Bank Lawyer's Blog

Arbitrary, Instrusive, and Ubiquitous

Inspired by last night's post, a regular reader pointed me to last Friday's post by Tom Brown, who was off to the races over two recent utterances by high-level CFPB officials. The post's title, "The Beginnings of Overreach at the CFPB. Whatever happened to personal responsibility?" gives you a clue that he and I (and Marvin Umholtz) are singing from the same songbook.

The first object of Tom's ire was Stacy Canan, deputy assistant director of the CFPB’s Office for Older Americans, who stated in an NPR interview that “There absolutely are some financial advisors that are using the designations just for marketing purposes...and they don’t really have the substantive expertise and training to back up what that designation implies to investors,” and "Seniors deserve the right to understand whether they’re entrusting their life savings to someone who’s only had a weekend seminar versus spent months or even years of training to learn how to give adequate financial advice.”

Canan's solution is that the CFPB should become involved in establishing standards for the accreditation of financial advisers. This drove Tom to a fits of sublime snark.

Seniors can ask. “What does it take to become a Chartered Retirement Planner anyway?,” they might say. Or “What’s does becoming a Certified Investment Advisor involve?,” would be another good one. Now that I think of it, a prospective client might have other questions as well, such as about the planner’s prior experience and educational background. She might also ask for references. Back in the days before the CFPB, this sort of preparation was referred to as “common sense,” and Americans were actually pretty good at using it.

Canan made another pronouncement that I had to read twice to make certain that she said what I thought she said. “Seniors in particular often mistakenly believe that their financial advisor is looking out for their best interest. That is rarely true.” Tom's response to that wholesale slander of an entire profession was pithy.

Really? Advisors only rarely look out for their clients’ best interest? One wonders how they’ve managed to stay in business. Canan seems to believe that the investment advisory business is simply systematic, organized thievery. Worse, she seems to think consumers are too stupid to recognize that. But not to worry! She’s from the federal government and is here to help. I’ve got a better idea. How about we assume that consumers are capable of taking personal responsibility for their decisions, and can be expected to make the right ones? Decisions related to one’s finances are among the most personal an individual can make. It’s outrageous that a government agency, the CFPB, is scheming to get involved in them.

Apparently, we have folks at the highest levels of this agency whose regulatory bona fides isn't sullied with the grime of actually having any first-hand knowledge of the businesses they currently regulate and seek to regulate. If ignorance is bliss, they're perpetually orgasmic. Moreover, the desire to infantilize entire segments of the American populace and require them to look to the CFPB as their paternal (or matriarchal) protector is palpable.

Tom also takes off on the recent pronouncements by the CFPB on student lending, especially that the solution to the student loan crisis is for lenders to forgive and/or modify indebtedness and to extend more of it to students who don't pay it back. Throwing good money after bad appears to be a dead end to those of us with a actual lending experience. As another of my readers put it in an email to me, "I don't even know where to start with this bad idea." On the other I do know where to start: with the trash can.

In the end, he articulates well a frustration that many of us feel.

The people who run the CFPB seem to have the basic view that under no circumstances should  people have to live with the consequences of their own freely made decisions or bear their own personal responsibility. Instead, the government should always be able to intrude itself in people’s lives to “fix” things. The trouble with allowing the government to insert itself into every part of your life is that, well, the government is going to end up inserting itself into every part of your life. There’s a word for that: tyranny. The CFPB tries to portray itself as a paternalistic entity that’s only trying to help people. In fact, it’s bureaucratic monstrosity, funded directly by the Fed, that is accountable to exactly nobody. The ideas that people at the CFPB come up with sound benign enough now. But as they accumulate (and they will, trust me) they’ll seem arbitrary, intrusive, and ubiquitous—and, of course, expensive.. But by then it will be too late. The time to start objecting to the agency’s intrusiveness is now.

Save Me From Myself

Marvin Umholtz's latest CU Strategic Hot Topics email newsletter contains a lengthy discussion of a position paper issued late last month by the National Consumer Law Center (NCLC), which calls on the CFPB to restrict bank and credit union overdraft fees to the "reasonable and proportional" standard applied to credit card penalty fees by the terms of CARD Act, notwithstanding the fact that there is no express statutory requirement to apply such a limitation to overdraft fees. The NCLC argues that the CFPB has such authority by virtue of its ability to ban "unfair, deceptive, and abusive practices."

Of particular interest to Marvin, and to me, is the use of behavioral economic theory (previously discussed here) as support for the argument that overdraft fees are inherently "abusive" and "unfair."

This correspondent found of particular interest the NCLC white paper’s discussion about how the CFPB should leverage unfair, deceptive, or abusive practices authorities to price-control overdraft fees. It argued that overdraft fees were inherently unfair because they were not avoidable by a reasonable consumer. The NCLC said, “Accordingly, the analysis should take into [account] consumers’ likely knowledge gaps and their optimism bias, which has been shown by behavioral economics research. The information differential between banks and consumers is stark. As discussed in Sections II and III.B, supra, banks use sophisticated systems to keep track of consumers’ transactions and maximize overdrafts. In contrast, behavioral economics research shows that consumers are over-optimistic and tend to discount the likelihood of negative events. Nor do they have the capacity to quickly and accurately assess the risks associated with such contingencies. This gives banks the opportunity to attract consumers with, for example, a promise of ‘free checking,’ while at the same time charging high fees for overdrafts and engaging practices to maximize them that will far outstrip any savings from lack of a monthly maintenance fee. As a result, overdrafts and their associated fees may not be reasonably avoidable by consumers – especially the lower-income consumers who bear the brunt of these fees.” The NCLC’s anti-bank rhetoric is specious and mean-spirited.

Behavioral economics assumes that many consumers are uninformed and irrational and that consumers make systemic mistakes in their choice of credit products. Rather than let people make their own decisions behavioral economists believe that a central regulator should adopt policies designed to address that ignorance and irrationality. Behaviorists use these premises to justify big government intervention in the market to prevent consumers from harming themselves. The NCLC’s anti-overdraft narrative is reliant on this everyone-is-a-victim belief.

I couldn't have said it better myself. And now, I don't have to.

Marvin continues:

As the NCLC points out, the Dodd-Frank Act defines a practice as abusive if the CFPB finds that it (1) Materially interferes with a consumer’s ability to understand a term or condition of a consumer financial product or service; or (2) Takes unreasonable advantage of – (A) A consumer's lack of understanding of the material risks, costs, or conditions of the product or service; (B) A consumer’s inability to protect his or her own interests when selecting or using a product or service; or (C) The consumer’s reliance on a covered person [the financial services provider].  The NCLC white paper came to the simple conclusion that due to the inherent nature of overdrafts they were abusive.  NCLC wrote, “When choosing a bank or type of account, consumers cannot be expected to be able to know or compare how banks process transactions or what steps the bank will do to induce overdrafts.  The way in which transactions are processed by a bank is a complicated matter that consumers cannot reasonably understand.  Again, banks take advantage of the consumer’s reliance that the bank will not engage in activities to deliberately trip them into incurring overdrafts and being charged overdraft fees.”  Why does the empowering of the CFPB to make arbitrary and capricious “abusive” findings remind this correspondent of the in loco parentis “ability to repay” determination in other Dodd-Frank Act-mandated CFPB rules?  Apparently the ideologically questionable behavioral economists at the CFPB will know “abusive” when they see it.  Do the CFPB behavioral economists have any respect for individual rights – like the right to make one’s own decisions even if mistaken?

I think that the answer to that question is "No." Or, perhaps, "Hell, No!"

None of this should come as a surprise. Liz Warren's purpose in birthing the idea for the CFPB was to create a powerful independent federal agency, free from most oversight and any chance of "regulatory capture," to decide whether consumer financial products and services were "safe" for consumers. In other words, the basis for the CFPB is a belief in the use of the Nanny State to protect the proles from themselves because the state knows what's best for them even when they don't. Behavioral economic theory is the bedrock on which this house of cards is built. Moreover, the CFPB has been manipulating statistics in its war on overdraft fees for some time.

Get used to it, folks, because barring a "counter revolution," this is only the beginning.

You Have Nothing To Lose But Your Chains

The latest edition of Ballard Spahr's "CFPB Monitor" starts off with an article by Barbara Mishkin about how CFPB employees have voted to unionize. Apparently, getting starting salaries of $173,000, plus tuition for courses in basic banking law, are not enough for the employees of the most powerful, poorly regulated federal government agency created since Joe Stalin went to (not) meet his (nonexistent) maker. No, their backsides are severely chapped over heinous office accommodations. It seems that the CFPB is in the process of renovating its Intergalactic Headquarters, aka, "The Death Star," and while that renovation is taking place, the "proles" are being asked to place their posteriors in...<gasp>...Dilbert-like "open space." Their current office space is sufficiently annoying, since more than one person has to share a private office, but cubicles???? Them's fightin' words, Pilgrims!

One "source" claimed that CFPB employees are worried about noise levels. Heck, they carry a pretty big stick, so why don't they learn to talk (and walk) softly?

Look, I understand that when you're threatening to lock and load on some beat-down community bank that issued a disclosure statement that said "may" instead of "will," and, therefore, was massively "deceptive," or you're telling an auto loan lender that if a dealer from which it buys paper ever causes emotional pain to a buyer's pet parakeet, the lender is on the hook for the vet's bill, you would be sensitive about cross-talk. Obviously, you need to keep the brow beating appropriately segmented. I mean, look what happened when Bugs Moran encroached on Al Capione's space. It wasn't pretty, and those guys were mere amateurs when it comes to wielding a Tommy Gun.

Now that the CFPB employees are represented by a union, though, I'm certain that office space is only the tip of the iceberg when it comes to workers' demands.

The union’s president is reported as having said that, in addition to workspace concerns, CFPB employees are concerned about travel policies and benefits, work schedules, reviews, promotions and alternative work schedules.  The report describes CFPB staffers as having “grown frustrated in recent months after putting in grueling hours as they raced to meet statutory deadlines” under Dodd-Frank.

I can imagine that working until 5:30 and even 6:00 pm can be wearisome if you have to do it day-after-day-after-day-my-god-will-this-never-freakin'-end!It wwould be suicide-induing if you had to grind it out in open space.

In the words of the last person to make the absolute best use of every second of every working day (and, especially, of every night) he spent in D.C, once intoned, "I feel your pain."

There Ain't No "There," There

Last week, an article by Andy Peters in the American Banker hit a nerve. It profiled a California bank that had tried to make small dollar loans work as an alternative to payday lending, but had decided to give up the effort.

One PacificCoast Bank in Oakland, Calif., is regrouping as it looks to battle payday lenders in the San Francisco Bay area.

The $282 million-asset thrift recently pulled the plug on its One Pac Pal loan, which it tailored to offer low-income clients short-term credit at reasonable rates and terms. The program, which began 18 months earlier, lost too much money, says Kat Taylor, One PacificCoast's chief executive.

"We have not yet found an economically sustainable product that's sufficient to save enough people" from payday lenders, she says.

I hate to say "I told you so," but...Oh, who am I kidding. I TOLD YOU SO!From August 1, 2007:

In June, when the FDIC issued its final Affordable Small-Dollar Loan Guidelines and FDIC Chairman Sheila Bair was pressing commercial banks to compete with payday lenders for the "Mini Me" loan biz, even banks in states like North Carolina, which kicked out the bottom feeders, were rolling their eyeballs in disdain at the prospect of rushing in to fill the breach. Among other problems, the Guidelines "encourage" banks to cap the APR at 36 percent.

[...]

The North Carolina banks banks profiled in the linked article didn't believe that there was enough bang for the buck to justify dipping their toes in the shallow water. Even the lone credit union that offered a payday loan-like product wasn't making any money on it because it was barred by state law from charging more than an 18% APR and it was actually requiring the loan to be paid back in 90 days. If it had only rolled the loan over (and over and over) and neglected to comply with the usury laws, it might, like Madonna, have been able to "get into the groove" and make some real payday lender-like money.

Lyndsey Medsker, spokesperson for the Community Financial Services Association of America, which, according to another article, represents about 60 percent of the payday loan industry, said the 36% annual percentage rate cap was a non-starter for commercial banks.

"There's an effort to cap loans at 36 percent annual rate, which the FDIC guidelines suggest. How that works into two- week loans is $1.38 per $100," she says. "I know payday lenders can't make money on that, so banks couldn't possibly either."

Mr. Peters' latest article also quotes a consultant as correctly noting that at the same time these loans pose a high risk of nonpayment, they bear a high regulatory compliance risk and, because credit scores must be thrown out the window (or reliance on them reduced), a high underwriting risk. Peters also notes that the FDIC ended its small dollar loan pilot program in 2009 because banks couldn't make a return sufficient to cover the risk.

One PacificCoast bank's experience is in line with the consistent experience of other FDIC-insured banks who've tried to beat payday lenders at their own game over the past six years. Basic business principles don't change. However, they've never ceased to be ignored in the service of an ideological agenda, one which holds that payday loans are evil because they have high fees that "trap" poor people in a never-ending spiral of debt, people who are too stupid and/or unsophisticated and/or desperate to think for themselves, and who must be protected from their inherent deficiencies by those who know better. Guys like Recess Richie and the Payday Slayers.

It's obvious that trying to use traditional banks as payday lending alternatives is not going to work. Unless, of course, you let them earn the same return that payday lenders earn.Which kind of thwarts the "higher purpose," doesn't it?

That's right Liz, reality bites.

Camden Fine Fires Off A Fine Salvo

In  recent opinion piece for Bloomberg News, ICBA CEO Camden Fine was in fine fettle, ranting about his favorite topic: new regulatory burdens are strangling community while the largest banks are doing just fine, thank you very much. Among his salient points are the following:

The megabanks are benefiting from what Bloomberg View calculated is an $83 billion annual taxpayer subsidy, the value of implicit guarantees by the U.S. Treasury. Bloomberg View was correct to characterize the too-big-to-fail subsidy as “a major driver of the largest banks’ profits.”

Perversely, Federal Deposit Insurance Corp. data show that large banks have both the lowest credit quality and the lowest cost of funds in the industry. Community banks rank the highest in both categories even though they have had to compete for years against the megabanks’ access to cheaper money in pricing loans. In addition, community banks must compete against the big lenders’ lower comparative costs in handling regulatory paperwork.

While Cam complains that this is "morally wrong," I suspect that in a nation overrun with Pontius Pilates who sneer in the throes of their born-again relativism "What is 'truth'?," appealing to "morality" as a behavior influencer will have as much impact on Congress as a stern talking to by Pope Francis would have on Charlie Sheen. More effective on the morally challenged is likely to be his economic arguments.

Community banks should be putting their capital to work in the small towns, rural communities and middle-class urban enclaves they know well. Instead, they are focusing too many of their precious human resources on onerous paperwork and time-consuming compliance measures.

Community banks are the source of almost 60 percent of all small-business loans of less than $1 million, as well as mortgage and consumer loans tailored to the needs of their local communities. Large banking organizations with more than $50 billion in assets hold almost 40 percent of outstanding small loans to businesses, according to the Federal Reserve, but loans to small businesses aren’t a significant portion of large-bank lending. Small-business loans represent less than 5 percent of the large banks’ total domestic lending.

Cam outlines five specific steps Congress and the federal regulators could take to help community banks (and credit unions, for that matter, although Cam would choke on his own tongue before admitting it). They include:

• Easing up on some of the more onerous residential mortgage lending and servicing rules.
• Eliminating the requirement that community banks report on every new small business loan application.
• Requiring a cost-benefit analysis for all new regulations and prohibiting the issuance of any regulation where the cost exceeds the benefit.
• Raising the threshold to $350 million in assets for the requirement for an audit of a bank's internal controls.
• Eliminating the annual requirement for sending no-change privacy policies.

These are all helpful suggestions, but  I'm frankly surprised that he didn't also call for the carpet bombing of CFPB's D.C. headquarters and insist that Jamie Dimon's king-size bed be short-sheeted. Oh well, the year is not even half over. There's still time to get down to the really important stuff.

A New Approach To Compliance

Steve Van Beek, NAFCU's Director of Regulatory Compliance, has a dynamite article in the latest issue of The Federal Credit Union, that community banks, as well as credit unions, would do well to heed. In addition to noting the obvious fact that Dodd-Frank's increase of regulations means increased compliance burdens for credit unions, he discusses a very important "paradigm shift" in the way credit unions (and community banks) need to view compliance. In the years "BFD" (Before Franken-Dodd), the compliance officer was often brought into the discussion of a product or service at a late date, and then gave it a thumbs up or thumbs down verdict. Steve rightly notes that the old school approach is a good way to be schooled by the CFPB.

Steve observes that the "CFPB's focus is principle-based as wellas requirement-based."

Not only will credit unions need to determine if their product or service is compliant with laws, regulations and guidance, but they will also need to expend resources to document that the product or service provides a benefit to members.

Why? Steve's glad you asked. Th answer is UDAAP: unfair, deceptive or abusive acts or practices. You have a new sheriff in town, the CFPB. It's focused on how consumers use products and services and how consumer service and product providers might "take advantage" of consumers. In other words, the CFPB seems to be running down the path of determining what products and services are "suitable" for consumers and which are not. It's a brave new world, one in which the old focus on checking off items on a compliance checklist is not going to get the job done. Instead, financial institutions will "need to build a UDAAP review into their product structure and development and monitor their products and services over time, as the UDAAP standard is not static."

There's a lot more meat on the bones, and I highly recommend that you read the whole article. It's a good warning shot across the bow of the critically dysfunctional and soon-to-be-beaten-down dinosaurs who squawk an outdated mantra: "Show me where it says I can't do that." Believe me, if you don't understand that it's a whole knew compliance ballgame and learn the new rules, pronto, the CFPB tire tracks will make a nice pair of bookends on the back of your bowling shirt as you lie face down and flattened in the middle of the consumer compliance highway.

Community Bank Consolidation: Over-Hyped?

I've been traveling on business this week and have missed posting the past couple of days, but I couldn't let the week end without commenting on a story in yesterday's American Banker, the tone, and much of the substance, of which, was that bank merger activity is stagnant and is not likely to improve in the near term. I'm not as gloomy.

Aside from the fact that our boutique firm is currently involved in a half-dozen deals, I attended a banking conference last Friday in Dallas (actually, the Four Seasons Resort in Las Colinas) hosted by Commerce Street Capital, in which that firm's head of M&A, former OTS Western Regional Director C.K. Lee, circulated some interesting statistics. One was that the total number of M&A transactions last year nation-wide was 230, the highest since 286 in 2007, before the crash. 39 of those were in the Southwest. In the first quarter of this year, there were 44 transactions, 8 of them in the Southwest. I was in Denver the last few days, and had lunch yesterday with an investment banker whose firm is heavily involved in M&A activity in Colorado and surrounding states, and he's also currently juggling a handful of deals at the moment.

While all of this is not exactly a raging inferno of M&A, it's not as depressing as the folks the American Banker interviewed made it out to be. There's no question that potential buyers who feasted on FDIC loss-sharing and the cheap prices they paid for failed banks are not enamored of sellers who want an actual premium over tangible book value. It's also true that, in some areas of the country, the bid/asked gap between sellers and buyers is wide. However, in some areas of the country, deals are getting done and there are more in the hopper.

Therefore, while I agree that the predictions of some pundits that there would be a "tsunami" of community bank consolidation this year will not prove to be true, I also think that as agencies like the CFPB continue to work their magic on the psyches of community bank owners, directors, and senior managers, and as the ownership of many closely-held community banking organizations continues to age, there will be more mice who decide that they no longer want the cheese, they just want out of the trap.

Then again, as Dennis Miller would put it, that's just my opinion. I could be wrong.

FDIC's Take On FFIEC's Social Media Guidance

I ran across an interview recently that the FDIC's Elizabeth Khalil gave to InfoSecurity's Tracy Kitten about the FFIEC's proposed guidance on social media. Among my take-aways are the following:

• The push for the guidance came from smaller banks that wanted the regulators to give them some free advice. We all understand the fact that because small banks have less money available to pay for expensive lawyers, they look to leverage off of every free resource they can glom onto. Trade associations aren't free, but if you're paying your dues, you look to them to give you your money's worth. Since banks pay the federal bank regulators assessments, they want some bang for those bucks, as well. I get it.
• While Ms. Khalil mentioned "reputational risk" as the second major risk of the three she discussed ("compliance issues" was number one and "third party risk" was the third), I think reputational risk layers through much of the regulators' concerns. For example, misuse of consumers' personal information may be a compliance risk issue, and a Facebook vulnerability to hackers is a third-party risk. However, they both can impact the bank's reputation. Bad things that happen in a bank's social media endeavors often pose a reputational risk as an additional risk, and that's a safety and soundness concern which, in turn, is a regulatory compliance concern.
• None of what's in the guidance is new, and banks that are already engaged in social media activities should already be familiar with the elements of the guidance. If they're not, they better become familiar in a hurry and hope that no one notices.
• Due diligence on third party service providers that you intend to use is critical. The due diligence needs to be ongoing. A third party's faux pas can bite the bank in the backside as well as the third party. Monitoring is essential.
• As is the case with online banking security, the regulators encourage banks to educate consumers on social media risks. For example, the regulators will look favorably on a bank educating its social media users on the risk of fraudulent bank sites, how to recognize the real deal from the fraudster, and that they should never give up personal information over social media. 
• Whether or not a bank is actively using social media to interface with current or potential customers, it needs to have a social media use policy. The bank's employees are using social media, and other people may be saying bad things about you in cyberspace. The bank should have a policy that deals with these issues.

The final guidance is expected to be out in the near future (the comment period closed March 25th), depending on the nature of the comments received.Interested bankers should keep their eyes peeled (although, don't hold your breath).

I'll be giving a breakout session on social media compliance on July 3, 2013 at CUNA’s America’s Credit Union Conference in New York City. If you're a reader and are attending that conference, say hello.

Tighten Up! No, Loosen Up!

The Obama administration’s recent call for mortgage lenders to loosen underwriting standards on residential mortgage loans to less-than-“Qualified Mortgagors” as long as the FHA (i.e., the American taxpayer) is taking most of the risk of default, generated some pretty strong reaction from the usual suspects.

"If that were to come to pass, that would open the flood-gates to highly excessive risk and would send us right back on the same path we were just trying to recover from," said Ed Pinto, a resident fellow at the American Enterprise Institute and former top executive at mortgage giant Fannie Mae.

[…]

"There's always a tension that you have to take seriously between providing clarity and rules of the road and not giving any opportunity to restart the kind of irresponsible lending that we saw in the mid-2000s," said a senior administration official who was not authorized to speak on the record.

Ya’ think?

The administration is also purportedly urging the Justice Department to ease up on lenders who make loans in accordance with the administration-encouraged looser and goosier FHA underwriting critera. The FHA also claims that it hopes to encourage "by example" Fannie Mae and Freddie Mac to follow along. It's as if the subprime meltdown never occurred and Dodd-Frank was never passed, except for the fact that the federal banking regulators, including the CFPB, are taking a directly contrary approach to mortgage underwriting. Moreover, loan originators live in mortal fear of Freddie and Fannie repurchase requests, which have been massive, since those two publicly-controlled giants are the conventional residential mortgage market.

This whip-saw of inconsistency evidences a major example of cognitive dissonance.

Private reaction from bankers and bank lawyers with whom I attended the recent Texas Bankers Association Annual Legal Conference in Austin, Texas, was even more derisive.  Much time during that conference was spent parsing the nuances of “Qualified Mortgages” and “Qualified Residential Mortgages,” which will make qualifying for a residential mortgage loan much more difficult for many potential homeowners. In addition, the plethora of new regulations being spewed out by the CFPB makes consumer lending, including making single family mortgage loans, riskier and more expensive. The bottom line for a number of community bankers is that they will be making few, if any, residential mortgage loans, at least not directly. In addition, bankers who decide to make residential mortgage loans are definitely not crazy about making anything other than loans that will fall under the QM safe harbor.

I would say that it’s amazing that the administration could talk so glibly out of both sides of its mouth, except that it’s not at all amazing. It’s what these cynical, pandering clowns do as naturally as breathing in oxygen and exhaling carbon dioxide.

Beating The CFPB To The Punch

Community banks have been concerned that, although they might be exempt from direct supervision and enforcement by the CFPB, they would be recipients of a "trickle down" effect that would result when their primary federal bank regulator would attempt to demonstrate that it could stay abreast, or even ahead, of the CFPB when it comes to cracking down on unfair, deceptive, and "abusive" practices. Fraud, small banks understand, but they tend to fear zealots who may not be able to define an "abusive" practice with precision, but sure as shooting know it when they see it.

An article in the most recent issue of Bank Safety & Soundness Advisor (paid subscription required) indicates that community bankers' fears are not without some foundation.

In a recent Webcast, officials from the Fed along with the Federal Reserve Bank of San Francisco showcased a broadbased enforcement approach to UDAP rules and regulations, and some high expectations for how banks should be identifying and resolving complaints involving abusive or deceptive practices.

While some of the examples cited, including inflating borrower income on loan applications and charging "bogus points and origination fees" are clearly fraudulent, the net appears to be cast widely by the Fed.

Officials indicated they view as a kind of red flag banks pushing new or modified products and services to generate new revenue, especially if done in conjunction with third-party vendors where fees are shared.

“While searching for revenue is part of what a bank needs to do, there is also a need to make sure
there is compliance with UDAP and consideration of UDAP risk,” said Maureen Yap, the Federal
Reserve’s special counsel for fair lending.

And the officials underscored the idea that an act or practice does not have to violate another law to be unfair or deceptive. A potentially tell-tale sign of that: cases where revenue growth depends on consumers making what regulators and examiners feel are poor financial choices.

There you go: what an examiner "feels is a poor financial choice" by a consumer is the acid test. That gives a whole boatload of precision and certainty to the determination of what is and is not "abusive." Every bank will have to have a Potter Stewart on staff to make the call, I guess.

The potential burden is not going to be light.

For individual institutions, the potential coverage is huge, including not only all products and services, but every phase of the life cycle, including development, marketing, and loss mitigation activities.

One bank's "bogus points" scam, perpetrated by rogue loan originators, led to a determination that it had a "disparate impact" on minorities, and earned that bank a referral to the Justice Department. So, there's that potential liability to look forward to, as well.

What's a small community bank to do? Fed officials tried to be helpful.

Officials declined to address specific fact situations bankers posed during the March 5 webcast. They suggested that banks use the same sort of analysis that regulators do in assessing potential misconduct.

Yap said the Fed tells examiners to focus on the “INN” in determining whether conduct is unfair under the law. There must be “injury” to the consumer or group of consumers, the injury is “not reasonably avoidable,” and there are “no countervailing benefits.”

She said Fed examiners focus on the “MRM” to judge whether behavior is deceptive. Does the representation or omission “mislead” the consumer? Is the consumer response “reasonable”
given the representation or omission? Is the misrepresentation or omission “material”?

“The act or practice does not have to violate another law to be unfair or deceptive,” she said.
“If the prongs of the analysis are satisfi ed a UDAAP violation can be cited.” She said CA Letter 07-08 — a joint Federal Reserve/FDIC statement on consumer compliance exam procedures for UDAP — was “very instructive” in the types of questions bank should expect.

There's your heading on a course through the fog-bound waters of "abuse": think like an examiner.

And after you take that journey down a rabbit "warren" (pun intended), you can resurface and start walking like an Egyptian.

You've got your marching orders, folks. You can get with the program or you can get out of the business. Welcome to this brave new world.