Attorney Ari Karin has pondered the implications of recent enforcement action by the federal government against large loan servicers, and he's drawn some interesting conclusions. Writing an opinion piece in National Mortgage News, he makes an observation that will ring true with many community bank officers and directors.
Practically, these actions suggest that as opposed to specific standards that must be met, a generalized standard of care is being developed. In other words, up to this point lenders had specific actions and goals that were required. A lender could compare its actions and performance to specific standards to determine its level of compliance.
It appears that we are witnessing the development of a generalized "reasonableness" threshold where lenders will now need to evaluate themselves based upon the processes and procedures of their competition. This obviously creates additional pressures on companies' compliance infrastructures because simply meeting minimum statutory requirements may not be sufficient in the future.
Rather, the more surrounding companies implement practices to protect consumers and avoid defaults and other problems, it could impose liability for companies lagging behind their competition. In that regard, meeting minimum statutory requirements would not be enough—lenders would need to measure themselves against their competition in regards to their compliance performance and review their own conduct from a generalized reasonableness perspective.
Put another way, a lender's compliance would essentially be viewed in hindsight, creating the need to predict possible outcomes and review them in advance to determine that their actions are generally reasonable at the time.
Reasonableness is in the eye of the beholder. When that eye is a jaundiced one, lodged in the skull of a bank regulator, what a lender might regard as "reasonable" is likely to be a world away from what the regulator views as "reasonable." Moreover, Karin's observation that judgments as to "reasonableness" will be made with the benefit of hindsight is chilling, if the judgments made with respect to many officers and directors of failed community banks constitute a taste of what lenders and servicers, bank and non-bank, provide a road map.
Looking at the most recent FDIC lawsuit against former officers and directors of a failed bank, we see that the defendants are typical of a class of unlucky former officers and directors who made commercial real estate loans, especially acquisition and development loans, during the years leading up to the Great Recession: the CEO; the senior executive officer in charge of commercial lending; and two directors who served on the bank's loan committee.
The lawsuit alleges the four recommended and/or approved commercial real estate loans and loans for land acquisition, development and construction that violated “prudent, safe and sound lending practices” and Bradford Bank’s own loan policy. Marsiglia and Mitchell served on the bank’s loan committee.
The lawsuit alleges that in seven loans from July 2006 to October 2007, borrowers were approved for loans they did not have the capacity to repay or were for amounts too high given the value of the underlying real estate. Some borrowers were approved for “speculative” land acquisition, development and construction loans “despite the known economic downturn at the time of loan approval,” the lawsuit said.
"Despite the known economic downturn at the time of loan approval." "Known" with hindsight, of course. At the time the decisions were made, they appeared to the people who made them as "reasonable." Now, we know better, don't we?
Moreover, as the former head of the FDIC during much of this mess, The Care Bair, admitted publicly, even demi-gods residing on the slopes of Mount Olympus failed to anticipate the length or depth of the downturn. Yet, with hindsight, the defendants were negligent and breached their fiduciary duties because their decisions were not "reasonable" in anticipating what "none of us saw coming."
Big loan servicers, welcome to our world. It's located on the far side of the looking glass.
As a side note: any director who decides to serve on a bank's loan committee needs to receive combat pay, a psychiatric examination, or both.