Category Archives:Financial Law

Consequences of Election

The trade associations and the trade journals have all made their prognostications as to the consequences of a Trump administration with a Republican majority in both the House (solid) and Senate (slim). The following is a review of the potential actions that could result from this new regime.
CFPB. While we would all like to put that genie back into the bottle, unwinding the agency appears unlikely to me. To create it, the Fed, FTC, and HUD all dismantled their consumer compliance rulemaking and interpreting sections. Some experts retired while some moved over to the CFPB. All of the rule-making functions were shifted to the CFPB. I suspect that it is unlikely that this function will be de-centralized with all of those divisions re-created. Also, I am skeptical that the Fed would get back its consumer regulation writing authority given some of the animosity that Trump has expressed toward the Fed! However, there are several other possible scenarios that seem very likely.
First, President Trump could take the DC Court of Appeals at its word and dismiss Director Cordray, with or without cause. The PHH decision “cured” the constitutional defects in the organization by concluding that the president should be able to remove him without cause. Alternatively, perhaps the extremely high-handed approach taken by this director could support a finding of “cause” to remove. The refusal to acknowledge the statutes of limitation applicable to various laws and the punitive use of penalties as well as retroactive changes in the game rules all are highly offensive and might support a “cause” finding.
Second, a Republican majority Congress could finally enact meaningful change to the agency by replacing the single director with a multi-party commission, more accountable to Congress.  In addition, the open pocket book should be slammed shut!
Executive Orders. Trump has promised to rescind Obama’s Executive Orders on “day one.” There are several relating to federal contractors that have been troubling to banks. These include rules relating to minimum wage and diversity rules. Not all applied to banks, however.
Employment Issues. The Obama DOL reversed the Bush DOL on the rules for exemption of mortgage loan officers. I could envision this interpretation swinging back around. In addition, DOL significantly increased the salary test for the exempt categories. I could see those getting cut back at least somewhat. The banking regulators have been asking banks with more than 100 employees for their diversity plans. That was part of the Dodd Frank Act but is not well articulated.  I would like to see that de-emphasized as well.
Arbitration. The CFPB clearly does not like arbitration. Its rule-making would eviscerate this remedy, arguably in contravention of the Federal Arbitration Act. The Dodd Frank Act only prohibits mandatory pre-dispute arbitration in residential mortgages and authorizes a study of other scenarios. This is another area that should be reined in.
Overdraft Programs. The CFPB has this on its agenda but has done very little work on it as of this writing. In a meeting I participated in this spring in Washington, it was painfully clear that Cordray doesn’t understand the difference between an ad hoc program and an automated one. It is also clear that the CFPB wonks don’t grasp the fact that their rules (like the small dollar loan proposal) would actually reduce credit availability and make it more costly. Similarly, strict limits on overdraft privilege would eliminate a cheap source of credit for many.
Residential Mortgage Rules. This area is extremely complex. The CFPB actually put into place rules with more flexibility than the statute. They could do this under their authority to create flexibility where appropriate. And integrating Truth in Lending and RESPA disclosures instead of having two sets of inconsistent documents is not a bad thing. Industry has invested millions of dollars and untold time into making TRID work. Unraveling it at this point would be hugely expensive.
By contrast, implementing more flexibility in the ability to repay rules would make sense. Both the statute and the rules make it hard for self-employed and high net worth customers to qualify for credit!
Basel III. It appears that European banks may thumb their collective noses at the changed and increased capital requirements. Thus, it doesn’t make sense for American banks to be hamstrung by these rules. While many of the pending Fed rules would primarily apply to the largest banks, the existing HVCRE requirements are having a negative impact on interim construction financing, hurting both lenders and the economy.
Taxes. This appears to be the area of greatest potential for meaningful reform. The changes in brackets and rates would be straight-forward, real relief. And, this has the potential to stimulate meaningful economic activity.
Fair Lending. Although the US Supreme Court held that the Fair Housing Act enforcement can use statistical analysis to find “disparate impact,” it has not applied this to the Equal Credit Opportunity Act-which has different statutory language. I believe that there is an opportunity here to rein in arbitrary actions by the banking regulators and the Department of Justice. Again, these have had the perverse effect of restricting credit availability in the pursuit of “cookie cutter” lending standards and terms.
Recent redlining rulings-which have been agreed to without trial-have forced banks to put branches in locations identified by the regulators or DOJ. This is antithetical to the concept that banks must also answer to their shareholders. It effectively converts banking into a kind of utility. All of this is the result of prosecutorial privilege rather than clear rules. This could be dialed back with appropriate appointments, I think.
ADA. Banks are being threatened with lawsuits over accessibility of their websites by the blind and visually impaired. Yet DOJ has stated that it will not provide rules for such websites until sometime in 2018. Right now industry doesn’t know which standards will be imposed, but they are liable for failing to meet them! DOJ has supported these lawsuits with amicus briefs but has not supported business by providing answers. Again, the right appointments could clarify this murky source of liability.
Conclusion. With judicious appointments and repeal of certain executive orders, Trump can significantly reduce some of the regulatory burden that is a headwind, slowing economic growth. For more information contact: Karen Neeley.

Kennedy Sutherland Named a 2017 'Best Law Firm' by U.S. News-Best Lawyers

Kennedy Sutherland LLP is pleased to announce that it has been named a “Best Law Firm” by U.S. News – Best Lawyers for 2017, achieving national Tier 1 rankings in the practice area of Financial Services Regulation Law.

“Kennedy Sutherland LLP has taken great pride in advising financial institutions on regulatory compliance and enforcement, complex transactions and other expansion activities and banking laws for over 30 years. It’s an honor to have our clients and peers include us in this distinguished group for the work we’ve done” said Patrick J. Kennedy, Jr.

Firms included on the “Best Law Firms” list are recognized for professional excellence with persistently impressive ratings from clients and peers. Inclusion in the rankings signals a quality law practice and breadth of legal experience and knowledge.

About “Best Law Firms”: The U.S. News – Best Lawyers® “Best Law Firms” rankings are based on a rigorous evaluation process that includes the collection of client and lawyer evaluations, peer review from leading attorneys in their field, and review of additional information provided by law firms as part of the formal submission process. To be eligible for a ranking, a law firm must have at least one lawyer listed in 23rd Edition of The Best Lawyers in America© list for that particular location and specialty.

About U.S News & Best Lawyers: U.S. News Media Group publishes the monthly U.S. News & World Report magazine and its signature franchises include its “America’s Best” series of consumer guides that include rankings of colleges, graduate schools, hospitals, health plans and more. Best Lawyers is the oldest peer-review publication in the legal profession. For over a quarter century, the company has helped lawyers and clients find legal counsel in distant jurisdictions or unfamiliar specialties.

 

Attorneys Recognized by Best Lawyers in America©

Kennedy Sutherland LLP is pleased to announce two attorneys have been named to the 2017 edition of The Best Lawyers in America©. Best Lawyers is an annual ranking designed to capture the opinion of leading lawyers about the professional abilities of their colleagues within the same geographical and legal practice areas.

The following lawyers were recognized by Best Lawyers as leaders in their field in the 2017 edition:

Each year, only a single lawyer in each specialty in each community is honored as the “Lawyer of the Year.” Kennedy Sutherland’s senior attorney, Karen M. Neeley, was selected Best Lawyers® 2017 Banking and Finance Law “Lawyer of the Year” in San Antonio, Texas.

Mr. Kennedy’s practice focuses on the representation of banks, bank holding companies and other financial intermediaries. For over 34 years Kennedy has represented these entities and their shareholders, directors and officers in a broad range of matters, including mergers and acquisitions,  S corp elections, ESOP and bank holding company formations, Community Reinvestment Act strategy, strategic planning, corporate governance and  state and federal banking law compliance. In addition, Mr. Kennedy’s practice includes representation of banks as well as project sponsors utilizing state and federal  tax credit  programs  including Historic Tax Credits, New Market Tax Credits, Renewable Energy Tax Credits and low income housing tax credits.

Ms. Neeley has provided legal services to community banks throughout Texas and beyond for over 30 years. In addition to serving as General Counsel for the Independent Bankers of Texas, she is an advisory director for the Texas Association of Bank Counsel. Routinely, Neeley advises banks on regulatory compliance, examination preparation, policies and procedures and has special expertise in Bank Secrecy Act, fair lending and consumer compliance matters.

First published in 1983, Best Lawyers® lists are compiled based on an exhaustive peer-review evaluation. Lawyers on The Best Lawyers in America list are divided by geographic region and practice areas. They are reviewed by their peers on the basis of professional expertise, and undergo an authentication process to make sure they are in current practice and in good standing. For the 2017 Edition 7.3 million votes were analyzed.

Government Contracts: Certificate Of Interested Parties

Effective for Texas government contracts entered into after January 1, 2016, businesses that contract with governmental entities must file a certificate of interested parties.

Scope.  This applies to any government contract with a “value” of over $1MM or which “requires an action or vote by the governing body of the entity or agency before the contract may be signed.”   There is no clarification as to the meaning of “value.”  Neither is there any clarification as to application to various business arrangements which do not have signed contracts. “Contract” would include financing arrangements as well as public fund depositary agreements.  Thus, credit transactions are covered (e.g. school bus finance lease, loans to purchase vehicles, etc.).

For purpose of this law, “governmental entity” means a municipality, county, public school district or special purpose district or authority.  The rule also applies to state agencies. The term “business entity” means any entity recognized by law through which business is conducted.  This would include banks.

Rulemaking. The law (Section 2252.908 Gov Code) gives the Texas Ethics Commission the authority to promulgate rules to implement it including authority to prescribe the disclosure form, which it has done.

Process.  The law and rules require the following steps:

  1. Business entity submits a disclosure of interested parties to the Texas Ethics Commission (TEC).  This is an online form, completed electronically.
  2.  Business entity prints a copy of the completed form, which will include a certification of filing from the TEC with a unique certification number.
  3. Authorized agent of the business must sign the printed copy of the form and have it notarized.
  4. Completed form with certification of filing must be filed with the governmental entity or state agency.
  5. The governmental entity or state agency notifies the TEC, using the TEC’s filing application, of the receipt of the disclosure form not later than the 30th day after the date the contract binds all parties to the contract.
  6. TEC posts the completed form to its website within seven business days after receiving notice from the governmental entity or state agency.

Contents of Business Disclosure.  The business disclosure must include a list of each “interested party” of the business.  “Interested Party” includes a person who has a controlling interest or who “actively participates in facilitating the contract or negotiating the terms of the contract.” This includes a broker, intermediary, adviser, or attorney for the business.   The rules-not the statute-define “controlling interest.”  This includes an ownership interest that exceeds 10%, directors if the board consists of not more than 10, and the four most highly compensated officers.  The rules clarify that an intermediary is one who actively participates in the facilitation or negotiation who–

  1. Receives compensation from the business entity for his participation
  2. Communicates directly with the governmental entity or state agency on behalf of the business entity AND
  3.  Is NOT an employee of the business entity.

Impact on Contract.  The law says that the governmental entity or state agency “may not enter into a contract” unless the disclosure of interested parties is made.  This creates the question of whether or not a contract entered into without such disclosure is void or voidable or effective regardless of the filing.

Impact on Banks.  This new law would appear to apply to all public fund agreements.  Although it is difficult to determine the “value” of such agreements, they are acted on by the governmental entity.  A bank’s cashier/COO who negotiates such an agreement would not be an intermediary under the rules.

Auto-Renew Contracts.   Public fund deposit agreements are highly regulated.  The Local Government Code, chapters 106, 116, and 117 apply.  Contract terms can be five years for counties and court funds and up to four for municipalities.  School district contracts are regulated by chapter 44 of the Education Code.  An auto renewing contract would appear to violate the contracting provisions of Texas law applicable to these governmental entities.

Potential Issues.  There is no definition of “value.”  Since the law captures contracts where there is action by a governing board, this issue does not appear to be a significant one for banks.

Next, must the agreement be signed by both the governmental entity and the business?  There are many arrangements that are not subject to such an agreement.  Right now, the definition of contract does not require both to sign.

“Intermediary” is defined by using the language of the statute without clarifying the meaning of “actively participates in the facilitation of the contract.”  It explicitly can include an attorney according to the statute.  Would this include drafting the agreement for a business?  To be safe, include the bank’s attorney as an intermediary if there is any negotiation of terms to the agreement.

For more information contact: Karen M. Neeley.

Additional information on House Bill 1295.

Riders Pass for Regulatory Relief

Congress passed and President Obama signed into law the Fixing America’s Surface Transportation (FAST) Act. Conceived as transportation legislation, the legislation became hotly debated after several provision targeted the financial industry services. After advocacy by the financial industry and community banks a compromise was reached which included community bank regulatory relief. In the legislation, three bills were included in an amendment to the funding bill.

H.R. 601, the Eliminate Privacy Notice Confusion Act: This legislation will reduce confusion among consumers by clarifying that they will receive privacy notices after opening a new account (only) when their financial institution’s privacy policies change rather than on an annual basis.

H.R. 1553, the Small Bank Exam Cycle Reform Act of 2015: This legislation  allows  banks with assets up to $1 billion to use an 18‐month exam cycle. A longer exam cycle is believed to reduce distractions and allow bank management to focus on serving their customers and communities.

H.R. 1334, the Holding Company Registration Threshold Equalization Act of 2015: This legislation increases the shareholder registration and deregistration thresholds contained in the JOBS Act (passed a few years ago) to savings and loan holding companies. A thrift holding company will not be required to register with the SEC until it exceeds 2,000 shareholders. A thrift holding company that drops below 1,200 shareholders will be allowed to deregister.

The highway and transportation funding legislation also exempts community banks $10 billion and under from cuts to Federal Reserve Bank stock dividends which will save approximately $200 million per year (ICBA estimate). In addition to the exemption, the law also contains ICBA advocated measures which will: restore funds cut from the federal crop insurance program; drop language that would have extended higher Fannie Mae and Freddie Mac guarantee fees; remove language that a bank must operate “predominantly” in rural or underserved areas to qualify for a QM mortgage underwriting exemption; and establish a process for appealing the CFPB’s rural area designation.

Read More on the advocacy of the bill by ICBA

TBA Files Freedom of Information Act Request with CFPB

The Texas Bankers Association (TBA) announced on its website that it has filed a Freedom of Information Act (FOIA) Request with the CFPB to obtain all documentation the CFPB requested from bank software processors on the overdraft activity of their bank customers.

In a memo, dated June 2nd, to state banking associations, the American Bankers Association raised concerns about the costs to industry of the CFPB’s use of its expansive authority to gather information under Section 1022 of the Dodd-Frank Act. The ABA stated in the memo that one of the processors had informed its clients that it may pass on to them the processor’s costs in responding to the CFPB’s order. The memo encouraged the Bureau to seek all relevant information before engaging in rulemaking, insist that the Bureau fund its data collection efforts, and support the introduction of legislation to address Section 1022 of the Dodd-Frank Act.

In its announcement, the TBA states that it was informed by its members that one of the processors would be billing its client banks for the cost of producing the information sought by the CFPB regarding overdraft checking programs. The TBA commented that it “objects to this third-party data search on both legal and customer privacy grounds” and is “concerned about the breadth of this data sweep and why the CFPB’s information requirements could not be satisfied with a representative cross-sampling rather than a demand request apparently sent to every major processor in the banking industry.”

According to the TBA, in addition to seeking “copies of all factual and analytical surveys and investigations conducted by the CFPB, or on its behalf by third parties,” its FOIA request also seeks “access to any legal analysis relied upon by way of supporting the CFPB’s legal authority for the issuance of the information orders.”

FDIC's Advisory Committee on Community Banking Scheduled to Meet

The Federal Deposit Insurance Corporation (FDIC) has announced that its Advisory Committee on Community Banking will meet on Friday, July 10. Staff will provide an update on a number of issues, including examination frequency and offsite monitoring; call report streamlining; the cybersecurity assessment tool; and recent rulemakings. There also will be discussions about high volatility commercial real estate loans and review of banking regulations under the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA).

The meeting is open to the public and will be held from 9:00 a.m. to 3:00 p.m. EDT in the FDIC Board Room on the sixth floor of FDIC headquarters located at 550 17th Street, NW, Washington, D.C. The meeting also will be webcast live. The agenda for the meeting and a link to the webcast are available at https://www.fdic.gov/communitybanking/2015/2015-07-10_agenda.html.

Yellen Responds to Basel III Letter

Federal Reserve Chairman, Janet Yellen, declined to pursue a policy change that would solve a tax liability problem for Subchapter S shareholders should the bank’s capital levels fall below the Basel III capital conservation buffer. Basel III’s capital conservation buffer prevents banks from making distributions to shareholders when capital falls below a threshold — but because federal tax liability passes through a Sub S bank to individual shareholders, Sub S shareholders can face tax liability even when they have not received a distribution. This puts Sub S banks subject to the buffer at a disadvantage to C corporation banks, which pay any taxes due directly out of the bank’s income.

The Subchapter S Bank Association has sent letters and advocated for a solution to this along with many other banking associations. Yellen said, in a response to a letter sent in October 2014 from several House members urging a solution, that the Fed “continues to believe that the capital conservation buffer should be applied equally to all banking organizations.” In addition, “By holding more than 1.25 percent capital above the minimum regulatory capital requirement, a state member bank can distribute up to 40 percent of eligible retained earnings as dividends,” she wrote. “As a result, shareholders should be able to pay their tax liabilities under most circumstances.” Unfortunately, going forward the Federal Reserve plans on monitoring the effects of the revised capital rule throughout its implementation.

YellenSubSLetter.pdf

FDIC Issues Statement on Providing Bank Services

On January 28, 2015, the FDIC issued a Statement on Providing Banking Services to encourage institutions to take a risk-based approach in assessing individual customer relationships rather than declining to provide banking services to entire categories of customers. The FDIC noted that individual customers within broader customer categories present varying degrees of risk, and some institutions may be hesitant to provide certain types of banking services due to concerns that they will be unable to comply with the associated requirements of the Bank Secrecy Act (BSA). The FDIC released the statement to announce that financial institutions that can properly manage customer relationships and effectively mitigate risks are neither prohibited nor discouraged from providing services to any category of customer accounts or individual customer operating in compliance with applicable state and federal law. Further, the FDIC believes when an institution follows existing guidance and establishes and maintains an appropriate risk-based program, the institution will be well-positioned to appropriately manage customer accounts, while generally detecting and deterring illicit financial transactions.

Federal Agencies Approve Risk Retention Rule

Six federal agencies (The Board of Governors, HUD, FDIC, FHFA, OCC, and SEC) approved a final rule requiring sponsors of securitization transactions to retain risk in those transactions. The final rule implements the risk retention requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

The final rule largely retains the risk retention framework contained in the proposal issued by the agencies in August 2013 and generally requires sponsors of asset-backed securities (ABS) to retain not less than five percent of the credit risk of the assets collateralizing the ABS issuance. The rule also sets forth prohibitions on transferring or hedging the credit risk that the sponsor is required to retain.

As required by the Dodd-Frank Act, the final rule defines a “qualified residential mortgage” (QRM) and exempts securitizations of QRMs from the risk retention requirement. The final rule aligns the QRM definition with that of a qualified mortgage as defined by the Consumer Financial Protection Bureau. The final rule also requires the agencies to review the definition of QRM no later than four years after the effective date of the rule with respect to the securitization of residential mortgages and every five years thereafter, and allows each agency to request a review of the definition at any time. The final rule also does not require any retention for securitizations of commercial loans, commercial mortgages, or automobile loans if they meet specific standards for high quality underwriting.

The final rule will be effective one year after publication in the Federal Register for residential mortgage-backed securitizations and two years after publication for all other securitization types.

Credit Risk Retention Final Rule – PDF (PDF Help)