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Nutter Bank Report, March 2009

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1.  FDIC Issues Rules on Risk-Based and Emergency Assessments
2.  Treasury Proposes Resolution Authority for Systemically Significant Institutions
3.  Federal Reserve Provides Guidance on Distributions to Shareholders
4.  Treasury Addresses Questions on Repaying CPP Investments
5.  Other Developments: Court Rulings on Truth in Lending and Check Collection

Full Reports

1.  FDIC Issues Rules on Risk-Based and Emergency Assessments

The FDIC has adopted an interim rule that will permit it to impose a 20-basis point emergency special assessment on all insured depository institutions on June 30, 2009.  The 20-basis point special assessment was announced on March 2 and will be collected on September 30, 2009, at the same time that the risk-based assessments for the second quarter of 2009 are collected, unless the FDIC reduces the amount of the special assessment before then.  The interim rule also permits the FDIC to impose additional emergency special assessments after June 30, 2009 of up to 10 basis points each on all insured depository institutions if the FDIC estimates that the fund reserve ratio will fall to a level that would adversely affect public confidence or to a level near zero at the end of a calendar quarter.  Any such additional emergency special assessments would be announced before, and assessed on the last day of, a calendar quarter and would be collected three months later with regular risk-based assessments.  The FDIC also announced on March 2 that it has adopted a final rule modifying the risk-based assessment system and setting initial base assessment rates at 12 to 45 basis points, depending on risk category, beginning on April 1, 2009.  The final rule provides for the following adjustments to an institution’s assessment rate:  a decrease based on the ratio of long-term unsecured debt (and, for small institutions, qualified amounts of Tier 1 capital) to domestic deposits; an increase for secured liabilities above a threshold amount; and for institutions that are not in Risk Category I, an increase for brokered deposits above a threshold amount.  The interim and final rules become effective on April 1, 2009.  Comments on the interim rule concerning special assessments must be received on or before April 2, 2009.

Nutter Notes:  The final rule on risk-based assessments introduces a new financial ratio into the financial ratios method applicable to most Risk Category I institutions that includes certain brokered deposits above a threshold amount (in excess of 10% of domestic deposits) that are used to fund rapid asset growth.  It also revises the assessment method for large Risk Category I institutions with long-term debt issuer ratings, broadens the spread between minimum and maximum initial base assessment rates for Risk Category I institutions from 2 basis points to an initial range of 4 basis points, and adjusts the number of institutions subject to these initial minimum and maximum rates.  For an institution that is not in Risk Category I, its ratio of brokered deposits to domestic deposits (if greater than 10%) will increase its assessment rate, but any increase will be limited to no more than 10 basis points.  After applying all possible adjustments, the minimum and maximum total base assessment rates for each risk category will be as set forth in the table below:

                                                       Total Base Assessment Rates*
Risk category:                                     I             II            III               IV
Initial base assessment rate           12 - 16      22           32            45
Unsecured debt adjustment            -5 - 0       -5 - 0       -5 - 0        -5 - 0
Secured liability adjustment            0 - 8        0 - 11       0 - 16        0 - 22.5
Brokered deposit adjustment            -             0 - 10       0 - 10        0 - 10
Total base assessment rate           7 - 24      17 - 43      27 – 58    40 - 77.5

* All amounts for all risk categories are in basis points annually. Total base rates that are not the minimum or maximum rate will vary between these rates.

2.  Treasury Proposes Resolution Authority for Systemically Significant Institutions

Treasury has announced it will propose legislation to grant to a single federal agency the power to oversee the orderly resolution of any systemically significant nonbank financial institution that is not currently subject to the resolution authority of the FDIC.  The announcement on March 26 outlines plans for a single regulator with resolution authority similar to the FDIC’s to supervise institutions the failure of which would have serious adverse effects on the financial system or the U.S. economy.  The proposal also describes alternatives Treasury is considering to fund the new resolution powers but states that, if the new powers are granted to the FDIC, the Deposit Insurance Fund will not be tapped.  Funding options include a mandatory appropriation to the agency out of the general fund of the Treasury, a scheme of assessments on the financial institutions covered by the new legislation, or a combination of both.  The federal government would also expect to receive repayment from any loans made to a financial institution that has been placed in receivership, and from the ultimate sale of any equity interest taken by the government in the institution.  Institutions covered by the new authority would be identified based on a variety of considerations including the institution’s interdependence with the financial system, the institution’s size, leverage (including off-balance sheet exposures), and degree of reliance on short-term funding, as well as the institution’s systemic importance as a source of credit and liquidity.

Nutter Notes:  The regulatory agency given the authority proposed by Treasury would supervise institutions such as holding companies that control broker-dealers, insurance companies, and futures commission merchants, or any other financial firm that could pose substantial risk to the economy.  Before the agency could force an institution into receivership, the Treasury Secretary, with the recommendations of both the Federal Reserve and the FDIC and in consultation with the President, would be required to make a determination that the institution is in danger of becoming insolvent, its insolvency would have serious adverse effects on economic conditions or financial stability in the United States, and taking emergency action would avoid or mitigate those adverse effects.  The Treasury Secretary and the FDIC would have the option to provide financial assistance to the institution rather than force it into receivership, depending upon recommendations of the Federal Reserve and the appropriate federal regulatory agency (if different from the FDIC).  The Treasury Secretary and the FDIC would also have the option of putting the institution into conservatorship with the intention of stabilizing it and returning it to private ownership rather than placing it in receivership.

3.  Federal Reserve Provides Guidance on Distributions to Shareholders

The Federal Reserve has published additional guidance for bank holding companies on the declaration and payment of dividends, capital repurchases, and capital redemptions.  While Supervision and Regulation Letter 09-4 largely reiterates existing Federal Reserve policies and guidance, it also expresses expectations that a bank holding company will inform and consult with Federal Reserve staff before declaring and paying a dividend that could raise safety and soundness concerns (e.g., declaring and paying a dividend that exceeds earnings for the period), redeeming or repurchasing regulatory capital instruments when the company is experiencing financial weaknesses, or redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred.  Consistent with the principle that a bank holding company should serve as a source of managerial and financial strength to its subsidiary banks, the Federal Reserve said that it expects a holding company to maintain capital commensurate with its overall risk profile, and that the capital planning process should include comprehensive policies on cash and non-cash distributions that articulate objectives and approaches for maintaining a strong capital position.

Nutter Notes:  The guidance reminds bank holding companies of the importance of ensuring that distribution levels are prudent and not based on overly optimistic earnings scenarios.  In declaring a dividend or making any other distribution to shareholders, the board of directors should consider any potential events that may occur before the payment date that could affect the institution’s ability to pay while still maintaining a strong financial position.  The guidance also summarizes certain regulatory requirements for Federal Reserve review of proposed redemptions or repurchases of equity securities or other instruments, such as the requirement in section 225.4(b)(1) of Regulation Y that certain non-exempt bank holding companies notify the Federal Reserve of actions that would reduce their consolidated net worth by 10% or more.  Under the risk-based capital rule for bank holding companies, most instruments included in Tier 1 capital with features permitting redemption at the option of the issuer (e.g., perpetual preferred stock and trust preferred securities) may qualify as regulatory capital only if redemption is subject to prior Federal Reserve approval.  In addition, bank holding companies participating in the Treasury Department’s Capital Purchase Program and other government capital programs must comply on an ongoing basis with the various requirements established by Treasury, including those explicitly set forth in the Emergency Economic Stabilization Act of 2008.

4.  Treasury Addresses Questions on Repaying CPP Investments

The Treasury Department has published answers to frequently asked questions about changes to its Capital Purchase Program (CPP) as a result of the American Recovery and Reinvestment Act of 2009 (ARRA) which, among other things, amends the Emergency Economic Stabilization Act of 2008 (EESA) to allow CPP participants to pay back Treasury’s investments.  The guidance published on February 26 addresses the procedures by which a banking organization may redeem all or a portion of the securities issued to the Treasury under the CPP.  The first step in a redemption would be to notify and consult with the institution’s primary federal banking agency, and contact the Treasury by e-mail at  Treasury’s outside lawyers who handled the original CPP investment will also manage the redemption and provide all necessary documentation.  A CPP participant may repay only part of its investment from the Treasury, but must pay at least 25% of the issue price of the preferred stock.  If the banking organization issued cumulative senior preferred stock under the CPP, it must pay any accrued and unpaid dividends at the time of any redemption.  In the case of non-cumulative senior preferred, the organization must pay accrued and unpaid dividends for the current dividend period, even if dividends have not been declared for that period.

Nutter Notes:  A CPP participant may also redeem warrants issued to the Treasury under the CPP.  Warrants may be repurchased at “fair market value” as determined in accordance with the agreement.  Treasury may not sell the warrants it holds to another investor until the issuer has had an opportunity to repurchase them.  However, if a CPP participant does not choose to exercise its option to repurchase the warrants, Treasury will attempt to liquidate them as soon as possible if they are registered with the SEC.  Private companies that participated in the CPP issued warrants for preferred shares that were exercised immediately upon closing by the Treasury.  Those warrant preferred shares may also be redeemed at the same time that a private banking organization redeems the original preferred stock investment.  Treasury’s guidance re-states ARRA’s requirement that a banking organization interested in redeeming its CPP investment must first “consult” with its primary federal regulator and Treasury about the redemption proposal, but the banking agencies and Treasury have not yet stated what factors will be considered by the agencies.

5.  Other Developments: Court Rulings on Truth in Lending and Check Collection

  • Technical Violations of TILA Do Not Support a Claim for Rescission

A recent federal court ruling held that purely technical violations of the Truth in Lending Act (TILA) involving the Notice of Right to Cancel in circumstances where the notice is otherwise clear cannot provide a foundation for a claim for rescission beyond the ordinary three-day period.  The case involved a Notice of Right to Cancel that did not specify the closing date of the loan or the date the rescission period expires.

Nutter Notes:  The United Stated District Court for the District of Massachusetts followed decisions in similar cases where dates were omitted from the form but the omission would not be confusing to an average borrower.  The court clarified that technical violations, such as the omission of dates, cannot form the basis for a rescission claim if a “reasonably alert” borrower would not be confused by the disclosure form.

  • Massachusetts Case Reaffirms Uniform National System of Check Collection

The Massachusetts Supreme Judicial Court recently ruled in a case involving collection on a foreign check that a U.S. bank’s customer remains the owner of the check during the collection process and bears the risk of collection, including the risk of loss from fluctuation in currency exchange rates.  The court also ruled that a bank is held only to a standard of ordinary care in a collection.

Nutter Notes:  The case involved a check drawn on a foreign bank in euros.  The payee presented the check to a branch of a U.S. bank for deposit into his account at that bank.  The teller did not tell the customer that the proceeds of the check would be converted from euros to dollars for deposit.  During a delay in collecting on the check not caused by the depositary bank, exchange rates declined causing the value of the deposit in dollars to decrease.

Nutter Bank Report

Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP.  Chambers and Partners, the international law firm rating service, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation.  The Chambers and Partners review says that the “well-known and well-versed” Nutter team “excels” at corporate and regulatory banking advice.  “The banking and financial services group at Nutter is staffed by a number of ‘blue-chip caliber partners’ who have formidable reputations in the community banking sector,” according to Chambers and Partners.  Visit the U.S. rankings at  The Nutter Bank Report is edited by Matthew D. Hanaghan.  Assistance in the preparation of this issue was provided by Lisa M. Jentzen.  The information in this publication is not legal advice.  For further information, contact:

Kenneth F. Ehrlich
Tel: (617) 439-2989

Michael K. Krebs
Tel: (617) 439-2288

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