The FDIC Board of Directors issued a proposed rule (the “Proposed Rule”) to implement Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) that provides temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts.  The separate coverage for noninterest-bearing transaction accounts becomes effective on December 31, 2010, and terminates on December 31, 2012.  The Proposed Rule also serves as formal notice that the FDIC will not be extending the Transaction Account Guarantee Program (“TAGP”) beyond its scheduled expiration date of December 31, 2010.  Comments are due on the Proposed Rule by October 15, 2010.  The FDIC noted that the shorter than usual comment period is necessary to give insured depository institutions adequate time to implement the notice and disclosure requirements set forth in the proposed rule by December 31, 2010. [Read more →]

The FDIC’s Board of Directors approved a final rule (the “Final Rule”) that will extend through December 31, 2010 safe harbor protection for applicable securitizations and participations in the event of an FDIC-insured bank’s failure.  The Final Rule is similar to the FDIC’s extension of the safe harbor on March 11, 2010.  For a discussion of the safe harbor and its extensions, see the June 16, 2009 Alert, the November 17, 2009 Alert and the March 16, 2010 Alert.  A detailed discussion of the Final Rule will appear in a future issue of the Alert.

The FDIC issued proposed guidance on automated overdraft payment programs (the “Proposal”), which outlines additional expectations for the banks it supervises.  The Proposal would supplement the FRB’s overdraft rules under Regulation E, which are discussed in more detail in the June 1, 2010 and November 17, 2009 Consumer Financial Services Alerts.  Whereas the new Regulation E opt-in requirement addresses only paying overdrafts resulting from one-time debit card and ATM transactions, the Proposal provides that customers should have an opportunity to opt out of the payment of overdrafts resulting from non-electronic transactions (e.g., checks).  The Proposal also provides that banks should not process transactions in a manner designed to maximize the cost to customers.  In addition, the Proposal calls for banks to monitor accounts and take meaningful and effective action to limit customer use of overdraft coverage as a form of short-term, high-cost credit, including, for example, by giving customers who overdraw their accounts on more than six occasions where a fee is charged in a rolling 12-month period a reasonable opportunity to choose a less costly alternative and decide whether to continue with fee-based overdraft coverage.  Moreover, the Proposal states that the FDIC expects banks to institute appropriate daily limits on overdraft fees.  The Proposal notes that overdraft payment programs will be reviewed at FDIC examinations.  Comments on the Proposal are due no later than September 27, 2010.

The FDIC announced that it has adopted an open-door policy (the “Policy”) designed to allow the public to give input and track the process that will lead to the adoption of rules and regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  The Policy goes beyond the requirements of the Administrative Procedure Act to allow public participation even before regulations are drafted and proposed.  Under the Policy, interested parties can request a meeting with FDIC officials or staffers, and the FDIC will provide increased disclosure concerning meetings between senior FDIC officials and private sector individuals.  The FDIC will disclose the names and affiliations of the private sector individuals as well as the subject matter of the meeting.  The FDIC said that the Policy will apply to “meetings discussing how the FDIC should interpret or implement provisions [of the Dodd-Frank Act] that are subject to independent or joint rulemaking by the FDIC.”  The FDIC also stated that it will hold a series of round table discussions with external parties on issues concerning implementing rules adopted under provisions of the Dodd-Frank Act.

The FDIC Board of Directors approved the establishment of a new Office of Complex Financial Institutions (“CFI”) and a new Division of Depositor and Consumer Protection (“DCP”).  The FDIC organized the CFI and the DCP to help the FDIC meet its responsibilities under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).

The CFI, said the FDIC, will conduct continuous reviews and oversight of bank holding companies with more than $100 billion in assets and will examine any nonbank financial companies designated as systemically important by the Financial Stability Oversight Council created by the Dodd-Frank Act.  The CFI is also the FDIC unit responsible for using the FDIC’s powers under the Dodd-Frank Act to implement orderly liquidations of bank holding companies and nonbank financial companies that fail.  The FDIC said that the establishment of the CFI is the first step in ending the presumption of “too big to fail.”

The FDIC Board of Directors adopted a final rule (discussed in FDIC Financial Institution Letter, FIL 49-2010) amending its deposit insurance and advertising of FDIC membership regulations to conform with provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permanently increase the standard maximum deposit insurance amount, effective July 22, 2010, from $100,000 to $250,000.

The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act permanently increases to $250,000 the standard maximum deposit insurance amount insured by the FDIC per depositor, per insured depository institution for each account ownership category. Click here for a copy of the related Financial Institution Letter.

The FDIC Board of Directors approved, by a vote of 5 to 0, revisions to its backup supervision and information sharing Memorandum of Understanding (the “Revised MOU”) with the other primary federal banking regulatory agencies, the FRB, OCC and OTS (the “Banking Agencies”).  The Revised MOU would enhance the FDIC’s backup authorities over insured depository institutions (“IDIs”) that the FDIC does not directly supervise.  The FDIC stated that the Revised MOU will “improve the FDIC’s ability to access information necessary to understand, evaluate and mitigate its exposure to [IDIs], especially the largest and most complex firms.”  The Revised MOU updates a 2002 accord among the Banking Agencies and clarifies and confirms the FDIC’s authority and ability to assess risk at weakening IDIs and to prepare and implement effective strategies to resolve IDIs after they fail.

The Revised MOU broadens the list of covered IDIs to include: (1) Problem IDIs with a composite rating of “3,” “4” or “5” or which are undercapitalized; (2) Heightened Insurance Risk IDIs where the FDIC’s insurance pricing system suggests higher risk; (3) Large IDIs (including mandatory Basel II “Advanced Approach” financial institutions and IDI subsidiaries of a non-bank financial company or large interconnected bank holding company recommended by the Financial Stability Oversight Council for heightened prudential standards; and (4) IDIs that are affiliated with entities that have had greater than $5 billion of borrowings under the FDIC’s Temporary Liquidity Guarantee Program.

The Revised MOU also covers: (a) the scope of special examinations and FDIC on-site presence; (b) how the FDIC and the other Banking Agencies will coordinate activities, including, among other things, targeted reviews and sharing of information) and (c) how the Banking Agencies will address differences in CAMELS ratings.

The FDIC staff recommended that the FDIC Board of Directors postpone additional planned premium increases beyond the increase of three basis points scheduled for January 1, 2011.  At their June 22, 2010 meeting, each of the five members of the FDIC Board of Directors concurred with the FDIC staff’s recommendation.  For background on the FDIC premium increases and prepayment requirements, please see the November 24, 2009 Alert.

The FDIC Board of Directors adopted a final rule (the “Final Rule”) that extends the Transaction Account Guarantee (“TAG”) Program from June 30, 2010 to December 31, 2010 for insured depository institutions currently participating in the TAG Program.  The TAG Program provides customers of participating banks with full deposit insurance coverage on transaction accounts.  The Final Rule gives the FDIC Board of Directors the option to extend the TAG Program until December 31, 2011 without further rulemaking.  For background on the proposed versions of the Final Rule, please see the April 13, 2010 Alert and the June 30, 2009 Alert.

The OCC, FRB, FDIC, NCUA and OTS (the “Agencies”) jointly issued guidance (the “Guidance”) addressing supervisory considerations related to bargain purchase gains and the impact such gains have on the application approval process.  The Guidance clarifies that all business combinations, including bargain purchase transactions and assisted transactions, should be accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805.  With limited exceptions, ASC Topic 805 requires all recognized assets acquired and liabilities assumed in a business combination to be measured at their acquisition-date fair values in accordance with ASC Topic 820.

The Guidance notes that an acquiring institution’s regulatory capital is subject to retrospective adjustments made during the “measurement period” – the period of time after the acquisition date that is required to identify and measure the fair value of the assets acquired and liabilities assumed in a business combination.  Because of this uncertainty, an acquiring institution’s primary federal regulator will review the significance of any gain expected to be recognized from a bargain purchase (for example, relative to the pro forma capital structure of the acquiring institution) when evaluating an application in connection with a business combination.  To facilitate this review of the pro forma capital calculations, an acquiring institution is encouraged by the Agencies to include one pro forma balance sheet with two sets of pro forma capital calculations in any application requesting approval of a business combination that results in a bargain purchase.  The first set of pro forma capital calculations should include a preliminary estimate of the gain from a bargain purchase, and the second set should eliminate that gain.

The Agencies may impose any of the following conditions in their approvals of business combinations where a bargain purchase gain is contemplated:

• Capital Preservation – An acquiring institution may be required to hold capital in excess of regulatory minimums in an amount commensurate with its asset quality and overall risk profile.
• Dividend Limitations – An acquiring institution may be required to exclude the bargain purchase from its dividend-paying capacity calculation until the end of the conditional period.
• Independent Audits – An acquiring institution, if not subject to an annual audit requirement, may be required to obtain an independent audit of its financial statements for the year in which a business combination occurs (and the subsequent year, if the measurement period is expected to continue into that year).
• Independent Valuations – An acquiring institution may be required to obtain independent valuations from a reputable and experienced third party valuation expert deemed acceptable to the agency for some or all of the identifiable assets acquired and liabilities assumed.
• Legal Lending Limit – An acquiring institution may be required to exclude any bargain purchase gain from the calculation of its legal lending limit until the end of the conditional period.

The Guidance does not add to or modify existing regulatory reporting requirements issued by the Agencies or current accounting requirements under GAAP.

The FDIC issued guidance (FIL-29-2010) (the “Guidance”) for depository institutions and others involved in deposit placement and collection activities.  In the Guidance, the FDIC outlines steps to be taken by insured depository institutions to ensure that depositors are appropriately notified regarding (a) whether their deposits are insured and (b) the steps that institutions and affiliates should take to ensure that deposits qualify for “pass-through” insurance.  Citing existing insurance rules, the FDIC notes that to receive pass-through insurance, (1) the institution’s records must expressly disclose the fiduciary relationship on behalf of others, (2) the records maintained by either the institution, the fiduciary, or an authorized third party must identify the actual owner or owners of the funds in the account and their respective ownership interests in the account, and (3) the funds must be owned by the customer(s) and not the entity performing in a fiduciary capacity.

For institutions that accept deposits with the intent to place some or all of the deposits with other institutions, the Guidance notes that depository institutions or their affiliates should:

• Maintain sufficient documentation for pass-through insurance coverage and a detailed listing of the name and location of receiving institutions, the owner of the funds, and the amount, interest rate, and maturity date of the deposits.
• Provide the depositors with the deposit amount and the name of the receiving insured depository institution at which their deposits are ultimately placed.
• Ensure the accuracy of marketing materials, customer statements, and disclosures regarding FDIC deposit insurance coverage on the accounts.
• Provide training for all personnel involved in collecting and placing deposits.
• Ensure deposit collection and placement activities comply with applicable consumer protection laws, regulations, and supervisory guidance.

The FDIC also states that deposits accepted from agents or custodians generally are considered brokered deposits, the receipt of which requires a waiver from the FDIC for an adequately capitalized institution and is prohibited for an undercapitalized institution.

On May 11, 2010, the FDIC’s board of directors issued a Notice of Proposed Rulemaking (the “NPR”) regarding proposed revisions (the “Proposed Rule”) to the safe harbor provided at 12 C.F.R. §360.6 (the “Safe Harbor”).

The original Safe Harbor, which was established by the FDIC in 2000 as a “clarification” of existing rules, offered federally insured depository institution (“IDI”) sponsors of securitizations, as well as investors and rating agencies, assurance that the FDIC would not use its powers as a conservator or receiver for a failed IDI to disaffirm or repudiate contracts in order to reclaim, recover or recharacterize as property of the failed IDI any financial assets transferred by that IDI in connection with a securitization or participated, so long as the transfer or participation satisfied the conditions for sale treatment under generally accepted accounting principles (the “GAAP”).

Revisions to the Safe Harbor became necessary because of changes to GAAP, for sale treatment of certain transactions and for consolidation of certain entities, threatened the effectiveness of the Safe Harbor – specifically, FAS No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (“FAS 166”) and FAS No. 167, Amendments to FASB Interpretation No. 46(R) (“FAS 167”), which are effective for reporting periods that begin after November 15, 2009. (For more information on FAS 166 and FAS 167, see the June 16, 2009 Alert.) In response, the FDIC issued an interim rule (initially in November and subsequently extended in March) (the “Interim Rule”) that continues until September 30, 2010 the protections afforded to transactions that comply with the Safe Harbor under the prior accounting rules. (For more information on the Interim Rule and the need for revisions to the Safe Harbor, see the November 17, 2009 Alert and the March 16, 2010 Alert). [Read more →]

The FDIC issued a Notice of Proposed Rulemaking (the “NPR”) that would require certain insured depository institutions (“IDIs”) to submit a contingent resolution plan outlining how the IDI could be separated from its parent structure and wound down in an orderly and timely manner.  The requirement would apply to IDIs with greater than $10 billion in total assets and that are subsidiaries of a holding company with total assets of more than $100 billion.  As of the fourth quarter of 2009, 40 institutions were identified as meeting the criteria and together represent 47.9% of all deposits insured by the FDIC.

The FDIC noted that IDIs that are part of complex organizations pose unique issues during the receivership process, as the relationships between the parent holding company, IDI and the IDI’s affiliates often affect resolution strategies.  The information provided as part of the contingent resolution plan is intended to assist the FDIC in preserving franchise value, maximizing recovery to creditors and minimizing systemic impacts on the financial system during the resolution process through an understanding of the IDI’s business lines, operations, risks and activities, the interrelationships between the IDI and its affiliates, and the non-obvious risks embedded within the distinct business entities. [Read more →]

The FDIC released additional FAQs on April 23, 2010 regarding its Statement of Policy on Qualifications for Failed Bank Acquisitions (“Statement of Policy”).  The additional FAQs were released to address questions received by the FDIC since its previous FAQ release on January 7, 2010.  The additional FAQs provide additional guidance regarding the scope of the Statement of Policy.

By its terms, the Statement of Policy does not apply with respect to investors in partnerships or similar ventures with bank or thrift holding companies or in such holding companies where the holding company has a “strong majority interest in the resulting bank or thrift and an established record for successful operation of insured banks or thrifts.”  The FAQs clarify that, in determining whether investors in an institution who made their investments prior to a failed bank acquisition are subject to the Statement of Policy, the FDIC will take into consideration whether a “significant portion” (a term the FDIC does not define) of the total equity or voting equity in the institution was “recently acquired” (a term the FDIC does not define) or was part of a “recapitalization” (a term the FDIC does not define) of the existing institution.  If the FDIC determines that a pre-existing investment was part of a recapitalization, the FAQs state that the Statement of Policy will apply if one or more failed bank acquisitions occur that in combination exceed 100% of the recapitalized institution’s total assets within an eighteen-month period following the recapitalization. 

In the January 7, 2010 FAQs, the FDIC stated that the Statement of Policy would not apply where private investors have one-third or less of the total equity shares and voting equity shares of the institution making the failed bank acquisition.  The new FAQs clarify that if the Statement of Policy applies because the one-third ownership threshold has been crossed, investors holding a minimum of either (1) one-third of the total voting equity shares or (2) one-third of a combination of total voting equity shares and total equity shares as a proportion of total equity shares, must be bound by the terms of the Statement of Policy.  This “anchor group” would consist of all holders of more than 5% of the voting equity shares and any holders of 5% or less of the voting equity shares that elect to be subject to the Statement of Policy.

The FAQs clarify that if an investor has a right to designate a board member, then the investor will be subject to the Statement of Policy, even if the investor owns 5% or less of the voting equity shares of the institution.  Senior management is not automatically subject to the Statement of Policy, absent voting equity share ownership, a right to designate a board member, or evidence of concerted action. [Read more →]