Maryland Legal Alert for Financial Services

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Maryland Legal Alert - August 2011

In This Issue:

2011 MARYLAND LAWS UPDATE

PREEMPTION – ARE WE THERE YET?

MORTGAGE LENDERS/BROKERS HEADS UP: NEW ADVERTISING REQUIREMENTS

ADVERSE ACTION & RISK-BASED PRICING – THE QUESTIONS KEEP COMING

FAILED INSTITUTION DIRECTOR AND OFFICER COMPENSATION

OTHER REAL ESTATE OWNED COULD SPELL TROUBLE FOR BANKS

 

2011 MARYLAND LAWS UPDATE

We have published our 2011 Maryland Laws Update for the financial services industry. As in the past, this year’s session was challenging, particularly in the area of residential mortgage foreclosures. A number of new laws and restrictions were adopted of which financial services providers should be aware.

If you have questions about any new laws and our lobbying efforts in connection with these laws, or would like us to mail you a hard copy of the update, please contact Bob Enten or any member of our Financial Services Group.

 

PREEMPTION – ARE WE THERE YET?

Last month, we reported that the Department of the Treasury questioned the OCC's proposed position on federal preemption under the Dodd-Frank Act. The OCC apparently did not take Treasury’s concerns to heart because on July 21, 2011 the OCC published final regulations confirming its position that Dodd-Frank does not require much change to the OCC’s existing preemption rules.

The changes that were made include: elimination of preemption for operating subsidiaries of national banks and federal thrifts; application of the same preemption standard for federal thrifts as for national banks; and “massaging” language to avoid ambiguity concerning the applicable preemption standard.

Regarding the applicable preemption standard, the OCC stated: “To the extent that an existing preemption precedent relies exclusively on the phrase ‘obstructs, impairs, or conditions’ as the basis for a preemption determination, the preamble [to the final rule] states that the validity of the precedent would need to be reexamined to ascertain whether the determination is consistent with the Barnett conflict preemption analysis.”

Thus, at present, it appears federal preemption applicable to national bank operations is nearly “business as usual” and federal preemption as to federal thrifts should follow the national bank rules. If you are confused, you are not alone.

Please contact Chris Rahl for counsel or for a shoulder to lean on.

 

MORTGAGE LENDERS/BROKERS HEADS UP: NEW ADVERTISING REQUIREMENTS

Nonbank mortgage lenders and brokers need to review immediately new Federal Trade Commission advertising rules, published on July 22, 2011. These new rules include a list of prohibited activities in connection with advertising mortgage credit. While mortgage lenders and brokers need to be informed about what is prohibited, most of these advertising activities are not of a type in which “our clients” engage (which is good).

However, the new FTC rule includes a recordkeeping requirement with which all mortgage lenders subject to FTC jurisdiction must now comply.

The new rules become effective August 19, 2011, so all non-bank mortgage lenders and brokers must take quick action to ensure compliance.

Please contact Chris Rahl if you would like to discuss these new mortgage credit advertising requirements in greater detail.

 

ADVERSE ACTION & RISK-BASED PRICING – THE QUESTIONS KEEP COMING

As we mentioned in our July 21 Dodd-Frank Survival Guide, final rules concerning the inclusion and use of credit scores in adverse action and risk-based pricing notices were published in the Federal Register (adverse action) (risk-based pricing) on July 15, 2011. We have been fielding numerous questions concerning how to comply with and implement the requirements in the rules, particularly as they relate to adverse action notices and the Federal Reserve Board’s new model forms.

If you have any questions, please contact Chris Rahl.

 

FAILED INSTITUTION DIRECTOR AND OFFICER COMPENSATION

On July 15, 2011 the FDIC published final regulations to address the FDIC's orderly liquidation authority under the Dodd-Frank Act with respect to failed financial companies.

Among other things, the regulations address how the FDIC will recover compensation paid during the past two years (except in the case of fraud) to any past or current director or senior executive officer who is "substantially responsible" for the failure of a "covered financial company." The phrase "covered financial company" includes a bank holding company and any of its subsidiaries that is predominantly engaged in financial activities (other than an insured depository institution or insurance company subsidiary) for which a systemic risk determination has been made under Dodd-Frank.

The FDIC adopted a simple negligence standard - a director or executive officer will be deemed to be substantially responsible for a company's failure if

(i) the director or officer failed to carry out responsibilities with the degree of skill and care an ordinarily prudent person in a like position would exercise under similar circumstances and

(ii) as a result, either individually or collectively, the director or officer caused a loss to the company that materially contributed to its failure.

Subject to certain exceptions, there is a presumption that a director or senior executive officer is substantially responsible for the company's failure if they are served, at any time, as the chairman of the board, chief executive officer, president, chief financial officer or in any other similar role regardless of title if they had responsibility for the strategic, policymaking or company-wide operational decisions of the company.

The definition of "compensation" is very broad and includes any direct or indirect financial remuneration received from the covered financial company. In addition to the traditional forms of compensation, the term includes employee benefits, perquisites and any profits realized from the sale of company securities.

If you have any questions about these final regulations, please contact Andy Bulgin.

 

OTHER REAL ESTATE OWNED COULD SPELL TROUBLE FOR BANKS

Given the real estate meltdown and the sluggish economy, it is not surprising that the balance sheets of many financial institutions show a significant amount of other real estate owned, or OREO.

To make matters worse, much of this OREO is commercial real estate in various stages of development. This fact, coupled with a weak real estate market, has made it difficult for financial institutions to dispose of OREO.

Many institutions believe that their chances of selling OREO and recouping their investment can be significantly improved if they are able to complete, or hire someone to complete, the development projects.

The problem, however, is that the federal banking regulators generally prohibit financial institutions from making capital improvements to real estate that is not used (or intended to be used) for banking purposes, including OREO. Under current law, financial institutions are expected to dispose of OREO within certain time periods, and, pending disposition, are expected to limit expenditures to ordinary maintenance payments (e.g., insurance premiums, real estate taxes, costs of upkeep, etc.).

There are circumstances under which the federal banking regulators will allow a financial institution to improve OREO, but prior consultation with and approval from the institution's primary federal regulator are typically required.

As a general rule, and although they differ in their approaches, the federal banking regulators will allow improvements if the cost will be small in comparison to the institution's investment in the OREO and the institution can show that its ability to sell the OREO within the prescribed time period will be limited unless the OREO can be improved.

Because the regulators consider land development to be speculative in nature and, thus, an unsafe and unsound banking practice, an institution's failure to consider these regulatory restrictions when dealing with OREO can have significant adverse consequences.

We have counseled several clients on this issue during the past year and have secured development approval.

If you have any questions regarding the acquisition, management, improvement and/or disposition of OREO, please contact Andy Bulgin