Bank Lawyer's Blog

Overheating The Brakes On Preemption

The harsh winds of speculation blew across the blogosphere this week about the dire possibilities unleashed by the decision last week of Nino and The Leftists to throw down some spike strips in the path of the OCC's speeding muscle car known as "national bank federal preemption." Yesterday's FinCri Advisor featured a jeremiad in which some experts warned that the Cuomo v. Clearing House Association decision "opened up the back door" to state attorneys general enforcing "safety and soundness" violations against national banks. I found that assertion to be untenable.

The ability now of states to prosecute national banks for consumer compliance violations means they also can go after issues of safety and soundness, says former OCC Chief Counsel Brian Smith, now a partner with Latham & Watkins in Washington, D.C.

"I don't see how one enforces a state law without implicating the actions of an institution, which is the reason for a bank examination. A bank examiner goes in, sees what a bank is doing and determines if it is safe and sound and complies with the law. Now the states can look at a practice and say, ‘That doesn't look legal. Here's a subpoena. Send us all your records.' Then the results of their enforcement actions are likely to have a material effect on the business practices of he bank, which ultimately is the safety and soundness of the bank itself."

First, the states cannot merely say "here's a subpoena." I made that clear a few days ago. The law enforcement officials will have to convince a judge that there exists probable cause that a violation of law has occurred in order to obtain a judicial subpoena. Administrative subpoenas are still not allowed. "Fishing expeditions" are specifically not intended to be permitted by any members of the SCOTUS, and the majority and dissenting opinions were clear on that point. Second, while it's true that a pattern of state law violations could very well constitute an "unsafe and unsound practice," that determination will be made, and enforced, against national banks strictly by the OCC (or its successor), not by a state attorney general or state court. Thus, much ado about about not much, at least at this point, in my opinion.

It made an attention-grabbing headline, though, didn't it?

The "back story" on all of this hoopla is that if you take attorneys general such "Spitz" Spitzer and "Deputy Sheriff" Barney Fife Andy Cuomo at face value and accept that there was a pattern or practice by some national banks of violating state fair lending laws, and that the OCC failed to do its duty to pursue examinations into such violations and to take enforcement action by reason of the same, then giving the state attorneys general the right to go after the banks directly through state judicial enforcement actions might conceivably result in eventually proving violations of the law and, as a result, forcing the OCC to act on the grounds that the banks were engaged in unsafe and unsound banking practices. However, if the OCC had been doing its job in the first place, then the banks will be subjected to no more liability than they should have been subjected to had the OCC vigorously enforced not only state law, but safety and soundness standards.

On the other hand, if, as many cynics have suggested, allegations of fair lending law violations were initially raised by Eliot Mess, and pursued by The Deputy, primarily to create a public relations event to further the political careers of the attorneys general involved, with no real hope of actually obtaining an eventual favorable judgment in court, but, at most, extracting a consent decree (in which the banks wouldn't admit wrongdoing) when the banks finally decided that they'd rather settle the bogus enforcement action than pay each of their defense counsels enough for a new mink stole for the wife and a Jaguar X-KE for each of the kids, then I don't see the SCOTUS ruling presenting undue "safety and soundness violation" risks to national banks. Either the banks broke the law or they didn't. Settling without an admission of liability (as many state actions are) does not necessarily mean that the OCC will determine that laws were broken or, even if they were, that the practice constituted a violation of safety and soundness standards. Again, it's the OCC, not the state, which decides "safety and soundness" violations by national banks.

Frankly, being pursued by a state attorney general who's being supervised by an independent judge and, perhaps, by a jury, in a court of law, with the rules of evidence applicable, and with the bank being presumed by law not to have violated the law, rather than having a federal bank regulator, with many fewer practical restraints on its power, with the deference traditionally shown by the courts to regulatory determinations of what's "unsafe and unsound" (other than in cases where "Nino Knows Best"), and with the ability to kill you softly over many months and years with a thousands cuts, having the ability to determine if you violated the law and, if so, what sanctions will be imposed, might work out better for the banks over the long haul. Even, and perhaps, especially, if they actually violated the law. OJ wouldn't have been acquitted if he was a national bank and the jury had been composed of OCC supervisory officials, regardless of the fact that "the glove didn't fit." Take my word for it.

There's no question that national banks are not in as good a position as they would be had Souter decided to just mess with everyone's head on his way out the door and vote with Thomas, or had Nino taken his Metamucil the night before oral arguments. Nevertheless, while hyperventilating about all the dire consequences that may flow from the decision might make great reading, it's grossly premature and, I suspect, grossly overblown at this point.

A Chink In The Armor Of Federal Preemption

After getting a chance to actually read the majority and dissenting opinions in Cumo v. Clearing House Association, rather than merely press reports of the same,  I find the opinions themselves only mildly surprising, for reasons that don't have to do with the reasoning employed by Scalia and Thomas in their opposing opinions, but because Thomas confounded his condescending left-leaning critics by refusing to fulfill his assigned role as Nino's "sock puppet." Who knew he had a mind of his own?

To the pinheads who post here, it appears simply that Scalia and the majority refused to accord Chevron deference to the OCC's interpretation of the admitedly ambiguous term "visitorial powers" as including enforcement of state laws against national banks because (1) "Nino Knows Best" what's a reasonable interpretation of "vistorial powers" and (2) extending that definition to enforcement actions is not reasonable. To the contrary, The Sock Puppet thought that inclusion of enforcement actions within the scope of "vistorial powers" was a reasonable interpretation of that ambiguous term in the National Bank Act and that the Court should have deferred to the OCC's interpretation. It was a close call, reasonable (and unreasonable) people can disagree, and among this august body five thought one way and four the other. Game over, unless you "say you want a revolution, well you know, we all want to change the world." National banks will just have to learn to live with it. Until the composition of the Court changes or Nino gets hit by a bus.

The trade press and popular press were full of dire predictions, such as that by Cheyenne Hopkins in the American Banker, warning that the decision "could open the floodgates for lawsuits from state attorneys general..."

"Most attorney generals were waiting until this case was decided," said Arthur Wilmarth, a professor at George Washington Law School. "Given the amount of private litigation we've seen, it certainly wouldn't surprise me to see some state enforcement actions."

Yes, that may be correct. There may be an increased number of enforcement actions by state attorneys general against national banks. However, the rub is that both the majority and dissenters agreed that Eliot Spitzer, Cumo's predecessor who commenced the tussle by issuing correspondence to national banks in lieu of administrative supoenas, had no power to compel national banks to deliver documents or to allow inspection of their records pursuant to anything other than a judicial subpoena, issued by a judge and based upon a finding that there is probable cause to believe that state laws (that have not otherwise been preempted by federal law) have been violated by the national bank. As Scalia put it in the majority opinion:

If a State chooses to pursue enforcement of its laws in court, then it is not exercising its power of visitation and will be treated like a litigant. An attorney general acting as a civil litigant must file a lawsuit, survive a motion to dismiss, endure the rules of procedure and discovery, and risk sanctions if his claim is frivolous or his discovery tactics abusive. Judges are trusted to prevent “fishing expeditions” or an undirected rummaging through bank books and records for evidence of some unknown wrongdoing. In New York, civil discovery is far more limited than the full range of “visitorial powers” that may be exercised by a sovereign. Courts may enter protective orders to prevent “unreasonable annoyance, expense, embarrassment, disadvantage, or other prejudice,” N. Y. Civ. Prac. Law Ann. §3103(a) (West 2005), and may supervise discovery sua sponte, §3104(a).

An attorney for a state regulatory agency (not in Texas) who prefers anonymity professed a glass-half-empty view of Cuomo's "victory" in an e-mail to me last week.

In a fine example of Scalia's sick, twisted sense of humor, he tells the states you can bring lawsuits against national banks to enforce your nonpre-empted consumer protection laws, but you can't issue subpoenas to get the information you need to file those lawsuits. (Oh, and Rule 11 sanctions apply to state attorneys so don't try filing that lawsuit and getting the information supporting the lawsuit thru discovery. No sovereign immunity from Rule 11.) I can just hear Scalia saying nanner nanner. This case does nothing for the states as far as I can see.  I seriously think he must have meant this decision as a joke directed at all of the states' attorneys sitting down with their cup of joe in the morning to read a new SCOTUS case that is supposedly good for states.  And the punchline is the last paragraph.

Actually, I think the last two paragraphs of Scalia's opinion are a telling "punchline." From those paragraphs:

Here the threatened action was not the bringing of a civil suit, or the obtaining of a judicial search warrant based on probable cause, but rather the Attorney General’s issuance of subpoena on his own authority under New York Executive Law, which permits such subpoenas in connection with his investigation of “repeated fraudulent or illegal acts . . . in the carrying on, conducting or §63(12) (West 2002). That is not the exercise of the power of law enforcement “vested in the courts of justice” which12 U. S. C. §484(a) exempts from the ban on exercise of supervisory power.

Accordingly, the injunction below is affirmed as applied to the threatened issuance of executive subpoenas by the Attorney General for the State of New York, but vacated insofar as it prohibits the Attorney General from bringing judicial enforcement actions.

In a long discussion with a reporter from the National Law Journal prior to oral argument in this case, I told her that Spitzer's letter clearly sought to exercise a visitorial power. Unfortunately for the State of New York, without the exercise of such powers, the states will be hamstrung in determining whether or not violations of state laws of the kind in question in this case (fair lending laws) have occurred. That's why, although it's reasonable to assume that some states will be more active in this area, I'm as skeptical as my state regulator correspondent at this juncture that this will "open the floodgates" of litigation. If it does, expect the push-back by targeted banks to be furious, including nasty battles to impose sanctions on state attorneys general who do attempt to "game" the system in order to go fishing.

This issue will be affected by the proposed federal consumer protection agency, if that monster is ever created by Congress. Bank trade associations appear to be on their heels at this point in opposing it, but if the proposal gains traction (which appears likely), bankers and their lobbyists will wage a long, protracted battle to make the federal agency the exclusive agency over such matters, and to gut the present proposal to make the federal standard a "floor" and to allow the states to impose and enforce higher consumer protection standards. No matter how wounded the banking business appears to be politically at the moment, I don't see it rolling over. Instead, I expect blood on the floor and mounds of cash burned before the commercial banking business lets that type of system come to pass. Expect the banks to be supported by their primary regulators (other than Sheila Bair, of course). Neither the OCC nor the Fed has any interest in losing turf to a new "consumer products" regulator. Neither does the OTS, although they don't, at this point, appear to be a long-term player.

Of course, all of this is premature gas-baggery. If any of the pundits who've been blabbing about the future could actually predict the future, they'd be taxing the limits of their livers' ability to process Mai-Tai's on the verandas of their multi-million dollar homes on Hapuna Beach on the Big Island of Hawaii, instead of billing by the hour or the piece, being quoted in newspapers, or writing blogs. The only thing that can be predicted with certainty is that this will be a most interesting federal legislative session for those of us nerds who follow this stuff.

Blindsided

I returned to the office today, haven't had time to read the SCOTUS opinions in Cuomo v. Clearing House Association, and won't get a chance to read them until this weekend. Therefore, I'll save my bloviating about it until next week. By that time, I should have some decent commentary written by others to pilfer and/or mock. One preliminary reaction, though: I didn't see this one coming, any more than I saw Ginsburg and the other court liberals joining forces with The Court Jester, then letting him write the majority opinion. I guess I should have taken the questions asked during oral argument by Roberts and Ginsburg at face value, since they indicated that those two weren't playing devil's advocates after all. Instead, they were telegraphing their ultimate positions. Then again, according to today's American Banker, both sides were caught flat-footed by the Supreme Court's siding with Andy Cuomo. As far as the practice of trying to predict human behavior is concerned, it's always useful for a bellowing bovine to realize that he's just as much of a dull-normal cud-chewer as the rest of the herd.

By the by: I heard that Andy was still so excited by this unexpected decision that he spit up a little while being burped by Eliot Spitzer this morning after his bottle.

On a completely unrelated topic, TJX continues to pay various aggrieved entities and natural persons over the massive data security breach we've been following for the last several years. Last week, it was reported that TJX Cos. will pay $9.75 million to settlle actions brought by 41 state Attorneys General over the breach.

[I]t will pay $2.5 million to create a data security fund for states as well as a settlement amount of $5.5 million and $1.75 million to cover expenses related to the states' investigations. But TJX stressed that it "firmly believes" that it did not violate any consumer protection or data security laws.

[...]

TJX must also certify that its computer system meets detailed data security requirements specified by the states and must encourage the development of new technologies to address weaknesses in the U.S. payment card system.

In April 2008, TJX Cos. offered to set aside $24 million to reimburse customers who through their MasterCard credit cards were defrauded because of a data breach last year. A similar agreement was made with Visa-card issuing banks the prior November for up to $40.9 million to help banks cover costs including replacing customers payment cards and covering fraudulent charges.

In January, TJX Cos. offered a 15 percent discount to its customers during a "Customer Appreciation" day to reward customers' loyalty as the company dealt with the breach.

TJX also denied that it had anything to do with the death of Michael Jackson, the downing of another Airbus, or that recent nasty outbreak of E. Coli bacteria in ground beef, although that doesn't mean it won't eventually be forced to pay something to settle claims related to those events made at some point in the future.

Data security breaches: gifts that keep on giving.

The Devil's Advocates and a Leap of Faith

In what may be great examples of Supreme Court Justices playing head games with advocates, in today's oral arguments over the OCC preemption case we discussed yeasterday, Justice Ginsburg seemed to question the OCC's position and Chief Justice Roberts seemed to support the OCC. If they each continue down those respective paths, they'll end up 180 degrees from where they were two years ago in Watters v. Wachovia, when Ginsburg wrote the majority opinion upholding federal preemption and Roberts led the dissent.

The lawyer representing Cuomo, New York Solicitor General Barbara Underwood, argued that states must be able to enforce their fair-lending and other consumer-protection laws. The OCC's position "detaches the state's power to make laws from its power to enforce them," Underwood said.

Justice Ruth Bader Ginsburg returned several times to that idea, challenging the lawyers representing the US and the banks to come up with other instances where states had the right to "prescribe, but not enforce" laws.

"The state law, as this picture is drawn for us, is applicable," Ginsburg said. "It's substantive law applicable to these banks, but only the federal authority can enforce it. That seems passing strange."

[...]

The current case bears some resemblance to a dispute resolved by the Supreme Court in 2007 in favor of the banking industry. The court ruled 5-3 that states can't regulate the mortgage-lending subsidiaries of banks supervised by the OCC.

While the 2007 case involved traditional banking regulation, including licensing and so-called visitorial powers, the latest fight concerns more general state rules, such as anti-discrimination and consumer-protection laws.

The lawyer for the Clearing House, Seth Waxman, cited the case in arguing against state enforcement.

Ginsburg, who wrote for the majority in that case, said Waxman was offering "an inaccurate description" of the decision and cautioned him against relying on it to make his point today because the issues were different. "I do not think that excerpts of that opinion should be taken out of that context," she told Waxman.

Several justices questioned Congress's intent in drafting the laws that govern banks and federal regulation. Chief Justice John Roberts, who dissented in the 2007 case, said there was a reason for Congress's concern about states targeting national banks because it had happened in the past.

"Why isn't it a complete answer, to what I agree is a somewhat unusual situation of preempting enforcement but not the substance of law, that it's enforcement that raises the concerns?" Roberts asked. "Why doesn't that make perfect sense?"

Personally, I wouldn't get too excited about this banter. Often, it merely masks what the ultimate decision of each jurist will be. For most of us, hitting the blackjack tables in Las Vegas gives us better odds. Still, it gives us something to do in our down time.

As usual, Antonin Scalia got in the biggest zinger.

"What incentive does the federal government have to enforce state law?" asked Justice Antonin Scalia. "It has so much spare time after enforcing federal law that it's going to be worrying about state law?"

Now, that's one "Supreme" whose vote, along with his quota of snark,  you can always count on.

Elsewhere, Big Bucks investor Wilbur Ross announced that private funds he controls and money manager Invesco Ltd. would be participating in the PPIP.

"At this stage, you don't know where the most attractive opportunities will be. We just know they're going to be big," Ross told Reuters.

Recently, Henry Kravis stated publicly that he'll pass on particpating, due to fear of the government changing the deal after the investment has been made, as it's done already. Ross, on the other hand, is willing to take that risk.

Ross played down fears that big investment gains could be clawed back later by the U.S. Congress for political reasons.

"If that's the case, I'll be the victim and not our investors. It's a risk we've decided to take. We're relying on the good faith of the Treasury," he said.

"Relying on the good faith of the Treasury." It's hard to believe a billionaire said that, isn't it? He definitely either knows something we don't (which is extremely likely) or he's a true believer. No guts, no glory, I suppose. On the other hand, what a leap of faith!

Chipping Away At Preemption

A recent action that received little coverage (other than by BankThink) was the request by Consumers Union that The Treasury Department order the OCC to rescind its preemption regulation. Consumers Union is trying to win the case of Cuomo v. The Clearing House Association, LLC through the back door. It appears to believe that its chances of winning before the Supreme Court of the United States this time around are as bleak as they were in the case of Watters v. Wachovia and is trying to "preempt preemption" through the Obama administration.

Former OTS attorney and current Paul, Hastings partner V. Gerard Comizio correctly observes that the Treasury's influence in this sphere is hamstrung by changes made to banking laws during the 1990s. The OCC doesn't answer to Treasury in the matter of rule-making, so Geithner can tell the OCC to rescind, and the OCC can tell Geithner to stick it in his ear. Not that the OCC would do that, just that it could.

I doubt that Tim Geithner, with all he's got on his plate these days, will take up a cause that weakens the authority of the OCC, diminishes federal power over banking, and could add to the regulatory burden of national banks.  With every Tom, Dick, and Cuomo seeking to promote his or her career under the guise of being the next Eliot Mess, the last thing Geithner likely desires is to stick his nose into the middle of this kerfuffle.

Emily Flitter of BankThink does note two interesting points, however.

The changing of the presidential guard seems to have emboldened consumer groups. Six months ago, who among them would have even imagined appealing to a power over Comptroller John Dugan’s head?

[...]

Even if he doesn’t, however, the OCC might still find its authority curtailed. Congress could take up the issue again. During a press conference Tuesday in which he outlined his priorities for the year, House Financial Services Committee Chairman Barney Frank said Mr. Geithner should reverse the Treasury’s support for the OCC’s assertion of authority. Otherwise, Rep. Frank said, Congress would begin working on a new law. “States do a better job” making and enforcing consumer protection laws, he added.

My bet is that all parties will await the decision of the Supreme Court's latest shot at the OCC preemption issue. If the SCOTUS comes down once again on the side of national banks, as I expect, then I also expect Barney to get busy. It's a crap shoot whether such legislation would pass and be signed by the President. If the economic stimulus doesn't stimulate, and the next iteration of "Son of TARP" doesn't juice the financial system, then our feckless leaders might be focused on more critical issues. On the other hand, as I've said previously, this year appears to be the best ever to see such legislation enacted.

Preemption: High Tide?

When we discussed the US Second Circuit Court of Appeal's decision in December 2007 to uphold the principle federal preemption of the authority of state regulatory authorities to enforce state laws on fair lending against national banks, it generated a big yawn from us, because the decision was expected. On the other hand, we didn't  think that Eliot Spitzer would give up, and expected him to appeal to the US Supreme Court. He did (or at least his successor Andrew Cuomo did, inasmuch as Eliot Mess left office under a cloud of ignominy). On Friday of last week, the SCOTUS granted certiorari and will hear the case in its next term. Expedited briefing means that oral arguments might be heard as early as April.

At this point, I expect the SCOTUS to uphold the Second Circuit's ruling. The same broad preemption principles that were upheld in Watters v. Wachovia would seem to support the reasoning of the Second Circuit (and the district court) in Cuomo v. Clearing House Corporation. Nevertheless, with the change in administration (one not likely to be as forceful in its support for preemption in all areas as was the Bush administration), you have to wonder how strenuous the arguments will be when briefs are filed in March. Given the nature of the laws at issue in this case, you also have to wonder  if some of the preemption-supporting justices who formed the majority in Watters v. Wachovia (Alito?) might change their minds as to the reach of federal preemption. Justice Thomas recused himself in Watters v. Wachovia, but should be able to vote with his brothers Scalia and Roberts against pre-emption in this one.

Even should the OCC prevail as expected, there exists the risk that a ruling to uphold the Second Circuit might be the high tide of SCOTUS preemption rulings for national banks. With a new sheriff in the White House, with the Democrats in control of the House and Senate (although control in the Senate is not  filibuster-proof), and with preemption-hating Democratic leadership in Congress influencing the public debate, I can clearly see a scenario where Barney and the Boyz lead a charge for federal legislation that shortens the reach of national preemption as it applies to certain types of state laws such as those that are the subject of this action. I see much conflation in the public mind of predatory lending, subprime lending, discriminatory lending, unregulated and regulated lenders, banks and non-banks, into one big mess of "kill them all and let God sort the guilty from the innocent." When Joe and Jane Sixpack (and their elected representatives) are looking for scapegoats, national banks will do just fine.

As I said in October 2005, I think the states will continue to lose on these issues "unless Congress changes the law." At this point, it's merely a gut feeling and nothing more, but if there ever is a time that might be ripe for such a change, this year (or next, perhaps) might be that time. Regulatory reform legislation is coming to the banking industry, and the clipping of the wings of federal preemption might be part of that package.

Delaying The Inevitable

Housing Wire recently posted further evidence that the various state foreclosure moratorium laws are not achieving their goal of forcing lenders to modify loans with borrowers who are substantially delinquent.

It appears that California is now following in the footsteps of Massachusetts. Despite recent legislation in the state that added 45 days to the borrower notice period for defaults, impacting foreclosure activity during Sept. and Oct., new data from ForeclosureRadar finds that November saw significant activity increases across all stages of foreclosure. From October to November, filings of Notices of Default increased 28 percent; Notices of Trustee Sales increased 10 percent, and properties sold at auction increased by 14.8 percent.

In other words, the extra notice period appears to have only stalled defaults, at least to some extent, not prevented them.

On the other hand, the effect of the moratorium and, more importantly (in my opinion), the traditional servicing practice of delaying foreclosures during the holiday season, have resulted in foreclosure numbers that are at historic lows. All this means, in the opinion of ForeclosureRadar, is that we'll have an "unprecedented backlog" heading into the new year. If that's correct, expect loan servicers to greet 2009 with a "foreclosure tsunami." We used the word "tsunami" because it's become a cliche, and we're inordinately fond of cliches. As Dorothy Sayers once said about a facility to quote others, our fondness indicates an incapacity for original thought. We glory in our lack of originality. Everyone has to play to their strengths, and ours is a gift for mediocrity and imitation.

Continuing along this line, we agree with the concerns of Housing Wire's publisher, Paul Jackson. He's as convinced as we are that servicers are the ones suffering from these delays, since, in most cases, they must continue to advance delinquent payments to the investors, and recoup them only when the property is sold. Over the long haul, driving up costs and increasing losses of servicers and investors will restrict credit and make it more expensive. Such concerns are not likely to deter the spread of such moratoria, however. In fact, we wouldn't be surprised to see a federal moratorium enacted next year. Politicians are nothing if not short-sighted and, as they have with prior crises for which they've been partly responsible, have thus far have been able to deflect blame long enough that once the crisis passes, no accurate accounting of blame will be made.

No Matter How Hopeless, Fight On

The opponents of tax anticipation loans are not giving up their fight (paid subscription required) to restrict those loans, notwithstanding the recent ruling of the US Sixth Circuit Court of Appeals that held that state laws that limit tax preparers who originate such loans are preempted by federal law when the tax preparers are originating the loans on behalf of national banks.

Chi Chi Wu, a staff attorney for the National Consumer Law Center in Boston, said groups like hers would continue to call for restrictions on these loans, because they have "triple-digit APRs." Ms. Wu wrote an amicus brief for the case on behalf of the state of Connecticut. Consumer advocates are paying particularly close attention to a proposal the Internal Revenue Service made in January that would prohibit tax preparers from disclosing or using taxpayer return information for the purpose of marketing refund anticipation loans. That proposal is still in the public comment period.

Expect the wars against these bottom-feeding loans to rage on. Incidentally, Ms. Wu's cousin, Cha Cha, opted to give up the fight and audition for "Dancing With The Stars."

Equally determined to never say "never" are advocates of seller-funded downpayment assistance (DAP) for FHA loans. Yesterday was the first day that DAP was effectively zapped by the Housing and Economic Recovery Act. In an article in yesterday's "Housing Wire," reporter Diana Golobay almost sang "Ding, dong, the DAP is dead."

It’s official. Down payment assistance — DAP or DPA to most industry participants — has gone the way of the Tyranosaurus Rex, independent Wall Street investment banks and the even textbooks that once suggested Pluto as the outermost planet in our solar system. That is to say that DPA is no more, effective today.

Well, I don't know about T. Rex being kaput. Plenty of associates in major law firms would say that their firms' managing partners are dinosaurs and that they're unfortunately alive and kicking.

The proponents of DAP--the nonprofit corporations that were paid a fee by homebuilders to launder pass-through the "donated" downpayment assistance through to the homebuyer/borrower--are also trying to sound Churchillian.

Nonprofit groups, including giants such as Sacramento-based Nehemiah Corp. of America, are now either out of business or looking to other lines of business while they continue to lobby Congress to reinstate the controversial FHA program. Efforts to pass a bill that would reinstate DPA stalled in a House committee, however, as concern over a historic financial bailout package pushed down payment program concerns to the back burner in the past few weeks.

Nehemiah hosted a media teleconference Wednesday that saw company president and CEO Scott Syphax vow to fight for the restoration of the program.

“It ain’t over yet,” said Syphax. “Regardless of the outcome in the next 48 hours or so, we will continue to press forward on behalf of the interests of working-class families and the communities they reside in across the country.’”

Yep, that's what we need right now: mortgage loans, backed by federal insurance, with a much higher default rate. Good luck, Scott!

Beneath The Bloviation

While the blogosphere bloviates breathlessly about the U.S. Treasury Department's blatant grab for unbridled power, the likes of which has not seen since Julius Caesar crossed the Rubicon, some bank law nerds have been diverted by more mundane aspects of the ever-expanding reach of federal preemption of state banking laws as they apply to the operations of national banks and federally-chartered thrifts. Hard on the heels of the US Sixth Circuit Court of Appeals decision that supported the OTS extending federal preemption of state licensing laws to a federal thrift's "exclusive agents," the US Second Circuit Court of Appeals has ruled that a Connecticut law that attempts to restrict the operations of "facilitators" who "facilitate" (e.g., take and forward to a lender loan applications for) "tax refund anticipation loans" made by third party lenders, does not apply to such "facilitators" when their "facilitation" is undertaken on behalf of loans made by national banks. Specifically, provisions of the Connecticut law that would limit locations where such loans could be made, or would restrict the annual percentage rate of such loans, do not apply when the facilitators are facilitating loans made by national banks. According to the trial court and the Sixth Circuit Court of Appeals, such state law provisions are preempted by the National Bank Act. With respect to annual percentage rates, the National Bank Act allows national banks to "export" the rate allowed by the state where they are "located" (i.e., where their main office or a branch office is located, or the state named in their certificate of organization). The Connecticut law attempted to restrict the annual percentage rate to a rate (or rates) lower than that that would be allowed by the state where the national bank in question was located.

We'll see how much power Congress eventually gives the Treasury Department, although if appearances on the Sunday morning talking-head shows are any indication, Democrats and Republicans in Congress actually appear to be cooperating with one another to give the new "Garbage Debt Czar" the power he needs to collect the waste generated by "just a few bad loans too many" and dispose of them to God-knows-who for God-knows-what-price at a time some time in the future (as long as the Czar hustles up and buys or commits to buy the garbage within the next two years). The details are still being worked out (not that has lessened the blather from all sides as to how this is the beginning of the end of life on this planet and, perhaps, the universe). We'll also be interested to see how and when the Democrats will exact their ton of flesh from the hides of the "fat cats" they claim are completely responsible for this present pickle, and how much largess for their core constituencies (non-profit consumer groups, trial lawyers, and those "common men and women" who had "a lot of junk done to them" by the fat cats). With the blogs in full bloom, rest assured that no thought about the matter, no matter how trivial or inane, will be left unuttered.

In the meantime, under the radar scope, the federal court system will continue its slow but inexorable work of consigning the Tenth Amendment to the dustbin of history.

H/t CSBS

Preemption Creep

When the US Sixth Circuit Court of Appeals recently overturned a district court decision, and held that State Farm's federal saving bank's "exclusive agents" who act as mortgage loan originators are not subject to state licensing by the state of Ohio, it came as no surprise to us. We never bought the district court's allegation that an opinion letter of the OTS that interpreted federal law was a "legislative rule" that required the OTS to follow the Administrative Procedures Act. The OTS was merely interpreting the law as it applied to a specific set of facts, not issuing a new regulation. The Court rejected that approach and decide that Ohio law was preempted by federal law based upon the Court's de novo of applicable law and regulation.

While the Court observes in a footnote that State Farm's agents may eventually be subject to state licensing in accordance with the requirements of the recently enacted Housing and Economic Recovery Act of 2008 (“the HERA”), the extent of state regulation will have to await the enactment of the necessary Ohio implementing legislation, which may be a year off. In the meantime, the exclusive agents need to eat and the federal savings bank needs to make loans (although, we hope, only the most fair and balanced mortgage loans). In addition, the Court apparently wanted to state in no uncertain terms that the march of federal preemption slogs onward, grinding the rights of the states beneath its jackboot heel. Or. something like that.

Actually. the Sixth Circuit panel relied heavily upon the approach of the US Supreme Court in Watters v. Wachovia. As did the SCOTUS with respect to national banks, the Sixth Circuit focused on the effect of state law on the exercise of a federal savings powers, not on the corporate structure through which the bank exercised those powers.

Properly understood, Watters stands for the proposition that when considering whether a state law is preempted by federal banking law, the courts should focus on whether the state law is regulating “the exercise of a national bank’s power” not on whether the entity exercising that power is the bank itself. Id. at 1570.

The federal savings bank was exercising its power to originate mortgage loans through exclusive agents. The Ohio licensing law impeded the bank in the exercise of those powers. Therefore, the Ohio law was preempted. It was as simple as that.

The Court also observes in a footnote that it's not deciding the question of whether or not the Ohio law might apply to non-exclusive agents of federal savings banks. Although the sweep of the Court's opinion (and of the Wachovia opinion, for that matter) is broad, it's logical to conclude that a non-exclusive agent that is not working exclusively for federal savings banks and/or national banks, but for non-federal loan originators, as well, would be subject to licensing by the state. It would be a Rubik's cube of "parsing the nuances" to try to allocate the extent of preemption and non-preemption where such "non-exclusive agents" were involved, and it would be tough to argue preemption in such a case (although I could do it with a straight face if paid a sufficient hourly rate).

Nevertheless, this latest decision gives more ammunition to those states rights advocates who legitimately ask, as did a correspondent whose plaintive cry was noted in a previous post: "Where does this all end?"

I think we all know the answer to that question, don't we?