Iowa Banking Law Blog

Interim OTS Rule Bars Those Convicted of Certain Criminal Offenses from Holding Certain Positions with SLHC’s

The OTS is adopting an interim rule implementing section 19(e) of the Federal Deposit Insurance Act (FDIA).  The interim rule “prohibits any person who has been convicted of any criminal offense involving dishonesty or a breach of trust, or money laundering or has agreed to enter into a pretrial diversion or similar program in connection with a prosecution fur such an offense from holding certain positions with respect to a savings and loan holding company (SLHC).”  Link to Federal Register. 

The prohibited positions are as follows: (1) becoming or continuing as an institution affiliated party of an SLHC; institution affiliated party includes directors, officers, employees, controlling shareholders, anyone required to file a change in control notice, anyone who participates in the conduct of affairs of an SLHC as determined by the OTS, and any independent contractor (including attorneys) who knowingly or recklessly is involved in the violation of a law or a breach of duty; (2) any person who owns or controls an SLHC. 

The interim final rule describes procedures for applying for an order granting an exemption on a case-by-case basis.  The rule also contains two regulatory exemptions: a temporary exemption for persons holding a position with a SLHC as of the enactment of 19(e) of the FDIA and an exemption for employees involved solely in agriculture, forestry, public utilities, manufacturing, or retail merchandising. 

The rule is effective as of May 8, 2007; comments must by received by July 8, 2007.  A summary of the rule and the procedure for submitting comments can be viewed on the Federal Register link provided above.

For further information contact Howard O. Hagen.

Federal Reserve Issues Proposed Amendments to Regulation Z (Truth in Lending)

The proposed revisions apply only to open-end credit and would change the format, timing, and content requirements of: 1) credit card applications and solicitation disclosures, 2) account-opening disclosures, 3) periodic statement disclosures, 4) change in term notices, and 5) advertising provisions.  You can view a summary of the proposed changes and a section-by-section analysis at the Federal Reserve website, here.  Comments are being accepted until June 29, 2007 and can be submitted here.

Going Mobile: The Future of Banking?

It wasn’t too long ago when the thought of checking statements and paying bills online was a revolutionary concept.  But with the arrival of “mobile banking” (or the “mobile wallet,” as it has been referred to), online banking may soon become outdated.  According to a report published by Celent, it is estimated that by 2010, 35% of households that do online banking will be using mobile banking.  Mobile banking will not only enable customers to check statements and pay bills online through the use of their cellular phones, the FDIC reports that customers may soon also have the ability to make purchases and payments from their cellular phones, send money through a secure connection, and download money to their phone.  Celent also estimates that these transactions will comprise 10% of the contactless market by 2010.  Apparently, mobile banking is of great interest to members of Generation Y (i.e. 18-25 year olds), with 40% of this population indicating that mobile financial services would be a factor to consider when selecting a bank.  However, given the frequency of lost or misplaced cellular phones, one obvious concern would be how to protect against unauthorized access to a customer’s bank account.

For further information contact Mary A. Zambreno at Dickinson, Mackaman, Tyler & Hagen, P.C.

Wal-Mart Enters Investment Services Market--House to Vote on Bill Barring Retailers from Operating Own Bank

After withdrawing its bid to start an industrial bank in March, Wal-Mart announced that it will offer discount brokerage services.  Wal-Mart will team with ShareBuilder Corp., a Bellevue, Washington-based discount brokerage in what is sure to be the first of many Wal-Mart ventures into the financial services market.  Link to Wall Street Journal article. (subscription required for full article).  On the Wal-Mart website it is described as "Wal-Mart Easy Investing by ShareBuilder."   

In other Wal-Mart news, the House is scheduled to vote today on a bill barring retailers such as Wal-Mart from opening their own banks.  The bill would "block non-financial companies from setting up or owning so-called 'industrial loan corporations,' which can issue credit cards, make loans and, in some cases, take deposits."  http://www.businessweek.com/ap/financialnews/D8P8N38G1.htm.  A similar bill passed the House last year, but ultimately stalled in the Senate.

For more information contact Howard O. Hagen or Jeffrey J. Andersen.

Is Your Bank in Compliance with the National Flood Insurance Act?

On May 16, 2007 the Federal Reserve Board assessed a civil monetary penalty against Orrstown Bank of Shippensburg, Pennsylvania for violating the National Flood Insurance Act, 42 U.S.C. §4012a(f).  Link.  The bank was fined $385 for each violation, for a total of $1,665.  The banking community should be on notice that federal bank examiners are looking for National Flood Insurance Act violations and that the Federal Reserve will assess civil penalties for violations. 

The National Flood Insurance Act basically states that a lender subject to federal regulation cannot make or extend any loan secured by either real estate or a mobile home located in an area identified as having special flood hazards and in which flood insurance is available unless the principal balance of the loan is covered by flood insurance for the term of the loan.  If the relevant area is identified as having special flood hazards after origination of the loan the lender must give the borrower notice that he or she should obtain flood insurance.  If the borrower fails to do so within 45 days, the lender is required to purchase flood insurance and may charge the borrower for the cost of the premium.  The Act also has provisions regarding escrow of flood insurance payments and the placement of flood insurance by the lender. For the complete text of the relevant statute see 42 U.S.C. 4012a.   

UPDATE:  Since this was originally posted, the Federal Reserve has assessed civil penalties against East West Bank (Link), and First Sentinel Bank (Link) for violations of the National Flood Insurance Act.

For further information contact Jeffrey J. Andersen.

Virtual Banks in a Virtual World

On May 3, 2007 five virtual bank licenses were sold for a total of $404,000.  These licenses give the respective buyers the exclusive right to engage in banking activities on Entropia Universe.  Entropia Universe, similar in many ways to Second Life, is a “massive online virtual universe . . . set in a distant Sci-Fi future.”  http://www.entropiauniverse.com/en/rich/5035.html.  “Players” on Entropia create an online identity, called an “avatar” and explore, hunt, and interact with other, among other things—all while in front of their computer.  By hunting, collecting, mining, opening a virtual business, etc. players can earn Entropia currency, called PED.  There is a fixed 10 to 1 exchange rate between PED and U.S. dollars and players can easily exchange dollars for PED’s or vice versa.  With their PED’s, players can by tools, weapons, or virtual real estate in the Entropia Universe. 

So where does a bank come in, and why would anyone pay nearly $100,000 dollars for a mere license to bank in this virtual arena?  The answer is simple—because real money can be made.  There are over 500,000 registered users on Entropia Universe and in 2006 $350 million dollars was exchanged for PED, the virtual Entropia currency.  These virtual banking licenses allow owners to lend money and collect interest from Entropia players, using virtual Entropia property as collateral. 

Like real world banking, virtual banking is not cheap.  After purchasing the 2 year exclusive license, bank owners must plunk down $100,000 (1 million PED) of working capital to open the bank.  Virtual bankers must also pay a monthly rent for the virtual building, and 5% of all interest charged.

This fascinating development raises many questions.  Who regulates these virtual banks?  What laws apply?  Will these bold investments payoff?  And finally, if a virtual market collapses in a virtual universe does anyone hear it?  Only time will tell. 

For more details see the following link:  http://www.entropiauniverse.com/en/rich/6357.html 

For more information contact Jeffrey J. Andersen.

Letters of Credit Rules to Change July 1

On July 1, 2007, new rules regarding Letters of Credit become effective.  The new Uniform Customs and Practices for Documentary Credits (2007 Revision), referred to as UCP 600, will replace the 1993 revision known as the UCP 500.  U.S. banks issue billions in commercial letters of credit every year, thus performing a very important role in international trade.  Most of the commercial letters of credit are issued “subject to the UCP 500.”  The change to the new rules will therefore have a big impact on the policies and practices of banks that issue or accept Letters of Credit. 

The new rules will have many changes.  One important change is the establishment of an absolute five calendar day deadline to examine documents and pay or reject a draw.  The UCP 500 merely required the issuing bank to make a decision within a reasonable period of time.  Further, the UCC gives banks “a reasonable time, not to exceed seven business days.”  UCC § 5-108.  Banks must be aware of the new UCP 600 absolute five calendar day rule.

The UCP 600 makes other important changes, including new rules for determining the enforceability of issuer-proposed amendments, new rules regarding the addresses of applicants and beneficiaries, and new definitions of terms. 

Banks that issue or accept Letters of Credit should review the new rules before July 1, 2007, as the new rules may soon be deemed customary credit practice.  Furthermore, in light of the changes to the UCP, banks should evaluate their use of the UCP for standby Letters of Credit and consider if a change to ISP98 would be beneficial.