Banking Law Prof Blog

Eighth Circuit Recognizes Limits on Federal Preemption

The U.S. Court of Appeals for the Eighth Circuit recently ruled that national bank assignees or purchasers of mortgages are not completely shielded from state law violation claims by a blanket claim of federal preemption.  The case is Thomas v. U.S. Bank. 

Plaintiff/Appellants are Missiouri homeowners who received "high loan-to-value" second mortgages (reflecting total debt of 125% of the value of their homes) from FirstPlus Bank, a federally insured state-chartered bank which has since failed.  Their mortgages were purchased or assumed by other banks, including some national banks.

Plaintiffs claim that the loans violated state law, specifically the Missouri Second Mortgage Loans Act (MSMLA) which limits the type and amount of closing costs and fees that can be imposed on residential second mortgages secured by MissourI real estate.

The national banks removed the case to federal court and successfully moved for dismissal of the case, contending that state law claims were completely preempted by the Depository Institutions Deregulation and Monetary Control Act (DIDA). 

On appeal, the Eighth Circuit reversed and remanded to state court for trial.  The Eighth Circuit opinion distinguished preemption under the National Bank Act (NBA) and the limited scope of preemption provided by the plain language of DIDA.  NBA would have applied if national banks had originated the loans.  DIDA applies to loans originated by statte-chartered banks.

State law claims in this case are not preempted because state law usury limits are higher than the ceiling provided under federal law -- even though these claims are for non-refundable broker's fees that exceeded MSMLA limits and for closing costs and fees that exceeded the fees actually charged by third-party providers where the originator FirstPlus retained the difference.

The state law remedy -- forfeiture of interest and twice the interest paid -- is not preempted here -- if the state law claims can be established at trial.

Link:  http://www.aba.com/aba/documents/GeneralCounsel/BankingDocket/ThomasvUSBankNational.pdf

(ag) Sept. 5, 2009, in Federal Preemption, Lending Issues, Consumer Protection, Predatory Lending, Dual Banking

Second Quarter 2009 Not Pretty for FDIC Insured Institutions Nationwide

Although Texas banks may be doing "less bad" than the rest of the country as I've discussed in a previous post, the FDIC's Quarterly Profile based on aggregate second quarter figures for all insured institutions paints a grim picture for the banking industry as a whole following many years of profitability. Following are some key points (can't use the word "highlights" here) from the report:

• The banking industry posted its second quarterly loss in the past 18 years.
• Higher loss provisions still weigh heavily on industry earnings.
• Loss provision expenses have been growing in significance for two years.
• Margins improved slightly in the Second Quarter of 2009.
• Troubled loans increased at a slower rate in the Second Quarter.
• Noncurrent ["delinquent" or "90 days or more past due"] loan growth is outpacing growth in reserves.
• The noncurrent loan rate has risen to a record 4.35% of all loans and leases.
• On a more positive note, loans that were 30-89 days past due declined substantially.
• Overall capital levels have improved.
• The number of "problem" institutions is at a 15-year high.

Link:  http://www2.fdic.gov/qbp/2009jun/qbpall.html

(ag) Sept. 3, 2009, in Economy, Federal Banking Agencies/FDIC

Bringing Securitized Assets Back Onto Bank Balance Sheets

The comment period is open for a Joint Federal Banking Agency proposed regulatory capital rule.  Beginning in 2010, new accounting rules from the Federal Accounting Standards Board (FASB) will require major changes in the way banks account for currently off-balance sheet items, including securitized assets. 

How shoud the bank capital requirements be adjusted or phased-in to reflect these new items on the balance sheet and the true risk involved?

Link:  http://www.occ.treas.gov/ftp/release/2009-101.htm 

(ag) Sept. 3, 2009, in Capital

Increasing Deposit Insurance Premiums and Report on the Condition of Texas Banks

The Federal Reserve Bank of Dallas has published an excellent explanation of the FDIC's assessments on banks to restore losses to the insurance fund incurred by reason of bank failures during this Recession.  In addition to an informative discussion of how the deposit insurance fund gets its money, the article, Restoring Banking's Safety Net: Deposit Insurance’s Steeper Cost By Kory Killgo, highlights the fact that Texas banks, on the whole, are doing well compared to the rest of the country, despite the Recession. 

Could it be that Texas bankers learned some painful lessons during the Banking Crisis of the 1980s that are helping them perform well now?  Banking regulators in Texas also learned to be more vigilant and more conservative.  Once burned, twice shy pays off!

"Eleventh District banks [Texas, northern Louisiana, and southern New Mexico] have higher relative levels of deposits, so we would expect their assessments to be higher than banks elsewhere—but that isn’t the case. The reason involves the condition of the banks.

"The FDIC places insured institutions in one of four risk categories. In the Eleventh District, a greater percentage of banks falls into the lowest risk category—a function of district banks’ generally higher safety and soundness ratings and levels of capital. Ninety-three percent of Eleventh District banks are in the FDIC’s lowest risk category, compared with 86 percent of banks elsewhere. Because of these factors, they tend to have lower assessments.

. . . .

"The condition of Eleventh District banks offsets their relatively higher concentration of deposits, reducing assessments and freeing up capital."

(ag) Sept. 2, 2009, in Economy

Mexico's Ano Horrible - Report on Financial Crisis

The Dallas Federal Reserve Bank has issued an intriguing report on the impact of the Global Financial Crisis on the Mexican economy and the prospects for recovery.

Link:  http://dallasfed.org/research/swe/2009/swe0903b.cfm

(ag) Sept. 2, 2009, in Economy

California Fires Cause Temporary Bank Closings

Emergency preparedness and disaster recovery plans are required for every bank.  Due to wildfires, some banks are having to exercise those plans, much like banks affected by Hurricane Katrina.  On August 31, the Office of the Comptroller of the Currency authorized national bank offices affected by the California fires to close at their discretion and to make every effort to reopen as quickly as possible.

Note to compliance officers:  Update your disaster recovery plan!

LInk to Proclamation:  http://www.occ.treas.gov/ftp/release/2009-102.htm

(ag) Sept. 2, 2009, in Federal Banking Agencies/OCC

B of A - Getting Out of Harm's Way?

The Wall Street Journal has an article today about Bank of America seeking to repay part of the Bailout money it received.  Of course, the reason for repaying the money is to escape the intensive government scrutiny and restrictions that came with it.

LInk:  http://online.wsj.com/article/SB125176546582274505.html

(ag) Sept. 1, 2009, in Economy

George Soros and the Financial Crisis

  It's not bedtime reading, but well worth considering:  THE CRASH OF 2008 AND WHAT IT MEANS by George Soros.  If you aren't already an adherent, you should ponder Soros' theories of "reflexivity" and "radical fallibility." 

Reflexivity, fully described in his earlier book, THE ALCHEMY OF FINANCE, is discussed again in his current work.  Reflexivity distinguishes two aspects of human interaction with financial markets (and reality in general):  the cognitive function and the participating or manipulative function. 

He says, "I came to realize that market participants cannot base their decisions on knowledge alone, and their biased perceptions have ways of influencing not only market prices but also the fundamentals that those prices are supposed to reflect.  ...Participants' thinking plays a dual function.  On the one hand, they seek to understand their situation. . .the cognitive function.  On the other hand, they try to change the situation. . . .the participating or manipulative function."  [p. viii]

 "Reflexivity can be interpreted as a circularity, or two-way feedback loop, between the participants' views and the actual state of affairs.  People base their decisions not on the actual situation that confronts them but on their perception or interpretation of that situation.  Their decisions make an impact on the situation (the manipulative function), and changes in the situation are liable to change their perceptions (the cognitive function).  The two functions operate concurrently, not sequentially." [p. 10]

Radical fallibility, as applied to financial markets, says that "instead of being always right, financial markets are always wrong.  Markets have the ability, however, both to correct themselves and occasionally to make their mistakes come true by a reflexive process of self-validation. . . . .To be specific, financial markets cannot predict economic downturns accurately, but they can cause them."  [p. 77]

His perspective on market fundamentalists and financial regulation are equally intriguing:

"Market fundamentalists blame market failures on the fallibility of the regulators, and they are half right:  Both markets and regulators are fallible.  Where market fundamentalists are totally wrong is in claiming that regulations ought to be abolished on account of their fallibility.  That happens to be the inverse of the communist claim that markets ought to be abolished on account of their fallibility. . . .The fact that regulators are fallible does not prove that markets are perfect.  It merely justifies reexamining and improving the regulatory environment." [p. 78]

(ag) Aug. 31, 2009, in Economy

Consumer Information about Credit Cards and Mortgages

FDIC's Consumer News highlights information for the public about recent changes to credit card rules, prohibitions against abusive lending practices, and revised consumer disclosures.

Link:  http://www.fdic.gov/news/news/press/2009/pr09158.html

(ag) Aug. 31, 2009, in Consumer Protection

Edge Act Jurisdiction

Here's a forthcoming article to watch for:

"The 'Technicalities' of Edge Act Jurisdiction: Advocating for the Federal Courts' Adoption of and Adherence to a Uniform and Narrow Interpretation of 12 U.S.C. § 632," by Elizabeth Sheyn --  to be published in the University of Toledo Law Review. 

Abstract:  This article proposes a new (uniform and narrow) standard for interpreting the Edge Act of 1919, which provides a basis for original federal district court jurisdiction over civil suits arising out of “transactions involving international or foreign banking” or “out of other international or foreign financial operations."  Under the Edge Act, any defendant in a suit mentioned above may remove the suit from state court to federal district court.  This standard will remedy the federal courts’ recent adoption of a broad construction of the Edge Act, which has resulted in the consideration of cases that would ordinarily have no business being before a federal court, such as suits involving purely state law claims without any diversity of citizenship.

The abstract is available on SSRN: http://ssrn.com/abstract=1461823.

(ag) August 30, 2009, in International Banking

Washington Post & Too Big To Fail

On Friday, the Washington Post ran a feature on the "too big to fail issue," complete with data to demonstrate that the big have gotten bigger as a result of the bailouts.  Will this issue be addressed in the regulatory reform legislation working its way through Congress?  It's sure to meet well-organized, well-funded opposition to any "breakups" a la Ma Bell and the Baby Bells.  Antitrust is a dead language. And "free market" only means "let me do what I want until I get in trouble, just bail me out if I stumble." 

Link:  http://www.washingtonpost.com/wp-dyn/content/discussion/2009/08/28/DI2009082801337.html

(ag) August 29, 2009, in Economy, Financial Regulatory Reform

SEC, Bank of America, and Executive Compensation

The SEC is now saying that Bank of America acted in good faith but essentially made a careless error by not disclosing to investors its plans to pay bonuses to Merrill Lynch executives. (You won't be surprised to learn that B of A has said all along that it did nothing wrong.)

So why is the SEC backtracking?  Well, Federal District Judge Jed Rakoff is balking at approving SEC's quick $33 million settlement with Bank of America.  He thinks that if the problem is as bad as SEC initially claimed that they shouldn't be so quick to settle for so little.  He thinks SEC's enforcement should be more agressive.  SEC's puzzling response is that the bad behavior wasn't THAT bad?????

LInk to WSJ story:    http://www.washingtonpost.com/wp-dyn/content/article/2009/08/27/AR2009082703818_pf.html

Congress should be watching this watchdog.  It didn't bark when it should have and now it appears toothless.

(ag) August 28, 2009, in Executive Compensation

Texas Association of Bank Counsel - 33rd Annual Convention

The Texas Association of Bank Counsel (TABC) will hold its 33rd Annual Convention in Ft. Worth, TX, on Oct. 8 and 9, 2009.  Great topics and a great networking opportunity!

Link:  http://texasbankers.informz.net/texasbankers/data/images/2009_tabc_conf_bro.pdf

Guaranty Bank - Second Largest Bank Failure for 2009

Last Friday, the Office of Thrift Supervision (OTS) closed Guaranty Bank, Austin, TX, and appointed FDIC Receiver.  This is the 10th largest failure in U.S. history.  Cost to the deposit insurance fund is estimated at $3 Billion.  BBVA Compass, headquarted in Birmingham, AL, bought all the closed thrift's deposits and $12 Billion of its assets. 

Link:  http://www.fdic.gov/bank/individual/failed/guaranty-tx.html

(ag) August 27, 2009, in FDIC

Identity Theft: It Can Happen to Anyone

Today's story is that Federal Chairman Ben Bernanke has been a victim of identity theft.  His wife's purse was stolen and identity thieves began using the family checkbook.

Link:  http://news.yahoo.com/s/afp/20090826/pl_afp/uscrimefinancebankbernankenewsweek_20090826232518

Remind banking law students that the Federal Trade Commission (FTC) website has great information about how to prevent and respond to identity theft.  The motto is "Deter, Detect, Defend."

Link:  http://www.ftc.gov/bcp/edu/microsites/idtheft/

(ag) August 27, 2009, in Identity Theft

The Pathology of Too Big to Fail

Chairman of the Dallas Federal Reserve Bank Richard Fisher says that if we don't want to repeat the current unfortunate economic situtation in the future, we must "think long" and "exorcise the notion that an institution is too big to fail and remove all incentives for any institution to risk infecting the health of the financial system. If we make some enemies in the process, so be it. The object is to get it right."

I could not agree more!!!

Link to speech:  http://dallasfed.org/news/speeches/fisher/2009/fs090723.cfm

(ag) August 26, 2009, in Economy

Link to Fisher's speech: 

Will FDIC Need a Loan from Treasury?

AP Business Writer Stevenson Jacobs' article, "Agency That Insures Bank Deposits May Need Help," notes that tomorrow the FDIC will publish the amount of reserves it holds to satisfy deposit insurance claims. 

Only once before, during the Bank and S&L crisis of the 1980s and early 1990s did FDIC's reserves dip into the negative column.  If this does appear imminent, FDIC could borrow from Treasury and pay back the loan with interest or it could raise deposit insurance assessments on banks.

Link:  http://news.yahoo.com/s/ap/20090826/ap_on_bi_ge/us_fdic_shrinking_fund/print 

(ag) August 26, 2009, in Economy, FDIC

National Economic Update

On Monday, the Federal Reserve released its report on the "National Economic Update."  Here's the summary:

" A New Beginning?

Recent data revisions show that output fell much more steeply last year than was first thought. Newly available monthly indicators suggest, though, that the downturn will soon end, or has in fact already ended. Production is stabilizing, new orders are rising, and firms are making progress in controlling their inventories. Long-leading financial indicators signal that growth is likely through at least the end of 2009.

A Deeper Hole Than We Thought

Estimates of real gross domestic product (GDP) released late last month show a much steeper decline in economic activity during the 2008–09 recession than was previously indicated. . . . .

Economic Activity Begins to Stabilize

The latest monthly indicators suggest that output declines may be ending. After hitting lows late last year, the Institute for Supply Management’s composite manufacturing and nonmanufacturing indexes both have risen to levels consistent with expansion of the overall economy."

Link to Report:  http://dallasfed.org/research/update-us/2009/0905.cfm

(ag) Aug. 25, 2009, in Economy
 

Bernanke Renomination

Federal Reserve Chairman Ben Bernanke has been renominated by President Obama for a second term.  Senate confirmation is required.  Here's a link to Bernanke's nomination acceptance message posted today:

Link:  http://www.federalreserve.gov/newsevents/press/other/20090825a.htm

(ag) Aug. 25, 2009, in Economy

New RESPA FAQs

The Department of Housing and Urban Development (HUD) has posted new FAQs for its RESPA (Real Estate Settlement Procedures Act) regulations.

Some new requirements were effective January 16, 2009.  Other very significant changes involving revised Good Faith Estimates (GFEs) and HUD-1 Settlement Statements will be effective January 1, 2010.  The time to prepare is now!

Link:  http://www.hud.gov/offices/hsg/ramh/res/faqfinalrev4.pdf

(ag) August 23, 2009, in Lending Issues