BANKING LAW FINAL EXAM

PROFESSOR SPENCER

APRIL 27, 2001

SUPPLEMENTAL INSTRUCTIONS

This exam consists of two parts. Part I consists of multiple choice questions for which you should choose the BEST answer. These 30 questions will each count for 2 points. Do not spend too much time on anyone question.

Part II consists of three questions totaling 15 points. Your responses to the first two questions should not exceed five TOTAL handwritten blue book pages or the typed equivalent. The essay question and the problem will primarily be graded according to the quality of your legal analysis, with less attention given to the accuracy of any mathematical computations which may be called for. Problems worth up to 20 points and class presentations worth up to 5 points have already been graded and will be added to your exam totals.

As stated in the syllabus and verbally in class, you may bring to and use in answering the exam questions the course textbook, the statutory supplement, class handouts, your notes, and any other material that you prepared or substantially assisted in preparing.

PART I: MULTIPLE CHOICE

1. Which of the following was NOT a decade in which the federal government enacted a number of significant banking laws which we covered in the class?

A. 1930s

B. 1960s

C. 1980s

D. 1990s

2. The rate and charge restrictions of Minnesota=s 8% general usury law are most likely to apply to:

A. Unsecured loans of$100,000 or more to individuals for personal, family or household purposes.

B. Unsecured loans of less than $100,000 by unlicensed lenders to individuals for any purpose.

C. Loans to corporations of less than $100,000.

D. First mortgage loans by lenders making many such loans.

3. Which of the following categories of charges would be the LEAST likely to be treated as Ainterest@ under Minnesota common law:

A. Discount points paid by a home purchasers to finance their purchase of a residence.

B. Appraisal and title insurance fees, regardless of amount.

C. Appraisal and title insurance fees, but only if bona fide and reasonable in amount.

D. B. and C. are equally unlikely to be considered Ainterest.@

4. The Gramm-Leach-Bliley (GLB) privacy regulation=s definition of Aconsumer@ would include:

A. An individual who purchases traveler=s checks once from an institution.

B. An individual who has an account with an institution.

C. Someone who uses an institution=s ATM on a weekly basis.

D. A, B, and C.

E. B and C only.

5. Under GLB, nonpublic personal information about a customer may be provided to a nonaffiliated third party when/if:

A. The institution has provided an opt-out notice with an explanation of how to exercise the opt-out to the customer and a reasonable period of time has passed from the time that notice was provided without receiving an opt~out instruction from the customer.

B. The institution has provided an initial privacy disclosure to the customer only.

C. The customer has never indicated in the past that he or she does not want his or her information shared.

D. None of the above.

6. The following must be included on a privacy policy disclosure for an institution which shares information:

A. A detailed description of security measures taken to protect a customer=s privacy.

B. Categories of nonpublic personal information that the financial institution collects.

C. Categories of entities with which the institution shares information.

D. Band C only.

E. A and C only.

7. Which of the following is a correct statement:

A. National banks are primarily currently regulated by the Office of the Comptroller of the Currency (OCC).

B. Federal savings banks are primarily currently regulated by the Federal Home Loan Bank Board (FHLBB).

C. Credit unions are generally characterized by a Acommon bond@ of some sort between/among their members.

D. All of the above.

E. A and C only.

8. Which of the following is a true statement with regard to the chartering of a national bank by the Comptroller of the Currency:

A. If the proposed bank=s corporate powers and capitalization are consistent with the purposes and requirements of the Federal Deposit Insurance Act, the Comptroller need not determine whether the proposed bank meets the Aconvenience and needs@ of the community proposed to be served.

B. The Comptroller=s decision on whether to charter a national bank is not subject to judicial review for any purpose.

C. A court reviewing the Comptroller=s chartering determination should give substantial deference to the Comptroller=s determination.

D. A and B are generally both correct statements.

E. A and C are generally both correct statements.

9. The Marquette National Bank v. First of Omaha Service Corp., U.S. Supreme Court decision stands for the following proposition:

A. A national bank can charge its out-of-state credit card customers the rates allowed in its home state.

B. A national bank can use the highest rate available to any competing lender in the state of its customers= residence.

C. A national bank=s rates and charges are subject only to specific rate and charge limitations adopted by the Comptroller of the Currency.

D. A national bank credit card issuer can only charge residents of states other than its home state the same rate that a bank in the customer=s state could charge to residents of the national bank credit card issuer=s home state (i.e., reciprocity).

10. Which of the following is the most accurate statement:

A. A national bank can export interest rate, points, and other prepaid finance charges, but cannot export late payment fees greater than those allowed by the laws of its customer=s state of residence.

B. A national bank can generally export credit card late payment fees as part of the interest rate law of the state where the bank is located.

C. Whether a national bank can export credit card late payment fees depends upon the common law or statutory interpretation of the term Ainterest@ in each customer=s state of residence.

D. Late payment fees are always penalties which cannot be enforced unless they constitute reasonable Aliquidated damages@ under principles of federal common law applicable to national banks.

11. Which of the following statements correctly expresses a principle of antitrust law and enforcement policy:

A. The principal purpose of the Sherman Act is to protect competitors, not competition.

B. The Tenth Circuit decision in the 1994 Sears v. Visa case refused to balance the value of perceived increases in interbrand competition against the challenged restraints on intrabrand competition as a result of Visa=s bylaws.

C. One general difference between bank antitrust analysis and general antitrust analysis is that under the Bank Merger Act and Banking Holding Company Act, the responsible agency can balance the community=s convenience and needs against an increased likelihood of a monopoly or substantial reduction in competition in a line of commerce.

D. The anti-tying provisions of section 106 of the Bank Holding Company Act effectively prevent bank holding companies, or banks, from soliciting their existing bank customers to purchase additional banking products or services from them.

12. Which of the following statements inaccurately summarizes a distinction between permissible and impermissible banking activities?

A. A debit card containing a customer=s stored value with a university (or single merchant) is not deposit taking because it is not a third party payment instrument.

B. A debit card containing a customer=s stored value with a university (or single merchant) is not deposit taking because it is merely ancillary to a more general contract for the sale of goods and services between the seller and its customers.

C. Under the Texas Attorney General=s opinion on debit card programs at state universities, a group of retailers should be able to offer a debit card program on a cooperative basis whereby customer deposits could be centrally received and used for purchases at any of the cooperating merchants= facilities.

D. The authorization in the National Bank Act for a bank to exercise incidental powers necessary to carry on the business of banking has sometimes been interpreted to include, as Anecessary@ powers, ones that are Aconvenient@ or Auseful@ in connection with the performance of one of the bank=s traditional banking activities.

13. Subject to numerous exceptions, a bank may loan what percentage of its unimpaired capital stock and surplus to any Aone person@:

A. 5%

B. 10%

C. 15%

D. 20%

14. The following are accurate statements with regard to computation of a bank=s lending limit:

A. A bank=s capital and surplus is limited to its Tier I capital.

B. A bank=s capital and surplus includes the sum of its Tier I and Tier II risk-based capital plus the balance of its loss reserves not included in Tier II capital for capital adequacy purposes.

C. The maximum amount which a lead bank may loan to any individual borrower is unaffected by any participation interests in the loan which it sells to other banks prior to funding the loan.

D. A loan to one corporation will never be combined with a loan to a separate corporation for purposes of determining bank lending limits.

E. More than one of the above answers is a correct statement.

15. A bank director has a spouse who owns a leasing business, and they have a daughter who is a physician. The following transactions would apply against the director=s lending limit:

A. A loan to her spouse=s business.

B. A loan to her daughter.

C. A loan to her daughter which the director co-signs.

D. The bank=s lease of two vehicles from the director=s spouse=s leasing company.

E. More than one of the above transactions would apply against the director=s personal lending limit.

16. A bank with a $1 million lending limit wishes to make a $5 million loan to its biggest loan customer by arranging a loan participation of $4 million with its much larger correspondent bank. The following would not be a permissible term for either a national bank or a Minnesota state-chartered bank:

A. Monthly payments made over the term of the loan will first be utilized to pay interest to both lead and participant bank in the ratio of 1:4.

B. Funds remaining from each payment will be used to reduce the unpaid principal balance of the participant bank portion of the loan until that portion is repaid entirely.

C. In the event of default, all proceeds recovered in default, after payment of interest, will be utilized to reduce the correspondent bank=s portion of the loan before any funds are utilized to pay the lead bank=s portion of the loan.

D. The contract provides that the lead bank may collect a reasonable fee out of each month=s loan proceeds to cover its administrative costs, before disbursing the remaining funds pro rata between itself and its correspondent bank participant.

17. Which of the following accounts will have combined federal deposit insurance in excess of $100,000:

A. An individual=s $50,000 savings account and that individual=s $75,000 checking account in the same bank.

B. An individual=s $50,000 savings account and his and his wife=s $75,000 joint checking account in the same bank.

C. An individual=s $50,000 savings account in Bank A and his $75,000 checking account in Bank B.

D. All of the above.

E. B and C only.

18. A financial institution=s Community Reinvestment Act (CRA) rating may affect:

A. Its ability to establish a deposit-taking branch.

B. Its ability to merge with another depository institution.

C. In the case of a bank holding company, its ability to qualify as a Afinancial holding company@ under the Gramm-Leach-Bliley Act.

D. All of the above.

E. B and C only.

19. Which of the following is a generally accurate statement about CRA:

A. A financial institution=s low CRA rating will generally prevent it from expanding unless the institution=s Board of Directors has adopted a plan to improve its community lending efforts.

B. CRA is a bright line statute which includes specific credit allocation obligations.

C. For CRA compliance purposes, a bank must expressly subordinate its concerns over safety and soundness to the convenience and needs of the community to be served.

D. A bank with low loan penetration ratios in certain underserved, lower-income portions of its trade area may be expected for CRA purposes to take affinnative steps to make customers in such parts of its trade area aware of its products and services

20. The following principles can be determined from the Fifth Circuit=s decision in the FDIC v. Bank of Coushatta case:

A. FDIC capital directives are generally reviewable, at least as to constitutional Issues.

B. FDIC capital directives are considered less intrusive than other regulatory tools such as cease and desist orders and termination of a bank=s insured status.

C. Both of the above propositions are supported by the Court=s analysis.

21. In its decision in the Winstar case, the United States Supreme Court:

A. Required thrift regulators to let the acquiring institutions count supervisory goodwill toward their required Acore capital.@

B. Rejected all of Wins tar=s claims for relief because no member of Congress signed the Assistance Agreement accepting the Winstar proposal.

C. Required the government to pay contractual damages for Winstar=s losses arising from regulatory changes from the accounting treatment pennitted under the Acquisition Assistance Agreement.

D. All of the above.

22. Establishment of which of the following activities by a bank at a facility which it owns will, generally by itself, be sufficient to make that facility a branch of the bank:

A. Taking deposits.

B. Cashing checks.

C. Making loans.

D. Any of the above.

E. Either B or C.

23. Which of the following is an approval criterion for interstate mergers and branching under the Riegle-Neal Act of 1997:

A. Adequate capital.

B. Adequate management.

C. Failure of a merger to result in control by the combined institution of more than a specified percentage of a state=s insured deposits.

D. All of the above.

24. The Gramm-Leach-Bliley Act (GBL) interacted with prior law by:

A. Reaffirming the provisions of the Glass-Steagall Act prohibiting commercial banks from affiliating with investment banks.

B. Requiring bank holding companies to convert to newly authorized Afinancial holding companies.@

C. Authorizing the formation of Afinancial holding companies@ which are authorized to engage in a broad new range of fmancial activities, provided they are well-capitalized, well-managed, and own depository institutions which are well-capitalized, well-managed, and are CRA-rated as Asatisfactory@ or better.

D. Allowing subsidiaries and affiliates of banks to engage in a broad range of financial activities, but only if the activities are also permitted for the banks themselves.

25. A Afinancial subsidiary@ is:

A. A direct subsidiary of a commercial bank.

B. An indirect subsidiary of a commercial bank.

C. A direct subsidiary of a fmancial holding company.

26. Conglomerate, Inc. owns 2% of the voting stock of First National Bank. The directors of Conglomerate wish to purchase more of the bank=s stock, but do not want Conglomerate to become a bank holding company because its other business activities may be subject to review by the Federal Reserve and to restrictions under federal law. Conglomerate proposes to purchase 20% of the voting common stock and 25% of the non-voting preferred stock of First National.

A. Conglomerate will become a bank holding company because of its 25% share of First National=s non-voting preferred stock.

B. Conglomerate will not be deemed to have control, because it will not own 25% or more of any class of voting securities.

C. Conglomerate=s more-than-10% interest in each of two classes of securities will establish control over First National as a matter of law.

D. The Federal Reserve Board maybe@abie:=@to find a control relationship even if Conglomerate does not meet one of the three tests of direct control, ifit can show that Conglomerate Adirectly or indirectly exercises a controlling influence over the management of policies of the bank or company.@

E. Both A and C are accurate statements.

27. The CAMELS system is:

A. A self-testing mechanism for banks.

B. A uniform financial institutions rating system.

C. A 6-point scale on which Asix@ is the highest rating.

D. A system of storing water at banks for community emergency purposes.

28. The term Aunsafe or unsound@ banking practice:

A. Was first used in bank regulations following the 1991 enactment of FDICIA.

B. Can be the grounds for a number of remedies, including removal of a director or officer or termination of FDIC insurance.

C. Is subject to specific definitions in the applicable regulations.

D. All of the above.

29. The Third Circuit=s Seidman decision concluded that an unsafe or unsound banking practice required the following:

A. An imprudent act by a officer or director of the financial institution.

B. A resulting abnormal risk to the financial stability of the banking institution.

C. Both A and B.

D. Neither A nor B was required to be established.

30. Read together, the Atherton and O=Melveny and Myers decisions by the U.S. Supreme Court stand for which of the following propositions:

A. Directors, officers and institution-affiliated parties of national banks will be held to a uniform federal common law standard of care in the exercise of their duties.

B. States may not insulate directors or officers of insured depository institutions from liability for gross negligence in the exercise of their responsibilities.

C. States may not hold directors, officers or institutions-affiliated parties to a higher standard of care than a Agross negligence@ standard.

D. All of the above.

E. None of the above.

PART II B ESSAY/SHORT ANSWER QUESTIONS

A. Attorney General/Class Action Lawsuit (7.5 points)

During the week between Christmas and New Year=s, you receive word that the Minnesota Attorney General is holding a press conference shortly to announce a lawsuit he will be filing against the bank and bank holding company which you serve as assistant general counsel. The lawsuit seeks millions of dollars and injunctive relief based upon allegations that your clients sold nonpublic personal infonnation about your customers to third party marketing companies, and that your company is directly liable for the telemarketing activities of those companies. The announcement is a surprise since, in earlier discussions, the Attorney General had promised to provide you, prior to his taking any fonnal action, an opportunity to discuss alternative programs, processes and remedial measures. You are advised that numerous newspaper articles will appear the next day about the filing and press conference. You call the general counsel on her cell phone, and from a stopping point at 8,000 feet elevation in Aspen, she asks that you have a memo on her desk the next morning addressing the following issues:

1. What types of claims do you anticipate will be included in the action?

2. What types of defenses can you make to these claims?

3. Do you anticipate receiving class action lawsuits in the following weeks containing substantially similar allegations to the Attorney General action?

Please prepare a memorandum (not exceeding the length specified in the instructions) analyzing the above issues without regard to the Gramm- Leach-Bliley privacy rules. You may limit your analysis to Minnesota law, even though you anticipate receiving letters from other state attorney generals in the foreseeable future seeking the production of a broad range of documentation on your company=s privacy practices and its relationships with third party product providers.

B. (5 points) Consider a highly rated bank with no off-balance sheet activities and the following, grossly simplified balance sheet:

Assets Liabilities and Equity

$25M cash and government securities $95.5M deposits

$75M commercial loans $ 0.5M reserve for possible loan losses

$100 million $ 1.0M subordinated capital notes

$ 3.0 M equity capital $100 million

1. Does the bank satisfy the Acore@ leverage ratio requirement of3% for highly rated institutions?

2. Does the bank satisfy the 4% core capital risk-adjusted test?

3. Does the bank satisfy the 8% total capital risk-adjusted ratio?

C. (2.5 points) Explain the circumstances under which a bank=s lending limit could increase from 15% to 25% of its capital and surplus as defined in 12 U.S.C. '84. (P.S. This is the last question, and one sentence answer will suffice.)