Bank Lawyer's Blog

Credit Union Executives: New Targets of Opportunity?

Kidnapping a bank executive's family and holding them until the executive brings the crooks money from the bank is a time-honored tradition in the Wild Wild West, as this 1987 newspaper article demonstrates. According to reader John Thomas, Senior Vice President of Regulatory Compliance with the Missouri Credit Union Association, crooks in Tennessee have used the gambit in an attempt to rob a credit union. 

The CEO of the credit union apparently took longer than the crooks had anticipated. Growing nervous, they released the executive's family and fled. If they'd been particularly vicious, I suppose that they could have harmed the family members, to send a message or simply out pure meanness, so there's that to be thankful for. On the other hand, credit unions, generally being smaller in size on average than banks, would not seem to be the normal targets for these kinds of crooks, so that raises a concern as to whether or not this will become a trend for the credit union industry.

According to John, this may be a sign of of bad times to come. From his email to me that accompanied a link to the article from the Credit Union Times:

Perhaps everything can be explained by the perps being, well, “stupider than usual.”  Given the stunning lack of success of the criminal enterprise, we can assume planning wasn’t their area of expertise.

Nevertheless, people desperate enough to attempt kidnapping are desperate enough to try it again elsewhere and try it again, this time, with a rational plan.  Eventually, somebody will get the formula right.

As the article regarding the Texas bank from 1987 indicates, somebody in the past has gotten it "right." On the other hand, we also have the recent example of fake kidnappers strapping fake bomb vests to an assistant bank branch manager/fake kidnapping victim in an epic fail of a robbery. Thus, while somebody occasionally gets it "right," it appears that they also frequently get it all wrong.

Nevertheless, being a branch manager or senior bank or credit union executive may now be legitimately considered a "high risk" occupation. Keep your eyes peeled, and never answer the door to a stranger unless you've got a Glock in your hand with a round chambered and the safety off.

Don't Ask, Don't Tell

You may recall last year's pronouncement by the head of FinCEN, Jennifer Shasky Calvery, that 105 financial institutions were, thanks to the amazing guidance provided in February 2014 by FinCEN, servicing state-legal, federal-illegal marijuana businesses. Apparently, less than 10% of those are in Colorado, land of the free and home of the dazed, because according Colorado Rep. Jared Polis, only eight commercial banks and two credit unions in that state are banking the pot biz, and none of them want to be publicly named.

I assume that they don't want to happen to them what happened to publicity-challenged MBank out of Oregon. As recently related in published reports, that Oregon bank announced in January that it was open for (marijuana) business not only in Oregon, but in Colorado, and that it had the "tacit approval" of the FDIC to bank the unbankable. Within less than a week, because it was supposedly "overwhelmed" by the response from Colorado marijuana businesses, it pulled entirely out Colorful Colorado. Now, it's announced that it has pulled out of the entire marijuana business nationally, even in its home state of Oregon, apparently haven satisfied the munchies and gotten a good night's sleep. Like the Colorado exit, the industry-wide exit is supposedly due to the unexpected response of unbanked pot sellers and the bank's determination that "the bank is not big enough to provide and support all of the compliance components required."

It may be pure coincidence, but it appears that any time a bank is publicly "outed" as a banker to the stoned, the bank pulls out of the business. None of the 105 institutions cited by Ms. Calvery or the ten cited by Mr. Polis was named. Had they been, how many of them would have "pulled an MBank"? Most, if not all, is my guess.

Unlike banking payday lending, a perfectly legal business that the regulators are trying to eradicate, banking marijuana selling, a blatantly illegal business (under federal criminal laws), is just fine with the federal banking regulators as long as the bank flies under the radar screen. It's OK to service an illegal drug business as long as you (A) file the right kind of Cheech & Chong SAR or SARs, and (B) don't ever, ever, let anyone but the illegal business owners and bank officials know about it. Do you think that this state of affairs breeds cynicism and contempt for the rule of law? Me, too.

"Don't Ask, Don't Tell." It was bad policy for the US military and it's no better for the US banking business.

Do Not Go Gentle Into That Good Night

This post has absolutely nothing to do with banks or banking law. On the other hand, it involves a dark fantasy that many of us harbor, but few of us live out: killing your computer.

When ctrl + alt + delete doesn't work, just shoot the darn thing.

That's what one man did on Monday night, according to Colorado Springs police. Lucas Hinch, 37, was cited for discharging a weapon within city limits after he took the fight with his computer outside and got the revenge most of us only dream about.

"He got tired of fighting with his computer for the last several months," Lt. Jeff Strossner said. "He was having technology problems, so he took it out in the back alley and shot it."

[...]

Hinch shot it eight times, Strossner said, "effectively disabling it."

The computer is not expected to recover.

That last line makes reporter Cassandra Kloos my new unrequited love interest.

Hinch was even more revealing to the Los Angeles Times.

Hinch told the Los Angeles Times he has no regrets.

"It was glorious," he said. "Angels sung on high." 

The Dell kept giving Hinch the "blue screen of death," he said of the machine's final moments. 

"It was extremely frustrating," he said. "I reached critical mass."

As was the case with most people who reach "critical mass," a meltdown quickly followed.

"It was premeditated, oh, definitely," he said. "I made sure there wasn't anything behind it and nothing to ricochet."

Hinch was issued a summons for discharging a firearm within city limits, which Hinch called a small price to pay for justice.

“That computer had a bad day," he said.

You learned that machine, boy! You learned it real good!

A couple of years ago, I had an HP laptop that kept giving me the blue screen of death. Instead of shooting it, I engaged in a series of epithet-laden soliloquies via telephone with a customer support person who insisted on calling  himself "Dave" but who I insisted on calling "Mujibar," since I understood only 15% to 20% of his sort-of-recognizable-as-English-but-not-quite responses. HP took back the infernal machine and performed some kind of Santeria rituals on it. It came back devoid of blue screens, but I never got back that lovin' feeling for it and within a year retired it and replaced it with, ironically, a Dell desktop, the same brand that Hinch assassinated.

I should have performed a one-and-a-half Hinch on it, from the high board, instead.

The cops confiscated Hinch's 9 mm automatic pistol. If he ever gets its back, I'll invite him down to the Lone Star State and we can set the HP up at a local gun range, give it a last cigarette and a blindfold, and shoot the living sugar out of it. Come to think of it, he doesn't need to bring his nine. I've got plenty of long-and-short barreled options in my own private arsenal to blow it to hell. Most of them are even legal.

Lizzie Warren's Latest Bad Idea

Writing in Forbes, Tim Worstall dissects Elizabeth Warren's recent call for a tax on financial transactions and discovers that it's not only cancerous, but DOA.

He first restates Warren's announced purpose for the tax.

Among specific legislative steps Warren wants to see, she said Congress should impose a tax on every financial transaction, a policy embraced in Europe and by some fellow Democrats. She argued such a step would kill high-frequency traders who rely on “gimmicks that add no value to the economy” to turn a profit.

That's a favorite Warren meme: banks and financial markets are rife with "gimmicks," "tricks," and "traps" that only Native American law professors with the intellectual heft of Warren and her fellow elitists-masquerading-as-populists can discern and then devise methods with which they can protect the common people (too fog-brained from their poverty to protect themselves). Those methods always usually involve the gentle ministrations of powerful federal bureaucracies staffed not by what Honore de Balzac once labeled as "pygmies," but by legions of Mother Teresas and Mahatma Ghandis. After all, Lord Acton had it wrong: absolute power only absolutely corrupts the other guy.

Worstall begs to differ.

We’ve had one recent Nobel Laureate in Economics whose Nobel was for the study of taxation systems. That’s Sir John Mirrlees (along with Peter Diamond). And one of the points that they make is that transactions taxes, taxes like the FTT, are a really, really bad idea. It’s entirely fine to try to tax the financial sector more (I don’t know about Diamond but Mirrlees would think it OK) but the way to do that is through a consumption tax (like sales tax, or VAT) not a transactions tax. So, we’ve theory against Warren’s idea.

And then there’s that one single peer reviewed paper I’ve ever done. An early version of which is here:

There are several problems with the tax itself: it won’t reduce volatility, a desired aim, it will increase it. Banks won’t be paying the charge because corporations don’t pay taxes, only people do. The pain and grief it causes to those who will pay it will be more than the revenue raised. But more than all of these, there’s one really large problem that no one seems to have noticed yet – there just won’t be any extra money to spend.

That’s right, we’ve all these people licking their lips at being able to spend more of our money and there just won’t be any more of our money for them to spend: there will be less.

The secret to this comes from the EU Commission’s own attempt to persuade us that tens of billions can be taken out of the system without anyone noticing. They report that such a tax would raise 0.1% of GDP in revenues but would lower GDP by 1.76% while it did so. It’s a reasonable rule of thumb that 40-50% of the marginal changes in GDP consist of tax revenues. So, if we reduce GDP by 1.76%, we reduce tax revenues by 0.7-0.9% of GDP. In return we get tax revenues of 0.1% of GDP.

These are, recall, the EU’s own numbers, not those made up by some neo-liberal (I prefer realist) like me.

This is rather a serious problem for the argument in favour of a new tax. Not only won’t it raise any revenue, nor solve any of the perceived problems that it’s aimed at, but it will actually blow a hole in current tax revenues – leaving us with decidedly less money, not more, to do good things for poor people.

I’m all for the idea that we shaft the people who shaft us through the financial and tax system. But what Elizabeth Warren is proposing is this financial transactions tax. Something that will cost us, the people, more money and also, at the same time, reduce the amount of tax revenues that the government can collect to spend upon us, the people.

Worstall ends with purported wonder as to why, if the tax not only doesn't do what its proponent want it to do, but makes matters worse, Warren would propose it. I know why: because it feeds her public image as an advocate of the common man and it appeals to the envy of that common man who feels (with much justification) that the system is rigged, and that "The Banks" are the dragons who must be slain if the common man is going to get his "fair share" of the economic pie. Tax the "rich." Redistribute the taxes (or what's left of them after feeding the maw of the bureaucracy) to the "common man." Huey ("Every Man a King") Long had quite a run with the theme of wealth redistribution in the 1930s until he was gunned down the day after he announced his run for the White House. 

Today, we have The Massachusetts Mohican picking up the same war club and swinging it. No one wishes her the same personal fate as Long, but let's hope that her crackpot ideas continue to shatter on the hard rock of the facts.

The Fed's Cold Comfort To Colorado MJ Businesses

I'm traveling this week on business, but I didn't want to leave town without a comment on the visit of Esther George. head of the Federal Reserve Bank of Kansas City, to Denver last week. She was invited to meet with Colorado Representatives Polis and Perlmutter, who've been trying to find a way around the inconvenient fact that what might be legal in Colorado in the way of raising, refining, and selling marijuana for recreational use is still a violation of Colorado criminal laws, as is the handling of funds derived from such illegal activities by banks. According to Rep. Polis, George gave them the Mount Rushmore Response: impassive staring with no audible sound.

George was "circumspect" in her comments about banking for marijuana businesses, Perlmutter said.

"She wouldn't give us a 'yes, no or maybe,'" he said.

But George "expressed great interest in learning about the challenges" marijuana businesses are facing, said Perlmutter, D-Golden.

In other words, like Bill Clinton, she felt their pain in a rhetorical sense only.

The application of Colorado's Fourth Corner Credit Union, formed top bank the unbankable state-legal Mary Jane businesses in Colorado, for a FRB master account has been hung up for months at the Fed. It is likely in Washington, D.C., where it may be sucked into a black hole, eaten by a goat, or consigned to Elizabeth Warren's S&M dungeon.

What actually caught my attention was the assertion by Polis that eight banks and two credit unions were secretly banking marijuana businesses. In other words, eight banks, with the "tacit" collusion of bank regulators, are engaged in illegal drug money laundering.

I understand. The banking regulators are too busy trying to drive legitimate payday lending businesses out of business through Operation Choke Point to bother with federal criminal laws. This is perfectly understandable in the Humpty-Dumpty, Alice-Through-The-Looking-Glass world in which we live today.

New ILCs? Nahhh!

Four and one-half years ago, we wondered if the three-year moratorium on FDIC insurance applications for new industrial loan companies (ILCs) and other restrictions placed upon ILCs by Franken-Dodd would spell the death knell for the ILC charter. While that moratorium expired a couple of years ago, no new ILC charter applications have been filed since then, and those few charter applications that were pending before the Care Bair put her Bairly legal 2006 moratorium on new ILC insurance-of-account applications have still not been approved by the FDIC. Therefore, a disinterested observer might be forgiven for assuming that the moribund charter might remain, as Fredo Corleone was to his brother, The Godfather, "dead to me."

However, American Banker reporter Ian McKendry thinks that for ILCs, perhaps there's a ray of sunshine peaking through the clouds (paid subscription required).

With optimism growing that de novo bank activity might rebound, some observers say attention could soon shift once again to the embattled industrial loan company charter.

[...]

[N]o federal law banning commercial or financial parents from pursuing ILCs has ever been enacted. And as the industry's continued recovery increases the likelihood of more new-bank applications overall, some observers believe interest in the ILC charter may ultimately pick up as well.

"You are going to see movement because there is pent-up demand," said Frank Pignanelli, who represents industrial banks as a partner at the Utah government relations firm Foxley & Pignanelli. "There is pent-up demand for capital to be used either through ILCs or other state-chartered institutions and I just don't think the FDIC can stop that any longer."

Other commentators think that just because a couple of de novo commercial bank applications have survived the FDIC gauntlet in the last five years, that is no reason to think that ILC de novo applications will fare as well, especially when the owner will be a commercial (as opposed to financial) business. They point to the fact that the two successful de novo bank charter applications involved unique situations, and clearly involved banks focused on serving specific communities where the need for a traditional community bank was clearly demonstrated (after considerable time and expense). The traditional attraction of the ILC charter has been to serve specific commercial businesses in financing their operations, including providing financing to customers who buy their products. The reason for Oh-My-Little-Sheila's original renegade moratorium, and the outcry that prompted and continues to "dog" the ILC charter, involved the efforts of retail giants like Home Depot and Wal-mart to enter the "banking" business, which scarred the living ca-ca out of the commercial banking business (which lives in mortal fear of the low-cost competitive advantage possessed by entities like Wal-mart as much as it does the tax-exempt status of credit unions). Critics see those concerns as still being the insurmountable roadblock to a resurgence of new ILCs that are FDIC-insured.

It's true, however, that there is no impediment built into federal laws for new ILC charters.

"We are pretty close to the possibility where you could see one of these applications fairly soon," said V. Gerard Comizio, a partner at Paul Hastings LLP. "It is now legal again for a nonfinancial company to get an industrial loan bank charter and deposit insurance for it."

Jerry's perfectly correct regarding legality. However, it was legal in 2006 for the FDIC to approve insurance of accounts applications for ILCs whose owners were engaged in commerce, and the FDIC punted, and has continued to punt, the ball down the field. Then again, Jerry's a guy whose opinion I respect, so I may have to turn my ILC frown upside down.

Or not. "Pretty close to the possibility where you could see" is, for me, a sight that is far beyond the visible horizon.

Subprime May Return, But Will It Be In A Pine Box?

Former community banker and occasional guest poster Pat Dalrymple is a columnist for a Colorado newspaper who has a former insider's view on the sometimes wild and wacky world of commercial lending. You didn't think it was either wild or wacky? Read Pat's latest column.

He’s baaaack.

No, neither Jason, nor Freddie, nor Arnold has returned after having been absolutely, irrevocably annihilated in the last episode.

Rather, it’s subprime, the evil force that terrorized America, from Wall Street to Main Street to Elm Street, that may be coming soon to a closing near you.

A residential mortgage lender has announced that it’s making loans of up to $2 million that don’t require tax returns or employment verifications. Nor does it set a minimum time from a short sale that the borrower might have had. Bankruptcies and foreclosures require only two years’ seasoning after the event. Income is verified through bank statements, and an income-to-debt ratio can be as high as 50 percent.

The loan to value ratio is capped at 85 percent, but no mortgage insurance is mandated. A 700 credit score will qualify a borrower for a $2 million loan, and only 500 is necessary for a mortgage up to $750,000. And, to top it all off, cash-out refis are OK.

Sounds kind of scary, doesn’t it?

Pat parses the underwriting risks, and comes to the conclusion that money can be made on this type of lending, "subprime" or not, and that from an underwriting standpoint, it's not "scary" at all. To him, the business reward can outweigh the risk. However, the "scary" fly in the ointment is something far more terrifying than a default on an undercollateralized loan. It's something that utters the horrifying names "trial lawyers" and the Cherokee princess known as "The Spawn of She Who Dances With Donors" (h/t Dennis Miller) in the same fetid breath.

The new regulations that have come online in 2014, and this year say that lenders have a so-called “safe harbor” if they make loans underwritten to conforming, i.e., Fannie Mae, guidelines. These loans are called “qualifying mortgages.” If a loan is outside that qualifying mortgage safe harbor it means that a borrower, whose house is in foreclosure, can actually allege that the lender did not adequately assess the borrower’s ability to repay when making the loan, and sue the lender.

If the suit takes place during the first three years of the life of the loan, and the borrower is successful, that borrower can collect from the lender all the interest and fees paid during those three years, plus attorney fees (this last phrase is kind of important). After three years, there’s no cash settlement; the amount is simply offset against the foreclosure.

For a big lender, there has to be a goodly number of these cases before the company is at risk, and the likelihood of that is less in a recovering economy. But those three little words, “plus attorney fees,” really gets the attention of the class action bar.

And then there’s the regulatory risk, which could be considerable. No law or reg says a lender can’t make loans that are not “qualifying mortgages.” But the assumption of the Consumer Financial Protection Bureau, the federal big-dog regulator, is that these loans can be traps to abuse consumers. And no lender wants to spark the attention of the CFPB.

This agency has enormous power. It answers to nobody but Congress, which isn’t exactly the best manager of anything. And the bureau can levy enormous fines, called civil money penalties, on the companies and people who work for these businesses. Just one CFPB audit can pull the plug that can send a lender down the drain.

A lender venturing outside the safe harbor can be like a Methodist missionary taking pictures in North Korea.

You’re definitely being watched.

Coloring outside the lines used to be dangerous because you could lose your shirt if you didn't manage the elevated risks with dexterity and price the product appropriately to compensate for the fact that the "earners" had to more than makeup for the "non-earners." In that respect, the economics were pretty much the same as those governing a Mafia family, so most subprime lenders "got it." Today, it's much more dangerous because you may have to face your two biggest nightmares: a lawyer with an cause of action that might have actual merit, and a government bureaucracy staffed by true believers and accountable only to God/Gaia/Zeus/Baal/Richard Dawkin's Eternal Nothingness/[Insert Name of Favorite Cosmic Muffin or Nihilist Here].

That should scare away all but the psychopathic, the suicidal, or the moronic. Or, perhaps, that rare fellow who looks into the muzzle of the .44 Magnum and says to himself, "Ya' know, come to think of it, I AM feeling lucky today!"

Compliance Costs: No Ceiling In Sight

These days, Chief Compliance Officers should be awarded combat pay. In a recent think piece reprinted in the American Banker (paid subscription required), author Jennifer Openshaw claims that CCOs will need a knew tool: a crystal ball.

"The key is that they have to be more risk identifiers than ever," says Barbara Stettner, managing partner at the international law firm of Allen & Overy. "The expectation is that CCOs will have to look around the corner for the organization—where is tech taking us, and what are the global risks the firm will be facing given the business line they're engaged in? They can't just be putting fires out anymore; now, it's about thinking ahead. I have this new tech, or a new generation that can't get off iPads, so how does that impact compliance and my role?"

Openshaw thinks that three key future risk areas for CCOs will be technology, cybersecurity, and new investment products and markets. Layered onto this smorgasbord of cutting edge risks is the impact of social media.

Social media platforms are evolving along with technology, and that can complicate the life of a CCO. The old marketing and advertising rules won't change much, but the forums—Twitter, LinkedIn, and so on—will continue to develop and pose significant challenges to the industry.

[...]

Social media platforms are evolving along with technology, and that can complicate the life of a CCO. The old marketing and advertising rules won't change much, but the forums—Twitter, LinkedIn, and so on—will continue to develop and pose significant challenges to the industry.

...David Rozenson, counsel and senior consultant at Boston Compliance, sees an inherent compliance conflict looming.

"As the social media platforms become more complex, the best approach for CCOs may be to keep it simple—to establish basic principles and prohibitions regarding employees' use of social media and stressing that they apply to all communications outside of the work environment," he says.

Unfortunately, the easy approach may mean that your more social media-savvy competitors, who take more risk, but spend the time and money to manage it, leave you eating their dust.

As Opensahw also observes, these evolving areas of risk mean that spending on compliance will not be decreasing.

Expect more pressure to find return on investment on the higher mechanisms required for compliance, and more struggles between CCOs and CEOs on the subject.

As I've noted in the past, because the commercial banking and credit union businesses are highly regulated, they're poor venues for wild and wooly types at one end of the spectrum and anal-retentive bean counters at the other end of the spectrum. The financial institution regulators want you dancing a waltz, and if you insist on jitterbugging, sooner or later you'll be bounced from the dance hall. On the other hand, in an era where risks are increasingly sophisticated, you can't skimp on compliance. You may not need to sit behind the wheel of a compliance Ferrari, but driving a horse and buggy won't cut it.

Yes, it's tough to make a buck in the current environment, and not merely due to the Federal Reserve's damn-the-savers management of interest rates. Elevated compliance costs are one reason for the consolidation of the banking industry (to achieve economies of scale), as well as for the dearth of de novos (although other factors drive both trends). But, there you have it. It costs more to comply now than it used to cost, and it is likely to cost even more in the future.

And the beat(ing) goes on.