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          IBAT                                                                              Capitol Comments


          The Texas Department of Banking has revised Supervisory Memorandum 1010,
, which addresses bank-owned life insurance
          (BOLI). This supervisory memorandum is designed to aid state chartered banks in making informed
          decisions consistent with safe and sound banking practices. With prudent planning and analysis,
          along with adequate monitoring and controls, BOLI can afford certain protections and enhance an
          institution's overall value. However, BOLI transactions can be complicated and often represent
          activities substantially different from traditional bank products. A thorough understanding of the
          nature and characteristics of any BOLI product is needed before committing any bank resources and
          bank management should ensure that transactions meet the guidelines set out in this memorandum.

          Editor's Note: This memorandum is an excellent discussion for the authority of state chartered banks
          to engage in BOLI transactions, as well as setting forth the guidelines for BOLI transactions. The
          OTS and the OCC have issued extensive regulatory bulletins on this specific subject, and the material
          contained in this Supervisory Memorandum expands discussion of the various regulatory risk issues
          and the need for proper board and internal bank management supervision, for the accounting of
          BOLI transactions, as well as other kinds of deferred compensation agreements, see the Interagency
          Guidelines in the FFIEC section of this newsletter.


          The FDIC has released FIL-19-2004,,
          which is the FDIC Community Development investment guide to assist FDIC-supervised institutions
          in assessing community development investment opportunities. The guide explains how an insured
          state nonmember bank determines whether an investment is permissible and satisfies the CRA
          definition of "qualified investment" as a lawful investment, deposit membership share, or grant that
          has community development as its primary purpose. The guide also explains how the following four
          investment vehicles may satisfy the CRA definition of qualified investment:
          1. Small Business Investment Companies;
          2. New Market Venture Capital Companies;
          3. Qualified housing projects; and
          4. Community and economic development entities, community development projects and other
          public welfare investments.
          In addition, the guide describes how the following types of investments may be structured to achieve
          a community development purpose:
          1. General obligation municipal bonds,
          2. Municipal revenue bonds, and
          3. Mortgage-backed securities.

          Editor's note: This is especially helpful for those banks that are transitioning from CRA small bank to
          CRA large bank status.

          The FDIC's 2003 Annual Report is available on the FDIC's website:

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          The FRB has made a number of improvements to its web site, including the capability to view and
          submit comments on regulatory proposals. Comments on regulatory proposals can be submitted by
          e-mail to: or
          The Board will continue to process public comments delivered by standard mail and fax. In addition,
          the Board has expanded the offerings on its Freedom of Information Act (FOIA) web pages. Public
          comments on proposed regulations, other proposals, and information collections are posted at
 The Board has also established
          two special sections on its web site. One contains Federal Reserve documents relating to the
          proposed Basel II Capital Accord under the heading "Banking Information and Regulation." Updates
          related to Basel II, as well as historical documentation, can now be found at
 The second section is dedicated to
          the FRB's financial education efforts and contains educational tools on personal finance gathered
          from across the Federal Reserve System. Users have easy access to multiple resources, including
          information on e-banking, shopping for a mortgage, preventing identity theft, consumer credit
          protections, and economic education. The site is at:

          Editor's comment: Wow! What a lot of new information is available. IBAT submits it's comment
          letters by e-mail as well as posts them to the IBAT website,
          /ch_comment_letters.asp?s_category_sub=. Also, don't forget about the old (in webpage years), but
          useful link to all of the lettered regs:

          The summary of the March 2004 Beige Book is available at the following link:
 The report contains a
          national summary of economic activity, and a more detailed report by Federal Reserve District.


          See Notice 04-07,, for the Amendments
          to Operating Circular 3, Collection of Cash Items and Returned Checks. In addition to several minor
          technical changes, the amendments include three substantive changes to the coverage of Operating
          Circular 3:
          1. FedImage* Informational Services,
          2. Electronic Adjustments and the Documents to Follow Archive (DTF Archive), and
          3. Settlement and Adjustment Services for same day settlement (SDS) items.

          Note: Although these services are not new, the amendments standardize the terms under which the
          services are offered.

          The FRB announced amendments to Appendix A of Reg CC, effective May 15, 2004,
, that reflects
          the restructuring of the Federal Reserve's check processing operations in the Eleventh District
          (Dallas). Appendix A provides a routing number guide that helps depository institutions determine
          the maximum permissible hold periods for most deposited checks. As of May 15, 2004, the El Paso
          office of the Dallas Fed will no longer process checks, and the banks currently served by that office
          for check processing purposes will be reassigned to the Reserve Bank's head office in Dallas. As a
          result of this change, some checks deposited in the affection regions that are currently nonlocal

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          checks will become local checks that are subject to shorter permissible hold periods.

          Editor's Note: We warned you this was coming in the September 2003 edition of this newsletter.


          The Federal Reserve Bank of Kansas City has issued a press release February 12 entitled Top 10
          Ways To Reinvent Rural Regions, Throughout
          the nation, rural regions are on a quickening quest to reinvent their economies. As the drift from
          rural to urban or suburban areas accelerates, rural areas must turn to thinking regionally, as single
          cities or counties can no longer muster on their own. IBAT has seen evidence of this, as more and
          more community banks in rural areas are opening branches in nearby (or even not so nearby) urban
          or suburban areas in order to remain profitable, and some rural community banks are even moving
          their home offices to urban or suburban areas.

          Editor's note: IBAT remains committed to the principle of locally-owned community banking-Main
          Street Banking. This article provides some ideas that might prove to be an economically viable
          alternative to abandoning the rural areas entirely.


          Julie L. Williams, Chief Counsel and First Senior Deputy Comptroller for the OCC was a speaker at
          the Legal Conference, sponsored jointly by IBAT and TSCBA in San Antonio. In her speech, she
          urged cooperation between the states and the OCC with regard to the OCC's state law preemption
          and visitorial powers rules. The full text of the speech may be viewed at:

          The OCC has revised the "Business Combinations" booklet of the Comptroller's Licensing Manual,
 This booklet replaces the 1998
          version to incorporate recent regulatory and policy changes, such as a bank's combination with a
          nonbank subsidiary or affiliate, transactions with affiliates, and anti-money laundering effectiveness.

          The OCC has issued its February 2004 Bank Accounting Advisory Series,
          /BA022004.pdf. These advisories are not official rules or regulations of the OCC, but rather they
          represent either interpretations by the OCC's Office of the Chief Accountant of generally accepted
          accounting principles, or the OCC interpretations of regulatory capitol requirements.

          Hint: use the Advisory in preparing your Consolidated Reports of Condition and Income (call
          reports), as it contains what the OCC considers generally accepted accounting principles (GAAP).

          The OCC has issued Advisory Letter 2004-2,,
          which provides supplemental guidance concerning how national banks and their operating
          subsidiaries should handle complaints forwarded by state authorities. The guidance makes clear that
          the OCC expects national banks to take steps to resolve consumer complaints fairly and
          expeditiously regardless of the source of the complaint. The guidance also states that referral of a
          complaint does not constitute a "visitation" under federal law and the OCC rules and that national
          banks should not cite the OCC's visitorial powers as a justification for not addressing the complaint.

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          Note: According to Julie Williams, Chief Counsel and First Senior Deputy Comptroller: "While the
          OCC has certain exclusive regulatory, supervisory and enforcement authority over national banks,
          that does not mean that national banks cannot and should not accept information from state agencies,
          and other sources, and take appropriate actions to address their customers' concerns."


          The FFIEC has a new website feature called FIND (Financial INstitutions Data),
, that provides information on the FFIEC's Call Report Modernization
          initiative. This link features a timeline, progress reports, frequently asked questions and answers, and
          highlights of future process changes. It provides details about project participants and how financial
          institutions and software vendors can participate in the initiative. The site also contains information
          outlining the technology supporting the new reporting process.

          Suggestion: Always check this site before submitting future call reports. You are likely to find some
          ideas as to how to ensure the accuracy of the call report, a more efficient way of compiling the
          information or an easier way to submit the report.

          The FFIEC has issued an advisory on Accounting for Deferred Compensation Agreements and
          Bank-Owned Life Insurance (BOLI)
          /2004/not0409.pdf#Page=2. Consistent with generally accepted accounting principles (GAAP), the
          advisory highlights the appropriate accounting for obligations under a deferred compensation
          agreement, commonly referred to as a revenue neutral plan, or an indexed retirement plan.

          Editor's note: This advisory is for the accounting for deferred compensation plans and BOLI. For
          the authority and structuring of BOLI for Texas state chartered banks, see Supervisory Memorandum
          1010, under the Texas Department of Banking section of this newsletter.

          The FFIEC agencies have jointly issued an Update on Accounting for Loan and Lease Losses,
 The guidance provides an update on the status
          of the proposed Statement of Position, "Accounting for Credit Losses," which was issued in June
          2003 by the Accounting Standards Executive Committee of the American Institute of Certified
          Public Accountants. It also identifies the current sources of generally accepted accounting principles
          and supervisory guidance regarding allowances for loan and lease losses that institutions should
          continue to apply.

          COMMENT: This is a kind of FFIEC heads-up that there are some enhanced ALLL account
          procedures in the works by FASB, AcSEC and the SEC, all tucked away in the footnotes, of course.
          IBAT comented on the FASB proposals, expressing our serious concerns with the changes.


          The Texas Department of Insurance has promulgated its Basic Manual of Rules, Rates, and Forms for
          the Writing of Title Insurance relating to home equity liens,

          COMMENT: We have always said if you can get a title company to insure your home equity lien,

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          you are home free. However, also note that because of the additional risk involved, title companies
          take a more conservative approach in their underwriting standards as to what they will insure, and
          they may not be willing to insure a lien that a banker might otherwise deem possible from a lending
          standpoint. The Texas Department of Banking is not requiring title insurance on all home equity
          loans, but rather is taking a risk based approach. For example, assuming a home evaluated at
          $200,000 with an outstanding purchase money lien of $120,000, a lien for a $10,000 home equity
          loan need not be insured; however, assuming the same home had no first lien and a home equity loan
          of $150,000, the examiners might cite a technical exception if there were no title insurance, because
          of the greater lending risk.


          In its Expanding the American Dream Commitment,
          /background.pdf, Fannie Mae said it will implement new policies that ban mandatory binding
          arbitration clauses in mortgages. This action was predicted when on December 4, 2003, Freddie Mac
          announced it would refuse to buy subprime mortgage loans with mandatory arbitration clauses.
          Consumer groups and community activists have pressed the government-sponsored enterprises to ban
          such clauses to prevent unscrupulous lenders from using arbitration clauses to handle disputes in
          secret by avoiding a public trial. See In Re Palm Harbor Homes, Inc., reported in the February
          edition of this newsletter.

          Editor's Comment: On the other hand, see the proposed rule for the Texas Residential Construction
          Commission, on State Sponsored Inspection and Dispute Resolution Process (SIRP),
, which provides for mediation
          before a dispute between a builder and homeowner can go to court.


          Those of you who deal with applications for Statements of Ownership and Location (SOLs) will be
          glad to know that there is now a "Frequently Asked Questions (FAQs) Page" on the TDHCA's
          Manufactured Housing Division website, To find the
          FAQs, click on the "Ownership and Location Records" tab in the column on the left. The link to the
          FAQs is the fourth bulleted item under the "Important Information" heading. Two new forms have
          also been posted on the same webpage under the heading "Ownership and Location Forms." They
          are the Quick Processing Coversheet and the Application for Statement of Ownership and Location.

          Editor's note: Kudos to the TDHCA in so quickly adapting their webpage to S.B 521,

          BILLTYPE=B&BILLSUFFIX=00521&VERSION=5&TYPE=B, passed during the 2003 state
          legislative session. This bill was a remarkable clean-up of H.B. 1869,
          BILLSUFFIX=01869&VERSION=5&TYPE=B, passed during the 2001 legislative session, which
          was such a mess that nobody fully understood it.


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          In Bank of China v. NBM LLC,, the
          Second Circuit threw out a jury verdict of more than $100 million in favor of the Bank of China,
          overturning a trial court that said the bank could press fraud claims against loan customers if bank
          officials were aware of fraudulent activity. The Bank brought a civil Racketeer Influenced and
          Corrupt Organizations Act (RICO) claim against NBM LLC. RICO claims require a "reasonable
          reliance" by plaintiffs on the wrongdoing of the defendant. The court imputed knowledge by certain
          bank officers to the bank as a whole. In the process of obtaining loans from the bank, NBM LLC
          socialized with bank officers who were familiar with all aspects of the transactions, and even
          participated in some deals.

          Editor's note: This marks the first time any federal district or appeals court has directly addressed
          whether a plaintiff must show "reasonable reliance" in a RICO action where the underlying offense is
          bank fraud. Although the case is binding only in the Second Circuit (New York, Vermont and
          Connecticut), the Second Circuit is often considered the circuit most respected for its commercial law
          decisions, and it is likely to set the standard should a RICO claim be decided in any other federal
          district or circuit.

          Suggested action: If a bank officer becomes aware of fraudulent activity on the part of a loan
          applicant, this should be made part of the loan memorandum that is presented to the board or the loan
          committee, so that the credit will not be extended in the first place. And, of course, the bank's code
          of ethics should prohibit a loan officer's participating in deals with prospective or existing borrowers.

          The Fair Credit Reporting Act requires creditors to make a "reasonable investigation" to verify credit
          information disputed by consumers, according to Johnson v MBNA America Bank NA,
 The case involved MBNA, which
          claimed Linda Johnson was responsible for an outstanding $17,000 balance on a credit card in the
          name of Edward N. Slater. Although she was an authorized signer at the time the account was
          opened, the fact that she married Slater several years later did not make her a co-obligor. Johnson
          obtained copies of her credit report from the three major credit reporting agencies and disputed
          MBNA's claim. The bank cursorily reviewed the account and decided that its information was
          correct. Based on MBNA's conclusions, the credit agencies continued to pass on the information
          about the outstanding balance in the credit reports. Johnson sued MBNA, claiming the bank violated
          the FCRA by failing to properly investigate her dispute. A jury agreed and awarded her $90,000, and
          the Fourth Circuit affirmed. A reasonable investigation requires more than a cursory investigation.

          Editor's note: Although this is decision is binding only in the Fourth Circuit (Maryland, North
          Carolina, South Carolina, Virginia and West Virginia), it is the first on the issue by any federal
          appeals court, which means that it most likely will be followed by the other federal circuits. So be
          warned: if a consumer disputes information in a credit report, be sure to conduct a thorough
          investigation, not just a cursory review.

          There is an interesting discussion of the cure provisions regarding a Texas home equity loan in the
          case of Adams vs. Americiquest Mortgage Co, for which, unfortunately, no electronic cite is
          available. The opinion was issued on January 26 by the United States Bankruptcy Court for the
          Northern District of Texas, Amarillo Division, Case No. 03-20518-RLJ-7. The facts in this case are
          not in dispute, making summary judgment proper. The facts are that Larry and Tina Adams (the
          Debtors) purchased the home in which they presently live in 1994, granting a purchase money lien
          for a portion of the purchase price. In 2000, the Debtors refinanced their 1994 note with a cash out
          refi home equity loan from AAMED Funding Group (the 2000 loan). On December 19, 2002, the

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          Debtors refinanced the 2000 loan from Ameriquest Mortgage Co. (Ameriquest) (the loan from
          Ameriquest being referred to as the 2002 loan) It is the 2002 loan that is at issue before the court.

          The 2002 loan was not handled as a home equity loan. It was handled as a simple refinance of the
          purchase money loan and lien. The deed of trust in connection with the 2002 loan had the standard
          language: "the loan evidenced by the note is not an extension of credit as defined by section 50(a)(6)
          or 50(a)(7), article XVI, of the Texas Constitution." Section 50(f) requires that a refinance of an
          existing home equity loan, as defined by subsection (a)(6) must also be a home equity loan. The
          Debtors argue that the 2002 loan is not a home equity loan and therefore the lien granted is invalid as
          an improper attempt to refinance a prior home equity loan. Ameriquest does not dispute that the
          2002 loan was not handled as a home equity loan, but contends it may save its lien by curing the
          various defects in the 2002 loan that prevent it from being characterized as a home equity loan.

          The court cites section 50(f) that says a refinance of a debt that is a refinance plus cash-out secured
          by the homestead is a home equity loan. The wording in the deed of trust that says it is not a home
          equity loan is ineffective as against the Texas Constitution. Then the court cites art. XVI, Section
          50(a)(6)(A)-(Q), which are the requirements imposed on a lender making a home equity loan, such as
          the non-recourse provision and forfeiture and cure provision, and concludes that the cure provision is
          as much a part of the home equity loan as the non-recourse provision. The court then lists the home
          equity loan defects: the principal amount of the loan exceeds 80% of the value of the property; the
          loan purports to make Debtors personally liable; the loan is secured by a deed of trust that allows
          non-judicial foreclosure; there was a lack of required notices under 50(a)(6)(Q)(i); the security
          instrument does not say it was an extension of credit defined by 50(a)(6); and that the neither
          Debtors nor Ameriquest had signed a written acknowledgment of the fair market value. The court
          cited Doody v. Ameriquest Mort. Co., 49 S.W. 3d 342 (Tex. 2001), for the proposition that the cure
          provision can be used to save all of the requirements of a home equity lien, not just the 3% fee cap,
          which was the issue in Doody.

          Independent Bankers Association of Texas                                           

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