The OCC approved the first use of a “shelf charter,” a new mechanism that makes it easier for nonbank investors to buy failed banks without first owning a bank.

The shelf charter program, which was established by the OCC in November 2008, enables private equity firms to obtain conditional preliminary approval of a national bank shelf charter.  The OCC stated that the approval process for a shelf process can be just as demanding as the approval process for a regular charter.  During its initial review, the OCC evaluates “the qualifications of the proposed management team, the sources and amount of capital that would be available to the bank, and a streamlined business plan that describes how the acquired bank will be operated.”  If the OCC gives its conditional preliminary approval of the shelf charter, the shelf charter remains inactive until the private equity firm is ready to acquire a troubled banking institution.  The private equity firm then must meet certain conditions specified in the OCC’s conditional preliminary approval, be cleared to view the FDIC’s list of troubled institutions and to bid for those institutions, and have its bid for such an institution approved by the FDIC.  Since the beginning of the shelf charter program, the OCC has granted only four shelf charters, and prior to January 22, 2010, no shelf charter has been used to successfully bid for a failed bank. [Read more →]

In Interpretive Letter No. 1123, the OCC permitted a national bank to exchange its participation interest in other real estate owned (“OREO”) acquired in satisfaction of debt for an interest in an LLC formed with other participants to hold that OREO.  The bank had participated in a syndicated loan to two residential real estate developers that was collateralized by residential real estate developments.  The syndicate foreclosed on the properties after the developers filed for bankruptcy.

The OCC approved the bank’s proposal based on the argument that, because an interest in the LLC would be more marketable than an interest in the underlying real estate, each of the banks in the arrangement would be better able to dispose of its interests in the properties and recover loan losses.  In addition, rather than managing the properties according to the complex and burdensome terms of the loan documents, aggregation of the banks’ interests in the LLC would allow the banks to designate one institution, the LLC’s managing member, to more efficiently address the day-to-day responsibilities of holding, managing, and negotiating the disposal of the properties. [Read more →]

The OCC published a Consumer Advisory to help consumers better understand reverse mortgages. The publication provides basic information about reverse mortgages, the costs and benefits of this product, and “rules of thumb” for consumers. Click here for the publication.

The OCC issued Interpretive Letter #1118 (“Letter #1118”), permitting a national bank (the “Bank”) to exchange real property acquired for a debt previously contracted (“DPC”) for an interest in an entity that would dispose of the real property.  The Bank had purchased participations secured by townhouse units in a townhouse apartment complex, and subsequently acquired an interest in the units (the “DPC Interests”) when the borrower defaulted.  The Bank and several other financial institutions with fractional interests in townhouse units at the complex decided to contribute their DPC Interests to an LLC (“LLC”) to manage and dispose of the real estate.  In this case, the Bank contended that by exchanging the DPC Interest for an interest in the LLC, which would wholly own the property interests making up the entire townhouse complex, it would be better able to recover its loan loss and to dispose of the property.  Furthermore, the LLC would operate and maintain the complex as a whole, rather than each individual bank’s bearing responsibility to operate and maintain its individual units in the townhouse complex, providing each of the banks with cost savings through efficiencies.  The OCC concluded that the Bank has authority under 12 U.S.C. §§ 24(Seventh) and 29 to engage in this exchange. [Read more →]

The OCC issued Interpretive Letter #1115 (“Letter #1115”), permitting the purchase of auction rate preferred securities (the “Securities”) by a wholly-owned subsidiary (the “Subsidiary”) of a national bank (the “Bank”). The Securities pay a fixed yield or a specified yield based on a rate or index not under the control of the issuer or the purchaser. The Securities are perpetual, but may be redeemed at the option of the issuer and contain mandatory redemption provisions that require the issuer to redeem the Securities at par plus accumulated dividends under certain conditions. The Securities rank senior to the issuer’s common stock and the dividends are cumulative. [Read more →]

The FDIC issued a financial institution letter reminding directors and officers of FDIC-insured financial institutions that a strategy of aggressive asset growth or reliance on non-core liabilities (e.g., high-cost brokered or internet deposits, secured borrowings, or deposits that are newly insured or guaranteed pursuant to temporary FDIC programs) will result in more extensive monitoring and examination by the FDIC, and may result in higher deposit insurance premiums. [Read more →]

The OCC granted a conditional preliminary approval of a new type of national bank non-operating “shelf‑charter,” thereby helping to expand the pool of potential equity and other investors in troubled banks and thrifts. [Read more →]