Posts filed under ‘Small Business/SBA/Community Banks’

Déjà Vu? FTC Delays Red Flags Rule Enforcement for the 5th Time

At the request of members of Congress, the Federal Trade Commission (FTC) announced on May 28, 2010 that it would, for the fifth time, delay enforcement of the Identity Theft Red Flags Rule (the Rule).  This time, the enforcement date has been pushed back until December 31, 2010.  This delay gives Congress time to act on recently introduced legislation that would exempt healthcare, accounting and legal practices with 20 or fewer employees from compliance with the Rule.

Developed under the Fair and Accurate Credit Transaction Act of 2003, the Rule has already been enforced by banking regulators for most financial institutions since November, 2008.  The FTC has interpreted enforcement of the Rule as having a surprisingly wide application for the non-financial institution businesses that it regulates.  Under the FTC’s interpretation, any business that bills customers after providing goods or services is a “creditor” subject to the Rule. This includes many health care providers, construction companies and other merchants and service providers.  If such “creditors” have “covered accounts” (as defined in the Rule), they must adopt an identity theft prevention program. That program must be designed to identify, detect, and respond to patterns, practices, or specific activities – known as “red flags” – that might indicate identity theft.

It is precisely the wide scope of the FTC’s interpretation of the Rule which has caused the delays.  Initially, many business did not believe the Rule applied to them.  After the FTC opined that many service providers, including attorneys and health care providers, would be subject to the Rule, industry trade associations have attempted to limit the application of the Rule through various forums.  On October 29, 2009, the American Bar Association secured a decision in federal district court that the Rule does not apply to lawyers, which the FTC is appealing.  More recently, in May 2010, the American Medical Association, along with the American Osteopathic Association and the Medical Society of the District of Columbia,  filed a lawsuit against the FTC to prevent application of the Rule to physicians after unsuccessfully petitioning the FTC to reconsider its broad interpretation of the Rule.  That lawsuit is still pending.

A full copy of the FTC’s May 28, 2010 press release is available here.

June 2, 2010 at 8:41 pm Leave a comment

President Announces Community Bank Program to Increase Credit Flow to Small Businesses

The President announced plans today that, if put into action, would lead to the realization of at least some much-needed and long-sought-after assistance for community banks.  A copy of the President’s announcement is available here. (Skip to Page 2 for Details).

According to the President’s proposal, which is part of the White House’s “Financial Stability Plan,” the program would target small business lending, but would also offer a mechanism for banks with less than $1 billion in assets to access capital with an annual dividend rate of 3%.  The announcement is short on specifics, but here are the basics:

(1) Banks will receive capital in an amount equaling up to 2% of risk-weighted assets; 

(2) The annual dividends on the capital will equal 3% for the first five years and 9% thereafter; and 

(3) Banks seeking to participate in the program will submit a “small business lending plan” in which the bank explains how additional capital will help increase its lending to small businesses.  (Banks approved for the program that elect to participate will also be required to follow up with quarterly reports detailing small business activities).

Over the next few weeks, Treasury will work with community banks and the small business community to hammer out the program’s specifics.  Notably, the release contemplates that banks already participating in the capital purchase program will be able to replace existing capital, which carries a 5% dividend (7.7% for S-Corps), with investments under the new program.   

 The President also announced support for legislation that would increase the size of key Small Business Administration (SBA) loans. The aim of the increase would (supposedly) allow the SBA to ensure that more small businesses can get access to credit.

 The first prong of the proposed legislation would increase the Maximum 7(a) loan from $2 million to $5 million, providing greater access to capital that businesses could use to boost working capital as well as purchase machinery equipment and real estate.  

The second prong of the proposed legislation would increase the maximum 504 project loan from $2 million to $5 million for standard borrowers (supporting a total project of $12.5 million) and from $4 million to $5.5 million for manufacturers (supporting a total project of $13.75 million), thereby increasing the qualifying borrowers’ ability to undertake larger projects.

And the third prong of the proposed legislation would increase the maximum loan size of the SBA microloan programs from $35,000 to $50,000.

October 21, 2009 at 10:11 pm Leave a comment

FDIC Issues Frequently Asked Questions to Provide Additional Guidance Regarding Sweep Account Disclosure Requirements

On July 6, 2009 the FDIC issued a list of Frequently Asked Questions (FAQs) in response to industry questions regarding sweep account disclosure requirements in 12 C.F.R. § 360.8.  These FAQs can be found here in FDIC FIL-39-2009.  Notably, the FAQs address the requirements for a properly executed repo sweep arrangement, such that the customer has a perfected security interest in the underlying securities upon the event of a bank failure, which is significant, because otherwise the customer’s funds could be treated as uninsured deposits.

July 7, 2009 at 1:16 am Leave a comment

Tagging Out of the TAG Component of the FDIC’s Temporary Liquidity Guarantee Program

Today the FDIC announced that it is seeking public input on whether to extend the Transaction Account Guarantee (TAG) component of the Temporary Liquidity Guarantee Program (TLGP).  As you may recall, the FDIC established the TAG program in October 2008 as part of a broader effort to stabilize the nation’s financial system.  Under the TAG program, the FDIC guarantees all deposits held in qualifying noninterest-bearing transaction accounts at participating depository institutions.  The TAG program is currently set to expire on December 31, 2009. 

According to its announcement (available here), the FDIC is seeking input on whether to allow the TAG program to expire as scheduled, on December 31st, or whether to extend the TAG program for six months until June 30, 2010.  If extended, depository institutions currently participating in the TAG program would be given the opportunity to opt out.  However, any institution opting out of the program would be required to notify its customers that, beginning on January 1, 2010, deposits in qualifying noninterest-bearing transaction accounts would not be covered by the FDIC beyond standard deposit insurance limits.

For institutions that do not opt out of the extended TAG program, the FDIC would increase the fees currently assessed for the program by 10 to 25 basis points during the proposed extension period.

June 23, 2009 at 7:53 pm Leave a comment

FDIC and ABA Clarify Required Repo Sweep Disclosures

On February 2, 2009 the FDIC issued a final rule that, among other things, requires certain disclosures regarding repo sweep accounts, effective July 1, 2009. The final rule can be found at 12 C.F.R. § 360.8(e).

Required Disclosures
The final rule requires institutions to inform sweep account customers if their swept funds are deposits under 12 U.S.C. 1813(l): (1) within the first sixty days after July 1, 2009 and periodically thereafter, but not less than annually; (2) in all new sweep account contracts; and (3) in all contract renewals. If the accounts are not deposits the institution must also disclose the status of the funds should the institution fail, for example, secured creditor or general creditor status.

Additional Requirements
These disclosures must be consistent with how the institution reports the funds on its Call Reports or Thrift Financial reports. The disclosure requirements do not apply to sweep accounts where: “transfers are within a single account, or a sub-account;… [or involve] only deposit to deposit sweeps,… unless the sweep results in a change in the customer’s insurance coverage.” The final rule does not require any specific language in the disclosures, allowing institutions to draft their own disclosures. Finally, the FDIC listed several examples of the means by which disclosures may be made, including client letters, transaction confirmation statements or account statements.

ABA Request for Guidance
The ABA recently asked the FDIC for guidance on how banks can ensure that repurchase agreements that are tied to sweep accounts are “properly executed,” such that customers possess perfected security interests in the underlying securities. This is significant, because an unperfected security interest would result in funds being treated as deposits and potentially uninsured in the case of a bank failure.

The ABA hosted a May 21 telephone briefing on these issues. It appears, from the telephone briefing and subsequent guidance from the ABA, that the focus of the FDIC regarding “properly executed” repurchase agreements that are tied to sweep accounts is “control.” In particular, this requires (1) identification of specific securities in the daily written confirmations that are required by the Government Securities Act, (2) inclusion of provisions in the repurchase agreement that appoint the bank as the customer’s agent and that give the customer the right in an event of default (such as bank failure) to direct the bank to sell the securities and apply the proceeds to the bank’s obligations under the agreement and (3) removal of any provisions in the repurchase agreement (and in any confirmations) that permit the bank to unilaterally substitute securities.

June 22, 2009 at 2:51 pm Leave a comment

Processing of Federal Reserve Membership Applications

The application process for organizing a state member bank just got a little easier. The Board of Governors of the Federal Reserve System recently released Supervisory Letter SR 08-5, which outlines a new streamlined application process for de novo bank membership applications. The Supervisory Letter touts the following benefits:

  • Reduces the application processing time by allowing organizers of a de novo state bank to file the Federal Reserve membership application simultaneously with the filing of the Interagency Charter and Federal Deposit Insurance Application form with the FDIC and the applicable state banking agency;
  • Increases coordination between the FRB, the FDIC and the applicable state banking agency to prevent the organizers from having to respond to duplicate inquiries for information regarding the applications; and
  • Simplifies the “name check” process by encouraging the responsible Reserve Bank to coordinate with the FDIC and the applicable state banking agency to enable the directors of the new institution to have all fingerprint cards made and submitted simultaneously.

While the process may have been simplified, the substantive requirements for membership have not. Organizers must take care to meet the criteria for membership set forth in Federal Reserve Regulation H (12 CFR 208.3(b)). Not only must organizers be mindful of the requirements for admission as a member of the Federal Reserve System, but they also need to consider state-specific requirements for organizing de novo banks and FDIC requirements for obtaining deposit insurance.

For more information about the Federal Reserve membership application click here.

September 24, 2008 at 6:09 pm Leave a comment


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