Bank Lawyer's Blog

A Change of Policy, But Only in Two States

While the epic "Yo Mamma" wars between banks and credit unions have been well-documented (and often lamented) on this blog, I have no explanation for the recent activities of Chase Bank and Huntington Bank, as outlined in a recent article in Credit Union Times.

As many as 30 credit unions in West Virginia and Ohio have been scrambling to establish new correspondent vendors after a regional and national bank terminated their accounts over the past few weeks.

The $1.4 billion Volunteer Corporate CU and the $3.7 billion Corporate One FCU both reported the closed accounts, and in both cases said members reported the banks cited Bank Security Act and money laundering risk.

Charlie Thomas, VolCorp’s senior vice president of West Virginia operations, said the Nashville, Tenn.-based corporate first became aware of the terminated correspondent relationships in late March when a member called, asking for assistance. He said the two banks were the Columbus, Ohio-based Huntington Bank and New York-based Chase Bank.

[...]

Thomas said a letter he’d seen from Huntington to a credit union said the decision to terminate the business relationship was the result of regulatory requirements, “some of which may be new or been amended since the credit union opened its account.” The decision reflected a change in bank wide strategy, and was not a reflection on the credit union, the letter added.

The two banks aren't providing a more detailed explanation and the Fed refuses to comment to reporters on the matter, including indicating whether the banks were directed to close the accounts by their primary regulators because of BSA concerns. Speculation includes the theory that the banks are trying to reduce volatility of deposits, but other observers note that those banks are so large that the 30 banks would be but a blip on the radar screen. Also, why only banks in those two states? Is there some massive money laundering risk suddenly emerging from coal country? Are moonshiners now allied with Mexican drug cartels and laundering massive amounts of illicit cash through these credit unions?

This may be worth following. Or, it may not be. If anything interesting pops, I'll post.

FDIC's Take On FFIEC's Social Media Guidance

I ran across an interview recently that the FDIC's Elizabeth Khalil gave to InfoSecurity's Tracy Kitten about the FFIEC's proposed guidance on social media. Among my take-aways are the following:

• The push for the guidance came from smaller banks that wanted the regulators to give them some free advice. We all understand the fact that because small banks have less money available to pay for expensive lawyers, they look to leverage off of every free resource they can glom onto. Trade associations aren't free, but if you're paying your dues, you look to them to give you your money's worth. Since banks pay the federal bank regulators assessments, they want some bang for those bucks, as well. I get it.
• While Ms. Khalil mentioned "reputational risk" as the second major risk of the three she discussed ("compliance issues" was number one and "third party risk" was the third), I think reputational risk layers through much of the regulators' concerns. For example, misuse of consumers' personal information may be a compliance risk issue, and a Facebook vulnerability to hackers is a third-party risk. However, they both can impact the bank's reputation. Bad things that happen in a bank's social media endeavors often pose a reputational risk as an additional risk, and that's a safety and soundness concern which, in turn, is a regulatory compliance concern.
• None of what's in the guidance is new, and banks that are already engaged in social media activities should already be familiar with the elements of the guidance. If they're not, they better become familiar in a hurry and hope that no one notices.
• Due diligence on third party service providers that you intend to use is critical. The due diligence needs to be ongoing. A third party's faux pas can bite the bank in the backside as well as the third party. Monitoring is essential.
• As is the case with online banking security, the regulators encourage banks to educate consumers on social media risks. For example, the regulators will look favorably on a bank educating its social media users on the risk of fraudulent bank sites, how to recognize the real deal from the fraudster, and that they should never give up personal information over social media. 
• Whether or not a bank is actively using social media to interface with current or potential customers, it needs to have a social media use policy. The bank's employees are using social media, and other people may be saying bad things about you in cyberspace. The bank should have a policy that deals with these issues.

The final guidance is expected to be out in the near future (the comment period closed March 25th), depending on the nature of the comments received.Interested bankers should keep their eyes peeled (although, don't hold your breath).

I'll be giving a breakout session on social media compliance on July 3, 2013 at CUNA’s America’s Credit Union Conference in New York City. If you're a reader and are attending that conference, say hello.

Scapegoating 101

The 20/20 hindsight afforded members of Congress when judging the alleged failures of the independent foreclosure reviews that we discussed last night also graces the peepers of the Government Accountability Office.

The independent foreclosure reviews abruptly ended by regulators in January failed from a lack of objectivity, oversight and consistency in the loan sampling process, said Lawrance Evans, director of financial markets and community investment for the Government Accountability Office.

[...]

Despite having a large portion of the funds already in the mail to homeowners, Evans says GAO’s probe into how the IFR was handled is far from complete.

He told lawmakers GAO plans to conduct more studies on how regulators came up with the $8.5 billion settlement figure when there is no data to show how that number was chosen or exact calculations on how many homeowners were, in fact, harmed by foreclosures.

He pointed out that "regulators’ statistical sampling approach did not include mechanisms to allow the regulators to monitor consultants’ progress toward finding as many harmed borrowers as possible."

Without data on how many borrowers were actually harmed, the GAO representative says his office wants answers on how the compensation figures were determined by the OCC and Federal Reserve.

In other words, the beat(ing) will go on.

And On.

And on.

While that's going on, the regulators are going all passive-aggressive by asking Congress to clarify that the regulators have the power to take enforcement action directly against independent contractors for banks. Because, you know, if the regulators require banks, as part of related enforcement orders, to hire independent consultants to perform very expensive services in order to comply with the enforcement orders, and the lack of clear, or even consistent, instructions on what the criteria and processes should be to perform those services leads to later criticism of the regulators over those services, well, then, regulators must be able to blame somebody, and looking in the mirror is simply out of the question (vampires cannot see their own reflections). Thus, the regulators must be able to blame the independent contractors and pursue them via enforcement processes that give the regulators a leg up on the object of their (lack of ) affection. Just like banks.

The independent contractors are reacting badly to the regulators' reaction (paid subscription required).

"I'm not sure having the regulators regulate consultants would make them more independent," said Jon Winick, president of bank advisory firm Clark Street Capital. "A better idea is to have the regulators hire the consultant then."

That would be a good alternative, except then the regulators would be responsible for the consultants' performance (or lack thereof), and we can't have that. They must be able to blame either the banks, the consultants, or both. That's not possible if the regulators are in a position to bear any responsibility.

"To me, the whole thing about the consultants is just more scapegoating," said Walter Moeling 4th, a partner at the Bryan Cave law office.

Man, I'm glad I'm not as cynical as Walt. Personally, I think this is all just a legitimate disagreement among well-intentioned people who are not worried about covering their own backsides, deflecting blame, or promoting themselves at the expense of others, but only about trying to "do the right thing."

Dancing With The Bear: The Softshoe Shuffle Continues

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

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

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

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

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

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

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

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

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

 

Tighten Up! No, Loosen Up!

The Obama administration’s recent call for mortgage lenders to loosen underwriting standards on residential mortgage loans to less-than-“Qualified Mortgagors” as long as the FHA (i.e., the American taxpayer) is taking most of the risk of default, generated some pretty strong reaction from the usual suspects.

"If that were to come to pass, that would open the flood-gates to highly excessive risk and would send us right back on the same path we were just trying to recover from," said Ed Pinto, a resident fellow at the American Enterprise Institute and former top executive at mortgage giant Fannie Mae.

[…]

"There's always a tension that you have to take seriously between providing clarity and rules of the road and not giving any opportunity to restart the kind of irresponsible lending that we saw in the mid-2000s," said a senior administration official who was not authorized to speak on the record.

Ya’ think?

The administration is also purportedly urging the Justice Department to ease up on lenders who make loans in accordance with the administration-encouraged looser and goosier FHA underwriting critera. The FHA also claims that it hopes to encourage "by example" Fannie Mae and Freddie Mac to follow along. It's as if the subprime meltdown never occurred and Dodd-Frank was never passed, except for the fact that the federal banking regulators, including the CFPB, are taking a directly contrary approach to mortgage underwriting. Moreover, loan originators live in mortal fear of Freddie and Fannie repurchase requests, which have been massive, since those two publicly-controlled giants are the conventional residential mortgage market.

This whip-saw of inconsistency evidences a major example of cognitive dissonance.

Private reaction from bankers and bank lawyers with whom I attended the recent Texas Bankers Association Annual Legal Conference in Austin, Texas, was even more derisive.  Much time during that conference was spent parsing the nuances of “Qualified Mortgages” and “Qualified Residential Mortgages,” which will make qualifying for a residential mortgage loan much more difficult for many potential homeowners. In addition, the plethora of new regulations being spewed out by the CFPB makes consumer lending, including making single family mortgage loans, riskier and more expensive. The bottom line for a number of community bankers is that they will be making few, if any, residential mortgage loans, at least not directly. In addition, bankers who decide to make residential mortgage loans are definitely not crazy about making anything other than loans that will fall under the QM safe harbor.

I would say that it’s amazing that the administration could talk so glibly out of both sides of its mouth, except that it’s not at all amazing. It’s what these cynical, pandering clowns do as naturally as breathing in oxygen and exhaling carbon dioxide.

Beating The CFPB To The Punch

Community banks have been concerned that, although they might be exempt from direct supervision and enforcement by the CFPB, they would be recipients of a "trickle down" effect that would result when their primary federal bank regulator would attempt to demonstrate that it could stay abreast, or even ahead, of the CFPB when it comes to cracking down on unfair, deceptive, and "abusive" practices. Fraud, small banks understand, but they tend to fear zealots who may not be able to define an "abusive" practice with precision, but sure as shooting know it when they see it.

An article in the most recent issue of Bank Safety & Soundness Advisor (paid subscription required) indicates that community bankers' fears are not without some foundation.

In a recent Webcast, officials from the Fed along with the Federal Reserve Bank of San Francisco showcased a broadbased enforcement approach to UDAP rules and regulations, and some high expectations for how banks should be identifying and resolving complaints involving abusive or deceptive practices.

While some of the examples cited, including inflating borrower income on loan applications and charging "bogus points and origination fees" are clearly fraudulent, the net appears to be cast widely by the Fed.

Officials indicated they view as a kind of red flag banks pushing new or modified products and services to generate new revenue, especially if done in conjunction with third-party vendors where fees are shared.

“While searching for revenue is part of what a bank needs to do, there is also a need to make sure
there is compliance with UDAP and consideration of UDAP risk,” said Maureen Yap, the Federal
Reserve’s special counsel for fair lending.

And the officials underscored the idea that an act or practice does not have to violate another law to be unfair or deceptive. A potentially tell-tale sign of that: cases where revenue growth depends on consumers making what regulators and examiners feel are poor financial choices.

There you go: what an examiner "feels is a poor financial choice" by a consumer is the acid test. That gives a whole boatload of precision and certainty to the determination of what is and is not "abusive." Every bank will have to have a Potter Stewart on staff to make the call, I guess.

The potential burden is not going to be light.

For individual institutions, the potential coverage is huge, including not only all products and services, but every phase of the life cycle, including development, marketing, and loss mitigation activities.

One bank's "bogus points" scam, perpetrated by rogue loan originators, led to a determination that it had a "disparate impact" on minorities, and earned that bank a referral to the Justice Department. So, there's that potential liability to look forward to, as well.

What's a small community bank to do? Fed officials tried to be helpful.

Officials declined to address specific fact situations bankers posed during the March 5 webcast. They suggested that banks use the same sort of analysis that regulators do in assessing potential misconduct.

Yap said the Fed tells examiners to focus on the “INN” in determining whether conduct is unfair under the law. There must be “injury” to the consumer or group of consumers, the injury is “not reasonably avoidable,” and there are “no countervailing benefits.”

She said Fed examiners focus on the “MRM” to judge whether behavior is deceptive. Does the representation or omission “mislead” the consumer? Is the consumer response “reasonable”
given the representation or omission? Is the misrepresentation or omission “material”?

“The act or practice does not have to violate another law to be unfair or deceptive,” she said.
“If the prongs of the analysis are satisfi ed a UDAAP violation can be cited.” She said CA Letter 07-08 — a joint Federal Reserve/FDIC statement on consumer compliance exam procedures for UDAP — was “very instructive” in the types of questions bank should expect.

There's your heading on a course through the fog-bound waters of "abuse": think like an examiner.

And after you take that journey down a rabbit "warren" (pun intended), you can resurface and start walking like an Egyptian.

You've got your marching orders, folks. You can get with the program or you can get out of the business. Welcome to this brave new world.

Fauxcahontas Hits The Deck Running

Most spanking new US senators have respect for the seniority system that's been in effect in the US Senate since Daniel Webster was making speeches that were actually eloquent. Most new senators tread lightly, with a sense of relative humility ("relative" being the operative word in a joint where the average ego makes Achilles look like Saint Francis of Assisi)and a realization that by storming out of the gate at the sound of the bell they might stumble, break a leg, and be put down. Then again, most US senators aren't a direct descendant of warriors of the Great Plains.

Sen. Elizabeth Warren isn’t wasting time wading into banking policy.

Less than a month into her new job, the Massachusetts Democrat, a new member of the Senate Banking Committee, is seeking information from regulators on why federal bank regulators halted a detailed review of foreclosure files this month.

In a letter sent to the Office of the Comptroller of the Currency and Federal Reserve on Thursday, Ms. Warren and Rep. Elijah Cummings (D., Md.), requested a detailed set of documents related to a foreclosure- review launched by the bank regulators in 2011.

[...]

In their letter, Ms. Warren and Mr. Cummings urged the regulators to provide information on the reviews’ findings – including how much several consulting firms were paid, and any conclusions about how much consumers were harmed.

The review was designed to address banks’ use of so-called robo-signers, a term for employees who signed off on numerous foreclosures and falsely claimed to have reviewed each case. Banks and regulators concluded that it was becoming far too expensive and not compensating homeowners. In recent weeks, regulators have reached agreements with 13 banks, in a pact now worth $9.3 billion.

The lawmakers said they agreed with regulators’ goal of making sure consumers receive aid more quickly. However, they argued that far more information about the settlement agreements should be public.

“Public confidence in the banking system has been badly undermined by a widespread concern that large financial institutions are not held fully to account when they break the rules—and that consumers are not sufficiently compensated,” they wrote.

Although the OCC and Fed refused to publicly comment on the cheeky request of She-Who-Hunts-At-Walmart, my understanding is that, under their breath, the bank regulators were discussing "a pound of sand" or something similar. Perhaps I didn't quite hear them clearly.

I understand why everyone is upset with the robosigning shenanigans, and I've many times blathered on this blog that robosigners deserve to be punished, including being fined and, where perjury has been committed, imprisoned. On the other hand, I'm not sure how the "compensation" argument continues to preoccupy the minds of lovers of The Great Spirit like Liz. I realize that the settlement exacted from the large loan servicers by the bank regulators required "compensation," but that seemed to me to be more of a purely political sop than an attempt to render justice. In a just world, lenders ought to be punished for falsifying documents and borrowers ought to pay their debts. Apparently,  "The Greatest Senator From Massachusetts Since Scott Brown" agrees with many that because of documentation or ministerial deficiencies, borrowers who had defaulted on their loans were "unjustly" foreclosed upon and should have been allowed to stay in their homes without having to cure those defaults, and because they weren't allowed to stay in their homes with the loan terms modified as necessary to accomplish that result, they are entitled to be "compensated."

I predict that over the next six years, Lizzie will inspire much talk of "pounding" and of "sand", most of it in the same declarative sentence.

I knew there was going to be a silver lining to Liz in the Senate. I never expected it to pay off so quickly. I sure hope Barney Frank wins John Carey's vacant seat so whenever blogging topics are ebbing, I can always go to my sure fire daily double.

The 10th Circuit Shoves The Fifth Amendment Under A Rug

The 10th Circuit Court of Appeals issued a ruling a couple of weeks ago that has received scant attention, but merits close scrutiny. Cutting through all the "mumbo jumbo" (a hat tip to some of my lawyer-bashing clients), the court found that when it comes to determining a bank's capital levels, the bank's primary federal regulator can set it at any level it chooses, and the decision is not subject to judicial review. "Arbitrary and capricious"? The courts don't recognize the concept when it comes to capital levels. The sky's the limit.

The case arose out a "borrow-short-invest-long" strategy employed by Oklahoma-based Frontier Bank, whose primary federal regulator is the FDIC. The FDIC was concerned with the riskiness of the strategy. The bank and the FDIC negotiated a memorandum of understanding that, among other things, required the bank to maintain a 7% leverage ratio. In 2008, the FDIC determined that such a ration was not high enough and that the strategy was "unsafe and unsound," and when  the bank resisted the FDIC's demands, the FDIC filed a notice of charges and the parties were off to the races in an administrative hearing setting.

The administrative law judge who heard the case sided with the FDIC and proposed an order that would require the bank to maintain a 10% tier 1 leverage capital ratio. The FDIC adopted the ALJ's recommendation and the bank appealed to the 10th Circuit, alleging that the FDIC's decision was "arbitrary and capricious" for (among other things) lacking adequate support for the 10% capital ratio requirement. Those are, of course, the magic words under applicable law for providing a basis for appealing such an order.

The Court had the following to say about its ability to review the FDIC's determination of appropriate capital levels of the institutions it supervises.

Congress left the setting of capital levels exclusively to the FDIC’s discretion because there is no “meaningful standard against which to judge the agency’s exercise of discretion.” See Heckler v. Chaney, 470 U.S. 821, 830 (1985); see also 5 U.S.C. § 701(a)(2). Since there is no such standard,
there is no way for us to discern whether the FDIC abused its discretion or acted arbitrarily and capriciously in establishing minimum capital levels for Frontier, regardless of the enforcement procedure the FDIC employed.

[Applicable statutory law] vests this court with jurisdiction to review cease-and-desist orders. But it also explicitly incorporates the APA’s standards for judicial review. Id. While the APA embodies a presumption of judicial review, “[t]his is just a presumption, however, and under § 701(a)(2) agency action is not subject to judicial review ‘to the extent that’ such action ‘is committed to agency discretion by law.’” Madigan, 14 F.3d at 1449 (quoting Lincoln v. Vigil, 508 U.S. 182, 190-91 (1993)). As § 701(a)(2) makes clear, judicial review is not available in those circumstances where the relevant statute “is drawn so that a court would have no meaningful standard against which to judge the agency’s exercise of discretion.” Heckler, 470 U.S. at 830; see Madigan, 14 F.3d at 1449. “In such a case, the statute . . . can be taken to have ‘committed’ the decisionmaking to the agency’s judgment absolutely.” Heckler, 470 U.S. at 830; see Lincoln v. Vigil, 508 U.S. 182, 191 (1993).

Because the International Lending Supervision Act of 1983 vested in each federal banking agency the "ability to set authority to establish such minimum level of capital for a banking institution as the appropriate Federal banking agency, in its discretion, deems to be necessary or appropriate in light of the particular circumstances of the banking institution," the court ruled that the agencies had "sole discretion" to set such levels and, moreover, held that the law gave the court no standard to use to review an agency's determination. Given the lack of a standard for judicial review, the court determined that it had no power to review the decision.

The court further held that the fact that the decision of the regulator was made in the course of a cease-and-desist proceeding, as opposed to a capital directive, is meaningless. Either way, it's up to the sole subjective discretion of the regulator and the court cannot review the regulator's determination.

I found the following passage especially ironic.

The amount of capital a bank needs to weather uncertainty is a subjective judgment
dependent on an informed analysis of the magnitude and likelihood of the attendant risks...Reasonable minds will differ as to appropriate capital levels because they reasonably differ on their assessment of the attendant risks.

What has the concept of "reasonable minds" got to do with the discussion? The court has determined that the decision as to appropriate capital levels for each bank is within the sole discretion of the the bank's primary federal regulator regulator and that the decision is entirely subjective. Whether the capital level determination is based on "my mother made me do it," "Lord Zardoz of the Planet Mongo commands it," or "Simon Says," it's not up for any stinking Monday morning quarterbacking by any two-bit appeals court on the basis that it was "arbitrary and capricious," "without a reasonable basis," "as loony as a fruitcake," or any other rationale employed by those interested in providing a modicum of due process to banks in such matters.

While the opinion addresses several other points of contention between the bank and the FDIC, and slaps the bank down on all of them, the sticking point for those of us daydreaming about the Fifth Amendment is the absolute discretion of the FDIC (and, of course, the OCC, FRB and NCUA) to set capital levels without any ability to challenge those decisions in court. Bankers are used to the fact that challenging regulatory decisions is an uphill battle. What they're not usually expecting is a ninety degree incline.

Unless the bank successfully takes this up to the SCOTUS, I think this might just take a legislative fix.

Foreclosure Misbehavior: Both Sides Of The Coin

Among the featured news stories today was the $8.5 billion settlement by ten large banks of federal charges that they had “wrongfully foreclosed” on the homes of borrowers. The settlement puts an end to the loan-by-loan foreclosure review process mandated by the OCC and the Federal Reserve arising out of allegations that the banks had "fudged" foreclosure documentation, a subject that has generated plenty of palaver by pundits and news organizations for some time.

Under the settlement, people who were wrongfully foreclosed on could receive from $1,000 up to $125,000. Failing to offer someone a loan modification would be considered a lighter offense; unfairly seizing and selling a person's home would entitle that person to the biggest payment, according to guidelines released last summer by the OCC.

The agreement covers up to 3.8 million people who were in foreclosure in 2009 and 2010. All will receive some amount of compensation. That's an average of $2,237 per homeowner, although the payouts are expected to vary widely.

About $3.3 billion would be direct payments to borrowers, regulators said. Another $5.2 billion would pay for other assistance including loan modifications.

According the OCC, the review process was not only taking too long, it was diverting money away from borrowers and into the hands of the outside review companies. As a third party service provider, I fail to see what the problem might be with third parties being enriched at the expense of the needy, but I realize that reasonable people might disagree with my narrow view of the matter.

At any rate, I'm not alone in questioning this settlement. My soul mates, consumer advocates, also berate the end of the reviews.

But advocates say the foreclosure deal allows banks to escape responsibility for damages that might have cost them much more. Regulators are settling at too low a price and possibly at the expense of the consumer, they say.

"This was supposed to be about compensating homeowners for the harm they suffered," said Diane Thompson, a lawyer with the National Consumer Law Center. The payout guidelines already allowed wronged homeowners less compensation than the actual damages to them, she said.

Diane has been strangely silent, at least as far as I can glean from a Google search, about the other side of the coin of foreclosure process abuse: borrowers abusing lenders.

Fraud investigators say they are seeing an emerging foreclosure rescue scheme in which desperate homeowners record phony documents — a felony — simply to stall losing property at public auction.

The cost of buying time can be steep: The homeowner typically pays a bundle of money for bogus forms and learning how to use them, often loses the property anyway and then faces criminal charges.

In the past couple of weeks, authorities have launched prosecutions against four Stanislaus County property owners. All were warned when investigators got wind that the owners might be up to something, but each returned later or sent someone else to try to file fake papers again.

"It comes to a point where enough is enough," said Jeff Mangar, a prosecutor with the district attorney's real estate fraud unit. "How many breaks can we give these people?"

According to many of the commenters to the linked story, the answer to Jeff's question is "an infinite number." Among the more temperate of the comments is the following:

ONLY banks are allowed to use fraud and forgery. "People" are not at issue here....bank profits must be preserved at the low, low cost of....law. We are running out of lawful redress options, leaving what? The DA's office is cowardly due to being controlled by the banks. How? Take a look at their pension funds and where that money is invested....right, IN "financials". Banks, in other words. We, the people, no longer have any representation. Mr. Gulley, will you investigate foreclosure fraud and forgery by the "servicers", "lenders" and alleged Plaintiffs? No? I THOUGHT NOT.  The question is why not? Oh yeah, he doesn't want to "upset the lending".....AND he must protect the banks. People? No matter. When you create enough people who "have nothing to lose"....it does not end well. History does not bode well for the richest 1% when they continue to  oppress people...need an example? Our own revolutionary war! Despair + Tyranny+ no future = ?

Yeah, revolution is right around the corner, pal. Just as soon as you get through stuffing your pie hole with a Quarter Pounder, Large Fries, and a 16-oz. Cherry Coke, you and your buddies will be taking on Seal Team Six and the 101st Airborne. I'll get a ahead of the crowd and start investing in body bag manufacturers tomorrow.

Lawbreakers on both sides need to be prosecuted. Contrary to the belief of some segments of the American public, "robo-signers" on the lenders side are doing the "perp walk" and no one is shedding a tear for them. There should be no more sympathy for borrowers who break the law. At least, there shouldn't be among people who believe in the rule of law. These days, I'm beginning to wonder if that might be a minority.

A Large Victory For A Small Bank

In response to a couple of posts last week about the high cost and uphill nature of fights against federal regulatory enforcement actions, a reader sent me a link to evidence that a small Arkansas thrift proved that even the George Baileys of the world can occasionally fight city hall and "win." What's even more surprising in the case of Priority Bank is that the OCC's Ombudsman demonstrated that his office is good for something more than due process window dressing.

Priority Bank successfully appealed findings contained in the May 9, 2012, notice of charges for an order to cease and desist, according to an insider.

The outcome of that shrouded internal review process indicates the OCC's Office of the Ombudsman ruled in favor of modifying, for the better, Priority's CAMELS examination ratings.

The linked article, written by Arkansasbusiness.com reporter George Walden, indicates that the thrift might have been subject to some "unfair and unbalanced" supervision by the local OCC office.

The jurisdiction for the regulator-lender dispute was transferred out of the OCC's Little Rock field office and its Dallas district office all the way back to headquarters in Washington, D.C. Why?

Priority Bank successfully argued that it was being unfairly treated, and the prejudicial bias flowed from something akin to personal animosity. That, at any rate, is the perspective of an informed source.

I'm an uninformed source, so I'll have to take that insight at face value, at least for the time being.

A number of bankers and lawmakers have been pushing for the creation of a truly independent office of ombudsman for the federal banking agencies.  I think that's a good idea and the regulators think it's a lousy idea. No surprise there. In this case, it appears that the ombudsman's office did its job effectively. However, an exception to the rule does not convince me that reforms are not required to ensure more due process for banks and affiliated persons.

Another reader, an attorney who defends banks in enforcement actions, opined that "Judge Miserendino [the administrative law judge who hears enforcement actions of the federal banking agencies] has begun to take the Siedman, Gulf Federal and Kaplan views of unsafe or unsound, which is making agencies think twice on some of their cases. I believe we will begin to see a few more cases being dropped as a result of Adams." The "Adams" decision is the one discussed in this recent post. The three decisions he cites arose out of the wave of thrift failures in the late 1980s and early 1990s, and put some borders around the breadth of regulatory discretion to interpret what's an "unsafe and unsound" banking practice.

I hope that my correspondent is correct. Regardless, it won't change the overbearing cost of defending such actions, nor am I convinced that it will substantially alter the willingness of regulatory agencies to commence and pursue questionable enforcement actions and use defense costs as an incentive to squeeze a settlement out of defendants, regardless of the actual merits of the claims made.