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Newsletter of the ABA Business Law Section Banking Law Committee
  Banking Law Committee Journal
March 2012
Join the Committee Online

Message from the Chair

Featured Articles
  Beyond "Shall":
Dodd-Frank's Permissive Rulemakings

By Gabriel D. Rosenberg and
Jeremy R. Girton
Davis Polk & Wardwell LLP

  Loan Sales: Should the Borrower be Permitted to Bid
By Laurence M. Smith
Wolff & Samson PC

  Cordray's Recess Appointment: Future Legal Challenges
By V. Gerard Comizio and
Amanda M. Jabour
Paul Hastings LLP

  What Is Good Faith? Subjective and Objective Standards for Banks Accepting Payment Orders
By Mark E. Wilson and
Jeremy D. Kerman
Kerns, Frost & Pearlman, LLC

  Bank Owned Life Insurance (BOLI) and PLR 201152014©: An Innovative Arrangement Poses Numerous Issues
By Charles C. Morgan and
James L. Hess
HMH Consulting, LLC


Editorial Board:

Peter E. Heyward
    Editor
    Morgan Stanley
    Peter.Heyward@morganstanley.com

Benjamin P. Saul
    Co-Editor
    BuckleySandler LLP
    bsaul@buckleysandler.com

  Message from the Chair
   
Sally Miller
This edition of the Banking Law Committee Journal includes five articles on a wide range of topics. Gabriel Rosenberg and Jeremy Girton of Davis Polk & Wardwell LLP have contributed a thought-provoking article on questions about the prioritization and coordination of permissive rulemakings pursuant to the Dodd-Frank Act. Laurence Smith of Wolff & Samson PC has provided a piece that questions a procedural convention underlying many commercial loan sales today: the refusal by the lender to sell the loan at a discount to the borrower or its affiliate some or all of whose principals are the same as the principals of the borrower. In addition, Gerald Comizio and Amanda Jabour of Paul Hastings LLP have written an article that details the potential legal challenges that could arise out of President Obama's recess appointment of Richard Cordray as Director of the CFPB. Grappling with the meaning of "good faith" for purposes UCC Article 4A -- particularly in the area of E-Banking? Mark Wilson and Jeremy Kerman of Kerns, Frost & Pearlman LLC explain how recent case law suggests that the FFIEC Handbook on E-Banking could provide significant insight. And last, but not least, HMH Consulting's Charles Morgan and James Hess explain the key issues counsel should consider before managing Bank Owned Life Insurance pursuant to the arrangement set forth in Private Letter Ruling 201152014.

William F Kroener III
Chair, Banking Law Committee


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  Featured Articles
   
Beyond "Shall": Dodd-Frank's Permissive Rulemakings
By Gabriel D. Rosenberg and Jeremy R. Girton, Davis Polk & Wardwell LLP

The burden on regulatory agencies to complete the hundreds of rulemakings required by the Dodd-Frank Act has garnered a great deal of well-warranted attention. Much less discussed, however, are the 198 places in the Act that authorize, but do not require, regulatory action. These "permissive rulemakings" raise key questions about the prioritization and coordination of rulemaking. These provisions and related controversy are the focus of this paper.

Required vs. Permissive Rulemakings

Dodd-Frank's 848 pages only begin to outline the multiple regulatory regimes it puts into place. The Act contains 243 provisions that specifically require U.S. financial regulators to adopt final rules - counting each regulator separately, this amounts to roughly 400 rulemaking requirements. Of these 400 requirements, 286 have specified deadlines, mainly within the first two years after Dodd-Frank's enactment. The Act further requires 87 studies to be conducted, some repeated annually. As Jonathan Macey of Yale Law School recently noted: "Laws classically provide people with rules. Dodd-Frank is not directed at people. It is an outline directed at bureaucrats and it instructs them to make still more regulations and to create more bureaucracies."


More...

Loan Sales: Should the Borrower be Permitted to Bid?
By Laurence M. Smith, Wolff & Samson PC

Following the collapse of Lehman Brothers, many commercial mortgage lenders have sold more loans than they have originated. Escalating vacancy rates and a precipitous decline in property values are among the causes of the defaults which have led to the loan sales. Rather than examine causal factors, this article explores a procedural phenomenon underlying many loan sales: the refusal by the lender to sell the loan at a discount to the borrower or its affiliate some or all of whose principals are the same as the principals of the borrower. Why?


More...

Cordray's Recess Appointment: Future Legal Challenges
By V. Gerard Comizio and Amanda M. Jabour, Paul Hastings LLP

On January 4, 2012, President Obama appointed Richard Cordray as director of the Consumer Financial Protection Bureau ("CFPB"), pursuant to the President's constitutional recess appointment powers. The Recess Appointments Clause, Article II, Section 2, of the U.S. Constitution provides in part that "[t]he President shall have power to fill up all Vacancies that may happen during the Recess of the Senate, by granting Commissions which shall expire at the End of their next Session."

Cordray's appointment has raised questions about the constitutionality of the President's actions for a number of reasons. Partially because the appointment of a CFPB director has been politically charged, challenges to Cordray's appointment are likely.1 These potential legal challenges include, but are not limited to, challenges to both new regulations and enforcement actions against nonbank lenders. 2 As a result, the legal issues surrounding the appointment have significant implications for all institutions regulated by the CFPB.


More...

What Is Good Faith? Subjective and Objective Standards for Banks Accepting Payment Orders
By Mark E. Wilson and Jeremy D. Kerman, Kerns, Frost & Pearlman, LLC

The Uniform Commercial Code ("UCC") contains several provisions incorporating the concept of "good faith." But what exactly does "good faith" mean? The Code originally defined "good faith" as "honesty in fact in the conduct or transaction concerned." See UCC § 1-201(19) (2006). While many in the banking industry are familiar with this subjective, "pure heart and empty head" standard, banking lawyers may be surprised to learn that the current uniform text imposes an objective standard as well as the traditional subjective one. This dual, subjective-objective standard of good faith applies to funds transfers under Article 4A of the UCC. The Federal Financial Institution Examination Council ("FFIEC") has established guidelines that may assist financial institutions in meeting the objective component of the good faith standard with regard to funds transfers, especially with regard to Internet schemes such as "phishing" frauds.


More...

Bank Owned Life Insurance (BOLI) and PLR 201152014©: An Innovative Arrangement Poses Numerous Issues
By Charles C. Morgan and James L. Hess, HMH Consulting, LLC

Private Letter Ruling 201152014 (the "PLR") describes a novel approach to managing Bank Owned Life Insurance ("BOLI"). This article outlines the most significant issues that counsel should call to the attention of bank management should they be considering participation in this untested arrangement.

The stated purpose of the transaction described in the PLR is to provide banks with a more effective, centralized way to manage BOLI and, where appropriate, either negotiate the terms of new replacement life insurance policies or renegotiate the terms of existing BOLI. Probably of at least equal importance, the conclusions in the PLR bless the arrangement as a structure that eliminates the income tax impediments to updating BOLI plans that otherwise would effectively prevent a bank from purchasing replacement life insurance coverage or renegotiating the terms of existing BOLI.

One of the unfortunate problems with updating BOLI plans is that doing so could cause the bank to lose interest deductions on its debt. The PLR concludes that the transaction, as structured, does successfully eliminate the risk that banks holding minority interests in the LLC will lose those interest deductions but it does not address many other concerns to which the proposed transaction may give rise.


More...

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