Bank Lawyer's Blog

Bailing Out The Bad Guys

I wonder how mandatory mediation will work with crooks? According to The Wall Street Journal, "[f]raud goes a long way toward explaining why mortgage defaults and foreclosures are rocking financial institutions, Wall Street and the economy."

The Federal Bureau of Investigation says the share of its white-collar agents and analysts devoted to prosecuting mortgage fraud has risen to 28%, up from 7% in 2003. Suspicious Activity Reports, which many lenders are required to file with the Treasury Department's Financial Crimes Enforcement Network when they suspect fraud, shot up nearly 700% between 2000 and 2006.

In 2006, losses from fraud could total a record $4.5 billion, a 100% increase from the previous year, says Arthur Prieston, chairman of the Prieston Group, which provides lenders with mortgage-fraud insurance and training. The surge ranges from one-off cases of fudging and fibbing to organized criminal rings. The FBI says its active mortgage-fraud cases have increased to 1,210 this year from 436 in 2003. In some regions, fraud may account for half of all foreclosures. "We've created a culture where a great many people know how to take advantage of the system," says Mr. Prieston.

Of course, originators, lenders and Wall Street all made it easy for crooks to steal their money. As The Wall Street Journal notes, a lot of these crooks weren't "rocket scientists."

The evolution of mortgages into a securities instrument turned loan origination into a competition. Caution gave way to a push for speed and volume. Embroiled in an all-out war for market share, issuers reduced barriers to credit, for example, by offering so-called "stated-income" loans, which require no proof of income. "The stated-income loan deserves the nickname used by many in the industry, the 'liar's loan,' " says the Mortgage Asset Research Institute, which works with lenders to prevent fraud. A recent review of a sampling of about 100 stated-income loans revealed that almost 60% of the stated amounts were exaggerated by more than 50%, MARI says.

Obviously, there's plenty of blame to go around. Nevertheless, if 60% of stated-income loans had grossly overstated incomes, meaning, obviously, that Chuckles Schumer's previous rantings about these loans being "liar loans" has a basis in fact, and if crooks were responsible for a large percentage of loans currently in foreclosure (one realtor cited by The Wall Street Journal states that half of the foreclosed residences whose sale he is handling involve borrower fraud), does the rush by government to stem foreclosures make sense? I'm not talking about the federal plan to help a fraction of subprime borrowers, which is a useless endeavor from the get-go, but about all the jawboning, thug-like threats, and public posturing by various state officials who want to "stem the tsunami of foreclosures" that will sweep over their states. People who weren't dumb enough sufficiently unsophisticated to take out a subprime or other loan that they couldn't afford to repay might consider current attempts by state officials to hinder foreclosures by lenders to be a bailout of borrowers that might save some babies, but also will save a lot of dirty bath water.

Then again, 2008 is an election year, isn't it?

I'd love to see a mediator sit down with one of the borrowers profiled in The Wall Street Journal article and attempt to "reason things out." The mediator would half-way home before he realized he was missing his wallet.

Ohio Tries Foreclosure Mediation

We'll be interested to see if this idea bears fruit or is merely another fruity idea.

Ohio Supreme Court Chief Justice Thomas J. Moyer stood with Gov. Ted Strickland and state Attorney General Marc Dann last month when they disclosed an initiative to reduce home foreclosures plaguing Ohio.

Along with the administrative, legislative and legal remedies they outlined, Moyer said the state's top court was developing a judicial approach that would attempt to push more foreclosure lawsuits into mediation.

Since then, Moyer has convinced state courts in several Ohio counties to go along with the plan, and he expects by mid-January to have a list of recommendations for courts to adopt, as well as a roster of attorneys to mediate cases.

[...]

"This is a last chance, that's a good way to describe it," Moyer said of mandates to try settling foreclosure cases out of court.

By the time a foreclosure lawsuit has been filed, a homeowner typically has been in default for months and has missed several chances to work out a payment plan with the lender.

Experts say that at that point, a homeowner usually is resigned to losing the house and doesn't hire an attorney, or can't afford one.

That means many foreclosure lawsuits end with a default judgment for the lender.

[...]

A Franklin County committee is studying the plan, said Common Pleas Court Judge Guy L. Reece.

"Obviously, if the chief justice feels there is a problem, there is a problem," Reece said.

Franklin County judges are concerned about pushing all foreclosure lawsuits into mediation, Reece said, because the county lacks enough mediators and the money to pay them, plus they face the legal issue of competing rights.

The Supreme Court has the authority to adopt a temporary rule requiring courts to push mediation, but Moyer said he's not inclined to make the demand.

Rather, the high court likely will present best practices, he said.

But Moyer argues that if foreclosure lawsuits are pushed into mediation before a judgment, resolutions for homeowners and lenders can be reached.

In the last two months, he said, 27 county courts in the state have begun using mediation. Most of those courts are in smaller counties where foreclosures haven't been as prevalent.

"In the larger ones, we're still working on a plan that will assist them in getting some of these into mediation," Moyer said. "We hope by the second week in January to have a best-practices plan."

It's probably just me, but this seems like a lot of wasted effort designed more to give the appearance of action than it does of accomplishing anything of substantive value to borrowers (much less to lenders). Lenders aren't in a rush to foreclose on residential properties in a down market. As we've noted many times before, lenders almost always make more money by modifying a loan than by foreclosing. Also, as the article's unnamed "experts" opine, by the time a foreclosure hearing rolls around, the borrower has missed more than one opportunity to negotiate a modification with the lender and has given up on the loan and the house. Can a borrower be "forced" to engage in mediation? If not, why does the Supreme Court of Ohio think that mediation will work? I thought mediation  required two interested parties?

Perhaps a few borrowers and/or lenders might benefit in a few instances, but I don't see a non-mandatory, "best practices" scheme of "pushing mediation" as accomplishing anything. Time will tell, but I think that all this is designed to do is to throw yet one more ultimately useless delay and expense (for the lender, if not for the borrower) into the foreclosure process, which, in the vast majority of cases, will ultimately result in the lender foreclosing on the home.

Then again, that's just my opinion. I could be wrong.

New England Banks Settle With TJX

Just in time for Christmas, TJX got a sweet treat in their stocking when 300 New England banks who were suing TJX over a massive information security breach decided to settle.  As we posted a few weeks ago, the federal judge who denied the banks class action status urged them to pursue a class action in state court. Although the banks' attorneys threatened to pursue TJX, the wind was out of their sails.

TJX Cos. and New England banks yesterday said they have agreed to settle a high-profile lawsuit over payment card security practices in the wake of the record-setting data breach at the Framingham retailer that compromised up to 100 million accounts.

TJX, the parent of discount retail chains including TJ Maxx and Marshalls, will pay community banks and trade groups in Massachusetts, Connecticut, and Maine a portion of their legal expenses.

Specifics weren't disclosed, but the deal won't add to the $256 million TJX previously had budgeted to deal with the breach, a spokeswoman said yesterday.

[...]

TJX still faces claims from an Alabama bank and probes by federal and state officials. Mary Monahan, partner at Javelin Strategy & Research in California, said the deal is a relative win for TJX and no surprise after a decision by a federal district court judge made it harder for the banks to join together to sue TJX as a class.

"Once that happened, it became too expensive for the banks to continue on this route," she said.

Both sides said they were pleased with the outcome.

Funny how that works. No one ever admits that they "lost." Neither side confesses that they got their kiester kicked, or gloats that they made the other side cry like a little girl.

On the other side, telling litigators to turn off the billing clock and stop running up invoices that could choke a horse has got to be a relief for the banks. I wonder what "portion" of the litigation expenses will be reimbursed? 300 banks and trade associations: that's a lot of clients to bill. I imagine some bank litigators will be happy about their year-end bonuses in 2007.

As part of yesterday's deal, the bankers are recommending their members accept the repayments Visa is offering under the terms of its deal with TJX.

In statements yesterday, both sides said they hope the deal will improve overall security. "The TJX experience underscores broader challenges facing the US payment card system that require urgent action," said Carol Meyrowitz, TJX chief executive.

Daniel Forte, president of the Massachusetts Bankers Association, said the case was worth pursuing to show weaknesses in the payment system.

"This data breach and the ensuing litigation have clearly initiated an important nationwide dialogue on the importance of improving the security of the US payment card system," he said.

Well, as long as suing the pants off TJX was done as a public service, and not to recoup losses caused by TJX's alleged negligence, then all's well that ends well, eh?

The banks' PR firm should get an extra Christmas bonus for that bit of spin.

Bank Lawyer's Blog will be "on holiday" for the next two weeks. If something earth-shaking compels us to blather, we might post. Otherwise, we intend to enjoy the down time. I hope readers have a wonderful holiday season.

Even you, Sheila.

Jerks Give Knee-Jerk Reactions To Fed Subprime Proposal

The latest sign of The Apocalypse: Jim Cramer and Bank Lawyer's Blog agree on something. In a rant this morning on NBC's Today Show, Jimbo had this to say about the Fed's proposed rules "cracking down" on subprime lending "abuse":

These loans have already been shut out by the market. No bank is making these loans. This regulation doesn't help at all. It means nothing.

The fact that it means nothing means that politicians and consumer advocates with plenty of nothing to say will say it all, loudly and proudly.

"The Federal Reserve’s proposed guidance is riddled with loopholes and exceptions that will undermine its effectiveness," said Deborah Goldstein, executive vice president of the Center for Responsible Lending, a nonprofit group in Durham, N.C. "The proposals fall far short of what was needed, and in some ways fall short of where the industry was already headed."

"Short proposals" got no reason to live, is that what you're saying, Deb? I find your "shortfallphobia" disconcerting and far from politically correct. Shame on you!

In Congress, leading Democratic lawmakers said the Fed had been too cautious.

Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, said the central bank showed it was "not a strong advocate for consumers." Senator Christopher J. Dodd of Connecticut, chairman of the Senate Banking Committee, called the proposal a "step backward."

No, the Fed is the nation's central bank and a federal bank regulatory agency, Barney. Where is "strong advocate for consumers" set forth in the Federal Reserve Act? Please point that out to us. Ask Sheila Bair. She found consumer advocacy lurking in the emanations of the penumbras of the Federal Deposit Insurance Act with respect to the FDIC, so she might be able to help you manufacturer an argument with respect to the Fed.

As for Chris Dodd, we observe that Ben Bernanke can run backward faster than Chrissy J. can run forward, so I don't see Dodd's insult as meaningful.

John Taylor, president of the National Community Reinvestment Coalition, a housing advocacy group, said simply disclosing the fees was not enough because home buyers were already inundated with a blizzard of disclosure forms to sign and can easily miss the significance of what they are approving.

Borrowers "shouldn’t need to be a lawyer or financial expert," Mr. Taylor said, "to protect themselves from unfair and deceptive lending."

Yeah, God forbid that a citizen would have to hire an attorney to represent him or her in what for most Americans is the most important financial transaction they will enter into in their life.

By "unfair and deceptive lending" I assume that Mr. Taylor means expecting a borrower to be able to read at a grade school level. I agree, that is too great an expectation.

Not every pie hole that's open and emitting air is spewing methane, however. Chuck Webber, a financial institutions lawyer with Fagere & Benson, talks about the next step down the road (which, conveniently for the cynical pols, will be far enough down the road so that the average voter forgets the law of unintended (if logical) consequences).

"Making it tougher for lenders to make loans means they will make fewer loans. And the loans they do make will go only to the well-to-do and people with perfect credit," he says. "That will take us right back to the environment that created the need for subprime lending in the first place. Less-than-perfect borrowers--the very people the government set out to help--will go back to having little ability to get credit."

Loan sharks and payday lenders, your day will come again.

The Upside Of Subprime

Some things in life are bad
They can really make you mad
Other things just make you swear and curse.
When you're chewing on life's gristle
Don't grumble, give a whistle
And this'll help things turn out for the best...

And...always look on the bright side of life...
Always look on the light side of life...

 ---"Always Look on the Bright Side of Life" (Monty Python)

All we've been hearing lately has been bad news about the subprime mortgage meltdown, the spillover into residential and commercial real estate, the liquidity and credit crunches, and the 50-50 chance of a recession. Sure, things look dicey, but there's always a silver lining if you just know where to look.

Bankers and industry analysts expect a new wave of mergers among smaller community and midsized regional banks as the economy founders, the housing market struggles and banks vehemently fight for market share...

[...]

Industry experts point to a couple of factors that suggest a buying frenzy in the making. Bank stocks have taken a beating in recent months, which lowers potential acquisition costs. Some banks might decide to merge as a way to better weather the weak residential mortgage and housing markets.

[...]

With the economy sluggish, the interest-rate environment for banks challenging and the stock market fairly flat, there are instances when "you're better off hitching a wagon to someone else," said Mike Clarke, president and CEO of Access National.

Bank M&A Lawyers: Start Your Engines!

This may be one of those rare lousy economies that bank lawyers, especially those in big firms, usually only dream about: bankruptcy and corporate lawyers both billing like there's no tomorrow. I get kind of choked up just thinking about it. Oh, and let's not forget the litigators. Calculated Risk has a roundup of stories about lawsuits involving subprime CDOs.

See? It always pays to look on the bright side of life.

Quick! Act Like We're Working!

According to a press release issued by Colorado Governor Bill Ritter's office today, Division of Real Estate Director Erin Toll (the subject of an earlier post) has issued an emergency rule that "prohibits prepayment penalties that extend past the adjustment date of an interest rate, teaser rate or payment rate. The borrower's payment virtually always significantly increases on the adjustment date. The rule creates a presumption that a mortgage broker has violated their duty of good faith to the borrower if they recommend a loan product with a prepayment penalty that extends beyond the adjustment date. The rule took effect Friday."

Although the press release refers you to the Real Estate Division's web site, that site contained no reference to the emergency rule as of 4:30 pm MST this afternoon. I assume that the rule will prohibit mortgage brokers licensed by the Division of Real Estate from recommending loans with such a feature.

Background on the rule can be found in Rocky Mountain News columnist John Rebchook's article from last Friday. Rebchook  makes a couple of pertinent observations.

   Now, lenders tell me many of these loans when [sic] away when the subrpime market drove off a cliff in August. These type of regulations, whether enacted as an emergency rule or adopted by the Legislature, always address future transactions. They can't be retroactive for loans that people now wish they had never inked.

If loans with these features are no longer being made, and the regulation cannot apply retroactively, then why the need for any such regulation, much less an emergency regulation? More useless grandstanding by a Governor and his minions to make it appear that "something is being done" to deal with a "crisis," when, in fact, nothing useful at all is being accomplished? You be the judge.

More From The Wildnerness

OCC Chief Counsel Julie Williams was, once again, "on point" in a presentation a few weeks ago to a Joint Center for Housing Studies Harvard University National Symposium on "Understanding Consumer Credit: Expanding Access, Informing Choices, and Protecting Consumers." It's been almost three years since we posted about an earlier speech by Ms. Williams in which she called for a revolution in consumer credit disclosures. Since then, Congress has changed hands but the same old dysfunctional approach remains the norm.

You say you want a revolution? Don't hold your breath.

This time around, Ms. Williams uses the subprime mortgage meltdown as a means to again call for for a sane approach to consumer credit disclosures, and to warn Congress, albeit in diplomatic terms, about the alternatives to regulating consumer credit that are being proposed by consumer advocates and some wing nuts in Congress. Conveniently for Bank Lawyer's Blog, she begins her presentation by listing the main points she will make in her remarks.

• The traditional and prevalent regulatory approach to consumer protection in the consumer credit area – disclosure – has not worked well; not because it couldn’t work well, but because it has not been effectively implemented in a way truly useful to consumers;
• Product-focused regulation in the form of substantive prohibitions and restrictions on terms of credit, which some may label the “we know what’s good for you approach,” has a place, but is a regulatory technique to be used with great care; it can strike at transactions that are abusive and overreaching in some contexts, but if its not applied with precision, it also can reduce legitimate credit opportunities for borrowers with limited or non-traditional credit profiles;
• There are other approaches to regulation, such as provider-focused regulation, used in other industries or in other contexts in financial services regulation, that have not been extensively employed in consumer credit regulation, that could be used to beneficial effect; and
• There needs to be a realistic recognition that some types of financial services providers are more extensively regulated than others, and that fact has implications for the regulatory standards that are applied to them and the mechanisms that are used, directly and indirectly, to obtain compliance with those standards.

It's a short presentation, but infused with Ms. Williams' usual ration of common sense. She also (we presume without a hint of irony) quotes the following from a recent editorial by Barney Frank in The Boston Globe:

"One aspect of the subprime mortgage crisis that deserves special attention is that it was in large part a natural experiment on the role of regulation. And the results are clear: Reasonable regulation of mortgages by the bank and credit union regulators allowed the market to function in an efficient and constructive way, while mortgages made and sold in the unregulated sector led to the crisis.

"At every step in the process, from loan origination through the use of exotic unsuitable mortgages, to the sale of securities backed by those mortgages, the largely unregulated uninsured firms have created problems, while the regulated and FDIC-insured banks and savings institutions have not. To the extent that the system did work, it is because of prudential regulation and oversight."

Don't let the fact that it's not FDIC-insured institutions who caused the subprime mortgage crisis deter FDIC Chairman and consumer advocate Sheila Bair from continuing to lead the charge for widespread re-writing of all subprime ARM loans. We're still parsing the Federal Deposit Insurance Act to determine where "consumer advocacy" is listed among the purposes of the FDIC and the functions of the Chairman. We'll keep you posted.

As to Ms. Williams speech, it's not long, so read the whole thing. You'll quickly see where she sees the dangers from ill-advised legislation that focuses on product-focused or provider-focused approaches to "solving" the subprime "crisis." You'll also see that she hasn't backed off her criticism of the uselessness of current consumer disclosures and her call that radical reform must be made, reform that results in consumer disclosures being drafted not by lawyers, but by actual human beings, and those capable of communicating with "ordinary people."

You "Borrowed" The Wrong Woman's Identity, Pal

The "synthetic identity fraud" problem we've been yapping about has made it into the main stream media. An NBC affiliate television station in South Florida profiles a woman whose social security number has been used by another person for 16 years to obtain all kinds of credit, and none of the banks or credit reporting agencies involved ever realized that the social security number and name never matched. Unfortunately for the identity "abuser," his victim may be small, but she's tough and relentless, and she brought the case to the local media, which loved doing a parking lot ambush. Now, local law enforcement and the U.S. Secret Service are on the case.

When you see who the "alleged" (and his attorney denies any wrongdoing) perpetrator is, you'll swallow hard before you ever finance another automobile purchase through a dealer again.

As I've said before, the use of false or fraudulent personal information has got to become the main focus of financial institutions, law enforcement authorities, credit card companies, credit reporting agencies, and last--and definitely least, if you're talking about competence--legislators.

UPDATE: I apologize for the incorrect link to the video (now fixed, I hope). Thanks to the reader who pointed out, once again, that it seldom pays to blog while drinking.

Pardon Me If I Reminisce

A list of pardons and commutations by President Bush was published the other day. Included in the list of those receiving a pardon was John G. Smith. The Dallas Morning News briefly mentioned that Mr. Smith was a former officer of Vernon Savings, one of the most spectacular blowups in a string of spectacular blowups of savings and loans in Texas and elsewhere in the Southwest in the mid-to-late 1980s. Even by Texas standards, Vernon's owner, Don Dixon, was over the top.

The Dallas Morning News article is a bit misleading. It would lead you to believe that Mr. Smith was "convicted" of filing a false financial document and received probation. Actually, he pled guilty to overstating the net worth of Vernon by $2 million, and in return for agreeing to cooperate with federal prosecutors against other Vernon executives and related parties, he cut a deal to stay out jail. Pat King, Vernon's president, received five years in prison in addition to five years probation, and Woody Lemons, the former CEO of Vernon, received 30 years. Dixon escaped with only five years (he served less than thirty-nine months). It's funny how the wheels of justice turn.

A president has absolute discretion to grant pardons, and doesn't have to announce his reasons, and few do. When, as he was leaving office, President Clinton pardoned Susan MacDougal, his own sweet reminder of the savings and loan collapse, he didn't need to articulate a reason. His opponents tried for years to nail both Bill and Hillary Clinton over the failure of Madison Guaranty Savings in Arkansas, principally over a series of transactions that were lumped together under the name "Whitewater" (the Independent Counsel's final report of which is here, for those wonks and nerds who crave detail). A producer for ABC television's "World News Tonight" even contacted your trusty blogger in the early 1990s and asked if he would appear in a news story about Whitewater and use the words "Hillary Clinton" and "straw man" in the same sentence. For a number of reasons, that on-camera appearance never happened, for which I'm glad, seeing as how Clinton enemies often have nasty things happen to them. Susan MacDougal was pressured to turn on the Clinton's, but she refused to do so. She spent eighteen months in federal prison for contempt for refusing to answer questions put to her by then Independent Counsel Ken Starr, and Starr then unsuccessfully prosecuted her for obstruction of justice. All-in-all, she "stood by her man" and the payoff of a pardon was understandable.

In Mr. Smith's case, perhaps there were Texas connections that pushed his case with the White House. Certainly, the Bush family is not ignorant of the savings and loan debacle and the pain it can cause. On the other hand, there may be no more of a lesson in this pardon than one that many defense counsel have already learned: when your client's caught in a conspiracy, the first defendant to the table with an offer to turn on his co-defendants is usually the defendant who cuts himself the sweetest deal.

Second Circuit's Support of OCC Preemption No Surprise

I wasn't even going to address this big yawn of a ruling, but a reader wrote me and asked what I thought of the U.S. Court of Appeals for the Second Circuit's decision to uphold the district court ruling in the case of OCC v. Spitzer. What I thought about the decision was the same thing I thought about the subject in October of 2005, when Spitzer said that he'd appeal the district court's ruling: "As readers of this blog might suspect, I think the OCC's case is cut and dried. Spitzer will lose."

Cynics might claim that Spitzer knows he has no way of winning, but that his pursuit of the big, bad national banks and their federal regulator will enhance his reputation with New York voters for whatever might be his next step up the New York State political ladder. It's probably only coincidental that recent polls show him with a 30 point lead over his nearest challenger for the New York Sate Democratic Party's nomination for Governor, and this fight keeps his name "up front" in the minds of liberal voters on issue which pits the little guy against "The Man."

More generous observers might propose that although Spitzer knows the law is against him, he hopes to pressure the OCC to actively investigate what his office believes are legitimate complaints of discriminatory lending practices by national banks. In addition, he may hope to generate some leverage for action by the US Congress to limit national bank preemption in the area of state fair lending laws.

Whatever the actual motivation for Mr. Spitzer, he's losing the legal battle. On the issue of federal preemption, he'll continue to lose in the federal courts unless Congress changes the law.

The American Banker (paid subscription required) quoted a couple of well-known D.C. banking lawyers about what an "important decision" this is. Uh-huh. Maybe. What it's not is unexpected. It's entirely consistent with previous federal court rulings on OCC federal preemption and the OCC was guaranteed a win. Nevertheless, Spitzer got his name in the papers and more publicity for his run for governor. In other words, both litigants received exactly what they expected. The only people who were screwed were the taxpayers of New York, but they promoted Spitzer up the political ladder to governor, and elected another publicity hound to succeed him as attorney general, so they're getting what they deserve. It wouldn't surprise me at all if Cuomo appealed this decision to the Supreme Court of the United States. After all, it's all about "the pub," not about the law.