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Missouri Legalizes Medical Marijuana – Implications for Banks

On November 6, 2018, Missourians voted to amend the Missouri constitution to allow the use of marijuana for medical purposes. Amendment 2 allows the use of marijuana for ten medical conditions and imposes a four percent tax on the retail sale of marijuana, with the funds to be used for the health care needs of military veterans. Missouri joins over 30 other states in legalizing marijuana in some form. Despite Missouri’s and other states’ laws, the manufacture, distribution, and dispensing of marijuana remains illegal at the federal level under the Controlled Substances Act. Banks and other financial institutions must navigate this conflict between state and federal law with limited guidance from regulators.

Bankruptcy Rule Changes: What You Need to Know

Nearly every year, there are changes to the Federal Rules of Bankruptcy Procedure. 2017 was no exception, and new rules went into effect on December 1, 2017. Creditors should be aware of the new timeframe for filing claims and new relief that can be sought in Chapter 12 and Chapter 13 plans. Below is a summary of some of the new rule changes.

What property owners need to know about new registration requirements

Missouri Governor Greitens recently signed into law, RSMO §347.048, a new registration requirement affecting limited liability companies (LLCs) that own and either rent or lease real property, or own vacant real property, located in Kansas City, Missouri or Independence, Missouri.

Document Retention Policy for Banks

Document retention sounds like a boring topic until you realize that your bank can be subject to huge monetary damages and possible regulatory action if it doesn’t handle document retention correctly. In the old days, banks could simply keep every document forever to be on the safe side. That isn’t a practical alternative in today’s environment. Nowadays, retaining documents after their useful date can actually harm the bank.

Yet Another Data Sheriff In Town: CFPB Issues Its First Data Security Enforcement Action

On March 2, 2016, the CFPB finalized a Consent Order with Dwolla, an online payment platform, for violations of the CFPA.  It is the CFPB’s first enforcement action related to data privacy and security.  It is notable because Dwolla appears to have become an enforcement target due solely to its robust claims about security, and not due to any data breach.  It also places obligations on Dwolla’s Board to become responsible for data privacy and security in the company.

Have you revised your Reg E disclosures to take advantage of the recent changes in Kansas Law?

Effective July 1, 2015, a Kansas bank can reduce its liability for fraudulent electronic fund transfers on a consumer account by revising its Reg E disclosures.

Proceeds from Insurance Settlement Outside the Scope of Article 9

The Bankruptcy Appellate Panel for the First Circuit recently held that a creditor holding a perfected security interest in accounts and payment intangibles did not have a perfected security interest in the proceeds of an insurance settlement.

Supreme Court Issues Opinion on TILA Rescission Rights

We previously provided an update on developments concerning the right of rescission granted under the Truth in Lending Act (“TILA”). The United States Supreme Court recently issued a consumer-friendly decision regarding the rescission process.

Pat Whalen Publishes Data Breach Notification Article in BankNews

Spencer Fane Chairman Pat Whalen was featured as a guest author in this month’s issue of BankNews magazine providing insights and updates on the protocol for handling data breach notifications. The article, titled “When to Send a Data Breach Notification,” discusses the laws surrounding security breaches and the responsibility of companies to determine when notification of customers is both necessary and required by law.

Missouri Supreme Court Rules that Lenders and Servicers are Subject to the MMPA

The Missouri Supreme Court recently issued two decisions (Conway v. Citi Mortgage, Inc. and Federal National Mortgage Association and Watson v. Wells Fargo Home Mortgage, Inc.) holding originators and servicers of mortgage loans may be subject to causes of action for unfair or deceptive practices under the Missouri Merchandise Practices Act (MMPA).

Eighth Circuit Issues ECOA Decision

The Eighth Circuit recently issued a decision regarding the Equal Credit Opportunity Act (“ECOA”) that may change your bank’s approach to spousal guaranties.

A New Bill Could Pave the Way for the Post Office to Join the Financial Services Industry

On July 23, 2014, Representative Cedric Richmond introduced the Providing Opportunities for Savings, Transactions, and Lending Act of 2014 (also referred to as the POSTAL Act of 2014).  The bill proposes that the United States Postal Service (“USPS”) be allowed to provide some financial services, including small-dollar loans, checking accounts, and interest-bearing savings accounts.

CFPB Issues Policy Regarding Same-Sex Marriages

CFPB Director Richard Cordray recently issued a memorandum clarifying the CFPB’s policy with respect to same-sex marriages. The memorandum clarifies that the CFPB recognizes all lawful marriages that were valid at the time of the marriage in the jurisdiction where the marriage was celebrated.

How Small is Small?

Lenders that participate in Small Business Administration (“SBA”) loan programs should be aware that the SBA recently issued an interim final rule to increase monetary based small business size standards.  These standards are based on criteria such as receipts, assets, net worth and income.

Debunking the Rumor that Directors Should Not Have Access to Information in Suspicious Activity Reports

Do you remember that children’s game called “Telephone” that you played long ago at birthday parties, on car trips or around campfires?  You know — the game where one person passes a message to the next, and then to the next?  The message evolves as it travels, inevitably surprising and confounding everyone by the time it reaches the end of the circle.

Missouri Division of Finance Transitioning Licensing to NMLS

Effective May 1, 2014, the Missouri Division of Finance is authorized to license all Missouri mortgage brokers and originators through the Nationwide Mortgage Licensing System (NMLS). All currently licensed Missouri companies may request transition of their licenses onto the NMLS beginning on June 2, 2014. 

Real estate is back. So is construction lending. Be prepared.

A bank’s commercial construction lending portfolio often covers a wide variety of projects ranging from residential developments, apartments, condominiums and hotels, to office buildings and shopping centers.  Every type of commercial construction project requires a borrower with requisite expertise and skills to construct and market the project. Accordingly, a bank’s construction lending team not only needs to believe the project is a viable one, but they must also have the requisite expertise and skill to understand if a borrower’s budget is appropriate for the project. Understanding the budget process helps to make sure that the loan will accommodate both the initial project costs as well as reasonable cost overruns.

Recent Missouri Loan Modification Reminders Decision

The Missouri Court of Appeals for the Western District recently issued an opinion that reminds banks in Missouri, and elsewhere, of several important points when modifying loans.

IRAs Are Not Exempt From Tax Levy

One of the most persistent rumors regarding individual retirement accounts (“IRAs”) is that they are exempt from all creditors. While it is true that the laws of most states exempt IRAs from general creditors, including in the event of a bankruptcy, IRAs are generally not exempt from tax levies.

OCC Issues Garnishment Booklet

We frequently receive questions from banks regarding garnishments, particularly in response to recent changes in applicable regulations. To assist banks with such questions, the Office of the Comptroller of the Currency recently issued the “Garnishment of Accounts Containing Federal Benefit Payments” booklet.

Recent Developments concerning TILA Rescission Rights

Under the Truth in Lending Act (“TILA”), consumers are granted a right of rescission for mortgage loan transactions. Normally, a mortgage lender provides the consumer notice of this rescission right, and the consumer has three business days to rescind the transaction. If the mortgage lender does not provide the required TILA disclosures, the right to rescind is extended from three business days to three years. The Eight Circuit and the Eastern District of North Carolina have both recently provided additional guidance with respect to a consumer’s rescission rights and the rescission process.

Can Depository Banks Have Liability to PACA Claimants?

The Perishable Agricultural Commodities Act (“PACA”) is a federal statute regulating the purchase and sale of agricultural commodities, such as fruits and vegetables.  7 U.S.C. § 499(a)-(s).  PACA provides protection to producers and growers of perishable goods who transfer such perishables to brokers, dealers, and merchants, who in turn sell the food to purchasers.  Essentially, PACA provides that all inventory and proceeds held by a broker that are related to perishable commodities are held in trust by the broker.  The PACA trust is for the benefit of all producers that have sold products to such broker.  PACA trust funds can be commingled and producers are generally entitled to a pro rata distribution of trust funds without the need for tracing.  Producers, as the beneficiaries of a PACA trust, are entitled to a priority position over secured creditors of the broker.

Collection Fees Based on Percentage of Debt Violates FDCPA

For convenience, when collecting a debt, lenders may be tempted to simply add a percentage of the outstanding balance as the collection costs, rather than determining the actual costs of collection. The Eleventh Circuit, in the recent case of Bradley v. Franklin Collection Service, Inc., determined that, even in situations where the debtor has agreed to pay all costs of collection, this practice violates the Fair Debt Collection Practices Act (“FDCPA”).

Reliance on Reg. Z Model Forms May Be Misplaced

Lenders beware! A federal district court recently held that despite a lender’s use of a model form, the disclosure provided by the lender did not adequately notify the borrower of his rescission rights under the Truth in Lending Act (“TILA”) and Regulation Z.  In the case of Simmons v. CitiMortgage Inc. the United States District Court for the District of Utah the borrowers successfully sued the lender to enforce their rescission rights.

Banking the “Legal” Marijuana Industry is Still a Risky Business

Last Friday, the Financial Crimes Enforcement Network issued Guidance that is intended to clarify how banks can provide financial services to marijuana-related businesses and still comply with their BSA/AML obligations.  Unfortunately, the intent of the Guidance is undermined by its stipulations.   So much so, in fact, as to beg the question of whether FinCEN’s actual intent is to make compliance impossible.

Third-Party Claims under the Fair Debt Collection Practices Act

A recent decision from the Seventh Circuit reminds creditors, including banks, that the provisions of the Fair Debt Collection Practices Act (the “FDCPA”) may apply to parties other than the debtor.  In the case of Todd v. Collecto, Inc., a man brought claims under the FDCPA against a debt collection company that contacted him with respect to a debt owed by the man’s mother. 

Do Spousal Waivers Violate Reg B?

The reach of the Equal Credit Opportunity Act (“ECOA”) and Regulation B (“Reg B”) has become a popular conversation topic among banking professionals. As part of that conversation, many commentators have questioned whether Regulation B prohibits the use of a spousal waiver.

Do LLC’s Need Operating Agreements?

Did you know that most states do not require that a limited liability company adopt a formal operating agreement? In fact, only five states, including California, Delaware, Maine, Missouri and New York, require that an LLC maintain an operating agreement. Therefore, the question often arises as to whether a customer needs or should have an operating agreement.

What to do When Litigation Happens: Part II

Doug Weems reminds employers although litigation risks can be minimized, litigation is a fact of life in the United States.

What to do When Litigation Happens: Part I

Doug Weems discusses what to do when litigation happens. Although litigation risks can be minimized, litigation is a fact of life in the United States.  Here are some suggested steps to take if you or your bank is sued.

The Message from Regulators in 2014: “You had Better Mind Your Own Business and Everyone Else’s . . . . Or Else!”

If you look back at all of the regulations, guidance and enforcement actions over the past year, you will notice a very distinct trend. That is, more and more banks are being held responsible for the acts of others. For the acts of their customers. For the acts of their service providers. For the acts of completely unrelated third-parties with whom banks choose to do business. Indeed, in this regulatory environment, the consequences of not minding everyone else’s business can be devastating!

Federal Court Puts to Rest Challenges to the Method of Determining the Amount of Foreclosure Deficiency

In prior Alerts we described appellate court decisions addressing challenges to the Missouri common law rule of basing the amount of loan deficiency after real estate foreclosure on the foreclosure price paid, regardless of the fair market value of the affected real property. Challengers have pressed for adoption of a rule that would establish the amount of deficiency as the difference between the unpaid loan obligation and the fair market value of the real property subject to the foreclosure sale. By statute that is the rule in several states, including Kansas.

FFIEC Issues Final Guidance on Social Media

The Federal Financial Institutions Examination Council (“FFIEC”) issued final guidance on December 11, 2013, about the applicability of existing consumer protection laws, regulations, and policies to financial institutions’ activities on social media. The guidance does not introduce new requirements, but it is intended to assist financial institutions in understanding the risks related to social media.

The Bankruptcy Code v. the Fair Debt Collection Practices Act: Who Wins?

The case of Simon v. FIA Card, Services, N.A., recently decided by the Third Circuit, demonstrates the potential for conflicts between the Bankruptcy Code and the Fair Debt Collection Practices Act (“FDCPA”) and emphasizes that banks should approach bankruptcy debtors with caution.

Happy Holidays from the CFPB: 1,088 Pages of New Disclosure Rules that will Present Some Interesting Practical Problems for Implementing Banks

Just in time for the holidays, the CFPB gifted the banking industry another 1,088 pages of final mortgage disclosure rules. 

New Homeownership Counseling Requirements Bookmark This Page and Update Your Mortgage Loan Procedures

Last week, the CFPB launched a website tool to help consumers find local housing counseling agencies to answer their questions or address their concerns about home ownership.  This tool can also be used by banks to generate a list of approved counselors for borrowers in connection with mortgage loan applications. 

Final FDIC Guidance regarding Deposit Advance Products

The FDIC has issued final guidance for state chartered banks regarding deposit advance products.  We previously mentioned the proposed guidance and discussed applicable risks in connection with our first of two blog entries regarding changes to Missouri law that may now make deposit advance products more appealing.

Reminder of Fee Changes for Certain Missouri Loans

As you may be aware, Section 408.140 of the Missouri Revised Statutes, concerning loan fees for small loans, has recently been modified.  We previously blogged about the changes regarding short term cash advance fees.  As we indicated, with respect to open-end credit tied to a transaction account, the maximum credit advance fee that may be charged by a lender is now the lesser of $75 or 10% of the amount advanced.  This change became effective August 28, 2013.

Environmental Indemnity or Waste of Words?

On November 12, 2013, the First Circuit Court of Appeals handed down its decision in VFC Partners 26, LLC v. Cadlerocks Centennial Drive, LLC, slip op. (1st Cir., 2013). This decision serves as a reminder that courts will look carefully at the words used in a loan agreement’s environmental indemnity provisions to decide whether or how they apply. If the actual wording chosen (likely many years earlier) does not fit the environmental costs sought to be indemnified, the party pursuing indemnity may be greatly disappointed.

The “Name Game” Continues for Locating Notices of Federal Tax Liens

Under Article 9 of Uniform Commercial Code, security interests in most personal property securing business debt are perfected by filing a UCC financing statement in the appropriate office that provides the “name of the debtor,” among other information. UCC §9-502(a). What is the “name of the debtor” has been the subject of two major revisions to UCC Article 9. The 2001 revisions adopted an “only if” answer to this question for registered organizations (corporations, limited partnerships, limited liability companies and certain registered business trusts). Under that revision, the only correct name for a UCC filing against a registered organization is “… the name of the debtor indicated on the public record of the debtor’s jurisdiction of organization….” UCC §9-503(a)(1).

Changes Regarding Force-Placed Hazard Insurance

Along with the CFPB’s numerous other mortgage regulations, some regulations concerning force-placed hazard insurance are set to take effect on January 10, 2014. The new regulations, which can be found in 12 C.F.R. § 1024.37, dictate a specific procedure that must be followed before a servicer can charge a borrower for force-placed insurance.

Agencies Issue Disappointing Statement on Qualified Mortgage Fair Lending Risks

Earlier this year, I authored a client alert examining the potential implications of the CFPB’s new mortgage rules in light of HUD’s recent clarification on how it will apply the statistical disparate impact approach to fair housing enforcement. That article examines the potential conflict between the two rules and concludes that bankers who attempt in good faith to comply with the new mortgage rules by making only “Qualified Mortgages” will be at high risk for a fair housing / fair lending enforcement action.

Adventures of the Missouri No-Oral-Credit-Agreement Statute; Governor Signs Corrective Amendment in SB 100

The Missouri credit agreement statute of frauds has had uneven interpretations by the courts.  It has been amended twice to overrule appellate court decisions that limited its obvious intent, which is to eliminate all claims by borrowers and guarantors(or lenders) that oral promises or commitments had been made or breached or that there were representations at variance with written loan agreements, promissory notes, guaranties or similar documents.  It was originally adopted as § 432.045, R.S.Mo., in 1990. 

An Expensive Word

Changing one word in your loan documents could save you thousands of dollars if you sue borrowers in Kansas. That word is “reasonable”—as in whether your borrowers must pay for “reasonable” attorneys’ fees that you spend to collect their loans, rather than all of your costs of collection.

Impact of Chapter 11 Bankruptcy on Liens

In the Chapter 11 bankruptcy case of Acceptance Loan Company, Inc. v. S. White Transportation, Inc., the Fifth Circuit recently held that a secured creditor’s lien remained in place after the confirmation of the debtor’s plan, despite the fact that the secured creditor received bankruptcy notices and took no action to protect its interest until after the plan was confirmed.

Interagency Guidance Clarifies Banks’ Right to Report Financial Abuse of Elders

The Federal Reserve, CFPB, FDIC, OCC, SEC, NCUA, FTC, and CFTC recently issued Interagency Guidance to clarify that banks and other financial institutions are generally free to report suspected exploitation of elderly customers to government authorities without violating federal privacy provisions of the Gramm-Leach-Bliley Act.

The New Uniform Commercial Code Article 9 Rules To Determine An Individual’s Name For Filing Financing Statements

Under Article 9 of the Uniform Commercial Code security interests in most personal property securing business debt are perfected by filing a UCC financing statement in the appropriate central filing office. With few exceptions, such as perfection of purchase money security interests, the first creditor to file a correctly prepared financing statement in the proper location has priority over a security interest perfected in the same property by a later filing. Prospective lenders search the UCC filing office records under the “name” of the proposed borrower to confirm that there is no indication on file that any other party may have a prior perfected security interest against the proposed borrower covering the offered collateral. Filing offices index UCC files by the debtor’s “name.”

Practical Implementation of the CFPB’s New Mortgage Rules: Here is Where You Should Start

In the past year, the CFPB has issued 1,097 pages of final mortgage rules.
I consider myself to be an efficient reader, and it took me roughly three and a half minutes to read just one of those pages.  At that rate, a bank compliance officer would need almost 64 hours of uninterrupted time just to read the text of the new regulations.

Regulatory Alert – Examiners are Taking a Close Look at Interest Rate Risk

The news is rolling in from both banks and regulators — interest rate risk (“IRR”) will be a primary focus of upcoming safety and soundness examinations. In the current market of tight net interest margins and slow loan growth, regulators are concerned that banks may begin reaching for higher yields in the form of longer-term assets. This concern could be well-founded given the strong forces that are creating incentives on both sides of the closing table.

Deposit Advance Products are Now Available to Missouri Banks . . . But Mind Your Regulatory Ps & Qs

Missouri’s Senate Bill 254, which will become effective on August 28, 2013, will permit Missouri banks to charge the lesser of $75 or ten percent of the loan amount on short-term, direct deposit cash advance products. Although existing Missouri law already allows state-chartered banks to offer similar products, the fees in relation to those short-term loans were previously capped at the lesser of $25 or five percent of the loan. Due to the lower fee cap, most Missouri banks did not offer these products, presumably because the potential fees did not compensate for the related risks.

Betsy Garvin Confirmed as Vice Chair of the Missouri Bankers Association Bank Counsel Section

Betsy Garvin was chosen as Vice Chair of the Missouri Bankers Association Bank Counsel Section at the Missouri Bank Association’s Board of Directors Annual Convention held on June 11, 2013 in Branson, Missouri.

Federal Judge Strikes Down Federal Reserve’s Interchange Fee Rule

On July 31, Judge Richard Leon of the Federal District Court of the District of Columbia ordered the Board of Governors of the Federal Reserve (the “Federal Reserve”) to go back to the drawing board on its rule governing debit card transaction fees. Judge Leon found that the fees permitted under the Federal Reserve’s rule were invalid under the Administrative Procedures Act (“APA”) because they were not a correct interpretation of the statute the rule was intended to implement. In his order, Judge Leon stated that the Federal Reserve “clearly disregarded Congress’ statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit card transaction.”

Changes to Kansas Concealed Carry Statutes

Kansas recently enacted amendments to the state’s concealed carry statutes, the Personal and Family Protection Act (the “Act”). These changes, contained in HB 2052, are relevant to all public and private entities, including banks. The Act allows businesses to post signs indicating that concealed weapons are not allowed on their premises. Previously, however, the Act did not speak to the potential implications of posting such signs. Now, as a result of the amendments in HB 2052, there is more clarity as to the impact such signage may have on business-owner liability for incidents related to concealed weapons.

How to Handle Data Security Breaches & Internet Fraud Losses

Elizabeth Fast will be speaking on the subject of data security breaches and internet fraud losses at the  4th Annual MIBA Security Conference in Columbia, MO on September 25, 2013.

Updates to the Colorado Certificate of Title Law

Colorado amended its certificate of title statute to add “off-highway vehicles” to the and allow for the creation of an electronic titling system.

Governor Signs Bill Amending Missouri No-Oral-Credit-Agreement Statute

Prior Alerts have outlined the history of the Missouri No-Oral-Credit-Agreement Statute, originally §432.045, R.S.Mo.  After being amended in 2004 by §432.047 to overrule a limiting appellate opinion, the Missouri Court of Appeals, Eastern District, held that it was effective to negate all claims and defenses based upon any allegations or oral promises including those based on fraud or any other equitable doctrine.

CFPB Releases Final List of Rural and Underserved Counties for 2014

A number of the Consumer Financial Protection Bureau’s (“CFPB’s”) new mortgage rules contain exemptions or safe harbors for mortgage loans made by creditors that, during the preceding year, operated predominantly in “rural” or “underserved” counties or for mortgage loans made in “rural” counties. The CFPB has now released its 2014 final list of “rural” and “underserved” counties that may be used by banks to determine whether a county is “rural” or “underserved” during 2013, and accordingly, whether it will qualify for an exemption under the CFPB’s new mortgage rules in 2014. The CFPB has confirmed that banks may rely on this list as a safe harbor in determining whether a county is “rural” or “underserved” in a given calendar year.

Examiners Take a Comprehensive Approach to Reviewing Executive Compensation

An increasing number of our community bank clients report that regulators are focusing significant examination effort on compensation policies and the related risk-assessments and controls. By now, most bankers are aware of the Consumer Financial Protection Bureau’s (“CFPB”) new rules regarding mortgage loan originator compensation that will go into effect in January of 2014. Banks that make residential mortgage loans will likely be reviewing their compensation policies with an eye toward compliance with those regulations long before the effective date. But even now, months before those rules go into effect, examiners are taking a much broader look at bank compensation policies – not just focusing on mortgage loan originators and consumer compliance, but also on a bank’s overall risk-assessments and controls related to all types of incentive compensation. Accordingly, as you think about reviewing mortgage compensation for compliance with the new CFPB rules, we encourage you to expand your review to incorporate the more comprehensive risk-assessment and mitigation components that your safety and soundness examiners will be looking for.

Merging or Acquiring Another Institution? Don’t Forget your Compliance Due Diligence

If you have filed a federal regulatory application for a bank merger or acquisition recently, you probably noticed a new question in the standard application form. Bank regulators are now routinely asking for a description of the acquirer’s due diligence review of the target institution, as well as the scope of resources committed to the review, any significant adverse findings and, if applicable, the corrective actions to be taken to address those findings. Essentially, the regulators want to make sure you have done your homework. They will also use the provided information to issue-spot in connection with their review of the transaction and as a piggy-back for any related examinations. In our experience, regulators take responses to the due diligence question very seriously, and an incomplete or shallow response can result in significant delays in obtaining regulatory approval.

Further Adventures of the Missouri No-Oral-Credit-Agreement Statute; Corrective Amendment Does Not Pass

As described in prior Alerts, the Missouri specialized statute of frauds covering “credit agreements” has had uneven interpretations by the courts. It has been subject to one amendment and one proposed amendment intended to overrule appellate court decisions that have limited its obvious intent, which is to eliminate all claims by borrowers and guarantors, when pursued by lenders for payment, that oral promises had been made that excused performance or that were at variance with written loan agreements, promissory notes, guaranties or similar documents. It was originally adopted as § 432.045, R.S.Mo., in 1990.

Bankers Caught Between the Fair Lending Rock and the Credit Quality Hard Place

In the wake of the housing and foreclosure crisis, the United States Department of Justice (“DOJ”) and federal bank regulatory agencies have made fair lending enforcement a top priority. As a result, banks have become subject to severe examination criticism, enforcement actions and even civil actions alleging discrimination in loan pricing, particularly with respect to unsecured consumer loans. Banks have endured these harsh consequences, even where there was no evidence or even any allegation that the bank intended to discriminate. In response, many community banks have revised lending policies to eliminate virtually all loan officer discretion in the pricing of unsecured consumer loans, with the inevitable result that unsecured credit is generally less available to the very consumers that the fair lending laws were designed to protect.

The Guaranty of Swap Obligations Raises Enforceability Issues Under Dodd-Frank Regulations

The business borrower entering into a secured financing transaction at a floating interest rate typically attempts to manage the interest rate risk by entering into a “swap” with a “counterparty” resulting in fixing the interest rate the borrower is required to pay. Lenders almost always require that commercial loans to a privately owned business be guaranteed by its owners. As a swap involves some potential liability to the lender, the lender normally includes such liability in the definition of the “Obligations” being incurred and required to be paid by the borrower, secured by any collateral and guaranteed by the borrower’s owner.

Reducing the Bank’s Liability for Internet and Electronic Fraud Losses

Internet and electronic fraud losses are increasing drastically for financial institutions.  Although the fraudster has ultimate liability for the fraud loss, the fraudster rarely can be found so the liability for the fraud loss generally is shifted to the bank.  This article explains how the bank can reduce its liability for Internet and electronic fraud losses with respect to commercial accounts if the bank utilizes reasonable security procedures and a properly drafted agreement with its customer.

Change in Method of Foreclosure Deficiency Rejected

In a prior Alert, we described an April 2012 Missouri Supreme Court decision in which the Court refused the urging of a borrower to change the Missouri common law rule of basing the amount of loan obligation deficiency after real estate foreclosure on the foreclosure price paid, regardless of the fair market value of the foreclosed-upon real property

Payment Fraud Losses Increase for Community Banks

The 2012 payments fraud survey conducted by the Federal Reserve Bank, in coordination with the Independent Community Bankers of America, reports that 96% of the financial institutions surveyed have experienced payment fraud losses.  That’s no surprise to community banks in Missouri.  I receive at least one telephone call every day regarding a payment fraud situation so I understand how these fraud losses are increasing.  The national survey states that over 50% of the financial institutions reported their payment fraud losses had increased over 2011.

UCC Article 9 Amendments Colorado Executive Summary Outline

This is an executive summary outline of the changes to Article 9 of the UCC.

Proper Use of the UCC Article 9 “File Drawer” System to Address Unauthorized Terminations of UCC Financing Statements

Most security interests in personal property securing commercial loans are perfected by filing a Uniform Commercial Code (UCC) financing statement, typically with the secretary of state of the state of organization of the borrower if a registered organization or with the secretary of state of the state of the principal residence of an individual debtor. In most instances, the security interest of the lender first to file a financing statement has priority over security interests perfected by subsequent filings.

Proposed Revision to Missouri No-Oral-Credit-Agreement Statute in Response to Court-Limiting Holding

In 1990, the Missouri General Assembly adopted a specialized statute of frauds covering “credit agreements,” §435.045. Its obvious intent was to eliminate claims by borrowers and guarantors, when pursued by lenders for payment, that oral promises had been made that excused performance or were at variance with written agreements (notes, loan agreements, guaranties).

Perfecting a Security Interest in a Limited Liability Company Ownership Interest – Not a Simple Task

Many loans to small (and not-so-small) businesses include the requirement that the owners pledge to the lender their ownership interests in the prospective borrower. When the borrower is a corporation, the standard approach under the Uniform Commercial Code calls for the lender to perfect its security interest by obtaining physical possession of the certificates representing the stock, along with a “stock power” (separate endorsement by the owner that would allow the lender to transfer the stock to any purchaser in foreclosure). So long as the lender retains possession, it has a perfected, first-priority security interest in the pledged stock.

Limited Liability Company as Borrower: Be Sure the Loan is Duly Authorized

When the borrower is a limited liability company (LLC), equivalent certifications are even more essential. Unlike corporations, which have a basic, well-understood power structure (officers, board of directors, shareholders), LLC’s may vary widely in structure. They may be member-managed (members can bind the LLC) or manager-managed (only managers can bind the LLC). LLC operating agreements, especially if the LLC is manager-managed, also tend to have more detailed statements of the scope and limitations on the power of the managers to take action on behalf of the LLC without member approval. Unlike corporations, LLC managers customarily serve somewhat as both a type of board of directors (authorizing actions) and officers (carrying out authorized actions).

Jury Trial Waiver Challenged

In 1997, the Missouri Supreme Court held that the right to a jury trial, which is guaranteed by the Missouri Constitution (Article I, Section 22(a)), may be waived by contract by “clear, unambiguous, and conspicuous language.” Malan Realty Investors, Inc. v. Harris, 953 S.W.2d 624, 627 (Mo. En Banc. 1997). Relying on that holding, lenders almost uniformly include, in all capital letters, and often in bold-face type, language clearly waiving the rights to a jury trial.

The Perils of Invoking “Insecurity” Default

Although by their literal terms such default provisions allow the lender to take drastic action (acceleration of debt; foreclosure on collateral) as long as the lender “believes” itself insecure, invoking such default provision is fraught with peril.

New Legislation Proposes Change to Perfection of Security Interest in Vehicles

The Missouri legislature recently passed legislation that will impact the manner in which a lender perfects a security interest in vehicles held for lease by a debtor engaged in leasing activity.  Banks should be aware of this change in order to ensure that they are properly perfecting their security interests in vehicles held for lease.

U.S. District Court, Western District, Predicts Change in Missouri Foreclosure Deficiency Law

A recent Missouri Supreme Court case, First Bank v. Fischer & Frichtel, Inc., decided April 12, in which the Court, en banc, refused the urging of a borrower to change the Missouri century-old common law rule of basing the amount of deficiency after real estate foreclosure on the price paid in the foreclosure sale.  Borrower in that case asserted that the rule be changed to base the deficiency on the property’s fair market value, regardless of the amount paid (normally, “bid-in” by a credit bid by the foreclosing lender).

After the Gut Punch, Regional Banks Back at Work

Over the past five years, loans to businesses, big and small, tumbled. There were many events that caused the tightening of credit both globally and locally, but to understand where we are we must remember where we were.

Challenge to Foreclosure Deficiency Suit Rejected

In this case, the lender foreclosed upon real estate securing a loan with a balance of $1,133,875 and bid $466,000 as the only foreclosure sale bidder. In the suit to enforce the deficiency, the debtor presented testimony that the fair market value of the real estate at the time of foreclosure was $918,000. The trial court instructed the jury that the measure of damages should be based upon the fair market value of the property and the jury applied that instructions and awarded the lender only $215,875 (plus interest and attorney’s fees), the trial court, however, granted the bank’s motion for a new trial because the jury instruction was not consistent with established Missouri common law.

Effective May 1, 2011: New Garnishment Procedures for Federal Benefit Payments

Effective May 1, 2011, credit unions must implement new procedures for handling garnishments on accounts that receive federal benefit payments by direct deposit. This is the first time that federal agencies have imposed an affirmative duty on financial institutions to protect federal benefits from garnishment.

Form 1099-A Reporting

There are many different types of IRS Form 1099 that a financial institution is required to report each year. Based on my past experiences, it seems that financial institutions have the most questions with respect to the Form 1099-A (Acquisition or Abandonment of Secured Property).

New Changes to Missouri Garnishment Law

Garnishments may seem like commonplace to many banks. The general idea of turning over funds of a judgment debtor held by the bank to a judgment creditor appears to be a straightforward transaction with little risk to the bank. Yet, a garnishment can often place a bank in a precarious position.

Is It Time To Revise Your Loan Policy?

A written loan policy is evidence that a bank has established a process to identify, measure and control risks in the lending arena. Therefore, an incomplete or inadequate policy may raise regulatory concerns with respect to the bank’s risk management practices.