A story in the June 2020 issue of this newsletter analyzed the recent final rule regarding interest rate transfers promulgated by the Office of the Comptroller of the Currency (OCC) after Acting Comptroller Brian Brooks pressed the issue as one of his first policy initiatives. The "Permissible Interest on Loans that are Sold, Assigned or Otherwise Transferred" rule (Final Rule) confirms national banks and federal savings associations may rely on the long-standing "valid-when-made" principle, which allows purchasers of loans from financial institutions to continue to enforce the interest rate available to the bank or savings association, even if the rate would otherwise violate state usury laws.
For all the uniformity the UCC brings to the areas of law that it covers, it remains the case that the UCC frequently does not define key terms. As a result, state law steps in and fills the definitional gaps created by the UCC. For example, the U.S. Supreme Court has explained that
Filling out the collateral description box in a UCC financing statement is tedious work. Why not just incorporate the collateral description from the security agreement and record the financing statement with the UCC filing office? Sounds like an easy shortcut.
The Office of the Comptroller of the Currency (OCC) recently released a Notice of Proposed Rulemaking which creates a bright line test for discerning what entity is the "true lender" in a loan transfer transaction between a national bank and a third party. This is a significant regulatory development coming on the heels of new, final prudential rulemaking by the OCC and the Federal Deposit Insurance Corporation (FDIC) on interest rate transfers.
In general, irrevocable letters of credit are invincible under Article 5 of the Uniform Commercial Code. What happens when the conservator of a failed credit union repudiates a letter of credit, relying on its powers under the Federal Credit Union Act because the beneficiary did not draw on the letter of credit before the appointment of the conservator? The story of how the beneficiary of the letter of credit successfully battled the National Credit Union Administration Board is told by the U.S. Court of Appeals for the Eighth Circuit in a recent decision.
Since the Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) in 2008, a shadow has hung over the agency. Dodd-Frank implemented a unique structure for the CFPB consisting of a single director insulated from the executive power of the President because he or she is only removable "for cause." CFPB's critics attacked this single-director structure as unconstitutional. Under the separation of powers doctrine, they argued, the President must retain the unconditional power to remove the director as a matter of discretion, or "at will." For its detractors, disbanding the CFPB became their mission. Under that scenario, the unconstitutional for-cause removal rule for the agency's director would render the whole agency illegitimate.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act introduced a consumer protection regime that broadly prohibits unfair, deceptive, and abusive acts by financial institutions and other covered entities or persons in connection with consumer transactions regarding financial products or services. While earlier UDAP statutes, such as Section 5(a) of the FTC Act, prohibit unfair and deceptive acts and practices, Dodd-Frank added the "abusive" piece. In the years since the enactment of Dodd-Frank, the Consumer Financial Protection Bureau, which administers Dodd-Frank UDAAP, has struggled to define what constitutes "abusive" behavior and to differentiate abusive acts from unfair or deceptive acts.
Due to the restrictions on social distancing created by the Coronavirus pandemic, the days when closings on big financial deals occurred in person around the board room table seem to be gone, at least until the spread of COVID-19 is arrested. The customary handshake and pat-on-the-back are no longer socially acceptable. E-signatures are becoming more common than wet ones.
As his first major policy initiative, on the day he assumed office, acting Comptroller of the Currency Brian Brooks spearheaded the release of the OCC’s final rulemaking on permissible interest rate transfers. The Final Rule is intended to offer comfort to national banks and federal savings associations relying on the “valid-when-made” common law principle, which protects the interest rate on a loan after the loan is transferred.
Sixteen years ago, the Supreme Court of Georgia handed down a legal malpractice decision reading into the law an attorney’s duty to file a UCC continuation statement (UCC-3) in a transactional financing deal where loan payments extended beyond the original five-year effective period of the original financing statement (UCC-1). At the time of the closing, the defendant attorney did not inform his client about the UCC’s lapse rules and need to file a UCC-3.
Over the years, this newsletter and the related book, Clarks’ Oil and Gas Financing Under the UCC, have emphasized the volatile, cyclical nature of oil and gas commodity prices and the challenges banks face when lending to the oil and gas industry. But even by the standards of an industry used to boom and bust cycles, volatility in the oil commodity markets has been unprecedented in recent weeks.
Loan forgiveness is one of the driving forces attracting borrowers to the Payroll Protection Program (PPP) passed by Congress under the CARES Act. To date, the rules governing loan forgiveness are murky at best.
A hot topic for financial institutions during the COVID-19 crisis is how to protect their right to insurance payments under business interruption insurance policies. In these COVID-19 times, Financial Institutions (FIs) commonly have relationships on both the depository and lending sides with their commercial customers who may be piling up fees on depository accounts and be in arrears on loan payments. Bank customers, on the other hand, may be looking to shield payments from their creditors.
In a case of first impression, the Supreme Court of Illinois (Illinois Supreme Court) held a Futures Commission Merchant (FCM) to be a “bank” under the wire transfer rules found in Article 4A of the Uniform Commercial Code (UCC). The defendant is Wedbush Securities, Inc. (Wedbush Securities). The fraudsters infiltrated the plaintiffs’ email system and successfully tricked Wedbush Securities into honoring fraudulent payment orders.
The Board of Governors of the Federal Reserve Board (FRB) will offer up to $500 billion in lending to states and municipalities to help manage cash flow shortfalls created by the coronavirus pandemic. This new credit facility extends and expands the Municipal Liquidity Facility (MLF) announced by the FRB in early April 2020.
If a debtor has granted a consensual security interest in the funds in its deposit account to a secured lender, does the lender have priority over the claims of a judgment creditor who later levies against the funds in the deposit account? One leading decision is a 2016 case from a California federal district court. The court gives priority to the judgment creditor under the rules of Article 9. The decision thoughtfully resolves the priority issue based on the language and policies behind UCC 9-332(b). More recent case law stands firmly behind the California case.
Bank of America successfully defeated a series of judicial maneuvers by a putative class of small businesses. The plaintiffs seek an order mandating the bank to open its lending doors under the Payroll Protection Program of the CARES Act to small businesses who lack preexisting depository and credit borrowing relationships with BofA. Significantly, the Maryland federal district declined to read a private right of action into the CARES Act. An appeal is pending before the United States Court of Appeals for the Fourth Circuit.
CARES ACT stimulus payments from the Treasury are reaching deposit accounts at U.S. financial institutions throughout the country. The $2.2 trillion legislation authorized these payments to help mitigate the economic hardships individuals are facing as a result of the coronavirus crisis.
The law governing UCC continuation statements is pretty straight-forward. Let’s take a quick look at the rules governing continuation statements. This is an area that has generated little litigation. The biggest issue involves “retroactive lapse” if the secured lender fails to comply with the Article 9 rules after the debtor has taken bankruptcy.
Nature of structured settlements. This is the era of structured tort settlements and lottery prizes. Some beneficiaries of these streams of payment do not want to take payments over years, but want to cash out immediately. These consumer products are widely advertised on television. We’ve analyzed these issues before in this newsletter and in our treatise. But, now is a good time to revisit the legal rules governing structured settlements.