Bank Lawyer's Blog

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.

FDIC Solves Subprime Crisis

Last night, a reader alerted me to Damian Paletta's breaking news in The Wall Street Journal that the FDIC's Sheila Bair had assisted the Treasury Department by proposing a dandy little scheme to spend $50 billion in taxpayer funds to bail out one million subprime borrowers with low-interest loans. Obviously, the plan has a lot more to it than that, but why waste any more breath on it than Treasury Secretary Paulson did today.

Paulson said he will "look carefully" at the FDIC plan, while emphasizing his confidence in the Hope Now Alliance of lenders spearheading a private effort to modify home loans.      

"It's only fair to point out our priority is doing the things we're already doing administratively, doing the things we're already doing working with the private sector," he said. "That's where we are, that hasn't changed, despite my high regard for Sheila."

A blatant brushoff if I've ever read one, complete with a not-so-coded "despite my high regard for Sheila." That reminds me of a parenthetical in a recent post by Yves Smith at Naked Capitalism in which he asserted that female regulators might be better suited to cracking down on the good-old-boy business of banking: "(the horrific example of Sheila Bair notwithstanding)."

A financial advisor for a private equity fund e-mailed me today with this question regarding Bair's proposal: "What the **** has this got to do with the business of the FDIC?"

Not a damn thing. It's got everything to do with Sheila Bair's personal agenda, however. In a lame duck administration, there's apparently no one making her do the job she was hired to do.

The preliminary puzzled reactions are nicely summarized by Paul Jackson at Housing Wire, if you're interested. A more "spirited critique" is contained in this post at Market Ticker (the answer to his question is "yes.") I'm consigning this to the same dust bin where I filed the OTS' proposal on negative capital certificates (although I have much more respect for the OTS and John Reich). Wake me up when someone with power starts taking an interest and pushing it forward.

Shooting down Sheila is like bringing down the Goodyear Blimp "Snoopy 2" with a surface-to-air missile. There's not much sport left in it.

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?

Regulatory Flexibility

Rooting around, searching for something totally unrelated, I recently unearthed a recent Office of Thrift Supervision Approval of Rebuttal of Control granted to Legg Mason Inc. and certain related entities in January.

The rebuttal was filed in connection with the proposed acquisition by Legg Mason and various of its subsidiaries to acquire more than ten percent of Countrywide Financial Corporation's voting stock. Obviously, Legg Mason doesn't want the group of related companies or any of its members to be classified as a savings and loan holding company, for a number of very sound reasons. Legg Mason had been granted approval by the OTS in 2003 to acquire more than ten percent but less than twenty-five percent of the stock of Countrywide's voting stock, but was required by the OTS to obtain prior OTS approval for any "subgroup" to acquire more than ten percent of any class of voting stock of a savings association in the future. The Legg Mason companies now proposing to acquire the additional voting stock of Countrywide are such a "subgroup."

In support of the subgroup's Rebuttal of Control, it filed a Rebuttal of Control Agreement. The form of those agreements is set forth in 12 CFR 574.100. To rebut a presumption of control, the acquirors are supposed to submit an agreement that "materially complies" with the form set forth in 12 CFR 574.100, although the OTS has the authority to "otherwise agree in writing." The Legg Mason "subgroup" requested a number of changes from the standard form, and the OTS agreed to them.

A number of the changes were made to conform to the OTS' 2003 ruling, and others made to ensure that the acquirors did not control Countrywide. However, the  OTS also  approved some additional changes to engage in certain advisory services with Countrywide and its affiliates, something that the standard agreement prohibits. In fact, the standard agreement prohibits the acquirors from engaging in any intercompany transactions with the thrift or holding company. The OTS doesn't believe that in this case, the ban on intercompany transactions is warranted because the nature of the services to be provided by the subgroup to Countrywide, and by Countrywide to the subgroup, would not "enable the Acquirors  to influence or control " Countrywide or its affiliates. Those services are (1) banking and financial services to be provided by Countrywide and (2) investment advisory services to be provided by the Legg Mason "subgroup."  The services are to be provided on market rates and terms.

The OTS merely states that with respect to Countrywide providing banking and financial services services to Legg Mason, the OTS "does not believe" that such services would permit Legg Mason to control or influence Countrywide. That's the end of the discussion. The advisory services to be provided by the Legg Mason entities to Countrywide merits a paragraph, the crux of which is that since there's plenty of market competition for such advisory services, the danger of influence or control is not present.

The OTS may or may not be correct in the conclusions it reached. Unfortunately, without more discussion of its analysis, it's impossible to challenge its reasoning. In other words, the OTS just breezed through the issues and reached a conclusion favorable to Legg Mason's subgroup being able to acquire more voting stock of Countrywide.

Not that a bank regulator would have done whatever it took to let Legg Mason pump badly needed capital into troubled Countrywide. The fact that Legg Mason upped its stake in Countrywide to 15% a couple of weeks after the OTS gave its approval and that Countrywide desperately needed the "scratch" was likely coincidental. Not that the OTS might have looked the other way when, in September 2007, the "subgroup" publicly announced that they had increased their voting stock from 8.76% to 10.04%, which should have required a prior approval of the Rebuttal of Control at that time, not four months later. I'm also sure that the OTS' decision being released one week to the day following the announcement by Bank of America that it was acquiring Countrywide is pure serendipity.

A CEO of a federal thrift recounted to me how he once listened to an OTS minion, looking especially arrogant with half-closed eyelids and a barely-concealed Elvis-like sneer, blather about the OTS' "unwritten rule" concerning savings and loan holding company capital requirements (find those "unwritten" rules in the regulations, I dare you), and about how the savings and loan executive should have known about these "unwritten rules" that the executive unwittingly "violated." With 30+ years of such experiences under my belt, I tend to take a jaundiced view of these matters. When a regulator wants to serve his agency's self-interest, the "What, Me Worry?" style of analysis can quickly replace the "tortures-of-the-damned-drowning-in-a-river-of-red-tape-and-nitpickers" style in which many financial thrift employees find themselves floundering when they want an interpretation on an issue on which the regulators have no skin in the game.

Perhaps Legg Mason hasn't been directly trying to influence Countrywide. On the other hand, the public statements that Legg Mason fund manager Bill Miller has made criticizing Bank of America's offer price and demanding that Countrywide drop its poisoned pills, might lead a skeptic to think otherwise. It won't make any difference to the OTS. The need to keep Countrywide afloat pending the consummation its acquisition by Bank of America  will keep its views of regulatory compliance "elastic."

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.

OTS Keeps Pitching

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

Much Ado About Squat

While I bill the living Hades out of clients, read Tanta's take at Calculated Risk on the "New Hope Plan." Her "initial reaction" is better than most people's studied analysis. It's written by someone who's "been there, done that."  Also, parse the comments to that post, especially Tanta's, for more insights. Unlike some of the intellectually dishonest testimony recently given to Congress by "those who can't do, regulate," Tanta knows what she's talking about. She's the real deal.

I can't disagree with her conclusion: "Is it all kind of anemic after all the build-up?  Yep."

Is it possible to be in lust with a woman's mind? I think so. If Tanta's married, I sure hope she cheats.

Stop Me If You've Heard Any Of This

Scattershooting on hump night:

---Ten days or so prior to Chuck Schumer sounding the alarm about Federal Home Loan Bank of Atlanta advances to Countrywide's thrift subsidiary, Raymond Natter, former deputy chief counsel of the OCC and former counsel to the Senate Banking Committee, observed in an opinion piece about the Federal Home Loan Bank system in the American Banker (paid subscription required) that the system "has an enviable record of safe lending. Since it was authorized in 1932, there has not been a single credit-related loss on a Home Loan bank advance." Of course, who would know better about the risk involved in FHLB advances, an expert who's been part of the federal bank regulatory system for years or a tin horn Foghorn Leghorn? You be the judge. We don't intend to let this bone go ungnawed. We'll be checking in periodically to determine whether the FHLB Atlanta knows its business better than Chuckles. Want to lay odds on the answer to that question?

---Who's Barney Frank's favorite federal banking regulator? Too easy, huh? In the November 19, 2007 edition of the American Banker (paid subscription required), Barney almost squealed with ecstasy as he gushed about consumer advocate FDIC Chairman Sheila Bair.

The Massachusetts Democrat noted the difference among banking regulators in their appetite for regulation. He ranked Ms. Bair, Comptroller of the Currency John Dugan, and Office of Thrift Supervision Director John Reich in descending order.

"The regulators, they vary," he said. "Sheila Bair has been more supportive, but none of them have been resistant. They have all been cooperative. Look, Ben Bernanke"  — the Federal Reserve Board chairman — "is the one who said it is important to do some secondary-market restriction. Sheila Bair has been on top of it. … Sheila Bair is the most pro-regulation, Dugan in the middle, and Reich on the end," he said.

Yep, Sheila's Barney's kind of girl, that's for sure. We didn't know that such an animal existed, but she's it. Kudos to John Reich, who's obviously not Barney's kind of guy. That's one more reason to suspect that the federal thrift charter may linger on.

---Remember those clowns enterprising businesses that have been helping people with low credit scores "piggyback" the higher scores of other consumers by becoming "authorized users" of the better borrower's accounts? Two of them in Florida are under investigation (paid subscription required).

The Florida Attorney General's Office is investigating two companies that arrange for consumers to boost their credit scores by becoming authorized users on the card accounts of people with better credit.

Sandi Copes, a spokeswoman for the office, said that in June it began investigating Credit Builders LLC of Tampa, which runs the Web site instantcreditbuilders.com and uses the ICB brand. Since last year, she said, the office has been investigating RCA Credit Services LLC of Largo, which operates legalcredit.com, for several issues, including the promotion of account authorization.

One of the state's concerns is the impact of credit score inflation on lenders, Ms. Copes said. "We want to make sure they're not facilitating any lending fraud."

Oh, perish the thought!

John Coates, the consultant who handles media relations for Credit Builders, said that the state is using the company as a "scapegoat" for the subprime mortgage meltdown and the credit crunch.

Right, John, the State of Florida, which isn't responsible for the subprime mortgage meltdown in the first place, is trying to distract the public from its nonexistent responsibility by attacking your small outfit, which isn't a subprime lender or a mortgage broker. Uh-huh. Although you do "assist" subprimers in artificially boosting their credit scores by piggybacking some stranger's credit account...for a fee, of course. Which, I suppose, then would enable them eventually to qualify for a nice subprime 3/7 ARM with a funky teaser rate. No, John, you're not a "scapegoat," just a "donkey."

"Their approach is to make little companies like ICB, which has been in business for a year, look bad, and not banks that created the fiasco," Mr. Coates said. "ICB is helping to get people out of subprime."

Oh, I'm sorry, John, I sold you short (not that there's anything wrong with being a little person). You want to convince creditors that these borrowers with lousy FICO scores are now "prime" borrowers because they sucked off the superior FICO score of a prime borrower as an "authorized user." As the nimrods in that Chevy truck ad would say: "Sweet!"

However, what's with the "banks created the subprime fiasco" allegation, John? Uh, no, it was unregulated originators and Wall Streeters that created the fiasco. Even Barney Frank admits that. I sure hope you know more about your little market niche than you do about subprime mortgage lending in general. My "props" to you, though, for assuming the mantle of "victim," which goes down so well these days. Too bad you're not a disabled, Native American, Muslim, female basketball player from Rutgers (or are you?), because then you'd have the "full monty" of victimization flour to sprinkle on the floor and roll around in 'til you're covered from head to toe. Put you in the oven, bake you at 350 degrees for an hour, and you'd be good enough to eat, I swear.

He likened the company's service, which is designed to raise credit scores and help customers get better loan terms, to the recent efforts to prevent defaults by restructuring mortgages.

Well, that's such a stretch that we'll have to start calling you "Gumby" Coates, John. Here's an idea: try a logical thought process. You'll find it curiously refreshing. Or, maybe you won't.

Ms. Copes said the state also is looking at whether the companies violated Florida's Deceptive and Unfair Trade Practices Act. She would not say how they might have broken the law, but she noted that it requires companies to comply with the federal Credit Repair Organizations Act. That law prohibits collecting fees before services are rendered.

Mr. Coates said that until recently Credit Builders collected its fees up front, because it did not consider itself a credit-repair organization.

However, he said, it now has clients put their fees in an escrow account and collects the money once the service is rendered.

Yes, always best to take the "tried and true" route. Nothing but playing the rules according to Hoyle will suffice for the piggyback FICO score biz.