Bank Lawyer's Blog

Twice As Bad Is Very Bad

The 300 banks that are suing TJX Companies over the data breach that compromised the personal and financial information of tens of millions of consumers are uncovering evidence that the security breach may very well have been twice as bad as previously reported.

Significant security shortcomings led to the data breach at retail giant TJX -- a breach which credit-card companies now say compromised more than 94 million accounts, according to court documents made public on Thursday [October 25, 2007].

The last public disclosures by TJX indicated 45.6 million accounts had been compromised. Oh, heck, what's 48.4 million between friends? We call that "fudging." And by "we," I mean those of us who while away our hours running numbers for the Gambino crime family or performing audits of public companies for one of the Big 4.

The documents -- part of the paperwork filed in a lawsuit brought by more than 300 New England banks against the retailer -- cite Visa USA and Mastercard International executives as well as a security consultant to paint a grim picture of the lack of security that allowed intruders into the retailer's computer systems. The consultant retained by TJX to investigate the breach found that the company had not complied with nine of the twelve security measures mandated by credit-card companies under the Payment Card Industry (PCI) Data Security Standard (DSS), the court documents stated.

"There were ... many deficiencies and PCI DSS violations which the attacker was able to exploit in order to compromise data from the TJX network," the unnamed consultant stated, according to court documents.

[...]

The court documents made public in the case include depositions of key executives and a request that the banks be able to amend their complaint against TJX with information gained through the depositions and discovery.

[...]

Between $68 million and $83 million in fraud in 13 countries can be attributed to the TJX breach, according to an excerpt of an August 31 deposition of Joseph Majka, vice president of investigations and fraud management at Visa USA. Visa's estimate of the damage caused by the breach will only increase, Majka stated.

"Due to the sheer number of accounts that are believed to be exposed and compromised," the damages will likely rise, the executive stated during his deposition. "You know, these are going to be sold off for a period of time in the future, so it's going to continue for some time out there."

As of June 2007, Visa established that 65 million unique accounts had been compromised because of the breach, Majka stated. Mastercard International estimated that at least 29 million cards of its cards had been compromised, the card company's Director of Fraud Management Neil Maguire stated in an excerpt from his September 27 deposition.

This story keeps getting worse and worse, and not just for TJX.

Visa USA issued $880,000 in penalties against a bank that processed transactions for TJX Cos., after an investigation of a computer hacking incident at the retailer.

[...]

"The compromise presents a substantial risk to Visa and its members," states a June 22 letter from Visa, marked "highly confidential." The letter, now an exhibit in the case, is signed by a vice president of Visa, the biggest payment card network, and written to Fifth Third Bank in Cincinnati, which is also being sued. Both the letter and the TJX response were made public late Friday on the electronic docket system for Federal District Court in Boston.

[...]

Visa can levy fines when merchants don't meet the rules, but they generally are imposed on the banks that process transactions. Fifth Third could potentially pass the fine onto TJX.

According to the Visa official's letter, the investigation found Fifth Third itself wasn't following certain security rules that the bank and its merchants must meet.

The fine was determined in two parts. First, Visa assessed what it called an "egregious fine" of $500,000, "due to the seriousness of this security incident and the impact on the Visa system."

In addition, Visa levied fines totaling $380,000, retroactive to October 2006, for what it called "TJX's failure to cease storing prohibited data" by Sept. 30, 2006. This apparently is a reference to stored customer credit card numbers that were later compromised in the intrusion.

If this keeps up, Fifth Third may have to downgrade its name to Tenth Sixth.

Mortgage Reform: The Beating Continues

For those who couldn't participate in today's conference call, moderated by Rod Clement of the ABA's Mortgage Lending Committee, that I mentioned in a post last week, here are a few highlights.

Michael Winston gave a quick overview of the Mortgage Reform and Anti-Predatory Lending Act of 2007 and had the following comments:

• Representative Brad Miller, one of the sponsors, is reported to have warned fellow Democrats that "we have to be careful now because since we're in the majority, what we propose might actually become law."
• The law, if it ever becomes law, is likely to be a litigation bonanza. Michael, being a litigator, has mixed emotions about that prospect, I'm sure.
• Yield spread premiums as a form of broker compensation will be "killed."
• If states don't pass licensing laws that meet the standard set by this Act and that cover all mortgage lenders and brokers in the state who are not otherwise subject to regulation, those "unlicensed" lenders and brokers will have a fiduciary duty to the borrowers.
• The Act will eliminate "stated income loans" ("liar loans," Chaz Schumer likes to call them). What do you do with the borrowers who already have one and need to refinance, but can't qualify for a "truth teller loan"?
• Section 202's requirement that the loan provide a "net tangible benefit" to a borrower who is refinancing and that the lender make the determination in "good faith" will have litigators licking their chops and manning the battle stations.
• The assignee liability and due diligence obligations placed on securitzers by Section 204 essentially eliminate the "holder-in-due-course" protection that assignees have traditionally enjoyed. You think there's a credit squeeze now?
• Section 206 provides that upon foreclosure, the "successor in interest" to the borrower takes the property subject to "bona fide" leases entered into by "bona fide" tenants prior to notice of foreclosure. Michael stated that the adverse effect upon real estate loan pricing could be substantial.

Katya Gill briefly discussed a proposed HUD Form 1 and a proposed Good Faith Estimate that attempt to disclose loan terms in more detail, but, in my estimation, aren't likely to make a dent in the thick craniums of many borrowers or elevate their financial awareness one iota. Then again, I could be wrong.

Katya also noted that Senators Obama and Schumer both introduced subprime mortgage bills last April and June, but that not one centimeter of movement has been observed on either piece of legislation since it was introduced. A cynic might assume that those beached whales were floated for no other sake than appearances.

I sure wish Congress would seriously consider my "Sam Kinison" approach to subprime mortgage lending disclosure. If your goal is to stop mortgage lending dead in its tracks, let's at least have a laugh and help a homeless person gain useful employment and exercise his lungs while we're at it.

Michael also discussed bankruptcy legislation (previously discussed here) which would allow "equity stripping" and "loan modifications" by bankruptcy courts in Chapter 13 cases. He indicated that prospects for passage are "not good" (from his lips to God's ear!). The negative impact on the repricing of outstanding securitized loans, as well as on future residential loan pricing, would be substantial.

Why do I have the sneaking suspicion that this is all hat and no cattle?

You Can't Get There From Here

Saturday's Houston Chronicle had an amusing (to perverse readers like your truly, at least) article on the current housing finance crisis, the dirty word "bailout," and how many of the proposals that have been made to "fix" the crisis have a snowball's chance in Hades of either (a) being adopted or, if adopted, (b) actually resolving the crisis. According to the Chronicle the stumbling block to any bailout is simple: "Most risky home loans made near the end of the housing boom can't be salvaged."

"Some people are just in houses that are just way out of reach for them," said Douglas Elmendorf, a senior economics fellow at the Brookings Institution, noting that politicians do not like "explicitly appropriating funds for this."

[...]

Washington's desire to help is undercut by the reality that it's not viable to rescue homeowners or banks that made loans or investors that bought securities backed by mortgages.

"I have sympathy with a lot of the borrowers, but I don't see how you would decide which ones were worthy and which ones weren't," Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said last week, while announcing legislation to crack down on mortgage lending abuses.

When a soft touch like Barney shakes his head at a bailout, you know that it's got to be DOA. On the other hand, Frank's all for closing the barn door after the horses. There's no question that no one (other than the incurably wicked or deranged) wants to see a repeat performance of the unbridled shenanigans that occurred over the last several years in the subprime mortgage market. In that regard, it's likely that some bad legislation will be enacted that will over-correct prior (and no longer persistent) market practices and exacerbate the current credit squeeze by making housing credit tougher to obtain and more expensive for prime, as well as "less than Grade A," borrowers. Trying to fine tune business practices is like trying to fine tune the hot and cold water in your shower. First it's too hot, then too cold, then too hot, then too cold, and on and on until you get it just right. That kind of tinkering is generally best achieved by market participants who've been scalded and/or frozen and are sensitive to all the "nuances." When Congress tries to do it in its usual ham-fisted manner, it generally slams the tap either all the way to "surface of the sun" or to "absolute zero."

Not that such a risk will stop Congress. The taxpayers pay Congressmen and Senators to "do something" and we can't expect them to simply sit on their hands, can we? Especially a well known "hands on" kind of guy like Rep. Frank.

Frank and several consumer groups say lending law reform is needed to prevent mortgage abuses in the future, while Republicans say doing it now makes it harder for the housing market to recover.

Rep. Patrick McHenry, R-N.C., warned at a House hearing Wednesday that Frank's proposed bill would "push us into a housing recession" because lenders would face new restrictions on their ability to help borrowers refinance.

Political pragmatists say there are so many complicated issues at hand and so many interest groups involved that only narrow proposals can muster support.

"Damn the complicated issues! Full speed ahead!"

The final legislation may be more narrow than Frank's "Mortgage Reform and Anti-Predatory Lending Act of 2007" that was submitted last week, but it's likely that we'll get some type of legislation enacted by Congress this year. Whether it will have a negative impact on credit  depends on how broad it might be. If it contains a suitability standard (like the "net tangible benefit" in Section 202 of the proposed bill) or the "securitizer liability" in Section 204, I expect that it will negatively impact the availability and cost of credit.

Sheila Bair's proposal of "a chicken in every subprime borrower's pot" comes in for some abbreviated fisking.

Sheila Bair, chair of the Federal Deposit Insurance Corp., argues that mortgage servicing companies should agree to widespread conversions of adjustable-rate loans to fixed-rate loans for borrowers who are current on payments but confront rate resets.

Experts in the $6 trillion market for mortgage-backed securities say Bair's idea won't work because mortgage servicing companies, which collect and distribute loan payments to lenders, have a legal responsibility to modify loans only if they're confident the changes would be successful, says Mark Adelson, a mortgage securitization consultant.

Mr. Adelson must have confused Ms. Bair with someone concerned with the financial well-being of the lenders and servicers that her agency regulates (and insures). As we've previously observed, her primary concern is with a quick fix that appears to help borrowers and the politicians who cater to the downtrodden. The FDIC's new motto: "Legal responsibility? We got your legal responsibility; RIGHT HERE!"

Dick Durbin's Chapter 13 modification and cramdown proposal also gets a cold shoulder.

Some Democrats and consumer advocates want bankruptcy judges to be able to modify loans to keep struggling borrowers from losing their homes. Critics say the idea would keep lenders out of the mortgage market and result in more bankruptcies.

Finally, the always-ready-with-a-quote Bert Ely blows up the idea that Fannie or Freddie can play a part in any "rescue effort."

Finally, some Democrats want Fannie Mae and Freddie Mac to be allowed to expand their mortgage portfolios, creating financial flexibility for investors and lenders to help borrowers refinance. Republicans, however, don't want to do that until the government-sponsored mortgage giants get more oversight in the wake of multibillion-dollar accounting irregularities discovered in recent years.

The federal regulator of Fannie and Freddie agreed to a smaller portfolio cap increase than what Democrats want, arguing that the companies have enough capacity to help the battered mortgage market.

"Fannie and Freddie aren't doing anybody any favors," said Bert Ely, an Alexandria, Va. banking consultant. "They're refinancing people that would be good candidates" for new loans, "no matter what."

That's right, Bert. Neither Fannie nor Freddie is going to make subprime loans, so how, exactly, either is going to affect the subprime credit crisis is a mystery to us all. But it sure sounds like "a plan" when some politician calls for expanded capacity for Freddie and Fannie, doesn't it?

In a world where appearance trumps substance, the "spin" is all that matters.

It's The Business Model, Stupid

In an op-ed piece in the October 19, 2007 edition of American Banker (paid subscription required), professional risk analyst Christopher Whalen (Senior Vice President of Institutional Risk Analytics, which I mentioned in a recent post) declared that the recent failure of NetBank sounds the death knell for "the independent online banking model."

It wasn’t just the lack of any physical branches that spelled doom for the thrift. According to Whalen, it was an "irrational growth strategy" in light of the fact that "the bank's efficiency ratio was 148%, meaning it was spending $1.48 to get every $1 in new revenue."

The remarkable thing about NetBank is that investors and bank managers continue to believe, even today, that the Internet banking model is viable for a stand-alone business. Examining the peers of NetBank in the Internet category, it is difficult to find an institution even close in terms of returns on assets or equity to the performance of its peers in asset size.

Branches and people remain an important part of the business model at U.S. banks. Remember that scale does not seem to be an issue at Internet banks. In fact, the largest player in this category, ING Direct, which assumed NetBank's insured deposits, continues to turn in truly awful results. With an ROA of 0.33% and an ROE of 4.13%, ING Bank FSB has consistently lagged its peers for the past five years.

[…]

The moral of the story is that no matter how fast a bank's assets grow, stable profits will be elusive if the business model is insufficiently broad and consistent.

The fact that many online banks seem to have a hard time achieving adequate profitability suggests that this business model may not be viable except as a loss-leader within a larger organization. Look at the proliferation of online banking arms at the major banks, and it seems reasonable to ask how a free-standing Internet bank can survive.

For investors, NetBank's failure illustrates a profound lesson: when the capital of a federally insured bank falls below a certain level, the primary regulator can appoint the FDIC as receiver, leaving the parent holding company no alternative to bankruptcy.

I agree with Mr. Whalen’s views, but, as I’ve noted previously, the Internet-only bank model (and the "monoline" business model in general) has been anathema to the banking regulators for a number of years. When I made that observation last June, I received some wry disagreement via e-mail from some folks who pointed out that Countrywide had built a giant business, in a very short period of time, on a monoline business model focused upon residential mortgage lending.  Since then, Countrywide’s become another poster child for the dangers of a monoline bank. Simply put, in the future, the odds are poor that a one-product or one-delivery-channel bank will ever make it out of the starting gate.

Mr. Whalen’s warning to investors is also apt. When you invest in a bank, you’re investing in a business that is not going to be able to resort to a Chapter 11 bankruptcy proceeding to "work out" its problems and emerge, Phoenix-like, on the other side. It’s extremely likely that the business will be seized and your investment extinguished before your bank ever becomes insolvent.

In that sense, banking is not a "low risk business."

A Little Link Love

I'm late, I'm late for
A very important date.
No time to say hello, good-bye,
I'm late, I'm late, I'm late

No, we're not pregnant, just busy. So, it's time for a few hot links to brighter lights and a hardy "Hi-O Silver, Away!" At least, until next week.

First up comes the following e-mail received today and directed to members of UMKC law professor Patrick Randolph's BrokerDirt newsletter (subscribe here). It was sent by Jackson, Mississippi lawyer Rod Clement, on a topic that Rod thought might be of interest to readers:

The ABA Mortgage Lending Committee will have a telephone conference on Tuesday, October 30, 2007 at 11:00 am CST.  Katya Gill and Michael Winston will report on matters relevant to mortgage lending from the recent Mortgage Bankers Association meeting.  Katya will discuss recent statements and guidance issued by the Federal financial regulatory agencies as well as proposed new forms of the HUD-1 closing statement and the Good Faith Estimate of Settlement Charges. Michael will discuss proposed legislation intended to address subprime mortgage problems, including The Mortgage Reform and Anti-Predatory Lending Act of 2007, which was introduced in Congress on October 23, 2007.  A copy of the proposed HUD forms and the Mortgage Reform and Anti-Predatory Lending Act of 2007 are posted on the website of the Mortgage Lending Committee, http://www.abanet.org/dch/committee.cfm?com=RP282000. We also will have a brief summary of the status of the ACORD working group’s work on revising the ACORD 28 Evidence of Commercial Property Insurance form. 

There is no registration or fee for this telephone conference.  The dial-in number is 800-504-8071 and the pass code is 9885651.  The call will start at 11:00 am CST and will end at approximately 11:30 am CST

An article in today's American Banker (paid subscription required) reports that in Congressional testimony yesterday, both Comptroller of the Currency John Dugan and OTS Director John Reich voiced concerns over portions of The Mortgage Reform and Anti-Predatory Lending Act of 2007, including that its overly tight underwriting restrictions would choke off mortgage credit to those subprime borrowers who are going to need it, while FDIC Vice Chairman Martin Greunberg sided with consumer advocates in not only supporting the the underwriting standards, but urging Congress to go even further. The FDIC's stand in opposition to that of the other bank regulators was no surprise. Greunberg was there is place of FDIC Chairman Sheila Bair, a well-known consumer advocate, who was home ill. You need to be careful whose butt your kissing in D.C. these days, what with that antibiotic-resistant strain of staph infection making the rounds.

On a totally different issue, now that I have apologized to Pepperdine University School of Law Professor Mark Scarberry on screwing up his official title, I've decided to become an unabashed pimp for his legal articles. He's got a recent one posted on the American Bankruptcy Institute's website entitled "Interpreting Bankruptcy Code Sections 502 and 506: Post-Petition Attorneys' Fees in a Post-Travelers World." It discusses the recent US Supreme Court "Travelers" decision and should be of interest to bankruptcy wonks. My main interest in it was that it involved yet another overturning of a crack decision by the Ninth Circuit Court of Appeals (motto: "No Precedent? No Problem!"). You can view and download a copy of Professor Scarberry's article by clicking the "New York, USA" button at the bottom of the summary page to which I've linked.

Finally, HUD circulated the following notice today via e-mail:

FHA will issue official guidance regarding implementation of the regulation regarding a mortgagor’s cash investment.  In the interim, to address the questions raised by many industry partners, FHA is providing the following information:

1. Nehemiah Corporation of America, due to a previous Settlement Agreement and as discussed in the rule, is granted relief from the effective date of the rule until April 1, 2008.

2. HUD has agreed to grant the AmeriDream Downpayment Assistance Program relief from the effective date of the rule until February 29, 2008.

3. All other similar downpayment assistance providers have not been granted relief from the effective date of the rule, which is October 31, 2007.

To read the final rule in its entirety and for more information please visit: http://hudclips.org/sub_nonhud/cgi/pdf/4846a.pdf

Alert readers will recall that AmeriDream sued HUD to attempt to stop the implementation of the final HUD rule on seller-funded downpayment assistance programs. It looks like it bought itself a little time before getting the boot.

Just Saying "No" To Junk

I could post tonight about something relevant to banking law, but since it's my blog, to heck with it, I'll post about one of my pet peeves, junk faxing. When I last spewed bile at junksters, they'd just won a major victory in Colorado, thanks to a hot young female litigator with one of those big law firms that makes a living inhaling vile emanations from the Dark Side of The Force (not that's there's anything wrong with that, of course). The fearsome Brandee Caswell has practically run junk fax claims aggregators out of Rocky Mountains.

In response to an earlier post on the topic, a raving lawyer-hater from St. Louis who disguised himself as "J. Brickman" (but who has appeared on a number of other lawyer blogs under other aliases) pointed out in the combox (in the old days before I tired of policing the trolls, unhinged, the self-promoters, and the comment spammers and eliminated the comments feature entirely) that Colorado had forbidden class action law suits under the TCPA against junk faxers, thereby eliminating yet another weapon against hated purveyors of junk (albeit a distasteful weapon to those of us who generally accord class actions the same enthusiasm we show for tractor-pulls and Mark Cuban's ballroom dancing prowess). In our glass-half-empty doldrums, we simply assumed that soon we'd be buried in non-stop Viagra solicitations.

What we hadn't counted on was (as described by a reader of this blog in a recent e-mail to me) "the Bluest State," its love for class actions, and its disdain for business in general, but especially a business that advertises its wares via telephone lines.

Local businesses considering a blitz of fax advertisements to tout services or products may want to reconsider given that illegal fax advertising can end up costing businesses upwards of $500 per unwanted fax.

The issue of illegal faxed ads is at issue in a new class action lawsuit filed in September in Suffolk Superior Court.

In the lawsuit, Natick resident Michael Collins is suing Woburn-based Lock & Keys Inc. for its alleged illegal faxing of hundreds of advertisements sent to Collins and others like him, according to court documents.

The suit alleges that the Woburn-based locksmith is in violation of the Telephone Consumer Protection Act, a federal statute that recognizes that unwanted and unrestricted telemarketing, via fax or telephone, can be an intrusive invasion of privacy, according to court documents.

The statute "allows for damages of $500 per unsolicited fax advertisement," said Ted Broderick, the Boston-based attorney representing Collins. "It has to be an ad that is sent without your permission. (Plaintiffs can receive) up to $1,500 if it's found to be done willfully."

Ted's got quite a track record in class action junk fax litigation, which, obviously, hasn't been found to be prohibited by courts in Massachusetts.

Broderick has worked on a handful of illegal-fax cases. Broderick settled a similar illegal-faxing case this summer for $475,000 against Braintree-based ABC Mortgage Co. Of that settlement, $130,000 went to the National Consumer Law Center, $130,000 went to the Massachusetts Attorney General's Office's consumer aid fund and the rest was left to be claimed by class members, although Broderick was on sure how many consumers were not that list. Broderick, who said he worked on the case for about five years, was awarded a fee of about $160,000, or one third of the total settlement, which was decided by the court.

Hmmm. Everybody involved got more of "a taste" (as Tony Soprano used to put it before he "cut to black") than the plaintiffs. Ah, the downside of class action litigation! The "biggest loser" is often the "winning" class.

"At the end of the day ... the lawyer profits more than the class," said Robert Bone, a law professor at Boston University. "They are very controversial. Critics look at this and say, 'Look these are just lining the pockets of attorneys and ... they are likely to settle on terms that benefit the attorney.' Supporters say, 'Maybe we need some reform, but we shouldn't throw the baby out with the bath water.' "

Personally, I often like to throw out the baby with the bath water and start fresh the next day, but I'm pretty sure that's just me. I'm not quite certain what baby is being thrown out with what bath water in the case of a successful class action lawsuit against a junk faxer, but I'm certain that the average sane man would get a bit queasy over the notion that annoying junk faxes end up "lining the pockets" of attorneys of any sort, much less those of class action attorneys, especially when the class of plaintiffs will likely end up with nothing more than a discount coupon for fax toner.

On the other hand, I doubt that ABC Mortgage will be hitting anyone with junk faxes soon, eh? That thought alone makes me a bit more tolerant of the obvious injustice of an attorney being awarded a fee, approved by the court, for doing what the law allows and stopping some fool who needs to spend three days locked in a room with Richard Gere, Tom Cruise and a bushel of horny gerbils a wayward business owner from annoying Mr. Average Joe with a bunch of junk.

Dissing DAP

A couple of weeks ago, we posted about the FHA's crackdown on down payment assistance (DAP) from certain non-profit entities that receive the funds for the assistance from sellers, extract a "servicing fee" and turn around and "gift" the seller's money to the buyers to use as a down payment. The FHA objected to such arrangements because the sellers were artificially inflating sales prices to cover the assistance given, and buyers/borrowers who received such assistance were more likely to default than were other buyers/borrowers. The crux of the argument against the FHA's position is that it favored people with access to other forms of down payment assistance, which is true, yet meaningless.

An alert reader who stumbled across my blog via a link from Calculated Risk, and who preferred to remain anonymous, sent me a link to a November 2005 GAO Report to the Chairman of the House Financial Services Committee's Subcommittee on Housing and community Opportunity. Among the findings are the following:

• GAO analysis indicated that FHA-insured homes bought with seller-funded nonprofit assistance were appraised at and sold for about 2 to 3 percent more than comparable homes bought without such assistance.
• Regardless of the source of assistance and holding other variables constant, GAO analysis indicated that FHA-insured loans with down payment assistance have higher delinquency and claim rates than do similar loans without such assistance. Furthermore, loans with assistance from seller-funded nonprofits do not perform as well as loans with assistance from other sources. This difference may be explained, in part, by the higher sales prices of comparable homes bought with seller-funded assistance.

As I said in the earlier post, HUD wasn't pulling figures out of its nether regions. Its decision on seller-funded DAP is not without a substantial basis in fact and is not arbitrary. AmeriDream will lose its lawsuit to overturn the FHA's decision, and seller-funded DAP will be a no go from now on. Bank on it.

Speaking of Calculated Risk and DAP, Tanta at Claculated Risk takes "UberNerds" through the DAP problem in drill-down fashion, asks the question "Does it really matter whether gift funds come from an interested party?", and provides an answer.

Yes, it does. A party without an interest in the transaction has no incentive to induce or persuade the borrower to pay more than the fair market value of the property; in fact, a distinterested party has an incentive to assure otherwise, since the lower the appraised value and contract sales price, the less the third party has to contribute. Government agencies and true nonprofits who provide such assistance are known for being mean and skeptical reviewers of appraisals and sales contracts, you see. (They also generally have income limits and other rules designed to keep speculators and other non-needy folks out of their programs.) Seller-funded DAPs avoid all that "red tape" and "excessive processing time."

[...]

Those who claim that DAP loans provide a benefit to borrowers without funds are making no sense even if you grant that making loans to people without even minimal skin in the game is a good idea: the DAP programs simply keep contract sales prices inflated, channel fees into the pockets of "nonprofits" who provide no other service than laundering money, and result in lower insurance premiums than FHA should be getting for loans with riskier profiles. If you care at all about the long-term survival of the FHA program, you would be doing everything you can to protect it from this kind of damage.

Good stuff, if logic and the facts interest you. AmeriDream hasn't let either logic or the facts stop it so far, so I assume it wouldn't be impressed with Tanta's analysis.

As a side note, Tanta has a witty post on why, as a blogger who's not in it for the money, she doesn't talk to the press. More good stuff.

Pay Attention To Me!

When Barney Frank told the Fed to "use it or lose it," he probably didn't appreciate the fact that the Fed gave him the cold, dead-eyed stare that it usually reserves for eying a 3-day old piece of sushi left out in the sun. So, he's sending the Fed a thumb-sucking, foot-stomping message last heard when Glenn Close told Michael Douglas in the movie Fatal Attraction: "I will not be ignored!"

While Barney's not killing the FRB's pet rabbits or attacking Ben Bernanke with a butcher knife, he's delivering a more subtle and nuanced message (paid subscription required).

A bill by House Financial Services Committee Chairman Barney Frank to revamp mortgage standards would leave the Federal Reserve Board off the list of regulators that would write rules to implement it, according to financial services and consumer advocacy representatives given a sneak peek this week.

Mortgage regulations traditionally fall predominantly under the central bank's bailiwick, but observers said its decade-plus deliberation over crafting lending rules covering the entire market might have jeopardized its power.

The bill, which Rep. Frank plans to sponsor along with two North Carolina Democrats, Reps. Brad Miller and Mel Watt, is still a draft and likely to change when the committee considers it. Nevertheless, observers said the plan to leave the Fed out of the rule-writing process seemed like a political statement.

The remainder of the article offers speculation that's all over the place on what the meaning of the omission might be, but the following seems the most likely explanation.

Many of the groups who have been working intimately with staff members on the bill said that they viewed the move as an obvious slap intended to embarrass the Fed, but that they expected the agency would ultimately be given rulemaking too.

"It's the chairman's way of sending a message that 'We don't appreciate that you have not been responsive.' … It allows the discussion to occur on record in the committee," one industry lobbyist said.

Michael Calhoun, the president of the Center for Responsible Lending said the omission is "probably stemming from the 'Use it or lose it' comment that Mr. Frank made earlier in the year."

No one expects that by the time the bill (if it's passed) makes it into law that it will omit the Fed from the list of regulators with authority to interpret and enforce it. This is merely more political gamesmanship, a politician "sending a message" to a bureaucrat about who has the bigger pair of whatever it is they use to reproduce themselves inside "The Beltway." Yet, it makes the front page of a major trade publication, and, therefore, serves the purpose of the politician who wants to send the message.

We'll see if any of this "nuanced" political nonsense changes any actual behavior or results in any long term benefit to the American people. Anyone laying odds?

No wonder that 71% of Americans disapprove of the way Congress is doing its job.

Time For Alphonso To Go?

Last year, in discussing the disappointing resignation of HUD General Counsel Mike Gottfried, we also discussed allegations of cronyism that were made against HUD Secretary Alphonso Jackson and that were being investigated by HUD's Inspector General. As we noted at the time, there was no apparent "smoking gun." Subsequently, the Inspector General found none and closed the investigation.

Well, where there's gunsmoke, there's apparently gunfire, because now Alphonso's subject to a new IG's investigation, only this time the FBI has Jackson in its cross-hairs.

The FBI and the department’s internal watchdog are examining Jackson’s ties to a friend who was paid at least $392,000 in federal money after Jackson passed along the man’s name for a job as post-Katrina construction manager at the Housing Authority of New Orleans.

[...]

Jackson triggered the inquiry last year by the Housing and Urban Development Department’s inspector general when he told a minority group of commercial real-estate executives in Dallas that he had revoked a contract because the applicant who thanked him said he did not like Bush.

“He said, ‘I have a problem with your president,’” Jackson told the crowd. “I thought to myself: ‘Brother, you have a disconnect. The president is elected, I was selected. You wouldn’t be getting the contract unless I was sitting here....’ He didn’t get the contract.”

Jackson later told investigators “I lied” when he made the remark about taking back the contract. The inspector general, after a four-month inquiry, turned up no evidence of a canceled contract.

Yet the report found what it called “some problematic instances” involving HUD contracts and grants, including Jackson’s opposition to money for a contractor whose executives donated exclusively to Democratic candidates.

What a great defense: "I'm not a crook, I'm merely a liar." And his lie was that he publicly admitted that he broke the law!

These allegations aren't coming from Democrats in Congress who are out to settle political scores or to further harass a Republican president. These investigations are coming from within the agency this man heads and from the FBI. It's not to say that he did anything improper. He's innocent until proven guilty, naturally. On the other hand, the fact that these types of allegations repeatedly surface and engender formal investigations, and the further fact that the prior investigation was based upon Jackson's own statements (intentionally false, it turns out) that he had violated the law, gives rise to the suspicion that there's a distinct odor emanating from the Secretary's office, and that it's not a pleasant one. More "dead skunk in the middle of the road" than "Chanel No. 5."

Of course, any denials issued by Secretary Jackson should be given the same credibility that you'd give any man who admits publicly to lying about breaking the law.

I Squat Corrected

Proving once again that one should never drink and blog, at least not simultaneously, or unless one appoints a "designated blogger" to ensure that all posts arrive safely and correctly, Mark Scarberry, Professor of Law at Pepperdine University School of Law, e-mailed to inform me that I incorrectly attributed co-author status to him in my post of September 19, 2007 on Dick Turban's Durbin's proposed bankruptcy "re-reform" bill. In that post, I referred to an article as having been authored by two law professors, when, in fact, Mark Scarberry is "two-two-two-profs-in-one." Professor Scarberry is not only a Professor of Law at Pepperdine, he is also the "Robert M. Zinman Scholar in Residence" at the American Bankruptcy Institute. Only one guy wrote the article, and a Robert Zinman wasn't one of them. My bad.

So that I wouldn't feel like a complete dork (not that there's anything wrong with being a complete dork, you understand), Professor Scarberry also pointed me to a chart that I thought I would share with bank lawyers and other n'ere-do-wells who while away the hours reading Bank Lawyer's Blog and Internet porn. Professor Scarberry has put together a chart, posted at the ABI's website, that compares the Durbin bill with three other bills dealing with bankruptcy reform as of October 17, 2007. It's a good resource for those of us (a) trying not to suffer projectile vomiting while considering the prospect of cramdowns in Chapter 13 and (b) attempting to compare these pieces of legislation to gauge whether we need to purchase Pepto-Bismol by the bottle or by the gross.

On another subject that prompted e-mail, in response to yesterday's post reader Tracy Coyle asks a simple question: "Why do people not use attorneys for real estate closings?" She relates that the law firm for which she works uses the following flyer:

You are about to sign 30 pages of legal fine print that will demand you pay 1/2 a MILLION dollars and you ARE NOT going to talk to an attorney first??   

As I responded to Ms. Coyle, "it's human nature."

People constantly e-mail me as a result of my blog, asking for free advice. Law students ask for help writing law review articles. Entrepreneurs with financial companies that are operating in "grey areas" of financial regulation propose that I employ my 33 years of experience and expertise to think about how to restructure their business enterprises and if, after that effort, I come up with the "silver bullet" to solve their problem, they promise that they'll pay me "something." Reporters want me to guide them down the most intricate and confusing labyrinths of banking law, on the off chance that they'll mention my name in an article few will read and even fewer will comprehend. Oh, and they're "on deadline" so I need to drop what I'm doing and accommodate their schedule. Consumers who've had any number of problems with banks (many of their wounds being self-inflicted) want to use me as a "pro bono" resource to solve their "issues" or as a free referral source. Lawyers with a banking problem want to "exchange ideas" as a "professional courtesy," yet the exchange is entirely from me to them, and I never receive follow-up as to how the transaction turned out.

 

Many people appear to be (A) lazy and (B) cheap. Not all, not even most, perhaps, but many. They want a lot in return for a little, and they have a sense of entitlement about it. In addition, I think that lawyers might be the most devalued "experts" in the country. Nobody needs them until, you know, they NEED them, and that's often after they've gotten their pinkie caught in the conveyor belt and are headed for disaster. At that point, the only solution is amputation and they blame the lawyer for the harshness of reality.

 

As I said, it's human nature. Many people want "something for nothing and their chicks for free" (my apologies to Mark Knopfler).

Not that Tracy touched a nerve or anything, but I feel her pain.

And don't get me started on the various obnoxious strangers who, out of nowhere, suddenly e-mail me to either demand my time or a "quick answer" to a question they pose (because their time is so valuable and mine is not?), or end their grossly insufficient and often cryptic e-mails with a curt "Are you interested?" (in  what?) or an arrogant demand of "All I'm interested in is whether or not you know anything about this subject."

I've basically stopped responding to the vast majority of e-mails that I receive from strangers. If they don't pass either the basic manners test (or, if contentious, at least be witty about it and make me laugh, like Francine McKenna), or the "smell" test, I assume that such communication is why the "delete" button exists. If I've become gun-shy and blown off an inquiry from a legitimate, well-intentioned business person, well, that's unfortunate, but there are no shortage of bank lawyers in the universe, and a quick trip to one of the many lawyer locator websites will stir up a school of likely-looking groupers for you to net. And rest assured that the country's law schools are grinding more lawyers every day. One thing this country will never suffer from (at least in my lifetime) is a shortage of lawyers.

In fact, the only thing that surpasses the number of lawyers in this country is the apparently limitless gall of some truly clueless denizens of cyberspace.

Like I said, don't get me started.