Bank Lawyer's Blog

How About A Moratorium On Moratoriums?

Word came today from Teresa Rice, General Counsel of the Minnesota Bankers Association, that a major amendment was made on the Minnesota Senate floor on Monday of this week that exempts loans originated by state or federal banks, savings banks, or credit unions from the one-year foreclosure "deferment" provided by the Minnesota "Subprime Borrower Relief Act of 2008." The law has been making banks in the land of a thousand lakes sweat a bit (a lot, actually). In an e-mail to me today, Tess stated that the proposed legislation "is the first major bill in a long time that the Minnesota Bankers Association has had to completely oppose." At the rate the cynics in state legislatures across the country are churning out this chum, it may not be the last.

At least we didn't have to face the astonishing prospect of federally-chartered banks and thrifts pulling out the big stick of federal preemption and then having state banks, thrifts and credit unions cry about a competitive disadvantage (or simply switch charters). Then again, "eligible foreclosed loans" that were originated by non-financial institution lenders and purchased by banks and thrifts (and securities that are backed by such loans) are still in for impairment.

Housing Wire's Paul Jackson reported yesterday on a similar one-year moratorium bill passed by the New York Assembly (along with three other consumer protection measures). It does not appear to contain an exemption for banks, thrifts and credit unions. If it makes it through the Senate and is signed by the governor, perhaps we'll get to see how "astonishing" are the actions of federally-chartered banks and thrifts in pushing preemption. The legislation would give the trial court the right and obligation to determine a new mortgage payment for the duration of the moratorium in an amount "which will preserve the relative financial interests of both parties under terms which are equitable and just." Cool. No rewrite of the mortgagee's contract there, is there? No, there isn't, according to one of the bill's sponsors.

Under the terms of the bill, lenders would need to certify their complete cost of carry — traditionally, around 1.5 percent of unpaid principal balance per month — which would be paid by the borrowers in lieu of their full mortgage payment during the stay period.

Specifically, the bill says that the “lender must establish to the satisfaction of the court the minimum monthly amount necessary to preserve their relevant financial position so as to prevent an erosion of the mortgagee`s financial position.”

Amusingly, the bill also says that “the purpose is to postpone the mortgagee’s profit and not to cancel or alter the terms of the mortgage agreement.” For one thing, lenders don’t profit from a foreclosure, so the bill is essentially winding up losses for all parties, not postponing some sort of phantom profit; for another, the bill most certainly alters the terms of the borrower’s mortgage agreement — that’s the very textbook definition of a one-year moratorium on payments.

Don't throw ugly facts into a perfectly positioned political spiel, Paul. The force of logic's irrelevant to a cynic. Speaking of which, Sheila Bair ought to be on board with this bill, regardless of its financial impact on any FDIC-insured institutions. It appears to be pro-consumer, and underlying financial reality is not a consideration.

The long-term foreclosure moratorium appears to be the flavor of the day for pols eager to show the voters that they'll stand up for the little guy and face down evil  mortgage lenders. New York State Assembly Speaker Sheldon Silver spun it so well.

"The federal government was quick to bail out big businesses like Bear Stearns from near-collapse, but seems to have all but forgotten the everyday common household victims of this national crisis," said Silver. "We in the Assembly Majority want to see New York's families stay in their homes and our communities to remain intact. Our package is not a bail out. It's an assistance program to help homeowners in our state keep the American dream from turning into a nightmare."

That's right, the unique "bailout" of Bear Stearns to prevent a general collapse of the financial system (which even economic moralists like Warren Buffet and Charlie Munger thought was a justified exception to the "moral hazard" rule) is the same as artificially delaying the foreclosure of thousands of subprime loans to borrowers who can't pay them now and won't be able to pay them in a year. And the fact that it's an election year means that "the Assembly Majority" doesn't give a rat's tukus that the effect of such legislation won't make a silk purse out of a sow's ear, which will still be attached to the same lipstick-wearing pig when the moratorium expires. Of course, that will be after November 2008, won't it? At that point, while the voter/borrower pigs are butchered, the legislator pigs will be back grunting at the public trough.

Not So Astonishing

Law professors Elizabeth Warren and Adam Levitin over at Credit Slips have got themselves worked up about "a new idea," an "astonishing" one (according to Professor Levitin), concocted by those dastardly  national banks and federal thrifts: "They  shouldn't have to obey state law when they foreclose on someone's home." That would exercise me, too, if it were true. I'd even agree with Professor Levitin that it demonstrates plenty of chutzpah and with Professor Warren that "the scope of this argument is stunning," except I don't see that national banks and federal thrifts are making that argument, at least not based upon the source cited by the professors.

The article, written by the American Banker's Cheyenne Hopkins, states that national banks are considering a challenge to changes to state foreclosure laws that would, in fact, severely impair the lenders' contractual rights under the loan documents. Foreclosure moratorium laws, for example, would likely not generate a  challenge unless the moratorium period was excessive (an eye-of-the-beholder judgment, I acknowledge). However, some states are going well beyond traditional foreclosure matters.

Some of these measures would go further than delaying foreclosures and include changes to a loan's terms or underwriting standards — provisions that are more easily preempted by federal regulators.

The state measure causing the industry the most angst is a Minnesota one that, in addition to allowing a year delay in foreclosure proceedings, would allow a struggling borrower to make monthly payments equal to the minimum monthly payment when the loan was originated or 65% of the monthly payment at the time of the default, whichever is smaller.

Many industry representatives say that would be going too far, since it would affect how a bank can do business — a criteria that more clearly falls under preemption power.

"There comes a point where states and localities are using foreclosure laws as a pretext or to impair the enforceability of lawful loans, and that's the point where preemption may come back into the picture," said Laurence Platt, a lawyer at Kirkpatrick & Lockhart Preston Gates Ellis LLP. "A little bit of breathing room for the borrower is not going to trigger preemption, but if they in fact choke the lender to death by effectively declaring the loan unenforceable with its terms, that will trigger constitutional and preemption issues."

That hardly seems like an "astonishing" position to take, nor does it demonstrate much chutzpah, unless refusing to stand by, drooling, while your contractual rights are abrogated by a change of state law, when settled federal preemption principles would prevent that from occurring, now constitutes chutzpah. It seems more like sechel to me, but then my Yiddish is a bit rusty. 

My friend and former partner Joe Lynyak also correctly notes in the article the practical risks of national banks taking an aggressive position vis-a-vis state foreclosure laws.

"If someone is going to take an aggressive stance regarding preemption, the concerns are reputational risk in front of the public for taking the legal position, and the the legal risk that ultimately the claimed preemption is either not found to be valid or the validity of the foreclosures are then called into question," said Joe Lynyak, a partner at Buckley Kolar LLP. "This is really right at the edge of the battle on preemption and is a very, very complicated analysis."

Joe's now with Venable LLP, by the way, but I doubt that change would change his position on the issues. By "very, very complicated analysis" I think he means "very, very expensive." At least, that's what I meant when I used the term back when I was an equity partner in "Big Law."

Perhaps the professors have access to other articles or court cases where these "astonishing" threats of federal preemption of local foreclosure laws have been made by national banks or federal thrifts. If so, they should cite them, because based upon the lone article they do cite as the basis for their concern, I'd say they're exercised about a non-existent threat.

To be fair, however, I have to admit that the OCC's quest for power is insatiable. I've previously warned that the OCC's need for lebensraum will eventually compel it to make a bid for universal domination. Therefore, I can appreciate why the professors, both apparent consumer champions, might assume the worst. Eventually, they'll be correct. On the other hand, I plan on joining the OCC stormtroopers right before the final blitzkrieg that will be launched to wipe out the National Association of Realtors and bring all consumers everywhere (even on that frozen rock, the former "planet" Pluto) under the jackbooted heel of the OCC. I'm superficial enough to always back the winner, but cautious enough not to jump on board while the outcome's still in doubt. I'll know the time is right to start sucking up to the OCC when we finally repeal that pesky Tenth Amendment.

A Blueprint For A Structure That Will Never Be Built

On Monday, David Milstead, the Finance Editor of The Rocky Mountain News, circulated a list of questions to an assortment of heavy hitters in financial services in Colorado (although he appears to have left off a number of others), about the just-announced "Paulson Blueprint" for the reorganization of regulation of financial institutions at the federal level. On April Fool's Day, he published the responses.

Here are the questions:

* Is this necessary? Was the current system really broken?

* Will it be more effective than the current system?

* Is it "too easy" on Wall Street, as some critics have said? Who is being protected in this proposed system?

* What are the perils and pluses of moving, in some cases, away from state regulation to federal regulation?

* Should regulators be competing to be the 'regulator of choice' for the subjects of regulation?

* Is it too early in the current problem environment to try to craft an overhaul plan?

In light of the act that the respondents had not been given sufficient time to review the plan in detail and give it any thought, I'm not sure what, if anything, of value Mr. Milstead was trying to accomplish, other than to fill space. I think Phil Feigin, former Colorado Securities Commissioner and now toiling like many of us in the sweat shop of private practice, got off the best opening line:  "I have certainly not had the time to digest the whole report."

Many of the answers are interesting, if predictable given the roles of each of the respondents.

Ray Friedlob, an attorney with a firm where I once toiled back before Caesar had conquered Gaul, threatened to bloviate but then, thankfully, backed off.

Since I deal with this so much I could take pages and hours to answer but will only relate a few top of mind observations.

I fought off an attack of narcolepsy and read the rest of his comments. In private practice, we only grind out pages and hours when we're paid by the page or the hour, so I knew he was all hat and no cattle with those threats. Unless you're being paid to spend time, efficiency rules the day.

Ultimately, Ray kicked a corpse while he was down by blaming it all on Greenspan. I guess Ray either doesn't know Hillary Clinton's plans to resurrect Alan from the dead or he doesn't care.

Jeff Wilson used the term "Subprime Tsunami," and should be fined, beaten, and left in a ditch for that infraction. Otherwise, his line "the regulators don't prevent problems. At best, they manage them, and in some cases, they actually manufacture them," is a keeper, which I intend to steal and use repeatedly without any attribution. Being a sociopath has its rewards.

I also loved credit union CEO Doug Ferraro's bon mot.

This reactionary proposal is like cleaning a bug off your windshield with a fire hose. It is an entirely misplaced attempt to fix a real issue by creating 100 bigger problems.

As that guy in the Chevy truck commercials says: "Sweet!"

Taylor Kirkpatrick admitted in his opening sentence that he is an investment banker, thereby destroying his credibility for all that followed, as sage as it might be. I immediately switched to YouTube and watched the latest "Girls Gone Wild" video.

Phil Feigin had a number of good lines, in addition to the one noted above, including  "I have a hard time believing this proposal will go anywhere." To that I give a hearty thumbs up and an approving inflection of "Dude!"

David Peterson, another investment banker, smacked down the regulators.

It is very difficult to take these regulators pleas seriously when it appears that they are more concerned with protecting their turf than fulfilling their public service roles.

I assume that David's taken the same approach as the authors of Bank Lawyer's Blog: what can they do to us: eat us? I also assume that he hasn't got any applications pending with any regulatory agencies at the moment.

Proving that I'm not completely suicidal, I'll leave Colorado Banking Commissioner Richard Fulkerson alone. However, I have had experience with Richard in his prior life as a Supervisory Agent with the OTS, and I will give him the ultimate compliment: he's no Sheila Bair.

Don Childears, the CEO of the Colorado Bankers Association, makes the following telling point, echoing Phil Feigin:

Despite some merit to the proposals I can’t see anything passing in the next year – due to a GOP President negotiating with Democrats in Congress (who think they will have the White House in a year), and regulated entities having differing views among their ranks and with regulators who also are jockeying for position.

Unlike Don, who's salaried, I bill by the hour and blog for free (try living off of click-through ad revenues from a blog that discusses bank laws), and, therefore, I'd have to say that spending a great deal of time parsing the nuances of the "Paulson Plan" is a non-starter. The "Blueprint" is going nowhere this year, so why spend a lot of time worrying about it when we've got more urgent issues to occupy us? It's a lame proposal by a lame duck administration, and the Democrats, who control both houses of Congress, have already pronounced it DOA.

Nevertheless, we've managed to squeeze one MSM newspaper column and a lowly blog post out of it, so it's served a higher purpose, hasn't it? Now, back to Jessica Simpson's kidneys.

More Accurate Identity Theft Reporting By Banks: The Opening Salvo

Last year, Chris Hoofnagle, Senior Staff Attorney, Samuelson Law, Technology & Public Policy Clinic and Senior Fellow, Berkeley Center for Law and Technology, University of California-Berkeley Boalt Hall School of Law, published an article in the Harvard Journal of Law & Technology entitled "Identity Theft: Making the Known Unknowns Known." Essentially, Chris argues that we have little public information available on the extent of the problem of identity theft crimes against bank customers, either in the form of "new account fraud" (where an impostor opens an account in the victim's name) or "account takeover" (where an impostor uses an existing account, such as a credit card, to commit fraud). Although the FTC maintains information concerning reports by victims of identity theft, Chris argues that "financial institutions are in a better position [than victims of identity theft] to report information on identity theft."

Why, you might ask, is it necessary to have more detailed and accurate reports of this crime? Chris is glad that you asked.

First, it would identify the business practices most vulnerable to fraud. Second, it would help to identify the consumer protections that work and those that do not, and thus assist regulators and law enforcement agencies in allocating resources to combat the crime. Third, improved reporting would help focus public attention on the root causes of the crime. In particular, it could provide a potential counterpoint to the conclusions of some victim surveys that have relied on questionable assumptions and asserted that the fault for identity theft lies with the victims.

Finally, providing more accurate, institution-level statistics on identity theft would make the security of personal information a new product differentiator, similar to low interest rates and fee-free accounts. It would enable benchmarking of financial institutions using that factor so that consumers could tell which institutions have the highest and lowest rates of fraud. Assuming that the market is competitive, it is likely that lenders that provide the safest financial products would be rewarded with consumer loyalty. This rubric would also pressure institutions bearing the ignominious mark of having the most identity theft to adapt or to be driven from the marketplace.

Chris proposes that financial institutions be required to report three principal categories of information: (1) the number of identity theft incidents suffered or avoided; (2) the forms of identity theft attempted and the financial products targeted (e.g., mortgage loan or credit card); and (3) the amount of loss suffered or avoided.

Chris lays out a detailed argument as to why current data (including that gleaned from SARs, which is not public information in any event) is not sufficient, and why more detailed reporting by financial institutions would give regulators, law enforcement agencies and regulatory authorities a better picture of the extent of identity theft, which financial institutions appear to be more vulnerable to the crime, where bank regulatory and law enforcement efforts should be directed, and, finally, which institutions ought to be avoided by customers who are concerned about this form of crime.

I concede the validity of Chris's arguments that reporting by banks would provide more accurate data. However, I question whether consumers, as a practical reality, will alter their behavior based upon the results. I suspect that the entire issue of personal privacy is a lot like Mark Twain's observation about the weather: everyone talks about it and no one does anything about it. When I listen to speeches or read articles such as those by Professor Fred Cate of the Indiana University School of Law, that recount instances of consumers selling their personal information for Starbucks vouchers, I question whether consumers will really punish those banks that seem to be doing a poor job of meeting the challenge of identity theft.

On the other hand, I have no doubt that regulators would find a failure to take effective measures to prevent this crime to be an unsafe and unsound banking practice. Therefore, I think that more detailed reporting by banks to bank regulators (state and federal, as appropriate) would be beneficial. I'm certain that a nasty argument would break out as to whether national banks and federal thrifts should also report this information to state law enforcement authorities so that the Marc Dann's and Andy Cuomo's of the world can make political hay with it. Finally, I expect that skeptics of the current federal bank regulatory regime won't take much comfort in the prospect of relying on federal bank regulators to punish banks that are "guilty" of excessive identity theft. Many critics of the federal bank regulators will want a private right of action against banks, or at least a right of action by state attorneys general, in addition to federal enforcement.

I expect that banks, already burdened with BSA/Anti-Money Laundering reporting, and disillusioned with the apparent fruitlessness of much of the suspicious activity reporting that they currently make (recent federal regulatory protestations to the contrary notwithstanding), would fight hard against such detailed reporting requirements. Given the current credit crisis and the resulting pressure on capital and the bottom lines of many banks, the howls from the banking industry will be long and loud.

Chris also points out the difficulty of tracking "synthetic identity theft," which, we have previously noted, is becoming the identity theft crime of choice. I don't find a practical solution to the difficulties he presents, and I don't see an impetus on the part of financial institutions to voluntarily come up with such a solution. That will be a tough nut to crack.

I have a number of other issues, but lack the time at present to discuss them. I hope to get to them in future posts.

For those who might tend to brush off Chris's article as impractical "law professor posturing," they'll need to rethink any such out-of-hand dismissal. To force the hand of financial institutions, on February 26, 2008, Chris released a paper (download it here) entitled "Measuring Identity Theft at Top Banks." He used a FOIA request to the FTC to obtain data on identity theft reported by victims and, using that data, has compared the largest banks. He admits the problems with the data and with his methodologies, yet asserts that it's the best information available and an appropriate methodology to use in light of the lack of self-reporting by institutions. Among the biggest banks, HSBC, Bank of America and Wamu fair poorly, ING Bank very well.

I suppose that banks can try to ignore Professor Hoofnagle and hope that he goes away or is ignored. Then again, if gadflies like bloggers publicize his studies, and more main stream publications pick up on the results, banks may find themselves forced to start reporting more information as a matter of self defense. The "beauty part" of that result would be that Chris wouldn't have any skin in the game as to the accuracy or inaccuracy of his initial rankings using the limited information available. His ultimate goal is to force the acquisition and reporting of more accurate information so that more accurate rankings might be obtained. That being his goal, this opening salvo is quite a clever gambit.

UPDATE 03/11/08: An anal attentive commenter has pointed out the grievous error I made in incorrectly referring to the "Indiana University School of Law" as the "University of Indiana Law School." I have corrected this misnomer and beg the forgiveness of Hoosiers everywhere.

Eliot Spitzer: Idiot

Someone needs to hit Eliot Spitzer with a Thorazine dart, slap a straight jacket on him, and strap him to a gurney before his Bush Derangement Syndrome causes his head to explode. Not that if that happened, any bystanders would be splattered with gray matter, but when a vacuum is breached, the concussive effects of the implode can be devastating. Ask anyone who saw Britney Spears on Rodeo Drive last Saturday sporting an English accent.

Spitz's latest meltdown is a doozy. His opinion piece in today's edition of The Washington Post tips over into the abyss of downright falsehood.

After laying out the contention that he and "49 other" state attorneys general several years ago saw an increase in predatory lending practices so vast that those practices "threatened our financial markets,"  he alleges that the Bush administration not only looked the other way, it actively campaigned to protect predatory lenders by thwarting Eliot Mess and the rest of the Unmentionables in their pursuit of the bad guys.

In fact, the government chose instead to align itself with the banks that were victimizing consumers.

[...]

Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.

Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.

In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.

Throughout our battles with the OCC and the banks, the mantra of the banks and their defenders was that efforts to curb predatory lending would deny access to credit to the very consumers the states were trying to protect. But the curbs we sought on predatory and unfair lending would have in no way jeopardized access to the legitimate credit market for appropriately priced loans. Instead, they would have stopped the scourge of predatory lending practices that have resulted in countless thousands of consumers losing their homes and put our economy in a precarious position.

When history tells the story of the subprime lending crisis and recounts its devastating effects on the lives of so many innocent homeowners, the Bush administration will not be judged favorably. The tale is still unfolding, but when the dust settles, it will be judged as a willing accomplice to the lenders who went to any lengths in their quest for profits. So willing, in fact, that it used the power of the federal government in an unprecedented assault on state legislatures, as well as on state attorneys general and anyone else on the side of consumers.

If I had time to fisk this loon, I'd be happy to do so, but why work when someone's already done the heavy lifting for you? With little delay, Comptroller of the Currency John Dugan called Spitzer a liar.

Almost everyone who has paid attention to the subprime lending crisis has concluded that OCC-regulated national banks were not the problem.  Instead, the worst abuses came from loans originated by state-licensed mortgage brokers and lenders that are exclusively the responsibility of state regulators.

However, comments from today assert that the OCC and national bank preemption have prevented the states from taking action against predatory or abusive lenders.  That’s just plain wrong.

The OCC extensively regulates the activities of national banks, including mortgage lending.  The OCC established strong protections against predatory lending practices years ago, and has applied those standards through examinations of every national bank.  As a result, predatory mortgage lenders have avoided national banks like the plague.  The abuses consumers have complained about most — such as loan flipping and equity stripping — are not tolerated in the national banking system.  And the looser lending practices of the subprime market simply have not gravitated to national banks: They originated just 10% of subprime loans in 2006, when underwriting standards were weakest, and delinquency rates on those loans are well below the national average.

Nothing the OCC has done has prevented the states from regulating and preventing abuses among the lenders that they license – lenders that are the source of most of today’s problems.  The states have ample authority – as well as clear responsibility – to set standards for these lenders and enforce them.  It defies logic to argue that preemption was an impediment.  National banks are bound to obey the strict standards enforced by the OCC everywhere they operate – even in states that had far less rigorous standards.  The states should have applied equally rigorous standards to the non-bank lenders that were responsible for the bulk of the problems.

Spitz is obviously still sorry he can't sit down after the ass-kickings the OCC repeatedly gave him, using a pair of Julie Williams' stiletto-heeled, sling-back pumps, in his losing lawsuits over the preemption power of the OCC. Opponents of national bank preemption of state laws that restrict predatory lending have legitimate arguments to make. None of them were made by Spitzer, whose bald-faced lies are so easily exposed that if the Governor of New York had an ounce of integrity and an iota of intellectual honesty, he'd feel ashamed. Luckily for Eliot, he's a punk through-and-through, and completely devoid of either quality, so he'll sleep just fine tonight.

What a dork.

OTS Keeps Pitching

As previously reported, OTS Director John Reich is relentless in his shilling for a continued role for the OTS as a federal regulator. He's jumped all over proposals from Congress that a federal regulator oversee previously unregulated mortgage brokers and bankers. Last week, he spoke to the National Association of Mortgage Brokers and, after kissing up to the audience with bromides about how most of the mortgage banking business is honest and how blame for the current subprime mortgage mess has to be spread far and wide, he told them that the OTS was better suited than HUD to be the primary regulator to oversee a national scheme of registering and licensing mortgage originators. Speaking specifically of H.R. 3915, which passed the House last November, he made some "helpful suggestions."

Under H.R. 3915, the states are given the authority to ensure that all non-federally supervised originators are registered with the Nationwide Mortgage Licensing System and Registry. The states would be required to have a system in place for registering and licensing loan originators and, if they do not, HUD would step in to establish and maintain a system.

American consumers deserve basic protections when they make the largest investment of their lives, and we as public servants, have a responsibility to do our best to provide those protections. We believe that there may be two potential areas where OTS could play a role in achieving this goal – (1) licensing and registration of mortgage originators, and (2) joint state and federal oversight of state regulated mortgage banking companies.

Regarding the first point, as I said before, H.R. 3915 requires HUD to step in if a state is unable to put in place a system for registering and licensing mortgage brokers and other non-federally supervised originators. I wonder, however, if HUD is best positioned to take on this responsibility. OTS has many attributes that might make us a better choice.

At the OTS, we focus our regulatory approach on maintaining a thriving mortgage lending industry that complies with applicable laws and regulations to protect consumers. We strive to achieve that goal with a minimum burden on the industry. We have an expert staff that has a unique understanding of the financial services and mortgage industries. We believe that the private sector must be allowed to innovate, compete and prosper, but without harming consumers.

Now, regarding my second point, federal oversight of the entities that fund the mortgage process is crucial. It is critical to ensure that mortgage banks be forced to compete by the same set of standards as insured depository institutions. Establishing a partnership between the states and a federal overseer to set and enforce minimum mortgage funding standards would ensure accountability and consistency throughout the mortgage lending process. This could be similar to the partnership that exists between the FDIC and state banking commissioners in the oversight of state-chartered banks.

Such a partnership need not involve establishing a federal mortgage banking charter, but rather a federal-state partnership to regulate these entities and ensure nationwide uniformity. The OTS has extensive expertise in the oversight and supervision of mortgage banking operations that I believe would benefit the currently unregulated mortgage banking market.

It is not my intention to needlessly expand our regulatory authority, but OTS is in a unique position to help level the playing field by acting as a backstop for state licensing and registration for originators, as well as participating in a prudential federal-state supervision of state mortgage bankers who fund mortgages. If Congress determined that the OTS could provide the best solution by taking on these responsibilities, we would certainly rise to the challenge.

It is not my intention to needlessly expand our regulatory authority... Sorry, but when I read that line, I had to shake my head.  Whether he's "needlessly" trying to expand the authority of the OTS is debatable, but he's definitely trying to expand its authority. Who can blame him? While there is support for the federal thrift charter from some quarters, including those who tire of dealing with the FDIC as their primary federal regulator (such as those applicants for a Utah ILC charter who decided to go with a federal thrift charter rather than wait for the FDIC to do its job), and those who enjoy smoother branching powers and a more solid federal preemption power, there is no question  that Countrywide's acquisition by Bank of America and rumors of Wamu being in the crosshairs of JPMorgan Chase have got to give the OTS a serious case of flop sweat.

Actually, Director Reich has a point about the expertise of the OTS in mortgage banking. It does have such expertise. Score one for the OTS. In addition, what Reich did not mention, but we will, is that the OTS has not been subject to the regulatory paralysis that seems to have plagued HUD from time to time over the years. There are also those nasty allegations of cronyism against Alphonso Jackson that have been made during his tenure as head of HUD. I'd say that confidence in HUD is not at an all-time high, so Reich's timing is apt.

As might be expected,  Reich's comments generated a  frigid response from the Conference of State Bank Supervisors.

CSBS President Neil Milner responded "I am concerned that the OTS does not appreciate the tremendous scope and breadth of initiatives the states have undertaken to form a new supervisory system for mortgage brokers and lenders and the enormity of the task to replicate what currently exists and is being developed.  To disrupt our progress would actually be a setback for the improvements in supervision that are taking place.  We are pleased that Congress has recognized the importance of our efforts in the House-passed mortgage reform bill, H.R. 3915, and legislation introduced by Senators Feinstein (D-CA) and (R-FL) this week in the Senate, S. 2595."

In other words, thanks for your offer of "help," but we'll pass.

California: Here It Comes

Our federal solons are busy concocting sweet treats for the voters in an election year, the kind that melt in your mouth, give you a brief sugar high, then bring you crashing back down to earth smack dab in the midst of an economic cycle that will work its way out the painful way regardless of your wishful thinking. In California, activist legislators are getting down to more serious business: micromanaging the subprime mortgage meltdown in a manner sure to make a painful situation downright excruciating. From today's Housing Wire:

While Federal efforts at mortgage reform seem to have stalled, Housing Wire has learned that California Assemblyman Ted Lieu is set to introduce sweeping reform to statewide mortgage legislation.

His bill, AB1830 – the Subprime Lending Reform Act – will seek to outlaw negative amortization mortgages and stated income lending, while placing tough new restrictions on when yield spread premium would be allowed.

Via an anonymous source, who suggested the bill could be unveiled as early as Thursday, HW obtained an advance copy of proposed changes to California’s Financial Code as part of AB1830, which would amend the state’s current law regulating so-called "covered loans" – conforming loans where rates are eight percentage points above the yield on US Treasuries, or loans with points and fees that exceed 6 percent.

The proposed bill seeks to extend the state’s regulatory authority to loans where the APR is as little as three percentage points above the Treasury yield, and to non-traditional mortgages as well, including interest-only and option ARM products.

In addition to outlawing option ARM mortgages altogether, the bill would essentially eliminate stated-income lending for high-cost, subprime and non-traditional mortgages — the bill’s language says stated income applications must be “verified,” which really means they aren’t stated at all. The bill would also outlaw YSP as a method of compensation for high-cost, subprime and non-traditional mortgages.

The use of YSP in all other mortgages (including, ostensibly, prime originations) would be limited by establishing a rate ceiling of 200 basis points above par, and only permitting the use of YSP whenever it is the broker’s sole form of compensation on a loan.

For high-cost mortgages in particular, the bill would outlaw balloon payments and prepayment penalties, as well as requiring full borrower documentation. The bill would also require certification of third-party counseling “on the advisability of the loan transaction” from a HUD-approved agency prior to origination.

AB1830 would also prohibit brokers, lenders and servicers from engaging in direct marketing designed to get a consumer to refinance out of an existing subprime or non-traditional loan within 12 months of closing on a purchase or prior refinance, although borrowers may still inquire regarding refinancing opportunities.

AB 1830 sounds fairly consistent with the overreaching legislation introduced or already enacted in other states. I've been badgered to comment in depth on the various state laws, especially Maine's, which appears to be particularly odd, and I might do so once I work through the current stack of Marvel comics that I haven't been able to read. However, my banking and thrift clients have mostly national charters, and all of them, state and federal, are consistent in their response: we won't make any loans covered by any such law. FDIC-insured institutions were not the culprits in the subprime mortgage lending fiasco. Again: even Barney Frank admits it. Whether it's amping up state law restrictions or tightening HOEPA at the federal level, the effect will be to further restrict residential mortgage credit. Banning or severely restricting the use of yield spread premiums, as opposed to requiring an adequate disclosure of them, is another brilliant idea that will further reduce the availability of credit. Banning all option ARMs also seems draconian, but I'm merely a shill for the Dark Lord Sauron, so what do you expect?

There's an old adage that "bad facts make bad law." Substitute "brains" for "facts" and you've got another truism.

Second Circuit's Support of OCC Preemption No Surprise

I wasn't even going to address this big yawn of a ruling, but a reader wrote me and asked what I thought of the U.S. Court of Appeals for the Second Circuit's decision to uphold the district court ruling in the case of OCC v. Spitzer. What I thought about the decision was the same thing I thought about the subject in October of 2005, when Spitzer said that he'd appeal the district court's ruling: "As readers of this blog might suspect, I think the OCC's case is cut and dried. Spitzer will lose."

Cynics might claim that Spitzer knows he has no way of winning, but that his pursuit of the big, bad national banks and their federal regulator will enhance his reputation with New York voters for whatever might be his next step up the New York State political ladder. It's probably only coincidental that recent polls show him with a 30 point lead over his nearest challenger for the New York Sate Democratic Party's nomination for Governor, and this fight keeps his name "up front" in the minds of liberal voters on issue which pits the little guy against "The Man."

More generous observers might propose that although Spitzer knows the law is against him, he hopes to pressure the OCC to actively investigate what his office believes are legitimate complaints of discriminatory lending practices by national banks. In addition, he may hope to generate some leverage for action by the US Congress to limit national bank preemption in the area of state fair lending laws.

Whatever the actual motivation for Mr. Spitzer, he's losing the legal battle. On the issue of federal preemption, he'll continue to lose in the federal courts unless Congress changes the law.

The American Banker (paid subscription required) quoted a couple of well-known D.C. banking lawyers about what an "important decision" this is. Uh-huh. Maybe. What it's not is unexpected. It's entirely consistent with previous federal court rulings on OCC federal preemption and the OCC was guaranteed a win. Nevertheless, Spitzer got his name in the papers and more publicity for his run for governor. In other words, both litigants received exactly what they expected. The only people who were screwed were the taxpayers of New York, but they promoted Spitzer up the political ladder to governor, and elected another publicity hound to succeed him as attorney general, so they're getting what they deserve. It wouldn't surprise me at all if Cuomo appealed this decision to the Supreme Court of the United States. After all, it's all about "the pub," not about the law.

OTS Preemption Bus Hits A Speed Bump

In light of State Farm Bank, FSB vs. John B. Reardon (opinion here), Banking Law Prof Blog asks: Are we headed back to the Supreme Court to resolve the exclusive agent question?   Watch this space!

Fair enough. We will.

Unless the Court of Appeals overturns the District Court's decision, then we're likely to end up in the SCOTUS, eventually. Perhaps, we might end up there even regardless of what the appeals courts do. The last big preemption case, Watters v. Wachovia, was taken up by the Supreme Court notwithstanding the fact that the circuit courts were unanimous in upholding the OCC's preemption authority with respect to national bank operating subsidiaries.

State Farm won a round last year in Connecticut, and now has lost a round in Ohio. (Lenders are not faring well in Ohio, recently, are they?). In our comments on the Connecticut decision, we bemoaned the waste of state resources devoted to losing efforts like Watters v. Wachovia, and this latest effort, to stop the OCC's iity, biity brother, the OTS, from expanding like rogue viruses until they destroy the Tenth Amendment as it applies to the world of banking. It's money flushed down the drain. Resistance is futile. Surrender or die. Whatever you do, don't waste state tax dollars tilting at windmills. Yet, these state rights die-hards just won't quit. God bless 'em.

This fight reminds me in some respects of the futile battles fought by state's rights advocates over the federal preemption of state limitations on the exercise of due-on-sale provisions of deeds of trust by federal savings and loans during the 1970s and 1980s. The Supreme Court's de la Cuesta decision, as well as a number of other state and federal appellate court decisions on the vast preemptive breadth of the Home Owner's Loan Act of 1933, resulted in a pretty nasty outcome for the states. The outcome in this arena is likely to be no less nasty.

The Ohio judge appears to be engaging in wishful thinking when he tries to impose a requirement upon the OTS to adopt preemption opinions by formal regulation subject to notice and comment requirements of the APA. The OTS is not taking an action that results in preemption of  state law, it's merely issuing an interpretation that interprets its own regulations and finds that they preempt the application of state law to federal savings banks' "exclusive agents." The Connecticut determined that where an agency is interpreting its own regulations, as opposed to a federal statute, the court must give deference to that interpretation. The Ohio court disagreed and found that although the OTS might very well have power to preempt state law, it must do so through the formal processes of the APA. I doubt that the OTS will concede that it has to begin adopting preemption regulations that govern each specific state law that it wishes to preempt, rather than doing what it's always done: issue an interpretive letter signed by its Chief Counsel. No other court has imposed such a requirement upon the OTS and before the OTS commences such a practice, I think that it will have to be told to do so by the US Supreme Court.

As much as I'm conflicted about the continued erosion of state banking authority in the face of the continued expansion of federal preemption principles, I see the OTS ultimately prevailing on this issue. At the same time, I have to acknowledge the plaintive cry of one of my correspondents, a former state banking regulator: "Where does this all end?"

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Bank Lawyer's Blog will be on holiday break until next week. Have a great Bird Day!

Commie or Clown?

You can't leave town for a few days without another Attorney General roiling the mortgage and stock markets with another press conference, with plenty of photo opportunities, held solely to further his political career by sticking his nose into places where his brain is incapable of following. In the process, he, and the hand that manipulates the sock puppet that everyone knows he is, get to take shots at Fannie Mae, Freddie Mac, and the federal banking regulators. In other words, just another normal day in the "Empire State."

New York Attorney General Andrew Cuomo subpoenaed Fannie Mae and Freddie Mac as he expanded his investigation into "widespread" collusion between real estate appraisers and lenders including Washington Mutual Inc.                  

Cuomo is seeking information on whether home loans purchased by Fannie Mae and Freddie Mac, the two biggest investors in U.S. mortgages, were based on tainted property appraisals. Investment banks were also subpoenaed, he said, declining to name them.

As with all spin doctors, Cuomo's working hard to dramatize the crucial importance of his publicity stunt as the turning over the first of many rocks, under each of which will be a nest of worms and grubs known as "Mortgage Lenders" [hack, expectorate].

"I don't believe it's just about Washington Mutual,'' Cuomo said at a press conference in Manhattan today. "I believe it's widespread. I believe it's the rule not the exception. And we're investigating Fannie Mae and Freddie Mac and other investment banks as to the underlying practices that have allowed this to go on for so long.''

And the basis for his belief? Well, just because. He doesn't say. Obviously, if it's merely WaMu, then the drama factor isn't as great as it would be when the entire mortgage lending industry is unmasked as being rife with mortgage appraisal fraud. Cuomo ought to be able to drag this puppy around by a leash for years.

As expected, Fannie and Freddie were so impressed by Cuomo and his tactics that they immediately gave him the finger. OFHEO Director James Lockhart's official response to Cuomo drips with condescension. Basically, Lockhart's calling Cuomo and his staff ignorant about mortgage backed securities and the way the GSE's work with lenders, and is also accusing Cuomo of not being interested in solving any actual problems that it uncovered, inasmuch as Cuomo's office didn't bother to even notify the OFHEO, which oversees both GSEs, before it issued its subpoenas. Obviously, if OFHEO was involved, the problem, if it exists, might very well have been remedied before Cuomo got an opportunity to hold a press conference. Freddie and Fannie also stated that they intended to keep on buying loans from WaMu.

Adding to the theater of the absurd aspect of the affair was nutbag Jim Cramer's public (and obviously contrived) meltdown in which he called Cuomo a Communist.

You have to love it when Cramer's partner in crime observes that Cramer never called out Cuomo's predecessor (and role model) Eliot Mess and Cramer's defense is that Spitzer's his friend! Credibility Alert!

The real problem with accusing Cuomo of being a commie is that communism as an intellectual construct requires a degree of intelligence to understand and follow, even if it's right into the brick wall which is reality and the judgment of history. Cuomo hasn't got the intellectual horsepower to get it. His system of belief is firmly rooted a politician's "Will to Office." That's as deeply philosophical as he gets.

Spitz and Andy held a press conference (of course) to address Cramer's accusations. Spitz said he would give Cramer a call "and straighten him out." I think he meant by use of The Rack. Andy just laughed like a goof ball. Spitz got in a quick shot at the federal banking regulators and the effect of his expensive and repeatedly futile efforts to overturn federal preemption principles. All-in-all, you'd think that maybe Cramer engineered the entire dust up as a favor to his former Harvard Law School classmate.

The sad aspect is that Cuomo may actually be on to something. During a previous banking crisis, widespread real estate appraisal fraud was uncovered and a number of appraisers were sued and/or imprisoned for fraudulent practices. Also, I have personal experience in representing residential appraisers who were removed from a large financial institution's list of approved appraisers because their valuations were "too conservative." The lender was regulated by a federal banking regulator that was completely uninterested in following up on the accusations. I have no idea whether WaMu is guilty of anything, or if Cuomo's intimations of widespread fraud have any basis. I'm merely saying that if any of this smoke leads to the discovery of a fire, I would not suffer an immediate myocardial infarction caused by the shock of the revelations.

The cynical side of me, however, questions the failure of Cuomo to involve the OFHEO, and to first work behind the scenes to investigate the alleged abuse and any role Freddie and/or Fannie might have played, or any light their records could have thrown on any lender's practices. Moreover, there is no discussion by Cuomo of the OTS being consulted by Cuomo's office, and late last week, the OTS stated that it had not been contacted by Cuomo.

Complicating the issue is that Cuomo is running into criticism from the Office of Thrift Supervision, which regulates WaMu, as well as a separate federal agency that oversees Fannie and Freddie. The OTS said Thursday it is investigating Cuomo's charges against WaMu, but added, "At this time, the OTS has not been contacted by the New York Attorney General's Office regarding this matter, including the basis for these allegations. We look forward to learning more about the NYAG's investigation."

You'd think that WaMu's primary regulator would have easy access to WaMu's records, if getting at those records was your priority. This further supports the conclusion that this is merely a cheap publicity stunt designed more to pump up Cuomo's career than to effectively remedy an alleged abuse. If there actually is abuse that needs to be ended, this process doesn't seem designed to actually end it. It does seem designed to feed the need for press by yet another political hack.