Banking & Finance Law Report

Tag Archives: Bank Regulation

Temper Your Expectations on Cannabis Banking Reform: foreseeable pitfalls of the SAFE Banking Act

On September 25, 2019, the Secure and Fair Enforcement (SAFE) Banking Act of 2019 passed the U.S. House of Representatives by an impressive margin of 321 to 103. The U.S. Senate—once seen as a gauntlet of insurmountable obstacles to cannabis banking reform—has also seen some meaningful progress.

Senator Mike Crapo (R., Idaho), the influential chair of the Senate Banking Committee overseeing the SAFE Act in the Senate, previously expressed no interest in allowing the SAFE Act a vote out of committee that would enable the full Senate to vote on its passage. But now, Mr. Crapo has expressed interest in voting on the SAFE Act before year’s end. And Senate Majority Leader, Mitch McConnell, whose public comments on marijuana have been negative, recently met with marijuana industry executives in a move some see as potentially signaling McConnell’s eventual support for cannabis banking reform.

Following the Act’s passage in the House, and with an improving outlook in the Senate, financial institutions have been preparing for increased involvement with cannabis-related businesses. However, while many believe the SAFE Act is closer than ever to solving the country’s cannabis banking woes, we believe that the Act’s passage alone may not provide the cannabis industry …

The Bank Industry’s Cannabis Problem

The banking industry has a cannabis problem—it cannot bank cannabis related businesses.

Despite the fact that over 35 states have legalized medical cannabis in some form and more than 10 others have recreational cannabis laws, the mainstream banking industry has been largely unable to provide services to lawful cannabis companies. That is because federal law still views cannabis as an illegal Schedule I drug subject to the Controlled Substances Act—on par with drugs such as heroin.

This complex federal overlay has prevented the banking industry from being able to service not only cannabis companies, but also non-plant touching ancillary businesses working with cannabis companies. Consequently, banks are forced to sit on the sidelines while cannabis companies try to figure out what to do with their growing cash reserves.…

Why You May Want To Do Business Under Ohio’s 2018 Banking Law

Let’s say your client is a bank based outside of Ohio, and suppose further your client wants to set up a banking business in Ohio.

Most of the time a merger transaction will result in a non-Ohio bank doing business in Ohio through an out-of-state franchise of course. But in light of changes to Ohio banking law that took effect on January 1, 2018, in an appropriate business situation, an Ohio bank might be a good way for a non-Ohio banking organization to do business in Ohio.  Consider:

  • The directors of the Ohio bank now have the protections of general corporate directors such as the business judgment rule and not the more limited protections previously afforded bank directors. (Ohio Revised Code §1105.11)
  • Director requirements for an Ohio bank have been loosened. Now there is no requirement that Ohio bank directors live in Ohio in order to serve on the bank board. (Ohio Revised Code §1105.02)
  • Directors, officers and employees of an Ohio bank are not individually liable for bank law violations unless the person knowingly violated the law. (Ohio Revised Code §1105.11)
  • The new law modernizes communications requirements by providing that board meetings can be held through any communications equipment

Changes to Ohio Banking Law

Last year, the Ohio Legislature made a number of important changes to Ohio’s statutory banking code. These are the first comprehensive changes in more than twenty years.  Most of the changes were effective January 1, 2018.

The heavy lifting of the new Ohio banking bill is language that consolidates a number of existing financial institution charters into one single charter. Going forward, Ohio-chartered banks, savings and loans and savings banks will be operating under one common form of charter.

So, generally speaking, the changes made by the new banking code can be summarized with two words: consolidation and clarification.  The happy result is much needed modernization.…

Judicial Review of CAMELS Ratings – Banking Organizations Weigh In

Several trade associations for the banking industry have weighed in on a pending potential landmark case in the Northern District of Illinois regarding the possible judicial review of CAMELS (Capital, Asset Quality, Management, Earnings, Liquidity and Sensitivity) ratings of financial institutions. As noted by this blog earlier this year, the United States Court of Appeals for the Seventh Circuit, in Builders Bank v. FDIC, 846 F.3d 272 (7th Cir.2017), vacated a lower court ruling stating that CAMELS ratings by the FDIC were committed to agency discretion and thus beyond judicial review. The case has been remanded to the Northern District of Illinois, where the Clearing House Association, the American Bankers Association, and the Independent Community Bankers of America have filed a brief as amici curiae, in support of neither party but solely to assert that CAMELS ratings are not exempt from judicial review.

In their brief, the amici assert that the availability of judicial review of agency decisions serves important purposes, by “providing assurance that agencies do not exceed the limits of their statutory authority and treat parties fairly, consistently, and rationally,” particularly in the arena of CAMELS ratings, which “are a cornerstone to bank regulation” and …

Potential Changes for HVCRE Loans

In this blog, we have described some of the original concerns with the “high volatility commercial real estate” loan regulation as well as some suggestions for change. These rules apply to certain real estate loans for acquisition, development and construction.

Recently, there have been suggestions that changes are possible regarding “high volatility commercial real estate” loans or “HVCRE” loans.

Here is a quick reminder of the issues. Effective January 1, 2015, all banking organizations were required to allocate significantly more capital when making commercial real estate loans that were considered to be HVCRE. Under these rules, an HVCRE loan had a risk weight for capital purposes 50% greater than the risk weight of a non-HVCRE commercial loan. Questions quickly arose.

An HVCRE loan is a loan that finances the acquisition, development or construction of real property prior to permanent financing. The regulations apply to existing loans as well as new loans.

There are important exceptions to this classification including: loans on one to four residential properties, community development loans, agricultural loans and certain qualifying real estate loans.

For real estate loans to qualify for the exception, the loan to value ratio must be less than or equal to the applicable …

JUDICIAL REVIEW OF CAMELS RATINGS?

Bankers will be interested in a recent appellate court order in a bank regulatory case. Their lawyers will be astonished by it because the ruling lights a flicker of hope in an area where there has been none for many years:  the judicial review of CAMELS ratings.

The ruling came early in a litigation seeking to contest the imposition of a CAMELS rating of 4. A CAMELS rating is a summary rating regulators use to quantify the condition of banks at a given point in time.  For the uninitiated, the term stands for Capital, Assets, Management, Earnings, Liquidity and interest rate Sensitivity.  It is a fundamental element of the relationship between banks and their regulators.  The rating impacts how much banks pay for federal deposit insurance, among other matters.  A bad rating increases the cost of this insurance.

There are very few bankers of any experience who have not in their heart of hearts wished that they could contest an unsatisfactory CAMELS rating. The prospect of an even-handed judicial review might be a popular choice for many bankers.…

Website Accessibility Regulations Delayed Until 2018 but Banks Should Not Table the Issue

Long awaited Guidelines from the federal Department of Justice (DOJ) for website accessibility under the Americans with Disabilities Act (ADA) are now expected sometime in 2018. But, as discussed below, that does not mean that financial institutions transacting business with the public through websites and mobile applications should ignore web-based accessibility entirely until 2018. Law firms and the DOJ are attempting to enforce the ADA on website owners in the absence of mandatory regulatory guidelines.

The ADA and public accommodation

By way of background, the ADA requires that “places of public accommodation” be accessible to the disabled. Most financial institutions operating some form of physical facility open to the public understand their obligations to make those physical facilities accessible. Public accommodations are generally businesses that are open to the public and fall into one of 12 categories listed in the ADA, including “service establishments” which includes banking and financial institutions. Disabled persons can sue under the ADA alleging that they were denied full and equal access to the goods and services at a “place of public accommodation.” The DOJ also can bring suit for alleged ADA violations. There is a set of very specific and largely objective criteria for accessibility …

Federal Reserve Expresses Openness to Relaxation of HVCRE Regulations on Community Banks

Last year, as noted by this blog, the FDIC, OCC, and Federal Reserve imposed harsher capital requirements on certain “high volatility commercial real estate,” or HVCRE, exposures, in accordance with the Basel III international banking standards. These new requirements were opposed not only by the real estate industry but also by banking associations, particularly the Independent Community Bankers of America (ICBA). The ICBA argues that the Basel III rules were intended to apply only to large, internationally active banks, and that the rules place too great a regulatory burden on smaller institutions. A recent report by the Federal Reserve Bank of Philadelphia notes that CRE regulations disproportionately affect smaller banks, as “CRE represents approximately 50 percent of small bank loan portfolios, compared with just over 25 percent of large bank portfolios.” The report goes on to state that loans that might be classified as HVCRE under the new rules represent approximately 5% of total loans for the median commercial bank with total assets below $10 billion, “a modest, but certainly not insignificant, portion of small banks’ CRE portfolios.” …

Newly Effective HVCRE Loan Rules

Lenders who finance commercial real estate exposures should be aware of new regulations that impose harsher capital requirements on certain “high volatility commercial real estate,” or HVCRE, exposures. In June 2013, the FDIC, OCC, and Federal Reserve jointly approved proposed rules intended to implement new international banking standards, known as the Basel III Capital Accords, as well as establish new risk-based and leverage capital requirements for financial institutions, as required by Dodd-Frank. The rules have been in effect for all banks since January 1, 2015, having applied to the largest banks one year prior.

Under the rules, an HVCRE exposure is defined as “a credit facility that, prior to conversion to permanent financing, finances or has had financed the acquisition, development, or construction (“ADC”) of real property,” if it fails to satisfy any of the following three capital requirements:…

The Eleventh Circuit Holds That the National Bank Act Preempts State-Law Whistleblower Claims by Terminated National Bank Officers

The United States Court of Appeals for the Eleventh Circuit just recently held that an officer of a nationally-chartered bank regulated by the National Bank Act (NBA) had no claim for wrongful termination under a Florida whistleblower statute.  According to the federal court, the state-law whistleblower claims were preempted by 12 U.S.C. § 24 (Fifth) of the NBA, which gives a national bank the power to dismiss bank officers “at the pleasure” of the board of directors.  Consistent with decisions by other federal circuits, the Eleventh Circuit interpreted “at the pleasure” to be equivalent to at-will employment and held that the Florida whistleblower statute at issue was preempted because, contrary to the nature of at-will employment, it prohibited dismissal of an employee for complaining about certain improper activities by an employer.  Further, there was no comparable employment protection in federal law (e.g., Title VII) that would indicate congressional intent not to preempt the Florida statute through 12 U.S.C. § 24 (Fifth) of the NBA.  This is a useful employment law decision for national banks that helps preserve their freedom to employ, or not employ, their officers as they see fit and avoid certain types of miscellaneous wrongful termination lawsuits under …

Volcker Alliance Report Ignores Community Banks (For The Most Part)

There is much to like in the recently released report of the Volcker Alliance.  Unfortunately, however, there is little discussion of those banking institutions commonly referred to as community banks.

At roughly the same time last month, the Independent Community Bankers Association of America highlighted in a press release the importance of community banks in helping small businesses gain financial stability.  The release said there are roughly:

6,000 community banks, including commercial banks, thrifts, stock and mutual savings institutions. Assets may range from less than $10 million to $10 billion or more. Across the nation, community banks operate 52,000 locations, employ 700,000 Americans and hold $3.6 trillion in assets, $2.9 trillion in deposits and $2.4 trillion in loans to consumers, small businesses and the agricultural community.

The relative unimportance of the community banking industry, notwithstanding employment of roughly 700,000 people, to those who prepared the Volcker Alliance report on regulatory reform suggests just how concentrated in large banking organizations the financial services industry has become following the Great Recession.  The draftsmen just had bigger fish to fry.…

CIP To Cover Small Business Ownership And Control

It has been an active couple of weeks for FinCEN from a regulatory pronouncement perspective. For example, FinCEN has proposed a regulation to amend existing “know your customer” rules for certain financial institutions to require the verification of beneficial owners of legal entities. Legal entities in this context would mean corporations, partnerships or similar business entities. Public companies, regulated entities and trusts other than business and statutory trusts, would not be covered.

In addition, FinCEN issued an advisory for financial institutions on the importance of a “culture of compliance” with respect to BSA/AML. The guidance had these suggestions based on recent enforcement actions: ensure leadership that supports compliance; don’t mitigate BSA/AML efforts in light of revenue considerations; operating departments must share with compliance staff BSA/AML information; the organization must devote adequate resources to BSA/AML compliance; BSA/AML compliance should be tested by an independent party and the organization’s leadership and staff should understand the purpose and use of BSA/AML reporting. FIN-2014-A007 is available here.

FinCEN’s proposal to amend existing “know your customer” rules requires a financial institution would have to identify each individual who directly or indirectly own 25% or more of the equity and one individual who has responsibility …

Risk Management and In-house Bank Lawyers

In-house bank lawyers got a vote of confidence last week. The context was a comment submitted to the Office of the Comptroller of the Currency regarding proposed enforceable guidelines on the risk management practices for the nation’s largest banks. Last January, the OCC proposed the guidelines and asked for comments. Previously, risk management practices suggested by the OCC have been largely precatory.

The proposed guidelines suggest minimum standards for the design and implementation of a risk governance framework. While the proposed guidelines would apply to banking organizations with consolidated assets equal to or greater than $50 billion, once they are effective, they will be influential regarding the risk management practices of smaller banks. The guidelines document (Docket ID OCC-2014-0001) is available here.

The overall goal of the proposal is to help banking institutions in “defining and communicating an acceptable risk appetite across the organization.” The measures should address such things as the capital, earnings, and liquidity that may be at risk on a firm-wide basis, the risk that may be taken in each line of business, and each key risk category monitored by the institution. A bank’s risk management practices should cover the following categories of risk: credit risk, …

Patent Reform and Financial Institutions

The U.S. Senate overwhelmingly passed (95–5) the America Invents Act (formerly titled the Patent Reform Act of 2011) (S.23 or AIA), on March 8, 2011. This legislation represents a major patent reform initiative and is quite possibly the most significant patent reform since the 1952 Patent Act. This legislation could have significant impact on financial institutions.

The headline change ofthe AIA is that a patent would be awarded to the first-to-file a patent application rather than to the first-to-invent the invention. This should favor large financial institutions who are regularly active in patenting innovations because they will have the resources and systems in place to win a race to the patent office. Small financial institutions or those not regularly active in patenting innovations will need to adapt to more quickly react to their innovations or risk losing the race. Perhaps a more significant impact on financial institutions due to this change is that the first-to-file system makes prior users vulnerable to patent infringement. A financial institution can use an innovation for years as a trade secret and then be liable for patent infringement when another party patents that innovation. This could be very problematic in the financial industry which has largely considered its business methods and …

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