Bank Lawyer's Blog

FHFA Takes A Baby Step

Even though she managed to lose the governor's race in heavily-Democratic Massachusetts to a Republican (thereby earning the disdain of Democratic strategist David Axelrod), and even though a federal district court last month dismissed her lawsuit against the FHFA and its wards, Fannie Mae and Freddie Mac, on the basis that the court system doesn't have the right to "second guess" the FHFA's business judgement (isn't that a novel concept!), Massachusetts AG Martha Coakley still had the gall to issue a public statement about the FHFA's recent decision to back off its policy of refusing to consent to the write-down of loan principal where a foreclosed house is sold back to the defaulting owners.

“The reversal by FHFA of Fannie and Freddie’s policies, which we have long advocated for and brought suit over in part, alters some of their rigid policies to help keep people in their homes,” she said in a statement Tuesday.

To help keep people in their homes who didn't pay their loans as they agreed to pay them and who are getting a better deal than they originally bargained for, at the expense of Uncle Freddie and Aunt Fannie, both of which have been de facto nationalized. I guess that would be a Progressive's orgasmic night dream were it not for the fact that Coakley had absolutely nothing to do with the policy reversal and, more telling, the "reversal" will not help that many homeowners remain in their homes.

However, the impact of the change could be limited. It will only apply to the 121,000 homes that Fannie and Freddie have already foreclosed on and own, a provision that’s intended to curtail any incentive for borrowers in good standing to default. That narrow scope is unlikely to quiet the drumbeat for the FHFA to make bigger changes intended to help a larger number of borrowers who owe more than their homes are worth.

Foreclosed-upon borrowers will also still need to find the cash or financing to buy the old home back at market value, a tall order for those with tarnished credit histories.

“This is a ‘feel-good’ type of policy. It’s directionally helpful to a small number of homeowners that ran into trouble, but at the end of the day, I don’t look to this to have a major policy impact,” said Clifford Rossi, a finance professor at the University of Maryland.

[...]

The new policy in effect reduces mortgage principal, albeit for a small number of foreclosed-upon borrowers. Some nonprofit groups said that Fannie and Freddie would be better served to reduce the borrower’s principal before a foreclosure.

Fannie and Freddie wouldn't be "better served" by such a policy, although delinquent borrowers, Nanny-State lovers, and the fake Native American politicians they so love to lionize would definitely be "better served."

Speaking of which, the fact that 1/32 Cherokee Princess Fauxcahontas went all "jihad" on Mel Watt last week obviously had more to do with this latest publicity stunt than any dismissed lawsuit by a pol who couldn't beat Abu bakr al-Baghdadi in a race for Prime Minister of Israel. You could see the flop sweat flying off of Watt's brow at that Senate hearing like angel dust in the aftermath of a Lindsey Lohan sneezing fit. It's not pretty when a cougar eats her young.

The FHFA's position has long been that it does not want to engage in any process which encourages borrowers to default in order to gain what are, in effect, write downs of underwater mortgages. This is, in theory, especially important in light of the fact that Fannie and Freddie are in conservatorship and, ultimately, it's the American taxpayer on the hook (leaving aside the fact that both entities have become cash cows pouring their profits into the US Treasury). This is only a baby step toward fulfilling the call for widespread write-downs for political ideological humanitarian reasons, but then, every long journey begins with the first step, no matter how tiny. Between now and 2017, it would not be at all surprising to see the pace quicken and the stride lengthen.

Isaac: Time To Allow Small and Medium Bank M&A;

Former FDIC Chairman William Isaac claims that it's long past time to cut small and medium size banks regulatory relief and to take away roadblocks to mergers and acquisitions for the same institutions. He and Professor Robert Kaplan also briefly observe that the federal regulators' war on check cashers and payday lenders is depriving the "unbanked" of "bank-like" services. As is often the case with Bill's views, there are no objections from this peanut gallery.

Ya'll have a Happy Bird Day.

State Nullification: Inhale Deeply

When we asked a couple of months ago whether the Cannabis Co-operative Credit Unions that have been authorized by Colorado law were "dead on arrival," we thought that the answer was "yes." Yet, there appears to be a beating heart and hopeful heart in this body, inasmuch as the State of Colorado recently granted the first such charter.

There  are a couple of catches, however. First, the NCUA still has to grant deposit insurance, which may be a couple of years away (although Colorado law allows the co-op to open its doors as long as it has "applied" for NCUA insurance). The second is that state law requires that the credit union have access to the Federal Reserve system via a master account. One of the attorneys for the credit union asserts that the credit union has a "right" to a master account. I'm not so sure, but I guess we'll see, won't we? 

This development comes on top of anecdotal evidence that a few banks are providing financial services for marijuana-related businesses and that the federal banking regulators know about it and are "tacitly" approving the same (in other words, not writing up the bank in an examination for engaging in this activity, as long as they have the right "risk-management policy" in place). If those instances denote a trend, then apparently "prosecutorial discretion" is waxing in areas other than illegal immigration. Apparently, you have to be involved in a much more heinous business like legal payday lending, check-cashing, legal gun-selling, deposit advance lending, overdraft protection, and legal online match-making before you offend the ethical sensibilities of the US Justice Department and the federal banking regulators. Engaging in organized drug financing in violation of federal criminal statutes is not worth the while of the current occupants of the executive branch of the federal government.

On the issue of whether or not recreational marijuana use ought to be decriminalized at the federal level, I'm an evangelical agnostic. I believe deeply, based solely on divine revelation and natural law informed by reason, that there are valid arguments on both sides of the issue, and I'm willing to listen to rational argument both for and against the proposition. However, the fact remains that what Fourth Corner Credit Union and those who assist it in servicing marijuana-related businesses is illegal under federal criminal laws. They are violating federal drug laws, and, arguably, engaged in a conspiracy to do so. There are a number of convicted felons whiling away their days in federal penitentiaries for having engaged in organized activity to promote the cultivation, harvesting, processing, distribution, and sale of marijuana, and the "processing" of funds derived from such activities.

This nation once almost went to war with certain states (South Carolina being the most prominent) over the theory of "nullification," whose advocates asserted that states could "nullify" within their borders the application of federal laws with which the state disagreed. President Jackson was prepared to use federal troops to invade any state that tried to put that theory into practice. Although the specific issue at that time involved tariffs, and today it involves the use of drugs, one hundred and eighty years later we seem to be on the verge of the same war, in which certain states think that they can, by changing their state laws on drugs, somehow nullify the effect of federal drug laws within their borders. A critical difference today is that the federal authorities are not only not prepared to combat the nullification effort, they appear to be accommodating it.

With several states, and the District of Columbia, enacting recreational marijuana use legislation earlier this month, and with more states expected to consider similar legislation in 2016, the issue is not going away and it's not just a problem for Colorado and Washington state. Personally, I think it would be better for the respect for the rule of law to have a debate in Congress over the merits of changing federal drug laws, or, at the very least, to have the Justice Department go through the process of considering the removal of marijuana as a Schedule 1 controlled substance. Moreover, for those financial institutions and those that aid and abet them in financing marijuana-related businesses, January 2017 could bring the second coming of a John Ashcroft wanna-be as Attorney General, and the worm could turn. If that happens, the discretion of prosecutors may be to nail your hide to the side of a barn. After all, I remember when "open bank assistance" and "forbearance" were not dirty words for bank regulators. Times change. Stuff happens.

Actually, I don't expect such cautionary advice to concern those most at risk. They're too busy inhaling and munching.

Rant Me A River

When credit union consultant Marvin Umholtz gets worked up, it makes my blogging life a breeze. All I have to do is cut and paste. While a number of bankers would rather drink Drano rather than follow a newsletter dedicated to credit unions, I assure all of you bankers who bleed red rather than blue that you will love Marvin, especially when he goes after one of this blog's bête noire, the Adjustment Bureau, as he did in his latest email newsletter:

This correspondent knew that the self-righteous and meddlesome Consumer Financial Protection Bureau’s (CFPB) www.consumerfinance.gov zealous crusaders had targeted overdraft protection programs for the agency’s peculiar brand of “reforms,” yet the arrival of that CFPB intervention still came in a surprising way. In an 870-page proposed rule http://files.consumerfinance.gov/f/201411_cfpb_regulations_prepaid-nprm.pdf ostensibly regulating prepaid products, the CFPB reclassified overdraft services as an extension of credit and overdraft fees as the cost of credit. The agency has set its precedent in this prepaid products rule for all future treatment of overdraft services. If the CFPB extends the credit definition to all overdraft services in every circumstance as it is expected to do based on this prepaid products proposal, then it will effectively ban overdraft services – period. As a result of the loss of overdraft services many credit unions’ fee income would drop precipitously. The only conclusion that a rational person could come to would be that the CFPB has become the biggest threat to safety and soundness that credit unions now face. And since this proposed prepaid products rule also covers mobile and other electronic prepaid accounts, PayPal, Google Wallet, and scores of other innovators should also watch their backs. The CFPB’s proposed prepaid accounts rule was loaded with intended and unintended consequences.  

The CFPB’s proposed rule amends Regulations Z and E to regulate prepaid cards, codes, or other devices capable of being loaded with funds and usable at unaffiliated merchants or for person-to-person transfers, and that are not gift cards, with overdraft services or credit features. The agency’s action effectively bans overdraft services use with prepaid cards since the CFPB proposal also requires the prepaid card provider determine the customer’s “ability to repay” prior to linking overdraft services to the product. With the added underwriting costs, the overdraft services would likely be uneconomical to the provider. The ramifications from the CFPB reclassifying overdraft services as credit would be widespread. For example, the Department of Defense’s proposed Military Lending Act rule that imposes a 36% federal usury limit on loans to military service members and their families for all consumer loans (other than those secured by real estate or a vehicle) is still pending. Should it be finalized as is expected, it would make the overdraft fee on all CFPB re-defined credit extensions via overdraft coverage have excessive and illegal annual percentage rates (APRs) due to the hefty fee charged for the overdraft. Operationally a credit union could not then allow any service member or member of their family to have overdraft services on their deposit accounts. Such a distorted approach to the marketplace would be problematic at best. It would certainly be inefficient; and it could generate ill will. It might also generate class action lawsuits. And that is just one illustration of the potential fallout from the CFPB’s reclassification of all overdraft services as credit extensions.

According to the CFPB, “Among other things, prepaid cards that access overdraft services or credit features for a fee would generally be credit cards subject to Regulation Z and its credit card rules. Moreover, the proposal would require that consumers consent to overdraft services or credit features and give them at least 21 days to repay the debt incurred in connection with using such services or features. Further, Regulation E would be amended to include disclosures about overdraft services or credit features that could be linked to prepaid accounts. The compulsory use provision under Regulation E would also be amended so that prepaid account issuers would be prohibited from requiring consumers to set up preauthorized electronic fund transfers to repay credit extended through an overdraft service or credit feature.” The CFPB’s lengthy rule included 89 pages of summary and background before it even began to discuss the proposal on a section-by-section basis. The legal language of the rule followed that analysis. Once the rule is published in the Federal Register, there would be a 90-day comment period.

The agency announced the proposed prepaid products rule in a November 13^th press release www.consumerfinance.gov/newsroom/cfpb-proposes-strong-federal-protections-for-prepaid-products and in conjunction held a prepaid accounts field hearing in Wilmington, Delaware. The field hearing included opening remarks by CFPB Director Richard Cordray www.consumerfinance.gov/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-the-prepaid-products-field-hearing and a panel presentation featuring prepaid products industry representatives and consumer activists. In his remarks Director Cordray once again made it abundantly clear that the CFPB’s intent was to socially re-engineer the financial services marketplace to meet a decidedly left-leaning partisan agenda. At the close of his speech he said, “Just because consumers may not be able to afford or qualify for a bank account, or just because they do not want to be part of the brick-and-mortar banking system, this does not mean they deserve to be treated as second-class citizens. Like anyone else, they deserve to have a safe place to store their money and a practical means of carrying out financial transactions. And though many prepaid companies already have opted to offer some of these basic, common-sense protections, it is important to ensure that they are not simply optional but instead are cemented as the standard for the industry and enshrined in law.” Apparently, the CFPB knows what is best for all. It seems like the agency routinely uses the “protecting the most vulnerable” as the excuse for big government intervention and the imposition of innovation-crushing regulations.

Every time the in loco parentis CFPB acts purportedly in this correspondent’s best interests it seems more like the agency is trampling on his individual liberties. As a colleague once speculated during a conversation with this correspondent, the next thing the CFPB is likely to do is a full takeover of checking accounts. It’s only a matter of time. The CFPB will tell financial services providers what services people can have, how much service they can have, what they will pay for the service, and when the financial service provider is permitted to stop providing the service. There was also some discussion about the timing of the controversial “overdraft as credit aspect” of this prepaid products rule coming after the midterms rather than before. Was it deliberate or just a coincidence? There certainly were a lot of Democratic members of the House and Senate running for re-election November 4^th who had sponsored legislation that restricted overdraft programs that were probably drafted by the consumer activists. These members of Congress, at least those who were re-elected, and the activists now have the CFPB to do their dirty work.

If you'd like to subscribe to the newsletter, email Marvin at [email protected]. Tell him the Texas curmudgeon referred you. I mean, you simply have to love a guy who uses "in loco parentis" when referring to the Death Star.

CFPB Delenda Est!

CFPB Shocked To Discover The Rules of Discovery

Thanks to Marvin Umholtz, I recently discovered the fact that the CFPB suffers from the same psychological ailment that struck the OCC a few years ago: "transparencyphobia."

A federal judge forced the Consumer Financial Protection Bureau to obey the same rules of discovery in civil litigation that apply to everybody else even if government officials are annoyed by them.

Judge John E. McDermott rejected a motion by CFPB. As a result, the bureau's officials were required to submit to depositions — cross-examinations of witnesses conducted under oath but outside the courtroom — in a case filed by the bureau.

The Adjustment Bureau had sued, in federal district court, a document storage firm that holds attorney-client privileged information for bankruptcy lawyers. The defendant wanted to conduct normal discovery procedures, including depositions of CFPB officials. The CFPB balked, as did the OCC in a case discussed on this blog several years ago (a discussion that brought this blogger anonymous threats of regulatory retaliation). In this case, the judge was no more sympathetic to the government's fear of the spotlight than was the judge who ruled against the OCC.

But CFPB balked, telling the court that the bureau has an inherent right to “nondisclosure” and that “even the disclosure of purely factual material may be protected by deliberative process privilege.”

The CFPB added that “requiring the bureau to designate any individual to appear at deposition would only serve to annoy, oppress, and cause undue burden on the bureau.”

[...]

McDermott's Sept. 15, 2014, order forced CFPB to provide a witness for an October deposition. Samuel Gilford, a CFPB spokesman, told the Washington Examiner that the Morgan Drexen case was the only time a bureau official has submitted to a deposition.

As the reporter notes, that's likely because the CFPB usually pursues defendants through administrative enforcement actions and extracts settlements from them prior to things getting nasty. In only a relatively few cases has the CFPB filed civil litigation. Apparently, the crack trial attorneys at the bureau weren't aware that the federal rules of discovery apply to the oppressor as well as the oppressed. A level playing field is apparently a novel concept to them.

This is somewhat surprising because it's not a novel concept.

“I do not think that there is legal support for the conclusion that there is a blanket prohibition on taking depositions of federal agency employees,” said Jonice Gray Tucker, a partner with BuckleySandler LLP, a Chicago-based law firm that provides legal counsel to financial service companies.

James Copland, director of the Center for Legal Policy at the Manhattan Institute in New York, said all plaintiffs, including federal agencies, should be treated identically. “I don’t think that civil enforcement action should be treated any differently due to a federal agency,” he said.

Moreover, it's not as if legal commentators hadn't been telling the CFPB that it had to comply with federal rules of discovery.

A March 14, 2013, securities enforcement and litigation update published by the WilmerHale law firm in Boston also said that once an agency goes into court, it must abide by federal discovery rules, including submitting to depositions.

The ability of both sides to depose each other, WilmerHale argued, levels the playing field. “Several recent court decisions strongly suggest that the playing field levels once the agency ends up in litigation,” the law firm wrote.

WilmerHale cited five cases since 2012 that affirmed federal agency officials aren't exempted from depositions.

Among the five was a 2012 case involving another federal agency, the U.S. Securities & Exchange Commission, titled SEC v. Merkin. Of that case, the WilmerHale update said “the court determined that 'like any party litigating in federal court, Merkin has the right to take a ... deposition from the SEC.'”

So, what gives? Why did the CFPB try to pull something that seems over-the-top, even for an agency that pushes the envelope of unaccountability? According to Ms. Tucker, it may be a case of "inexperience."

Tucker suggested that CFPB’s aggressiveness may be a result of having “more junior staff attorneys [who] may be less experienced. In addition, some staffers are relative newcomers to consumer financial services issues.”

In addition, she said, “this can present challenges because, in making day-to-day decisions, some of the enforcement staff may not yet fully understand the businesses they are regulating or how much effort goes into responding to their requests.”

That can “result in situations where the staff take positions that are not completely reasonable, or take actions that are perceived as more aggressive than they may have intended,” she said.

 Oh, I think the positions taken were just as aggressive as they were intended. When you truly believe that you're doing God's work, it's always a shock when the heathens don't see things your way. In addition, many of the regulators apparently believe that if the public understands that the way in which they "reason" their way to a decision to screw with a member of the regulated is just as dysfunctional as they sausage-making manner in which Congress makes legislation, they might decide to take up arms and burn the house down. Or worse, adversely affect their government pensions.

Then again, Ms. Tucker's speculation regarding inexperience is consistent with the fact that the Adjustment Bureau's lawyers have also found it very valuable to take basic bank regulatory courses in order to learn what experienced bank lawyers learned decades ago. Perhaps basic courses in civil procedure should be added to the curriculum, along with a few lectures on the principles of due process. It couldn't hurt.

Ben Goes Private

One of our favorite regulators, "Little Ben" Lawsky, has let word slip out that he's planning to leave his post as New York Banking Jeffe  next year to take a job in "the private sector." He won't reveal exactly what part of "the private sector" he intends to inflict himself upon. However, we've long been a fan of his broad base of experience in how businesses, especially banks, operate on a granular level. The Wall Street Journal linked above sums that "private sector" experience up nicely.

Mr. Lawsky previously served as Gov. Cuomo’s top aide during both his governorship and his term as New York State Attorney General. Prior to that, Mr. Lawsky was a prosecutor in the Manhattan U.S. attorney’s office and served as chief counsel to New York Democratic Senator Charles Schumer.

If he wants to fill the small slippers of his idol, Elliot Mess, he might be aiming for a short stint as a talk show host that no one watches, or, perhaps, as a busboy in a brothel. However, if he intends to really make his own mark on the world, we have the following suggestions of employment for which we assume he is well qualified:

 

 

 

 

 

 

 

  

Whatever private sector job he chooses, we're absolutely certain that he'll simply nail it.

What's Good For The Bank Is Good For The Bank Lawyer

Recent articles in the Wall Street Journal (paid subscription required) point out an inconvenient truth for many bank law firms: as third party service providers, they, too, must ensure that their information security systems are "up to snuff."

Big banks are demanding that their law firms do more to protect sensitive information to ensure that they don’t become back doors for hackers.

Once given special status as trusted third parties, lawyers, particularly those who get access to sensitive bank information, now are more likely to get full background checks. The number of compliance checklists for law-firm technology systems and security procedures has ballooned. And law firms big and small increasingly are getting on-site audits to check who has access to documents and office servers.

[...]

The demands come as financial regulators are paying more attention to third-party vendors. Benjamin Lawsky , the superintendent of New York state’s Department of Financial Services, last week sent a letter to dozens of banks requesting information on security risks relating to law firms, accounting firms and other third parties.

Law firms “can have access to a very large volume of sensitive data on a recurring basis and that makes them a point of vulnerability,” Mr. Lawsky said.

When "Gentle Ben" Lawsy speaks, lawyers better listen. Not because he possesses any special insight into the banks he regulates (his background in actual banking is non-existent), but because he's demonstrated that he intends to follow in the footsteps of his role model, Eliot "Mess" Spitzer, by pursuing publicity-laden enforcement actions against victims that the public loves to loathe. Banks and lawyers might as well have a bulls-eye painted on their foreheads.

Thus far, it appears that big banks and their big firm minions are first in line for proctoscopic examinations. However, how long will it be before the "trickle down" theory of bank regulation that we've seen prove itself again and again since the creation of Franken-Dodd and its dark spawn, the CFPB, will spread this "closer look" process to smaller banks and their law firms? Not long, I think, even if you measure the passage of time in dog years.

It's hard to argue that law firms for banks of any size should be cut any slack. The Interagency Guidelines Establishing Information Security, the relevant regulatory guidance on third party relationships (such as OCC Bulletin 2013-29), and basic ethical requirements to protect the confidentiality of client information, should have impelled lawyers for banks to take information security in an online world quite seriously long before this point. In many cases, engagement agreements between law firms and bank clients already specifically require that law firms take the kind of security precautions that big banks are requiring of their law firms. True, "one size does not fit all" may be as true of bank law firms as it is of the banks they represent, so, perhaps, not every law firm will need to have inn place all of the precautions described in the linked article.

Some firms instruct attorneys not to open documents sent via email unless they are in a secure environment—in the office, or using a firm laptop on an encrypted line. For particularly sensitive matters, firms might restrict work to stand-alone computers that don’t connect to the Internet, said Mary E. Galligan, a Federal Bureau of Investigation veteran who now is a director of cyberrisk services at consulting and accounting firm Deloitte & Touche LLP.

Mobile devices are a particular focus. Many firms can wipe data from smartphones and laptops that are lost or stolen, and most firms install some level of encryption.

Law firm Davis Polk & Wardwell LLP in recent weeks added a new precaution: Lawyers must have a special application installed on their smartphones to open attachments sent to their firm addresses.

On the other hand, those security measures make sense and many of them are not unreasonably expensive to implement. Those firms that don't want to encounter a nasty (and expensive) surprise would be wise to take this concern seriously, and prepare for such an examination, whether or not one is ever actually performed.

Disparate Impact's Bump In The Road

In today's American Banker (paid subsciption required), Rachel Witkowski riases some good points about the potential impact of the recent decision of federal district court judge Richard Leon's recent decision that HUD's use of disparate impact violates the Fair Housing Act. For one thing, it throws a monkey wrench in HUD's use of the questionable theory, even though other ideologically-driven regulators like the CFPB and the US Justice Department may not be deterred from continuing to use it as cudgel with which to beat lenders senseless.

It is unlikely to stop other regulators, including the Consumer Financial Protection Bureau, from their own use of the theory in other circumstances, but sources said it will slow down what HUD can do under disparate impact until the Supreme Court issues a ruling on a similar case before it.

As another observer notes, it also boosts the morale of lenders, trade groups, and others that have been fighting the theory over the past few years. While HUD will likely appeal the decision, the fact that the same issue is before the SCOTUS and that arguments on that case are likely to be heard early next year means that HUD's pursuit of the appeal, and use of the theory in other instances, may be deterred.

Judge Leon's opinion was, to say the least, unvarnished.

As is typical for Leon — who often issues strongly worded opinions — the judge blasted the use of disparate impact, saying the Fair Housing Act "only" prohibits disparate "treatment," or intentional discrimination. Responding to an argument by the government that his court was precluded from weighing in on the use of disparate impact, Leon replied, "Please!"

"The expansion of FHA to include disparate-impact liability would not only have wide-ranging disruptive effect on the pricing and provision of homeowner's insurance, but would also require insurers to collect and analyze certain types of race-based data on their clients and prospective clients," Leon said in the final opinion.

He added that the case was "another example of an administrative agency trying desperately to write into law that which Congress never intended to sanction."

That has been the story of the life of the banking industry since January 2009.

Witkowski also points out that Judge Leon's decision, and the case pending before the Supreme Court, involve the Fair Housing Act. The CFPB has been using disparate impact to push claims under the Equal Credit Opportunity Act. Therefore, a decision against disparate impact under the Fair Housing Act doesn't necessarily apply to actions by the CFPB under ECOA. However, what such a ruling would likely do is encourage victims of CFPB's overreach to fight back, with the legitimate hope that they will ultimately prevail. Personally, I would love to see the CFPB continue to paint a bulls-eye on the forehead given the change in contol of Congress effected yesterday. The more examples of stained theories used to push ideological social engineering goals, the more reason for concerted action by Congress to put actual oversight on The Adjustment Bureau, and the more likelihood that wing-clipping will occur, even if it has to wait for a change in the White House in January 2017.

Culture wars aren't won overnight. Banks are in it for the long haul.

CFPB Delenda Est!

Poison "IvI"

*Kevin LaCroix discussed a recent federal district court decision that adds to the number of court rulings that the "Insured versus Insured" (IvI) exclusion in banks' D&O insurance policies does not preclude officers and directors of a failed bank from making a claim for coverage under the policy based upon claims of the FDIC as receiver against them for their alleged acts and omissions as officers and directors of the bank. This issue has come to the forefront again as a result of the waive of (mostly community) bank failures following the economic collapse of 2008. As was the case in the previous wave of savings and loan and bank failures in the late 1980s and early 1990s, insurance companies have attempted to invoke the exclusion in order to deny liability, arguing that the FDIC as receiver "steps into the shoes of the failed bank."

(As a side note, my Contracts professor in law school asserted that insurance companies have a very simple business model: Collect Premiums. Deny Liability.)

Kevin explains the exclusion in the specific policy.

The IvI Exclusion provided in pertinent part that the policy does not provide coverage for any claim against an Insured “brought by or on behalf of any Insured or Company [including the Bank] in any capacity.” The exclusion had a carve-back that preserved coverage for “a Claim that is a derivative action brought or maintained on behalf of the Company by one or more persons who are not Directors or Officers and who bring and maintain such Claim without the solicitation, assistance or active participation of any Director or Officer.”

The insurance company in the case discussed by Kevin asserted that the IvI barred coverage for claims asserted by the FDIC since the FDIC was itself the "Insured." The judge denied the motion for summary judgment filed by the insurance company and granted the FDIC and defendants' motion of summary judgment on the basis that the exclusion was "ambiguous" and could not, therefore, be used as a basis to deny coverage.

Judge Guilford went on to note that “the insurance company has the ability, as a repeat party to these contracts, to ensure that ambiguities are eliminated over time.” The insurer “had the opportunity to make clear in the Policy that the IvI Exclusion applied to the FDIC-R, and it could have done so with a simple statement.” Judge Guilford noted that, in fact, the carrier “provides an optional regulatory exclusion – not included on the policy here – that explicitly names the FDIC.”

Without thrashing through the weeds in a manner that would interest lawyers rather than bankers (and the lawyers can read the opinion via the link provided by Kevin), the takeaways for officers and directors are as follows:

• Read your policy and obtain professional, independent help to ensure that you understand it and that you get the best possible protection. As the court points out, the "regulatory exclusion" could have left the defendants high and dry if the insurance company had inserted it in the policy, Understand what could bite you in the nether regions and shop around if you have to.
• Get the protection you need before you need it. Your best opportunity to obtain the most favorable policy will be when things are going swimmingly, not when you're taking on water faster than you can bail out the dinghy.
• While the trend of court decisions appears to be in favor of the insureds and against the insurer on the issue of IvI in the context of FDIC receivership claims against former officers and directors, the issue is far from settled. Kevin points out that contrary rulings do exist (one in the Northern District of Georgia, one of the less favorable regions to be from if you plan to run a bank into a ditch) and that there appears to be questionable reasoning in some of the favorable rulings. Therefore, expect insurers to continue to litigate the issue until doing so will open the door to a can of whoop-ass sanctions and a complete failure to pass the lying-with-a-straight-face test.

*Photo's Source: Barrett Insurance Agency