Bank Lawyer's Blog

What A Tangled Web We Weave

Steve Van Beek at the NAFCU Compliance Blog had a nice three-part series of posts on the CFPB's recent announcements and round table discussion about overdrafts. In the first post, Steve talked about the issue of linked accounts. The CFPB has suggested that an alternative to overdraft protection is to link checking and savings accounts, so that if the checking account is overdrawn, money could be pulled from the savings account to cover it, rather than having the customer be hit with an overdraft fee. Noting that this only works if the savings account has sufficient funds in it (and assuming that the type of folks who are allegedly most "victimized" overdraft fees--the working poor--would ordinarily have sufficient funds available to establish a savings account in the first place), Steve also observes that Regulation D is implicated, but is apparently not on the CFPB's radar screen.

Regulation D limits the number of withdrawals from a savings account to six per month.  This includes any withdrawals/transfers to cover overdrafts in a checking account.  And, this is a combined six per month.  So, if a member were to make two other "Reg D" withdrawals in a given month, the member would only have four left for transfers to the checking account to cover overdrafts.

A Question for the CFPB:  What happens when a member has linked accounts and overdraws 8 times in a month?

An additional wrinkle is that Regulation D remains with the Fed,and was not transferred to the CFPB. So Steve asks a couple of additional pertinent questions.

Here are a couple of questions that I have for the CFPB:

• Will you be talking to the Federal Reserve about the Regulation D transaction limitations?
• Assuming you are unsuccessful in your discussions with the Fed, will the CFPB work to inform consumers of the Regulation D limitation when it promotes overdraft coverage via "linked accounts"?

Steve expresses his exasperation about tunnel vision from which "some regulators" suffer when they only consider their own regulations when they decide to screw with financial institutions. Steve didn't say "screw with," but I'm sure he thought about it, so I'll say it for him because I lack both common sense and any conception of self-restraint.

Steve's other two posts on overdrafts are here and here. He raises good points and, while we embed Youtube videos of mock PSAs, we're glad someone is doing the heavy lifting.

Speaking of which--I missed one PSA last night that "spoke" to a nephew who's currently majoring in beer pong at a Southeastern Conference institution of "higher" learning. In his honor, I offer you one more warning that can save you not only a lot of money, but tons of grief.

$5 Debit Card Fee: Intended To Anger The Masses?

While I was busy hobnobbing with fellow sharks last week (most of us were Hammerheads, not Great Whites), our beloved leader (aka "The One") intimated that among the "Unfair, Deceptive, and Abusive Practices" he wants Rich Cordray and the CFPB to crack down on is the heinous practice of banks making "a certain amount of profit" by "mistreating" their customers. By "mistreating," he apparently means charging customers fees for things like using their debit cards instead of sticking to their knitting and making money "the old-fashioned way, by earning it -- by lending to small businesses, by lending to consumers." Although the president tried to back and fill later in the week, there was no mistaking his gambit to jump on the populist bandwagon and fire an RPG at the Hindenburg of low-flying, slow-moving TBTF blimps, Bank of America. Every body loves to poke a stick in BofA's eyeballs, even the author of this blog from time to time. It would take superhuman willpower not to, and there's no super human in this neck of the woods (unless you count the superhuman sheen of Rick Perry's well-coiffed "do").

While semi-serious drive-by analysts like "yours falsely" were belaboring the obvious, Aite's Ron Shevlin was looking at another angle of the debit card kerfluffle: "Maybe — just maybe — Bank of America has a well-thought-out plan behind its debit card fees: Maybe it actually WANTS customers to leave."

...[R]ather than flat-out telling unprofitable — or potentially unprofitable – customers to close out accounts, BofA figures, “Hey, we’ll slap a fee on them. If they don’t like it, they’ll leave; if they stay, they become more profitable.”

And, wouldn’t you know it, Durbin opens his mouth and HELPS BofA by telling customers to “vote with their feet.” Talk about effective word-of-mouth marketing!

Ron gives some examples of how the numbers might work to BofA's advantage. He also takes pot shots at credit unions, who, apparently, have been making noises about how they'd love to pick up some of those refugees fleeing America's biggest bank. Ron thinks they need to drill down a little bit deeper before they get what they wish for and find out that what they've wished for is as useless as a congressman's conscience.

I don't know whether BofA intends to drive off a cord of dead wood in some master stoke of reverse psychology or whether this is simply another instance where The Bank That Couldn't Shoot Straight puts another slug in its foot while trying to clear leather. Either way, it affords the opportunity to fling snark in all directions like a chimp in a cage throwing unsavory offal at tourists, and when you blog not for profit but for your own perverse amusement, BofA is a gift that just keeps on giving.

Conspiracy Theory

Last month, shortly before Sheila Bair exited the FDIC stage left, a well-respected journalist wrote an opinion piece which pooh-poohed all the knuckle-dragging, mouth-breathing, conspiracy theorists who claimed that the FDIC had slowed up FDIC receivership proceedings in the two months leading up to Sheila's July 8th departure for the sake of appearances. This journo assured readers that we should just believe him/her because he/she knew Sheila would never do such a thing and the FDIC staff would never allow the Care Bair get away with such a thing. Naturally, starting on July 8th and continuing through the end of July, the FDIC took down 13 banks, which tied July with April as the month in 2011 with the largest number of FDIC receiverships and the most in any month since July 2010.

Just sayin...

Speaking of conspiracies, NAFCU Compliance Blog's Steve Van Beek points out something that has increasingly irked many financial institutions: bypassing the formal rule-making process through the issuance of "guidance."

I’m of the opinion that any discussion of regulatory burden should address the increased use of guidance documents by regulators in lieu of proposing regulations through the notice-and-comment rulemaking process. 

Preach it, Brother Van Beek!

Although I've heard consultants bloviate that banks don't necessarily need to follow every portion of issued "guidance" because "guidance" doesn't have the force of law, I've previously offered the view that banks who heed the advice of such consultants need to start wearing asbestos underwear, because their nether regions will be flame roasted over the Bunsen burner of "safety and soundness." Steve's point about the backdoor circumvention of the rule making process by regulators is well-taken.

Obama Opts For "The Enforcer" Over "The Creator"

If the bitter comments made by correspondents in e-mails I received today about the White House kicking Richard Cordray upstairs to the top job at the CFPB is any indication of the sentiments of community bankers and credit union directors and senior management generally, the announcement went over like a lead balloon. I take that back. It went over with the sound of a watermelon hitting the sidewalk after being dropped from the roof of a high-rise.

Here's a sampling.

From the chairman of the board of a community bank:

Is it two years and then a run at the OH governorship or will the siren song of DC (and the prospect of an unlimited budget to persecute...er..prosecute all perceived enemies of the working class - not self employed plumbers who challenge presidential candidates but, you know, the real working class) be too strong?

Not that there is the possibility of a good choice. DC would only choose a well credentialed TBTF banker who would have no concept of either the value of smaller institutions or the harm caused to consumers (folks we call friends and neighbors) by the protection racket. TBTF bankers understand only too well the logical (and obviously therefore well deserved) competitive edge that regulation hands to the big and bureaucratic. And to be fair, most TBTF bankers haven't had to think about the consumer in years.

Community bankers who think the CFPB will be going after payday lenders and independent mortgage brokers are good examples of the triumph of hope (hype?) over experience. The CFPB and the trial lawyers who love it will go after institutions with yankable federal and state licenses, identifiable capital, reserves, D&O insurance, and wealthy board members who can pay civil penalties, not judgment proof strip mall financiers. Nobody ever expects the Spanish Inquisition.

No, nobody ever expects the Spanish Inquisition, but when it fortuitously appears, the Torquemedas among us take full advantage of the availability of racks, wheels, bamboo splinters, and feral weasels to make their victims lives a living hell. Community banks who think that the CFPB will forget about them while they focus on easier pickings might want to recall the words of Martin Neimoller:

First they came for the Jews and I did not speak out because I was not a Jew.

Then they came for the Communists and I did not speak out because I was not a Communist.

Then they came for the trade unionists and I did not speak out because I was not a trade unionist.

Then they came for me and there was no one left to speak out for me.

This from a caustic credit union commentator:

Check out www.whitehouse.gov/blog/2011/07/18/big-week-new-consumer-agnecy for Warren's parting shots. She apparently plans to be rabidly partisan until the bitter end.

I don't know how "rabid" Liz might be, but there's never been a doubt in my mind that she and her cohorts at the blog she used to write for (and may again, once Cordray tells her to keep her phone line open so he can call her whenever he needs her, then immediately forgets her number) have been a bit "fevered" in their bank-bashing. I suppose her comment in her "op-ed" piece regarding the opponents of the CFPB tests some folks' gag reflex.

I remain hopeful that those who want to cripple this consumer bureau will think again and remember that the financial crisis -- and the recession and job losses that it sparked -- began one lousy mortgage at a time.

I hate to break the news to Liz, but the CFPB isn't going to prevent "lousy mortgages" from being made in the future, other than by helping to make it more expensive to make mortgages, thereby limiting both the number of lenders willing to make them and (because of their increased cost) the number of borrowers who can qualify for them. The dream of transparent disclosure has been around, literally, since the 1960s, and notwithstanding layers of laws and regulations administered by even denser layers of bureaucrats, the dream remains simply that: a dream. Yet, this grand scheme will finally untie the Gordian knot and ensure a fair deal for the average Joe and Jane because we'll now have a federal bureaucracy with real teeth and a visionary fine-tuning its DNA. Not much accountability, not much effective oversight to restrain it if it abuses its power in ways entirely predictable to anyone who ever read Lord Acton. But to hell with all that, because this massive, powerful federal agency is finally going to achieve utopia here on earth where all previous efforts have failed. This time, by gum, the bureaucrats are going to get it "right."

Let's say the CFPB succeeds in its quest to make the terms of loans perfectly understandable to even the dimmest bulb in the evolutionary lamp store. No moral human being thinks it's just fine to "trick" or defraud people, so if the CFPB succeeds, then the days of "lousy loans" are done and gone, right? If the CFPB effectively requires every maker of a "lousy loan" to place in block letters at the top of the page "YOU ARE ABOUT TO EAT A CRAP SANDWICH," nobody who clearly understands the terms of a such a stinker is going to down it, correct? Where there's a need to borrow and a willingness to lend, many are they who shall be willing to serve their fellow man the sandwich and many are they who shall be willing to munch it while washing it down with a hearty glass of motor oil (10W40), both parties assuring one another that it tastes like chicken. It's basic human nature, a nature governments have never been able to effectively "reform," although they certainly have been able to twist it. As Wittgenstein observed, "Nothing is so difficult as not deceiving yourself."

I doubt that Liz is a fan of Wittgenstein, though. Hegel, maybe. Perhaps Marcuse, since she's a child of the '60s. Whatever her philosophical influences, it's obvious that she and her supporters are convinced that only through the application of massive centralized bureaucratic power at the federal level can human beings be made free from the injustice of a "lousy loan."

She ends her piece for the White House blog with a cry meant to rally her followers.

We got this agency by fighting, we stood it up by fighting, and, if takes more fighting to keep it strong and independent, then we can do it.

Keep fighting, Liz, because you haven't seen anything yet. 2012 is right around the corner.

The ancient Greeks had a word for this: hubris.

Clarity

I'm in the midst of a road trip this week in the service of the Dark Side of The Force, but before I "go dark" until next week, I'd like to give my "props" to the two NAFCU compliance officers who've taken over postings at the NAFCU Compliance Blog from Anthony Demangone (who was kicked upstairs to the COO's job). Last week, Sarah Loats Zimmerman had a useful clarification about the upcoming changes to the FCRA Adverse Action model forms. As Sarah points out, Dodd-Frank mandated a change to the FCRA form, not the Regulation B form, but since many lenders combine the notices where appropriate, the FRB issued a proposed combined model form. The effective date for the new form is July 21, 2011, so a final form should be issued shortly. If your bank has been confused about this issue, Sarah's post should help clear up that confusion.

On Friday, Steve Van Beek wrote his second post of the week (and revised an earlier post) regarding the second notice that must be given regarding noninterest-bearing transaction accounts. While Steve discusses some other notices that are required in regulations that apply to credit unions, the discussion should be useful to banks and other financial institutions, which have similar regulations. It's another fine instance of compliance officers clarifying less-than-clear regulations inflicted upon financioal institutions by lawyers. For that, you have to give both Steve and Sarah a hat tip.

Wanna' Bet On Who Wins?

I'm not certain how many bankers have been following the legal slug-fest between the National Credit Union Administration and Vensure Federal Credit Union, but it has all the earmarks of a heck of a story, when and if the final story is ever told. The latest recap of the battle is in this article by David Morrison in Credit Union Times, but stay tuned for more tidbits as the federal district court judge in the case, Rosemary Collyer, hears arguments, takes testimony, and makes rulings. The NCUA placed the credit union in a conservatorship on April 15, 2011, and like at least one federal thrift that was seized in March, the credit union decided to challenge the seizure in court.

  It appears that Vensure has had an unconventional history and that its business plan seems perfectly suited for a Martin Scorsese film starring Robert De Nero and Joe Pesci.

In its filings leading up to a May 11 deadline, the NCUA suggested that it had known something was up about the institution, which the NCUA characterized as being a "sleepy little credit union" as early as 2008 when an organization calling itself the National Investors Financial Education Association applied for CU services through the Grand Adirondack Federal Credit Union (Vensure's name at the time).

NCUA's filings said the agency had "concerns" about the request, but that after they were answered, it allowed members of the organization's Manhattan chapter, located in New York City, to join GAFCU.

Prior to this addition, the NCUA characterized the CU as "self-liquidating," with assets dropping from $73,529 in December 1999 to $30,966 in December 2007.

But after the addition of NIFEA in April 2008, a delayed examination of the CU's books in November of that year found that the CU's assets had grown by more than ten times, to more than $349,000.

It was soon after, in early 2009, that the NCUA said it was surprised by the credit union's "sudden" move from New York to Arizona.

"NCUA was completely unaware of any intended move by GAFCU and caught off guard by the news because not only did GAFCU fail to convey its intention before it moved, it also elected not to notify NCUA first after it moved," the agency said in its filing.

Then, according to the NCUA, an almost comic search ensued around the country for the true location of the CU that involved the NCUA staffers phoning or visiting locations in New York, Florida and Texas before they finally found GAFCU, now headquartered in the small Arizona town of Gilbert.

Only by this time, the CU's assets had increased to $2.1 million, its balance sheet swelled, according to someone whose name was redacted from the filing, by fee and "other operating income" from two CUSOs: Account Process Systems and Verartis Inc., which offered financial transaction and financial counseling services.

But by the time GAFCU applied for and received permission to change its name to Vensure FCU, the NCUA said it had learned that the income had not come from transaction processing or financial counseling but from the "legally suspect source" of Internet gambling transaction processing.

The agency was immediately concerned and said it began pressing Vensure to stop the processing and sever its relationship with Trinity Global Commerce Corp., the third-party transaction provider for two of the largest online poker sites, PokerStars and Full Tilt Poker.

If I'd known these folks were working with PokerStars, I'd have asked them to set me up for a private game of one-on-one "No-Limit Texas Hold 'Em" with Vanessa Rousso. I never realized the sleepy world of credit unions had within its ranks institutions run by people who understand that when you scream "All IN!" you're not urging everyone at the pool party to jump in the water.

As might be expected, Vensure has an entirely different spin on its activities. Illegal? Fuggedaboutit!

Vensure reiterated its previous contentions that it had complied with the NCUA's demands to cease processing for Trinity and that the agency had been satisfied with the CU not renewing the contract and only processing for Trinity in the interim. The NCUA had only conserved the CU, Vensure argued, because its leadership was concerned about being embarrassed by the U.S. Attorney's actions.

The "U.S. Attorney's actions" are explained in a previous article in the Credit Union Times.

...Vensure was the only credit union on a list of 16 domestic U.S. financial institutions to have an account or accounts seized by federal officials after the U.S District Court for the Southern District of New York unsealed indictments against the principal owners and officers behind some of the largest Internet poker websites. The dual indictments, one criminal and the other civil, charged the owners and officers of PokerStars, Full Tilt Poker and Absolute Poker/Ultimate Bet and the companies themselves of conspiring to defraud banks to get them to process credit, debit and prepaid card transactions from their gambling sites.

I'm outside the loop on this one, and can only guess at how it will eventually play out. On the other hand, I've had decades of experience in representing certain people who think that because they can argue with a straight face that what they are doing is not technically illegal, the financial institution regulators should just leave them alone so they can use insured deposits to fund all of that fun stuff. I'm a slow learner, but even I have learned this about that sort of business plan: you will cast your bread upon the water and it will return to you as burnt toast. If you're doing something "edgy," do it outside a highly regulated business like a bank or a credit union. Unless, of course, you like spending lots of money on lawyers, in which case, please come right on in and double down.

Durbin Amendment Small Bank Exemption An Illusion

In  a letter to the American Banker (paid subscription required), ICBA CEO Cam Fine tells readers why the Durbin Amendment's exemption for banks under $10 billion in assets simply won't work.

The exemption will not protect community banks or their customers because the Dodd-Frank Act shifts control over routing debit card transactions from issuers to merchants, allowing them to bypass small financial institutions and negating any benefit for exempt community banks and credit unions. Further, large retailers will be able to steer customers to use the rate-controlled cards issued by the largest financial institutions. Ultimately, the market will, over time, drive pricing for community banks in line with rates required at larger institutions.

Banks will raise fees and/or limit services to make up for the lost revenue from debit card interchange fees. It's as simple as that. It's also something that anyone could have seen coming.

The winners, according to Fine? "...big-box retailers. Large merchants will use the new government pricing restrictions to minimize their costs and shift transaction costs to consumers."

Dodd-Frank was supposed to address the causes of the financial collapse and ensure that "it never happens again." As hubristic as that goal might be, it's hard to conflate financial reform with Durbin's special interest excursions into fine tuning private market pricing of services in favor of big-box retailers who line his PAC's pockets with campaign contributions. I guess the commercial banking PACs just didn't cough up enough cash to engage Durbin's "principles" on this one.

The bankers will simply have to look elsewhere to buy the support necessary to remove this provision from the law. Fortunately for them, they're getting backup from most of the federal bank regulators. Moreover, this is one issue where credit unions and banks are speaking with one loud voice.

A word of caution to anti-Durbin forces, however: the man is not made of granite. We all remember his crying jag on the Senate floor when certain folks jumped him for comparing American interrogators at Gitmo to Pol Pot, Nazis, and other odious historical pariahs. So, if you're going to beat him up verbally, make sure you're using kid gloves. I mean, not everyone can control their emotions as well as...say...John Boehner.

Common Causes

A couple of recent posts by Anthony Demongone at NAFCU Compliance Blog are worth a read, regardless of your charter type. The first concerns (in part) the Office of Servicemember Affairs within the Consumer Financial Protection Bureau. The head of that office is Holly Patreus, wife of General David Patreus, currently head of US and NATO forces in Afghanistan, and someone who has "clout." Ms. Patreus served fair warning in recent testimony before Congress and in other public pronouncements that when it comes to consumer lenders trying to mess with members of the US military, she intends to man the barricades. Anthony points out some implications.

Her testimony is a good reminder for me to repeat something I mentioned before.  The existence of her office within the CFPB will shine a light on the intersection of servicemembers and financial services.  The SCRA will receive more attention. The DoD "MAPR" regulations will receive more attention.  Servicemembers now have a visible champion on the Hill, and those who feel aggrieved have a place to voice their complaint.

Anthony then links to some materials that supply guidance on the DoD regulations, the SCRA, and other pertinent matters. While some of the materials are addressed to credit unions, they should be useful to consumer lenders of all types.

Regardless of what bankers may think of the CFPB, it's a losing proposition to disregard the legitimate concerns of service members. All financial institutions would be well advised to pay attention to Ms. Patreus.

Today, Anthony discussed this week's congressional hearings on the impact of the Durbin amendment (regarding debit card interchange fees). He linked to a video by the NAFCU that runs tomorrow in select locations, and that is posted on Youtube. Even bankers, who spend a lot of time complaining about credit unions, ought to agree that its well done.

Remember the old proverb: "The enemy of my enemy is my friend." Occasionally, it's true.

You Are The Downdraft Above My Wings

I may represent banks, but I learn from whatever source I can, even [shudder] from those dreaded nemeses of community banks known as "credit unions." Rob Rutkowski's That Credit Union Blog is a case in point. Without Rob (and a h/t to NAFCU Compliance Blog), I never would have learned of the most pleasing strategy employed by one financial institution for thwarting a common enemy of all right-minded financial institutions, regardless of charter: class action attorneys.

The instance discussed by Rob involves a lawsuit filed against a credit union for a violation of the Electronic Funds Transfer Act because the ATM sign was missing. Rob cites a line I've heard before about how it's natural to suspect that class action lawyers are running around at night prying the signs off of ATMs, then finding a lead plaintiff (which is not hard to do) to use as the propr to file a class action complaint against the financial institution. Now, I'm sure that now upstanding member of the bar would countenance the stealing of a sign merely to provide the pretext for filing the type of case where the lead plaintiff gets some cash, the class action plaintiffs' lawyers get a huge wad of cash, and the rest of the class gets a pack of Juicy-fruit and the promise of a new tomorrow.

Here, in Rob's words, is the method used by the unnamed financial institution to derail the class action freight train:

In essence, a defendant can take the wind out of the sails of a putative class action plaintiff by making an Offer of Judgment 10 days prior to the plaintiff’s Motion for Class Certification.  Clear as mud?  Let’s take a hypothetical.

Anthrax Research Federal Credit Union owns an ATM attached to one of its branches.  One night, the EFTA notice concerning ARFCU’s $1.00 for non-member withdrawals mysteriously vanishes.  Felix Filcher then makes a withdrawal the next day and a week later, Attorney Benny Bumbles sues the credit union for the EFTA violation for not having a sign on the ATM.  The credit union makes an Offer of Judgment for $1000.00 for the statutory violation.  Attorney Bumbles has 10 days to move for class action status and if he fails to do that, it’s game over for Filcher.  Take a look at Stilz v. Global Cash Network, Inc., No. 10 CV 1998 (N.D.Ill., Oct. 7, 2010) (2010 WL 3975588) if you want to see this concept in action.

Chalk one up for the forces of righteousness. If this keeps up, class action attorneys who specialize in suing banks might be reduced to sending their kids to public school and buying their spouses Yugos.

Man, She Hates Credit Cards

When I read this interview with Elizabeth Warren last week, I saved it for a later "fisking," but before I even got started, Anthony Demangone at NAFCU Compliance Blog beat me to it with a "Whoah, Nelly" summation that cut to the heart of what Ms. Warren's all about: "credit cards are bad."

Anthony also analyzes some comments of Ms. Warren that were put out by the US Treasury Department in the form of a question and answer session. Again, Ms. Warren's observations offer insight into her agenda and what banks and other financial institutions can expect from the CFPB as long as she's in charge of it whether de facto or de jure). In addition, Anthony's self-confessed "snark" happens to resonate with this purveyor of the same. Among my favorites:

Man, she hates credit cards. Forget payday lenders, fly-by-night "credit repair companies, and auto-title loan companies.  Credit cards are front and center on her agenda.

In the words of my man Snoop Dog: "Fo shizzle."

One more point made by Anthony that touches on a tune I've long been singing: We agree with Ms. Warren's desire to have "clear" disclosures so that consumers (which even we minions of the Dark Side of The Force happen to be) can make "apples-to-apples" comparisons of consumer loan products. People like the OCC's Julie Williams and this pathetic blogger have been yakking about that need for years. As Anthony also notes, however, this is a task that's easier said than done.

Keep in mind that many regulators have gone before you with this same task in hand. The Federal Reserve has spent a good deal of time on consumer issues and consumer testing of financial disclosures. No matter how much work you throw into this, keep in mind that you'll run into one basic problem: many consumers simply do not attempt to read disclosures. I agree that some credit card agreements are complex, but the Schumer Box gives consumer more than enough information to compare credit card products. And to say that the mortgage problems we face today are due to poor disclosures while not talking about broker misrepresentations, predatory lenders, and consumer responsibility is simply not telling the whole story. 

There aren't many people in D.C. of any political persuasion who are interested in "telling the whole story." You'd have a better chance of finding a Marxist on Fox News or a disciple of Russell Kirk on MSNBC. Ms. Warren has an agenda and her narrative serves the agenda. Spreading the responsibility for the consumer credit mess we're equally among the participants does not serve the agenda of building another large federal bureaucracy to protect us from ourselves. "The whole story" will have to be pieced together from other sources.