Everything You Wanted to Know About De Novo Bank Formations But Were Afraid to Ask.  For several years under two different chairs, the Federal Deposit Insurance Corporation (FDIC) has been publicly stating that it encourages de novo bank formations (and the filing of the federal deposit insurance applications that go along with them).  However, until recently, the FDIC had taken little formal action supporting these statements. That changed last week, when FDIC Chair Jelena McWilliams introduced a series of initiatives “to promote a more transparent, streamlined and accountable process” for all deposit insurance applications for organizers of new, or de novo, banks.  In announcing the initiatives, Ms. McWilliams stated that "A pipeline of new banks is critical to the long-term health of the industry and communities across the country. The application process should not be overly burdensome and should not deter prospective banks from applying. The FDIC wants to see more de novo banks, and we are hard at work to make this a reality.” 

The FDIC is seeking comment from interested parties on all aspects of the deposit insurance application process. Through a Request for Information (RFI), the FDIC is soliciting feedback on a number of topics, including ways in which the FDIC could or should support the continuing evolution of emerging technology and Fintech companies; aspects of the application process that may discourage potential applications; possible changes to the application process for traditional community bank proposals; and other suggestions for improving the effectiveness, efficiency, or transparency of the application process. The RFI also solicits comments to address any other matters of interest or concern to affected stakeholders. Comments on the RFI will be due sixty days from publication in the Federal Register.  In addition, the FDIC has established a voluntary process that gives organizers of new institutions the option of requesting feedback on a draft deposit insurance proposal before filing a formal application. The new process is intended to provide an early opportunity for both the FDIC and organizers to identify potential challenges with respect to the statutory criteria, areas that may require further detail or support, and potential issues or concerns. The FDIC has also updated two publications related to the deposit insurance application process. The publications, Applying for Deposit Insurance – A Handbook for Organizers of De Novo Institutions, and Deposit Insurance Applications Procedures Manual, address the informational needs of organizers and provide comprehensive instruction to FDIC staff.

Regulatory Developments

FINRA Releases 2018 Report on Examination Findings

On December 7, the Financial Industry Regulatory Authority (FINRA) released its second annual Report on Examination Findings, which highlights observations from recent FINRA examinations based on their potential significance, frequency and impact on investors and the markets. The report focused most heavily on suitability for retail customers, which includes reasonable-basis suitability, customer-specific suitability and quantitative suitability. FINRA observed a variety of suitability issues, including inadequate consideration of the retail customer’s financial situation, investment experience, risk tolerance, time horizon, investment objectives and liquidity needs. FINRA also observed registered representatives providing unsuitable recommendations for complex products, creating an overconcentration in illiquid securities, engaging in excessive trade volume and frequency and failing to take cumulative fees, sales charges or commissions into account when making a recommendation. Generally, effective suitability supervisory programs identify risks, develop policies and implement controls tailored to the features of the products offered and the customer base served. Examples of such effective supervisory programs include some which restricted or prohibited registered representatives from recommending various products to certain investors, some which required registered representatives to receive training on complex or high-risk products before they may recommend such products and some which created limits for trading volume, frequency and cost to prevent unsuitable trading practices.

Other highlighted observations from the report include fixed income mark-up disclosure, reasonable diligence for private placements and abuse of authority. Finally, the report briefly discussed the following additional observations: anti-money laundering, accuracy of net capital computations, liquidity, segregation of client assets, operations professional registration, customer confirmations, DBAs and communications with the public, best execution, TRACE reporting and market access controls.

Kraninger Confirmed as New CFPB Director

On December 6, on a party line vote, the United States Senate confirmed Kathy L. Kraninger to serve as the Director of the Consumer Financial Protection Bureau (CFPB) for a five year term. Ms. Kraninger assumed her duties as the second permanent director of the CFPB on December 10.  Ms. Kraninger previously served as Associate Director of the Office of Management and Budget; Clerk of the United States Senate Committee on Appropriations; and Deputy Assistant Secretary for Policy at the Department of Homeland Security.

FDIC Re-Issues Processing Timeframe Guidelines for Applications, Notices, and Other Requests

The FDIC has re-issued its guidance that establishes timelines for processing applications, notices and other requests submitted to the FDIC. The revised guidance applies to filings processed by FDIC Regional Offices. FDIC Regional Offices make decisions on approximately 95% of filings made with the FDIC. The guidance provides processing timelines for both standard and expedited requests. While this guidance applies to submissions by all existing and proposed insured depository institutions, the FDIC stated that certain filings would not be subject to the timelines included in the release. For example, the timelines would not apply to filings that raise legal or policy issues, could attract unusual attention or publicity, or involve an issue of first impression.

FDIC Updates Affordable Mortgage Lending Guide

On December 6, the FDIC updated the Affordable Mortgage Lending Guide so as to reflect the current information available about mortgage products offered through Fannie Mae and Freddie Mac. The Affordable Mortgage Lending Guide serves as a resource for community banks to compare mortgage products and to determine whether they wish to expand or initiate a mortgage lending program. Among administrative changes, the update removes products which are no longer offered, such as the FHA Refinance of Borrowers in Negative Equity Positions product, adds new products, such as the Fannie Mae MH Advantage™ and Freddie Mac HomeOne^SM, and reflects changes to several existing products.

 

Alternatives Reference Rates Committee Drafts Libor Transition Language

The Alternatives Reference Rates Committee (ARRC), a group of private-sector market participants and public agencies convened by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York, issued consultations on draft fallback language for bilateral business loans and securitizations that reference the U.S. dollar London Interbank Offer Rate (LIBOR). The draft was made as part of ARRC’s plans to facilitate the transition from LIBOR to its recommended alternative rate, the Secured Overnight Financing Rate (SOFR). ARRC proposed two approaches for fallback language one of which would provide a streamlined amendment mechanism to negotiate a replacement benchmark in the future and the other which would replace LIBOR with a version of SOFR which would provide more upfront clarity. The two approaches build in triggers related to the LIBOR cessation and a proposed mechanism for implementing a replacement rate and setting a spread.

Client Alert: For First Time, Delaware Court of Chancery Holds That Merger Target Suffered Material Adverse Effect

On October 1, the Delaware Court of Chancery, in Akorn, Inc. v. Fresenius Kabi AG, et al., held for the first time that a target company had suffered a material adverse effect (MAE) sufficient for an acquiror to validly exercise its contractual right to terminate a merger agreement and walk away from a deal without cost. The Fresenius case is an important additional data point for M&A practitioners in understanding how courts analyze terminations arising from an MAE. While the Court did not alter the legal standard used in prior case law, the fact that the Court ruled in favor of the acquiror and the heavily fact-intensive analysis illustrate the approach that will be taken by courts and provide some useful lessons for those involved in M&A. For more information, read the client alert issued by Goodwin’s Mergers & Acquisitions practice.

Enforcement & Litigation

District of Minnesota Rejects Marks, Grants Defendant Summary Judgment in TCPA Case

On November 13, the District of Minnesota rejected the Ninth Circuit’s expansive interpretation of the Telephone Consumer Protection Act’s (TCPA’s) automatic telephone dialing system (ATDS) provision in Marks v. Crunch San Diego, LLC. In Roark v. Credit One Bank, N.A., No. 16-cv-00173 (D. Minn. Nov. 13, 2018), the court instead turned to the language of the statute itself and found that the equipment at issue did not satisfy that definition. Moreover, the court found that defendant had relied in good faith on consent it had received from the previous owner of plaintiff’s phone number and therefore could not be held liable under the TCPA. View the LenderLaw Watch blog post.