Ten Important Roles For A Good Financial Institution Counselor

By Mary Beth Guard

Hiring legal counsel can be a wise investment for a financial institution if the lawyer's knowledge and skills are used in a manner that maximizes those resources. An astute attorney can spot potential problems and help the institution shape its practices to avoid them, and the old saying still holds true: "An ounce of prevention IS worth a pound of cure."

A bank's attorney can perform many different tasks. Here, we have identified the ten we believe are the most crucial to successful risk management.

The attorney should study all new laws or regulations to determine their impact upon the bank. Whether it is a change to a section of the Uniform Commercial Code or a statute affecting smoking in places of public accommodation, the lawyer should analyze it in light of the institution's business to determine to what extent, if any, current policies, procedures, or practices must be changed to comply with the new provisions of law or regulation. When the Americans With Disabilities Act went into effect, for example, lawyers for financial institutions which were building new facilities or undergoing major renovation should have quickly become familiar with the Act's requirements, in order to ensure the new or remodeled facilities did not contain barriers to the use of the bank's services by persons with disabilities.
"Before a new policy is adopted, or a new program or product is launched, a review should be done by counsel. Many banks, when a new policy is required, will borrow one from another bank so they don't have to start from scratch on drafting a new document. The problem with that is that the other institution's policy will reflect ITS practices. Proposed policies should be carefully scrutinized to make sure they don't commit the bank to conduct that is contrary to some perfectly legal practice the bank is engaging in. Consider also the case of the bank which adopted a policy of requiring a copy of a drivers license to be placed in the file of all of its checking account customers. If some of those checking accounts have overdraft protection lines of credit, there's a Reg B violation that the attorney should catch. If the bank wants to start a new program, like giving away football tickets to the first fifty people to sign up for the bank's new NOW accounts, the attorney will be able to analyze the regulatory and tax implications of the proposed practice. Maybe the bank is going to establish a web site. Counsel should review the content of the web site to spot any regulatory deficiencies or wording that could cause problems. The attorney might suggest, for example, on the pages dealing with loan solicitations, that there be wording inviting people who live or work in a particular community or county (or whatever the bank's designated lending area might be) to apply for a loan, thereby making it clear that the bank is NOT soliciting business from parties outside that area. Any time the bank is about to engage in something new, there is a potential risk, and the attorney can effectively eliminate that risk through study and feedback.
New advertisements should be reviewed by legal counsel. While compliance personnel are certainly well-qualified to construct language that complies with Reg DD, Reg Z, Reg B and Fair Housing, the attorney can look beyond those regulatory requirements to other potential pitfalls. One bank ran an ad saying that each person who purchased a $10,000 CD would be entered into a drawing and become eligible to win a wonderful prize. After the ad ran in the paper, the bank's attorney saw it and realized that the bank had violated the prohibition against a national bank participating in a sweepstakes! A few minutes of review BEFORE the ad ran would have prevented the violation because the attorney would have spotted the problem.
It is risky for a bank to file a Suspicious Activity Report or a notification of potential claim to its bonding company without having its attorney draft the language. Typically, when an SAR is filed, or a bonding company is put on notice, only a few preliminary facts are known, and, in some instances, the true facts may be very different from how they appear initially. For that reason, those reports and notices must be carefully worded in order to avoid a defamation suit by the person being written about. A report that says, for example, "Mr. Jones has deposited over $30,000 in his account in the last week. He is a known drug dealer," could land the bank in hot water. The bank's counsel would be more likely to word it, "Over $30,000 in cash has been deposited by Mr. Jones into his account in the last week. From the bank's records, this amount of cash would appear to be inconsistent with Mr. Jones's normal practices, as well as his stated employment." That states the facts without accusing the customer of a particular crime.
When a customer's account is frozen, the customer may suffer financial hardship and other damages. The decision to freeze an account should therefore never be undertaken lightly. Counsel should review the facts and the legal basis for the hold. In a recent situation, Mama had two sons. She made Son #1 beneficiary of her IRA. Son #1 showed his lack of gratitude by murdering his mother. Son #2 then demanded that the bank freeze the IRA funds and not release them. Leave it to legal counsel to determine what action, if any, the bank should take in this, and other, sticky situations.
A loan is in default and the bank wants to foreclose on a mortgage or repossess collateral. No such action should be taken without review and approval of bank counsel. Consider the case of the bank which foreclosed on a farm and all of its equipment. It turns out the borrower was a soldier, fighting in Desert Storm. When he returned home from battle, he discovered his farm and equipment had been seized and resold, and his wife was in the psychiatric ward of the hospital because she had been staying out of state with relatives and only learned of the action taken when she tried to return home. The bank had clearly violated the Soldiers and Sailors Civil Relief Act . The legal basis upon which the bank may take action against the borrower or the collateral must be carefully analyzed.
Ensuring that all corporate requirements are fulfilled is also within the legal counsel's bailiwick. If the bank changes its name, proper amendments to the association or corporation documents must be made. Meetings, and notices of meetings, of shareholders and directors must comply with the law. If the company is publicly traded, that adds an additional layer of regulation. Overseeing compliance with corporate duties is a responsibility of legal counsel.
Even when the bank's litigation matters are delegated to outside attorneys, the oversight responsibilities of in-house counsel remain strong. In one recent case, a bank employee's husband accused her of illegal conduct with respect to an account maintained at the bank. After being notified of the allegations, the bank filed a criminal referral report. (They would now file an SAR.) The employee later sued, alleging, among other things, defamation and wrongful discharge. Outside attorneys were given the case. Since some attorneys do not practice banking law on a daily basis, they were wholly unfamiliar with a strong defense available to the bank - the federal law which says that a bank is shielded from liability to any person when it files a criminal referral report (SAR). Counsel familiar with banking regulations and laws would have been aware of the statute.
Before the bank takes adverse action against a customer, counsel should be consulted, particularly if the situation is unusual. Whether the bank is closing the customer's account or denying a loan, the impact on the customer is negative and the situation should be handled very delicately. A bank received a letter from someone in another part of the state saying that he wanted to find a piece of property to buy and wondered if the bank would finance it for him. He stated in the course of the letter that he had not worked since an injury landed him in a wheelchair, but his wife worked and would help him with the payments and they were starting to get back on their feet after the bankruptcy, despite all the discrimination they had suffered. The bank employee was about to write back, stating that the bank did not make out-of-territory loans when, fortunately, legal counsel learned of the letter. As she pointed out, the bank did have some out-of-territory loans, so the statement in the letter would not be correct and would appear to be a pretext for some sort of discrimination. Instead, the bank could simply point out that until the writer actually finds the piece of property he wants to purchase and supplies additional information in the form of an application, the bank cannot determine whether it would be willing to make the loan.

One bank wanted to close the account of a customer because he had assaulted his ex-wife, who was a bank employee, at the bank's branch. Another wanted to close an account because the customer smelled so bad that when he came into the lobby it made other customers and employees ill. Then there was a bank who wanted to deny a home loan to a man who was well-known for parking junk cars and dead washing machines on his lawn. The bank believed the man's ownership of property in the new neighborhood would cause property values of other nearby homes, some of which the bank had mortgages on, to decrease substantially. These are instances which put a lawyer's analytical and drafting skills to the test!
Some situations just don't fit the norm. The laws or regulations don't address them directly, and it should be the bank's lawyer who determines the course of conduct the bank should take. Let's say that Maude opened an account at the bank in 1965, and the signature card reflected that it was a joint account between her and her friend Larry. The problem is that Larry never signed the signature card. Maude has died. Her estate wants the money. Larry wants the money. Who wins? Lob that legal coin toss to the bank's counsel. In situations which fall outside the normal boundaries, the bank's attorney is in the best position to assess the risks inherent in each possible course of action.

It takes teamwork to make the bank successful and profitable. Each employee has a different set of strengths and a different knowledge base. Some are expert at assessing an applicant's credit worthiness. Others can instinctively spot a fraud. And while compliance, lending, and operations personnel handle day to day matters, they should call upon the lawyer's special strengths - the ability to detect potential legal problems and work around them, and the ability to evaluate risk in terms of possible judgments or penalties, in the ten instances outlined above. Avoidance of civil money penalties, lawsuits, bad publicity, and poor customer relations could depend on it!

Mary Beth Guard is the Executive Vice President/General Counsel and Chief Operating Officer for the Oklahoma Bankers Association. She writes and speaks frequently on all facets of banking law and is developing a bank compliance resource on the Internet at: www.bankcompliance.com after spearheading the creation of the OBA's nationally-recognized web site nearly two years ago.

Update: In February, 2000, Mary Beth Guard became the CEO of Glia Group, Inc.

Copyright © 1996 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 6, No. 11, 9/96