Bank Lawyer's Blog

Jamie Takes His Shots; Sheila Gets Constructive

I guess Jamie Dimon just got tired of taking shots from people he considers to be, intellectually speaking, a few fries short of a Happy Meal. While sometimes criticized for being an apple polisher for the left, he recently made it clear to an audience in Columbus, Ohio, that he's an equal opportunity "disparager" of politicians from both sides of the aisle.

He earned applause for comments on the importance of improving urban public schools, and the political ineptitude in Washington, D.C., hammering policy-makers on several occasions for "reams of bad policy."

"I don't blame Republicans or Democrats," he said. "I blame them all."

I guess Jamie's still bent about being kicked around in a House hearing a few years ago. He's usually treated with kid gloves by most pols, so it's understandable that he was shocked when someone actually threw a high hard one at his head in public. Still, his blame game has a lot of players.

He also had blunt advice about building a strong company.

"Fire the a--holes," he said to laughs. "They will destroy your companies."

OK, so if you fired all the a--holes in Congress, you'd have a barren wasteland. Come to think of it, that sounds pretty much like what we have with all the a--holes still in place. I guess that also applies to most big banks, as well, though, doesn't it?

A--holes: We're what made America great.

While Dimon's remarks didn't come as a shock, recent remarks by another character who made her bones during the last banking meltdown did stun this observer, because they actually made sense (paid subscription required).

[Sheila Bair] [t]he former chairman of the Federal Deposit Insurance Corp. is calling for a legislative solution she argues could significantly diminish regulatory burden on community banks: giving regulators the power to exempt institutions with less than $10 billion of assets from existing and new regulations.

Community bankers are lobbying for specific exemptions from specific provisions of law. Bair thinks that approach is too narrow.

Bair said bankers should push for a broader solution, one that could fix many of those problems and future ones that arise. She said too often regulators feel like they have to start applying regulations geared for larger institutions to smaller ones.

"There is this fear that if you don't do something you are going to look weak if you aren't dealing with the small banks the same way as big banks," she said.

But if Congress provided an explicit directive to regulators to consider granting small banks an exemption from rules they implement, that trend could begin to turn around. It would allow regulators to craft streamlined rules for small banks, effectively giving a stamp of approval to a two-tiered regulatory system, a concept that many lawmakers already endorse.

 "This might inform more of a two-tiered approach," Bair said. "It's clean, simple, easy to write… I don't know why anyone would object to it."

It would also empower regulators to act rather than having them return to Congress asking for an exemption. That is currently the case with the Volcker Rule, a Dodd-Frank provision that places limits on bank investment in private equity and hedge funds. Fed officials have asked Congress to exempt small banks from the rule.

As Bair also points out, her suggested approach seems to take the subject of community bank regulatory relief out of bitter partisan arguments over "rolling back" the "reforms" of Franken-Dodd. Even Princess Fauxcahontas might support such an approach, especially if she's on her meds when it comes up for a vote.

Critics raise legitimate concerns, including whether $10 billion is too low a threshold, and whether exempting broad swaths of regulations from such legislative coverage could gut the effectiveness of the "relief" intended to be granted to smaller institutions. Other commentators raised my major concern: regulatory discretion means that regulators can decide not to act or to act ineffectively. They could also use their discretion to act in ways that promote something other than what objective observers would consider a proper goal (such as punishing gun dealers, online dating services, porn stars, payday lenders, or that annoying guy in the back of the bus who won't give up his seat to an obviously expectant mother).

Even with those concerns, her proposal is worth considering. Since, in the past, we've dumped on her like a DFW public works dump-truck with a load of sand-and-salt barreling down an icy freeway in February when she acts in ways we think may be "unwise" (Can you say "industrial bank moratorium"? I knew that you could!), we'll give her her props when she casts a pearl before this swine.

Choke Point: Not Dead Yet

I'm not the only one who's skeptical about the effect of the FDIC's recent letter that appears to end that agency's participation in Operation Choke Point. Former FDIC Chairman Bill Isaac claims (paid subscription required) that if that program is dying, it's not going to be a quick death. His example is an "early warning" that some folks may not be getting the message the FDIC claims it intended to send.

Bloomberg reports that Early Warning, a fraud prevention company owned jointly by several large banks, is cutting off some lenders’ access to valuable account data. Until now, the data had been available for both banks and nonbanks to use in their underwriting and fraud detection practices.

We don’t have all the facts yet, but Early Warning is reportedly telling its customers that it is cutting off lenders that charge high interest rates. The change "reflects both the wishes of our data contributors as well as various regulators," a company spokesman told Bloomberg. Early Warning’s primary metric for denying the service under its new guidelines is a rule that limits its lending customers to those that offer products with an APR at or below 36%.

Bill claims that none of his contacts at federal banking agencies admit to having any sympathy for the position of Early Warning. They claim that it does not embody regulatory policy.

In fact, Bill asserts, it flies in the face of regulatory policy.

Regulators want lenders to do more to determine the ability of subprime customers to repay their loans. Cutting lenders off from Early Warning’s data undermines subprime lenders’ power to properly underwrite loans.

We can all agree that abuses in short-term lending need to be curtailed. The rub here is that access to Early Warning has made short-term lending more responsible, not less.

When lenders can verify that the identity of the customer matches his or her bank account, they are able to quickly weed out first-party fraud — that is, loan applications by individuals or groups that have no intent to repay. That means lenders are able to improve fraud scoring, which in turn leads to lower default rates and ultimately means better pricing for borrowers. Having access to this valuable data is especially important for the more innovative players in the space, which are using advanced analytics and modeling to determine pricing.

In addition, Early Warning can give lenders the opportunity to stop automated clearing house withdrawals for borrowers whose accounts do not have enough funds. That is an important protective measure for customers who face expensive insufficient funds fees, bounced check fees or overdraft charges if the lender makes a payment attempt on the account.

As I've said repeatedly, you can't make this stuff up.

Perhaps a more encouraging sign (dimly lit as it is) is the apparent receptiveness of Attorney General nominee Loretta Lynch to "listen to reason" on the issue of Operation Choke Point. At least, she seemed to indicate that she is open to a serious consideration of the concerns of her opponents during her confirmation hearings. That's a slim reed, so we won't grasp it firmly. She also has a brief banking background, which indicates that her grasp of the issues might be based on something other than pure ideology (as compared to, say, those of the Massachusetts Mohican). At any rate, can she be worse than Eric Holder? Don't answer that question. It's too early to tell.

Julian Is Julienned

Juilan Castro, the head of HUD, has taken his lumps lately over his amateur-hour performance on The Daily Show. Apparently, he just can't catch a break. Last week, he had the misfortune to appear before the House Financial Services Committee where he suffered the ultimate humiliation. No, not being grilled by Republican hit man Jeb (Clampett) Hensarling. That's a badge of honor with Castro's crowd. Rather, it was having to listen to Maxine Waters publicly praise him that had to cause him to spit up a little bit in his mouth. I know that she had that effect on me.

U.S. Rep. Maxine Waters, D-Calif., Ranking Member of the Financial Services Committee, was one of the few to praise Castro.

"Secretary Castro, although today you will likely take a fair amount of criticism from my colleagues on the other side of the aisle for your decision, I’d like to take a moment to remind them that when the private sector virtually left our struggling housing market during the worst of the crisis, the FHA stepped up and provided the liquidity that kept it afloat. Despite the steps toward recovery the economy has taken since then, the housing sector continues to suffer from a tight lending environment – and a strong FHA is still very necessary," said Waters.

"I would also note that FHA is far from bankrupt, holding approximately $40 billion in reserves, continuing to generate revenue, and taking critical steps to recover its capital reserves, which are projected to show a positive balance in 2015," she added.

You heard that right: when the private sector collapsed, the FHA hung in there. Of course, the FHA had no choice. It couldn't file "bankruptcy" like a private entity, even though it was insolvent, because its insurance is backed by the full faith and credit of the United States, it is required to fulfill its statutory purpose of providing mortgage insurance to back mortgages to qualified borrowers (many of whom turned out to be unqualified, but that's another story), and it has been used by clowns like (the Bridge Over Troubled) Waters to apportion housing credit to a constituency that appreciates the fact that the FHA being the lender that loans where angels fear to tread and votes accordingly. I think that putting Freddie Mac and Fannie Mae into conservatorship and pumping government money into those giant slush funds for progressive housing policy ("A Chicken In Every Pot and An Illegal Honduran Gardner In Every Malibu McMansion") did more to prop up the housing market than FHA insurance. Then again, who am I to argue with a brainiac like Maxine.

Hensarling and his henchman on the Republican side of the far divide are a bit perturbed with recent actions by the Master of the Selfie Stick in the White House, who reduced the annual mortgage insurance premiums for FHA by 50 basis points, from 1.35% to 0.85%, at a time when the FHA has still not restored its capital reserve ratio to the legally mandated level of 2%. In fact, it's 0.41%. The $40 billion that Maxine crowed about is supposed to over $200 billion.

Castro's response was as dynamic and on point as were his masterful responses to John Stewart. [Editor's Note: The previous sentence was sarcastic, for those readers who seem to take everything I write here in dead earnest.] Castro said that everything's great, we've never been better, nothing to see here, let's all fly to Colorado and score some "Hashey Bars."

Hensarling was not amused.

"With all do respect (Castro), we have heard that before, and you are sincere. But this committee has been told that once, twice, three times, and it hasn’t proven true,” said Hensarling. “Once again, you are in violation of the law and that has got to stop."

Except, Jeb, it won't stop. You know it, and so does everyone else with an IQ above that of a chunk of week-old Limburger cheese. The Republican-controlled house could pass legislation to punish the FHA, perhaps even threatening its funding. Even if the majority in the House did pass such an unpopular measure, Democrats in the Senate would likely thwart its progress in that chamber with procedural maneuvers, and the Perpetual Campaigner would veto it even if both houses pass it. By the time that useless exercise has run its course, there will be a new occupant in the house-is-not-a-home at 1600 Pennsylvania Avenue and Castro will be back to doing what he does best: looking dynamite in Armani formal wear.

Yes, we know: this is all about press releases for 2016. Keep up the good work.

Luetkemeyer Resumes Choking Choke Point

God bless his Middle American heart (paid subscription required): Missouri Rep. Blaine Luetkemeyer "reintroduced legislation Thursday that would block regulators from ordering banks to end relationships with customers without cause, in response to" Operation Choke Point. Readers likely recall Rep. Luetkemeyer's introduction of the same bill last year which, because of Democratic control of the Senate, went nowhere. I suppose that he's encouraged by both the Republican takeover of the Senate and the FDIC's recent retreat (on paper, at any rate) from its hand-holding with the US Department of Justice in jointly bar-arming the windpipes of "disfavored" businesses so that they could not breathe in the rarefied air of the US banking system.

"I am reintroducing the Financial Institution Customer Protection Act because this legislation needs to be codified into law so that other agencies don't ever fall into this illegal and abusive practice," Luetkemeyer said in a press release.

The bill would forbid financial agencies from pressuring banks to cancel accounts unless there is a "material" reason and would mandate a formal rule defining reputational risk. The bill would also tweak language under the Financial Institutions Reform, Recovery, and Enforcement Act, narrowing violations covered under the law from those "affecting" financial institutions to those "by" or "against."

That last "tweak" would hinder the Justice Department's use of Section 951 of FIRREA to go on fishing expeditions against banks and businesses on the basis of investigation certain fraudulent or concealed actions that allegedly pose an ill-defined "reputational risk" to banks (and that, thereby, "affect" them), as opposed to actually being directed "against" the bank or undertaken "by" the bank itself. The DOJ was using the lower standard of Section 951 to pursue civil remedies (civil money penalties) rather than the higher standard to prove criminal wrongdoing, as a way to squeeze banks and the nefarious payday lending, gun-dealing, porno-purveying, online-hooking-up businesses they serviced to stop doing business together.

Even if the bill makes it through both the House and the Senate (where it will receive the gentle ministrations of War Chief Warren), you have to wonder whether the Perpetual Campaigner in the White House will veto it, and, if he does, whether the Senate has enough votes to override that veto. I'm skeptical.

Nevertheless, with Eric Holder slipping out the DOJ's back door, keeping the pressure on the DOJ (and the federal bank regulators) may bear additional fruit, if not this year, then in the next few years.

Another Step Back?

Ballard Spahr has one of the best initial analyses of last week's Financial Institution Letter in which the FDIC "encourages institutions to take a risk-based approach in assessing individual customer relationships rather than declining to provide banking services to entire categories of customers, without regard to the risks presented by an individual customer or the financial institution’s ability to manage the risk." In other words, the FDIC took another step back down from its participation in the Department of Justice's Operation Choke Point. The first step was taken last summer, when the FDIC obliterated its list of "risky businesses" by category. The FDIC claims that banks under its supervision should evaluate the risk of a business on a customer-by-customer, not industry-by-industry, basis.

The firm also discusses an internal FDIC memorandum to its examiners. Apparently, the FDIC is attempting to head off any rogue examiners who, like the former head of supervision in Atlanta, tried to put all payday lenders out of the banking system because he didn't favor that line of business as a matter of personal moral preferences.

The internal memorandum states that FDIC examiners: 

• Should not use “informal suggestions” to make recommendations or requirements for terminating deposit accounts or for criticizing a bank’s management or risk mitigation associated with deposit accounts that does not rise to the level of a recommendation or requirement to terminate accounts
• Must put in writing in the report of examination (ROE) their criticisms of a bank’s management or risk mitigation associated with deposit accounts
• Cannot base recommendations for terminating deposit account relationships solely on reputational risk to the bank

The memorandum further mandates that before recommendations or requirements for terminating deposit accounts are provided to and discussed with a bank’s management and directors, they must be made in writing and an FDIC Regional Director must approve them in writing. It also requires such findings to be “thoroughly vetted with regional office and legal staff” before they are included in the ROE or supervisory actions are pursued.

I suppose that this means that from now on, when a payday lender is blackballed by an FDIC-regulated institution, you'll know it's either the result of the institution's own analysis of the risk posed by that specific lender, or, at least, that the persecution has been authorized at high levels of the FDIC, not merely by a lone-wolf, piss-ant field examiner. That ought to give everyone comfort.

As the firm concludes, this latest guidance, while welcome, is not a "Get-Out-Of-Jail-Free" card for payday lenders, porno kings and queens, gun dealers, online dating services, and other "undesirables." As a practical matter, banks that want to do business with them will still be subject to heightened due diligence requirements. Although Ballard Spahr does not put it this way, I will: such businesses will still, for practical purposes, be considered "guilty until proven innocent." The customer will have to be able to demonstrate that it is one of the "good payday lenders" before the risk will likely be judged to be acceptable to the bank.

We'll have to see how this shakes out. While these signs are favorable, until there is a change in the White House, I'm from Missouri on whether we've actually turned a corner.

CFPB's Mini-Me

Melanie Brody and Anjali Garg of K&L Gates warned us last week about a new trend in perils for those who wish to provide financial services to consumers.

At the end of 2014, the New York Department of Financial Services (“DFS”) became the first state regulator to settle a case using its authority to enforce the federal Consumer Financial Protection Act (“CFPA”). In Benjamin M. Lawsky, Superintendent of Financial Services of the State of New York v. Condor Capital Corporation and Stephen Baron, the DFS claimed that indirect auto lender Condor Capital Corporation (“Condor”) and its sole shareholder, Stephen Baron, violated both New York State law and the CFPA’s prohibition on unfair, deceptive, or abusive acts or practices (“UDAAP”) by, among other matters, overcharging consumers and deceptively retaining credit balances due to them. The settlement requires Condor and Baron to admit to New York and federal violations, pay an estimated $8-9 million in restitution and pay a $3 million penalty, and surrender all of Condor’s state lending licenses.

Although several state attorneys general have leveraged Dodd-Frank’s state action provisions to enforce and seek remedies under the CFPA, the Condor case marks the first time a state regulator has used them, and it will likely prompt other state regulators to do the same. In his press release announcing the settlement, Superintendent Lawsky said, “This case demonstrates that the Dodd-Frank Act provides a powerful new tool for state regulators to pursue wrongdoing and obtain who were abused. We hope other regulators across the country will consider taking similar actions when warranted."

Not content to destroy financial service business in New York, Gentle Ben Lawsky wants other states to join in the fun. An added attraction for state regulators is the press this type of unprecedented action achieves, which is useful in establishing your bona fides as the logical successor to Eliot Mess as "The New Sheriff of [Insert Name of Street Here].

The entire client alert is worth reading and I encourage you to do so. It explains concisely the types of claims that state regulators and attorneys general can bring under Franken Dodd and the remedies (pain) that they can pursue against financial institutions. For those with shorter attention spans, here are Ms. Brody's and Garg's take-aways (with footnote references omitted):

First, subject to the limitations applicable to national banks and federal savings associations, the provisions bestow much of the CFPB’s enforcement powers on every “state attorney general” and “state regulator” in the United States. A pessimistic person might think of this as the creation of hundreds of mini-CFPBs. As if this were not alarming enough, the state action provisions do not contain language limit ing state actors’ authority to residents of their own states, and a number of state actors, including the New York DFI, have already used the provisions to seek remedies for out-of-state consumers as well as their own residents.

Equally or maybe even more concerning is that the CFPA’s UDAAP prohibitions are broadly defined and could potentially be used to challenge a wide range of conduct that, in many cases, is not expressly prohibited by state law. Although most states have a statutes prohibiting unfair and deceptive acts and practices (“UDAP”), few, if any, expressly prohibit “abusive” conduct. Further, in many cases, state regulators do not have authority to bring state UDAP claims. Moreover, whether or not a practice is viewed as a UDAAP is often influenced by subjectivity. Ideally, state actors will align their UDAAP interpretations and enforcement policies with those of the CFPB and Federal Trade Commission, thus giving institutions a more uniform view of the types of conduct that could be challenged; theoretically, however, the state actor provisions could open institutions up to hundreds of subjective interpretations.

Finally, the CFPA’s remedies are considerably stronger than the remedies most state actors can seek under state law, providing a means for state actors to both recover very large monetary awards as well as severely disrupt an institution’s business. In the Condor case, for example, in addition to the financial restitution and penalties, the New York DFS obtained a temporary restraining order that stopped Condor from obtaining new business in any state, froze the company’s assets, enabled the DFS to inspect Condor’s documents and access Condor’s business premises and storage facilities, and allowed the DFS to secure and take control of the business’s premises. Ultimately, the DFS achieved a settlement that will completely shut Condor down and obtain penalties and restitution for the company’s consumers.

Bad actors need to exit the stage. The problem with Franken Dodd is that it puts a lot of power in the hands of true believers, with inadequate checks and balances on the natural consequences of the truth of Lord Acton's assertion that power corrupts. While the author's of the article rightly advise financial institutions to take a close look at their compliance capabilities, I also think that banks and other financial institutions that don't have the resources to devote to a "robust" compliance infrastructure (which will be trying to sail the fog-shrouded waters of "abusive" and "unfair" without running aground) might also be advised to take a step back and reconsider the extent of their involvement in providing consumers with financial services. These mine fields are becoming increasingly dangerous.

All The Mail That's Fit To Print

It's been awhile since I dipped into the BLB mailbag. It's about time to see what kind of flack I receive.

First up is an email I received from a gentleman who referred to himself as the Director of Public Relations for Citi. Without hurling a single epithet, he informed me that the dispute with a lawyer/house renovator whose home was broken into by contractors for CitiMortage was "resolved" on December 10, 2014. He did not indicate what that "resolution" might have entailed, but we assume, based upon the nature of the dispute ("Show Me The Money!"), it involved coin of the realm passing from Citi and/or its contractor to the homeowner/attorney. While Toni Braxton may yearn for her heart to be unbroken, we aren't aware of any way in which you can unbreak into a house.

Another recent blog post on a scholarly article written by University of Alabama Law Professor Julie Anderson Hill on the legal cunundrum for banks trying to bank state legal - federal illegal marijuana-related businesses in Colorado, I received an email from Professor Hill. She corrected me on the nature of the "Mary Jane" credit union formed in Colorado, Fourth Corner Credit Union. I thought that it was the first special purpose "Cannabis Cooperative" authorized under Colorado law. Instead, Fourth Corner is a state chartered credit union. Because of quirk's in Colorado law, it may open its doors prior to receiving deposit insurance from the NCUA (a processes that could take years), although its still needs approval by the Federal Reserve System of a master account. The organizers think that this approval process by the Fed is a sure thing, but neither Professor Hill or I are as confident. On the other hand, it's not that there is any precedent on which to base an opinion, so we're just going to have to wait and see. The organizers had, according to press reports, hoped to be up and running by January 1, 2015, but that hasn't occurred. Stay tuned.

Finally, a financial institution trade official asked if I thought that Maxine Waters had personally drafted the press release that contained the following words, allegedly spoken by her:

“The disparate impact standard is absolutely essential to providing for fair housing throughout our nation. I sincerely hope that the Supreme Court will make the right decision in this case by affirming that the Fair Housing Act unequivocally prohibits actions that have the effect of disproportionately denying housing to marginalized communities,” Waters said Friday.

“Failure to do so would be contrary to congressional intent; it would overturn decades of major progress in fair housing; and would be particularly devastating for minority individuals and communities,” she added.

Waters said unchecked discriminatory housing practices, such as subprime lending to minority communities, in the time leading up to the mortgage crisis continue to prevent working class families from joining the middle class.

“The disparate impact standard under the Fair Housing Act has been effectively used for decades to weed out practices that create barriers to housing for people on the basis of factors like race, color, religion and gender,” she said.

Given her previous problems in the socialization/nationalize arena, we are both doubtful that Rep. Waters wasn't acting as a mere sock puppet for the guiding hand of a professional PR hack. Then again, we could be wrong. Either way, we're rooting for the visiting team in the disparate impact game being played before the SCOTUS.

Surprisingly, there were no anonymous emails threatening my life or worse, regulatory retaliation. Perhaps with the spring thaw, the wombats and trolls will again be out in force.

Compounding Your Errors

Because we've been relentless in our coverage of Bank of America's repeated foreclosure faux pas over the years, it's only fair to welcome to the slap-fest BofA's erstwhile partner in slime, CitiMortgage. Like the bank America love's to call its own, Citi also knows that when it comes to generating bad publicity for banks in general and big banks in particular, nothing works better than breaking into and looting a house the bank does not own.

Until this year, Honesdale attorney Jeffrey S. Treat thought he had seen everything in the wild world of home restoration, flipping and landlording.

CitiMortgage and its agents confused his handyman’s special — a small, long-vacant foreclosure he purchased for cash at 1526A Thackery Ave. in Scranton — with a home it foreclosed on two doors down.

In several visits from June through July, the bank cleared Treat’s building of its contents, including tools, building materials and replacement windows.

The bank changed the locks and crudely padlocked and posted the home.

This came as a great shock to Treat, who had no mortgage on the home and no relationship with Citi.

Unable to reach an agreement with the bank or the company that did the property clean-out, Safeguard Properties of Valley View, Ohio, Treat sued them and CitiMortgage Inc. of O’Fallon, Missouri, for the $3,500 estimated worth of what they removed and $5,000 for trespassing and damages.

A spokesman for Citi said Safeguard Properties and Treat are trying to resolve the issue. But Treat is past negotiating and is preparing for court.

“I don’t live there, and it was just tools, lumber and whatnot, but it’s just bizarre that this would happen,” he said. “It’s my place and all these people were in there and they took my stuff. Yeah, I feel violated.”

If you're going to pick on an individual to abuse in this fashion, who better than a lawyer? Sure, people love to loathe attorneys, yet as a group, they have the annoying habit of not being intimidated by big institutions, knowing their way around a courthouse, and, most unfortunately of all for giant financial institutions, matching bankers tit-for-tat when it comes to displaying your inner A-hole.

Not that Jeff didn't have provocation to sue the beatitudes off of Citi, you understand.

All summer, there were subtle and not-so-subtle clues that a big bank was about to pounce on his property. Treat tried to warn everyone, but never suspected a confused mortgagor would trespass, break into his property and remove everything in it.

It started when he found oversized sheriff’s sale notice on the house, citing a CitiMortgage foreclosure. He called the big law firm handling CitiMortgage’s foreclosures.

“You got the wrong house,” he said. He researched Citi’s actual foreclosure, found the property they wanted was two doors up, which he said was in much better shape than his dusty gut-job. He thought that was the end of it.

He continued working on the property, often with help from his father-in-law, who is retired and enjoys the activity. Through the summer, the grass was mowed regularly.

Treat concluded his father-in-law was taking care of the lawn.

His father-in-law thought Treat was taking care of the lawn.

They never discussed it.

Turns out, it was probably CitiMortgage and Safeguard Properties.

“That shows you what kind of guy I am,” Treat said. “I didn’t even thank my father-in-law for the work I thought he was doing, otherwise I would have known that Citibank was treating my property as though it was theirs.” He gets wind of people on his property and makes a visit, finding the locks changed, the home cleared and a padlocks attached from the outside.

The neighbors watched it happened, thinking Treat fell behind on his payments.

Treat broke into his own property, saw his stuff was gone and replaced by a Safeguard sign-in clipboard where employees logged their visits and what they had done. Treat’s tools, replacement windows, even bags of cement were gone. Treat put up a sign to CitiMortgage and Safeguard, telling them to that it is not their house.

The bank's contractor, who stole Treat's tools, could have settled up by just paying a premium on the "conservative estimate" Treat gave it for the value of those tools. Instead, it decided that nickel-and-diming was the way to best address the "reputational risk" that the federal bank regulators claim is of major concern when a bank engages in questionable activities, like processing payments for an online dating service or a payday lender. We assume that breaking and entering might also qualify as "high risk" of damaging a bank's reputation.

Treat sued them for five large in small claims court.

Citi could still have cut its reputational losses by cutting Treat a check. I mean, going to small claims court when the only issue involves an amount that Treat claims is "not even an hour of fuel in a corporate jet" seems like bullying the little guy, especially when the question of liability is cut-and-dried. However, according to the linked article, both the bank and its contractor have hired lawyers to contest the proceeding. I hope they show up at the right courthouse. Their track record does not give one encouragement. I suggest the use of a seeing eye dog.

You have to wonder who at the bank is making the judgment call to slug this one out. Treat's getting all the favorable press, and whether or not he gets the full monty financially when he gets his day in court, he's already exacted his pound of flesh in the court of public opinion. The negative publicity hit has got to be costing Citi more than simply paying the guy a few grand and keeping this embarrassing episode out of the newspapers.

Things could have been worse, I suppose. Treat could have had a pet parrot in that house.

More Depth On Legal Issues Surrounding Marijuana Banking

University of Alabama Law Professor Julie Anderson Hill has posted a draft of a work-in-progress, an article for an upcoming Case Western Law Review Symposium Issue, entitled "Banks, Marijuana, and Federalism." In it, she explores the legal issues surrounding banks providing banking services to state-legal marijuana-related businesses in more depth than you'll see on the pages of this rag. While it requires some polishing (including the addition of a specific discussion of Fourth Corner, the Colorado cannabis co-op, in a section in the later portion of the article that she discusses in passing earlier in the article), I found it to be a valuable addition to the analysis of the risks to banks that want to provide services to such businesses.

Here's a portion of the "abstract" of the article provided by Professor Hill, which summarizes her approach and conclusions:

This article explores the root of the marijuana banking problem as well as possible solutions. It explains that although the United States has a dual banking system comprised of both federal- and state-chartered institutions, when it comes to marijuana banking, federal regulation is pervasive and controlling. Marijuana banking access cannot be solved by the states acting alone for two reasons. First, marijuana is illegal under federal law. Second, federal law enforcement and federal financial regulators have significant power to punish institutions that do not com-ply with federal law. Unless Congress acts to remove one or both of these barriers, most financial institutions will not provide services to the marijuana industry. But marijuana banking requires more than just Congressional action. It requires that federal financial regulators set clear and achievable due diligence requirements for institutions with marijuana business customers. As long as financial institutions risk federal punishment for any marijuana business customer’s misstep, institutions will not provide marijuana banking.

Among the many fascinating (to a nerd like me, at any rate) observations made by Professor Hill was the following potential problem with the Federal Reserve approving Fourth Corner's access to the federal reserve payments system:

If the Federal Reserve provided payment services to a cannabis credit co-op, the Federal Reserve and its employees would be engaging in money laundering. They might also be conspiring to manufacture and distribute marijuana, aiding and abetting the manufacture and distribution of marijuana, and acting as accessories after the fact for the manufacture and distribution of marijuana. 

As long as they don't process payments for payday lenders, online dating services, or Smith & Wesson, they should be safe from prosecution under the "prosecutorial discretion" mantra chanted by the present executive branch monks until the current administration vacates the White House. The problem with that approach is that the statutes of limitation will not have expired by the time new Attorney General Ted Cruz decides to wage a little MJ jihad on every Justice Department and federal bank regulatory agency official who looked the other way when some bankers in Colorado or Washington lit up a fat boy and followed the money.

I also agree with her conclusion that, while action by the U.S. Congress is necessary, it's not enough. A change in attitude by federal bank regulators will also be required, whether of not we get a federal legislative fix. If due diligence requirements make it too risky and expensive to bank these businesses, then marijuana businesses are going to find themselves continuing to face problems that only a third-party payment processor or payday lender could truly appreciate.

De Novo Headwinds Abating?

The FDIC chose an odd way to announce a purported "thaw" in its long-denied freeze on de novo banks: Q&As. Released late last month, the brief document supplements a 1998 FDIC Policy Statement regarding applications for deposit insurance. It was generated by a request by a couple of bank trade organizations for clarification on several points, including pre-filing meetings, application processing time, initial capitalization, and an initial business plans. The trade groups were concerned that the policy of the FDIC announced in 2009 in FIL-50-2009, which, among other things, extended the requirements for higher capital requirements and business plans from three years to seven years, was no longer justified given improved economic conditions and was "choking off" the creation of new financial institutions.

Without explicitly rescinding (or even mentioning) FIL-50-2009, the Q&As provides that the periods for higher capitalization and business plans is now three years. That's encouraging. The answers concerning pre-filing meetings and usual and customary processing times for applications are not new, but it is always good to have a reaffirmation of what is to be expected by the FDIC so that potential applicants can plan with some certainty.

The fact remains that since the onset of the crisis, only one new insurance application has been approved, and that one was for a bank with a fairly uncommon targeted customer base. If there is, indeed, now a willingness to consider new deposit insurance applications for de novo banks in good faith, there may, actually, be a few more filed.

As some observers in the trade press have mentioned, the increased regulatory burden and the less-than-fully-recovered economy present challenges to any new bank business plan. It's harder to make money without size, and size takes capital and growth, both of which present challenges, from a business and regulatory perspective. In addition, the de novo capital raising, organization, and regulatory approval process is time-consuming and expensive. If the promises that seem to made in the latest Q&As are not true, then what previous organization groups discovered will also be true in the future: you can burn through a lot of money on consultants and other out-of-pocket expenses and find after twelve-to-eighteen months that you've managed to bottle nothing but air.

I don't expect that the Q&As will lead to a gold rush in de novo bank applications. However, I do expect that a few more venturesome  groups that previously wanted to fly the de novo route will at least travel to the airport to see which way the windsock is blowing.