Bank Lawyer's Blog

Dancing With The Bear: The Softshoe Shuffle Continues

My posts concerning former bank CEO Patrick Adams and his long, hard, expensive fight to clear his name encouraged one reader to send me a copy of a decision from a couple of months ago that involved another bank officer (actually, the Chairman of a bank) who has been slugging it out with the OCC (and in this case, the Fed) four the last four years over an attempt by the regulators to oust him from his position with the bank. The D.C. Circuit Court of Appeals held in his favor and sent the case back to the banking agencies with some pretty caustic comments.

The entire opinion is an interesting read, but here's a synopsis, paraphrased from one prepared by my correspondent.

Louis DeNaples, was a director and controlling shareholder of a national bank and two bank holding companies.  In 2008, Pennsylvania state prosecutors charged him with perjury.  But the charges were later withdrawn pursuant to an agreement in which Mr. DeNaples agreed, among other things, to release claims against the state based on irregularities in the underlying grand jury proceeding.  Thereafter, the state court expunged the entire prosecution.  The Comptroller of the Currency and the Federal Reserve Board, however, concluded that Mr. DeNaples had violated Section 19 of the Federal Deposit Insurance Act, which prohibits a person from participating in a regulated financial institution after entering into a “pretrial diversion or similar program” with respect to certain criminal offenses, including perjury.  The agencies thus issued cease-and-desist orders directing Mr. DeNaples to resign from his positions, and to divest his shares, in the regulated institutions.

Mr. DeNaples appealed, arguing, among other things, that (1) his agreement for withdrawal of the perjury charges was not a “pretrial diversion or similar program,” and in any event (2) Section 19 does not apply to expunged convictions.  A three-judge panel of the D.C. Circuit unanimously agreed on both counts.

First, the Court held that the banking agencies’ interpretations of Section 19 are not entitled to Chevron deference.  The panel adopted DeNaples' argument that no deference is warranted for any part of the Federal Deposit Insurance Act because multiple agencies enforce it, creating the potential for inconsistent agency interpretations, as occurred in this case.

Next, the Court held that the agencies had applied inconsistent and overbroad definitions of the term “pretrial diversion or similar program,” essentially capturing any situation where a person supplies a “quid pro quo for the prosecutor’s withdrawal of charges.”  The panel explained that pretrial diversion generally refers to a discrete program that seeks some offender- or community-oriented outcome such as treatment, rehabilitation, or restitution.  The Court, moreover, adopted the argument of DeNaples' lawyers that the agencies on remand must consider the meaning of “pretrial diversion” under state law, which they adamantly refused to do in the earlier cease-and-desist proceedings.

Finally, the Court agreed with DeNaples that the OCC’s and the Board’s positions on the impact of expungement were both internally inconsistent and at odds with a published FDIC policy statement.  In a stunning rebuke of the agencies, the panel criticized their positions as “bizarre,” “untenable,” “unpredictable,” and a “scattergun approach,” and said that reconciling their views “is like trying to draw a two-dimensional shape on the surface of a grapefruit.”

Trying to draw a two-dimensional shape on the surface of a grapefruit. For four years. A worthy endeavor, no?

Incidentally, the lead counsel for DeNaples (at leas, the lawyer named in the opinion) is Howard Cayne, a well-known D.C. banking law litigator who, like your trusty bloviator, has "danced with the bear" on previous occasions. The man must have a high tolerance for pain. As must Mr. DeNaples.

 

Don't Bring A Popgun To A Gunfight

Due to more business travel over the next three days, this will once again be a short week for the blog. Although I hadn't intended to post another story about how one more bank or credit union employee or customer in Missouri had used a firearm to take down a robber, my Missouri correspondents continue to send me inspirational stories from the land that Micahel Bloomberg forgot (or the land that forgot Michael Bloomberg), like the following.

A 34-year-old Missouri man was shot in the face Friday after he tried to rob a bank while wielding a toy gun.

The suspect, Michael Oliva, entered Security Bank in Trimble, Mo., Friday afternoon wearing a black mask and holding a realistic plastic gun replica, the police report states.

Mr. Olivia pointed the "gun" at a bank employee and demanded she empty her teller drawer. Not knowing the gun was fake, she dropped to the floor and began crawling toward another bank employee shouting for help.

The suspect pointed the fake gun toward the employee on the floor when another employee heard the cries. He retrieved his Smith & Wesson .357 revolver and fired two rounds at Mr. Olivia, hitting him once in the jaw.

A S&W .357 revolver: the Missouri breakfast of champions.

What did the robber intend to accomplish by tracking the bank emplyee who had hit the floor and was crawling away, to yell "Bang! Stop or I'll put the next one in your left butt cheek"? When you're armed with a "realistic looking" fake gun and your opponent is armed with a realistic looking real gun, the best thing to do when a bank employee calls your bluff is to drop the fake gun and run like your pants are on fire (which they may be in the next nanosecond). I'm not offering that advice as a matter of personal experience, just as a matter of common sense.

In the Show Me State, bank employees who pull a firearm to defend other bank empoloyees are not hounded by the authorities as they might be in more civilized states, where being shot in the face while trying to pull a bank robbery makes you the victim, one entitled to a boatload of sympathy and a nice financial settlement. Instead, they're accorded a hat tip from law enforcement.

The worker who fired the shot will not be charged.

"Anybody that does any kind of crime, breaks into houses or goes and robs anybody then basically they're taking their own life on the line," said Chief Larry Fish, Trimble Police Chief, in the Fox 4 News report.

Chief Fish sounds hopelessly unevolved. Exactly like most Texas lawmen.

Sooner of later, bank robbers in Missouri will learn that there are easier ways to make a living, like keeping Lindsay Lohan and Charlie Sheen clean and sober. Until they do, however, it appears that bank employees and customers alike will continue to "discourage" them from plying their trade.

Eductaing Customers About Online Fraud: A Case Study

Two years ago, we discussed the fact that, pursuant to supplemental guidance issued by the FFIEC, financial institutions were going to have take seriously the need to educate their online banking customers about ways to prevent online banking fraud. BankInfoSecurity's Tracy Kitten recently interviewed the heads of social media and information security for Bank of the West about their efforts in this area. In addition to posting educational videos for customers on the bank's web site, the bank is uploading to the bank's Youtube channel in an attempt to make those videos "go viral." In other words, the bank is blending its internal information security technology and social media expertise to do what the bank regulators want them to do: help combat online banking fraud by educating their customers.

While the entire, relatively short, interview is worth a listen, I took away the following points:

• If you want social media content to "go viral" (for the social media challenged: "circulate widely via social media"), you have to make the content "relevant and compelling." You also must update it frequently. Easier said than done. It's why I believe that banks need to blend their internal talents, the way that Bank of the West is doing. Social media is not the sole province of either marketing or "technologists." It takes folks with a variety of skills to make it rock.
• To banks like this one, that have been in the social media game for a while, the recently proposed FFIEC social media guidelines are no big deal. They should be well positioned to meet those guidelines with little, if any, modification to their existing procedures. As one of the gentlemen interviewed observed, they've been expecting these guidelines for years.
• Social media (videos) is only one arrow in the educational quiver. The bank is also using seminars targeted to specific groups of customers (small businesses, primarily, since that's the customer group that is most at risk for online banking fraud losses).
• Of most concern to information security officers is the movement of organized criminal organizations into this arena. They bring with them the money and skill set (not to mention the ruthlessness) to pull off the most successful heists, targeting not the banks but their customers.
• Quality is more important than quantity in online education efforts. Throwing everything against the wall and seeing what sticks will likely not be a successful approach.
• You need cooperation from different areas of the bank to do this successfully. Therefore, you need "buyoff" internally before you launch, not after.
• Most of these efforts are too new to be able to measure their effectiveness, but using the tools that are available to do so on an ongoing basis is important. If your efforts aren't paying off, then you need to consider tweaking them.

The Not-So-Secret Facts of Life

The LA Times obtained a bunch of documents from the FDIC pursuant to a FOIA request and uncovered some startling news: the FDIC is settling lawsuits against those it alleges caused banks to fail. Worse than that, the FDIC is agreeing not to issue press releases regarding many of the settlements. This earth-shattering news is labeled a "major policy shift" from the way the FDIC handled failed bank litigation that arose out of the last big bank meltdown, "when the FDIC trumpeted punitive actions against banks as a deterrent to others."

Before I address that last point, let's listen to some more suspicious minds support the Times theme that all of this "secret settlement" skulduggery smacks of some kind of plot to let evil-doers escape the lynch mobs that surely would have strung them up if only the FDIC had set public outrage en fuego by  trumpeting these settlements from the top of the Rocky Mountains.

Critics fault the government for going easy on banks in the aftermath of the financial crisis. At a Feb. 14 hearing, Sen. Elizabeth Warren (D-Mass.), founder of the Consumer Financial Protection Bureau, criticized FDIC Chairman Martin J. Gruenberg along with other bank regulators for their reluctance to make examples of Wall Street firms by taking them to trial.

Quoting "The Founder" is a go-to proposition for the Times, and one that lacks the punch that soundbites from other less usual suspects bring to the table. In addition, the Times' accusations range far beyond Wall Street banks. It's mostly (if not entirely) the little guys that are being pursued. God forbid they should get a break today from anyone other than MacDonalds.

Attorneys who have represented bank officials and the FDIC said regulators are now far likelier to settle cases before filing lawsuits than after the last spate of failures, when more than 2,300 institutions collapsed in the 1980s and early 1990s, bankrupting a fund that insured savings and loan deposits. That crisis grew out of Reagan-era deregulation, which allowed thrifts already hurting from 1970s inflation to make riskier investments, including commercial real estate deals that soured en masse during the second half of the 1980s.

Critics describe the FDIC's current practice of low-profile deal-making as a major departure from the S&L crisis.

"In the old days, the regulators made it a point to embarrass everyone, to call attention to their role in bank failures," said former bank examiner Richard Newsom, who specialized in insider-abuse cases for the FDIC in the aftermath of the S&L debacle. The goal was simple: "to make other bankers scared."

Newsom said he couldn't understand the shift, unless the agency doesn't "want people to know how little they are settling for."

The FDIC should disclose as much as it can, said Lauren Saunders, managing attorney at the National Consumer Law Center in Washington. "Transparency is always better, and serves as a deterrent to future misconduct."

Yes, let's deter the future conduct of owning, managing, and directing a community bank that concentrates on loan products that the regulators find are being originated and managed within the parameters of safety and soundness guidelines until, within a few months, the world falls apart in the greatest economic collapse since the Great Depression. Thereafter, although we feel compelled to go after many failed bank officials, directors, and third parties because we've got an obligation to recover whatever losses to the fund we are able whenever we can do so without being laughed out of court, we understand, in our heart-of-hearts, notwithstanding the posturing we might do for political or litigation purposes, that these times are different than late 1980s.

This is what neither the Times nor its talking heads understand (or, if they do understand, will admit): the facts are different this time. In the 1980s, there were a number of outright crooks involved in the banking and, especially, the thrift business in certain parts of the country, some wearing stetsons and cowboy boots, others clad in three-piece Armani suits. There were fraudulent appraisals, my-dead-cow-for-your-dead-horse swaps, 100 percent loan-to-value ADC loans on raw dirt, rapid multiple flips that would have taxed Shawn Johnson, and similar shenanigans. The damages were also limited to certain regions of the country where real estate bubbles were exploited (or partially created) by financial institutions who engaged in outright speculation until those bubbles burst. Also, many of the worst players were (relatively) smaller players.

In the latest debacle, the causes of losses are more complicated and the resulting economic consequences much more devastating and widespread. Many of the hundreds of banks that failed collapsed because they were steamrolled by the swiftness of the onset, and the depth, of the economic collapse triggered, in large part, by subprime residential mortgage loans, the complex web of securities they spawned, and the resulting residential real estate inflation. Commercial real estate wasn't the primary cause of the collapse this time, it was a casualty of the collapse. You can argue until you're blue in the face about the nuances of fiduciary duties and CRE concentrations, but in all but the low hanging fruit cases, the FDIC doesn't have smoking guns laying in plain sight to use to extract huge settlements or litigation awards out of either defendants or, more importantly, their insurance companies, who are fighting back.

As to the lack of a "deterrent" to future potential wrongdoers that allegedly results from not making settlements public, I wouldn't be concerned that "silent settlements" are encouraging prospective bank officers and directors to do anything. Those who haven't said "screw it" and opted to sip mai-tais in Cabo until they need their livers "Rolfed," or are seriously considering an alternative exit strategy, aren't chomping at the bit to jump feet-first back into subprime anything or to make CRE or any other product or service their concentration-of-choice, and their primary regulatory supervisors wouldn't let them go there even if they yearned to do so. "Other bankers" are plenty scared Mr. Newsome, without the need to read about FDIC settlements. At least, that's the story with the vast number of smaller banks in this country.

I suppose there might be some deterrent effect if the FDIC announced settlements against the officers and directors of the large Wall Street banks that helped create the mess we're in and which then failed, so that future Wall Street bankers would...oops...none of them failed. That's right: they were bailed out. My bad!

Buried in the story is the rationale for keeping mum (until FOIA forces disclosure) about settlements.

Defendants benefit by settling because they can avoid admitting guilt and limit the damages they might face in court. The FDIC benefits by collecting money without the hassle and expense of litigation. The no-press-release arrangements help close those deals.

Those are valid reasons, and they make sense for both parties.

Let's hope the Times drills a little deeper next time and strikes oil instead of gas.

Unaccountably Unaccountable

Famed criminal defense attorney F. Lee Bailey once a stated that if he were charged with a crime and was, in fact, innocent of that crime, he would prefer to be tried by a military court of justice. He thought that military officers were disciplined to apply the law and the applicable rules fairly. I have no idea whether Bailey's view is supportable or not. However, I do know that if I'm guilty as charged, my best chance of beating the rap is to be tried by a jury of my "peers."

They were charged with "defiant trespass."

But after a Common Pleas Court jury on Tuesday acquitted the 12 Occupy Philadelphia protesters arrested in a 2011 bank sit-in, the trial judge shook their hands and called them the "most affable group of defendants I've ever come across."

"I think what this really shows is that when the people of Philadelphia make a decision, they want someone accountable," said Aaron Troisi, a 26-year-old working toward a master's degree in education at Temple University. "Accountability and justice is not what they experienced with banks like Wells Fargo."

Troisi's view of accountability would be labeled "ironic" if he was just a tad more self-aware. Instead, I'd label it "clueless."

The defendants were found guilty by a judge in municipal court, but were given the right to have the case retried by a jury in Common Pleas Court. As so many defendants facing substantial evidence of their guilt have previously discovered (including The Juice and Robert ("Don't Do The Crime If You Can't Do The Time") Blake), when a group of your average citizens decides to apply the law to the facts, whatever feels right is likely to rule the day.

The original charges of trespass were brought by the Philadelphia District Attorney's Office after the defendants trespassed on private property (the inside of a bank branch office) as part of the nationwide Occupy This-and-That-and-Also-That-Thing-Over-There movement. It seemed like a slam dunk case, especially when the municipal court judge agreed. But after 13 hours of hard deliberation, the jury decided that it was an episode of "Boston Legal," where jury nullification is just part of the way a jury ought to roll. The linked article doesn't say, but I'm wondering whether, at any point in the defendants' counsel's summation, a rotund attorney stood up from the defense table, eyed the jury, uttered two words ("Denny Crane"), and then sat down. If so, the verdict makes sense.

The trial judge not only shook the defendants' hands, she told them to soldier on in "La Cause."

Afterward, Judge Nina N. Wright Padilla took the unusual step of coming down from the bench and asking all 12 to approach so she could shake their hands.

"I hope you continue your work in a law-abiding way," said Padilla.

In Philadelphia, "law-abiding" apparently does not apply to abiding by trespass laws, at least where the property owner is a large bank.

In an upside down world, the defendants displayed a firm grasp of logic.

"If this jury has found us innocent, then it must mean that Wells Fargo is guilty," said 71-year-old Willard R. Johnson, one of the 12 on trial.

I need to see the diagram of the syllogism that led Willard from Point A to Point B. On second thought, forget it.

According to the article, the jury bought defense counsels' arguments that the First Amendment protected the defendants and that even if the actions did violate the law, "the protest served a greater good for society that trumped the trespass charge."

"The greater good" trumps the rule of law. In Robert Bolt's play "A Man For All Seasons," Thomas Moore replies to his future son-in-law, Roper, a Christian zealot who claims that he'd cut down every law in England to get at the Devil.

Oh? And when the last law was down, and the Devil turned 'round on you, where would you hide, Roper, the laws all being flat? This country's planted thick with laws from coast to coast– man's laws, not God's– and if you cut them down—and you're just the man to do it—do you really think you could stand upright in the winds that would blow then? Yes, I'd give the Devil benefit of law, for my own safety's sake.

Beware of modern day zealots, who claim to "speak truth to power," and who would cut down any law that stands between them and "the common good."

Tracking A Troll

I'm going to hold off on further comment on the United Western decision for the time being while other people work to track down the abusive troll who drove off the rails over last Wednesday night's post on that decision. His IP address is 68.100.237.36, which belongs to Cox Communications. They've been notified and verified that they're looking into it.

Interestingly, on Friday, I had two visits to the blog in the early morning hours (prior to 7 am) from the troll's IP address, and the troll spent over ten minutes reading the pages I linked to in Thursday's post, including my 2007 post on the criminal nature of his conduct. I hope that he learned something. He was back over the weekend several times. He uses both a Mac operating system and a Windows system, so I assume he has a Macbook or iPad and also a desktop PC. I also know, for each visit, his browser, monitor resolution and color depth, Javascript version, entry and exit time, pages visited, and other information that will come in handy when the time comes to nail his identity down.

Interestingly, on Friday I received 11 visits to the blog from the OCC, and only four from the FDIC and FRB combined. All OCC visits were from IP addresses 199.83.40.33 and 199.83.40.34. I say "interestingly," because the only hateful comments I've received from federal bank regulators over the past few years have come from people employed by the OCC, one of whom is an attorney and who advised me after the summary judgment hearings in the United Western case last November that I "should keep a spot next to your plate tomorrow for a big helping of crow.  Mmmm….  Tasty." How did that guy know I was eating a raven for Thanksgiving?

The other contact from the OCC was by a person who posted a comment in January to another post using the IP address 199.83.40.34. He identified himself only as "Carl," but used the email address "cgoss@gmail.com." A quick Google search revealed the likely name of an OCC attorney. I made a reply comment that called him out, by that full first name, for using an OCC computer to leave immature comments on a blog during working hours, and I heard nothing further from him. Of course, I suppose someone at the OCC using his gmail address and first name could have been setting him up. Maybe it's that kind of place.

The last visit from the OCC on Friday came via a link on this page on Investor Hub, where investors in United Western stock have been following the trial for some time. Guess where the troll's first visit from home on Saturday morning originated? Yes, from that same page at Investor Hub.

All this may be coincidental. This coward may be holed up in the Air and Space Museum or working the cash register at a 7-11. Nevertheless, if this clown is, as he alleges, with one of the federal banking regulators, then I hope his conduct is considered to be an aberration by that agency.

By the way, visitors, especially those with a law degree, really need to read and pay attention to my Disclaimer and Comment Policy.

Barring further developments, I'll be back to other topics tomorrow.

UPDATE 03.11.13: A reader emailed me to ask whether I wasn't being too harsh on this troll, but that my correspondent might feel differently if the troll had threatened regulatory retaliation. I thought I had made that clear in my previous post. "Don't think that people in the banking agencies forget your gratuitous insults." How, exactly, would you interpret that? You think I'm irritated because of name-calling? 

The Perils Of Trolling

Last night's post about Tuesday's United Western decision generated an attempt by an "anonymous" troll to leave an abusive comment this morning. I moderate comments, so it didn't make it past the "editor." In addition to some substantial "I hate Kevin" vitriol (some of it scatological), and threats that the regulators (of which the troll intimated he was one) would "get me" for my snark, it contained what I think are outright libelous per se statements regarding the former management of United Western and their outside counsel. The troll used a pseudonym and what I assume to be a phony hotmail account email address. I assume that the troll didn't realize that my blog service captures the unique IP address of all commenters, this IP address being one assigned by Cox Communications to a residence in the Annandale/Falls Church area of the Washington, D.C. suburbs. There's only one location with that assigned IP address, and it won't take more than  a John Doe subpoena to uncover the name of the account holder at that location.

I forwarded the comment and identifying information to United Western's attorneys. I assume that they'll take it from there. I think that it's time to remind the unhinged of the issues I raised in a post in 2007. In addition to other legal (and, if the troll is a lawyer, ethical) violations, the conduct constitutes a federal crime.

Please people: Get a grip. If my blog posts drive you so batty that you feel compelled to engage in illegal anonymous harassment, either seek professional therapy or...here's an idea...don't read this blog.

Where's My Treat?

A faithful reader from The Show Me State sent word that my recent story about a gun-toting bank president in the land that wrought the Jayhawk-killing Outlaw Josey Wales, who tracked down and took down a bank robber who'd just robbed his bank, has a happy ending.

The robber who was captured at gunpoint by the president of a Lincoln County bank last year was sentenced Friday to six years in prison.

Donald Ray Lee, 58, pleaded guilty Jan. 16 of second-degree robbery, according to court records. He was sentenced by Lincoln County Associate Circuit Judge Ben Burkemper.

According to the story, Donny Ray wore his granddaughter's Halloween mask as a disguise. I think it's safe to sAY THAT any bank lawyer worth his salt would have advised his client that 9 out of every 10 successful robberies require a gender-appropriate Halloween mask. Cross-dressing is just fine for Mardi Gras, but frowned upon for "stickups" of the illegal variety.

Plus, the carrying of an actual firearm is, in most cases de rigueur, preferably of a caliber larger than your average Missouri bank president's, which, also according to the linked story, happens to be .380. Donny Ray was not only bereft of a proper mask, he was sans boom-boom. While bank president David Thompson is still on my banker action hero list, his mettle was not tested to the utmost by Mr. Lee, a man who told police that "he only went into the bank for trick-or-treat." Well, it appears that he got a trick instead of a treat. If he were a member of Gen Y instead of a Boomer, he'd have cried and demanded that he was entitled to the treat by reason of the fact that he was a sentient being in the Milky Way Galaxy.

At 58, even if he serves his entire term (unlikely in a world ripped asunder via sequester), he's got plenty of time to figure out a way to get it done right. Like these guys, who all wear a style of mask that everyone associates with male thuggery: NHL players.

The Rocky Mountain Lowdown: Loan Collateral Up In Smoke

I asked Steve Mulligan, a partner in the Denver office of the law firm that suffers my presence in their Texas office, to write a guest post for the blog on an issue of concern to lenders in Colorado (and, perhaps, other states) where, after the most recent state and national elections, lighting up a fat boy in public, or growing smokable hemp in  your basement, no longer puts you on the wrong side of local law enforcement. As Steve points out, that's not the end of the story for lenders whose collateral may be a place where some mellow cats are toking up a Rocky Mountain high.

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Bankers & Lenders, Your Real Property Collateral May Be At Risk if Your Borrower Violates Federal Drug Laws

By Steven T. Mulligan, Bieging Shapiro & Barber LLP

Bankers and lenders, if your borrower grows marijuana or rents to people who grow marijuana, your real property collateral may be at risk of forfeiture under federal law despite the fact that such activity might be legal under Colorado state law.

Judge Howard A. Tallman, chief judge of the U.S. Bankruptcy Court in Colorado, had recent occasion to considersuch a situation.  In In re Rent-Rite Super Kegs West Ltd., the Chapter 11 debtor owned a warehouse in Denver and some of its tenants were in the business of growing marijuana.  While this may be a legal activity under Colorado law, it is not under the federal Controlled Substance Act (the “CSA”) unless one receives a certificate of registration from the Drug Enforcement Agency (“DEA”). 

Judge Tallman looked to § 856 of the CSA, known as the “crack house statute,” which provides that it is a federal crime to use real property or allow real property to be used for unlawfully manufacturing, storing, distributing, or using a controlled substance.  Marijuana is a Schedule I controlled substance under the CSA. 

The Judge then looked to the criminal penalties for violating the CSA which includes a potential prison term of not more than twenty years.  As a result, the federal forfeiture statute comes into play.  That statute provides that real property used in connection with activities that violate the CSA and are punishable by more than one year’s imprisonment is subject to forfeiture.

Consequently, Judge Tallman found that the debtor’s illegal activity put the lender’s collateral at risk because of the federal forfeiture statute.  Moreover, since the automatic stay provisions of the Bankruptcy Code do not prevent the U.S. from seizing property under the forfeiture statute, the risk continued every day that the debtor remained in bankruptcy.  The matter was before the court on the secured creditor’s motion to dismiss the debtor’s bankruptcy case. 

In re Rent-Rite highlights the need for lenders to gather important information when underwriting and administering a commercial real estate loan.  Such information should include current rent rolls, copies of any leases, and research on any tenant; it may be that the name is a good indication as to what the tenant’s business is.  If possible, you may want to visit the property to see if any potentially illegal activity is taking place.  An affirmative covenant from the borrower that no activity in violation of state or federal law may also be beneficial.

Additionally, consider requiring the borrower to provide periodic updates and immediate notification if it enters into any new leases or changes its own business to include growing marijuana.  Finally, think about reviewing your default provisions; if the borrower engages in activities that are in violation of the CSA or allows such activities to occur, you may be able to declare a default under the loan documents.

Disparate Impact On Ex-Cons A No-No

Credit Union consultant and pundit Marvin Umholz has been hammering on the Obama administration's use of "disparate impact" theory in not only the fair lending context, but in the equal opportunity employment context, as well (previously discussed here). In his latest email newsletter "CU Strategic Hot Topics" (you can email Marvin at marvin.umholtz@comcast.net to be added to the circulation list), Marvin discusses the use of disparate impact to undermine the use of by financial institutions of background checks on prospective employees. The following is the section of the newsletter that focuses on this problem.

The new U.S. Department of Housing and Urban Development (HUD) rule entitled, “Implementation of the Fair Housing Act – Disparate Impact Rule (FR 5508) was posted in the Federal Register February 15^th www.federalregister.gov/articles/2013/02/15/2013-03375/implementation-of-the-fair-housing-acts-discriminatory-effects-standard?utm_medium=section_news&utm_source=homepage.  However, HUD’s use of the disparate impact doctrine to statistically prove discrimination regardless of intent represents just the latest in the executive branch’s efforts to utilize the controversial effects test to enforce the Fair Housing Act, the Equal Credit Opportunity Act (ECOA), and other laws.  In addition to HUD, the CFPB, the U.S. Department of Justice www.justice.gov, and the Equal Employment Opportunity Commission (EEOC) http://www1.eeoc.gov//eeoc/newsroom/wysk/arrest_conviction_records.cfm are using the statistical disparate impact discrimination effects test in their regulatory enforcement actions.

A February 15^th opinion essay in The Wall Street Journal reminded this correspondent that the EEOC

http://online.wsj.com/article/SB10001424127887323701904578276491630786614.html?KEYWORDS=perform+criminal+background+checks+at+your+peril is also a disparate impact activist in the extreme.  The op-ed began, “Should it be a federal crime for businesses to refuse to hire ex-convicts?  Yes, according to the Equal Credit Opportunity Commission, which recently released 20,000 convoluted words of regulatory ‘guidance’ to direct businesses to hire more felons and other ex-offenders…Last April, the agency unveiled its ‘Enforcement Guidance on the Consideration of Arrest and Conviction Records in Employment Decisions,’ declaring that ‘criminal record exclusions have a disparate impact based on race and national origin’…These statistical disparities inspired the EEOC to rewrite the corporate hiring handbook to level the playing field between ‘protected groups’ and the rest of the workforce…Most businesses perform criminal background checks on job applicants, but the EEOC guidance frowns on such checks and creates new legal tripwires that could spark federal lawsuits…If a background check discloses a criminal offense, the EEOC expects a company to do an intricate ‘individualized assessment’ that will somehow prove that it has a ‘business necessity’ not to hire the ex-offender (or that his offense disqualifies him for a specific job).”  Ex-offenders were disproportionately represented in the “protected groups” setting the stage for the EEOC’s statistical disparate impact effects test to the hiring process.

The op-ed continued, “Former EEOC General Counsel Donald Livingston, in testimony in December to the U.S. Commission on Civil Rights, warned that employers could be considered guilty of ‘race discrimination if they choose law abiding applicants over applicants with criminal convictions’ unless they conduct a comprehensive analysis of the ex-offender’s recent life history.  It is difficult to overstate the EEOC’s zealotry on this issue.  The agency is demanding that one of Mr. Livingston’s clients – the Freeman Companies, a convention and corporate events planner – pay compensation to rejected job applicants who lied about their criminal records…The EEOC is confident that its guidance will boost minority hiring, but studies published in the University of Chicago Legal Forum and the Journal of Law and Economics have found that businesses are much less likely to hire minority applicants when background checks are banned.  As the majority of black and Hispanic job applicants have clean legal records, the new EEOC mandate may harm the very groups it purports to help…The EEOC’s new regulatory regime is likely to chill hiring across the board and decrease opportunities for minority applicants.”  Did the EEOC run a cost-benefit analysis on this dangerous legal contortionism before it dove into these ideologically-questionable waters?  Does the EEOC consider its mission as being to inhibit job creation by exacerbating workplace uncertainty?

As recently as February 20^th CFPB Director Richard Cordray reminded everyone that the CFPB is committed to the disparate impact doctrine in executing its rulemaking and enforcement mission www.consumerfinance.gov/speeches/prepared-remarks-by-richard-cordray-at-a-consumer-advisory-board-meeting.  In his prepared remarks for delivery to the CFPB’s Consumer Advisory Board, Director Cordray said, “A final and consistent problem that can hijack consumers on the pathway to opportunity is the evil of discrimination.  For some people, the greatest challenges they face do not come from deceptive materials, debt traps, or market structures, but rather are rooted in something much more basic – unequal, invidious treatment based on characteristics such as race or gender or other bases prohibited by law.  The statistics show very clearly that communities of color were hit especially hard during the financial crisis.  All Americans saw drops in their household wealth, but African-Americans and Hispanics experienced the steepest drops.  This inequity is compounded by unequal access to responsible credit, which makes it difficult or even impossible to achieve their financial goals…We made it clear last year that – like other banking regulators and the Justice Department – we will pursue discrimination in consumer financial markets based on disparate impact as well as on intentional violations.  From the perspective of a consumer disadvantaged by policies that have a discriminatory effect, it makes no practical difference whether a lender consciously intended to discriminate.  Every consumer, regardless of race, gender, or other characteristics protected by federal law, should have equal access to credit and an equal chance to pursue the pathway to opportunity.”  The disparate impact doctrine is unconstitutional at best and a collection of counter-productive left-wing class warfare victimization claptrap at worst.

It was quite obvious from his remarks that CFPB Director Cordray believed that the United States was a nation statistically overflowing with victims and some were more victimized than others.  That is a distorted concept of what a level playing field should be.  The zealous application of the disparate impact effects test is unlikely to assure anyone access to increased prosperity and instead could bring the financial services marketplace to a screeching halt – and subsequently trigger widespread non-discriminatory austerity as a result.  Would that be consistent with the disparate impact doctrine?  Talk of social responsibility needs to be realistic.  It is more dangerous to promise too much than too little.  Despite the real social and economic advancement that has been made by ethnic minorities and other “protected groups” in this country, the federal government is still stuck in the 1960s.  Hopefully contemporary Americans believe in equal opportunity, not statistically-driven equality-mongering.  When it comes to the disparate impact doctrine, one can certainly hope that the U.S. Supreme Court Justices are true believers in equal opportunity rather than statistical quotas.

This is scary stuff. A number of my financial institution clients deem it a matter of safety and soundness to include within their contracts with vendors a provision that requires the vendor to perform background checks on employees who will perform services for the institution, especially if the employees will be involved in the handling of funds or sensitive information. Does that contractual requirement provide the vendor a legitimate business reason for performing the checks notwithstanding the potential disparate impact upon members of a protected class that contains a high number of ex-cons? On the other hand, is the financial institution subjecting itself to potential liability by imposing such a requirement and, if so, is it inserting itself between the rock of disparate impact and the hard place of unsafe and unsound practices?

The ideologues that are running the funny farm are forcing all of us to jump through the looking glass, head first.