Welcome to the second issue of Promissory Notes - our banking and finance e-newsletter - for 2024.

Business today is characterized by relentless change. To assist our clients in navigating this dynamic landscape, we pride ourselves on our ever-evolving practice. For 2024, we developed our report titled "ReSolutions" to show how Spilman's evolution translates into real, impactful enhancements to client service. To continue our commitment to next level client service, we proudly announce we have joined forces with a group of top-tier attorneys from Huntington, West Virginia. Click here to learn more and watch the full interactive presentation.

Thank you for reading.

Bryce J. Hunter - Member; Chair, Tax Credits Practice Group; Chair, Community Banking Group; Co-Chair, Banking and Finance Practice Group; and Editor of Promissory Notes

Joshua L. Jarrell - Member; Chair, Public & Project Finance Practice Group; Co-Chair, Banking and Finance Practice Group

“ATTOM, a leading curator of land, property, and real estate data, released its January 2024 U.S. Foreclosure Market Report, which shows there were a total of 33,270 U.S. properties with foreclosure filings — default notices, scheduled auctions or bank repossessions – up 5 percent from a year ago, and up 10 percent from the prior month.”

Why this is important: ATTOM’s latest report shows there were a total of 33,270 U.S. properties affected by foreclosure filings, which includes default notices, scheduled auctions, or bank repossessions. That figure represents an increase of 5 percent from a year ago, and a 10 percent increase from December 2023. Lenders repossessed 3,954 U.S. properties through completed foreclosures (REOs) in January 2024, up 1 percent from a year ago and up 13 percent from December 2023, representing the first month-over-month increase in completed foreclosures since July 2023.

States that had at least 50 or more REOs and that saw the greatest monthly increase in January included: Michigan (up 200 percent); Minnesota (up 47 percent); California (up 43 percent); Pennsylvania (up 36 percent); and Missouri (up 34 percent), ATTOM data shows.

Nationwide, one in every 4,236 housing units had a foreclosure filing in January. States with the highest foreclosure rates were Delaware (one in every 2,269 housing units with a foreclosure filing); Nevada (one in every 2,272); Indiana (one in every 2,499); Maryland (one in every 2,588); and New Jersey (one in every 2,647). Those major metropolitan statistical areas (MSAs) with a population greater than 200,000 with the highest foreclosure rates in January were Spartanburg, SC (one in every 1,579 housing units with a foreclosure filing); Columbia, SC (one in every 1,651); Cleveland (one in every 1,742); Detroit (one in every 1,799); and Las Vegas (one in every 1,923). Lenders started the foreclosure process on 21,770 properties in January, a 6 percent increase from last month and an increase of 5 percent from a year ago.

ATTOM also released a special report on U.S. commercial foreclosures, revealing a significant climb in commercial foreclosures over the years, from a low of 141 in May 2020 to the current figure of 635 in January 2024, which is closer to pre-pandemic numbers. --- Bryce J. Hunter

“The proposal also includes a policy statement to clarify the OCC’s review of applications under the Bank Merger Act.”

Why this is important: The Office of the Comptroller of the Currency (OCC), as well as the U.S. Department of Justice, have been advising for three years that it planned to adjust its rules for national bank combinations. Acting Comptroller Hsu announced proposed new rules (NPR) for such combinations. These new rules arguably make the process for bank mergers less predictable and more subjective than they have been in the past. The NPR removes the expedited review process and eliminates streamlined review. This previously set standards for a relatively short (and predictable) review period. The OCC claims it does not believe this will necessarily increase the average review period substantially. We’re from the government, and we’re here to help!  

Outlined under the NPR, the factors that make a positive OCC review more likely are: 1) the buyer and the resulting bank will be “well-capitalized;” 2) the buyer has an “outstanding” or “satisfactory” rating under the Community Reinvestment Act; 3) the resulting bank will have assets < $50 billion; 4) the acquiror has ratings of 1 or 2 for composite, management, and consumer compliance; and 5) the acquiror has no open formal or informal enforcement actions. Problems with Bank Secrecy Act, anti-money laundering, or fair lending are specifically flagged. Particularly if the transaction involves a troubled target institution, but possibly in other cases also, the OCC will “weigh the financial stability risk of approving the proposed transaction against the financial stability risk in denying the proposed transaction,” whatever that means. The OCC may deny applications from acquirors that have experienced rapid growth, are the functional target of the acquisition (reverse merger); or have engaged in multiple acquisitions in a relatively short period of time (“overlapping integration periods”). The OCC will critically evaluate plans for the communities served, looking at branch closures, particularly in low-income areas, costs, and community investment and outreach. The community comment period of 30 days may be extended by quite a bit. Globally systematic important banks (GSIBs) will be subject to even greater review.  

My view: My main concern is time. Longer review periods make transactions less predictable and can do damage particularly to the target bank. These “rules” do a pretty good job of just explaining what we all believed all the regulators considered when reviewing a merger. I see nothing particularly troubling or new about the list this recounts. Presumably, the OCC understands that, under the current U.S. banking system, there is competition among regulators, including the OCC, the Fed, and the FDIC. When the OCC historically created regulatory walls, banks that could, switched to other regulatory systems. We have worked with many banks that moved from “national” to “state” regulation over the years. That still is an option, particularly for local banks and smaller regional banks. There are advantages, however, for regional, multi-state banks to be under the OCC. It reduces the regulators and usually the regulatory burden. If the other regulators – Fed and FDIC – adopt these same “rules,” then this creates little opportunity to venue shop among regulators. If the OCC does not use these rules as a hammer, but rather just as a clarification for what it already is doing, and it works diligently to maintain a tight schedule for review, there may be no reason to venue shop. If the OCC uses these rules to extend the time of acquisition review or to muddy the waters for how acquisitions are reviewed, and it increases the “administrivia” in the process, we may see some national banks look at other regulatory venues (Fed and FDIC) in the near future. My hope is that this will not have a chilling effect on bank mergers, but it might. It certainly leans against bank mergers involving GSIBs. I think it’s too early to judge this, but I encourage anyone interested to read this article (for a slightly different conclusion) and also the actual proposed rules. --- Hugh B. Wellons

“Credit card debt grew by $50 billion in the fourth quarter of 2023.”

Why this is important: Demand for credit card debt and auto loans has continued to increase even though U.S. banks have further tightened credit standards, according to a recent Federal Reserve report. The survey of senior bank lending officers revealed banks tightened standards on credit card and auto loans, as well as commercial and industrial loans, over the fourth quarter of 2023. In particular, banks implemented higher minimum required credit scores and wider interest rate spreads over the cost of funds for credit card and auto debt loans.

Banks cited an uncertain economic outlook, reduced tolerance for risk, and a deterioration in their current or expected liquidity positions as reasons for tightening their credit standards. Even though banks have tightened their credit standards, the Federal Reserve Bank of New York reported credit card and auto loan balances increased over the fourth quarter, notably among younger borrowers. This dual perspective implies that lenders must find a balance between meeting increasing credit demand and identifying potential risks and remain vigilant as they seek to maintain loan portfolios. Based on the survey results, the Federal Reserve decided to keep interest rates steady, implying that the Federal Reserve is cautiously optimistic about the state of the economy.

As financial institutions navigate a dynamic landscape characterized by fluctuating interest rates and economic uncertainty, the survey results highlight the complex interplay between economic indicators and banking practices. --- Bryce J. Hunter

Why this is important: On September 5, 2023, the SEC’s Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure rules went into effect. These rules require publicly traded companies to disclose “material” cybersecurity incidents within four business days. “Material” means an incident where “there is a substantial likelihood that a reasonable shareholder would consider it important” in relation to making an investment decision. The disclosure guidelines require:

• Disclosure of cybersecurity incidents within four business days, including a description of the nature, scope, timing, and material or likely material impact;
• Implementation of detailed processes for assessing, identifying, and managing material risks from cybersecurity threats; and
• A description of the board of directors’ oversight of risks from cybersecurity threats and management’s role and expertise in assessing and managing material risks.

Enforcement of these new rules began in December 2023.

There is confusion regarding when the four-day disclosure countdown begins. It is not when the cyberattack is discovered. It instead begins when the cyberattack is determined to be “material,” which can vary from case to case. Regardless, time is of the essence, and public companies should not rely on the application of a “grace period” when complying with the disclosure rule. Consequently, companies subject to the disclosure rule should implement a response plan now so that they can are prepared to comply with the disclosure rule within the tight disclosure period. If your organization needs assistance developing a robust response plan in order to be able to timely comply with the SEC disclosure rule, please contact a member of Spilman’s Cybersecurity & Data Protection Practice Group for help. --- Alexander L. Turner 

“Streamlined rule details how financial institutions can appeal findings from supervisory examinations.”

Why this is important: The updated rule broadens the CFPB officials eligible to evaluate appeals, the options for resolving an appeal, the matters subject to appeal, and makes additional clarifying changes. The updated rule is effective immediately upon publication in the Federal Register.

The CFPB examines financial institutions for compliance with federal consumer financial law, and can help identify issues before they become systemic or cause significant harm. As with other supervisory agencies, CFPB examinations are confidential. The CFPB periodically publishes Supervisory Highlights, which share summaries of examiners’ findings without naming specific institutions.

The revisions to the appeals process include:

• The Supervision Director will select an appeals committee of three CFPB managers with relevant expertise who did not work on the matter being appealed, and who will advise the Supervision Director in conjunction with attorneys assigned by the CFPB’s General Counsel.
• The appeals committee will now be able to remand a matter to Supervision staff for consideration of a modified finding, in addition to the existing options of upholding or rescinding the finding.
• Institutions may now file an appeal of any compliance rating or finding, not only an adverse rating.

Banks subject to CFPB examination authority should focus on being thoroughly prepared (i.e., its board members and bank representatives) in handling the appeal process and on preventing adverse findings through thoughtful, proactive management of the supervisory examination process before supervisory findings are issued. --- Bryce J. Hunter