Bank Lawyer's Blog

Warren For Sheriff? Fa Shizzle!

I'm on the road again, but have just enough time to revivify the corpse of Liz Warren's most effective tool in her campaign to make herself the first "non-acting" director of the CFPB. No, I'm not referring to Keith Olbermann, as effective a ranting wing-nut as he may be, I'm referring instead to the stylin' and profilin' bling-blingers who put down some gold-chain-encrusted, Justin boot-scootin', Boomer Sooner rap in support of the new sheriff in town, the woman who'll put Wall Street in its place with no embarrassing side trips to visit a hooker named "Kristen."

For those who might have missed this musical gem the first time around, it's never too late to celebrate the greatness of Liz in "song" as we approach her recess coronation.

Enjoy.

Stop Whining And Post A %#$*& Sign!

I suppose I'd be more sympathetic to banks that complain about plaintiffs who cruise bank branches, seeking ATMs that don't post the signs required by the Electronic Funds Transfer Act, and then sue banks for violating that particular requirement portion of the EFTA, if (A) the law hadn't been around for a decade and/or (B) plaintiffs or their attorneys were ripping off the signs when no one was looking, then suing the bank for not having a sign. The latter might be the case in a few instances, but I doubt any bank that actually posted the sign wouldn't prefer to get into a swearing contest before a judge than they would merely roll over and pay off the leaches who would pull such a stunt. No, I think in most cases, the banks have simply failed to comply with a basic requirement of applicable law.

We can debate the merits of giving private citizens, like the retired couple of Robin Hoods who are featured in the linked story, the right to squeeze money out of banks when the plaintiffs haven't been misled or otherwise personally harmed. However, a private right of action is provided by the law for just this purpose: to arm private citizens with the ammo they need to force banks to comply with the law. With all the other matters they have on their plates at the moment, I'm sure state and Federal law enforcement and bank regulatory agencies are happy to leave the harassment of banks to roaming legions of do-gooders without portfolio.

Bank counsels' complaint that these lawsuits amount to a nuisance may be correct. The law intends them to be a nusisance. They're intended to change behavior. If you don't like the nuisance, you've got a choice: change the law or comply with it. The latter seems to me make the most sense, and is certainly the most cost-effective course of action, but what doesn't make sense is to complain that there's something unfair about private citizens doing just what the law intended them to do.

In this case, I have to agree with the anti-bankers. As a modification of PJ O'Rourkes Memo to Gen X, I'd tell complaining banks to pull up their pants, turn their hats around, and get a sign.

Snowe Job

Remember that $30 billion small business lending fund that Congress threw up last year, the one that had 10-year commercial real estate loan and OREO amortization in it, then out of it? Well, as Congress is wont to do, it's now trying to change the program after 637 banks have applied for some of the capital provided under the program. Unlike TARP, when folks like Barney Frank led the charge to change the rules on executive compensation after the TARP-taking banks were already hip-deep in the dark waters of TARP, this time it's the Republicans' turn to change the rules of the game ex post facto. Sure, I use the term "Republican" loosely, because it's Olympia Snowe, the Republican senator from Blue State Maine (her nickname: "Snowe The RINO"), but she still qualifies as being less liberal than Dick Durbin so for that part of the world, she almost qualifies for Tea Party status.

Snowe ostensibly worries that takers of the SBLF capital will use it to pay off TARP capital which, she claims, bears a much higher dividend rate. She's trying to ram through a bill that makes it tougher to qualify, "sunsets" the capital after 10 years, bars "troubled banks" from participating, restricts the use of the new capital as Tier 1 capital, and also bars any bank that took TARP capital from participating, even those that redeemed their TARP preferred stock and warrants.

Critics of Snowe respond that the authorizing legislation already bars banks on the FDIC's troubled institution list from participating. In addition, as one critic put it in a recent American Banker article, the lower interest rate applies only if and as the bank makes more and more small business loans.

"The only way [taxpayers] would get a worse interest rate would be through the banks specifically increasing small-business lending, which they say these amendments are supposed to be aimed at," [Carson Medlin SVP Stephen] Huntington said. "You can't have it both ways."

Oh, In Congress, Steve, you get to put it in every which way you can stick it. Then you turn it clockwise, wait until you hear a scream, then twist it counterclockwise. It's called "democracy in action."

The most amusing criticism is one uttered with a straight face by the last honest man left in D.C.

“You don’t change the rules once they’re in place,” said Paul G. Merski, senior vice president and chief economist for the Independent Community Bankers of America.

Paul, that train left the station many moons ago.

I've said this before and I'll say it again, so like Hans and Franz, "Hear me now and believe me later": when you do a deal with the U.S. government, you're doing a deal with the Gambino crime family, only without the great spicy meatballs, women named "Vera," and the chance to break somebody else's kneecaps. When your "partner" starts putting the screws to you, don't come crying to us. You either knew what you were getting into or you're too gentle for the rough and tumble of the doing-business-with-Uncle-Sammy world. Try something a little less cynical, like maybe incense dispensing in a Tibetan monastery or hearing the confessions of nuns.

Colorado AG Miraculously Punishes Evil Doer Without Liz Warren's Assistance

I don't believe that every homeowner who took out a loan in the last decade that he or she was later not able to repay "had a bunch of junk done to them." On the other hand, I'm convinced that a large number of them did, in fact, have a bunch of junk done to them. Yet another good (or bad, actually) example of a junk dispenser was just jacked, sliced, diced, and julienned in Colorado last week by the Attorney General of that state.

A Denver District Court judge has barred a Centennial mortgage broker from issuing loans in Colorado and fined him and his companies almost $1 million in civil penalties.

Leo Shifrin, and his companies Mortgage Planning & Lending Specialists, Ltd., Jupiter Lending, Mile High Mortgage, Shifrin Inc. and Wholesale Mortgage Lending, had engaged in deceptive advertising and fraudulent loan-origination practices, according to a news release from Colorado Attorney General John Suthers' office.

[...]

Suthers’ office reached a consent decree with Jerry Johnson, who was also involved with the business, shortly before trial that also forced him to pay $1 million in fines and stops him from issuing loans.

The complaint, filed in February of 2008, alleged the men defrauded customers from 2004 to 2007 by not telling them about important details during the loan-origination process. Through the use of what the complaint said were deceptive ads, the men steered the customers to risky “option-adjusted rate mortgage” loans “which are considerably riskier than traditional adjustable rate mortgages,” according to a news release from Suthers’ office.

“The court found that defendants lured borrowers into their offices with hundreds of advertisements printed in The Denver Post and The Rocky Mountain News that featured low teaser rates,” the release states. “The court found that defendants misrepresented and failed to disclose that these low teaser rates only lasted for a few months and then would quickly escalate upwards thereafter.”

Whitney also ordered the men to pay fees and court costs the AG incurred prosecuting the case.

Interestingly for proponents of the provisions of Dodd-Frank that created that soon-to-be juggernaut of national imperial power, the CFPB, in Colorado, malfeasors in the consumer loan business seem perfectly capable of being reigned in and spanked by existing state laws enforced by existing state law enforcement authorities. Then again, as Rahm Emmanuel once cackled, you never let a good crisis go to waste in adding another rung to the federal nanny state ladder andf continuing to render the Tenth Amendment to the dust bin of history. Plus, Liz Warren will get to test out her academic theories, concocted in the laboratory of her very own cerebrum, operating in the practical vacuum of a university law professor's cranium, on real banks and other financial providers in the real world. That opportunity to have fun and wreak havoc, alone, will be worth any cost the country ultimately might pay in unintended consequences that seem to frequently flow from the efforts of the federal government to fine-tune the intersection between private enterprise and social justice.

From a purely narrow, selfish perspective, we can't wait to see the well-intended results. From a broader perspective, we could wait indefinitely and never lose a night's sleep.

Recessively Favoring Warren

Anthony Demongone thinks that the tea leaves he's reading convince him that President Obama will make a recess appointment of Elizabeth Warren as director of the CFPB. I think he may very well be on to something. I speculated last September that he might make such an appointment in January, but since she's been acting as the de facto director anyway since the president appointed her as a "Special Advisor" last summer, and since it still appears that the Republicans in the Senate will block her confirmation, he can act realtively shortly before the July 21, 2011 deadline and accomplish what he set out to do without either the advice or the consent of the Senate.

According to Bloomberg, Warren's still on the president's short list. He might pick someone else, but recent liberal Democrats approached by the administration have not only been turning down the offer, but telling the president to nominate Warren. Inasmuch as the president has recently launched his re-election campaign by lambasting his Republican opposition in strident political terms ("Not that there's anything wrong with that!"), this type of slick maneuver (used by Bush II, by the way) would ensconce Warren in that position through the end of 2012. She could do a lot of damage to set the tone for the CFPB during that 18-month period, and based on the efforts she's made to date to push the CFPB's agenda forward as an "advisor," I expect she'd be hell-on-wheels dynamic as a director.

P.S. A senior officer for a community bank, who shall remain nameless, requested that I use a different photo of Ms. Warren. My previous favorite of her was often mistaken by some as a threat to reduce a certain portion of the physical anatomy of bankers who oppose Ms. Warren (and perhaps fear her wrath) to a size fit only for sopranos or, on a good day, perhaps contraltos. The display of said photo to the right is its swan song.

The "High Risk" Business Of Educating Customers

For bankers, the idea that the bank's first line of defense against cybercrooks is the bank's own Information security systems, processes, and procedures is undergoing a change. According to the American Banker's Jeremy Quittner (paid subscription required), the first line of defense that bankers are now focused upon (or should be focused upon) is the bank's customers.

Security experts say it's logical — and technologically possible — to make customers the first line of defense.

[...]

Arming consumers with tools such as alerts, which they set for things such as balance thresholds and transaction amounts, loops customers in continuously and makes them aware much earlier about fraud, she said.

While the experts interviewed by Quittner also say that banks should also be monitoring suspicious behavior behind the scenes (part of a "layered security: approach that's been discussed a number of times here), and should develop an understanding of their customers usual and customary behavior while engaging in online access to their bank accounts in order to do so, at least one of them strongly advocates direct engagement by the bank with its customers, making them a partner in crime-stopping.

[Avivah Litan of Gartner Inc.] advocates banks engaging the customer directly in security measures, which would at least make security seem less of a heavy-handed annoyance. "This is not a one-size-fits-all approach; this can be tailored by the customer," Litan said. She said one way banks could make consumer security more effective would be by giving consumers tools to individualize their security.

An example of this is the creation of "white lists," companies and individuals the consumer has told the bank it is acceptable for the customer to transact with.

"The customer could tell the bank, 'These are the only ones you can pay on my behalf. Anything beyond this threshold, ask my permission,'" Litan said.

As the experts point out, this takes a commitment by the banks to invest in technology that can be flexible. Although not directly addressed, although implied, by the thrust of the article, it will also require time and effort devoted to educating the customer.

It may not "take a village," but it will take, at the very least, a partnership, to better protect banks and their customers. Banks will have to become educators to make their customers more effective in combating the never-ending stream of bad guys trying to steal their money the new-fashioned way.

I once heard an information security officer for a bank complain that every time he proposed putting on educational programs for customers on how to better protect the customers' computer systems from susceptibility to crooks, he was shot down by the bank's attorney, who was worried that all educational efforts would do would be to subject the bank to additional liability if they misstated or omitted anything material in the educational material or programs. That's the purpose of disclaimers, which, if legal counsel is competent, ought to go a long way to mitigating any such risks.

When it comes to lawyers, I often feel my clients' pain.

Singing The Perp Walk Blues

While The New York Times droned on about the failure of federal prosecutors to make the Wall Street Fat Cats pay for their nefarious misdeeds (missing the obvious reason that they've sold their souls to The Great Horned One and will prosper in this life while burning for eternity in the next), Jones Day was cranking out an analysis of all the criminal prosecutions that have so far been pursued against former officers and directors of failed commercial banks and thrifts, and a few failed banks where criminal prosecutions may be forthcoming.

As Jones Day observes, only a handful of prosecutions have occurred thus far against failed bank executives, while there have been many more prosecutions of mortgage brokers and borrowers ("low hanging fruit" Jones Day calls them). Yet, that should be cold comfort to the executives of failed financial institutions. As is the case with civil actions, these cases usually involve a complex set of facts and take some time to build. We're likely just starting to see the commencement of the prosectutions. In addition, "prosecutors appear convinced that there were plenty of bad actors." Finally, prosecutors have a wide range of criminal statutes to use to pursue defendants and they haven't been shy of using them in the past to nail those they consider to be the bad guys.

Of the cases that are discussed by Jones Day, many of them involve classic cases of corruption that we saw in the 1980s, including using borrowers or other customers to funnel loan proceeds to bank executives, insider trading,creating fictitious borrowers and/or mortgage loans and/or bank accounts, filing deliberately falsified financial reports, outright lying to the regulators, embezzlement, and similar incidents of self-dealing criminality.

One of the practices that may receive some future "play" in connection with other failed banks is the use of various tactics to "mask the true financial condition of the bank." These can include bogus loan restructurings or refinancings, questionable "new" appraised valuations of real estate collateral, and other financial sleight of hand whose goal is to keep the pony trotting down the track until the economy improves. The regulators frown on such activities and, some former bank officials are discovering, so do criminal prosecutors. While I think that there is still legitimate room to argue about the valuation of collateral, the appropriate level of reserves, and the proper treatment of restructured loans, I think that "pretend and extend" in its most egregious forms will subject former officers, and perhaps directors, to criminal liability, in addition to civil; liability. This will certainly be true in those cases where the actions are not supported by the advice of independent, reputable, outside advisors.

It's too early to tell with any degree of certainty where this is headed, but it appears that for the executives and directors of failed banks, it's going to be a bumpy ride.

A Dumb Mistake Or A Smart Business Decision?

Although I'm no fan of the behavior of some of the large mortgage loan servicers, I thought some of the glee that some commentators took in what was spun as a monumental screw-up by MERS and/or US Bank, the trustee for the loan securitization trust, that gave a delinquent Florida homeowner his house free and clear was perhaps missing the point. Apparently, the situation with foreclosures in Florida is such a FUBAR that anything is possible, so maybe MERS did make a mistake and released the wrong property, or maybe US Bank was at fault. The facts are that the homeowner paid less than $1,000 on his $72,000 mortgage loan and yet the loan servicer, after commencing foreclosure, not only dismissed the foreclosure action but released the mortgage lien, claiming in documents filed with the court, that it "has received full payment and satisfaction ... and does hereby cancel and discharge said mortgage."

The speculation as to why the investors would just walk away from a foreclosure that the borrower had not contested seemed to center primarily on an act of either God or the Peter Principle.

"This is crazy," attorney David Goldman said as he looked over the files at the Times-Union's request.

"They won," he said referring to the mortgage holder. "They're standing at the goal line, and they just need to sell the house."

"One possibility is that they did it by mistake," said Chip Parker, an attorney who specializes in foreclosure defense. "There are just so many cases out there."

However, Parker also speculated about another reason, one that the loan servicer confirmed.

Parker also theorized that the mortgage owner simply made a business decision.

"The lender was faced with retaining new counsel," Parker said. "Maybe it looked at the value of the property, realized it's way, way underwater and simply not worth it."

That appears to be the case, though the mortgage holder provided few details when contacted.

The loan was being serviced by America's Servicing Co., a subsidiary of Wells Fargo.

"The investor on the loan, the bondholder on the trust, decided to write off the loan balance," said a Wells Fargo spokesman, "because of the significant decreased value of the property."

He declined to give more details or further explanation.

To me, he didn't need to provide further explanation. It's contained later in the article.

The home — two bedrooms, one bath and 1,120 square feet — is structurally solid, Laspina said. But many of the interior walls are covered with mold ever since the coils were stolen from the air conditioner.

Mold! If you're trying to sell a home, at least in this Southern state, disclosing the existence of mold is like saying the house is infected with the Plague or the Ebola virus, or worse, that your next door neighbor is Nicolas Cage. Potential buyers envision guys wrapped in hazmat suits, with giant vacuum hoses, bleach, and respirators waddling into the infested hell-hole to take one for the team. Making it your home-sweet-home becomes a tough sell. Perhaps the investors considered that factor and said the risk/reward ratio wasn't high enough to take any action other than simply walking away.

No worries for the homeowner, though. Apparently, he plans to scrape off the walls with a few fast strokes of a putty knife and then go for the quick flip and a cool windfall, now that this gift from heaven has fallen in his lap.

As for Laspina, he plans to clean the mold, mow the lawn and try to sell the house.

"I could certainly use the money," he said.

Now there's a closing line you could build a meltdown on. "I could certainly use the money." So could we all, Mr. Laspina, so could we all. It's ironic that after the big banks and Wall Street have been slammed for packaging and selling toxic waste, the cycle has spun to the point where homeowners are now getting their own chance to do the same.

Mile High Reefer Madness

High-speed internet service: when it's down, you realize what a slave to technology so many of us have become. I missed the Feedblitz deadline last night, so many of you will read this tomorrow. Be thankful for the small favor that graced your Thursday: no bloviating from BLB.

Two twists on subjects we’ve been following, the first on the leveling off of law school admissions and the other the strange tale of the Maxine Waters ethics investigation.

As to law students, we recently noted with approval that law school admissions nationwide are down, perhaps sparing the planet from some little bit of agony, since one less lawyer in the world means that many more people will live their lives shark-free. Unfortunately, we work for a law firm whose home office is in Colorado, and in the land of high peaks and mountain-spring-fed breweries, the state’s premier law school thumbs its nose at the so-called “trend.”

The University of Colorado Law School this spring had 3,160 applicants for its three-year program — up 12.7 percent from last year and the highest number of applicants in the school’s history.

The increase bucks a national trend of declining applicants, according to the ABA (American Bar Association) Journal, which reported on April 1 that the average drop in law school applicants nationwide is about 11.5 percent.

[...]

Colorado Law cited its reputation and value as reasons it saw an increase in applications while some of the nation’s other law schools reported declines, such as Yale Law School, which reported a 16.5 percent drop, and Duke, with a 20 percent decrease.

Oh, right! Its "reputation" as a draw I believe. Playboy just named CU it's "Top Party School for 2011."

Although Playboy and the heartbreak of glaucoma are not often paired, the magazine helpfully points out that the city has 50 medical-marijuana dispensaries.

Every April, it says, nearly half of the university's 24,000-plus undergrads turn out (on?) for the annual "4/20 smoke-out on school grounds."

Playboy reassures traditionalists, however, that Boulder is also a "beer drinker's paradise, with four breweries in town."

Here's an ugly truth: if you have to spend your life enduring the agony of being a lawyer, you might as well do it stoned.

As to Ms. Waters (who, come to think of it, might also be tinged with a whiff of "reefer madness"), the editorial board of her hometown rag, the Los Angeles Times (Motto: “We’re Not Fox News”) is getting fed up with the dysfunctional meltdown of the House ethics investigation of Maxine and tells the Ethics Committee not to cut bait, but to fish.

The glacial pace of this investigation is doubtless frustrating for Waters, and its apparent politicization doesn't reflect well on the committee. But those are not reasons to abandon the process. The panel should retain a special counsel to conduct a new investigation free of any suspicion of partisanship. The committee, which has several new members, should then move expeditiously to resolve the matter.

Notify Lucifer that Hell just froze over, but I agree with the Times. The partisan political hacks who presently are gumming up the works need to get their act together just long enough to make a finding, one way or the other. The "sell by" date on this investigation is long past.

Politically Incorrect

I have so many new readers that one long-time reader is afraid that some of the newcomers might have missed some of my most offensive previous posts. Not wishing to leave the professionally aggrieved without cause to to huff and puff, this reader suggested that I pick a post form the olden days that still might pack a punch of political incorrectness and do a redo. That sounded like a chance to pick low-hanging fruit, which every lazy, shiftless, trailer park denizen like this blogger yearns to make his life's calling, so here's one from early 20007, before the subpriume meltdown started to really heat up, and before the word "bank" became a true four-letter word. Although the link to The West Virginia Record article no longer works, that article was merely a pretext for offering up a post that was certain to offend as many as it amused.

Enjoy (or not)!

This post is dedicated to every banker who's sued or been sued, and to the men and women who love them.

As I read an opinion piece from The West Virginia Record, in which an anti-trial lawyer advocate, who wants to clean up the personal injury litigation mess that we have created in this country (and by "we" I mean "lawyers"), propounds that it will take "courage" to "reform" our broken civil trial system, I thought to myself: "Courage"? No, what this country needs is a heavy dose of plain old common sense, the kind of common sense I commented upon several years ago on another blog, but feel compelled to resurrect; the kind of common sense that was displayed by me and a few of my law school classmates when we used to sit in the law school grill, eating burgers and drinking beer, instead of studying. As a direct result of those brainstorming sessions (actually, full-blown brain hurricanes), we came up with a number of startling innovations and improvements to our system of dispensing justice, improving public health, and delivering legal services, among them:

• The Tort Wheel of Fortune. Instead of the crap shoot of a judge or jury, you just walked, rode or were carried into a room where your host -- say, Pat Sajak -- would spin a wheel with all possible trial outcomes on it, and you just took what was designated when the wheel stopped spinning. Sure, a woman badly frightened when a car backfired might win $4 billion, while a class of horribly disfigured babies scarred for life by a drug their mothers ingested during pregnancy and manufactured by a company which knowingly concealed its defects might take home only some lovely parting gifts, but HEY! This is America! Everybody wants that big pot of gold, and why should only those with a good lawyer be entitled to travel to the end of the rainbow? This way, everyone has a chance. Best part: all awards are funded by a consumption tax on those earning less than $13,000 per year.

• The Mobile Breast Check Station. Suggested by a beer-swilling, cigar-smoking female back-bencher (who anticipated by a decade, The Waitresses' "I Know What Boys Like"), this bright idea involved a converted school bus, staffed only by competent male law students, who would travel the nation performing, gratis, manual breast checks on women 18-40 years of age. No charge for the check because the examiners would pay the sponsor for the privilege of performing this public service. Our motto: "10 Lawyers, No Waiting. In by 9, Out by 5"

• Last, but hardly least, the Combination Pez-Dispenser and Professional Business Card Gun. We envisioned ourselves patrolling the roads, streets and superhighways of this great land, shooting Pez pellets with our professional cards attached, into the open windows of wrecked motor vehicles, back (and front) doors of ambulances, and homes where domestic disputes were occurring, as well as into emergency room entrances. With proper aim, the injured or otherwise aggrieved would not only be informed about a valuable professional service, but simultaneously would receive a refreshing breath mint, both delivered smack between your cheek and gum.

We hadn't considered the next logical step of drive-by dispensing to morgues, funeral homes, and houses of worship, but with our ambition and high ethical standards, it would have been only a question of time.

Courage? Sure, courage can assist a man in the game of life. Yet, the ultimate winner, the Übermensch, is a man willing to think not only out of the box, but also out of his mind, venturing into uncharted territory where an extra quart of pure grain alcohol and a tinfoil hat are all a man needs to rise above the madding crowd.