Financial Institution Letter FIL-81-2016

The FDIC is seeking comment on a handbook developed to facilitate the process of establishing new banks.

Applying for Deposit Insurance – A Handbook for Organizers of De Novo Institutions provides an overview of the business considerations and statutory requirements that de novo organizers will face as they work to establish a new depository institution and apply for deposit insurance. It offers guidance for navigating three phases of establishing an insured institution: pre-filing activities, the application process, and pre-opening activities.

This Financial Institution Letter applies to all proposed insured depository institutions.  The amount of filings for De Novo institutions had decreased and this proposed handbook is proposed guidance for those clients and friends wishing to form a financial institution.

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The Dodd-Frank statute also led to the adoption of Regulation 15G of the Securities and Exchange Act of 1934 (15 U.S.C.A. § 78o-11), which requires the sponsor in a CMBS securitization to retain a 5% stake in the credit risk of the underlying commercial real estate asset. The purported purpose of the regulations is to require CMBS lenders to stay involved in the process and the transaction. The rules were finalized on October 22, 2014, but become effective for CMBS transactions on December 24, 2016.

Under the standard risk retention options, the sponsor must retain certain securities or find B-piece investors as follows.

1. 5% of the face value of each class of securities issued in the CMBS transaction.
2. 5% of the fair value of all CMBS securities issued, but only of the most subordinate class of securities.
3. 5% of the value of transaction through a combination of either of the above options.
4. An alternative option allows the sponsor to find up to two B-piece investors willing to assume the risk retention obligation of the sponsor, subject to certain restrictions.

The practical implications are additional transaction costs in complying with this statute.  It could create more due diligence and a slower closing process for the commercial real estate lender.

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It appears that the OCC will require fintech applicants to apply as nondepository institutions, meaning that these fintect firms will not require FDIC insurance as they will not take deposits.  However, the OCC  could make some requirements part of the chartering process, including, but not limited to requiring  compliance with the Community Reinvestment Act.   This process will benefit our fintech clients who have been subject to regulatory compliance and licensing issues in the states where they operate.  This national charter will grant the same preemption  that currently held by  national banks.   We look forward in assisting our clients in obtaining these charters and continuing to work with the strategic alliance  model.

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We offer a value-based consulting product to analyze goals, prepare a strategic plan and negotiate and document a transaction. I define marketplace lending as creating platforms to connect borrowers and lenders.

FinTech services are those using computer and other technology to enable banking and lending.  FinTech is used in the creation of the platforms.  The marketplace lender most often has an emphasis on new technology but when it enters the market, it has no expertise with state and federal lending law, including licensing issues.  Banks have regulatory expertise, but the systems are in constant need of modernization, updating loan products, etc.

I am working on an article “How to Successfully Strategic Alliances in Lending”  which gives an overview of the current state and federal law in this area and strategies to succeed.

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The issues to address as I continue to negotiate these strategic combinations are;  a review of the terms and conditions of the reserve account, the timeframes for the spinoff of the Loan Product and whether the bank partner retains some risk of exposure.   The marketing, technology and customer service is also an issue.  One of the reasons the non-bank partner handles these obligations is because it has the marketplace expertise.   I also think you have to look carefully at the Loan Product in this case.  With interest rates clearly violating the usury laws, there is always going to be a “red flag”.

Interestingly enough, on July 29, 2016, the FDIC issued FIL-50-2016, seeking comment on proposed Guidance for Third-Party Lending.  The comment period was extended to Oct. 27, 2016.  The proposed guidance defines third-party lending as an arrangement that relies on a third party to perform a significant aspect of the lending process.   Categories include (but are not limited to):  institutions originating loans for third parties, institutions originating loans through third parties or jointly with third parties and institutions originating loans using platforms developed by third parties.  The focus is that the institutions establish a third-party risk management program and compliance management system.

It appears, that the FDIC recognizes these bank-partner lending arrangements.    At this point, we will continue to proceed with caution on structuring these strategic combinations.

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Purpose: Provide mortgage brokers and lenders with an exemption to other licenses

Main Function: A required license for different types of consumer and commercial lending

http://codes.lp.findlaw.com/cacode/FIN/1/d9/1/1

http://www.cfllicense.com/

http://media.mofo.com/files/Uploads/Images/140219-Expanded-Commercial-Loan.pdf

CALL Report

Purpose: A financial report that must be filed by all regulated financial institutions in the U.S. every quarter

Main Function: The CALL Report contains each bank’s balance sheet and income statement and is audited by the FDIC for errors.

http://www.investopedia.com/terms/c/callreport.asp

CFPB-Consumer Financial Protection Bureau (12 U.S.C § 5491)

Purpose: Preventing predatory mortgage lending, improving clarity of mortgage paperwork for consumers

Main Function: Enforcing federal consumer financial laws; reviewing business practices to ensure that financial services providers are following the law

https://www.federalregister.gov/agencies/consumer-financial-protection-bureau

http://www.investopedia.com/terms/c/consumer-financial-protection-bureau-cfpb.asp

http://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp

Collateral

Purpose: Provide the lender security in the event of a loan default

Main Function: Assets a borrower offers a lender to secure a loan

http://www.investopedia.com/terms/c/collateral.asp

Dodd-Frank Act-Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. § 5301)

Purpose: Lower risk in various parts of the U.S. financial system to prevent economic collapse

Main function: Monitor performance of companies that are labeled as “too big to fail” Monitor insurance companies that pose an economic risk

Prevent predatory mortgage lending

Restrict bank investments and regulate trading in derivatives

http://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp

FDIC-Federal Deposit Insurance Company created (48 Stat. 162) (Glass-Steagall Act)

Purpose: Encourage stability in the financial system through the promotion of sound banking practices

Main Function: “Insuring deposits” in banks

http://www.investopedia.com/terms/f/fdic.asp

Federal Reserve Board (FRB) created (12 U.S.C. § 226)

Purpose: Govern the Federal Reserve System Provide a safer, more flexible, and more stable monetary and financial system

Main Function: Imposing penalties upon banks, setting the Federal Reserve discount rate

https://www.law.cornell.edu/uscode/text/12/226

http://www.federalreserve.gov/faqs/about_12594.htm

http://definitions.uslegal.com/t/the-federal-reserve-board/

http://www.investopedia.com/terms/f/frb.asp

Glass-Steagall Act

Purpose: Restore public confidence in the US banking system, Prohibit commercial banks from being involved in investment banking

Main Function: Create FDIC

http://www.investopedia.com/terms/g/glass_steagall_act.asp

Hard-money lender

Purpose: Loans that are backed only by the value of the property

Main Function: Short-term bridge loan with higher interest rates than subprime loans that are not given by banks due to the high risk involved

http://www.investopedia.com/terms/h/hard_money_loan.asp

HELOC-Home Equity Line of Credit

Purpose: HELOC enables a borrower to draw a loan of approximately 75%-80% of the home’s value

Main Function: Line of credit that uses the borrower’s home as collateral with a variable interest rate (based on current prime rates) attached to the loan

http://www.investopedia.com/terms/h/homeequitylineofcredit.asp

http://www.nolo.com/legal-encyclopedia/home-equity-loan-basics-30021.html

HUD-1

Purpose: Inform buyer and seller of charges

Main Function: A form used by closing agents to show all charges on a buyer and seller in a real estate transaction.

http://www.investopedia.com/terms/h/hud-1.asp

Intellectual Property (Intellectual Property Protection and Courts Amendments Act of 2004)

Purpose: Patents, trade secrets, and ideas owned and legally protected by a company from outside use.

Main Function: Prevent the theft of trade secrets and enable prosecution for stealing of company knowledge

http://www.copyright.gov/legislation/pl108-482.html

http://www.investopedia.com/terms/i/intellectualproperty.asp

Loan originator (12 U.S.C. § 1026.36 (1))

Purpose:  Institution that works with a borrower to complete a mortgage transaction.

Main Function: Offer credit terms, negotiating credit terms on behalf of a consumer, obtaining an extension of credit for a consumer, or referring a consumer to a loan originator or creditor.

https://www.law.cornell.edu/cfr/text/12/1026.36

http://files.consumerfinance.gov/f/201309_cfpb_titlexiv_updates.pdf

http://www.hud.gov/offices/hsg/ramh/safe/smlicact.cfm

http://files.consumerfinance.gov/f/201306_cfpb_compliance-guide_loan-originator-compensation-rule.pdf

OCC-Office of the Comptroller of the Currency created (12 U.S.C. § 38)

Purpose: Charter and regulate the national banks

Main Function: Monitors the banks to ensure they are operating safely and in compliance with federal laws

http://www.investopedia.com/terms/o/office-comptroller-currency-occ.asp

Peer to peer lending

Purpose: Borrowing and lending without the use of banks

Main Function: Allow borrowers that would not normally be approved for a loan to have a form of debt financing

The peer-to-peer loans generate income through interest for the lender, exceeding the amount offered from prime loans

http://www.investopedia.com/terms/p/peer-to-peer-lending.asp

http://www.mofo.com/~/media/Files/UserGuide/2015/150129P2PLendingBasics.pdf

QM or Qualified Dodd-Frank Mortgage

Purpose: Provide restrictions against lenders from issuing loans to borrowers that do not qualify

Main Function: Lenders analyze the borrower’s ability to repay based on incomes, assets, and debts to ensure there is less risk of defaulting on the loan

http://www.investopedia.com/terms/q/qualified-mortgage.asp

Regulation D (17 CFR § 230.501)

Purpose: SEC regulation regarding non-public offering exemptions.

Main Function: Allow companies to offer and sell their securities without having to register the securities with the SEC through Rule 504, Rule 505, and Rule 506.

http://www.investopedia.com/terms/r/regulationd.asp

http://www.sec.gov/answers/regd.htm

https://www.law.cornell.edu/cfr/text/17/230.501

RESPA-Real Estate Settlement Procedures Act (12 U.S.C. § 2601)

Purpose: Inform and protect potential homeowners to become more savvy consumers, Prohibit lenders from paying kickbacks to friendly mortgage brokers

Main Function: Lenders must provide large amounts of information to potential borrowers at points throughout the loan process

http://www.investopedia.com/terms/r/real-estate-settlement-procedures-act-respa.asp

SBA-Small Business Administration created (15 U.S.C. § 633)

Purpose: Protect the interests of small businesses and strengthen the United States economy

Main Function: Provide guidelines for loans made by lenders, and a guarantee that the borrower will repay the loans

https://www.sba.gov/about-sba/what-we-do/mission

https://www.sba.gov/content/what-sba-offers-help-small-businesses-grow

https://www.law.cornell.edu/uscode/text/15/633

Shadow Banking

Purpose: Financial institutions  (hedge funds) that are not subject to regulatory oversight due to not accepting traditional bank deposits

Main Function: Take higher risk instruments than regulated institutions such as derivatives, securities lending, risky investments

Regulated institutions operate in shadow banking when they are involved in credit default swaps

http://www.investopedia.com/terms/s/shadow-banking-system.asp

http://www.bloombergview.com/quicktake/shadow-banking

Sub-prime mortgage

Purpose: A type of mortgage that carries higher than normal risk of default due to being offered to borrowers with lower credit ratings

Main function: Provide the borrower with a higher interest rate to compensate for the lender’s risk.

http://useconomy.about.com/od/glossary/g/subprime_mortg.htm

State licensed-non-member bank (12 U.S.C. 1813(e))

Purpose: Subject to less regulation than member banks and only with the state in which they are chartered

Main Function: Nonmember banks are not required to purchase stock in the Federal Reserve

https://www.law.cornell.edu/uscode/text/12/1813

https://www.fdic.gov/regulations/laws/rules/1000-400.html

http://financial-dictionary.thefreedictionary.com/Nonmember+Bank

TILA-TILA-Truth in Lending Act (15 U.S.C. § 1601)

Purpose: To protect consumers in their dealings with lenders and creditors

Main Function: Requiring the disclosure of the annual percentage rate (APR), term of the loan and total costs to the borrower before extending credit

http://www.investopedia.com/terms/t/tila.asp

“Too big to Fail”

Purpose: Prevent the failure of large corporations through a government bailout

Main Function: A government bailout is given to a company as an attempt to avoid economic collapse

http://www.investopedia.com/terms/t/too-big-to-fail.asp

UCC Article 9-Uniform Commercial Code-Secured Transactions

Purpose: Provides the rules governing any transaction (other than a finance lease) that couples a debt with a creditor’s interest in a debtor’s personal property.

Main Function: Allows the creditor to repossess the debtor’s property to satisfy the outstanding debt.

http://www.uniformlaws.org/ActSummary.aspx?title=UCC%20Article%209%20Amendments%20%282010%29

https://www.law.cornell.edu/ucc/9/article9

Utah industrial bank

Purpose: FDIC-insured financial institutions which can be owned by commercial firms that are not regulated by a federal banking agency

Main Function: Sell certificates called investment shares and accept deposits. Industrial banks invest the funds in installment loans

https://www.fdic.gov/regulations/examinations/supervisory/insights/sisum04/industrial_loans.html

http://www.investopedia.com/terms/i/industrial-bank.asp

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