Bank Lawyer's Blog

Variations On The Theme of "Pet Parakeet"

Every once in a while, I receive an email that threatens to expand the level of parody and sarcasm beyond the ability of the human mind to contain it without erupting in cornucopia of burst cranial blood vessels like a bag of Orville Redenbacher Kettle Korn in the microwave after 45 seconds on "high." A recent post in which I envisioned the CFPB "telling an auto loan lender that if a dealer from which it buys paper ever causes emotional pain to a buyer's pet parakeet, the lender is on the hook for the vet's bill," inspired one bank executive's inner snark blossom to fully bloom. He or she shall remain anonymous, primarily because this most excellent rant was communicated, without naming names, by a friend of this banker. This banker obviously has a full grasp of the new paradigm in consumer lending.

Enjoy!

 

"How clearly illustrative of the hell I live in every day:  “…if a dealer from which it [a bank] buys paper ever causes emotional pain to a buyer's pet parakeet, the lender is on the hook for the vet's bill…”.  Don’t forget that asking the borrower to honor the terms of the loan to which he or she agreed is in fact considered an unnecessary infliction of emotional distress.  The parakeet will pick up those vibes in the house and stop singing.  This will only further depress the borrower, who is still by the way driving the $80,000 car for which he or she is not paying, because the parakeet’s song is what keeps that buyer motivated to get up every day.  If the borrower doesn’t get up and go to work every day, the bank can’t get paid for its loan.  So the bank has a vested interest in keeping the parakeet happy and in this case a vet may not be enough.  This parakeet needs a behaviorist.  A parakeet whisperer, who understands the parakeet and can help restore the parakeet’s emotional well-being, only after which there can be a hope for the bank to be repaid for its loan. The borrower should retain the car, because after all the car will be necessary to transport the parakeet to its bird shrink, without which the loan on the car can’t be repaid.  Now you can clearly see why it’s in the bank’s best interest not only to not be paid on the loan, but to in fact pay all expenses for a parakeet psychiatrist to get that parakeet singing again.  And there is no way to make sure this happens unless a government bureaucrat has a nice office from which to read all the reports the bank will be required to produce justifying that the bank has done all it could and spent money on everything possible to get that parakeet happy, or to otherwise force the bank to do more to help the parakeet.  Doing so from a cube would be, well, inhumane – though I can’t resist pointing out that I see a few parallels between the parakeet and the bureaucrat (both are sitting miserable and silent in a small cage and pooping on everything that crosses their paths….)"

 

Arbitrary, Instrusive, and Ubiquitous

Inspired by last night's post, a regular reader pointed me to last Friday's post by Tom Brown, who was off to the races over two recent utterances by high-level CFPB officials. The post's title, "The Beginnings of Overreach at the CFPB. Whatever happened to personal responsibility?" gives you a clue that he and I (and Marvin Umholtz) are singing from the same songbook.

The first object of Tom's ire was Stacy Canan, deputy assistant director of the CFPB’s Office for Older Americans, who stated in an NPR interview that “There absolutely are some financial advisors that are using the designations just for marketing purposes...and they don’t really have the substantive expertise and training to back up what that designation implies to investors,” and "Seniors deserve the right to understand whether they’re entrusting their life savings to someone who’s only had a weekend seminar versus spent months or even years of training to learn how to give adequate financial advice.”

Canan's solution is that the CFPB should become involved in establishing standards for the accreditation of financial advisers. This drove Tom to a fits of sublime snark.

Seniors can ask. “What does it take to become a Chartered Retirement Planner anyway?,” they might say. Or “What’s does becoming a Certified Investment Advisor involve?,” would be another good one. Now that I think of it, a prospective client might have other questions as well, such as about the planner’s prior experience and educational background. She might also ask for references. Back in the days before the CFPB, this sort of preparation was referred to as “common sense,” and Americans were actually pretty good at using it.

Canan made another pronouncement that I had to read twice to make certain that she said what I thought she said. “Seniors in particular often mistakenly believe that their financial advisor is looking out for their best interest. That is rarely true.” Tom's response to that wholesale slander of an entire profession was pithy.

Really? Advisors only rarely look out for their clients’ best interest? One wonders how they’ve managed to stay in business. Canan seems to believe that the investment advisory business is simply systematic, organized thievery. Worse, she seems to think consumers are too stupid to recognize that. But not to worry! She’s from the federal government and is here to help. I’ve got a better idea. How about we assume that consumers are capable of taking personal responsibility for their decisions, and can be expected to make the right ones? Decisions related to one’s finances are among the most personal an individual can make. It’s outrageous that a government agency, the CFPB, is scheming to get involved in them.

Apparently, we have folks at the highest levels of this agency whose regulatory bona fides isn't sullied with the grime of actually having any first-hand knowledge of the businesses they currently regulate and seek to regulate. If ignorance is bliss, they're perpetually orgasmic. Moreover, the desire to infantilize entire segments of the American populace and require them to look to the CFPB as their paternal (or matriarchal) protector is palpable.

Tom also takes off on the recent pronouncements by the CFPB on student lending, especially that the solution to the student loan crisis is for lenders to forgive and/or modify indebtedness and to extend more of it to students who don't pay it back. Throwing good money after bad appears to be a dead end to those of us with a actual lending experience. As another of my readers put it in an email to me, "I don't even know where to start with this bad idea." On the other I do know where to start: with the trash can.

In the end, he articulates well a frustration that many of us feel.

The people who run the CFPB seem to have the basic view that under no circumstances should  people have to live with the consequences of their own freely made decisions or bear their own personal responsibility. Instead, the government should always be able to intrude itself in people’s lives to “fix” things. The trouble with allowing the government to insert itself into every part of your life is that, well, the government is going to end up inserting itself into every part of your life. There’s a word for that: tyranny. The CFPB tries to portray itself as a paternalistic entity that’s only trying to help people. In fact, it’s bureaucratic monstrosity, funded directly by the Fed, that is accountable to exactly nobody. The ideas that people at the CFPB come up with sound benign enough now. But as they accumulate (and they will, trust me) they’ll seem arbitrary, intrusive, and ubiquitous—and, of course, expensive.. But by then it will be too late. The time to start objecting to the agency’s intrusiveness is now.

You Have Nothing To Lose But Your Chains

The latest edition of Ballard Spahr's "CFPB Monitor" starts off with an article by Barbara Mishkin about how CFPB employees have voted to unionize. Apparently, getting starting salaries of $173,000, plus tuition for courses in basic banking law, are not enough for the employees of the most powerful, poorly regulated federal government agency created since Joe Stalin went to (not) meet his (nonexistent) maker. No, their backsides are severely chapped over heinous office accommodations. It seems that the CFPB is in the process of renovating its Intergalactic Headquarters, aka, "The Death Star," and while that renovation is taking place, the "proles" are being asked to place their posteriors in...<gasp>...Dilbert-like "open space." Their current office space is sufficiently annoying, since more than one person has to share a private office, but cubicles???? Them's fightin' words, Pilgrims!

One "source" claimed that CFPB employees are worried about noise levels. Heck, they carry a pretty big stick, so why don't they learn to talk (and walk) softly?

Look, I understand that when you're threatening to lock and load on some beat-down community bank that issued a disclosure statement that said "may" instead of "will," and, therefore, was massively "deceptive," or you're telling an auto loan lender that if a dealer from which it buys paper ever causes emotional pain to a buyer's pet parakeet, the lender is on the hook for the vet's bill, you would be sensitive about cross-talk. Obviously, you need to keep the brow beating appropriately segmented. I mean, look what happened when Bugs Moran encroached on Al Capione's space. It wasn't pretty, and those guys were mere amateurs when it comes to wielding a Tommy Gun.

Now that the CFPB employees are represented by a union, though, I'm certain that office space is only the tip of the iceberg when it comes to workers' demands.

The union’s president is reported as having said that, in addition to workspace concerns, CFPB employees are concerned about travel policies and benefits, work schedules, reviews, promotions and alternative work schedules.  The report describes CFPB staffers as having “grown frustrated in recent months after putting in grueling hours as they raced to meet statutory deadlines” under Dodd-Frank.

I can imagine that working until 5:30 and even 6:00 pm can be wearisome if you have to do it day-after-day-after-day-my-god-will-this-never-freakin'-end!It wwould be suicide-induing if you had to grind it out in open space.

In the words of the last person to make the absolute best use of every second of every working day (and, especially, of every night) he spent in D.C, once intoned, "I feel your pain."

There Ain't No "There," There

Last week, an article by Andy Peters in the American Banker hit a nerve. It profiled a California bank that had tried to make small dollar loans work as an alternative to payday lending, but had decided to give up the effort.

One PacificCoast Bank in Oakland, Calif., is regrouping as it looks to battle payday lenders in the San Francisco Bay area.

The $282 million-asset thrift recently pulled the plug on its One Pac Pal loan, which it tailored to offer low-income clients short-term credit at reasonable rates and terms. The program, which began 18 months earlier, lost too much money, says Kat Taylor, One PacificCoast's chief executive.

"We have not yet found an economically sustainable product that's sufficient to save enough people" from payday lenders, she says.

I hate to say "I told you so," but...Oh, who am I kidding. I TOLD YOU SO!From August 1, 2007:

In June, when the FDIC issued its final Affordable Small-Dollar Loan Guidelines and FDIC Chairman Sheila Bair was pressing commercial banks to compete with payday lenders for the "Mini Me" loan biz, even banks in states like North Carolina, which kicked out the bottom feeders, were rolling their eyeballs in disdain at the prospect of rushing in to fill the breach. Among other problems, the Guidelines "encourage" banks to cap the APR at 36 percent.

[...]

The North Carolina banks banks profiled in the linked article didn't believe that there was enough bang for the buck to justify dipping their toes in the shallow water. Even the lone credit union that offered a payday loan-like product wasn't making any money on it because it was barred by state law from charging more than an 18% APR and it was actually requiring the loan to be paid back in 90 days. If it had only rolled the loan over (and over and over) and neglected to comply with the usury laws, it might, like Madonna, have been able to "get into the groove" and make some real payday lender-like money.

Lyndsey Medsker, spokesperson for the Community Financial Services Association of America, which, according to another article, represents about 60 percent of the payday loan industry, said the 36% annual percentage rate cap was a non-starter for commercial banks.

"There's an effort to cap loans at 36 percent annual rate, which the FDIC guidelines suggest. How that works into two- week loans is $1.38 per $100," she says. "I know payday lenders can't make money on that, so banks couldn't possibly either."

Mr. Peters' latest article also quotes a consultant as correctly noting that at the same time these loans pose a high risk of nonpayment, they bear a high regulatory compliance risk and, because credit scores must be thrown out the window (or reliance on them reduced), a high underwriting risk. Peters also notes that the FDIC ended its small dollar loan pilot program in 2009 because banks couldn't make a return sufficient to cover the risk.

One PacificCoast bank's experience is in line with the consistent experience of other FDIC-insured banks who've tried to beat payday lenders at their own game over the past six years. Basic business principles don't change. However, they've never ceased to be ignored in the service of an ideological agenda, one which holds that payday loans are evil because they have high fees that "trap" poor people in a never-ending spiral of debt, people who are too stupid and/or unsophisticated and/or desperate to think for themselves, and who must be protected from their inherent deficiencies by those who know better. Guys like Recess Richie and the Payday Slayers.

It's obvious that trying to use traditional banks as payday lending alternatives is not going to work. Unless, of course, you let them earn the same return that payday lenders earn.Which kind of thwarts the "higher purpose," doesn't it?

That's right Liz, reality bites.

Camden Fine Fires Off A Fine Salvo

In  recent opinion piece for Bloomberg News, ICBA CEO Camden Fine was in fine fettle, ranting about his favorite topic: new regulatory burdens are strangling community while the largest banks are doing just fine, thank you very much. Among his salient points are the following:

The megabanks are benefiting from what Bloomberg View calculated is an $83 billion annual taxpayer subsidy, the value of implicit guarantees by the U.S. Treasury. Bloomberg View was correct to characterize the too-big-to-fail subsidy as “a major driver of the largest banks’ profits.”

Perversely, Federal Deposit Insurance Corp. data show that large banks have both the lowest credit quality and the lowest cost of funds in the industry. Community banks rank the highest in both categories even though they have had to compete for years against the megabanks’ access to cheaper money in pricing loans. In addition, community banks must compete against the big lenders’ lower comparative costs in handling regulatory paperwork.

While Cam complains that this is "morally wrong," I suspect that in a nation overrun with Pontius Pilates who sneer in the throes of their born-again relativism "What is 'truth'?," appealing to "morality" as a behavior influencer will have as much impact on Congress as a stern talking to by Pope Francis would have on Charlie Sheen. More effective on the morally challenged is likely to be his economic arguments.

Community banks should be putting their capital to work in the small towns, rural communities and middle-class urban enclaves they know well. Instead, they are focusing too many of their precious human resources on onerous paperwork and time-consuming compliance measures.

Community banks are the source of almost 60 percent of all small-business loans of less than $1 million, as well as mortgage and consumer loans tailored to the needs of their local communities. Large banking organizations with more than $50 billion in assets hold almost 40 percent of outstanding small loans to businesses, according to the Federal Reserve, but loans to small businesses aren’t a significant portion of large-bank lending. Small-business loans represent less than 5 percent of the large banks’ total domestic lending.

Cam outlines five specific steps Congress and the federal regulators could take to help community banks (and credit unions, for that matter, although Cam would choke on his own tongue before admitting it). They include:

• Easing up on some of the more onerous residential mortgage lending and servicing rules.
• Eliminating the requirement that community banks report on every new small business loan application.
• Requiring a cost-benefit analysis for all new regulations and prohibiting the issuance of any regulation where the cost exceeds the benefit.
• Raising the threshold to $350 million in assets for the requirement for an audit of a bank's internal controls.
• Eliminating the annual requirement for sending no-change privacy policies.

These are all helpful suggestions, but  I'm frankly surprised that he didn't also call for the carpet bombing of CFPB's D.C. headquarters and insist that Jamie Dimon's king-size bed be short-sheeted. Oh well, the year is not even half over. There's still time to get down to the really important stuff.

The OCC Takes A Body Shot

Housing Wire's Jacob Gaffney was kind enough to turn readers on to a recent snark-fest by John Stewart, in which he turned the heat up on both MERS and the OCC. It's a rare day when you have an audience howling over financial esoteria. For those, like yours truly, who missed this segment, enjoy!

The Daily Show with Jon Stewart	Mon - Thurs 11p / 10c
Residential Evil
www.thedailyshow.com
Daily Show Full Episodes Indecision Political Humor The Daily Show on Facebook

A Bad Idea That Refuses To Die

Even though municipalities like San Bernardino have come to their senses and dropped a make-your-investment-banker-rich-quick scheme to seize underwater mortgages from mortgage lenders and wrote down the principal balances, the scheme refuses to completely die. I guess we'll have to use holy water, garlic, mirrors, fire, crucifixes and wooden stakes to stamp it out. In the interim, SIFMA continues to publicly pummel it.

In a recent post on its Pennsylvania + Wall blog, SIFMA's Timothy Cameron reiterates why those municipalities still considering this likely unconstitutional scheme to abandon it.

The proposals being touted target a very narrow slice of homeowners – those that are in private-label MBS and who are current on their existing mortgages, have good credit, and ideally don’t have existing home equity loans or other liens on the property. Those who are behind on their mortgage payments or have poor credit (which is the vast majority of homeowners needing help) will get no relief.

Within the small pool of qualifying homeowners, the proposal, on its face, will substantially undervalue their homes. In one example, the mortgage that investors would get paid $160,000 for is refinanced shortly thereafter for $190,000, with much of the additional $30,000 going to the plan’s backers after costs and a kickback to the municipality are accounted for. This is not fair compensation, since the amount paid is well below the face value of the taken note, and significant profits accrue to private parties.

In addition to the legal issues, the use of eminent domain will also be immensely destructive to U.S. mortgage markets in general and to specific communities using eminent domain, in particular. If the sanctity of the contractual relationship between a borrower and a creditor is undermined by the use of eminent domain, both lenders and investors will be reluctant to provide funding in the future. The result will be a significant contraction of credit availability, particularly in communities that have exercised eminent domain to seize loans. It will be much harder to get a loan: any loans that are granted will likely require much larger down payments, stronger credit scores and higher interest rates to compensate for this new and unprecedented risk. This contraction of credit availability would likely serve to halt any recovery in the municipality’s housing market, and could further depress housing values in the cities using eminent domain.

The last reason may be the most telling. Good luck with the future availability of affordable residential mortgage credit in your soon-to-be dustbowl of a community if you enact this scheme. The investment fund gets wealthy, of course, which is the impetus for this half-baked plan. All to help, but not so much, a narrow slice of the community.

Bad ideas never die. They never seem to fade away, either, unfortunately.

Florida Continues To Pummel Stern

Nearly two years ago, we noted that the Florida Bar had filed a complaint against former Florida Foreclosure King David J. Stern over alleged ethical lapses related to the meltdown of his foreclosure mill firm in the wake of a robosigning scandal. The wheels of justice grind exceedingly slowly (at least, they do in The Sunshine State), but last week, the Bar filed another whopper against Stern.

It took two years, but the Florida Bar has finally dropped a doozey of a complaint against former foreclosure king David J. Stern.

The 80-page complaint includes 17 counts or charges that Stern violated the Bar’s rules of professional conduct. The Bar alleges that Stern failed to properly supervise lawyers and non-lawyers at his firm and failed to halt regular violations of Bar rules.

The article summarizes the allegations made in the long complaint. Most have them appear to have been made public previously.

According to the newspaper, neither Stern nor his attorneys could be reached for comment (although another article states that Stern's lawyer, Jeffrey Tew, "told the newspaper Thursday that Stern has done nothing to warrant discipline"). Unfortunately for Stern, a former nemesis was ready and willing to pipe up with an opinion.

Former assistant state attorney general Theresa Edwards, who investigated Stern several years ago before being fired by the AG's office, said she thinks the bar should have acted sooner. (Contacted by the newspaper, the Bar declined, through a spokeswoman, to comment.)

"Considering the amount of money he's made, his bar license will be of little concern to him," said Edwards, who is now in private practice.

Biting off more than you can chew, then trying to gulp it down by cutting corners, appears, in retrospect, to have been a bad business plan. Then again, perhaps Ms. Edwards is correct. Perhaps he's made so much money that he won't care what the state does with his law license.

We'll see. At this rate, it may be another two years before this plays out. By that time, only crackpot bloggers may even remember who Stern was.

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."

Second-Guessing the Second Guessers

Every once in awhile, the blustering blunderbuss known as Senator Liz ("She-Reams-For-Sport") Warren fires a scattershot salvo that strikes a worthy target. You know, like when Dick Cheney shot a lawyer in the face.

The other day, Princess Rides-Bankers-Like-A-Burro was grilling some representatives of the big-time independent foreclosure review firms at a hearing that only Democrats attended (so you know it wasn't going to be pro-banker) and, as related by Larry Doyle, she struck oil.

Senator Warren: I just want to take a look at the Independent Foreclosure Review Payment Agreement details. I think you’ve probably all seen this one page agreement that lists all of the things that the banks did wrong and then boxes for how many people fall into each category and how much money they’re going to be paid. Is that right? You’ve all seen this? [Panel indicates they have seen it.]

And this was put out – who put this out? I think this is put out by the OCC and Federal Reserve. Is that right? As part of the settlement details. So I just want to ask you about this.

It has some pretty amazing categories here. The first category is about service members who were protected by Federal law whose homes were unlawfully foreclosed. It’s got people who were current on their payments whose homes were foreclosed. It’s got people who were performing all of the requirements under a modification who lost their homes to foreclosure.

And it tells how many people fall into each category and how much money the people in that category will receive. And, it ultimately resolves what will happen to 3,949,896 families.

So the question I have is having resolved this nearly 4 million families, who put the people, the families, into each of these boxes. Is that what your firms did. Mr. Ryan?

Owen Ryan, Partner, Deloitte & Touche LLP: No, Senator, we did not.

Senator Warren: So who put them in.

Ryan: I’m not sure how that schedule is prepared. I saw it for the first time yesterday.

Senator Warren: Mr. Flanagan?

James Flanagan, Leader, U.S. Financial Services Practice, Pricewaterhouse Coopers LLP: Same response. We were not involved in the accumulation of that information.

Senator Warren: Mr. Alt?

Konrad Alt, Managing Director, Promontory Financial Group: Senator, I’ve seen the schedule but I’m not familiar with the basis for its preparation.

Senator Warren: So let me understand this. You ran the independent reviews, right. That’s what you got paid to do. And yet, I presume, the only one left is the banks must have put them in these boxes and you made no independent review of their going into these boxes. You were not asked to do that? Mr. Alt.

Alt: No Senator, we were not asked to do that.

Senator Warren: Mr. Flanagan. 

Flanagan: No we were not.

Senator Warren: Mr. Ryan.

Ryan: We were not Senator.

Senator Warren: So that leaves us with the banks that broke the law were then the banks that decided how many people lost their homes because of their lawbreaking. And, as a result, how many people would collect money in each of these categories. Is that right Mr. Alt?

Alt: Senator, I’m not familiar with the basis for the scheduling. 

Senator Warren: So far as you know, there’s no independent review of the banks’ analysis…you looked at 100,000 cases and the banks have now put 4 million people into categories and resolved finally how much they will get from this review by the OCC and the Federal Reserve.

Sweet!

As Mr. Doyle put it, "Bang up job on behalf of the American taxpayer from these individuals and their firms charged with an independent review of this settlement process. NOT!!"

But here's a word in defense of the consulting firms: when Mr. Alt said that it wasn't in the scope of their duties, he was not kidding. As one of my readers, a bank lawyer, advised me, the entire review process was FUBAR from the get-go.

I saw it up close and it was an absolute Rube Goldberg process with the scope, criteria and objectives changing constantly. Regulatory example 1001 of do as I say, not as I do.

It's always easy to use 20/20 hindsight to bash people, of course. However, since the regulators love to do it to bankers, I guess turnabout is fair play.