Bank Lawyer's Blog

The Terminator Vetoes Privacy

Inasmuch as I criticize California state government for "excess legislation," I should, in fairness, praise it when it rejects the same.

Last week, Governor Schwarzenegger vetoed SB 1841, which would have required California employers to provide "clear and conspicuous" notice before electronically montioring the e-mail or internet usage of employees. While such notice is not currently required under federal law, and employers may monitor as long as they have a legitimate business purpose for doing so, obtaining the consent of employees to such monitoring is a means to ensure compliance with federal law. Intelligent employers notify employees that such monitoring is possible, either by separate notices or as part of a standard employees manual.

Business leaders had opposed the bill as providing just one more source of useless litigation. The Governor agreed.
---Kevin Funnell

Pilot Program - Lost in the Shuffle

It recently came to our attention that some smaller banks and thrifts were not aware of a lending limits pilot program that has been in place for the last three years, and was renewed in August for another three years by the OCC and the OTS. The basic rule is found under OCC regulations codified in 12 CFR 32.7. By virtue of Section 5(u) of the Home Owners Loan Act (12 USC 1464(u)), the rule applies to savings associations governed by the OTS in the same manner and to the same extent as it applies to national banks. OTS guidance on the program, including eligibility requirements and the OTS application process, is contained in TB 79a. OCC guidance is found in OCC Bulletin 2004-46 (although we think that this bulletin incorrectly states the termination date as June 11, 2007, instead of September 11, 2007).

The original pilot program was enacted in 2001, and has been extended through September 10, 2007. As now in place, the program covers (1) perfected first lien one- to four-family residential (either owner-occupied or not) real estate mortgages in amounts that do not exceed 80% of appraised value of the value of the collateral at the time the loan is made; (2) small business loans; and (3) small farm loans. The program’s purpose is to allow an “eligible institution” to make “qualifying” residential, small business and small farm loans to a single borrower, in addition to the amounts that it can already make under the general lending limits otherwise applicable to national banks and federal savings associations, up to the lesser of:

(A) 10% of its unimpaired capital and surplus,

(B) $10 million, or

(C) The percentage of its capital and surplus, in excess of 15 percent, that a state bank is permitted to lend.

The total outstanding amount of all loans to any one borrower cannot exceed 25% of unimpaired capital and surplus. Also, the additional outstanding amount of loans to all borrowers made under the pilot program cannot exceed 100% of unimpaired capital and surplus.

An “eligible institution” will be one that is “well capitalized,” has a composite rating of 1 or 2 in connection with its most recent examination or subsequent review,  and has a composite rating of at least 2 for both asset quality and management. The OTS guidance also requires that the institution have “experience and expertise” in making the types of loans for which additional lending authority is sought. An application for such authority must be submitted to and approved by the OCC or OTS, as appropriate. Once authority is granted, the institution may exercise the authority until notified by the OCC or the OTS that authority is rescinded, or until September 10, 2007, whichever occurs first.

Assuming that the bank or thrift meets the “eligibility” requirements, this pilot program can provide a national bank or federal savings bank with authority to make larger residential, small business or small farm loans than it would otherwise be permitted to make under the lending limit regulations. This has proven to be beneficial to some smaller lending institutions engaged in, for example, residential mortgage lending, who have the opportunity to originate larger loans, but otherwise would not have the unimpaired capital and surplus level to permit the loans under the lending limit regulations.
---Kevin Funnell

Federal Preemption - The Saga Continues

The never-ending, and never-successful assault on the doctrine of federal preemption of state law as it applies to the operations and activities of national banks and federal thrifts, and their operating subsidiaries, grinds on, this time in Maryland. The Maryland Commissioner of Financial Regulation:

"denies that any OCC regulation pre-empts state regulatory authority over operating subsidiaries" of national banks. He also said the OCC's position that states cannot examine national banks conflicts with the U.S. Constitution.

National banks and federal thrifts have prevailed consistently when state authorities have made these specific claims. In my personal opinion, it's no longer an issue that ought to be worthy of the waste of the taxpayers' money. The vast weight of regulatory, statutory and case law authority is against the position of the Commissioner.

The Commissioner is clearly going to lose. You can take that to the bank.
---Kevin Funnell