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.

Dealing with the Unresolved "Too-Big-to-Fail" Problem

Articles that appeared recently in The Financial Times and on Bloomberg.com highlighted the systemic problems that arise when financial entities are deemed too big to allow to fail.  As the first anniversary of the failure of Lehman Brothers Holdings, Inc. is being observed, there seems to be no plan to address this aspect of the financial crisis.  Ironically, the financial crisis has resulted in even greater concentration.  There is a danger that the new motto of market participants will become “Being too-big-to-fail means never having to say you’re sorry. . . and never having to admit you were wrong.”    

 

In their opinion article in The Financial Times, John McFall (Chairman of the Commons Treasury Committee) and Philip Augar (a former investment banker and the author of Chasing Alpha) advocate breaking up “a defective business model,” which they described using the following colorful language:

               

"Conflict of interest is embedded and this is unfair on other market users.  It is 'heads we win, tails you lose' as the banks make off like bandits in the good times and become pious onlookers as the taxpayer foots the bill when it all goes wrong." 

 

The article in Bloomberg.com is entitled “Lehman Monday Morning Lesson Lost with Obama Regulator-in-Chief," and it points out that the Obama Administration’s Plan for a financial regulatory overhaul would not force the largest financial entities “to shrink or simplify their structure.”  The article includes the following interesting quotations:

• Niall Ferguson, a professor of history at Harvard University, is quoted as follows: “The system is essentially unchanged, except that post-Lehman, the survivors have ‘too big to fail’ tattooed on their chests.”

• Simon H. Johnson, a former chief economist at the IMF, described the Obama Administration’s proposal as follows:  “The biggest problem is it doesn’t deal with too-big-to-fail.  It doesn’t say anything.  You have to make things a lot smaller.”

• Former Federal Reserve Chairman Paul A. Volcker argued in a speech delivered on April 8, 2008, that a “demonstrably fragile financial system that has produced unimaginable wealth for some, while repeatedly risking a cascading breakdown of the system as a whole, needs repair and reform.”

• FDIC Chairman Sheila Bair told the Senate Banking Committee in May of 2009 that a financial system “characterized by a handful of giant institutions with global reach and a single regulator is making a huge bet that those few banks and their regulator over a long period of time will always make the right decisions.”   

• Camden R. Fine, President of the Independent Community Bankers of America, asked “Does anyone think it’s a coincidence that less than 10 years after they repealed Glass-Steagall, the financial markets collapsed?”

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

Some Unfinished Business of the 2008 Financial Crisis

Now that Warren Buffett has opined in The New York Times that a meltdown was avoided and the economy is now out of the emergency room, it may be a good time to consider how many issues remain unresolved in the aftermath of the economy’s near death experience last fall.  An overview of these issues was provided earlier this year in Jamie Dimon’s letter to shareholders of JPMorgan Chase & Co. (available at www.jpmorganchase.com).  Set forth below is a partial list of the issues identified by Jamie Dimon, all of which, to one degree or another, could fuel a future crisis:

 

·         Poor underwriting standards that expanded the housing bubble

·         Use of poorly designed financial products (like option ARMs)

·         Poorly constructed securitizations

·         Unrealistic ratings provided by rating agencies

·         Dishonesty by some participants in mortgage markets

·         Excessive use of leverage by various market participants

·         Unbalanced reliance on short-term financing to support illiquid, long-term assets

·         Money market funds problems in responding to unforeseen demands for liquidity

·         Lax terms for the financing of liquid assets 

·         Lack of regulation of mortgage brokers

·         Lack of regulation of excessive derivatives activities by insurers

·         Inadequate regulation of Fannie Mae and Freddie Mac

·         An inadequate resolution process for failure of investment banks

·         Pro-cyclical regulatory policies

·         Excessively low interest rates and risk premiums

·         Compensation practices that rewarded bad behavior

·         Lack of a sound energy policy leading to high energy prices

 

The Obama Administration has delivered to Congress a comprehensive package of financial regulatory reform legislation that addresses many of these issues.  As was pointed out in an earlier article here, the reforms involved are politically difficult because of the interests of market participants, regulators and Congressional committees in preserving existing regulatory jurisdictions and objectives.  Whatever legislation ultimately emerges from Congress is unlikely to fully cure all the imbalances in our economy and our financial system.  Although such major reforms require careful deliberation, there is a risk that the 2008 financial crisis could recede into history with little being done to protect against a repetition of the kind of events that placed the financial system and the economy at risk of collapse.

Small Bank Tax Equity Act

Senators Orrin Hatch and Blanche Lincoln have introduced legislation that would allow state-chartered banks operating as LLCs to be taxed as an LLC by the IRS.  Currently, banks organized as LLCs are taxed as a corporation by the IRS. 

Many states, including Iowa, allow banks to be organized as LLCs.  These states allow LLC banks to be taxed as a partnership, avoiding the double taxation for corporations.   

Both the American Bankers Association and the Independent Community Bankers of America support the bill. 

A copy of the bill can be found here.

PROPOSED LEGISLATION ON ISSUING UNFAIR AND DECEPTIVE PRACTICES RULES

The House Committee on Financial Services recently introduced proposed legislation - H.R. 3526 sponsored by Representative Barney Frank (D-MA) - that would enable all banking agencies to write rules governing unfair and deceptive practices pursuant to the Federal Trade Commission Act.  Currently, only the Federal Reserve Board, the Office of Thrift Supervision and the National Credit Union Administration had this rulemaking authority.  The proposed bill would now allow the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to also issue rules regarding unfair and deceptive practices for those institutions that they each oversee.

While some would argue that the proposed legislation is advantageous because it creates more protections for consumers - for example, credit card practices at national banks overseen by the OCC can be regulated to prevent unfair and deceptive practices - opponents of the bill argue that it would deprive the Federal Reserve of its industrywide authority.

A copy of the full text of the bill can be found here. LINK

When Federal and State Law Collide in Garnishment Procedures

The Agencies have issued a proposed guidance concerning garnishment orders received by financial institutions.

Generally, federal law protects certain federal benefits – such as Social Security, Supplemental Security income, Veterans’ benefits, Federal Civil Service retirement benefits, and Federal Railroad retirement benefits – from inclusion in garnishment orders.  Unfortunately, however, when garnishment orders are sought in state court by creditors and debt collectors, either some orders may not provide that certain funds are exempt from garnishment due to federal law or the customer’s account is a commingled mixture of exempt and non-exempt funds.  Financial institutions, in an effort to comply with the state court order, typically put a freeze on the account until the issue can be resolved but because these exempt federal benefits are sometimes the only source of income for individuals, even a temporary freeze on the account can wreak havoc on an individual’s financial security. 

The proposed guidance is intended to solicit comments regarding how to comply with both federal and state laws.  The proposed guidance also proposes best practices, such as promptly notifying the customer of a garnishment order, determining whether accounts contain only exempt funds, notifying the creditor that the account may contain exempt funds, minimizing the cost to the customer by refraining from charging certain fees, and lifting the freeze as soon as permissible.

Comments can be made via the Federal Reserve’s website or by email, fax, or snail mail.

For further information contact Mary Zambreno.

No Farm Credit System Expansion in 2007 Farm Bill

On Thursday, the House approved an amendment to the 2007 Farm Bill removing expansionist Farm Credit System provisions that may have allowed the FCS to move into commercial and residential lending.  State and National Bankers Associations lobbied hard for this amendment and consider it a significant victory.  Anyone who has seen Schoolhouse Rock, however, knows that this is “Just a Bill” and has a long way to go before becoming the law.  For those under 40, here is a link to the YouTube video of Schoolhouse Rock's “I’m Just a Bill”).