Bank Lawyer's Blog

A Change of Policy, But Only in Two States

While the epic "Yo Mamma" wars between banks and credit unions have been well-documented (and often lamented) on this blog, I have no explanation for the recent activities of Chase Bank and Huntington Bank, as outlined in a recent article in Credit Union Times.

As many as 30 credit unions in West Virginia and Ohio have been scrambling to establish new correspondent vendors after a regional and national bank terminated their accounts over the past few weeks.

The $1.4 billion Volunteer Corporate CU and the $3.7 billion Corporate One FCU both reported the closed accounts, and in both cases said members reported the banks cited Bank Security Act and money laundering risk.

Charlie Thomas, VolCorp’s senior vice president of West Virginia operations, said the Nashville, Tenn.-based corporate first became aware of the terminated correspondent relationships in late March when a member called, asking for assistance. He said the two banks were the Columbus, Ohio-based Huntington Bank and New York-based Chase Bank.

[...]

Thomas said a letter he’d seen from Huntington to a credit union said the decision to terminate the business relationship was the result of regulatory requirements, “some of which may be new or been amended since the credit union opened its account.” The decision reflected a change in bank wide strategy, and was not a reflection on the credit union, the letter added.

The two banks aren't providing a more detailed explanation and the Fed refuses to comment to reporters on the matter, including indicating whether the banks were directed to close the accounts by their primary regulators because of BSA concerns. Speculation includes the theory that the banks are trying to reduce volatility of deposits, but other observers note that those banks are so large that the 30 banks would be but a blip on the radar screen. Also, why only banks in those two states? Is there some massive money laundering risk suddenly emerging from coal country? Are moonshiners now allied with Mexican drug cartels and laundering massive amounts of illicit cash through these credit unions?

This may be worth following. Or, it may not be. If anything interesting pops, I'll post.

Wal-Mart Bulks Up On Small Biz Lending

With the same perverse fascination that compels us to watch Godzilla crush Tokyo, we can't tear our eyes away from the sight of Wal-Mart's inexorable march into the land where, lately, many banks have feared to tread: small business lending. Through a venture between Wal-Mart's Sam's Club unit and nonbank small business lender Superior Financial Group, Wal-Mart plans to offer small businesses loans in the $5,000 to $25,000 range. As DBJ Confidential blogger (and Dallas Business Journal associate editor) Chad Watt so aptly puts it, "The Bank of Wal-Mart has come a step closer to reality."

The Sam’s venture hits banks while they’re vulnerable. Wal-Mart says 15 percent of its small business members have been denied a loan in the past year, up from 12 percent in spring 2009.

[...]

The deal with Superior is for an online loan application. That’s something Superior does anyway, so what is Sam’s Club bringing to the table? Put simply, a 20 percent discount on Superior’s application fee and a 25 basis point discount on Superior’s finance rate.

That should free up some more money for coffee cups and creamer.

As I said in March when discussing Wal-Mart's plans to rapidly expand its in-store MoneyCenters, Wal-Mart is on a mission to beat banks at their own game, and without the psychological and emotional pain (and financial burden) of dealing with federal bank regulators, like those who denied it an opportunity to enter the banking business through acquiring an industrial bank charter. Not being able to leverage insured deposits is a funding disadvantage, but one with respect to which a giant retailer like Wal-Mart can always find a work-around.

Love it or hate it, you have to respect Wal-Mart's persistence and ingenuity. If Wal-Mart's "lucky," however, they'll continue to grow their financial services business until they eventually become a too-big-to-fail, systemically important nonbank financial company that is drawn into the web of the soon-to-be-created "Financial Stability Oversight Council," where it can be hounded by bureaucrats like most of the rest of the financial institutions in this country.

I'm such a glass-half-full kind of guy, aren't I?

A Little Kryptonite Thrown At The FDIC

It's not often that the so-called "Superpowers" of the FDIC as receiver of a failed bank are curbed. However, Kevin LaCroix discussed a recent decision of the federal Second Circuit Court of Appeals that clipped the FDIC's wings in his The D&O Diary blog.

The suit arose out of a claim by the FDIC against a failed bank's fidelity bond, based on a fraudulent loan scheme allegedly concocted by officers of Connecticut Commerce Bank (CBC), which failed in 2002. The issuer of the bond denied coverage on the basis that CBC had made false statements and omissions on its application for the bond. The FDIC sued the issuer, alleging that such defenses are barred by the dreaded provisions of 12 USC 1823(e), which provides:

No agreement which tends to diminish or defeat the interest of the Corporation in any asset acquired by it under this section or section 11, either as security for a loan or by purchase or as receiver of any insured depository institution, shall be valid against the Corporation unless such agreement--

(A)  is in writing,

(B)  was executed by the depository institution and any person claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the asset by the depository institution,

(C)  was approved by the board of directors of the depository institution or its loan committee, which approval shall be reflected in the minutes of said board or committee, and

(D)  has been, continuously, from the time of its execution, an official record of the depository institution.

The section lists some exceptions to this general rule, none of which were applicable to this case.

The district court granted summary judgment in favor of the bond issuer and the Second Circuit upheld the district court's decision. While holding (contrary to an earlier Sixth Circuit opinion) that the fidelity bond is an "asset" of the failed bank, the court ruled that 1823(e) bars "secret defenses," but not bar defenses raised by the bond itself.

The Second Circuit found that "as the grounds for rescission were plainly stated on the face of the bond, there is nothing secret about [the fidelity bond insurer’s] misrepresentation defense." To recognize the FDIC’s position, the Second Circuit said, would be to "strike the rescission clause from the bond."

Kevin asserts that the decision has a couple of implications. First, it affirms that notwithstanding the "Superpowers" of the FDIC and the FDIC's willingness to push the envelope on the limits of those "Superpowers," "the FDIC’s ability to enforce the failed bank’s insurance coverage is subject to the defenses the insurer may have that appear in the relevant policies." Second, "the opinion starkly demonstrates the critical importance of the policy application process and the extent of the insurer’s rights, under certain circumstances, to seek rescission."

The Second Circuit’s view of the applicant’s obligation to provide responsive information is broad and encompassing...The breadth of the ruling rescission ruling could well prove helpful to insurers in other rescission cases, even those lacking the distinctive characteristics of this case."

The nature and extent of the FDIC-receiver's powers under 12 USC 1823(e) were critically important during the last bank crisis of the late 1980s and early 1990s. With the failure of nearly 250 banks in the last year and one-half, and with many more failures coming before the current crisis has run its course, banks and those who have relationships with them (including their borrowers, correspondent banks, loan participants, landlords, and service providers) are rediscovering, often to their extreme dismay, the extent and breadth of these "Superpowers."

Those interested in learning more might consider listening to Tuesday's webinar, "Revisiting the FDIC's "Super Powers": Contract Repudiation and D'Oench Duhme," given by Haynes and Boone lawyers John Podvin and Erin Burrows.