Banking Law Rule Attack Outline

BANKING LAW RULE ATTACK OUTLINE

I. NB ACT PREEMPTION

State law in some cases does apply to NBs:
Some state regulations: States have some residual control over NBs, and not everything is preempted by the NB Act. Some regulation is left to the states. NB v. CW.
NB’s Preemption of State Law:
Preempts if state law interferes w/ federally granted power: States can regulate NB’s but they cannot interfere, undercut, or undermine the NB’s exercise of a federally granted power. Barnett Bank (OCC said NB’s could sell insurance, Fla. Statute said the could and it was preempted).
NB’s do have the option of augmenting their rules w/ state law where:
The bank has a main office
The BHC is incorporated
DE corp law or
Model Business Corp. Act
Does not preempt state enforcement power:
Enforcement yes, administrative visitorial powers: States cannot exercise administrative visitorial powers over NBs, but they can bring ordinary law enforcement actions through the courts. Cuomo.
State regulation of operating subs (Dodd-Frank overruled):
Pre-Dodd-Frank: An operating sub gets the same preemptive immunity that the parent does under the NB Act. Waters v. Wachovia.
Dodd Frank Rule: The NBA no longer preempts state law as applied to state chartered subs and affiliates of NBs and Federal Savings Banks, the legal standard under Barnett would apply
Preemption ANALYSIS: 12 U.S.C. 25(b):
Note on procedure: First analyze preemption under 12 U.S.C. 25(b) then go to OCC reg if it makes it through preempted.
NB Act Preempts state consumer financial law only if the law would:
(1) Discriminatory effect on NBs: In comparison with the effect of the law on a state chartered bank, (OR)
(2) Go against the ruling in Barnett: Prevent or significantly interferes with the exercise of the banks power
Note: Statute overturns Waters, excludes field preemption and codifies Cuomo.
After look at 4 go through the OCC’s Statutory Preemption statute:
Deposit Taking; 12 CFR 7.4007:
(b) State laws that are Preempted: A NB may exercise its deposit taking powers w/o regard to state law limitations concerning:
abandoned or dormant accounts
checking accounts
Disclosure requirements
Fund availability
Savings accounts orders of withdraw
State licensing or registration requirements, and
Special purpose savings services
(c) State laws not preempted: Unless interfere w/ Bennett the following are not preempted:

contracts
torts
criminal law
rights to collect debt
acquisitions and property transfers
taxation
zoning
Lending; 12 C.F.R. 7.4008:

(d) State laws preempted: A NB may make non real-estate state loans w/o regard to state law limitations concerning:
Licensing registration
The ability of a creditor to inquire or obtain insurance for collateral or other credit enhancements or risk mitigation, in furtherance of safe and sound banking
Loan-to-value ratios
The terms of credit, including schedule for repayment of principle and interest, amortization of loans, balance, payments due, minimum payments, or terms to maturity of the loan, including the circumstances under which a loan may be called due and payable upon the passage of time or a specified event external to the loan
Escrow accounts, impound accounts, and similar accounts
Security property, including leaseholds
Access to and use of credit reports
Advertising and disclosure rules
Disbursement’s and repayments
Rates of interest on loans.

ii. (e) Not preempted: above.

II. PERMISSIBLE BANKING ACTIVITIES

Bank Powers by 12 U.S.C. 24(SEVENTH):
Establishment; 12 USC 24(SEVENTH): Exercise incidental powers as shall be necessary to carry on the business of banking. The Provisions applies for expansive Chevrondeference to OCC to expand powers of NBs:
Explicit banking activities:
Discounting and negotiation of promissory notes, drafts, bills of exchange and other evidence of debt
Receiving deposits
Buying and selling exchange coin or bullion
Loaning money on personal security, and
Obtaining, issuing and circulating notes
Denied to banks:
Ownership in real property
Ownership in corp. stock or underwriting securities, 12 U.S.C. 24 (SEVENTH)
Underwriting insurance, 15 U.S.C. 6712(a)
Charging interest above the legal rate, 12 U.S.C. 85
OCC has power to expand power of NBs through regulation:
Authorized to expand the NBs power
Can expand the power the power of NBs if reasonable:the business of banking is not limited to the enumerated owners listed in section 24(SEVENTH) and so the OCC clearly has the discretion to authorize activities beyond what is specifically enumerated. NB of NC.
Must limited the OCC’s discretion however: The exercise of the OCCs discretion however must be kept with in reasonable bounds. Distant ventured from dealing from in financial instruments –for example, operating a general travel agency are outside of the definition. Id.
Powers Authorized by the OCC are subject to Chevron deference:
If congress has clearly spoken on the issue: Then it is clear and the court and the agency must clearly interpret the statute, if the OCC decision is contrary then must be rejected.
If congress is silent on the issue: Then the issue is whether the agency’s answer is based on permissible construction of the statue
If congress has left a gap for agency to fill: Then the court should defer to the agency to fill the gap of a specific provision or regulation.
The court will only intervene if the decision is: Arbitrary, capricious, or manifestly contradicts the statute.
The OCC has stated that the following activities were among the business of banking:
Data processing, 12 CFR 7.5006: The business of banking include data processing if it is (a) financial or banking related and (b) if it is derivative of banking activity.
Correspondent banking services 7.5007: large banks offer banking services to facilitate small bank operations
Finder services 7.1002: Business of making may include finder services that include:
Identifying potential parties
Making inquires as to interest
Introduce or arrange contracts or meetings of interested parties
Act as n intermediary betweeninterested parties and
Otherwise bring parties together for a transaction that the parties themselves negotiate and consummate
Building a webpage and webhosting: Webhosting allows the banks to perform a finder function and is part of the business of banking also allows for process reports and economic data. OCC Interp. Let 875.
Permissible banking activities that have been labeled as incidental:
Business of banking:w/ in the scope of banking if the activity if:
Functionally equivalent or logical out growth of a traditional banking activity,
Would respond to customers needs or otherwise benefit the bank or its customers, AND
i.e., needed to carry on the business of banking.
Involves risks similar to those already assumed by banks
The test if incidental to the business of banking: Arnold tours put forth a 3 part test:
Convenient or useful,
In connection o the performance of a traditional activity, (AND)
Under one of the banks expressed authorized powers
Arnold tours must be viewed through the lens of M&M leasing:
Must look to see if functionally similar to a traditional activity: An activity is functionally similar/ interchangeable with an expressed power will be considered “incidental to banking,” i.e., functional similar to what the banks have already done.
Expansion of banking powers as incidental through 24(SEVENTH):
Travel agency services: Not incidental to banking powers. Arnold Tours.
Personal Property leasing:
Is incidental to the power of banking: Leasing in light of all relevantcircumstances the transaction constitutes a loanof money secured by a leased property, is incidental to the loan of money on personal security an activity authorized by the NBA. M&M Leasing.
Insurance:
Bank may act as an insurance agencies to sell insurance polices issued by other firms:
Acting as an agent, a bank does not take on any underwriting riks and the issuing insurer, no the bank bears the risk
Statutory Authorization; NB Act 12 U.S.C. 92:
May sell insurance as long as:
(1) Population in city less than 5K and
(2) Insurance companies that they are selling on behalf of are authorized by the state.
These activities include:
(1) Soliciting and selling insurance, and
(2) collecting premiums on policies issued by some companies.
The OCC has drastically expanded the reach of this provision; 12 CFR 7.1001: A bank van utilize 92 if it has a branch office located in a community having a population of less than 5k even though the bank’s principle office is located in a population that exceeds 5k.
Application and extension of the insurance rule:
Annuities: Banks are permitted to broker annuities incidental to the powers of banking, not selling insurance, professor believes that variable annuities, not hybrid annuities are functionally similar. VALIC.
May sell to populations Outside of 5k: A bank located in a small town may sell insurance nationwide, and the statute puts no real geographic restraint on this. Ludwig.
Crop insurance: 24(SEVENTH) does not authorize them to sell crop insurance protecting farmers from disasters, the court is concerned that this would open Pandora’s box.
Credit life insurance: Banks can sell credit life insurance b/c unlike other forms of insurance, credit life insurance is a limited special type of coverage written to protect loans, and is incidental to a loan.
Insurance underwriting:
FHCs can underwrite insurance in a sub: FHCs may underwrite insurance in a sub, but BHCs may not
Banks cannot underwrite insurance: May not provide insurance as a principle and this rule applies to FDIC insured state banks. 15 U.S.C. 6712(a).
GLB Act: Excludes letters of credit from the definition of insurance.
Cannot issue guarantees: But can issue standby letters of credit, which function a lot like a guarantee under the functional equivalency test. NB Banks of Dallas.
Real Estate:
NBs cannot own real property but there are exceptions: Banks have broad power to make loans secured by real property, 12 USC 371, but they have very limited power to own real property. Pursuant to 12 USC 29 a bank may purchase, hold, and convey real estate for a certain purpose and for ONLY the following four purposes:
Exceptions to prohibition of holding real-estate:
Foreclosing on debt: May hold real property acquired by foreclosing on debt. 12 USC 29.
Satisfaction of Ks:A bank may hold real property acquired in satisfaction on debts previously contracted in the course of dealings, 12 USC 29(THIRD)—property acquired by foreclosing on or settling a debt is known as a DPC property (Debt Previously Contracted or REO (real estate owned property).
Conducting its business:A bank may acquire and hold real property as necessary for tis accommodation in the transaction of its business. 12 U.S.C. 29 (FIRST)—the bank can own their premises and real properties
Public welfare: A NB can hold real property pursuant to its power to make investments designed primarily to promote the public welfare.
Limit: 5% of capital w/ OCC permission but can never exceed 10%.
Extensions of these rules by the OCC:
Hotels/ lodging; 12 CFR 7.1000(a)(2)(v)(d)(2): Can own residences to accommodate out of town employees if there is no suitable lodging in region.
Has been extended to: condos and large hotels.
Personal Property:
NBs can hold personal property: 12 USC 24 (TENTH): Can invest w/o limitation in vehicles, manufactured homes, machinery, equipment, or furniture for lease financing transactions on a net basis
BUT: such investments may not exceed 10% of the assets of the corporation
Trusts:
May administer a trust in a fiduciary capacity: May act as a trustee when not in contravention of state law.
Securities:
Restrictions:
Can only deal and hold securities for the account of customers and no on own account: NBs are prohibited from owning stock. 12 U.S.C. 24.
May not underwrite and take deposits:Banks may not underwrite securities unless you are dealing eligible securities: 12 USC 378(a)(1).
Eligible securities:
Can underwrite government securities: but firms have found other ways to underwrite securities under 24(SEVENTH)
Other restrictions on underwriting:
Cannot operate an investment fund that underwrites: May not operate an investment fund that involves the bank underwriting securities. ICI v Camp.
Can deal in commercial papers:
May issue commercial paper in private placements: There is only a 16 violation if there is a public offering a private placement is not a violation. Secs Indust. Association.
But NBs can:
Participate in the business of brokering in securities and stock:Can purchase and sell such securities and stock w/o recourse, solely upon the order, and for the account of, customers, and in the case for its own account.
May operate sub that brokers securities: Banks can own subs that engage in the brokerage business, but NBs still cannot buy and sell securities on their own accounts.
Banks ability to invest in securities does have a few exceptions:
Two exceptions to the prohibition of dealing securities:
Fed, local, and state gov/ securities: the bank may underwrite, deal in, and invest in U.S. gov/ securities and general obligations of state and local gov/
May purchase investment securities under restrictions from the OCC: Must have a AAA, AA, A, or B rating from at least two rating agencies.
Banks have a very limited ability to invest in equity securities:
May hold shares in subs: But subs must engage only in activities permissible for the parent bank or authorized by statute
May invest 10% in service corps: the can invest up to 10% of their capital in bank service cos (12 U.S.C. 1861-7).
Participate in venture capital activities: They can invest up to 5% of their capital in small business investment co’s, 15 U.S.C. 682(b), allowing banks to in essence establish venture capital co’s.
Derivatives:
Banks may engage in derivative transactions as business of banking:
May engage directly in hedging: They can cut out the mirror banks and go straight into the physical market in order to hedge risk.
Suppose to be used ideally to reduce risk: Hedging against risk of regular activities would be permissible under 24(SEVENTH) and not prohibited by GS-16. OCC interpretive letter.
If engage in shadow banking and enter into physical market could be a 10b-5 violation: Synthetic swaps and options are securities if you enter into the physical trading market. Cailoa.
The Lincoln push out rule has to be considered:
Prohibits federal assistance to swap dealers and major swap participants and calls for all swap activity to be pushed out to a non-affiliate.
Exception:
Risk mitigating hedging
Derivatives that are in traditional business of banking.

III. USURY

Usury laws overview:
Usury laws restrict the taking of excessive interest on loans, i.e., set a max an institution can charge. Business loans were not subject to these limitations/ consumer loans were.
Differ by state—state laws set different usury laws
Usury laws and NBs:
12 U.S.C. 85 Permits NBs located in a particular are to charge the greater of 3 rates: these rules are designed to give NBs an advantage
Same rate as most favored lender: The rate allowed by the laws of the state ot the most favored lender where the NB is located, except that where a state sets a different rate for state-chartered banks, this rate is allowed for NBs.
1% above the discount rate: On 90 day commercial paper in effect in at the Fed Reserve district where the bank is located (OR)
7% interest rate: if there is no rate that is fixed by the state
NBs can take advantage of the highest interest rate, even if state banks cannot: NBs enjoy most favored lender status under state law: They may take advantage of the highest rate allowed to any lender under 85 even if state charted rates are restricted to lower rates. Tiffany.
Can charge rate set by state where home bank is located in business in other state: Section 85 plainly provides that a NB may charge interest on any loan at the rate allowed by the laws of the state which the bank is located, i.e., where the certificate says your home bank is. Marquette.
Where bank has branches all over the place:OCC 1998: Look to the nexus of the loan and where the loan is services and made from and this allows you to charge an interest rate from nearly any state where you have a branch.
May charge late payment rate from home state: Banks can charge late payment fees from home state. Smiley.
The nation wide credit markets were made by removal of state usury ceilings:So NB could locate itself in state with favorable rates and then export those rates around the country.
Penalty for violating usury laws:
Forfeiture of interest: May lead to forfeiture of entire interest on note
Person may recover damages: Twice the mount of interest they paid

IV. SAFETY AND SOUNDNESS

Formulas:

Formula
Leverage Limit / Tier 1/Total Assets
Total Risk-Based Capital Ratio / Total Capital (Tier 1+ Tier 2)/ Risk Weighted Assets
Tier 1 Risk Based Capital Ratio / Tier 1/ Risk-Weighted Assets
Common Equity RBC / (Common equity + Retained Earnings)/ Risk weighted assets

Leverage limit:
Leverage limit: FDIC requires at least 4% of capital to total assets in order to qualify as adequately well capitalized.
Calculating a banks leverage ration:
1. Calculate a banks tier 1 capital by adding (AND THEN):
Common shs equity
Any non-cumulative perpetual preferred shares, AND
Any minority shareholding in consolidated subs
Divide the bank’s tier 1 capital by the bank’s total assets.
After making a loan:
After making a loan run through this against and make sure that the institution is still adequately capitalized.
Calculating Risk based capital standards:
There are three stages in a 8 step process:
Calculate the banks-risk weighted assets
Calculate the bank’s total capital, and then
Divide the banks capital by risk-weighted assets
Steps:
Calculate the banks capital:
Find tier 1 capital in the problem: Consists of:
Common stock and retained earnings (aka shs equity)
Non-cumulative perpetual preferred shs
Minority shareholdings in consolidated subs
Find tier 2 capital: Consists of everything else that qualifies as capital such as any other type of preferred sock that does not qualify as tier 1 capital, hybrid capital instruments, term subordinated debt and general loan loss reserves and net unrealized appreciation on equity securities.
Calculate the total capital=Tier 1 + tier 2 wit the following limits:
Only can exclude tier 2 as much as tier 1: in this calculation include tier 2 capital only to the extent that the bank has tier 1 capital, i.e., do not include more dollars of tier 2 than the bank has tier 1.
Next input in the formula:
Total risk based capital ratio= total capital/ risk weighted assets

V. PROMPT CORRECTIVE ACTION