Bank Lawyer's Blog

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."

Vendor Management Is Still A Regulatory Hot Button

According to the FDIC, a common theme in IT examination downgrades is poor vendor management by banks.

Last year, in 46% of the FDIC IT examinations in which bank ratings were downgraded, inadequate vendor management was cited as a causal factor, says Donald Saxinger, senior examination specialist in FDIC's Technology Supervision Branch.

"I'm not saying it was the primal causal factor, but, in 46% of the downgrades, vendor management was cited," Saxinger says. He spoke during the recent ABA Telephone Briefing "Vendor management: Unlocking the value beyond regulatory compliance."

Although the most common “error” that FDIC examiners discovered was the failure by banks to ask their vendors for copies of regulatory examinations, that wasn’t the only nugget contained in the linked article from the ABA Banking Journal. Among the others:

• Vendor management needs to consider all service providers that hold sensitive customer information, not just IT vendors. These include loan workout consulting, appraisal review companies, outside attorneys, and others.

• Make sure to get the proper exam reports about individual vendors. Some banks just obtain reports for the host data center, but not for the specific application that the banks were using.

• Even the proper reports don't cover everything that a bank must consider in its security risk management efforts. For example, one service provider with an otherwise clean report did not have an internal audit program and its business continuity planning was poorly documented.

This is all sound advice, of course, but knowing what you need to ask for is only half the battle. You also need to make certain that the agreement with your vendor gives the bank the right to ask for, and the vendor the obligation to deliver to the bank, copies of the necessary reports. Relying on the goodwill of the vendor in coughing up examination and audit reports, especially when they may contain results that are less than flattering to the vendor, is "unwise."

Here's one more tip: if the report reveals problems, the agreement with the vendor should require the vendor to notify the bank of what action the vendor intends to take to remedy the defects, and should also require the vendor to give the bank periodic progress reports on its progress in correcting those problems.

I'll be doing a webinar on March 6, 2013 on the topic "Technology Service Agreements: Meeting Regulator’s Expectations." It covers regulatory guidance applicable to credit unions, banks, and thrifts, although the same essential principles apply to each. The goal is to discuss the provisions of a technology service agreement that regulators expect (and that sound business judgment requires) be included, and to give financial institutions guidance on how to approach the issues covered by each of those provisions so that the institution meets its regulator's expectations while also meeting the institution's business needs.

Recess Richard In The Crosshairs?

Since Friday's decision by the DC Circuit Court of Appeals to invalidate Obama's recession appointments to the NLRB, my e-mail has been ablaze with speculation about the potential effect on banks, thrifts, and credit unions if the rationale applied by the court is also applied to Obama's recess appoint of Recess Richie Cordray as Director of the CFPB. Inasmuch as every pundit, bank lawyer, and crazy uncle will be blogging about this topic ad nauseum, I'm only going to make some preliminary observations, and then feed off the superior brain power of others. That's how I've made a living thus far and I see no reason to change at this late date.

The first observation is that Jay Carney is technically correct while at the same time laughingly intellectually dishonest. While Friday's decision was made with regard to specifically named defendants, none of whom were named "Cordray," all any existing or prospective plaintiff in a lawsuit against Cordray and the CFPB need do is file a complaint (or amend an existing one) to assert the same grounds, and Recess Richie's appointment is in jeopardy. Count on that movie coming to a theater near you, soon.

If the decision is upheld on appeal to the US Supreme Court (and bank on it, it will be appealed), the preliminary comments I've received break down between those of Steve Van Beek, Director of Regulatory Compliance for the NAFCU, who likely will have issued his own blog post already on thiis topic by the time you read this, and those of my friend Joe Lynyak of Pillsbury, who I'll quote (with permission) as follows:

The pertinence of this decision is that it also applies to the appointment of Director Cordray, and hence his appointment may be null and void.

This has two major consequences. First, in order for the CFPB to exercise most of its new authority, Title X of Dodd Frank specifically requires that a Director be appointed. Accordingly, a great deal of the CFPB’s actions since Director Cordray’s appointment—including the issuance of many regulations—may be void.

Second, and of particular concern to the mortgage industry, liability is now created in regard to the regulations issued by the CFPB as part of its Mortgage Initiative between January 10^th and January 21^st. That is because Section 1400(c)(3) indicates that all amendments made  to the lending rules as set forth in Title XIV become effective as of January 21, 2013 if regulations have not been issued. The pertinent section states as follows:

SEC. 1400. SHORT TITLE; DESIGNATION AS ENUMERATED CONSUMER

LAW.

(a) SHORT TITLE.—This title may be cited as the ‘‘Mortgage Reform and Anti-Predatory Lending Act’’.

(b) DESIGNATION AS ENUMERATED CONSUMER LAW UNDER THE

PURVIEW OF THE BUREAU OF CONSUMER FINANCIAL PROTECTION.—

Subtitles A, B, C, and E and sections 1471, 1472, 1475, and 1476,  and the amendments made by such subtitles and sections, shall be enumerated consumer laws, as defined in section 1002, and come under the purview of the Bureau of Consumer Financial Protection for purposes of title X, including the transfer of functions and personnel under subtitle F of title X and the savings provisions of such subtitle.

(c) REGULATIONS; EFFECTIVE DATE.—

(1)   REGULATIONS.—The regulations required to be prescribed under this title or the amendments made by this title shall—

(A)  be prescribed in final form before the end of the 18-month period beginning on the designated transfer date; and

(B)   take effect not later than 12 months after the date of issuance of the regulations in final form.

(2)   EFFECTIVE DATE ESTABLISHED BY RULE.—Except as provided in paragraph (3), a section, or provision thereof, of this title shall take effect on the date on which the final regulations implementing such section, or provision, take effect.

(3)   EFFECTIVE DATE.—A section of this title for which regulations have not been issued on the date that is 18 months after the designated transfer date shall take effect on such date. (Emphasis added.)

What this means is that virtually everything in Title XIV is now in force—and no one is in compliance—meaning that every loan being originated is in violation of numerous provisions of the Truth-in-Lending Act and RESPA (among others).

This exposure may cause the mortgage industry to strongly support the legitimacy of the Cordray appointment.

Steve's preliminary reaction (and I assume that he will expand upon this on his own blog) was "a different take."

According to the Fed and CFPB IG’s report, the CFPB has the authority to issue regulations (i.e., Reg E remittances, Reg Z and Reg X mortgages) for depository institutions without a Director.

I hadn’t fully thought through the “law is effective if the regulations are properly implemented” aspect as it relates to Cordray. That is an interesting angle. But, I’d think that the above would mean that credit unions and banks would be fine under the regulations as the CFPB had that authority regardless of whether they had a “Senate-confirmed Director” or not.

Steve referred me to a blog post from last year which discussed the ability of the CFPB to issue certain regulations with respect to FDIC- and NCUA-insured financial institutions to which those institutions were already subject at the time the CFPB was created, whether or not a "Senate-confirmed Director" was installed.

Joe's response to Steve's points is that "among other things, as a basic matter, if there was authority to issue new regulations, the only person authorized to issue them arguably would be the Secretary of the Treasury, who is in charge of the CFPB until the Director is appointed. The fact that Cordray signed and issued the mortgage regulations has a much force and affect (assuming the DC Ct. of Appeals decision is correct) as Jeffrey Dahmer."

His mention of Jeffrey Dahmer threw a wet blanket on my plans to go out for a dinner of short ribs on Friday night.

Steve's final word to me on Saturday was that "the mortgage brokers and nonbank mortgage servicers are the real ones who would be in deep do-do."

The CFPB didn’t have authority over those entities without a “Senate-confirmed Director” and, one could argue, they aren’t complying with Dodd-Frank as required by January 21, 2013. Depository institutions, on the other hand, would have the regulations (and the added 11 months and 9 days) to follow and comply with as the CFPB had authority (assuming the secret document from the file cabinet or similar) to issue the regs for banks and CUs.

Of course, there could be tons of nuances and issues that come up depending on which authorities (Dodd-Frank or existing TILA/RESPA) to issue certain provisions of the new requirements.

Luckily, my message to CUs is going to be simple – keep working on understanding and complying with the new regs. The other stuff will work itself out.

Steve's reference to a "secret document from a file cabinet" was prompted by an email to both of us from a well-known financial institutions attorney from the Pacific Northwest (who shall remain nameless to protect him from being identified as a reader of this blog, and well as to encourage his continued issuance of unrestrained hot opinions), who let loose with the following regarding Joe's comments concerning Tim Geithner being the only enforceable issuer of CFPB regulations in the absence of a "legitimate" Director:

Reading the Fed/IG material, I see they use the term "Senate confirmed" director as the trigger for CFPB authority. In the absence of a "Senate-confirmed" director, they say, the Treasury Secretary is authorized to perform all these functions. This required me to actually [gasp] read the law. Interestingly, 1066 refers to a Director "that is confirmed by the Senate in accordance with section 1011." Section 1011 doesn't say anything about confirmation, but uses the good old "with the advice and consent of the Senate." I assume (but have not checked my assumption) that a valid recess appointment would satisfy this requirement for the period during which the recess appointment was valid.

With that said, I have to think that the administration knew or suspected that a court would hold that Cordray never had the authority to begin with. What are the odds that they've planned for this all along, and will open the file cabinet and pull out a document in which Geithner delegated (last January) to Cordray the Secretary's authority authority to perform the functions in question. Thus, we can all breathe a big sigh of relief because all the rules were in fact, validly issued, and will remain in effect.

The One has us covered.

Obviously, the man is joking. Would an administration as upright and above-board as this one try to pull some half-baked, back-dated, robo-signed, authorization document out of a file cabinet (or out of its nether regions)? Perish the thought!

A number of talking (i.e., bloviating) heads, including this one, think that unless the SCOTUS overturns Friday's decision, the Republicans may have leverage to tweak FrankenDodd to create a CFPB commission structure that they think will somehow lessen the potential for an all-powerful federal regulator running amok, in return for which they'll stick in a retroactive legislative "fix" to validate whatever regulations the CFPB issued, no matter whose name appeared on the dotted line. Of course, at this early stage, it's way too soon to tell. Nevertheless, as my anonymous correspondent also observed: "One thing's for sure: it will be interesting." Indeed.

"The One has us covered." With what, I'm not certain, but watching and listening to Jay Carney, it's beginning to smell a lot ike flopsweat.

Steve's advice to credit unions is equally applicable to FDIC-insured financial institutions: "keep working on understanding and complying with the new regs. The other stuff will work itself out."

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.

The Pendulum Swings One Way

Last night's post about the high cost of fighting enforcement actions by the OCC brought a link from a reader to an article originally posted by attorney Stephens B. Woodrough nine years ago. Woodrough relates the horror story of an OCC enforcement action brought against his client, who is anonymously referred to as "Banker Jones." The story is told from the perspective of an advocate strongly pushing his client's sense of outrage at the treatment of the bullies at the OCC, and it should be kept in mind that it's only one side of the story. However, to those of us who've been in this game for several decades, Woodrough's closing contention is plausible.

At the time the OCC issued the Notice, the agency only pretended to offer Banker Jones the opportunity to exercise his legal right to a hearing. The charges were never issued against Banker Jones for the purpose of assessing a penalty in accordance with the due process procedures set forth in the Federal statutes and implementing regulations. Rather, the sole purpose of the Notice was to initiate the enforcement and adjudication process and to manipulate that process by using it as a weapon to coerce Banker Jones to pay a penalty order issued by consent, or failing in that effort, to inflict a financial penalty in the form of the legal fees and expenses Banker Jones would incur to prepare for an evidentiary hearing the agency had already decided would never be convened.

We've all seen the pendulum of regulatory enforcement swing from lax to zealous and back again as banking "crises" come and go. Perhaps, because the recent crisis was so severe and has been so prolonged, the recent responsive "tightening of the screws" by federal bank supervisory and enforcement personnel has been unusually harsh. Regulators are also under the burden of having the FDIC's Inspector General review every bank failure and come to the unimaginative conclusion that, in practically every case, the responsible federal banking agency did not act quickly or strongly enough. Finally, we have the undeniable fact that politicians and many members of the press and the public are howling for blood, decrying the fact that more "bankers" haven't been made to do the "perp walk" and, therefore, claiming that regulators have been captured by the regulated. Few critics are making distinctions between Wall Street "banks" and Main Street "banks."

Whatever the causes, the pendulum has been, and is still, swinging one way, fast and hard, and that way is not toward "lax."

The Yin And The Yang of D.C.

Echoing the complaints of community bankers, the National Association of Federal Credit Unions recently sent a letter of protest to the CFPB about its proposed rule to combine Regulation Z and RESPA disclosures. NAFCU warns that the proposal could drive many credit unions out of the residential lending business.

NAFCU argues the rule, in its current form, will force some credit unions to stop serving long-time borrowers while imposing unreasonable compliance costs on credit unions that already conduct quality due diligence.

The rule would force creditors to bare responsibility for any errors or lack of timeliness issues caused by a mortgage broker.

Federal credit unions also fear electronic-record retention requirements would impose unreasonable fees on credit unions and believe the rule's overall exemption for small credit unions should go beyond firms that issue five or fewer mortgages each year to include credit unions with $175 million or less in assets.

"Many small credit unions that conduct a small number of mortgage loans to their specific membership would simply cease their mortgage operations," the NAFCU wrote in its letter. "For example, a credit union whose membership consists of teachers in a part of one state or another whose membership consists of firefighters of another state may originate twenty mortgages in a year."

The organization suggests this type of credit union would not qualify for the exemption, forcing them to end relationships with long-time borrowers.

And the odds are that the CFPB gives more than a tinker's damn about that eventuality are...??

While NAFCU fights gamely for its members against the avalanche of regulatory burdens roaring down on small banks and credit unions from D.C., the National Association of Credit Unions has other things on its mind. Things like

ABBA tribute band ABBA The Concert will kick off the Credit Union National Association's (CUNA) 2013 Governmental Affairs Conference on Feb. 24 with a dazzling performance of ABBA's iconic hits, including Dancing Queen, Mama Mia, SOS and Take a Chance on Me.

[...]

ABBA The Concert, featuring Waterloo the band, bills itself as "the best ABBA since ABBA." The tribute group was formed in 1996 and quickly became known for its stunningly ABBA-esque sound and performances. The group has always included two members of the original ABBA rhythm section, and has performed more than 1,000 shows in more than 20 countries worldwide.

CUNA Councils Vice President David Rohn said CUNA Councils is delighted to again sponsor the GAC-opening concert. "Sunday's show promises to be a memorable experience--a concert full of popular hits and high-energy fun that all attendees will enjoy," he added.

[...]

CUNA's GAC is the credit union movement's premier political event and its largest national conference, each year providing more than 4,000 credit union executives and board members an opportunity to hear influential leaders from Congress, presidential administrations and federal regulatory agencies.

GAC attendees will also have the chance to meet directly with their members of Congress here in Washington.

And, the chance to bask in the wonderfulness of a fake ABBA band. As if the real ABBA wasn't sufficiently excruciating.

How did the promo piece omit the greatness of the group's most inspired tune, Bang-A-Boomerang?

Like a bang, a boom-a-boomerang
Dum-be-dum-dum be-dum-be-dum-dum
Oh bang, a boom-a-boomerang
Love is a tune you hum-de-hum-hum
So give it away, I think you'll learn
You'll get love in return
So bang, a boom-a-boomerang is love
A boom-a-boomerang is love

Give me a minute while I recover from my swoon.

As the credit union trade official who sent me notice of this concert-of-a-lifetime so aptly put it: "You couldn't make this s*** up."

No, you couldn't. What's more, why would you want to?

Responding to "Challenging" Examinations

My post of last week regarding the need for banks to restrain their mighty fist of snark when dealing with their regulators, prompted Anthony Demangone, COO of the National Association of Federal Credit Unions, to forward a copy of a memorandum that the NAFCU prepared a couple of years ago (and most recently updated in March 2011) entitled "Managing Examinations in Challenging Times." With Anthony's permission, I uploaded it and it can be accessed through this link.

While the technical discussion of the appeals process applies only to credit unions, the memorandum is chock-full of practical advice for financial institutions of all types. I especially enjoyed the ten points listed on pages 5 and 6, including the admonition to "stay professional," which echoes my advice of last week. While many readers may feel they've got these points well in hand, at the very least the memorandum provides a useful refresher, especially in the immediate aftermath of an exchange with an examiner in which the institution's personnel may be sorely tempted to unleash the hounds. Instead, briefly reviewing the 10 points may be even more useful than simply counting to ten.

I think an even more useful process would be a formal appeal process to an objective third party, as we discussed six months ago. That legislation never made it out of subcommittee, and nothing will be done in this lame duck year. However, depending on what happens tomorrow, we may see this issue revived in 2013.

Another Chapter In The Horror Story Known As "Due Deliberation"

Regular readers may recall the Sturm und Drang that accompanied the introduction earlier this year of the Financial Institutions Examination Fairness and Reform Act, a bi-partisan effort to introduce the virus of due process into the examination process. Federal financial institution regulators had a veritable cow over the prospect that the Fifth Amendment might impede their ability to do what they want, when they want, and if you don't like it...tough nuggies.

A couple of months ago, some legislators on both sides of the aisle got another bee in their bonnets and tried to pull a similar fast one on the bank regulators in the form of the Independent Agency Regulatory Analysis Act. That heinous concoction would subject bank regulations to considerations that apply to other federal regulations, a prospect that caused projectile vomiting across the FI regulatory spectrum (paid subscription required).

The legislation would authorize the president to require all independent agencies to take up to 13 additional steps before proposing a rule, including measuring its costs and benefits. The bill could face a mark-up in the Homeland Security and Governmental Affairs Committee in the lame duck session following the Nov. 6 elections.

But in a letter obtained by American Banker, financial regulators warn that the bill would transform the role of independent agencies and undermine their authority.

"This would give any President unprecedented authority to influence the policy and rulemaking functions of independent regulatory agencies and would constitute a fundamental change in the role of independent regulatory agencies," says the Oct. 26 letter to panel chairman Joseph Lieberman, I-Ct., and ranking member Collins.

The letter was signed by Federal Reserve Board Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro, Comptroller of the Currency Thomas Curry, Federal Deposit Insurance Corp. Acting Chairman Martin Gruenberg, Consumer Financial Protection Bureau Director Richard Cordray and National Credit Union Administration Chairman Debbie Matz.

"Beyond injecting an administration's influence directly into our rulemaking, the bill also would interfere with our ability to promulgate rules critical to our missions in a timely manner and would likely result in unnecessary and unwarranted litigation in connection with our rules," the letter says. "We urge you to consider the potential negative consequences of this bill before proceeding with it legislatively, and would be happy to discuss it in more detail at your convenience."

Consumer adovacy groups also waxed apoplectic and apocalyptic.

"This bill would undercut the ability of independent federal agencies like the Consumer Financial Protection Bureau, the Consumer Product Safety Commission and the Federal Trade Commission to protect consumers from predatory financial schemes, dangerous consumer products and costly, anti-competitive practices," the groups wrote in a Sept. 13 letter.

"Most significantly for consumers, S. 3468 imposes duplicative and time-consuming requirements on independent agencies to conduct cost-benefit analyses of proposed protections."

Gee, I can see how everyone would be concerned about "duplicative and time consuming requirements" putting a speed bump in the fast lane to burying banks and credit unions under thousands of pages of mind-numbing, soul-crushing, pocketbook-draining regulations.

Senator Portman, one of the bill's principal sponsors, is buying none of the blowback.

"Independent agencies exercise vast power over major sectors our economy — from telecom, to agriculture, to financial services — but they are exempt from commonsense requirements including cost-benefit analysis of major regulations to ensure they do more good than harm," Portman said in an Aug. 1 press release.

"This bill would close the loophole for independent agencies by authorizing the president to bring them within the same regulatory review framework that applies to other agencies. This is a bipartisan, consensus reform with broad support, and it will promote a more stable regulatory environment for economic growth and job creation."

Subjecting bank regulators to the same standards that other federal agencies must abide by? How radical!

Notwithstanding its "broad, bi-partisan support," the chances of it being enacted are slim to none, this session. However, bills like this are laying down markers for 2013. Let's hope that by that time, we have a White House and Congress that won't listen to Chicken Littles in the regulatory arena.

Diversity and Disparate Impact

Former credit union executive and current credit union consultant Marvin Umholtz's most recent issue of his email newsletter "CU Strategic Hot Topics" had an interesting take on the NCUA's Office of Minority and Women Inclusion (OMWI) and the implications for credit unions of the NCUA's upcoming assessments of credit unions' diversity policies and practices. With Marvin's permission, I've excerpted the entire discussion.

Credit Union Diversity Policies and Practices Destined for NCUA OMWI Scrutiny

In the NCUA’s September edition of its newsletter www.ncuareport.org/ncuareport/201209#pg1 starting on page 6 there was an article featuring the NCUA Office of Minority and Women Inclusion (OMWI) www.ncua.gov/about/Leadership/CO/Pages/OMWI.aspx that should serve as a reminder that the NCUA will soon begin assessing federally insured credit union diversity policies and practices.  As the article explained, the NCUA OMWI (along with those OMWI offices at the CFPB http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-hires-stuart-ishimaru-to-head-the-office-of-minority-and-women-inclusion the Federal Reserve System www.federalreserve.gov/publications/other-reports/files/omwi-report-20120402.pdf and the individual regional Federal Reserve Banks, the Office of the Comptroller of the Currency www.occ.gov/about/who-we-are/careers/omwi.html, the Federal Deposit Insurance Corporation www.fdic.gov/about/diversity/FDIC_OMWI_Annual_Report_2011.pdf, and the U.S. Treasury www.treasury.gov/about/organizational-structure/offices/Pages/omwi.aspx) has three missions under the Dodd-Frank Act Section 342 addressing the diversity of the agency’s workforce, contractors, and regulated entities.  The NCUA article pointed out that among those missions, “By law, each OMWI must develop standards to assess diversity in the agency’s regulated entities.  NCUA’s regulated entities consist of all federally insured credit unions.  NCUA’s OMWI Director and NCUA staff are now participating on a regulated entities subcommittee consisting of representatives from each covered agency.  The purpose of the subcommittee is to ensure a common framework and consistent approach among the agencies in implementing Section 342 with respect to regulated entities…NCUA’s ultimate goal for assessing credit union diversity standards is to develop an approach that satisfies congressional intent, but that also minimizes any potential regulatory reporting burdens by using pre-existing data sources wherever possible.  Once NCUA drafts proposed diversity assessment standards, the agency will make it available for public comment.”  Based upon past statements from the NCUA OMWI Director to this correspondent, the NCUA Board is expected to adopt a policy implementing Section 342 prior to the end of 2012. 

Section 342 was added in the 11^th hour at the insistence of Congresswoman Maxine Waters (D-CA) http://waters.house.gov during the House-Senate conference committee on the highly partisan Dodd-Frank Act.  Even to this day Congresswoman Waters continues to be among the Dodd-Frank Act’s staunchest defenders.  Having recently been cleared of longstanding House Ethics Committee charges, Congresswoman Waters now is again considered to be the first in line for either Ranking Minority Member or Chairperson of the House Financial Services Committee in 2013, depending on which political party holds majority control www.politico.com/news/stories/0912/81725.html following the 2012 elections.  Since this correspondent disagrees with Congresswoman Waters’ policy positions on financial services issues 99.99% of the time, neither one of those alternatives is good news.

During a September 21^st speech to the Congressional Black Caucus, CFPB Director Richard Cordray www.consumerfinance.gov/speeches/prepared-remarks-by-director-richard-cordray-at-the-congressional-black-caucus-foundation reported about the CFPB’s OMWI.  He said, “In January, at the same time that President Obama appointed me to serve as the first Director of the Consumer Bureau, we began standing up the OMWI.  In April, we were fortunate to bring on Stuart Ishimaru to lead our OMWI.  Stuart’s extensive work promoting diversity in the Civil Rights Division of the Department of Justice and the Equal Employment Opportunity Commission – and frankly throughout his life – makes him the perfect person for the job.  He has worked on behalf of underserved communities, and he brings with him decades of experience in overseeing federal policies geared toward fostering difference in the workplace and creating opportunities for women and minorities.”  Director Cordray then explained what the agency was doing in terms of workplace diversity and contractor outreach, but it was his comments about regulated entities that caught this correspondent’s attention and foreshadowed the CFPB’s likely activism.

Cordray said, “Third, and very importantly, Congress has directed that the OMWI will work to create standards to assess diversity at the financial institutions that the Consumer Bureau regulates.  Take a moment to grasp how this aspect of our task greatly broadens our opportunity.  The financial realm encompasses trillions of dollars of assets and employs more than five million people in the United States.  To the extent that we can encourage and influence a broadening of equal opportunity in this powerful and dynamic sector of the American economy, we will quite possibly make breakthroughs for the principles of diversity and inclusion that will be profound and lasting.  Just as we are convinced that having a mix of employee backgrounds and experiences is good for our work at the Consumer Bureau, we likewise are convinced that the same is true for financial institutions themselves.  Like us, they serve the broad consumer public of this country.  And like us, they will better understand the changing demographics and needs of their customer base if their own workforce is reflective of our changing society.”

Director Cordray continued talking about his ideological premise and politically-loaded interpretations, “As a new agency, we have the rare advantage of not being wedded to the old ways, and thus of being able to forge our own path.  I happen to believe that we are at a moment of time in this country where business leaders, both in the financial industry and elsewhere, are able to grasp the importance of the outlook that I have just described.  For a long time, the financial services industry did not traditionally reflect all its potential customers.  But it feels to me like this sector is ripe for change and is beginning to embrace this change.  If we are willing to step forward right now and make a persuasive case for diversity and inclusion, then I believe we will find that we are casting our bread upon the waters at a propitious time and this important effort will be crowned with success.  Put bluntly, there is a great business opportunity here for a sizable industry, and I am confident that good business leaders will be prepared to seize that opportunity.”  Since the CFPB has near dictator-like authorities over the financial services industry, one doesn’t know whether to consider Director Cordray’s remarks to be harmless political pandering to a targeted constituency or a tangible threat to implement ideologically activist policies that push the boundaries of the law.

Perhaps the biggest significance of the industry diversity assessments to be undertaken by the NCUA and the CFPB, as well as all of the other various OMWIs, is that the findings could serve as fodder for fair lending violation cases based upon the disparate impact doctrine that has been publicly declared as policy by the CFPB, the U.S. Department of Justice (DOJ) www.doj.gov, the Department of Housing and Urban Development (HUD) www.hud.gov, the Equal Employment Opportunity Commission (EEOC) www.eeoc.gov, and the Department of Labor www.dol.gov/ofccp/regs/compliance/fccm/ofcpch1.htm, among others.  The NCUA OMWI will be on a data-fishing expedition that once shared with other federal agencies will surely lead to lawsuits and coerced settlements.  Where does the NCUA Board stand concerning the application of the disparate impact doctrine on credit unions?  Does the NCUA Board plan to use the OMWI assessments to build law enforcement cases against federal credit unions? 

There's enough there to concern banks, as well as credit unions, of course. The use of diversity examinations as "fishing expeditions" to uncover evidence to support disparate impact enforcement actions is a troublesome prospect. Moreover, I listened to a CFPB attorney tell a crowd of Texas bank lawyers six months ago that every CFPB examination team would include an enforcement lawyer. Thus, collecting evidence for enforcement actions appears to be part of the CFPB's normal examination agenda, so Marvin's concerns are well-founded. After all, none of the regulators who have primary examination authority for the under-$10 billion bank and credit union industry segment will want to appear to be less "diligent" than the CFPB.

In Georgia, The Business Judgment Rule Is Alive And Kicking

This past Tuesday, a federal district court judge in Georgia found that in The Peach State, at least, officers and directors aren't liable for ordinary negligence. As discussed in a recent blog post by Kevin LaCroix, the business judgment rule is apparently alive and well in Georgia and it protects both officers and directors.

In an August 14, 2012 opinion in the FDIC’s lawsuit against former directors and officers of the failed Haven Trust bank, Northern District of Georgia Judge Steve C. Jones affirmed that Georgia’s business judgment rule is applicable to the actions of bank directors and officers. Based on that determination, Judge Jones dismissed the FDIC’s claims against the directors and officers for ordinary negligence and breach of fiduciary duty. Judge Jones also ruled that the FDIC must replead its gross negligence claims against the former directors and officers to provide specific allegations as to each defendant’s alleged involvement in or responsibility for the alleged wrongdoing.

[...]

In his August 14, 2012 opinion, Judge Jones granted the defendants’ motions to dismiss the FDIC”s claims for negligence of for breach of fiduciary duty. He determined first that, contrary to the arguments of the FDIC, t was appropriate to consider the business judgment rule at the motion to dismiss stage. Judge Jones then went on to conclude that “when Georgia’s business judgment rule is applied to claims for ordinary negligence, Georgia courts hold that such claims are not viable.” He also specifically confirmed that the business judgment rule is applicable in the banking context. Based on these determinations, Judge Jones dismissed the FDIC’s claims for ordinary negligence and breach of fiduciary duty (based on ordinary negligence).

Judge Jones denied the defendants’ motion to dismiss the gross negligence count, finding that “the complaint has alleged in a collective/group manner sufficient facts for which a jury might reasonably conclude that Defendants were ‘grossly negligent’ as defined by Georgia law.” However, noting that the “factual allegations must give each defendant ‘fair notice’ of the nature of the claim” against them, Judge Jones ordered the FDIC to replead its gross negligence claim “to provide specific allegations as to each Defendant’s involvement or responsibility for the alleged wrongs, decisions, approvals, transactions and loans referenced in the original Complaint.”

As Kevin also points out, this ruling is consistent with earlier rulings by the same judge in connection with claims by the FDIC against former officers and directors of another failed Georgia bank. Those rulings are significant for a number of reasons, among them the fact that, since the state of Georgia is apparently the elephant graveyard of community banks that concentrated in commercial real estate lending, these rulings could affect claims made against the officers and directors of failed banks where the FDIC has not yet decided to file suit, and might influence the decision of the FDIC as whether it's advisable to even file some lawsuits.

Kevin discusses briefly a recent decision by a federal district court in Florida that Florida law precludes the FDIC from pursuing claims of ordinary negligence against former bank directors, although the decision does not address the liability of former bank officers for ordinary negligence. As we've discussed previously, federal district courts in California have come to opposite conclusions on the applicability of the business judgment rule to former bank officers in that state. Thus, in some states, the state of the law appears to be "unsettled." We await federal appellate court decisions on these issues with interest.

For those interested in this topic, I'll be on a panel at the Harland Financial Services Connections Annual Conference with good friend Joe Lynyak of Pillsbury on August 28th in San Diego, discussing the lessons that failed banks can teach the officers and directors of "good" banks. I'll be giving a variation of the same presentation, this time with my law firm colleague Christian Otteson, at the Missouri Independent Bankers Association annual convention's "Hot Topics" session on September 11th. The MIBA insisted that only bald guys address them on this topic and Christian and I were pleased to oblige. Finally, I'll be the keynote speaker (flying solo this time) at the National Association of Federal Credit Union's Regulatory Compliance Seminar in Seattle on October 23rd with a version that's geared toward giving tools to credit union compliance officers that they can use to protect their officers and directors (including themselves) from the NCUA's gentle second-guessing, which can be disturbingly similar to the FDIC's. Following that speech, I'll likely retire the topic for awhile in order to prevent myself (and my audience) from the onset of sudden narcolepsy. Unless, of course, someone in Honolulu would like another dose, in which case, I'll make the sacrifice.