Bank Lawyer's Blog

NAR President-Elect Brays About Banks

The National Association of Realtors has long been a favorite target of this blog, primarily because we love to bag game that's easy to hunt, and NAR is so easy that it really ought to be considered roadkill. Last year, NAR President Pat Vredevoogd Combs boldly predicted that Congress would enact a permanent ban on national banks entering real estate brokerage by the end of 2007.  Didn't happen. Then there was the long -standing battle to prevent Wal-Mart from getting a bank charter, which NAR looped into the national bank/real estate debate. NAR also made a helpful suggestion last year that FHA step into the breach to solve the subprime lending crisis by refinancing subprime loans of delinquent borrowers after the subprime mortgage holder agreed to write-offs of principal balances (which is the same idea Barney Frank has been pushing with his legislation, which was recently passed by the House and which the White House has promised that the President will veto). Again, bankers said "Thanks but no thanks."

Last week, the president-elect of NAR, Charles McMillan, carried on NAR's fine tradition of bank bashing by blaming the entire state of the depressed real market nationally on conservative lenders who impose prudent underwriting guidelines on residential loans.

A rebound in the housing market is being held back by stingy lending standards, the president-elect of the National Association of Realtors said Thursday.

Irving real estate agent Charles McMillan – who takes over as head of the 1.3 million-member Realtors association later this year – faults mortgage companies for keeping some potential homebuyers out of the market.

"All of the relief that's been given to the banks in the marketplace has not trickled down to the consumer," Mr. McMillan said at the annual meeting of the National Association of Real Estate Editors in Dallas.      

"What they have done is raise fees and make qualifications almost impossible for people to get loans," he said.

In particular, Mr. McMillan criticized the high costs of so-called jumbo loans – mortgages of $417,000 and more – that are chilling buyer demand in many markets. Interest rates on such mortgages now are much higher than those on smaller loans.

And Mr. McMillan said that in some depressed housing markets lenders are raising costs even higher to homebuyers and making it tougher for them to qualify for loans. "That stigmatizes properties unfairly," he said.

You knew this was coming, didn't you bankers? Politicians are lambasting you and your regulators for lax lending standards, for making "liar loans," for tricking unsuspecting borrowers into loans that they couldn't afford to repay. The regulators are looking up your nether regions with electron proctoscopes, yammering at you to tighten up lending standards, increase loan loss reserves, and beef up capital. Right on cue, here comes this idiot from Irving (Texas, unfortunately) complaining that not only are you too darn conservative, you're taking "all the relief that's been given to you" and keeping it for yourself. You're not letting it "trickle down" to the little guy: the realtor.

What's "all that relief" you ask? Don't bother confusing Mr. McMillan with his lack of facts, bankers. He's got to blame somebody that the residential real estate market sucks, and he certainly wouldn't want to acknowledge the fact that realtors have been putting people into homes they can't afford for years, finding them mortgage brokers who will make a loan to a corpse as long as there's a yield spread premium and an origination fee in it, and that's fine by them as long as they get their real estate commissions paid.

Put simply, lenders haven't been given relief except with respect to access to liquidity, which they need to survive in the face of sustained losses from operations. Many lenders don't have the capital to fund growth, and if they did, they wouldn't pump it into assets like residential mortgage loans, for which the market's shrunk dramatically. As to underwriting standards being "too tight," tougher underwriting standards are long overdue, are required by all mortgage market participants and their regulators, and for the foreseeable future will be a fact of life. Get used to it, Chuck. Whining makes it appear, perhaps accurately, that you don't understand the new paradigm.

NAR also is concerned about homeowner anger management.

"We have consumers angry that they can't sell their homes," Mr. McMillan said. "America is hurting now."

Here's a helpful suggestion for alleviating the anger and the pain. NAR should fund a financing vehicle to buy all these great loans they want banks to originate with looser underwriting standards. In fact, NAR ought to set up a program in which realtors invest half of their commission in such loans, since they're obviously a great investment and, in doing so, they would help everyone concerned, including, especially, those hurt and angry home sellers. In addition, realtors should personally guarantee these loans, which (assuming the realtors have sufficient net worth and/or income streams) would make these loans a lot more attractive to lenders who might be a bit gun shy. Or, perhaps, NAR and/or its members could fund private mortgage insurance for such loans. That way, realtors will be performing a public service and simultaneously making themselves rich by taking advantage of the fact that banks and other mortgage lenders have overestimated the risk inherent in residential mortgage loans. They'll also provide the grease that will get this residential real estate wheel rolling again, just like in the good old days before the crash.

On the other hand, NAR might start treating its members like the adults they are, realize that real estate's a cyclical business, and that we're going through a down cycle, which will take time to work itself out, and stop making such a public ass out of itself.

I have a feeling that NAR represents the views of its rank and file members as well as the American Bar Association represents its members. In other words, not well. I know too many savvy realtors who understand reality as well as realty to believe that hysterics like those put out by Mr. MacMillan represent their considered views.

Not So Astonishing

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

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

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

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

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

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

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

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

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

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

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

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

Sheila's Singing The Same Old One-Note Samba

Sheila Bair won't quit. Like the Everyready Bunny, she just keeps going, and going, and going, on and on, singing the same old tired, sad, off-key tune. The fact that her intended audience continues to passively-aggressively ignore her when she talks to them and, when her back's turned, to give her a derisive middle finger, not only doesn't discourage her, it apparently energizes her. Obviously, she's deep into the D/S scene, and not on the "dominant" side of role playing.

In today's The Wall Street Journal, reporter Michael Crittenden faithfully reports yet another public yap-fest by Sheila in which she berates "[p]olicymakers, banks and other players in the housing market" for continuing to review loan portfolios "loan-by-loan" instead of just grabbing huge fistfuls of subprime loans and implementing "a more systematic approach to moving homeowners into more affordable loans." In other words, damn the facts and rational analysis, damn concepts of equity, damn what people in the mortgage business might consider to be in their own best financial interest, full speed ahead!

A normal, rational person who heads a powerful government regulatory agency might actually start to rethink a position if those who are supposedly subject to her influence pay her lip service, then continue doing things the old fashioned way.  Obviously, the "players in the housing market" have decided something: Sheila's not a player, or, if she is one, she can go play with herself.

Since we're talking about a career pol and academic, however, here's an idea for Sheila to chew on. Since she obviously knows better than other market participants what's in their own best interests, her position on wholesale loan modifications MUST BE the path to safety and soundness for the financial institutions the FDIC insures. As to those market participants who are subject to the FDIC's regulatory control, which, frankly, since she's so obviously right, would include all FDIC-insured institutions, even those whose primary federal regulator might not be pushing the same agenda as Sheila, she should be forcing them to adopt wholesale loan modification programs. Since the OCC, the OTS and the Federal Reserve don't know slime-from-shinola about this issue, and state bank and thrift regulators are equally ignorant and/or ineffectual, the FDIC should use its primary and backup enforcement authority to force the issue, to make these cretins fall in line. Any rational person would have to agree that a loan-by-loan analysis is not acceptable, right, so force those participants that you can reach to do what you want them to do.

In other words, Sheila, put up or shut up. The jawboning isn't working and is making you look not only foolish, but weak, which in D.C., is the bureaucratic kiss of death.

It might be that Ms. Bair realizes that she's on the sidelines and is not attempting to do anything other than conducting a PR campaign to build up her gravitas for her next job as the head of ACORN, a professor of finance at Bryn Mawr, or the Consumer Credit Commissioner of a state of her choice. Colorado's in the process of turning from red to purple, which ought to make it an attractive (or at least tolerable) destination for someone like Sheila (plus, she'd be only an hour away from radical snowboarding venues). So no one misunderstands where Ms. Bair's coming from in this "hurry-up-and-modify" world she lives in, she "demolished" the entire idea that there are any borrowers who might not be entitled to a loan modification.

She stressed the need for consumers to contact counseling groups and their lenders to try and prevent foreclosures. But describing a recent foreclosure prevention event she attended in California, Bair said policymakers need to better address the plight of consumers.

"I think we miss the human side of how this is impacting borrowers," Bair said, criticizing efforts by some policymakers to cast troubled borrowers as investors or speculators.

  "I didn't see a lot of house flippers," Bair said of the California event.

Ms. Bair attended an event in California and did not see "a lot of house flippers" there. Which is evidence of nothing, except that Ms. Bair views the world through a glass darkly.

Is it 2009 yet? Is there a new administration in the White House yet?

More Accurate Identity Theft Reporting By Banks: The Opening Salvo

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Another BSA Victim

More evidence of the unrelenting brain damage being inflicted upon commercial banks by federal bank regulators over Bank Secrecy Act/Anti-Money Laundering Act compliance failures surfaced last week in press reports that the California national bank subsidiary of Dutch commercial banking behemoth Rabobank Group was forced to sign a supervisory agreement with the OCC to improve its processes and training regarding its security and anti-money laundering activities.

In a conversation with the CEO of a BSA compliance consulting firm last week, I was told that the OCC was the toughest of the federal regulatory bunch on BSA and anti-money laundering compliance. I'd agree, but I don't want to goad any other regulatory agency into getting into a "size comparison" contest, so I'll simply concede that all the federal regulators are equally concerned with BSA and money laundering compliance and all are likely to be equally tough on banks that don't comply.

"Regulators aren't allowing any leeway on BSA," bank consultant Dave Alford said. "It's very strict."

There you go. All you regulators are strict constructionists.

At least in Rabobank's case, while the failures were serious enough to warrant a formal written agreement, they were not serious enough to merit a fine.

"There was no suggestion that there was a failure to file (required documents). The OCC wanted to see better organization and training for compliance," said John Hancock, general counsel with Rabobank N.A., the California subsidiary of Dutch banking giant Rabobank Group.

[...]

The agreement requires better record-keeping, better training and more complete processes for the bank and its employees, he said. Some banks have been hit with big fines for gross BSA failures. Rabobank was not fined, Hancock said.

"The evolution of bank regulations tends to move at a glacial pace. This is a field that is moving quickly," he said.

It's also a field that requires a lot of judgment calls by bank employees, calls that are subject to much Monday morning quarterbacking by auditors and examiners. I would expect that being a BSA Officer would be as much fun these days as being a jihadist caught in an open field in Iraq under a full moon with an Apache attack helicopter hovering over your right shoulder. I guess that's why every job posting I've seen in the last six or seven months for a bank BSA Officer carries with it a salary range that is just below that of a first year associate at a Wall Street law firm. Before the annual bonus that big firm baby lawyers get, that is. Still, it's a lucrative position, yet one that would seem to be thankless at any price.

A perverse sidelight of all of this concern about banks being required to catch the bad guys and to play the role of Junior G-Man in banker's clothing was recently e-mailed to me by a regular reader. While banks need to cross their "Ts" and dot their "Is" where suspicious activities are concerned, if they're defrauded by a borrower on a residential loan, they can wait for the next snowball fight in Hell to break out before the FBI will go after the crooks who caused the bank to suffer a loss. At least, that's the report from at least one source.

In 2006, the FBI studied three million mortgage loans and found that 30 to 70 percent of early payment defaults can be linked to misrepresentations in mortgage loan applications.

[...]

Although lying on a mortgage application is a federal crime, borrowers who committed mortgage fraud are low on the FBI's list of priorities. Joseph Schadler, an FBI spokesman, said investigators will be focusing on organized property flipping rings and bogus foreclosure rescue schemes instead of lying buyers.

'We're going to pick the ones that are the most egregious and have the greatest impact on the economy,' Schadler said. 'Fraud for property is less impactful on the economy than the speculative fraud where people are trying to flip homes for profit.'

That assertion seems debatable, and it sends the blogger off the deep end of the pool, as well it should.

Banks need to beef up their processes, procedures, technology, personnel, and training to smoke out and report suspicious activity (and, as we've previously observed, maybe do much more), all at considerable expense, and to make certain that they don't fail in any respect to comply with the law. On the other hand, the FBI's going to pursue only the biggest and splashiest cases that are uncovered.

As that guy in the Chevy commercial exclaims about the hemmie under the hood: "Sweet!"

Eliot Spitzer: Idiot

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

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

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

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

[...]

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

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

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

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

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

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

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

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

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

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

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

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

What a dork.

Conspiracy Theory: Are They Greased Wheels Or Is It A Greased Pig?

I was traveling the last few days, unable to blog, and blissfully unaware of the really important stuff happening in the wide world of banking law. I returned home today to find this article from Seeking Alpha, (h/t Housing Wire), breathlessly entitled "Countrywide Buyout Deal Greased From The Start." 

Apparently, there’s been shock to, and a slight amount of spit-up in the mouths of, certain observers of the Bank America buyout of Countrywide caused by the suspicion that the federal banking regulators might have been consulted prior to the public announcement of the acquisition. I fail to see any cause for shock. If Bank of America and Countrywide hadn’t consulted their respective regulators in advance on a deal of this magnitude and importance to the banking system, they would have been blithering idiots. Some bloggers are making that case based upon their analysis of the financial aspects of the deal, but as for the regulators "greasing the skids," with certain bloggers alleging that "smart money" says that the Fed or the OCC or the OTS, or any combination of the foregoing, "begged" or "cajoled" Bank of America to purchase Countrywide, that's taking a leap into the land where only Oliver Stone and similar wing nuts love to tread. I think that the acquisition is favored by the regulators, but I doubt that they twisted anyone’s arm or sweet talked Bank of America into doing this deal. 

There’s enough bizarre behavior in the banking world without adding pure speculation about regulatory "conspiracies" to the mix. Leave the outrageous insinuations to the professional nuts, like the authors of this blog. 

On the other hand, if there’s anything to the unusual volume of call activity on Countrywide stock, and somebody leaked information on the pending acquisition, then everyone involved ought to be nailed to the wall. People who leak information in such a manner and profit by it, and don’t even have the courtesy to share it with Bank Lawyer's Blog, need to be punished severely for their unacceptable behavior.

The Fine Print

Contracts between banks and their technology service providers need to be carefully reviewed by competent legal counsel, as well as by knowledgeable bank employees. Why? Well, it should be sufficient to state that regulatory agency guidelines advise banks that contractual review be taken seriously, as a matter of basic safety and soundness, and that certain laws require that certain contracts with certain vendors comply with certain legal requirements (such as the privacy and security requirements of the Gramm-Leach-Bliley Act). Apparently, those basic standards haven't made much of an impression on some banks, at least not if my most recent experience in reviewing and negotiating a software license and technology services agreement for a large commercial bank is any indication.

The vendor was providing services of an important nature to the bank, in the course of which the vendor would have access to sensitive information of the bank and its customers, including "nonpublic personal information" of consumers. In the course of my review, I found a number of provisions that imposed what should have been to any commercial bank unacceptable risk-shifting from the service provider to the bank, and several provisions that did not meet the requirements of applicable law or regulatory guidelines. In the course of performing due diligence on the vendor, the bank officer in charge of the project contacted in excess of five other banks that had been referred to my client by the vendor and that were using the software and services, and asked them what positions they had taken on several of the contractual issues. Every one of the contact persons at the other banks told my client's officer that they had signed the contract without a legal review and without requesting any changes, inasmuch as they assumed it was all "boilerplate" contract language.

As might be expected, the vendor was surprised by our requested changes, since other banks had apparently merely signed the contract "as is." However, after explaining the basis for our requests, and with a minimal amount of back-and-forth, we negotiated a mutually acceptable contract. Neither side looked at the process as a "zero sum game," and we tried to understand each party's legitimate business and legal concerns and to accommodate them, if possible, or at least try to reach a reasonable compromise. This necessary process was not complicated or time consuming, although it certainly took more time than merely signing a contract with no changes.

I'm not certain why the other banks did not have such a review performed. Unless the appropriate regulator uncovers that fact in the course of an examination, or a problem arises in the course of the relationship between the bank and the vendor that causes the bank to focus on the contractual provisions (especially the warranties, remedies, limitations of liability, and disclaimers), they'll all sit there fat, happy, and legally exposed.

Then again, there's always the chance that this sort of unfortunate event occurs.

Brett Rekola, owner of a small civil engineering and land surveying business in Webster, Mass., has never visited Cincinnati, and after his experience this month he's in no hurry.

Rekola said he and his wife, Karen, spent all day Dec. 3 and half of Dec. 4 trying to get someone at Cincinnati-based Fifth Third Bank to correct a mistake made by a bank vendor. That mistake left them with a badly damaged credit score, unable to get a student loan for their son's college tuition and complete a pending mortgage refinancing.

[...]

Fifth Third admits the error, which affects "several thousand" people, the exact number of which it hasn't disclosed. It blames the mistake on Fiserv, an outsourced-services vendor it says was hired by Florida-based Crown Bank, which Fifth Third acquired last month.

The error "on the part of Crown's software vendor," said Fifth Third spokeswoman Debra DeCourcy, happened when Milwaukee-based Fiserv was trying to transmit active mortgage documents to the major credit agencies and mistakenly included documents related to paid-off mortgages.

A Fiserv spokeswoman said Dec. 6 that she was not aware of the problem.

Blissfully unaware, eh? Merry Christmas!

The paid-off mortgages were supposed to have been suppressed, but they were not. Once they were received by the credit bureaus, they were treated as delinquent from the time they'd been paid off, because there was no indication of any further payments having been made.

In the Rekolas' case, their latest credit report from Experian said they'd been more than 180 days delinquent on their mortgage for 25 months.

In fact, the loan they'd taken out with a Boston-area bank and which somehow ended up in Crown's portfolio was paid off in full in May 2005.

Luckily for the bank, it's unlikely to be sued by the borrowers, or, if sued, is not likely to lose the suit.

Steve Shane, a lawyer whose practice specializes in consumer credit matters, said under federal law a borrower can sue only if he or she first disputes the credit report error with the offending credit agency or agencies. The reporting creditor - in this case, either Crown (which owned the mortgages) or Fifth Third (which bought Crown) - is under no legal obligation until it receives notice from a credit agency, even if it receives a complaint from the borrower, Shane said.

"By law, you can't accomplish anything by sending it to the creditor. There's no obligation to correct it until they're contacted by the credit bureau," Shane said. "Every creditor gets a free bite of the apple until they're notified."

The bank, however, suffers a hit to its reputation from articles like this, and incurs substantial man hours of effort to implement a software fix, whether or not, in this specific instance of possible vendor negligence, any other damages are incurred by the bank.  I'll bet Fifth Third took a look at the contract between Crown Bank and Fiserv to see what exposure Fiserv might have had. While I have no personal knowledge of the terms of this Fiserv agreement, past personal experience in reviewing and negotiating contracts with Fiserv leads me to strongly suspect that Fiserv didn't leave itself exposed to much risk to Crown Bank. If Fifth Third had been the bank negotiating the contract, I'd strongly suspect that the risk allocation provisions of the agreement would be "balanced." Then again, I could be surprised.

I've previously discussed on this blog the problems banks have with the reluctance of many technology service providers to provide meaningful recourse to banks when the technology services contract is breached by the vendor or the vendor is negligent. I expanded upon the subject in an article published in the December 2005 issue of The Journal of Internet Law. Nevertheless, no bank, no matter how large or small, ought to enter into a technology services agreement with a vendor without understanding all of the provisions of the agreement, including the risk allocation provisions. The time to determine whether adequate contractual remedies are provided is not when a problem arises.

More From The Wildnerness

OCC Chief Counsel Julie Williams was, once again, "on point" in a presentation a few weeks ago to a Joint Center for Housing Studies Harvard University National Symposium on "Understanding Consumer Credit: Expanding Access, Informing Choices, and Protecting Consumers." It's been almost three years since we posted about an earlier speech by Ms. Williams in which she called for a revolution in consumer credit disclosures. Since then, Congress has changed hands but the same old dysfunctional approach remains the norm.

You say you want a revolution? Don't hold your breath.

This time around, Ms. Williams uses the subprime mortgage meltdown as a means to again call for for a sane approach to consumer credit disclosures, and to warn Congress, albeit in diplomatic terms, about the alternatives to regulating consumer credit that are being proposed by consumer advocates and some wing nuts in Congress. Conveniently for Bank Lawyer's Blog, she begins her presentation by listing the main points she will make in her remarks.

• The traditional and prevalent regulatory approach to consumer protection in the consumer credit area – disclosure – has not worked well; not because it couldn’t work well, but because it has not been effectively implemented in a way truly useful to consumers;
• Product-focused regulation in the form of substantive prohibitions and restrictions on terms of credit, which some may label the “we know what’s good for you approach,” has a place, but is a regulatory technique to be used with great care; it can strike at transactions that are abusive and overreaching in some contexts, but if its not applied with precision, it also can reduce legitimate credit opportunities for borrowers with limited or non-traditional credit profiles;
• There are other approaches to regulation, such as provider-focused regulation, used in other industries or in other contexts in financial services regulation, that have not been extensively employed in consumer credit regulation, that could be used to beneficial effect; and
• There needs to be a realistic recognition that some types of financial services providers are more extensively regulated than others, and that fact has implications for the regulatory standards that are applied to them and the mechanisms that are used, directly and indirectly, to obtain compliance with those standards.

It's a short presentation, but infused with Ms. Williams' usual ration of common sense. She also (we presume without a hint of irony) quotes the following from a recent editorial by Barney Frank in The Boston Globe:

"One aspect of the subprime mortgage crisis that deserves special attention is that it was in large part a natural experiment on the role of regulation. And the results are clear: Reasonable regulation of mortgages by the bank and credit union regulators allowed the market to function in an efficient and constructive way, while mortgages made and sold in the unregulated sector led to the crisis.

"At every step in the process, from loan origination through the use of exotic unsuitable mortgages, to the sale of securities backed by those mortgages, the largely unregulated uninsured firms have created problems, while the regulated and FDIC-insured banks and savings institutions have not. To the extent that the system did work, it is because of prudential regulation and oversight."

Don't let the fact that it's not FDIC-insured institutions who caused the subprime mortgage crisis deter FDIC Chairman and consumer advocate Sheila Bair from continuing to lead the charge for widespread re-writing of all subprime ARM loans. We're still parsing the Federal Deposit Insurance Act to determine where "consumer advocacy" is listed among the purposes of the FDIC and the functions of the Chairman. We'll keep you posted.

As to Ms. Williams speech, it's not long, so read the whole thing. You'll quickly see where she sees the dangers from ill-advised legislation that focuses on product-focused or provider-focused approaches to "solving" the subprime "crisis." You'll also see that she hasn't backed off her criticism of the uselessness of current consumer disclosures and her call that radical reform must be made, reform that results in consumer disclosures being drafted not by lawyers, but by actual human beings, and those capable of communicating with "ordinary people."

Second Circuit's Support of OCC Preemption No Surprise

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

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

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

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

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