Financial Services Regulatory Relief Act is Enacted with Bank Directors’ Financial Guarantee Provision

On October 13, 2006, the Financial Services Regulatory Relief Act was signed into law as P.L. 109-351.

Undoubtedly there are provisions in the Act that are very favorable to the banking industry. AABD was never opposed to those provisions. AABD’s only opposition related to Section 702, which is part of the new law.

That section empowers the federal banking agencies to enforce written agreements and conditions to applications, notices, and requests that contain personal financial guarantees of directors, officers, and other institution-affiliated parties. Financial guarantees can include the promise that the director or other insider personally assure that the capital of the bank will remain at certain minimum levels now and in the future.

One or more of the federal banking agencies used these financial guarantees in the past, but the courts held that the guarantees were not enforceable unless the agencies could prove that the director was unjustly enriched or had acted recklessly in violation of law or regulation. Section 702 overturns these cases and statutory language that required such a showing by the agencies.

Underlying Section 702 is the idea that bank directors are “deep pockets” that serve as a ready source of financial support when and if the institution needs it. Any use of federal agency powers to pressure or require bank directors to capitalize a bank or commit to doing so is inappropriate and should not be condoned by any federal legislation.

AABD will support the repeal of Section 702 in the 110th Congress, but will also seek an explanation from the banking agencies as to how they intend to use this new authority. The agencies have explained to AABD that they do not intend to use this new authority “routinely” but have never explained how they intend to use the new power.

In the meantime, AABD strongly recommends that banks should retain knowledgeable counsel to review any proposed written agreements or conditions to applications, notices, or requests that might create a financial commitment by an individual director or other institution-affiliated party. AABD also requests our members and other to report to AABD immediately if any federal banking agency attempts to impose any personal financial commitment on a director or other insider. We need this information to assist us in representing bank directors as a group before the agencies and the Congress. For more information about Section 702 and its potential impact on bank directors, officers, and other institution-affiliated parties, please go the the Members Section.

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