw.com.

Update on Community Bank Lending Initiative

A comprehensive summary of the Obama Administration’s just-announced “Small Business Lending Fund” program that would recycle TARP funds to help banks with $1 billion to $10 billion in assets lend to small businesses is available online at http://www.whitehouse.gov/the-press-office/president-obama-outlines-new-small-business-lending-fund.

 

According to various news accounts, the Administration is considering whether to include weaker banks, and Administration officials have said that Congress must limit conditions on executive compensation in order for the new program to attract banks.  Furthermore, Treasury Secretary Geitner has publicly remarked that the new proposal is needed to help get growth back on track and repair some of the damage caused by the financial crisis.

 

If you have questions, please contact L. Allyn Dixon, Jr. at 515-246-4520 or adixon@dickinsonlaw.com.

Details of New Community Bank Lending Program Announced Today

Following up on remarks made in last week’s State of the Union address, President Obama today revealed plans for a new “Small Business Lending Fund," under which community banks with assets between $1 billion and $10 billion could receive funds to support small business lending. 

 

To avoid some of the stigma associated with the TARP program, this program would be a completely new program, funded with $30 billion paid back from TARP recipients.

 

The fund would provide capital investments with an incentive structure to support new lending.  As presented today by the President, banks with less than $1 billion in assets could receive capital investments of up to 5% of risk-weighted assets, while banks between $1 and $10 billion in assets could receive up to 3%.  Banks’ primary regulators will approve applications, and existing Capital Purchase Program participants with less than $10 billion in assets could convert their capital to the new program.

 

The dividend paid on the capital would start at 5%, but could be reduced to as low as 1% as a bank demonstrates increased lending compared to a 2009 baseline.  For every 2.5% increase in business lending over a two-year period, banks would receive a 1% dividend decrease down to a minimum of 1%.  After 5 years, the dividend would be increased to encourage timely repayment.

 

We will keep you posted as further details emerge.  If you have questions in the meantime, please contact L. Allyn Dixon, Jr. at 515-246-4520 or adixon@dickinsonlaw.com.

Iowa Appeals Court Rules in Case Involving Collection of Debt After More Than Four Years of Inaction by Lender

The Iowa Court of Appeals recently entered a ruling which should be of general interest to lenders.  The case of U.S. Bank v. Anna M. Weems, filed January 22, 2010, illustrates that long delays in the enforcement of a promissory note and mortgage can raise questions as to whether the lender is entitled to enforce the note and mortgage, even when the enforcement action is filed within the 10 year statute of limitations applicable to written agreements in general.  Anna Weems made her last regular payment on a note and second homestead mortgage held by U.S. Bank in March of 2004.  Between the time of that payment and U.S. Bank’s lawsuit against her on the note and mortgage over four years later, the Bank charged off the loan, quit assessing late fees and made no attempt to collect the note.  During that four year period Weems had regular contact with the Bank, both in connection with the administration of her first mortgage loan (she kept up the payments on her first mortgage during that time) and in connection with “numerous” volunteer training seminars Weems conducted for Bank personnel.  Based on the fact that the Bank said nothing to her during that time period regarding the delinquent second mortgage note, Weems argued that the Bank had by its conduct “abandoned” or “waived” its right to enforce the note and mortgage.  The District Court disagreed, granting summary judgment in the Bank’s favor.

 

Lenders should take note that, although the Court of Appeals upheld the District Court’s ruling in favor of the Bank, the decision was based on a close (2 -1) vote of the appellate judge panel.  One of the three judges who decided the case wrote a dissent in which he concluded that Weems was at the very least entitled to a full jury trial on the issue of whether the Bank had waived its right to enforce the note and mortgage in question.  He found that “a jury might find that U.S. Bank waived its rights to foreclose on the second loan when it coaxed payments from Weems to apply to her first mortgage for four years while making no effort to collect her debt on the second mortgage secured by the same home.”

 

Current public sentiment regarding what some pundits have described as “abusive” mortgage lending practices is reason enough for any Bank to be very cautious about engaging in conduct which could result in a jury, rather than a District Court judge, deciding the Bank’s right to foreclose a mortgage.  This lesson of this case, notwithstanding the final result, is that a lender can actually jeopardize its ability to foreclose a mortgage lien by its failure to start a  foreclosure proceeding or to take some other action to collect the underlying note within some reasonable time period following the borrower’s default.    

If you have questions, please contact Jon Sullivan at 515-246-4522 or jsullivan@dickinsonlaw.com. 

Iowa Appeals Court Rules in Case Involving Court Challenge of Non-Judicial Foreclosure

The Iowa Court of Appeals recently entered a ruling which should be of general interest to lenders.  The case of Regions Bank v. City State Bank, filed December 30, 2009, makes it clear that “non-judicial” foreclosures may in fact be subject to judicial review, even where the foreclosure appears to have complied with the strict requirements of Iowa’ non-judicial foreclosure statute.  The borrower in that case deeded approximately 117 acres of real estate to City State Bank, the first mortgage lien holder, pursuant to a written non-judicial foreclosure agreement between City State and the borrower.  City State Bank then notified Regions Bank, a second lien holder, of its statutory right to redeem the real estate by paying City State the full amount of the mortgage debt.  Regions had no interest in paying the full amount of the Regions debt in order to redeem all 117 acres, but alleged in a lawsuit it filed to set aside the non-judicial foreclosure action that it had the right to redeem one specific lot located within the 117 acres by paying a fraction of the total indebtedness owed to City State.  Regions based that claim on an agreement between City State and its borrower which contemplated that City State would have released certain lots from its mortgage, had the borrower paid some of the funds it borrowed from Regions Bank to City State, in exchange for partial releases of its mortgage.

Although the District Court found that City State had complied with the express requirements of Iowa’s non-judicial foreclosure statute and therefore granted summary judgment in City State’s favor, the Iowa Court of Appeals reversed the District Court’s decision, finding that the District Court should have at least granted Regions Bank more time to gather facts in support of its case before granting summary judgment to City State.  The Court of Appeals did not dispute the District Court’s finding that City State had followed the statutory requirements for non-judicial foreclosure set forth in the Code.  Unlike the District Court, however, the Court of Appeals found that that City State’s compliance with those statutory requirements did not preclude further judicial review of the foreclosure, because the Court of Appeals could not “foretell what effect, if any, [the alleged agreement between the borrower and City State] would have on the foreclosure process without examining its terms.”

At a time when many lenders and their borrowers are finding Iowa’s non-judicial foreclosure process to be the most cost-effective and speedy method for foreclosure of real estate mortgages, many junior lien holders are disappointed to find that their liens can be extinguished upon thirty days notice without judicial oversight of any kind.  This ruling will provide ammunition to those junior lien holders who may feel that judicial review of a particular non-judicial foreclosure is warranted.

If you have questions, please contact Jon Sullivan at 515-246-4522 or jsullivan@dickinsonlaw.com. 

Protecting the Enforceability of a Loan Guaranty

Banks that rely on the enforceability of loan guaranties should be concerned about the decision of the Iowa Supreme Court in Spreitzer v. Hawkeye State Bank, No. 06-0877 (October 30, 2009).  In that case the Iowa Supreme Court concluded, among other things, that a guarantor justifiably relied on a lender’s oral statements that were contrary to the language in a standard form guaranty despite wording in the guaranty requiring that amendments be in writing.

 

A $1.5 million loan made to Walker Manufacturing (the “Company”) was the subject of a personal guaranty cosigned by two shareholders (the “Guaranty”).  The Guaranty was signed at a meeting at which Ray Glass, the president of Hawkeye State Bank in Iowa City (“the “Bank”), and the co-guarantors, Spreitzer and Ross, were present.  The Guaranty expressly stated that it was enforceable against either shareholder and could only be amended in writing.

 

When he signed the Guaranty, Spreitzer understood that he would only be personally responsible for $750,000 and that the Bank would pursue both co-guarantors in the event of a default.  Spreitzer testified that Glass told him that the Bank would collect the amount subject to the Guaranty “equally” in that event.   Spreitzer assumed that Ross had the means to satisfy his half of the debt and that this representation meant that the Bank would require Ross to pay his share.  In reality, Ross had arranged his personal assets in such a way as to limit his exposure to less than $100,000, a fact known to Glass but not disclosed to Spreitzer.  When its loan became due, Walker Manufacturing was unable to repay the Bank.  Although Spreitzer was able to settle his liability under the Guaranty for $750,000, the Bank collected nothing from Ross.  The Bank seized the assets of Walker Manufacturing in an effort to collect the amount never paid by Ross.  Spreitzer suffered substantial losses when his investment in Walker Manufacturing became worthless.  

 

The Iowa Supreme Court addressed many legal issues in this case, but some of its most instructive holdings are listed below:  

 

• An ambiguous representation does not necessarily preclude a claim for fraud.   
• Holding back material information can provide a basis for a finding that a representation was false when made.    
• Oral representations made about standard form documents in a face-to-face setting can provide a basis for a finding that the representations were not seen as involving a clear conflict with the written terms and that there was justifiable reliance on the oral statements.
• Holding back material information can provide a basis for an award of punitive damages. 

An enforceable guaranty can make a critical difference in the quality of a loan.  There are strategies that can reduce the risk that a guaranty upon which a lender has been relying will turn out to be unenforceable or could be deemed to have been obtained fraudulently.  Contact us if you wish to learn more about how to buttress the enforceability of your loan guaranties.

 

If you have questions, please contact Howard O. Hagen at 515-246-4543 or hhagen@dickinsonlaw.com or Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

Examination Resolutions for 2010

According to this FinCriAdvisor article, there are two primary concerns that will impact every bank’s examinations in 2010: asset quality and liquidity.  Your bank’s New Year’s resolutions will need to include steps to ensure your examiners are assuaged on both counts.

• Resolve to have credit. One FDIC examiner stated the most common reason for enforcement orders with stringent progress report requirements is credit issues. Asset values are being challenged by examiners as a result of the real estate impact on the market. The examiner’s suggestion to satisfy regulators? Take a look at your bank’s reserves, then add to them.
• Resolve to be liquid. Bank deposits are a cause for concern for regulators. If the stock market continues to recover, customers may want to pay down debt or invest in the market again, instead of making cash deposits. This may cause problems for banks to retain their deposit funding. The examiner’s suggestion to satisfy regulators? Make sure you have access to sufficient amounts of liquidity, and don’t rely on deposits.

The FDIC has reported it will be growing its risk management staff by about 31% and its total examination staff by 25%.  For more information, please contact Mary Zambreno at 515-246-4512 or mzambreno@dickinsonlaw.com.

Excellent Article Regarding How Banks Guard Against Shaky Vendors

FinCriAdvisor has an excellent article containing a list of eight ways to protect your bank when vendors are failing.  In sum, the eight strategies outlined in the article are as follows:

1. Audit the vendor’s financial statements regularly.
2. Require interim financial statements.
3. Review contracts for notice and orderly transition clauses.
4. Ask for status reports.
5. Visit the vendor periodically.
6. Review the vendor’s certificate for D&O and errors and omissions insurance.
7. Scrutinize the loan documentation.
8. Establish risk abatement protocols.

As stated in the article, post-Taylor Bean many community banks learned this lesson the hard way.  As with many governance and oversight issues, these suggestions may seem like common sense.  Common sense strategies, however, are often the first victims of inattention and unstable assumptions.  It is important to have policies and protocol in place regarding the continuing review of third-party vendor relations.

 

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

Is Your Institution Red Flag Compliant?

The FTC announced in late October that the enforcement deadline for the Identity Theft “Red Flags” Rule would be extended to June 1, 2010.  This extension should be viewed as an indication of the time required for financial institutions and creditors to implement identity theft programs in compliance with the Red Flags Rule, rather than a license to procrastinate.  The announcement of the deadline extension came amid discoveries by federal regulators and examiners that a handful of institutions still had not implemented or formalized their identity theft programs, just days before the previous deadline of November 1, 2009.  The Identify Theft Red Flags Rule was adopted two years ago by the OCC, the Board of Governors, the FDIC, the OTS, NCUA and the FTC.  The original mandatory compliance deadline was November 1, 2008.

 

The Red Flags guidelines require that financial institutions and creditors offering or maintaining “covered accounts” must develop an identity theft prevention program designed to:  1) identify red flags for covered accounts and incorporate those red flags into the program; 2) detect those red flags; 3) respond to the red flags; and 4) ensure the program is updated periodically to reflect any changes in the risks to the customer or to the institution.

 

To administer the program, steps must be taken to address misidentified covered accounts, a lack of security training for employees, and insufficient oversight of third-party service providers’ compliance with the rules.

 

The OTS, which has incorporated this program into its safety and soundness exam process, is reporting that some institutions have not performed a risk assessment, established a written program, or updated their program and materials.  OTS safety and soundness examinations typically occur once every 12-18 months, so it is anticipated that by the middle of next year all OTS institutions will have been examined for their compliance with the Red Flags Rule.

 

NUCA has identified 55 credit unions that have had violations, with a majority of those violations having to do with the failure to establish and implement an identity theft prevention program.

 

If you have questions regarding the Red Flags Rule, please contact Mary Zambreno at 515-246-4512 or mzambreno@dickinsonlaw.com.

Some Takeaways from the Policy Statement on Prudent Commercial Real Estate Loan Workouts

On October 30, 2009, the FDIC and other financial regulators released a 33-page Policy Statement on Prudent Commercial Real Estate Loan Workouts describing how examiners should evaluate the efforts of financial institutions to renew or restructure loans to commercial real estate (“CRE”) borrowers.  Some key points contained in this policy statement that should be of interest to lenders are set forth below:

• The policy statement applies to borrowers who “continue to be creditworthy customers who have the willingness and capacity to repay their debts” and is intended, among other objectives, to “ensure that supervisory policies and actions do not inadvertently curtail the availability of credit to sound borrowers.”
• Examiners are to take “a balanced approach” in assessing risk management in CRE workout situations.
• CRE workout arrangements that are “prudent” and that are based on a “comprehensive review of the borrower’s financial condition” should not be criticized “even if the restructured loans have weaknesses that result in adverse credit classification.”
• Such renewed or restructured loans that involve “reasonable modified terms” and “prudent underwriting standards” are not to be the subject of adverse classification solely because the collateral value has become less than the loan balance, and they “should not be adversely classified or criticized unless well-defined weaknesses exist that jeopardize repayment.”
• In connection with such renewed or restructured loans it may be necessary to obtain a new or updated appraisal that reflects “current project plans and market conditions that were considered in the development of the workout plan.”
• Assumptions that were recently made by qualified appraisers (and, as appropriate, by the lender) that are reasonable under the circumstances should be given a reasonable amount of deference by examiners.
• It may be permissible to enter into a “multiple note structure in which, for example, a troubled loan is restructured into two notes.” A note that is “reasonably assured of repayment and performance according to prudently modified terms...may be placed back on accrual status in certain situations.” A note “that is not reasonably assured of repayment (i.e., the second note) should be adversely classified and charged-off as appropriate.”
• Such renewed or restructured loans “need not be maintained in nonaccrual status” if “supported by a well-documented credit assessment of the borrower’s financial condition and prospects for repayment under the revised terms.” 

Each bank’s situation is unique and the policy statement should be reviewed carefully as to its applicability to specific loans.  In some instances, it may be necessary to confer with your primary federal bank regulator.

 

If you have questions, please contact Howard O. Hagen at 515-246-4543 or hhagen@dickinsonlaw.com or Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.