Bank Lawyer's Blog

Feds To Tribes: Don't Bogart That Roach, Roll Some More

At the same time that the federal government is trying to drive Native American tribes out of the payday lending business, it is encouraging them to get into the pot business. As long as the file those Cheech & Chong SARs that were created out of whole cloth.

Indian tribes can grow and sell marijuana on their lands as long as they follow the same federal conditions laid out for states that have legalized the drug, the U.S. Justice Department said Thursday.

[...]

Oregon U.S. Attorney Amanda Marshall said that the Justice Department policy addresses questions raised by tribes about how legalization of pot in states like Oregon, Washington and Colorado would apply to Indian lands.

“That’s been the primary message tribes are getting to us as U.S. attorneys,” Marshall said from Portland. “What will the U.S. as federal partners do to assist tribes in protecting our children and families, our tribal businesses, our tribal housing? How will you help us combat marijuana abuse in Indian Country when states are no longer there to partner with us?”

How will we help you combat marijuana abuse? By telling you that it's OK to grow it? Makes sense to me.

Here's the rub: most tribes don't want anything to do with it.

But many in Indian Country are wary of compounding existing drug and alcohol problems by growing and selling pot.

The Yakama Nation in Washington state recently banned marijuana on the reservation and is trying to halt state regulated pot sales and grows on lands off the reservation where it still holds hunting and fishing rights. The Hoopa Valley Tribe in Northern California has battled illegal pot plantations on its reservation that have damaged the environment.

In South Dakota, the Oglala Sioux Tribal Council this year rejected a proposal to allow marijuana.

Oglala Sioux tribal Councilwoman Ellen Fills the Pipe, chairwoman of the council’s Law and Order Committee, said Thursday she needs to review the federal policy more thoroughly but that given her long background in law enforcement, she opposes loosening marijuana laws.

“For me, it’s a drug,” Fills the Pipe said. “My gut feeling is we’re most likely going to shoot it down.”

In Oregon, former Klamath Tribes chairman Jeff Mitchell said communities everywhere deal with drug and alcohol issues, and tribes are likely to proceed carefully.

“I have confidence in tribal government that they will deal with it appropriately and they’ll take into consideration social and legal aspects, as well as other implications that go along with bringing something like that into a community,” Mitchell said.

Obviously, the tribes have more common sense than the feds, and much more than a majority of voters in states that want to jump on board the cannabis gravy train and ride it 'til it derails in a cloud of smoke.

Moreover, as US Attorney Mitchell helpfully observes, the activities of the tribes in this respect would violate federal criminal laws. Which is why, other than for a few outliers, the banking industry in states like Colorado and Washington, continues to refuse to have anything to do with the marijuana business.

Maybe between casino gambling and pot, the tribes ultimately will have revenge on the people who took their land and put them on reservations, further weakening an already deracinated popular "culture" that seems, in many respects, to be revolving quickly, in an increasingly tight concentric circle, around the drain hole of history.

Wouldn't that be ironic?

Lousy Morale Is Not A Deterrent To Belief In The Greater Good

It's always sad when an agency dedicated to the proposition that all banks are created equal...equally bad, that is...falls short of its lofty ideal of seeing evil where others do not and wielding upon it The Sword of a Thousand Truths. Yet, we find that what we previously thought was just a minor dyspeptic episode suffered by a government bureaucracy otherwise chock-full of pristine beauty, peace, and contentment is, in fact, a virus of employee morale malaise that makes Ebola look like a cold sore.

The Financial Protection Bureau, the U.S. government’s newest agency championed by Elizabeth Warren to regulate financial institutions, is suffering from sliding employee morale and distrust of the agency’s leadership, according to the latest internal survey of its workforce.

Among the red flags raised by the survey obtained by The Washington Times, was that CFPB workers registered the biggest decline in optimism when asked whether the “organization’s senior leaders maintain high standards of honesty and integrity.”

[...]

Conditions inside the CFPB have deteriorated so much that the agency was forced this fall to solicit outside help for equal employment opportunity issues such as counseling, mediation, investigation and case management services, signaling it may not be able to handle the volume of employee complaints with its in-house resources.

According to its annual employee survey — which hasn’t been released publicly but was distributed internally Oct. 30 — opinions have shifted significantly against the CFPB this year. In 41 out of the 75 questions asked, employees' favorable opinions decreased or unfavorable opinions increased compared with last year.

[...]

the bottom 10 most unfavorable survey results revolved around performance reviews, proper recognition from management, employee empowerment, the ability for an employee to climb the agency’s ladder into a better position, and satisfaction with senior leaders’ policies and practices.

As a silver lining under this dark cloud, in 9 areas, the Bureau's employees rated the Bureau higher than its "peers" across the federal regulatory landscape. Although the article doesn't list those 9 areas, we assume that one of them involves superiors spraying their footwear with Eau de View Strawberry to make boot licking a less disagreeable task.

Before the bureau's opponents take heart from the possibility that the proletariat might rise up, throw off its chains, and slaughter its overlords, the survey demonstrates that notwithstanding the fact that the CFPB is a lousy place to work, its oppressed minions remain true believers.

The greatest strength at the agency is its employees’ belief in the value of the work they do, according to the survey. More than 90 percent of employees at the CFPB feel the work they do is important. They also are satisfied with their physical work environment, such as the noise level, temperature, lighting and cleanliness. Physical conditions at the agency had the largest jump in employee approval year over year.

Unionization and newly renovated workplace palaces apparently offset, to a substantial degree, the fact that your bosses suck golf balls through hundred-foot garden hoses. Therefore, expect the disgruntled foot soldiers of the Adjustment Bureau to continue to show up in the back pockets, and look over the shoulders, of evildoers (i.e., financial institutions). Being discriminated against, bullied, and unfairly reviewed apparently not only does not deter an ideologue from his or her progressive march toward utopia here on Earth, it does not even slow his or her pace.

CFPB delenda est!

Rant Me A River

When credit union consultant Marvin Umholtz gets worked up, it makes my blogging life a breeze. All I have to do is cut and paste. While a number of bankers would rather drink Drano rather than follow a newsletter dedicated to credit unions, I assure all of you bankers who bleed red rather than blue that you will love Marvin, especially when he goes after one of this blog's bête noire, the Adjustment Bureau, as he did in his latest email newsletter:

This correspondent knew that the self-righteous and meddlesome Consumer Financial Protection Bureau’s (CFPB) www.consumerfinance.gov zealous crusaders had targeted overdraft protection programs for the agency’s peculiar brand of “reforms,” yet the arrival of that CFPB intervention still came in a surprising way. In an 870-page proposed rule http://files.consumerfinance.gov/f/201411_cfpb_regulations_prepaid-nprm.pdf ostensibly regulating prepaid products, the CFPB reclassified overdraft services as an extension of credit and overdraft fees as the cost of credit. The agency has set its precedent in this prepaid products rule for all future treatment of overdraft services. If the CFPB extends the credit definition to all overdraft services in every circumstance as it is expected to do based on this prepaid products proposal, then it will effectively ban overdraft services – period. As a result of the loss of overdraft services many credit unions’ fee income would drop precipitously. The only conclusion that a rational person could come to would be that the CFPB has become the biggest threat to safety and soundness that credit unions now face. And since this proposed prepaid products rule also covers mobile and other electronic prepaid accounts, PayPal, Google Wallet, and scores of other innovators should also watch their backs. The CFPB’s proposed prepaid accounts rule was loaded with intended and unintended consequences.  

The CFPB’s proposed rule amends Regulations Z and E to regulate prepaid cards, codes, or other devices capable of being loaded with funds and usable at unaffiliated merchants or for person-to-person transfers, and that are not gift cards, with overdraft services or credit features. The agency’s action effectively bans overdraft services use with prepaid cards since the CFPB proposal also requires the prepaid card provider determine the customer’s “ability to repay” prior to linking overdraft services to the product. With the added underwriting costs, the overdraft services would likely be uneconomical to the provider. The ramifications from the CFPB reclassifying overdraft services as credit would be widespread. For example, the Department of Defense’s proposed Military Lending Act rule that imposes a 36% federal usury limit on loans to military service members and their families for all consumer loans (other than those secured by real estate or a vehicle) is still pending. Should it be finalized as is expected, it would make the overdraft fee on all CFPB re-defined credit extensions via overdraft coverage have excessive and illegal annual percentage rates (APRs) due to the hefty fee charged for the overdraft. Operationally a credit union could not then allow any service member or member of their family to have overdraft services on their deposit accounts. Such a distorted approach to the marketplace would be problematic at best. It would certainly be inefficient; and it could generate ill will. It might also generate class action lawsuits. And that is just one illustration of the potential fallout from the CFPB’s reclassification of all overdraft services as credit extensions.

According to the CFPB, “Among other things, prepaid cards that access overdraft services or credit features for a fee would generally be credit cards subject to Regulation Z and its credit card rules. Moreover, the proposal would require that consumers consent to overdraft services or credit features and give them at least 21 days to repay the debt incurred in connection with using such services or features. Further, Regulation E would be amended to include disclosures about overdraft services or credit features that could be linked to prepaid accounts. The compulsory use provision under Regulation E would also be amended so that prepaid account issuers would be prohibited from requiring consumers to set up preauthorized electronic fund transfers to repay credit extended through an overdraft service or credit feature.” The CFPB’s lengthy rule included 89 pages of summary and background before it even began to discuss the proposal on a section-by-section basis. The legal language of the rule followed that analysis. Once the rule is published in the Federal Register, there would be a 90-day comment period.

The agency announced the proposed prepaid products rule in a November 13^th press release www.consumerfinance.gov/newsroom/cfpb-proposes-strong-federal-protections-for-prepaid-products and in conjunction held a prepaid accounts field hearing in Wilmington, Delaware. The field hearing included opening remarks by CFPB Director Richard Cordray www.consumerfinance.gov/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-the-prepaid-products-field-hearing and a panel presentation featuring prepaid products industry representatives and consumer activists. In his remarks Director Cordray once again made it abundantly clear that the CFPB’s intent was to socially re-engineer the financial services marketplace to meet a decidedly left-leaning partisan agenda. At the close of his speech he said, “Just because consumers may not be able to afford or qualify for a bank account, or just because they do not want to be part of the brick-and-mortar banking system, this does not mean they deserve to be treated as second-class citizens. Like anyone else, they deserve to have a safe place to store their money and a practical means of carrying out financial transactions. And though many prepaid companies already have opted to offer some of these basic, common-sense protections, it is important to ensure that they are not simply optional but instead are cemented as the standard for the industry and enshrined in law.” Apparently, the CFPB knows what is best for all. It seems like the agency routinely uses the “protecting the most vulnerable” as the excuse for big government intervention and the imposition of innovation-crushing regulations.

Every time the in loco parentis CFPB acts purportedly in this correspondent’s best interests it seems more like the agency is trampling on his individual liberties. As a colleague once speculated during a conversation with this correspondent, the next thing the CFPB is likely to do is a full takeover of checking accounts. It’s only a matter of time. The CFPB will tell financial services providers what services people can have, how much service they can have, what they will pay for the service, and when the financial service provider is permitted to stop providing the service. There was also some discussion about the timing of the controversial “overdraft as credit aspect” of this prepaid products rule coming after the midterms rather than before. Was it deliberate or just a coincidence? There certainly were a lot of Democratic members of the House and Senate running for re-election November 4^th who had sponsored legislation that restricted overdraft programs that were probably drafted by the consumer activists. These members of Congress, at least those who were re-elected, and the activists now have the CFPB to do their dirty work.

If you'd like to subscribe to the newsletter, email Marvin at [email protected]. Tell him the Texas curmudgeon referred you. I mean, you simply have to love a guy who uses "in loco parentis" when referring to the Death Star.

CFPB Delenda Est!

CFPB Shocked To Discover The Rules of Discovery

Thanks to Marvin Umholtz, I recently discovered the fact that the CFPB suffers from the same psychological ailment that struck the OCC a few years ago: "transparencyphobia."

A federal judge forced the Consumer Financial Protection Bureau to obey the same rules of discovery in civil litigation that apply to everybody else even if government officials are annoyed by them.

Judge John E. McDermott rejected a motion by CFPB. As a result, the bureau's officials were required to submit to depositions — cross-examinations of witnesses conducted under oath but outside the courtroom — in a case filed by the bureau.

The Adjustment Bureau had sued, in federal district court, a document storage firm that holds attorney-client privileged information for bankruptcy lawyers. The defendant wanted to conduct normal discovery procedures, including depositions of CFPB officials. The CFPB balked, as did the OCC in a case discussed on this blog several years ago (a discussion that brought this blogger anonymous threats of regulatory retaliation). In this case, the judge was no more sympathetic to the government's fear of the spotlight than was the judge who ruled against the OCC.

But CFPB balked, telling the court that the bureau has an inherent right to “nondisclosure” and that “even the disclosure of purely factual material may be protected by deliberative process privilege.”

The CFPB added that “requiring the bureau to designate any individual to appear at deposition would only serve to annoy, oppress, and cause undue burden on the bureau.”

[...]

McDermott's Sept. 15, 2014, order forced CFPB to provide a witness for an October deposition. Samuel Gilford, a CFPB spokesman, told the Washington Examiner that the Morgan Drexen case was the only time a bureau official has submitted to a deposition.

As the reporter notes, that's likely because the CFPB usually pursues defendants through administrative enforcement actions and extracts settlements from them prior to things getting nasty. In only a relatively few cases has the CFPB filed civil litigation. Apparently, the crack trial attorneys at the bureau weren't aware that the federal rules of discovery apply to the oppressor as well as the oppressed. A level playing field is apparently a novel concept to them.

This is somewhat surprising because it's not a novel concept.

“I do not think that there is legal support for the conclusion that there is a blanket prohibition on taking depositions of federal agency employees,” said Jonice Gray Tucker, a partner with BuckleySandler LLP, a Chicago-based law firm that provides legal counsel to financial service companies.

James Copland, director of the Center for Legal Policy at the Manhattan Institute in New York, said all plaintiffs, including federal agencies, should be treated identically. “I don’t think that civil enforcement action should be treated any differently due to a federal agency,” he said.

Moreover, it's not as if legal commentators hadn't been telling the CFPB that it had to comply with federal rules of discovery.

A March 14, 2013, securities enforcement and litigation update published by the WilmerHale law firm in Boston also said that once an agency goes into court, it must abide by federal discovery rules, including submitting to depositions.

The ability of both sides to depose each other, WilmerHale argued, levels the playing field. “Several recent court decisions strongly suggest that the playing field levels once the agency ends up in litigation,” the law firm wrote.

WilmerHale cited five cases since 2012 that affirmed federal agency officials aren't exempted from depositions.

Among the five was a 2012 case involving another federal agency, the U.S. Securities & Exchange Commission, titled SEC v. Merkin. Of that case, the WilmerHale update said “the court determined that 'like any party litigating in federal court, Merkin has the right to take a ... deposition from the SEC.'”

So, what gives? Why did the CFPB try to pull something that seems over-the-top, even for an agency that pushes the envelope of unaccountability? According to Ms. Tucker, it may be a case of "inexperience."

Tucker suggested that CFPB’s aggressiveness may be a result of having “more junior staff attorneys [who] may be less experienced. In addition, some staffers are relative newcomers to consumer financial services issues.”

In addition, she said, “this can present challenges because, in making day-to-day decisions, some of the enforcement staff may not yet fully understand the businesses they are regulating or how much effort goes into responding to their requests.”

That can “result in situations where the staff take positions that are not completely reasonable, or take actions that are perceived as more aggressive than they may have intended,” she said.

 Oh, I think the positions taken were just as aggressive as they were intended. When you truly believe that you're doing God's work, it's always a shock when the heathens don't see things your way. In addition, many of the regulators apparently believe that if the public understands that the way in which they "reason" their way to a decision to screw with a member of the regulated is just as dysfunctional as they sausage-making manner in which Congress makes legislation, they might decide to take up arms and burn the house down. Or worse, adversely affect their government pensions.

Then again, Ms. Tucker's speculation regarding inexperience is consistent with the fact that the Adjustment Bureau's lawyers have also found it very valuable to take basic bank regulatory courses in order to learn what experienced bank lawyers learned decades ago. Perhaps basic courses in civil procedure should be added to the curriculum, along with a few lectures on the principles of due process. It couldn't hurt.

What's Good For The Bank Is Good For The Bank Lawyer

Recent articles in the Wall Street Journal (paid subscription required) point out an inconvenient truth for many bank law firms: as third party service providers, they, too, must ensure that their information security systems are "up to snuff."

Big banks are demanding that their law firms do more to protect sensitive information to ensure that they don’t become back doors for hackers.

Once given special status as trusted third parties, lawyers, particularly those who get access to sensitive bank information, now are more likely to get full background checks. The number of compliance checklists for law-firm technology systems and security procedures has ballooned. And law firms big and small increasingly are getting on-site audits to check who has access to documents and office servers.

[...]

The demands come as financial regulators are paying more attention to third-party vendors. Benjamin Lawsky , the superintendent of New York state’s Department of Financial Services, last week sent a letter to dozens of banks requesting information on security risks relating to law firms, accounting firms and other third parties.

Law firms “can have access to a very large volume of sensitive data on a recurring basis and that makes them a point of vulnerability,” Mr. Lawsky said.

When "Gentle Ben" Lawsy speaks, lawyers better listen. Not because he possesses any special insight into the banks he regulates (his background in actual banking is non-existent), but because he's demonstrated that he intends to follow in the footsteps of his role model, Eliot "Mess" Spitzer, by pursuing publicity-laden enforcement actions against victims that the public loves to loathe. Banks and lawyers might as well have a bulls-eye painted on their foreheads.

Thus far, it appears that big banks and their big firm minions are first in line for proctoscopic examinations. However, how long will it be before the "trickle down" theory of bank regulation that we've seen prove itself again and again since the creation of Franken-Dodd and its dark spawn, the CFPB, will spread this "closer look" process to smaller banks and their law firms? Not long, I think, even if you measure the passage of time in dog years.

It's hard to argue that law firms for banks of any size should be cut any slack. The Interagency Guidelines Establishing Information Security, the relevant regulatory guidance on third party relationships (such as OCC Bulletin 2013-29), and basic ethical requirements to protect the confidentiality of client information, should have impelled lawyers for banks to take information security in an online world quite seriously long before this point. In many cases, engagement agreements between law firms and bank clients already specifically require that law firms take the kind of security precautions that big banks are requiring of their law firms. True, "one size does not fit all" may be as true of bank law firms as it is of the banks they represent, so, perhaps, not every law firm will need to have inn place all of the precautions described in the linked article.

Some firms instruct attorneys not to open documents sent via email unless they are in a secure environment—in the office, or using a firm laptop on an encrypted line. For particularly sensitive matters, firms might restrict work to stand-alone computers that don’t connect to the Internet, said Mary E. Galligan, a Federal Bureau of Investigation veteran who now is a director of cyberrisk services at consulting and accounting firm Deloitte & Touche LLP.

Mobile devices are a particular focus. Many firms can wipe data from smartphones and laptops that are lost or stolen, and most firms install some level of encryption.

Law firm Davis Polk & Wardwell LLP in recent weeks added a new precaution: Lawyers must have a special application installed on their smartphones to open attachments sent to their firm addresses.

On the other hand, those security measures make sense and many of them are not unreasonably expensive to implement. Those firms that don't want to encounter a nasty (and expensive) surprise would be wise to take this concern seriously, and prepare for such an examination, whether or not one is ever actually performed.

Disparate Impact's Bump In The Road

In today's American Banker (paid subsciption required), Rachel Witkowski riases some good points about the potential impact of the recent decision of federal district court judge Richard Leon's recent decision that HUD's use of disparate impact violates the Fair Housing Act. For one thing, it throws a monkey wrench in HUD's use of the questionable theory, even though other ideologically-driven regulators like the CFPB and the US Justice Department may not be deterred from continuing to use it as cudgel with which to beat lenders senseless.

It is unlikely to stop other regulators, including the Consumer Financial Protection Bureau, from their own use of the theory in other circumstances, but sources said it will slow down what HUD can do under disparate impact until the Supreme Court issues a ruling on a similar case before it.

As another observer notes, it also boosts the morale of lenders, trade groups, and others that have been fighting the theory over the past few years. While HUD will likely appeal the decision, the fact that the same issue is before the SCOTUS and that arguments on that case are likely to be heard early next year means that HUD's pursuit of the appeal, and use of the theory in other instances, may be deterred.

Judge Leon's opinion was, to say the least, unvarnished.

As is typical for Leon — who often issues strongly worded opinions — the judge blasted the use of disparate impact, saying the Fair Housing Act "only" prohibits disparate "treatment," or intentional discrimination. Responding to an argument by the government that his court was precluded from weighing in on the use of disparate impact, Leon replied, "Please!"

"The expansion of FHA to include disparate-impact liability would not only have wide-ranging disruptive effect on the pricing and provision of homeowner's insurance, but would also require insurers to collect and analyze certain types of race-based data on their clients and prospective clients," Leon said in the final opinion.

He added that the case was "another example of an administrative agency trying desperately to write into law that which Congress never intended to sanction."

That has been the story of the life of the banking industry since January 2009.

Witkowski also points out that Judge Leon's decision, and the case pending before the Supreme Court, involve the Fair Housing Act. The CFPB has been using disparate impact to push claims under the Equal Credit Opportunity Act. Therefore, a decision against disparate impact under the Fair Housing Act doesn't necessarily apply to actions by the CFPB under ECOA. However, what such a ruling would likely do is encourage victims of CFPB's overreach to fight back, with the legitimate hope that they will ultimately prevail. Personally, I would love to see the CFPB continue to paint a bulls-eye on the forehead given the change in contol of Congress effected yesterday. The more examples of stained theories used to push ideological social engineering goals, the more reason for concerted action by Congress to put actual oversight on The Adjustment Bureau, and the more likelihood that wing-clipping will occur, even if it has to wait for a change in the White House in January 2017.

Culture wars aren't won overnight. Banks are in it for the long haul.

CFPB Delenda Est!

CFPB Cracks Down On "Marketing Services Agreements"

One of the first posts I inflicted on an unspecting public, way back in 2004, when "W" was King and the bubble had not yet burst, was a rant about bogus referral arrangements that violated the anti-kickback provisions of Section 8 of RESPA. And although HUD itself once stubbed its toe over Section 8's threshold, both HUD and state regulators have been all over various schemes that attempt an end-run around RESPA's prohibition on referral fees.

With the late-night creation of Franken-Dodd, we now have the gentle ministrations of everyone's favorite benign Grandpa of a federal regulator, the CFPB, applied to Section 8, and as a recent MoFo alert advises, CFPB promises to be (in the lyrics of Jimmy Webb) a "harsh mistress."

 The CFPB entered into a Consent Order with a title company (Lighthouse) on the basis that "marketing service agreements" for "advertising" with real estate companies were, in reality, disguised referral fee arrangements. Lenders who attempt similar arrangements with real estate-related businesses, in which compensation can be related to the volume of loan business referred to the lender should take a lesson.

As evidence of the violations, the CFPB cited the following:

• Lighthouse failed to determine, or document a method for a determination of, the fair market value of the services it received under the MSAs.
• Lighthouse determined the fees it paid under the MSA, in part, based on the number and value of referrals received by the related counterparty.
• Lighthouse did not monitor whether it was receiving the services for which it contracted.
• The number of referrals provided to Lighthouse by counterparties was significantly greater if Lighthouse had entered into an MSA with the counterparty.

In sum, the CFPB asserted that Lighthouse was unable to provide a legitimate fair market basis for its pricing under the MSAs and believed that there was a strong correlation between the pricing for each counterparty and the number of referrals Lighthouse received per the subject MSA’s.

Lighthouse paid a $200,000 penalty and the CFPB imposed a $5.00 cap on the value of any consideration that the title company to "referral sources." A fiver isn't likely going to generate beaucoup business for Lighthouse, is my completely obvious conclusion.

MoFo's "takeaways" are insightful.

• As expected, the CFPB will look beyond the face of an MSA and consider the facts behind implementation, performance, and payments as between the settlement service provider and the referring party.
• The CFPB in the Consent Order created a broad definition of “marketing services agreement,” a term that is not defined in RESPA.
• The CFPB emphasized that an objective determination of “fair market value” of marketing services to be rendered must be performed with written documentation of the determination that is retained and available for review.
• In the fair market value analysis, the CFPB frowned on the settlement service provider’s consideration of what other title companies in the market were willing to pay to referral sources for marketing services.
• The necessity of monitoring MSA performance to ensure that services contracted for are actually delivered.
• MSAs that result in more business being referred to the settlement service provider than is referred by the same referral sources not pursuant to MSAs provides evidence of a violation of RESPA §8(a). How the CFPB determined these differences is not clear from the Consent Order.

Any real estate services businesses that are starting to realize that when the CFPB is on the case, there will likely be no way to ever run this dodge again get a gold star for "perception." The last takeaway asks how the CFPB could have determined how much business is referred by the same source with a "marketing services agreement" and without such an agreement. I assume the authors of the alert are displaying a dry sense of humor. As everyone knows, with the CFPB being such a self-professed "data-driven" regulator, they'll always be able to find pertinent data, even if the hiding place is an orifice on their own body.

I don't think this is the beginning of the end of these types of arrangements. I think this the end. Period.

The again, there are always those living in caves who always are the last to hear. Thus, there may be a few more Consent Orders before "marketing services agreement" as ingenuously disguised referral arrangements finally become extinct.

Credit Unions Also Weighed Down By Regulatory Burdens

Recently, a group of credit union executives in Cincinnati sat down with Staff Reporter Steve Watkins of the Cincinnati Business Courier and let him know that when bankers complain about the regulatory burden that is crushing them, credit union executives feel their pain (albeit, in a tax-free kind of way).

A group of Greater Cincinnati credit union executives met with me for lunch on Monday at Palomino to talk about the issues that are affecting them, and the regulatory burden was topic one.

They had just met Monday morning with U.S. Rep. Steve Chabot, a Cincinnati Republican, primarily about the possibility of easing the regulatory burden. Patrick Harris, director of legislative affairs for the Ohio Credit Union League, told me the banking sector has had 180 new rules and regulations foisted upon it by Congress since 2010, following the financial crisis.

This isn’t a banks versus credit unions thing. Most of the changes the credit unions want would also ease burdens on banks, Harris said. They’re things like reducing the need to send out disclosures about privacy policies, as well as the ability of some credit unions to tap the Federal Home Loan Bank for funds. How big of a factor is it? We know how regulatory costs have caused banks like the Bank of Kentucky to sell. And it has $1.9 billion in assets. What chance do credit unions with $20 million or $30 million in assets have to comply with those same rules?

“When the small credit unions merge, one of the main reasons is compliance costs,” Cinfed Credit Union CEO Jay Sigler said.

The first thing you'll notice is that they're all sitting down for lunch and a bitch-fest at Palomino. The visual of complaining about the cost of regulations while scarfing down Tuna Puttanesca or Asiago-Almond Crusted Scallops is somewhat incongruous. Maybe the newspaper picked up the tab.

The second thing you'll notice, however, is that the smaller the size of the institution, the more incentive there is to merge. Inasmuch as credit unions, especially smaller credit unions, are sometimes touted as a vehicle most able to offer services to the "underbanked" customers who often might "fall prey" to evildoers like payday lenders, the fact that regulatory burdens are leading many to merge should give banks cold comfort. While the number of competitors may decrease, those who are left standing when the shooting stops are going to be better armed at not only surviving, but competing with commercial banks.

The article also notes that all types of loan demand appears to be relatively flat. While one credit union official observes that business loans are a small part of its portfolio, I think that there will be no let-up in pressure by credit unions for more business loan authority. I also expect that there will be no let-up in counterattacks by commercial bankers, who will continue to demand that if a credit union wants to loan like a bank, it should pay taxes like a bank.

Still, the important point to me is that regulatory burden continues to be a driver of financial industry consolidation across the entire spectrum. In other words, unless there is some serious regulatory relief provided (likely via the US Congress), especially for smaller institutions, the incredibly shrinking financial services industry appears to be ia horror show will continue for some time.

More Adventures In Consumer "Protection"

The CFPB's gossip column (which we've previously blasted) got a recent fisking from George Mason University scholars Hester Peirce and Vera Soliman. They point out several inconvenient truths about The Adjustment Bureau's plan to expand the scope of a public rag sheet where anyone and his second cousin Luigi can anonymously lambaste, in narrative form, any financial business in the Milky Way with unverified snark of various flavors. You know, just like what we like to do here at Bank Lawyer's Blog.

Peirce and Soliman make the following criticisms:

• There is not a market failure that would justify the public database (it's a solution in search of a problem). "There may be a powerful consumer demand for sharing bad experiences, but a private complaint database provider can more effectively satisfy that demand."
• It's a costly enterprise whose purported value does not justify the added expense.
• "By publishing a database of unverified, redacted (to remove personally identifiable information) consumer complaints, the Bureau would entice consumers to rely on incomplete and potentially inaccurate information—exactly the type of practice the Bureau seeks to stop financial firms from engaging in."
• Financial institutions will suffer financial harm from unverified complaints that they cannot effectively rebut, given the ridiculously short response time (15 days) and inability to publicly identify the accuser.
• The Bureau lacks legal authority to establish the database.
• The Bureau's argument that other agencies publish similar databases lacks argumentative "heft." "[B]ad practices at one agency do not justify bad practices at another." Moreover, some of those databases provide protections regarding verifiability that the Bureau's will not.

Based upon the CFPB's initial responses to comments it's received about the proposal, don't expect the CFPB to back down from this bad idea. After all, the CFPB has been fairly clear in recent public pronouncements that while technically it's mandate may be to prevent and remediate "unfair, deceptive or abusive" practices, what really revs its engine is "improving customer service." It's not enough to prevent fraud. The Adjustment Bureau is all about improving the "quality" of customer service. It doesn't believe that the free market can adequately manage that aspect of an agenda that requires that life be hassle free, at least if you're not a financial institution. From that perspective, a government-sponsored consumer gossip column makes all the sense in the world.

HMDA Data Drill-Down

Attorney Warren Traiger thinks that the proposed CFPB changes to HMDA will be "a
fair lending game changer" (paid subscription required).

Information that is currently proprietary, like applicants' credit scores and debt-to-income ratios and loan fees and interest rates, will now be shared annually with the CFPB and other regulators. The proposal will also allow regulators and potentially the public to analyze mortgage lending practices by applicants' age as well as by race, ethnicity and sex.

[...]

Regulators will no longer need to wait until examination time to assess a lender's compliance with the anti-discrimination laws, since they will have annual access to a panoply of sensitive data from almost every mortgage lender. Agencies will be able to routinely crunch and compare data from across the industry and in any geographic area.

Moreover, it may be only a matter of time until the enhanced data becomes public. While the CFPB has delayed consideration of what data should be released, its proposal states that "public HMDA data [should] be modified only when the release of the unmodified data creates risks to applicant and borrower privacy interests that are not justified by the benefits of such release to the public." In other words, protecting the privacy of mortgage applicants will be the only limit on how the data is released.

Warren warns that what all this looks like is a replay of 1991, when the initial release of HMDA information ignited a firestorm of "fair lending mortgage litigation and regulatory enforcement actions that continue unabated to this day." In the past, at least lenders could argue that raw data of discrepancies in loan denials between ethnic, racial, gender or age groups could not alone prove discrimination because of a lack of "control variables." Warren contends that the additional data regarding the credit profile of applicants and details of the mortgaged property will make it harder to make the argument that there are a lack of "control variables." Obviously, that's the intent of the new requirements, which are mandated by Franken-Dodd.

Warren suggests that lenders use the expected interval until the effective date (expected to be January 1, 2017 to run the numbers using the new categories to see if they show disparity in approval rates, do some digging into the story behind the numbers with respect to any disparities shown, and change training, underwriting, or other practices to correct any potential problems before the regulators or a class action lawsuit beats you to the punch. He omits prayer as a potential course of action, which I assume is the result of secular humanist bent of the American Banker, the trade publication in which his opinion piece was published last week. He also omitted one of my favorite remedies for all things even tangentially related to the CFPB: get out of mortgage lending and consumer financial products and services altogether. Unless, of course, you like feeding the families of class action trial attorneys, regulatory enforcement lawyers, and those "saints-in-the-making" at the CFPB who might not be able to define "abusive" with any degree of precision, but, as with pornography, know it when they see it.