Bank Lawyer's Blog

Third Party Vendor Agreements

Recently, we reviewed and helped a financial institution client negotiate, a loan document preparation agreement with a well-known “doc prep” firm. To our amazement, one provision of the agreement (prepared by the doc prep firm and presented to our client as its “standard” customer agreement form) allowed the doc prep firm to amend any provision of the agreement without the consent of the customer, and to have any such amendment be effective immediately. When we objected, and suggested that no modifications to an agreement should be made without the consent of BOTH parties, we were told that we were the first customer to ever raise this issue! This company prepares loan and disclosure documents for many commercial banks and savings associations. Although we found this difficult to believe, this statement was confirmed by the doc prep company’s general counsel. The company changed the provision for us, but we assume that other lenders are living with this obviously unsafe and unsound provision in a third party service provider contract.

All third party service provider contracts should be reviewed for their legal, as well as, business terms. This is required by the federal banking agencies as part of an overall program of risk management with respect to third party service provider relationships, and is a matter of fundamental safe and sound banking practice. See, for example, OTS Thrift Bulletin 82 and OCC Bulletin 2001-47. The depth and extent of a legal review might vary depending on the size and complexity of the particular arrangement, but completely forgoing a legal review is generally unwise. A national bank recently came to us to assist them in implementing a cost-effective program for third-party service provider contract reviews after being criticized by the OCC during an examination for its failure to have such a process in place.

One more word of caution: don’t accept at face value a vendor’s statement that the contract terms are “boilerplate” and not open to negotiation. Often, such statements are not correct, and most contract terms are, in fact, open to negotiation. Moreover, if the contract is deficient in some of its terms and provisions, to the extent that the bank or thrift would be engaging in a violation of a regulation or law (e.g., privacy protections for customers' nonpublic personal information), or otherwise engaging in an unsafe and unsound business practice (e.g., no effective recourse against the service provider for breach of the agreement), by signing it, then the bank would be well-advised to find a more flexible service provider.
---Kevin Funnell

Selling Assets and Deposits the E-bay Way

My husband has spent hours on E-bay buying parts for a motorcycle that he is repairing.  For the most part, it is a simple process.  People list parts for sale, include descriptions and pictures, and set forth the terms of the sale.  Everyone bidding knows the terms up front.  If you want different terms, you simply do not bid on that part.  Occasionally, you can contact the seller before the bidding ends and ask if they will consider different terms.  You do not win the bid and then ask for different terms.   

Asset and deposit sales should be so simple!  Institutions should be able to put their assets or deposits out to bid, include a contract with the offering, and receive bids based, in part, on that contract.  If a bidder needs changes to the contract, those should be discussed before the bidding is closed and included in the bid. 

Instead, time and time again we have seen that even when a contract is made an explicit part of the bidding process, it is viewed by bidders and their counsel as a mere suggestion.  After the bidding, the “lawyering” begins.   The value of the bid is whittled away as the terms of the contract change.    We have seen bids that initially appeared to be highly competitive turn into financially unacceptable bids through the contract negotiation process.   A process that, according to the terms of the offering, was not even supposed to occur. 

Including a standard contract as part of the bidding process makes it easier for sellers to compare bids.   Being told at the end of the bidding process, after a bid has been accepted, that the buyer will only agree to a contract with, for example, lifetime warranties, puts the seller at a disadvantage.  On the other hand, a buyer who knows at the beginning of the bidding process that the seller will only give six month warranties, can cost that term into its bid. 

We have seen this process work smoothly in large transactions, but more often than not, we have dealt with bidders who refuse to follow the terms of the offering.  The bidder does not mention that the bid is contingent upon negotiating new contract terms nor disclose what those terms are so that the seller can cost them into the bid.  The buyer simply sends in the lawyers to renegotiate the contract after the bid is accepted.  Then, they express amazement that the seller is not willing to negotiate critical terms.   

One of the things I like best about the E-bay bidding process is that sellers and buyers can post comments about each other.  If a seller is tardy in sending parts after the bidding closes, the buyer can post comments and warn future bidders.  If a buyer is a slow pay, the seller can warn other sellers.   

It would be great if there were a place to post comments about asset and deposit sellers and buyers.    “Bids without regard to terms of offering.  Beware of hidden cost of bid,” would probably be my most common comment about bidders. 
---Anna Dolak

SARs and The Sitting Ducks

Financial institutions must file Suspicious Activity Reports (“SAR”) under certain circumstances (31 CFR 103.18):  when an insider is involved in the criminal activity, when violations aggregate $5,000 and a suspect can be identified, when violations aggregate $25,000 or more and no suspect can be identified, and when violations aggregate $25,000 or more and involve violations of the Bank Secrecy Act or money laundering.  The filing must occur within 30 days of discovery of the facts surrounding the suspected criminal activity or 60 days, if no suspect was initially discovered.

Some institutions are diligent in detecting and filing SARs, only to be frustrated when no action is ever taken by law enforcement.  If a financial institution has a good fraud detection mechanism, it can often detect attempts to defraud it.  Even when repeated attempts are made to defraud the institution by the same perpetrators, if there is no financial loss experienced by the institution, law enforcement often does nothing.

For example, a financial institution may detect multiple instances when apparently different depositors attempt to open accounts with fraudulent checks.  Simple due diligence often reveals that the checks have been altered.  The institution may take its research a step further at that point and discover that the last several times when a potential depositor attempted to open an account with a fraudulent check some identifying information about the potential depositors was consistent (for example, a fax number).  The instances may aggregate to a large amount, but no loss was experienced by the institution and no suspect can be identified because the depositor obviously used a fraudulent identity.  In cases such as these, the perpetrators continue to attempt to “hit” the institution, but law enforcement does not pick up the cases because no actual loss was experienced.

Of course we understand that the cases where there were actual losses must be worked by law enforcement, but it is frustrating to never have cases investigated despite the large amounts involved and the obvious connection between cases.  The institutions feel like sitting ducks - if a fraudulent check slips through the system, then perhaps law enforcement will investigate.

No wonder some institutions swear that "SAR" actually stands for "Seldom Any Response."
---Anna Dolak

Attorneys As Bank Directors: My Lawyer, My Director, My Co-Defendant

In the 1990’s, I co-authored a chapter, Director and Officer Duties and Responsibilities, in the legal treatise "Banks and Thrifts: Regulatory Enforcement and Receivership Law" (First Edition: 1993; Second Edition: 1994), published by Matthew Bender.  In my chapter, I recommended against attorneys serving on boards of directors of client financial institutions.  This practice was common in the 1980’s and resulted in legal problems for a number of individual attorney/directors, their law firms and financial institutions when those financial institutions ran into financial and regulatory trouble and, in many cases, failed. For a number of years, law firms whose members sat on client bank’s boards of directors had difficulty obtaining professional liability insurance, or were penalized by higher premiums.

Financial institutions appear to be slipping into this practice again.  We see prominent (and smaller) financial sending legal work to law firms that have attorneys on their boards of directors. Another practice of the 1980’s that we have seen re-emerge is that some financial institutions are sending legal work, and even “bidding out” specific legal projects, only to law firms that agree to make large deposits in their institutions. Either case presents the potential for a conflict of interest.

The regulators made it clear in the 1980’s that they were concerned that attorney board members risked an actual conflict of interest or, at a minimum, the appearance of a conflict of interest, if work was sent to their firms.  A board member must act in the best interest of the financial institution.  A member of a law firm must act in the best interest of his/her law firm.  But, is an attorney, who serves as a board member, casting a vote to protect his or her financial interests or acting in the best interest of the financial institution?  It is truly the rare person who can make an independent decision when his or her financial interest is at stake. It’s not impossible; however, the appearance of a conflict of interest, and the potential for actual conflicts of interest arising, remains a potential risk. If the bank suffers a loss as a result of any transaction in which a director/attorney’s firm performed the legal work, the conflict of interest issue is apt to be raised, if not in the first instance by the institution itself, then as a result of ultimate regulatory scrutiny.

A financial institution that sends work only to firms that agree to deposit funds with them risks giving the appearance that it is less interested in the legal competency of the law firm than it is with getting deposits.  The selection of legal counsel should always be based on the competency and experience of the attorney who will perform the work. To do otherwise, suggests to the regulators that the financial institution is not basing basic business decisions on sound business judgment.

To paraphrase a cliché, we must heed the lessons we learned in the 1980’s or history may repeat itself.
---Anna Dolak

Unwanted Faxes

It's difficult for us to believe, but apparently some financial institutions and mortgage originators are unaware that sending solicitations or advertisements by fax to consumers and businesses, where there exists no prior business relationship or no oral or written consent of the recipient, is a violation of the Telephone Consumer Protection Act (TCPA). Some loan solicitors were under the impression that the ban applied only to solicitations that are faxed to consumers. The ban also applies to faxes directed to businesses.

In one case, the client sent a fax soliciting a loan relationship to a loan broker, who, apparently, is now in the business of suing lenders who send her such faxes. She had a form complaint, motion for summary judgment and memorandum of law at hand, and sued the client soon after receiving the fax. Not exactly the best way to build good will in the mortgage business, but if you decide to change your business model from productive citizen to professional plaintiff, you might as well do it right. Damages under the TCPA are as high as $1500 per fax. I suppose suing beats having to actually originate a loan.

The rules will get tougher at the end of this year. Beginning January 1, 2005, you will be required to obtain the recipient's signed, written permission before sending a fax, whether or not you have a "prior business relationship" with the recipient. Also, you will not be able to send your existing customers or any "prospect" a fax that seeks their written permission to fax.

If you're soliciting business by fax and you don't understand the existing and proposed rules adopted by the Federal Communications Commission under the TCPA, you're treading on dangerous ground.
---Kevin Funnell

GLB Privacy Rules and Attorneys-No Mas!

I'm sure our financial institution clients will all breath a sympathetic sigh of relief at the recent US District Court decision, in which the US District Court for the District of Columbia granted the New York State Bar Association's and the American Bar Association's motion for summary judgment, and held that lawyers, when they engage in the practice of law, do not engage in "financial activities" and are not covered by the privacy provisions of the Gramm-Leach-Bliley Act. In fact, the court declared that the Federal Trade Commission's determination to the contrary "is an arbitrary and capricious action" and was "beyond the FTC's statutory authority." Ouch!

After several years of wasted money and effort spent to combat a position that defied common sense, it is now clear that that only our clients will continue to be subject to the unnecessary burden of preparing those annual privacy notices that no one understands or reads. At least until the FTC decides to appeal the decision. What a warm and fuzzy feeling must wash over our clients at a time like this. The crushing burden of overregulation continues to test the will and the bottom line of banks, thrifts and many other businesses that, until Congress and the FTC enlightened them, had absolutely no idea they were "financial institutions" or that their customers yearned to know, on an annual basis, exactly what they did with their customer's "nonpublic personal information."

Well, at least we all can sleep better this evening knowing that lawyers have, once again, taken care of their own.
---Kevin Funnell