Florida Law
Florida Banking & Financial Institutions Law
Banking & Financial Institutions Law
Banks are financial intermediaries that link those who have money–depositors–with those who need money–borrowers. Banks play an important role in modern, industrial economies by gathering deposits, repackaging them into a staggering variety of financial instruments, and reselling them to borrowers. The important position that banks have in modern economies also is one of the easiest positions to abuse. Recognizing the potential for abuse and mismanagement inherent in the banking system and the negative effect that a weak banking system has upon a larger economy, state and federal authorities have created an extensive set of regulations that make the banking industry one of the most heavily regulated sectors of the economy. No other industry, through its day-to-day operations, affects as many other businesses as banking does. Many business managers feel frustrated when dealing with banks because they fail to understand that federal or state regulators sometimes put banks in regulatory straightjackets, or they do not understand how many bankers may be motivated in their actions by an understandable fear of borrower lawsuits. The relationship that a company has with its bankers is important to its success in business. Understanding the laws that affect bankers and their relationships with borrowers can better one's chances of getting a business loan on more favorable terms, and having satisfying business relations with banks.
This chapter discusses the strict regulatory environment in which banks operate and potential sources of lender liability. International Letters of Credit are discussed in the International Business Law Chapter. Several different types of bank loans primarily of interest to new companies are discussed in the Securities & Venture Finance Law Chapter. Workouts for troubled loans are discussed in the Bankruptcy & Workout Law Chapter.
National versus State Banks
Commercial banks can be chartered either as national banks or
state banks. The individuals who start a bank are free to choose
the type of bank charter that best fits their needs. National
bank charters are granted by the Department of the Treasury’s
Office of the Comptroller of the Currency in Washington, D.C.
State bank charters are granted by the individual state's banking
commission. In Florida, the Florida State Comptroller, located
in Tallahassee, regulates and supervises state bank charters.
Whether applying for a state or federal charter, applicants are
required to provide extensive information about their financial
history, their proposed management structure, the banking needs
of the community, and their intentions for serving the community
in which the bank will be located.
National bank charters are more expensive to procure although,
for most purposes, state banks and national banks have identical
rights and privileges once formed. One important difference between
national and state banks is that membership in the Federal Reserve
System (the "Central Bank" of the United States) and coverage
by the Federal Deposit Insurance Corporation (FDIC) are automatic
for national banks. State banks must make separate applications
to join the Federal Reserve System and the FDIC. Applications
for FDIC coverage and Federal Reserve System membership require
much of the same information required in the original charter
application.
Regulating Banks
Once a bank is chartered, state and federal regulators have a
number of tools available to control bank operations. The goal
of most banking regulation is to prevent widespread bank failures
like those that plagued the country during the Great Depression.
Much tighter supervision of commercial banks and federal guarantees
of most bank deposits have promoted much greater business confidence
in the banking system and prevented the widespread bank panics
that gripped the United States economy periodically in its early
history.
Regulatory Agencies
The Comptroller of the Currency has jurisdiction over the thousands
of national banks in the country. The Office of the Comptroller
issues national charters and has authority to examine and supervise
national banks. The Office of the Comptroller's numerous functions
are carried out through six regional administrative offices located
throughout the country. The state of Florida is assigned to the
Southeastern District, which has its principal offices in Atlanta,
Georgia, and is a good source of information about federal bank
regulations. The Office of the Comptroller also maintains duty
stations in Jacksonville, Miami, and Tampa. Bank examinations
also can be carried out by representatives of the FDIC and the
Federal Reserve. The Florida State Comptroller regulates branch
banking in Florida, sets maximum interest rates in certain categories
of loans and otherwise supervises state-chartered banks.
Banks also can be subject to control by a host of other federal
and state regulatory agencies. The Department of Justice has authority
to prevent bank mergers that it believes may create a trend toward
monopoly in a given area. The Securities and Exchange Commission
requires banks that sell stock to the public to file periodic
reports with the Commission. Banks that choose to participate
in a variety of government loan programs are subject to scrutiny
by the Veterans Administration or the Departments of Labor, Interior,
Housing and Urban Development, or Health and Human Services. In
addition, banks, like other businesses, are affected by state
and federal regulations regarding equal employment opportunity,
discrimination in lending, fair credit reporting, truth in lending,
and collection practices for delinquent loans.
Periodic Reports
Periodically, all banks are required to submit detailed financial condition reports to bank regulators. These reports must be submitted quarterly by larger banks and at least semi-annually by some smaller banks. Special reporting requirements are imposed on troubled banks and near continuous reporting is required for banks thought likely to fail.
Bank Examinations
In addition to having to file periodic reports, banks are subject to periodic visits by teams of inspectors to ensure the banks are being run in compliance with all applicable laws, that sound banking principles are being observed, and that the bank is not discriminating unfairly against any class of people. Often, these inspections are unannounced. Inspectors check all bank records, physically inspect documents, test computer systems, review loan procedures and policies, and count cash. Two areas of particular interest to bank examiners are the status of outstanding loans and the balance of the bank’s loan portfolio.
Status of Outstanding Loans
Bank examiners evaluate the strength of loans that a bank has made and make predictions of the likelihood that the loans will be repaid. Each bank receives a grade on the strength of its overall loan portfolio. To evaluate loans, examiners check the collateral pledged for each loan and the cash flow of the borrower repaying the loan. Accurate loan documentation is essential to this stage of the examination and, as a result, a bank may be quite strict in insisting upon proper documentation from even its best customers.
Portfolio Balance
A bank’s loan portfolio also is evaluated for balance. Theoretically, a bank’s loan portfolio is stronger if loans are spread out over a wide variety of loan categories such as real estate, manufacturers, service providers, and automobile fleets. A balanced loan portfolio is better able to withstand periodic economic fluctuations in any given industry than a loan portfolio heavily weighted toward one particular industry.
The Uniform Interagency Bank Rating System
More than one regulatory agency may have authority to examine a given bank, but because multiple examinations would be costly for the government and overly burdensome for banks, examiners use the Uniform Interagency Bank Rating System, a uniform set of standards, to grade banks. The Uniform Interagency Bank Rating System grades banks in five different areas–capital adequacy, asset quality, management ability, earnings performance, and liquidity. These five elements commonly are referred to by their acronym, CAMEL. Every bank is rated on a scale of 1 to 5 for each element of CAMEL, with 1 being the highest rating and 5 being the lowest. A rating of 1 is excellent. A rating of 2 is good, with minor problems. A rating of 3 signifies a bank has trouble in that particular area and will usually cause authorities to take action against the bank to remedy the problem. A rating of 4 signifies more trouble and usually triggers more serious corrective action. A rating of 5 is reserved for banks with a very high possibility of imminent failure and usually will trigger a search for candidates with which to merge the troubled bank.
Limits Placed upon Bank Loans
Both federal and state laws control the interest rates that banks can charge to borrowers. Regulations provide a range of permissible interest rates. A bank is free to charge different borrowers different rates within those ranges depending upon the bank’s perception of each business' ability to pay back the loan, the cost of funds the bank pays its depositors, and the competitive pressures of the financial marketplace. Federal and state laws also set lending limits on the amount that can be lent to a particular individual or business. These lending limits are determined primarily by the bank’s capital assets.
Limits Placed upon the Use of Bank Funds
Both federal and state laws place a variety of restrictions on what a bank can do with its own funds. These rules are extremely complex and only an experienced professional can adequately advise bank management. A few general comments can be made, however. National banks and many state banks are prohibited from investing in real estate except to the extent that the investment is used for the bank’s own needs. The total investment in the bank’s own real estate may not exceed the amount of its capital stock. Additionally, national banks and many state banks are prohibited from investing in nearly all equity securities. Limited exceptions permit investment in subsidiaries performing bank functions, United States Treasury securities, and general obligations of state and municipal governments. Banks generally are prohibited from investing in nonfinancial sectors of the economy such as manufacturing and health care. Within the financial services sector, banks are prohibited from making some investments in insurance or securities underwriting. These limits are coming under increasing scrutiny, however, and Congress currently is considering whether to do away with some of these restrictions.
Lender Liability
A big worry for lenders today is potential liability for the loans
they make. There was a time when bank officers felt free to step
in and tell a business how it ought to be run whenever that business
failed to make timely loan payments. Then, a wave of lawsuits
by business owners convinced juries that bank interference with
business decisions had been the cause of business failures. Failed
businesses sometimes won very substantial verdicts or settlements
from their banks. Early successes spawned a rash of copycat lawsuits
challenging every conceivable action a bank might have taken before
the business failed. Banks have lost lawsuits alleging bad faith
for failing to loan enough money, for loaning too much money,
for calling in a loan too early, and for failing to call in a
loan early enough.
A bank always needs to resist the temptation to take control of
a business too quickly because if the bank becomes so involved
in the debtor’s business that it “controls" the business, the
creditor can become liable for any liabilities incurred by the
business. This possibility is particularly serious because the
definition of when a creditor “controls a debtor" is hazy. There
is no simple formula to apply, so courts look to all the creditor’s
actions in the broadest context in answering the question. Lenders
need to be extremely careful about using their influence to get
the borrower to take actions detrimental to the company but beneficial
to the bank. Attorneys experienced in this area of law frequently
are called upon to advise their bank clients on how to ensure
better payment of loans without unnecessarily incurring liability.
The advice of experienced counsel is strongly recommended.
If all this were not enough to cause the average banker to lose
sleep, today’s bankers also need to worry about lawsuits brought
by the government for environmental cleanup costs at the sites
of borrowers' operations. Financial management of a debtor’s
business can have especially high risks in the realm of environmental
matters. In one notorious case, Fleet Factors, the court held
that a lender could be held liable for Superfund cleanup costs
at the debtor’s facility if the lender " had the ability to influence
the hazardous waste decisions of its borrower" even though the
lender had never actually participated in the decision-making
process. The court’s position that mere ability to influence a
borrower’s hazardous waste-handling decisions can trigger lender
liability for cleanup sent shock waves through the banking community.
The Environmental Protection Agency (EPA) has tried to assuage
the fears of many bankers by promulgating new rules to determine
when banks can become responsible for environmental cleanup costs.
However, many people in the banking industry are not comfortable
with the new rules and fear the potential for liability is still
great. Banks and bank clients concerned with how their actions
might be interpreted by a court assigning responsibility for environmental
cleanup costs should consult counsel experienced in interpreting
EPA lender liability rules.
Lender liability lawsuits are having a dramatic effect on the
way lenders and borrowers interact with each other. Many longstanding
relationships that once were consistently cordial are becoming
increasingly adversarial. Even a borrower in excellent financial
condition may find it increasingly difficult to secure loans if
it has a history of business litigation. Banks now feel threatened
by possible lawsuits from regulators and borrowers. Understandably,
they may be reluctant to offer business advice or to introduce
business managers to new business contacts.
Resources
Getting a Business Loan: Your Step-by-Step Guide, Orlando J. Antonini, Crisp Publications, Menlo Park, CA, 1993.
Lender Liability: A Practical Guide, James R. Butler Jr., et al, Bureau of National Affairs, Washington, D.C., 1987.
Borrowing for Your Business: Winning the Battle for the Banker's "Yes," George M. Dawson, Upstart Publishing Co., Dover, NH, 1991.
Doing Business with Banks: A Common Sense Guide for Small Business Owners, Gibson Heath, DBA/USA Press Inc., Lakewood, CO, 1991.
How to Get a Business Loan (Without Signing Your Life Away), Joseph R. Mancuso, Prentice Hall Press, New York, NY, 1990.
For information about federal bank regulations, contact the United States Department of the Treasury, Office of the Comptroller of the Currency, Bank Supervision and Policy, 250 E Street SW, Washington, D.C. 20219, (202) 874-5350; Southeastern District, Marquis One Tower, 245 Peachtree Center Avenue NE, #600, Atlanta, GA 30303.
For information about state banking regulations, contact the Florida State Comptroller, State Capitol Building, Plaza Level, #1401, Tallahassee, FL, 32399-0350.