Vol. III, No. 27, July 2, 2009

Latest News:

Treasury Delivers Bill To Congress To Create Consumer Agency

ABA's Grassroots Program is Crucial To Defeating the Legislation

Connelly Urges Mutuals To Fully Engage in Debate Over Banking's Future

Treasury Issues Policy on Repurchasing CPP Warrants

Supreme Court Gives State AGs Some Powers Over National Banks

ABA, First Trust Open NASDAQ To Celebrate Launch of Community Bank Fund

SEC Proposes Rules on 'Say on Pay,' Corporate Governance

FDIC Proposes Policy on Sales of Failed Banks To Investors

Agencies Adopt Unified Approach to Regulatory Conversions

FASB Head Speaks Out Against Political Pressure on Accounting Standards

Treasury Responds To ABA on Executive Compensation Issues

Selected Short Subjects

Treasury Delivers Bill To Congress To Create Consumer Agency

The Obama administration delivered its draft bill to Congress to create the Consumer Financial Protection Agency and give it authority to regulate financial products and services offered to consumers by banks and nonbanks. Existing regulatory authority would be stripped from the federal banking agencies.

ABA opposes the creation of a new agency because of its unprecedented powers and the additional regulatory burdens it would place on banks. In an Alert to CEOs, ABA called on bankers to send letters to their members of Congress expressing strong opposition to two priority parts of the administration's regulatory restructuring proposal: the consumer agency and the elimination of the thrift charter. (See details of ABA's grassroots program below.)

House Financial Services Committee Chairman Barney Frank (D-Mass.), who supports creating the new agency, called the administration bill "very welcome" and will allow the committee to report a bill before the start of the August recess. Frank said he believes there is "a great deal of common ground" between the administration and the committee.

Rep. Spencer Bachus (R-Ala.), the committee's ranking Republican, said, "The best way to protect consumers is not through the creation of another bureaucracy accountable to no one but by consolidating the regulatory system and holding regulators accountable for both consumer protection and safety and soundness."

The administration's bill major provisions would:

 Authorize the new agency to prescribe and administer consumer protection regulations and enforce new and existing rules. For example, Treasury Secretary Timothy Geithner said the new agency "will implement and enforce the new credit card bill. . .and have authority to combat the worst abuses in mortgage markets." The agency could prohibit or impose conditions on mandatory pre-dispute arbitration agreements. Violations of the agency's rule could incur civil penalties of up to $1 million a day. State officials could enforce not only their own rules, but federal rules as well.

The agency's broad reach would include authority over some or all of more than a dozen laws including the Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act and the Truth in lending Act. The proposal would direct the agency to propose model disclosures integrating TILA and RESPA disclosures within one year.

 Authorize adoption of standard, so-called plain vanilla, consumer financial products and services. The agency could require lenders to warn customers about the risks of alternative products and require giving customers a "meaningful opportunity" to decline the standard product.

 Allow the agency to set compensation standards for any employee, agent or contractor that communicates with a customer on financial products or services. The agency could not limit the total dollar amount paid to a person.

 Encourage, but not require, states to adopt standards for lenders that are not insured depository institutions to deter unfair, deceptive, abusive, fraudulent or illegal transactions on financial products or services. The new agency could also set minimum standards for lenders other than those regulated by a federal banking agency or a comparable state regulator.

 Prohibit the agency's rules from preempting state law if state law provides greater protection for consumers. A state attorney general would be authorized to bring civil actions for violations.

 Establish state law preemption standards for national banks and federal savings associations and their subsidiaries, and visitorial powers of state attorneys general. The proposal would also clarify the state law applicable to state-chartered nondepository institution subsidiaries and affiliates of national banks and federal savings associations.

 Establish a five-person board to run the agency, with four members appointed by the president and confirmed by the Senate, plus the director of the proposed National Bank Supervisor agency. The agency would be authorized to collect annual fees or assessments to run its operations, and Congress could appropriate funding.

Staff Contact--Floyd Stoner (202) 663-5339.

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ABA's Grassroots Program is Crucial To Defeating the Legislation

In urging members to write to their representatives in Congress on the proposals to create the Consumer Financial Protection Agency, ABA is posting on aba.com sample letters addressing either or both provisions. ABA's automated system enables bankers to customize these samples within a few minutes and send letters to their House and Senate members. Consumer agency letter. Thrift charter letter. Combined letter.

"It is important that everyone is involved in defeating these two proposals," the ABA alert said. "Unless Congress hears significant opposition from the banking industry it is likely to accept the administration's proposal as presented." To impact Congress, tens of thousands of bank employees and directors will need to contact their members of Congress during this campaign. "This is the battle for banking's future," ABA President and CEO Ed Yingling emphasized.

Staff Contact-- James Ballentine (202) 663-5359.

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Connelly Urges Mutuals To Fully Engage in Debate Over Banking's Future 

ABA Chairman Arthur Connelly strongly urged mutual bankers to become fully involved in maintaining the mutual option and the thrift charter, which the Obama administration's plan would eliminate.

In a special ABA conference call with more than 180 ABA mutual institutions and numerous bankers, Connelly said: "We are the heart and soul of traditional banking. We are community banking. We need to be fully engaged in the debate to ensure that the mutual option is fully preserved. We need your involvement, and your insights, and your commitment to fight. This is the battle over. . .our future and the future of our charters." 

ABA Mutual Institution Council Chairman Brian Lanigan also cited the importance of opposition to the proposal's creation of the Consumer Financial Protection Agency. "We're going to need to commit the time, the effort and the energy necessary to engage and educate our legislators. We need to seek them out and begin right now to shape their understanding of these issues and our priorities. We need to have our boards and our employees do the same," he said. Lanigan is first executive vice president and COO, Middlesex Savings Bank, Natick, Mass.

An audio file of the call is available for mutual bankers who were unable to participate. Bankers are encouraged to provide ABA with feedback on the administration's proposals by using the e-mail address regreform@aba.com.

Staff Contact-- Bob Davis (202) 663-5588.

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Treasury Issues Policy on Repurchasing CPP Warrants

The Treasury Department issued its policy on bank repurchase of warrants the government received when banks issued securities to obtain Capital Purchase Program funds.

Under the four-step program, within 15 days of repaying the CPP funds, a bank would submit a determination of fair value on warrants it wishes to repurchase. Treasury has 10 days to respond. Treasury said it would base its own appraisal on market prices, financial modeling and outside consultants.

If Treasury objects to the bank's determination and can't reach agreement, the bank and Treasury would each select an independent appraiser. If the appraisers fail to agree, a third appraiser would be hired and generally a composite valuation will be used to establish fair value.

If a bank chooses not to repurchase the warrants, Treasury has the option of disposing the warrants over time. Treasury said it will sell the warrants through auction over the next few months. (Treasury exercised warrants immediately on closing the initial investment of nonpublicly traded banks.)

Treasury said it would publish information on each repurchased warrant on its website. This will include the bank's determination of fair market value and Treasury's independent valuation inputs to assess the bank's determination.

Staff Contact-- Mark Tenhundfeld (202) 663-5042.

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Supreme Court Gives State AGs Some Powers Over National Banks

A divided Supreme Court ruled that state attorneys general have the power to enforce their state laws against national banks, partially invalidating the Office of the Comptroller of the Currency's visitorial powers.

In a 5 to 4 decision, the court drew the distinction between the OCC's exclusive visitorial powers under the National Bank Act to issue subpoenas and conduct examinations and inspect and require production of books and records vs. state powers to enforce state laws through judicial proceedings. In its regulations the court said, "The comptroller erred by extending the definition of 'visitorial powers' to include 'prosecuting enforcement actions' in state courts."

Despite the decision, the court upheld the injunction that was issued by lower courts precluding the New York attorney general from enforcing demands by subpoena, not in a judicial proceeding, for documents from national banks to determine whether they were engaged in lending discrimination.

The case is Cuomo v. The Clearing House Association and its companion, Cuomo v. Office of the Comptroller of the Currency.

ABA expressed disappointment at the decision. "Without uniform regulation and enforcement of the laws that apply to national banks -- which often includes state laws -- those institutions will face a patchwork of duplicative and conflicting federal and state regulation and enforcement actions," said ABA President and CEO Ed Yingling. ABA filed an amicus brief supporting the OCC.

 Information Sharing. The Supreme Court declined to review a decision by the U.S. Court of Appeals for the 9th Circuit in American Bankers Association v. Brown that restricts banks from sharing customer information with their affiliates. The appeals court held that a portion of the California statute giving bank customers the right to opt out is not preempted by the Fair Credit Reporting Act.

However, the appeals court agreed that the FCRA preempts provisions of the statute involving the sharing with affiliates of creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics or mode of living.

Staff Contact-- Greg Taylor (202) 663-5028.

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ABA, First Trust Open NASDAQ To Celebrate Launch of Community Bank Fund

ABA and First Trust opened the NASDAQ stock market on July 1 to celebrate the launch of the First Trust NASDAQ ABA Community Bank Index Fund (QABA).

"This is. . .an affirmation of all that's good about banking," said ABA Chairman Arthur Connelly. "America's community banks and main street banks today are healthy, they're alive and well, they're well capitalized and they're to a great extent profitable." Also presiding over the opening bell were Chairman-Elect Art Johnson and COO Diane Casey-Landry, accompanied by bankers and ABA staff. Casey-Landry appeared later on Fox Business News to discuss the new fund and community banking.

The fund will seek investment results generally corresponding to the new NASDAQ ABA Community Bank Index (ABQI), which tracks the performance of the 100 most actively traded community banks listed on NASDAQ.

The creation of the fund fulfills an initiative to bring more attention to community banks that began in 2003 with the launch of the ABA NASDAQ Community Bank Index (ABAQ).

Staff Contact-- Bob Davis (202) 663-5588.

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SEC Proposes Rules on 'Say on Pay,' Corporate Governance

The Securities and Exchange Commission unanimously proposed a rule requiring public companies that received Troubled Asset Relief Program funds to provide a non-binding advisory shareholder vote on executive compensation. The "say-on-pay" rule would implement a requirement of the economic stimulus law.

A vote will be required separately in the proxy solicitation for the election of directors at annual meetings during the period that the TARP obligation remains outstanding. The SEC asked for comments on whether specific disclosure guidance would be helpful.

The SEC also voted unanimously to propose a broader rule on compensation and corporate governance issues to be included in proxy and information statements of all publicly traded companies.

The proxy disclosure enhancements would include a written description of how a company and its board manage risks; the company's overall compensation approach; potential conflicts of interest by compensation consultants, including disclosure of relationships between consultants and the company and its affiliates; and disclosures about director nominees, including their experience and qualifications to serve on the board or particular committees, and why a board has chosen a particular structure. In addition, the proposal would change the way companies disclose expenses of annual employee stock-option awards.

The comment period on these proposals will end 60 days after publication in the Federal Register.

The SEC also approved by a 3 to 2 vote a New York Stock Exchange proposal to prevent brokers from voting shares on behalf of their clients. Some commissioners expressed concern  that the move could disenfranchise investors who rely on brokers to represent their interests. 

Staff Contacts-- Sally Miller (202) 663-5325, Carolyn Walsh (202) 663-5253.

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FDIC Proposes Policy on Sales of Failed Banks To Investors

The FDIC today proposed a policy statement to establish qualifications for private-equity investors to acquire failed banks. Despite the unanimous vote, board members raised issues that they said need to be addressed in a final rule. The FDIC will accept public comments for 30 days after publication in the Federal Register.

All agreed that private investment would save the Deposit Insurance Fund money, but that a balance is needed between protecting DIF from subsequent failures while having policy requirements that do not deter private investors. One area to be determined is what category of investors will be eligible for acquisitions. The FDIC will hold a roundtable discussion next week.

Under the proposal, the acquired bank would have a Tier 1 leverage ratio of 15 percent for at least three years and be well capitalized thereafter; the institution's holding company would be a source of strength; cross guarantees involving other investor-owned institutions would be pledged to the FDIC to pay for any losses; the institution could not make loans to the investors or their affiliates; and the institution could not be sold for three years.

The FDIC has already sold BankUnited and IndyMac to private-equity investors.

Staff Contact--Rob Strand (202) 663-5350.

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Agencies Adopt Unified Approach to Regulatory Conversions

The federal banking regulators issued a statement reaffirming that they are united in their approach to regulatory conversions and will not consider charter conversion applications or changes in an institution's regulatory agency that undermine the supervisory process.

Conversion requests made while serious or material enforcement actions are pending won't be allowed because they would delay or undermine supervisory actions, the agencies said through the Federal Financial Institutions Examination Council.

For conversions or agency changes that are allowed, the CAMELS rating and any outstanding corrective programs will remain in place.

Staff Contact--Richard Riese (202) 663-5051.

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FASB Head Speaks Out Against Political Pressure on Accounting Standards

Robert Herz, chairman of the Financial Accounting Standards Board, used a speech at the National Press Club to speak out against political pressure being applied that he said would undermine the private-sector body's independence.

"While we certainly welcome active dialogue with lawmakers, politicizing of accounting standard-setting by special interests risks undermining public confidence in the integrity of financial reporting. What I don't particularly welcome is when people try to exert political pressure on us to try to change accounting rules."

Herz was referring to a House hearing in March at which lawmakers threatened legislation to move FASB to take steps to provide relief on mark-to-market accounting rules.

"Unfortunately, there have been certain major companies -- including ones that subsequently failed and had to be rescued by the government -- and industry trade groups that have sought political intervention into accounting standard-setting," he said.

Staff Contact--Bob Davis (202) 663-5588.

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Treasury Responds To ABA on Executive Compensation Issues

Responding to questions from ABA, Treasury Department staff clarified several issues involving the interim final rule on executive compensation.

On bonus restrictions, Treasury confirmed that for banks that have accepted less than $250 million in Troubled Asset Relief Program funds, the limitations will apply to the "most highly compensated employee(s)" regardless of whether they are senior executive officers (SEOs). The interim rule's definition of most highly compensated employee had excluded SEOs.

Treasury also said that for banks accepting less than $250 million, the bonus restrictions will apply to the five most highly compensated employees which, again, may or may not be senior executive officers.

For banks accepting less than $25 million in TARP funds, the bonus restrictions will apply to the single most highly compensated employee which may or may not be the bank's CEO. For banks accepting $250 million or more, the bonus restrictions apply to the five SEOs plus some additional number of highly compensated employees.

Treasury said that a partial repayment will not permit a bank to move from one category to another, less restrictive bonus category.

ABA also raised privacy concerns over the CEO and CFO certifications that would require identification of the SEOs and the 20 next most highly compensated employees and their annual compensation. For public companies, these certifications would be included as exhibits to the Form 10-K. ABA also expressed concern that for all TARP recipients, whether publicly traded or not, this same personal information could be posted unintentionally to Treasury's website. Treasury staff indicated that this issue was under review and encouraged ABA and others to submit comments. The deadline for comments is Aug. 14.

Staff Contact--Sally Miller (202) 663-5325.

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Selected Short Subjects

• Tier 1 Capital. ABA told the Federal Reserve Board in a comment letter that it supports the proposal to permit S corporation bank holding companies and mutual bank holding companies to include in Tier 1 capital the full amount of any new subordinated debt securities issued to the Treasury under the Capital Purchase Program. The proposed rule would level the playing field for all bank holding companies. ABA asked the Fed to clarify that Tier 1 capital treatment will apply to shares regardless of whether they were issued before or after publication of the rule.
• Refinance Program. Fannie Mae and Freddie Mac have been authorized to refinance mortgages they guarantee or own in danger of default with loan-to-value ratios up to 125 percent, an increase in the 105 percent LTV limit. In making the announcement, the Federal Housing Finance Agency also said the program provides an incentive for borrowers to reduce the term of their loan from 30 years to a shorter term.
• Uptick Rule. ABA urged the Securities and Exchange Commission to adopt, among the several proposals, an uptick rule that would prohibit a short sale unless the price was above the highest current national bid price. ABA said in its comment letter that the best bid option is preferable to last sale price test and circuit breaker approaches. Trading centers should also be required to monitor compliance to prevent the execution or display of short sale orders at a down-bid price, ABA said. ABA was successful last year in convincing the SEC to impose restrictions on short sales of bank stocks. Since those restrictions expired, ABA has continued to work with the SEC to reinstate a modified uptick rule to help combat abusive short selling.
• RESPA Rule. ABA and nine other trade groups again urged the Department of Housing and Urban Development to withdraw its final Real Estate Settlement Procedures Act rule and work with the Federal Reserve Board to produce a single disclosure under RESPA and the Truth in Lending Act. The RESPA rule is effective on Jan. 1, 2010. The Fed is currently working to revise TILA requirements. "Unless the rule is suspended very soon, lenders and other settlement service providers will incur enormous systems costs that will ultimately be borne by borrowers," the groups said in a letter to Treasury secretary timothy Geithner, HUD Secretary Shaun Donovan and Fed Chairman Ben Bernanke.
• S Corporations. Sen. Chuck Grassley (R-Iowa), ranking Republican on the Senate Finance Committee, introduced S. 1381, a bill to reduce the amount of time an S corporation that converts from a C corporation has to hold built-in gains to avoid tax. The bill would reduce the holding period, effective permanently in 2010, to five years from the current seven years. The previous 10-year period was reduced to seven years in the stimulus law enacted earlier this year for sales that occur only in 2009 and 2010. The provision was included in a small-business tax relief bill.
• Appraisal Code. Reps. Travis Childers (D-Miss.) and Gary Miller (R-Calif.) introduced H.R. 3044, a bill to impose an 18-month moratorium on the Home Mortgage Valuation Code of Conduct. The code was effective for single-family loans sold to Fannie Mae and Freddie Mac beginning on May 1. The code requires strict boundaries to ensure that appraisals are independent of loan production.
• TARP Dividend Payments. House Financial Services Committee Chairman Barney Frank (D-Mass.) introduced H.R. 3068, a bill to require that the dividend payments banks are making on Troubled Asset Relief Program funds be used to fund various housing programs. The bill would direct $1 billion to the National Affordable Housing Trust Fund, created in 2008, but that has been unfunded because the source of the funds was supposed to be Fannie Mae and Freddie Mac. The bill would also direct $1.5 billion to the Neighborhood Stabilization Program; $2 billion to the Department of Housing and Urban Development to aid homeowners struggling to make mortgage payments; and another $2 billion to aid loans on multifamily homes in danger of default. So far, Treasury has received nearly $6 billion in dividend payments. Congressional Republicans have urged using the payments to pay down the national debt. A committee hearing is scheduled for July 9.
• Loan-to-Deposit Ratios. Federal banking regulators updated host state loan-to-deposit ratios used to determine compliance with a law that prohibits banks from establishing or acquiring branches in another state primarily for deposit production purposes.
• Reverse Mortgages. A study by the Government Accountability Office found that government agencies could do a better job in protecting seniors from misleading marketing of reverse mortgages. Most reverse mortgages are insured by the Department of Housing and Urban Development's Home Equity Conversion Mortgage program. GAO found that HUD's oversight of HECM-required counseling providers needed improvement. GAO also recommended that the Federal Financial Institutions Examination Council develop guidance to help bank examiners identify misleading claims in consumer education materials.
• Mortgage Metrics. The Office of Thrift Supervision and the Office of the Comptroller of the Currency reported that delinquencies and foreclosures on first-lien mortgages continued to increase during the first quarter, but loan modifications also increased. The report on data from loan servicing companies that manage 64 percent of the nation's mortgages found that modifications that reduce monthly payments have lower delinquency rates over time. More than half of modifications in the first quarter resulted in lower monthly principal and interest payments. Prime mortgages, which represented two-thirds of all mortgages in the portfolio, had the highest percentage increase in serious delinquencies -- up more than 20 percent from the prior quarter to 2.9 percent of all prime mortgages.