Bank Lawyer's Blog

How About A Moratorium On Moratoriums?

Word came today from Teresa Rice, General Counsel of the Minnesota Bankers Association, that a major amendment was made on the Minnesota Senate floor on Monday of this week that exempts loans originated by state or federal banks, savings banks, or credit unions from the one-year foreclosure "deferment" provided by the Minnesota "Subprime Borrower Relief Act of 2008." The law has been making banks in the land of a thousand lakes sweat a bit (a lot, actually). In an e-mail to me today, Tess stated that the proposed legislation "is the first major bill in a long time that the Minnesota Bankers Association has had to completely oppose." At the rate the cynics in state legislatures across the country are churning out this chum, it may not be the last.

At least we didn't have to face the astonishing prospect of federally-chartered banks and thrifts pulling out the big stick of federal preemption and then having state banks, thrifts and credit unions cry about a competitive disadvantage (or simply switch charters). Then again, "eligible foreclosed loans" that were originated by non-financial institution lenders and purchased by banks and thrifts (and securities that are backed by such loans) are still in for impairment.

Housing Wire's Paul Jackson reported yesterday on a similar one-year moratorium bill passed by the New York Assembly (along with three other consumer protection measures). It does not appear to contain an exemption for banks, thrifts and credit unions. If it makes it through the Senate and is signed by the governor, perhaps we'll get to see how "astonishing" are the actions of federally-chartered banks and thrifts in pushing preemption. The legislation would give the trial court the right and obligation to determine a new mortgage payment for the duration of the moratorium in an amount "which will preserve the relative financial interests of both parties under terms which are equitable and just." Cool. No rewrite of the mortgagee's contract there, is there? No, there isn't, according to one of the bill's sponsors.

Under the terms of the bill, lenders would need to certify their complete cost of carry — traditionally, around 1.5 percent of unpaid principal balance per month — which would be paid by the borrowers in lieu of their full mortgage payment during the stay period.

Specifically, the bill says that the “lender must establish to the satisfaction of the court the minimum monthly amount necessary to preserve their relevant financial position so as to prevent an erosion of the mortgagee`s financial position.”

Amusingly, the bill also says that “the purpose is to postpone the mortgagee’s profit and not to cancel or alter the terms of the mortgage agreement.” For one thing, lenders don’t profit from a foreclosure, so the bill is essentially winding up losses for all parties, not postponing some sort of phantom profit; for another, the bill most certainly alters the terms of the borrower’s mortgage agreement — that’s the very textbook definition of a one-year moratorium on payments.

Don't throw ugly facts into a perfectly positioned political spiel, Paul. The force of logic's irrelevant to a cynic. Speaking of which, Sheila Bair ought to be on board with this bill, regardless of its financial impact on any FDIC-insured institutions. It appears to be pro-consumer, and underlying financial reality is not a consideration.

The long-term foreclosure moratorium appears to be the flavor of the day for pols eager to show the voters that they'll stand up for the little guy and face down evil  mortgage lenders. New York State Assembly Speaker Sheldon Silver spun it so well.

"The federal government was quick to bail out big businesses like Bear Stearns from near-collapse, but seems to have all but forgotten the everyday common household victims of this national crisis," said Silver. "We in the Assembly Majority want to see New York's families stay in their homes and our communities to remain intact. Our package is not a bail out. It's an assistance program to help homeowners in our state keep the American dream from turning into a nightmare."

That's right, the unique "bailout" of Bear Stearns to prevent a general collapse of the financial system (which even economic moralists like Warren Buffet and Charlie Munger thought was a justified exception to the "moral hazard" rule) is the same as artificially delaying the foreclosure of thousands of subprime loans to borrowers who can't pay them now and won't be able to pay them in a year. And the fact that it's an election year means that "the Assembly Majority" doesn't give a rat's tukus that the effect of such legislation won't make a silk purse out of a sow's ear, which will still be attached to the same lipstick-wearing pig when the moratorium expires. Of course, that will be after November 2008, won't it? At that point, while the voter/borrower pigs are butchered, the legislator pigs will be back grunting at the public trough.

Not So Astonishing

Law professors Elizabeth Warren and Adam Levitin over at Credit Slips have got themselves worked up about "a new idea," an "astonishing" one (according to Professor Levitin), concocted by those dastardly  national banks and federal thrifts: "They  shouldn't have to obey state law when they foreclose on someone's home." That would exercise me, too, if it were true. I'd even agree with Professor Levitin that it demonstrates plenty of chutzpah and with Professor Warren that "the scope of this argument is stunning," except I don't see that national banks and federal thrifts are making that argument, at least not based upon the source cited by the professors.

The article, written by the American Banker's Cheyenne Hopkins, states that national banks are considering a challenge to changes to state foreclosure laws that would, in fact, severely impair the lenders' contractual rights under the loan documents. Foreclosure moratorium laws, for example, would likely not generate a  challenge unless the moratorium period was excessive (an eye-of-the-beholder judgment, I acknowledge). However, some states are going well beyond traditional foreclosure matters.

Some of these measures would go further than delaying foreclosures and include changes to a loan's terms or underwriting standards — provisions that are more easily preempted by federal regulators.

The state measure causing the industry the most angst is a Minnesota one that, in addition to allowing a year delay in foreclosure proceedings, would allow a struggling borrower to make monthly payments equal to the minimum monthly payment when the loan was originated or 65% of the monthly payment at the time of the default, whichever is smaller.

Many industry representatives say that would be going too far, since it would affect how a bank can do business — a criteria that more clearly falls under preemption power.

"There comes a point where states and localities are using foreclosure laws as a pretext or to impair the enforceability of lawful loans, and that's the point where preemption may come back into the picture," said Laurence Platt, a lawyer at Kirkpatrick & Lockhart Preston Gates Ellis LLP. "A little bit of breathing room for the borrower is not going to trigger preemption, but if they in fact choke the lender to death by effectively declaring the loan unenforceable with its terms, that will trigger constitutional and preemption issues."

That hardly seems like an "astonishing" position to take, nor does it demonstrate much chutzpah, unless refusing to stand by, drooling, while your contractual rights are abrogated by a change of state law, when settled federal preemption principles would prevent that from occurring, now constitutes chutzpah. It seems more like sechel to me, but then my Yiddish is a bit rusty. 

My friend and former partner Joe Lynyak also correctly notes in the article the practical risks of national banks taking an aggressive position vis-a-vis state foreclosure laws.

"If someone is going to take an aggressive stance regarding preemption, the concerns are reputational risk in front of the public for taking the legal position, and the the legal risk that ultimately the claimed preemption is either not found to be valid or the validity of the foreclosures are then called into question," said Joe Lynyak, a partner at Buckley Kolar LLP. "This is really right at the edge of the battle on preemption and is a very, very complicated analysis."

Joe's now with Venable LLP, by the way, but I doubt that change would change his position on the issues. By "very, very complicated analysis" I think he means "very, very expensive." At least, that's what I meant when I used the term back when I was an equity partner in "Big Law."

Perhaps the professors have access to other articles or court cases where these "astonishing" threats of federal preemption of local foreclosure laws have been made by national banks or federal thrifts. If so, they should cite them, because based upon the lone article they do cite as the basis for their concern, I'd say they're exercised about a non-existent threat.

To be fair, however, I have to admit that the OCC's quest for power is insatiable. I've previously warned that the OCC's need for lebensraum will eventually compel it to make a bid for universal domination. Therefore, I can appreciate why the professors, both apparent consumer champions, might assume the worst. Eventually, they'll be correct. On the other hand, I plan on joining the OCC stormtroopers right before the final blitzkrieg that will be launched to wipe out the National Association of Realtors and bring all consumers everywhere (even on that frozen rock, the former "planet" Pluto) under the jackbooted heel of the OCC. I'm superficial enough to always back the winner, but cautious enough not to jump on board while the outcome's still in doubt. I'll know the time is right to start sucking up to the OCC when we finally repeal that pesky Tenth Amendment.

A Word To The Unwise

I see by the attempted comments and e-mail that it's time to re-post this warning from last February. Predatory lending shills and mouthpieces are not only classless, they're clueless. No wonder they're so bereft of support from anyone other than those politicians they purchase.

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I'll take another brief breather from the "Bank" portion of this blog's title, and respond to a discussion about blogging and the law that I recently observed on another blog that I read. No, it wasn't written by Ana Marie Cox, the former Wonkette, although all serious-minded bank lawyers occasionally must cruise the blogosphere to see if Ana Marie's wandered into more faux-lesbian escapades of the sort so well covered by The Calico Cat way back "in the day," before Ms. Cox hit the big time. No, it was the blog of another female blogger who was being harassed and annoyed by an anonymous troll who was plaguing her in the comments section of her blog. One of the readers wondered if this sort of harassment might be illegal.

Actually, it is. A little over a year ago, Congress struck a blow against the right of vermin to exercise free speech. As Declan McCullough, chief political correspondent of CNET News, ranted at the time, on January 5, 2006, President Bush signed the "Violence Against Women and Department of Justice Reauthorization Act of 2005" that incorporated some changes to a federal law that was originally designed to combat stalking by making it a crime to make harassing or obscene telephone calls. The amendments to the law (Section 113) extended the definition of "telecommunications device" to include your home computer or a similar device or software used to access the Internet. Thus, the use of your computer to communicate with another person (whether or not the communication takes place), without disclosing your identity, "with intent to annoy, abuse, threaten, or harass any person" who receives the communication, is a federal crime.

Think about it: an anonymous troll who leaves a comment on your blog "with the intent to annoy" you has committed a federal crime. Notwithstanding the First Amendment.

Is this a great country, or what?

The same "annoy" language has been on the books for awhile, but only in connection with "telecommunication devices" which, until last year, did not include your computer. I think that  instant messages, emails and blog comments appear to be covered. Therefore, you can still attempt to annoy me, dear troll, but do so in your own name or I'll turn your sorry IP address into the G-Men, who can use your ISP to track you down and indict you.

I doubt that federal prosecutors are going to be going overboard on this. On the other hand, if a blogger-for instance, a lawyer who blogs-happens to have contacts with the U.S. Attorney's office and/or the FBI, he or she might be able to make things warm for the troll. At the very least, it's nice to know that a blog owner has additional legal recourse, especially for egregious cases. He or she will also have grounds to advise a troll's ISP that one of their users is violating federal law, as well as the ISP's acceptable use policy, which may very well spur some action on the ISP's part to stop the troll.

Another nice deterrent is to report trolls who harass bloggers from work to their employers. That information is also readily available form the blogger's server logs. Right wing attack dog Michelle Malkin did that to a law firm's employee and he was subsequently terminated. Actually, his employment was terminated, not his life, but you get the picture. I did the same to a State of Texas employee last year who spent hours of time during the work day attempting to harass me through blog comments. I didn't follow up to determine whether or not he'd been terminated for violating employment rules and the State of Texas General Services Administration's Internet acceptable use policy, but I haven't heard from the fellow since, so, like Fredo Corleone, he's dead to me.

I guess what I'd tell any cowardly twerp who can't control the demons in his head that tell him that he must attack, is that he should at least use his correct name and e-mail address. Also, as side note to trolls, if you're coming to a gun fight, come strapped with something larger than a cap pistol.

True Men Of PR Genius

The past week's Stevie Wonder Award, presented to the financial institution or affiliated party that was so blind it could not see that it was stepping in a public relations cowpie of epic breadth and depth, goes to...[drum roll]...:

It's A Tie!

Ladies and germs, we have a dead heat this week between payday lender Rent-A-Center ("perennially persecuting the penniless from its world headquarters in scenic Plano, Texas") and bank director William Farr of Denver-based Centennial Bank Holdings Inc. ("in racial sensitivity training classes since 1992").

First, Rent-A-Center.

According to last Friday's The Wall Street Journal, Rent-A-Center executives repeatedly called an Ohio food-bank association and demanded that they withdraw from a coalition that supports legislation that would make it tougher for payday lenders to do business in Ohio.

In a series of telephone calls in recent weeks, Rent-A-Center executives warned America's Second Harvest and its Ohio affiliates that Rent-A-Center would yank charitable contributions from hunger programs in the state unless the local food banks withdrew from the Ohio Coalition for Responsible Lending. The coalition has been pressing the state legislature to cap high interest rates charged on payday loans.

Wednesday, the Ohio House passed a bill that would cap the annualized interest rate on payday loans at 28% and limit borrowers to four loans of $500 each a year. Ohio's governor said last week that he supports a cap.

Rent-A-Center currently charges interest rates on one-week payday loans that are equivalent to an annual rate of as much as 782%, according to a company Web site. In Ohio, the average borrower pays $15 for each $100 borrowed, and the typical loan is repaid in 19 days, a 288.16% annual rate, the company says.

Well, if the legislation will effectively put Rent-A-Center out of the payday lending business in Ohio, you can understand why it would be irked that a non-profit association it funds might be supporting such legislation. Nevertheless, you have to weigh the disproportionately negative effect that appearing to strong-arm a food bank that feeds the poor will have on your fight against that legislation against the benefit gained from "repeatedly" calling officials of the food bank to express your displeasure. As it turned out, the incident was featured prominently in a major pro-business newspaper in a way that didn't help Rent-A-Center's cause. It gave proponents of the legislation a chance to paint the payday lender as a brow-beater.

As for Mr. Farr (no relation to actor Jamie Farr, I hope), his sense of humor is a bit "unrefined."

William Farr, up for re-election to Centennial's board of directors, is likely to come under fire for a poorly received joke he made about U.S. presidential candidate Barack Obama at a National Western Stock Show banquet in January, [activist shareholder Gerald] Armstrong said.

According to news reports, Farr pretended to read a telegram from the White House, then quipped "they're going to have to change the name of that building if Obama's elected."

Yeah, it took me a minute to parse that out, too. My conscious mind refused to accept what my subconscious mind immediately grasped. I mean, I realize that we're talking about a stock show, but that doesn't mean that reporters wouldn't be in attendance, even if Mr. Farr assumed that every attendee was a bigot.

"People in Northern Colorado are concerned about it," Armstrong said. "They don't think he should be on any board, anywhere."

Well, there might be some payday lenders who could use such a sensitive soul on their boards.

Investigation Damns Dann

Ohio Attorney General Marc Dann's attention will likely be diverted by more than trial court judges berating him for pushing his political career by intervening in foreclosure proceedings. Less than a month after a public scandal exploded over allegations by female employees in his office of sexual harassment by some of his lieutenants and of an affair by the AG with his much younger female "scheduler," two of his top aides were fired (one for trying to get a  lawyer on the AG's staff to commit perjury) and another resigned. Oh yeah, the AG finally admitted that he had an affair with a female staff member, but refused to reveal her name. Coincidentally, his "scheduler" also resigned.

Not-so-astoundingly, Dann refused to resign. While many commenters to various Ohio newspaper blogs expressed outrage at Dann's refusal to make like his role model, Eliot Spitzer, and take a powder, and although Ohio newspaper editorial boards, with the lone exception of Dann's hometown newspaper, have called upon him to resign, this appears to be a case where a true scumbag's purely political considerations and personal shamelessness coalesce to encourage him to drag his feet, at least until he sees how long he can hang on until, perhaps, the public sees another bright, shiny object and lets its ADHD lead it, slack-jawed, in other directions. As Jonathon Adler at NRO Online points out, if Dann, a Democrat, resigns before September 24, his replacement (to be appointed by Democratic Governor Strickland) would have to stand for re-election in November. If he resigns after September 24, his replacement could serve out the remainder of Dann's term (ending in 2010). Maybe I'll get a birthday present ad he'll resign on September 25.

Republicans are having a field day with the uproar. They'd like nothing better than to drag this out in a year when the news for Republicans nationally in general, and in Ohio in particular, has been bad. As one headline in Ohio put it, Dann's scandal is a "gift" to the Ohio Republican party. On the other hand, the Democrats have to decide whether the benefit of possibly losing the Attorney General's election in November (Dann barely beat his Republican opponent in 2006) is worth the public humiliation of keeping such a dead weight around for the next four months, especially if the public thinks that Governor Strickland is in cahoots Dann in engineering such a ploy. That might backfire on Ohio Democrats in a year when Ohio ought to go Blue.

Dann's downfall wouldn't be so satisfying if he hadn't swept into office, as did Eliot Spitzer in New York, with such a holier-than-thou attitude and a promise to root out evil. Also, his cynical intervention in foreclosure proceedings on a PR crusade against lenders for no purpose other than to delay the inevitable and to add to his public profile as a defender of the "little guy," revealed him to be as a big a bully and abuser of power as Eliot Mess.

His refusal to resign on the basis that he's suffered sufficient punishment ("public humiliation") for having an affair and for misleading the public and, it could be legitimately argued, the investigator he appointed to sort out the allegations of wrongdoing by his staff (the entire "pajama game" dance he did, and the "she was there at night and there in the morning" bit, was disgusting), renders hollow his contention that he's "taken responsibility" for the wrongdoing within his office. When the person who's ultimately responsible for wrongdoing decides his own punishment and that punishment is substantially lighter than the punishment suffered by the subordinates for whose bad acts he's responsible, then "responsibility" does not mean "accountability," or at least not an accountability in which the person held accountable suffers any substantial adverse consequences. In addition, his attempt to "complete" his misleading statements to the investigator at a later date unmask him as the quintessential trial lawyer, a type loathed by a public that appreciates an explanation that at least appears to be informed more by common sense and veracity than by whatever "spin" will permit you to skirt a perjury charge by the skin of your oh-so-clever teeth. You can read the transcript for yourself and make your own judgment. I think Dann's performance thus far reveals his utter contempt for the voters of Ohio. He must think them fools.

As we've discovered throughout the course of the subprime mortgage crisis, and the response of both state and federal politicians and bureaucrats to address it, the public ought to demand that its public servants be better than they've so far demonstrated themselves to be.  Notwithstanding the cynical pose sometimes struck by this blog for entertainment purposes, we honestly believe that the public isn't getting what it voted for or what it's paying for. It's got nothing to do with political factions (Republican Senator Larry Craig's adrift in the same moral lifeboat). The public deserves better than clowns like Spitzer and Dann.

Word Nerds Just Don't Get It

According to attorney and financial consultant Tom E. Greene, most lawyers suck at understanding numbers. At least, that's my blunt take on his more diplomatically-expressed views, as communicated to well-known law blogger Robert Ambrogi. Bob interviewed Tom for an article in his Bullseye Newsletter entitled "What Lawyers Don't Get About Finance," recently posted online.

There are two kinds of people in the world, says finance expert Tom E. Greene: word people and number people. Most lawyers fall into the first group, which explains why they either panic or gloss over when faced with financial concepts in litigation.

Since Tom makes a portion of his income by leading lawyers through the maze of various financial concepts, he has a vested interest in seeking out "word nerds." According to Tom, too many lawyers tend to believe that financial concepts can't be "boiled down to an understandable narrative." That's where Tom comes in, to hold the lawyer's hand and to explain these concepts in terms even a "financially challenged chimp" could understand. In that manner the weak-minded are not only comforted, but led into the light of revelation.

It might be because I associate with with financial types all day, or that so much of my professional career has been spent in the banking biz, but I know a lot of lawyers who grasp financial concepts just fine. Then again, I try not to hang with litigators (notwithstanding the fact that some of my best friends are litigators), and it appears that Tom is addressing himself mainly to them. I'm not sure that accusation holds water, though. Every litigator I know understands how to multiply an hourly rate by a finite number of hours, then square the result. When required by the court, they can even divide total number of travel hours by the number 2, then multiply by an hourly rate (and square the result).

I do agree with Tom's take on "the human factor."

Lawyers share another common misunderstanding about corporate finance, Greene says, which is that they forget the human factor.

"Attorneys think that large financial institutions have agnostic, computer-based models for financial transactions," he explains. "Usually, that's not true. Usually, it's a couple of individuals somewhere and it is very much subject to manipulation."

Just ask Jeff Skilling.

I don't recall ever seeing a "faith-based" financial model, so I'm not certain what an "agnostic" model might be, but I get his point. There is sometimes a tendency to be impressed with a snappy financial presentation, especially with pie charts, graphs and Excel spreadsheets, although I have friends who've never seen a spreadsheet they didn't relish slicing and dicing and looking to cough out "horse hockey" behind their fist like Bluto in the classroom scene from Animal House. I have one friend, in particular, a recovering lawyer working as a consultant, who would not only agree with Tom but would add that most of lawyers would be too arrogant to admit their ignorance. Apparently, many lawyers are not so arrogant, or Tom wouldn't make a living.

Ultimately, Tom asserts, numbers tell a story and he's a storyteller.

For Greene, lawyers involved in financial cases too often overlook the fact that behind every transaction, there is the work not of computers and calculators, but of humans. In every case, that means, there is the possibility of human manipulation, fault and fallibility.

The human factor, in other words, almost always provides the basic story a trial lawyer hopes to hone in on, even in the seemingly complex realm of high finance.

"Figures don't lie, but liars figure." I get it. Just barely, since I'm a word nerd, but I get it.

FDIC Solves Subprime Crisis

Last night, a reader alerted me to Damian Paletta's breaking news in The Wall Street Journal that the FDIC's Sheila Bair had assisted the Treasury Department by proposing a dandy little scheme to spend $50 billion in taxpayer funds to bail out one million subprime borrowers with low-interest loans. Obviously, the plan has a lot more to it than that, but why waste any more breath on it than Treasury Secretary Paulson did today.

Paulson said he will "look carefully" at the FDIC plan, while emphasizing his confidence in the Hope Now Alliance of lenders spearheading a private effort to modify home loans.      

"It's only fair to point out our priority is doing the things we're already doing administratively, doing the things we're already doing working with the private sector," he said. "That's where we are, that hasn't changed, despite my high regard for Sheila."

A blatant brushoff if I've ever read one, complete with a not-so-coded "despite my high regard for Sheila." That reminds me of a parenthetical in a recent post by Yves Smith at Naked Capitalism in which he asserted that female regulators might be better suited to cracking down on the good-old-boy business of banking: "(the horrific example of Sheila Bair notwithstanding)."

A financial advisor for a private equity fund e-mailed me today with this question regarding Bair's proposal: "What the **** has this got to do with the business of the FDIC?"

Not a damn thing. It's got everything to do with Sheila Bair's personal agenda, however. In a lame duck administration, there's apparently no one making her do the job she was hired to do.

The preliminary puzzled reactions are nicely summarized by Paul Jackson at Housing Wire, if you're interested. A more "spirited critique" is contained in this post at Market Ticker (the answer to his question is "yes.") I'm consigning this to the same dust bin where I filed the OTS' proposal on negative capital certificates (although I have much more respect for the OTS and John Reich). Wake me up when someone with power starts taking an interest and pushing it forward.

Shooting down Sheila is like bringing down the Goodyear Blimp "Snoopy 2" with a surface-to-air missile. There's not much sport left in it.

Sheila's Singing The Same Old One-Note Samba

Sheila Bair won't quit. Like the Everyready Bunny, she just keeps going, and going, and going, on and on, singing the same old tired, sad, off-key tune. The fact that her intended audience continues to passively-aggressively ignore her when she talks to them and, when her back's turned, to give her a derisive middle finger, not only doesn't discourage her, it apparently energizes her. Obviously, she's deep into the D/S scene, and not on the "dominant" side of role playing.

In today's The Wall Street Journal, reporter Michael Crittenden faithfully reports yet another public yap-fest by Sheila in which she berates "[p]olicymakers, banks and other players in the housing market" for continuing to review loan portfolios "loan-by-loan" instead of just grabbing huge fistfuls of subprime loans and implementing "a more systematic approach to moving homeowners into more affordable loans." In other words, damn the facts and rational analysis, damn concepts of equity, damn what people in the mortgage business might consider to be in their own best financial interest, full speed ahead!

A normal, rational person who heads a powerful government regulatory agency might actually start to rethink a position if those who are supposedly subject to her influence pay her lip service, then continue doing things the old fashioned way.  Obviously, the "players in the housing market" have decided something: Sheila's not a player, or, if she is one, she can go play with herself.

Since we're talking about a career pol and academic, however, here's an idea for Sheila to chew on. Since she obviously knows better than other market participants what's in their own best interests, her position on wholesale loan modifications MUST BE the path to safety and soundness for the financial institutions the FDIC insures. As to those market participants who are subject to the FDIC's regulatory control, which, frankly, since she's so obviously right, would include all FDIC-insured institutions, even those whose primary federal regulator might not be pushing the same agenda as Sheila, she should be forcing them to adopt wholesale loan modification programs. Since the OCC, the OTS and the Federal Reserve don't know slime-from-shinola about this issue, and state bank and thrift regulators are equally ignorant and/or ineffectual, the FDIC should use its primary and backup enforcement authority to force the issue, to make these cretins fall in line. Any rational person would have to agree that a loan-by-loan analysis is not acceptable, right, so force those participants that you can reach to do what you want them to do.

In other words, Sheila, put up or shut up. The jawboning isn't working and is making you look not only foolish, but weak, which in D.C., is the bureaucratic kiss of death.

It might be that Ms. Bair realizes that she's on the sidelines and is not attempting to do anything other than conducting a PR campaign to build up her gravitas for her next job as the head of ACORN, a professor of finance at Bryn Mawr, or the Consumer Credit Commissioner of a state of her choice. Colorado's in the process of turning from red to purple, which ought to make it an attractive (or at least tolerable) destination for someone like Sheila (plus, she'd be only an hour away from radical snowboarding venues). So no one misunderstands where Ms. Bair's coming from in this "hurry-up-and-modify" world she lives in, she "demolished" the entire idea that there are any borrowers who might not be entitled to a loan modification.

She stressed the need for consumers to contact counseling groups and their lenders to try and prevent foreclosures. But describing a recent foreclosure prevention event she attended in California, Bair said policymakers need to better address the plight of consumers.

"I think we miss the human side of how this is impacting borrowers," Bair said, criticizing efforts by some policymakers to cast troubled borrowers as investors or speculators.

  "I didn't see a lot of house flippers," Bair said of the California event.

Ms. Bair attended an event in California and did not see "a lot of house flippers" there. Which is evidence of nothing, except that Ms. Bair views the world through a glass darkly.

Is it 2009 yet? Is there a new administration in the White House yet?

What We Have Here Is A Failure To Truncate

The Wall Street Journal's Law Blog had an update last Friday about the status of class action lawsuits filed by aggrieved consumers (in other words, by class action attorneys who've "discovered" lead plaintiffs) to punish merchants who left too much information on electronically-printed credit card receipts in violation of the Fair and Accurate Credit Transactions Act (FACTA). Oddly, the Law Blog's link to FACTA ties to a Yahoo article by Chris Kelleher ("an award-winning small-business advisor and attorney") about the disposal requirements of FACTA, not the truncation requirements. Oh well, "close" is enough in horseshoes and law blogging, right?

The latest post is an update of a post earlier in April that discussed a split in lower courts, with one trial court denying class action status partly on the basis of an "annihilation defense" (class action damages would "annihilate" the defendant), and another court declining to strike down class certification on that basis. One commenter to that post points out that the "overwhelming majority" of the 300 class action lawsuits filed involve the failure to delete the expiration date of the consumer's credit card on the receipt, not all but the last five digits of the credit card number. The commenter alleges that "[t]he expiration date is of NO benefit to an identity thief..." I'm not certain that's correct, since it's one piece of information that, taken with others, can aid an identity thief. Moreover, its elimination is technically required by FACTA, and the failure to delete it exposes these defendants to between $100 and $1,000 per class plaintiff (and, of course, the always-beneficial-to-society class action attorneys' fees), so there you have it. If the plaintiffs can prove reckless or willful disregard for the law, then the upper limit of damages is a real possibility.

A commenter to the earlier post who claims to be an attorney whose firm is defending some of these suits makes the claim that the liability should be covered by the retailer's liability insurance, and, therefore, "so as long as we can keep the settlements reasonable, it won’t spell the end of the companies (just their ability to acquire reasonably-priced insurance in the future)." That's certainly a very practical take on the problem. Once again, the insurance company pays over the short run, but everybody pays over the long run through higher premiums, although this isn't an issue that's likely to be recurring, is it?

It might be because I followed FACTA so closely for some of my clients, but I'm not sympathetic to the ignorance of retailers, especially some of the large ones, who claim ignorance of the law (never a sufficient excuse in any event). In an article in last April's WSJ, an attorney for a retailers trade group blamed credit card companies for doing a lousy job of notifying retailers. I thought that was the job of retailers trade groups.  I simply don't see the equities lying in favor of the businesses in this case. With identity theft such a high profile crime, and with the  lead time provided to businesses to comply, the stick-your-head-in-the-sand approach doesn't seem to garner much sympathy, notwithstanding the fact that, once again, it's our favorite punching bag, class action plaintiffs' attorneys, trolling town for consumers with "nontruncated" credit card receipts.

At least one commenter claimed that class action litigation caused companies to change their practices, which is undoubtedly true, and which is used a justification for class actions. Ironically, a publication from September 2007 on this topic by Jones Day offers "prompt corrective action" as a tactic for defeating class action status.

At least two federal district court judges have denied class certification for these types of cases. When comparing the plaintiffs' failure to show any actual harm against the potential harm to the defendants in the tens of millions to hundreds of millions of dollars, the court determined that class actions were not the best method to adjudicate these claims...That both defendants immediately corrected their error upon filing of the complaints served as a major consideration behind these decisions...

Maybe an indication as to how much of a non-issue this hubbub might eventually turn out to be is demonstrated by the settlement outlined in the most recent Law Blog post.

In a settlement approved on Tuesday in the Western District of Pennsylvania, Kings Family Restaurant agreed to offer the plaintiff-class one of the following four options:

• a free ‘appeteaser’ and a free mini-sundae, with a retail value of up to $ 4.68; or

• a free homemade bowl of soup and a free slice of apple or pumpkin pie, with a retail value of up to $ 4.78; or

• a free cup of soup and a free ‘appeteaser,’ with a retail value of up to $ 4.38; or

• a free dinner salad and a free single scoop of Kings Premium Ice Cream, with a retail value of up to $ 4.38.

According to the opinion, defendant has further agreed to donate 500 gift certificates for kids’ soft drinks, with a retail value of $ 0.99 per drink, to First Tee, a non-profit organization which offers underprivileged children the opportunity to play golf. Defendant also agreed to pay plaintiffs attorneys fees and costs not to exceed $75,000.

The Law Blog states that only 165 class members (less than 1% of the class) obtained "coupons" (I assume the author meant the right to obtain the free "goodies" offered by the restaurant), which meant that the attorneys fees exceeded the recovery by 100 to 1. That's a relatively sweet deal for the lawyers, but not much reward for the class members, unless you're into "appeteasers."

As a parting observation, you have to love the comment by one anonymous person, presumably a lawyer: "I say 75 k is not worth my time." No wonder so many people hate lawyers.

Lending Tree A Little Late In Cutting Off Network Access?

Luke Mullins, associate editor at US News & World Report and author of the blog "The Collar," had a post Thursday about a disturbing letter that former Lending Tree mortgage customers received this week. According to Lending Tree, "several former employees may have helped a handful of mortgage lenders gain access to Lending Tree's customer information by sharing confidential passwords with the lenders." Those lenders used that information to gain access to the customers' loan request forms and to use the information from those forms to make their own loan solicitations to the customers.

The letter helpfully suggests that the customers get a free copy of their own credit report and, if they see any suspicious activity, to contact the credit bureau themselves and to consider filing a fraud alert with all of the credit bureaus. Lending Tree states that "we don't believe any identity theft or fraudulent financial activity resulted from this situation," although, of course, it can't be certain, can it? It may very well be that the former employees and miscreant lenders are willing to engage in such nefarious activities simply to solicit mortgage loans, but it's not beyond the pale to imagine that they're capable of worse.

Nowhere in the letter does Lending Tree offer to pay for any peace of mind, such as a year's worth of credit report monitoring. From a cost/benefit standpoint, that may make sense unless there's some evidence of identity theft or other fraudulent use of the information obtained. From a public relations standpoint ("reputational risk"), however, that's not exactly going the extra mile. Then again, it's not my money.

Luke quotes security expert Brian Cleary, who points out an obvious chink in Lending Tree's information security armor.

These are former employees—how can those user accounts to critical customer data still be active? Those should be shut down. So, their access to all of the information and resources should be revoked on the day of their termination.

Yep.

Cleary also emphasizes a point that I tell banks and other businesses all the time: "you can have policies, but if the policies live in a three-ring binder, and they are not put into practice as daily operating procedures—through some degree of automation—the chances of things like this occurring are pretty high." In other words, policies work only if you have procedures in place to ensure that they're enforced consistently.

In this case, the access termination procedures were deficient. I recently went through the development of a statement of work and negotiation of an services agreement with a vendor on behalf of a commercial bank client, to automate the process by which authorization (and termination of authorization) of access to the bank's network is effected. There are solutions in the marketplace to accomplish this, and their implementation increases the chances that a human being, asleep at the switch, fails to terminate the access of former employees. If you're going to rely primarily on human beings to implement the policies, then you'd better make sure that those human beings are either themselves subject to checks and reviews to make certain that they're following the policies.

Otherwise, you might find your bank the subject of "The Collar."