Bank Lawyer's Blog

Fifty Shades of Grey

Dick Durbin, not content to shiv banks and credit unions in the back on debit card interchange fees (an act that prompted former FDIC Chairman Bill Isaac to label the Durbin amendment to the Dodd-Frank Act as ""pure and simple, special-interest politics" and "a terrible precedent") in order to serve his corporate masters, big box retailers like Wal-Mart and Target, now has his sights set on credit card companies. As reported at Forbes today by Halah Touryalai, Durbin is in full press conference mode and publicly blasting the $7.25 billion anti-trust settlement that Visa and MasterCard recently worked out.

“I believe this proposed settlement represents a capitulation to the Wall Street banks and credit card giants. It is a sweetheart deal for them and a bad deal for merchants and for consumers. The settlement was negotiated in secret between Visa, MasterCard, the big banks, and the attorneys representing a small number of merchants,” he said.

"Negotiated in secret." Like most of Dodd-Frank and nearly all of Obamacare.

Senator D-Bag Durbin would prefer that if there's going to be any capitulation by anybody, it needs to favor those who line his campaign coffers with lucre. Any other result is "unjust."

Halah points out an inconvenient truth: while Dick postures as the consumer's friend, Durbin is selling consumers down the river.

As I’ve said before, neither side is looking out for consumers in the battle over swipe-fees.

Just like with the Durbin Amendment where retailers argued the same points saying the fees banks charge them are so great that they’re forced to increase the price of goods they sell to consumers. Banks argued the fees are important and are used to protect customers from fraud.

Both sides used consumers in their argument but in the end consumers lost when retailers got their way and a cap was placed on the swipe fees. Banks starting looking for new ways to make up fort he lost fees by shifting their focus from retailers to the consumer.

Durbin says he’s making “sure that merchants and consumers do not get nickled and dimed to death with hidden and unreasonable fees” but it seems the only ones ever getting hurt here are indeed the consumers.

Halah might have added that the windfall received by retailers from an over 100% reduction in interchange fees on debit cards has yet to manifest itself in lower prices to consumers.

In the U.S. Senate, there are no "white knights," merely fifty shades of grey. Dirty grey.

No Notice? No Worries (Maybe)!

While the blogsphere is today ablaze with equal parts rage and glee over the decision of the SCOTUS to uphold (most of) Obamacare, some of us took note of the fact that a bill moved out of a House committee that could help squelch a rash of lawsuits, some legitimate and some questionable, arising out missing physical fee notices on ATMs. The ever-vigilant folks at the NAFCU are keeping their eyes peeled for progress on this score, since credit unions, as well as banks, are being targeted by attorneys who specialize in discovering missing notices on ATMs in all regions of the country.

The House Financial Services Committee voted [yesterday] morning to report out H.R. 4367, a bill sought by NAFCU to repeal the ATM placard requirement on fee disclosures under the Electronic Funds Transfer Act. The bill awaits House action.

[...]

As of Tuesday, H.R. 4367 has 130 cosponsors. A similar measure, S. 3204, has 18.

H.R. 4367, introduced by Reps. Blaine Luetkemeyer, R-Mo., and David Scott, D-Ga., had 130 cosponsors as of Tuesday. A similar Senate measure, S. 3204, has 18 cosponsors.

In a highly partisan year, it's nice to see that at least some legislation that could do banks some good isn't completely dead in the water. We'll see how this fares during the rest of this long, hot summer.

This is going to take a Congressional fix because it doesn't appear to be anywhere on the CFPB's agenda for a regulatory solution, notwithstanding some previous tongue-in-cheek "wishing" to the contrary.

ADA: Another Goldmine For Professional Plaintiffs

In an article in the American Banker last week (paid subscription required), reporter Jeremy Quittner revealed that notwithstanding the fact that banks were given two years to comply with regulatory requirements to make ATMs accessible to the visually impaired by March 15, 2012, a number of banks have failed to make the grade. As a result, class action plaintiffs' attorneys, likely eyeing the March 15th deadline like a bobcat eyes an unaware rabbit that's blissfully munching on your rosebushes, have been suing the bejeebers out of non-compliant banks in some parts of the country. One defendant had a 118 ATMs in compliance, but the two remaining non-compliant machines caused the bank a settlement (amount undisclosed) and, what's just as painful, ongoing monitoring of its progress to come into compliance. Much of that monitoring will be conducted by the plaintiffs' law firm. We expect that their approach will be as impartial as ours would be if we were monitoring a class action plaintiffs' firm for compliance with a consent order and the penalty for noncompliance was having a hungry ferret in a burlap sack tied to your right thigh.

While I'm usually reflexively sympathetic to banks and antithetic to trial lawyers, in this case I have to agree with the sentiments of many bankers who were interviewed by Quittner.

Some bankers agree that they had plenty of time to get into compliance.

"While the rules were just finalized recently, they've been the subject of debate for over 10 years," Jonathan Velline, executive vice president of ATM banking and store strategy for Wells Fargo (WFC), wrote in an email.

As Quitnner points out, it's easier for a Leviathan like Wells Fargo to throw a lot of money and talent at compliance, while smaller banks can often be stretched by the burden. In addition, the cost of upgrading, or even replacing, the machines, can be expensive. Nevertheless, these are the rules of the game, and if you want to play, you have to play by the rules.

In some respects, this reminds me of the failure of some banks to comply with the multifactor authentication in online banking guidance when it was first issued. Some of the smaller banks adopted a "What, Me Worry?" attitude and after the deadline passed, were caught in flagrente delicto, or, in more colloquial terms, with their compliance pants down around their ankles. While I have no love for the vultures members of the bar who specialize in suing banks, with respect to this issue, banks who are still non-compliant just need to buckle down and "get 'er done," and hope that, in the interim, they somehow escape the gaze of the wolves at their doorsteps.

Loaning To The Little Guys: A Dastardly Turn Of Events

Five years ago, when The Care Bair womanned the helm at the FDIC and was prodding banks to make payday-like loans to poor consumers, but to cap those loans at a 36 percent APR, most banks who experimented with the products were scratching their heads, trying to figure out how to make money on small loans made at those rates when the borrowers posed such a high default risk. These days, when banks of all sizes are strapped for income-yielding products and are dipping appendages bigger than than their pinky fingers into the icy waters of small loans, left-leaning propaganda rags main stream newspapers like The New York Times are aghast at how "big banks" are "preying" on "the little people."

An increasing number of the nation’s large banks — U.S. Bank, Regions Financial and Wells Fargo among them — are aggressively courting low-income customers like Mr. Wegner with alternative products that can carry high fees. They are rapidly expanding these offerings partly because the products were largely untouched by recent financial regulations, and also to recoup the billions in lost income from recent limits on debit and credit card fees.

Predictably, consumer advocates, including the chart-topping consumer band "Recess Richie and The Jackboots," are threatening to inspect these products with a bias-detecting electron microscope of political correctness to ensure that banks don't actually provide a needed service to lower-income consumers at a price that permits the bank to make a profit.

The Consumer Financial Protection Bureau, a new federal agency, said it was examining whether banks ran afoul of consumer protection laws in the marketing of these products.

[...]

“We look at alternative financial products offered by both banks and nonbanks through the same lens — what is the risk posed to consumers?” said Richard Cordray, director of the bureau. “Practices that make it hard for consumers to anticipate and avoid costly fees would be cause for concern.”

Buried in the middle of the piece is this disconcerting news for Cordray and his fellow-travelers.

Still, in an April survey of prepaid cards, Consumers Union found that some banks’ prepaid cards come with lower fees than nonbank competitors.

Wait a minute! If banks are jumping into these products and offering them at rates that are lower than those offered by non-bank predatory payday lenders, wouldn't it be logical to expect that this might eventually force the non-bank small-loan lenders to lower their prices in order to compete? Given most banks' funding advantage over most of their non-bank competitors, isn't it likely that if the banks are able to find a pricing model that allows them to expand this business while lowering existing rates and fees, this would ultimately benefit low-income consumers? Therefore, shouldn't consumer advocates, including the "We're Just Here To Help You" crowd from the KGB CFPB, think that banks entering this business is a potentially good thing for consumers? Shouldn't they encourage, rather than discourage, this trend?

Personally, I think bankers are thinking about getting into this line of business need to have thick hides, because it's a business in which the more successful you are in offering the right type of products and services to your targeted customer base, the greater your chance of being determined to be a discriminatory thug, fit only for being stretched on the rack, then drawn anhd quartered.

Mr. Wegner, the U.S. Bank customer, said that once he mentioned that he needed a bank account, an employee started selling him prepaid cards, check cashing and short-term loan options. Mr. Wegner, who makes about $1,200 a month, said that he felt like a second-tier customer.

“It was clear that I was not getting the same pitches that wealthy clients would,” he said. Since that initial visit, Mr. Wegner said he avoided the branch so he was not approached with offers. “I go through the drive-through now,” he said.

Next year, Mr. Wegner will be complaining that the bank never offers him any credit options at any price. He'll moan about having become invisible.

Mr. Wegner, wealthy clients have high incomes and substantial assets to pledge as collateral and, therefore, pose much less repayment risk to the bank. Of course they're not going to be offered products and services they won't purchase, just as you won't be offered products and services for which you do not qualify under prudent underwriting standards, the kind mandated by safety and soundness standards that are imposed upon banks by law. This is called "living in the real world."

It's obvious that there's an element of the chattering classes that desires that banks be run as public utilities that parcel out credit as mandated by politicians and bureaucrats at rates and fees deemed "fair" by government committee. Until that system's in place, banks will be damned if they do and damned if they don't.

Ripping Down The Signs

Yesterday, a Republican from Missouri and a Democrat from Georgia reached across the aisle and instead of stabbing each other in the face, jointly introduced a bill in the US House of Representatives that would eliminate the requirement that banks post a notice of ATM fees on the outside of the ATM (instead, the electronic notice on the pop-up screen would be sufficient). There's been talk for some time that class action lawyers have been traveling the country ripping off the signs and then suing the banks because they're absent. If enacted, this law would shut down that robo-rip-off scheme.

The NAFCU's Steve Van Beek thinks the bill's a good thing, but only "a first step."

While the bill being introduced is a good first step, the unnecessarily confusing regulatory requirements remain in place.  In other words, the legal and compliance risks for credit unions do not change until this bill is passed (if it is passed). 

[...]

Think about the unnecessary burden this way:  The current legal and regulatory environment has financial institutions and ATM operators taking time away from serving their customers/members to go out and photograph their ATMs in order to provide defenses against class action lawsuits. 

Steve thinks the CFPB, if it's really interested in removing unnecessary regulatory burdens, ought to not only jawbone Congress in support of this bill, but "should take a good, hard look at their regulatory authority under the Electronic Funds Transfer Act and determine if they can remove this ridiculous requirement and get institutions back to providing services to their members rather than taking photos of their ATMs."

Dude, if that happens, I'll buy you a Hot Toddy to ward of the chill as we both do figure eights over an ice-covered Hell.

Ultimately, the overriding problem is that playing Whack-a-Mole with class action attorneys can wear you out. As soon as you put a bullet in the brain of one racket, they concoct another "claim" in order to feed their gaping maws. It's the American overlawyered way.

Cybercrooks Are Like Sharks: They Never Stop Feeding (Or Phishing)

Brian Krebs' latest horror story blog post about a new kind of corporate account takeover by cybercrooks contains many lessons for commercial bank customers. It also shows how the tactics of thieves are constantly evolving to take advantage of weaknesses of their victims and to close holes in their criminal schemes. While the initial "hook" of the story is the shift of criminals away from the use of "money mules" to the use of prepaid cards to funnel pilfered funds into their pockets, the details of the crime demonstrate a dishearteningly high level of technological sophistication, resourcefulness, intelligence, and effort by the thieves. These folks are, obviously, not Larry, Moe, and Curly.

Prepaid cards are more attractive to thieves than "money mules" because, as Krebs notes, many of these "mules" are so inept that they screw up the illegal transfers. Some even beat the thieves at their own game and keep the money for themselves. As Krebs wryly observes, "there are probably good reasons that a lot of these folks are unemployed."

Prepaid cards are a convenient alternative to mules because the crooks "have access to massive amounts of stolen data that can be used to fraudulently open up prepaid cards in the names of people whose identities and computers have already been hijacked. Once those cards are approved, the crooks can simply transfer funds to them from cyberheist victims, and extract the cash at ATMs. Alternatively, wire transfer locations like Western Union even allow senders to use their debit cards to execute a “debit spend,” thereby sending money overseas directly from the card." That's what happened in the case Krebs discusses.

That case involved a wholesale gasoline dealer, Alta East. "According to the firm’s comptroller Debbie Weeden, the thieves initiated 30 separate fraudulent transfers totaling more than $121,000. Half of those transfers went to prepaid cards issued by Metabank, a large prepaid card provider."

To make a long story somewhat shorter, here's the scheme:

• Crooks compromised the email account of an Alta East customer.
• They sent an email to a number of Alta East employees that asked about an Alta East invoice and attached a pdf file that was infected with a ZeusS Trojan-related Javascript element.
• Four Alta East employees clicked on the infected file, which downloaded the element, which in turn was used to gain access to information used to access Alta East's corporate bank accounts with Provident Bank. The element was so stealthy that it was not discovered by six different anti-virus products, but only by an outside consultant who eventually found it through an analysis of a hard drive conducted in an external environment.
• The thieves disguised their communications with the bank by using a proxy network of a nearby nonprofit business, whose system they'd also compromised, rather than Alta East's system.
• The thieves instructed the bank to transfer part of the funds to 15 prepaid cards and the rest to money mules scattered throughout the country.
• In accordance with its agreements with its customer, the bank notified Alta East by email the same day the transfers were ordered, but Alta East employees neglected to review the message until the next morning, by which time the transfers had been made.
• Alta East may recover $41,000 from the mules, but it stands to lose $80,000 and, apparently, has no way of recovering anything from the prepaid cards.

Krebs offers some valuable lessons, and I'd encourage banks and their customers to read them. One that I tell commercial bank customers constantly is the following: "Unlike consumers, businesses have basically no legal protection from their bank due to losses from cyber fraud. Yes, organizations should push their banks to do more on security. But for better or worse, small to mid-sized businesses who are counting on their banks to prevent this type of fraud are setting themselves up for disappointment and major financial losses."

Before banks take comfort from this advice, they should recall that one of the requirements of the new FFIEC Guidelines is to educate their customers about online banking security. Education programs were supposed to be in effect by the end of 2011. Krebs lessons for customers ought to be read by banks and incorporated into their educational materials or programs. After all, it's only a question of time before some enterprising plaintiff's attorney makes the failure to educate effectively the cause for a lawsuit against a bank the next time a customer suffers a loss in a scheme like this one.

Overdraft Fees "Disproportionate Impact"

Last Wednesday's post on the CFPB's opening salvo against overdraft programs generated some interesting correspondence. One banking lawyer, who requested anonymity (apparently on the theory that if the CFPB doesn't know your name, they can't kidnap your kids and hold them hostage until you shut up), shared the following observations about what he thinks the CFPB is up to:

Looks to us like the angle the CFPB will take on overdrafts is disparate impact under "Fair Lending".

"The CFPB inquiry is focused on transaction re-ordering to increase consumer costs, missing or confusing information, misleading marketing materials, and the disproportionate impact of overdraft fees on low-income and young consumers."(emphasis added)

This fits in conveniently with the dismissal of the City of St. Paul’s appeal of its SCOTUS case, originally due to be argued this week (well done article attached), which focused on whether there really is “disparate impact” grounds for a claim under “Fair Lending”. The press release by the City specifically notes that the City withdrew its appeal because "a victory could substantially undermine important civil rights enforcement throughout the nation."

"But it was clear that the scope of the decision at the Supreme Court could potentially impede our other efforts to protect people from predatory, discriminatory practices," [Mayor] Coleman said. Matthew Engel, an attorney representing some of the landlords involved in the lawsuit, said he understands the city's reasoning. "They basically could have overturned 40 years of civil rights case law," Engel said. The landlord respondents in the case did not oppose the city withdrawing its petition to the U.S. Supreme Court, since it leaves them with a win at the 8th U.S. Circuit Court.”

http://www.twincities.com/localnews/ci_19938569

It would seem likely to me that DoJ, HUD and the FDIC (which is at the forefront of disparate impact allegations) placed a good bit of pressure, and maybe some incentives, on the City to withdraw its appeal. Perhaps even the CFPB needed this result in order to launch the crusade de jour on overdraft fees. Seems that statistics may play an important role in future financial regulation. Appropriate (sarc1) since they were so helpful with CDO’s, credit ratings, FICO scores, etc. But they are more flexible than lies and damn lies. (sarc2)

I don't necessarily subscribe to the conspiracy theory, but nothing would surprise me any longer when it comes to the nanny state gravy train that's been rolling down the tracks the last several years. Moreover, as Hunter S. Thompson intoned, "Just because you're paranoid doesn't mean they're not out to get you."

As to "disparate impact," I think my correspondent has hit the nail squarely on the head. By the way, that was a nail I missed while focusing on all the screwing of banks the CFPB seems hell-bent on pursuing.

Other correspondents pointed out Richard Cordray's public utterances that impact "unfairness" or "abuse," which are expected to be potent weapons in the CFPB's arsenal as it launches preemptive strikes on those who would "trick" consumers into thinking that they understood overdrafts when, as we all understand by now, only Washington , D.C.-based bureaucrats really understand what's "fair" and what's not.

The bureau will request data from banks, and input from the public on how the ordering of transactions affects how much consumers pay, the agency said in the statement. Banks have sometimes debited customers’ accounts not in the order of the transactions, but with the highest amount first, so as to overdraw the account as quickly as possible and incur fees and interest.

The agency will also examine the quality of information consumers receive on overdraft programs, [and] bank marketing campaigns on overdrafts..., the bureau said.

Finally, the bureau is seeking feedback on a sample “penalty fee box” that could appear on checking account statements and state what fees consumers pay.

Overdraft programs: is it too early to add them to the endangered species list?

Tweet Me A Tale Of Overdrafts

The CFPB today launched the start of what could end up being a campaign to do away with overdraft protection programs. First, the CFPB sent out an e-mail to various "consumers" (some of whom are compliance officers with banks, it turns out), that asks consumers "to share" with the CFPB their thoughts on overdraft programs. Here's an excerpt:

Today, we're beginning an inquiry into checking account overdraft practices. As we do, we want to know more about how well consumers like you understand these practices.
 
Technology gives consumers more ways than ever to access their checking accounts. But that also means more - and easier - ways to overdraw those accounts. Banks often allow these overdraft purchases, but they assess a fee for each one. Because it's so easy to do, some people don't realize they're overdrawing. In addition, many people may not even realize they've opted into these fees on debit card purchases and ATM withdrawals.

[...]

We're hoping you'll share your answer on Twitter or Facebook so people can see that other people have similar experiences.
 
Sometimes, overdraft coverage and fees are automatic, like when you pay for something with a check or make an online bill payment. But your bank or credit union can't charge you for overdrafts on ATM or point-of-sale debit card transactions unless you have opted in. Knowing your status -- whether you have debit overdraft protection -- allows you to decide what is best for you.
 
We want to hear what you have to say about overdraft fees. We hope you'll share your status on Twitter or on Facebook. Your input will help us as we examine whether debit overdraft practices work for consumers. 

[...]

Regardless of how you tell us, it takes just a few seconds, and it will help us as we begin our examine overdraft products.

Oh Yeah, Baby! 140-character "Tweets" and Facebook status updates! When I seek scientific polling, I don't bother with also-rans like Gallup. I take whatever random sampling of snark folks with too much time on their hands and access to "The Internets" have to offer up. Especially when it "helps us as we begin our examine overdraft products." I guess it might have been better if the e-mail hadn't been drafted by Sofia Vergara.

As one community banking wag observed, "As if overdrafts hadn't already been beaten to a pulp by class action attorneys and the federal banking regulators." Hey, you can never get too much of a good thing, right? And when it comes to taking good care of consumers while simultaneously administering wedgies to bankers, nothing says "lovin'" like something from Liz Warren's oven.

Also today, the CFPB posted a "consumer advisory" on its web site on bank overdrafts. It covers some of the basics, including the astounding revelation that a consumer "can choose not to have debit overdraft." The consumers who rely on overdrafts to fund their between-paychecks needs might find that tidbit critically unhelpful.

However, the CFPB also warns consumers of the hidden danger of overdrafts: the fact that overdraft programs are designed to suck consumers into a black hole of insolvency and despair from which none will emerge.

For most banks, the overdraft fee is a fixed amount regardless of the amount of the transaction. You can incur several overdraft fees in a single day. This means that your $4 cup of coffee can end up costing you $35 and a small pack of gum can cost you another $35 all in the same day. That can be more than some consumers can bear.

The hyperbole of the foregoing can be more than some of the rest of us can bear. One commenter to the CFPB's post puts it succinctly.

How about a more even-handed or conservative message.  $4 cup of coffee that costs $35 or a pack of gum that costs $35.  You really think that this is normal behavior for the vast majority of consumers?  How about some personal responsibility rather than babysitting and handholding the minority that cry "poor me" when it is their own fault to begin with! 

How about requiring a financial management class for every high school student beginning in 9th grade, one every year, to teach them the basics of banking and financial plannng? 

Just another gov't agency to spend limited middle class tax dollars to protect the mindless minority.

Personal responsibility rather than babysitting? Perish the thought! Babysitting is the CFPB's raison d'être.

Today, overdrafts. Tomorrow? The nefarious practice of banks charging interest on consumer loans. Sure, it's "technically legal", but we all know that "abuse" is in the eye of the beholder who understands what's in the best interests of consumers when they do not.

Adios, Overdrafts

In the recent issue of the ABA Bank Compliance magazine, Key Bank's Carl Pry asks, "Are Overdraft Fees an Endangered Species?" He answers his own question, and the answer is "Yes."

Carl goes through the major compliance headaches caused by changes to Regulation E, and by the much more problematic FDIC Guidance and proposed OCC Guidance on overdraft fees. Whenever bankers see the words "guidance" and "regulatory" in the same sentence, they immediately don their asbestos underwear, gas-masks, and trench helmets and prepare for a hit to their bottom lines. Carl pulls no punches.

Each regulator approaches the issue in a different way, but the endgame seems to be evident: the days of overdraft fees as we know them are numbered.

Carl outlines the essence of what the "guidance" requires and how best to comply with those requirements. His advice will come as no surprise to those of us who have been following this process. However, he ends his article with a discussion of the "nuclear option" that most concerns bankers: The Consumer Financial Protection Bureau's ability to declare an act or practice "unfair, deceptive, or abusive." He makes the case that if it wants to, the CFPB (and the FDIC and OCC, which will enforce the CFPB's determinations of "UDAAP" for most community banks) could effectively declare most overdraft practices of most banks as either unfair, deceptive or abusive. That's a cheerful thought.

When the FDIC first adopted its guidance, industry experts warned about potential practical problems. For example, Debit News Magazine ran an article last spring that included problems related to batch processing of debit card transactions.

In addition to the general tenets of the guidance, there is a specific requirement pertaining to customers who previously opted into debit card overdraft protection as a result of last year’s Regulation E revisions. According to FDIC guidance, those who opted in and frequently overdraw their accounts must be given the opportunity to reverse their choice and opt out of their institution’s overdraft protection program.

This means that, for these customers, many of whom are frequent overdraft users, financial institutions are required to confirm the availability of funds prior to authorizing point-of-sale debit or ATM transactions. This could get tricky.

The speed with which electronic transactions are processed can vary depending on the technology of the retailer, the network and the data processors used by the bank. On top of that, an institution’s use of batch versus real-time transaction processing could have a material impact on identifying and declining overdraft transactions. It is feasible that a consumer could make several purchases between processing runs while their account has insufficient funds, resulting in multiple overdrafts.

We're hearing from various sources that the FDIC has been hammering community bankers for alleged UDAAP "violations" related to batch processing. Even in cases where a bank batch processes multiple times a day, there can be times when a transaction can be approved that should not be approved. Moreover, even if a bank processes transactions "in real time," there may be transactions under a merchant's floor limits or merchants may not be processing "in real time." We've also heard from bankers whose disclosures related to overdraft fees have been alleged by the FDIC to be deficient due to what the bankers believe are relatively unimportant wording differences that don't negatively impact the consumer.

The bottom line appears to be that the FDIC doesn't care about the technological issues. It doesn't like overdraft fees, and it's bound and determined to do everything it can to make the lives of bankers as miserable as possible until bankers get the message and drop overdraft fees.

Of course, eliminating all overdraft fees may very well will mean that bankers simply stop permitting overdrafts and treat everyone as having "opted out" of overdraft protection. At that point, "NSF" debit transaction rejections will become as common as bird droppings on the interstate highway. I'm sure the CFPB will then sanction bankers for engaging in an "unfair" practice, akin to the heinous federal crime of charging a monthly fee for the use of a debit card. That would be the cherry on top of a sundae that has all the earmarks of becoming the perfect Catch 22.

Oh, yes, I almost forgot: most of this brain damage is being inflicted on community bankers by the agency that recently bleated about how its focus was going to be on reducing the regulatory burden for community banks.

Wal-Mart and Monolines

Over four years ago, I observed that trying to get into the banking business with a "monoline" business plan was going to be more difficult than finding a bat-free belfry in the hallowed halls of Congress. I hadn't counted on the persuasive power of any business with the word "green" in it. 

A couple of weeks ago, the Federal Reserve Board approved the application of Green Dot Corp. to purchase a Utah bank.  The bank will be renamed "Green Dot Bank" (who woulda' figured!) and will start issuing all of Green Dot's pre-paid cards, which have been issued by Synovus Financial Corp. Green Dot's business plan is the marketing, selling, and servicing of prepaid cards through retailers, primarily Wal-Mart (which is also a shareholder). That's the plan, that's all there is to the plan, and it's a classic "monoline" business plan if I've ever seen one (and I've seen my share). That fact didn't bother a majority of the Board, but it sure bothered Governor Elizabeth Duke, who dissented.

Duke is bothered by the narrow focus of the business plan, which makes the bank susceptible to storms that can arise in that narrow business sector, which today appears to be prospering, but, as we have seen with subprime mortgage lending and commercial real estate, today's goldmine can turn into tomorrow's garbage heap in a hurry. Try walking into the Fed with a monoline business plan that's focused on making CRE loans and see how fast it takes the Fed to hand you your head. I mean, try walking in with an entity that's not partnered with Wal-Mart.

That partnership also caused Duke some heartburn. Duke worried that since "a single large retail partner" would account for a majority of Green Dot Bank's revenues, a loss of that "single large retail partner" could spell doom, and rather quickly. She also poo-pooed the conditions the majority placed on the Fed's approval (including maintaining a 15% leverage ratio for five years and restricting dividend payments), since they do not address her monoline concerns. These aren't unreasonable concerns and, again, you have to wonder whether the average financial business could wander in with such a game plan and not be shot down in flames. I wouldn't bet on it.

This is yet one more example (among many) of Wal-Mart's relentless drive to put the Sheila Bair era behind it and do whatever it can do to exploit (in a good way, of course) its street cred with The Peeps and sell the unbanked bank-like services without, of course, becoming a bank holding company, which would cause (and has caused) bankers throughout this country to break out with a severe case of shingles and to phone their mothers for chicken soup.

Love 'em or hate 'em, you have to respect 'em.