Bank Lawyer's Blog

Californians To Dodge All "Intrastate" Junk Faxes

According to press reports, federal district court judge Morrison England ruled yesterday that a California state law (SB 833) that prohibits all unsolicited faxes to California residents (whether or not the parties have an "existing business relationship") without their written permission is not preempted by federal law (Telephone Consumer Protection Act) with respect to unsolicited faxes that are sent by senders to recipients who are both located in California. However, SB 833 is preempted with respect to "interstate" unsolicited faxes.

I suppose half a loaf (actually, 1/50th of a loaf) is better than nothing. Obviously, all a California sender has to do is to arrange to send from outside the state, unsolicited faxes to California residents with whom it has an "existing business relationship," and doesn't have move an inch to send unsolicited faxes to similar residents located in other states.

No word at this early hour whether either side plans to appeal to the 9th Circuit. The Direct Marketing Association's crowing about the decisions makes it unlikely the plaintiffs will initiate an appeal, however.

A sad day for junk fax haters everywhere.

Swept Away In A Tidal Wave of REO

This tidbit from Paul Muolo's "What We're Hearing Column" in this past weekend's National Mortgage News "Daily Briefing":

Lester Dominick, president of MortgageFlex, told us last week that the REO (real estate-owned) tsunami should hit later this year or early next. He expects the first bloodletting will occur in investor properties. "They're going to get creamed," he predicted. He expects the Miami and Las Vegas markets could suffer the most.

Something fun to look forward to in the coming year, isn't it? Bankruptcy and workout specialists are already stretching and bending and running wind sprints to get ready.

I've had a number of people tell me that Las Vegas is a bubble waiting to burst. There's a local business columnist in Dallas who's been predicting the collapse of that real estate market (and several other "overheated" markets) for the last two years.

If you hang in there, sooner or later the law of averages has to catch up with your predictions.

The Bogeyman in the Closet

The vast right wing conspiracy has apparently hit banking.

According to the Los Angeles Times, the Bush Administration has embarked upon a massive campaign across a wide range of American businesses to preempt state laws that protect consumers. Why? Other than that they're simply evil, that is, which, of course, is a given.

Preemption initiatives by regulatory agencies have drawn less public attention than controversial legislative moves supported by the White House. With administration support, Congress has restricted class-action suits and banned certain claims against gun makers and vaccine producers.

By embedding similar protections for businesses in regulatory changes, the administration has advanced Bush's repeated pledge to rein in what he calls junk lawsuits.

The Gestapo OCC is not spared the LA Times wide net that ensnares all degenerate preemptors.

The U.S. Office of the Comptroller of the Currency has repeatedly sided with national banks to fend off enforcement of consumer protection laws passed by California, New York and other states. The agency argued that it had sole authority to regulate national banks, preempting state restrictions.

Yes, this OCC penchant for preempting state consumer protection laws is a recent phenomenon, rarely used in the past, and only taking off after the BushHitlerRoverian World Domination Monolith issued orders from on high for the federales to yank the rug of consumer protection from underneath the feet of the common man.

All those preemption opinions my clients bought and paid for over the last 31+ years by dint of my fine reasoning skills, i.e., wetting my index finger, sticking it in the air, and discerning which way the wind was blowing, were useless exercises in chicanery. If we'd been prescient, we'd have sat on our hands (palms flat and facing downward, I presume) and merely awaited the Messiah (second coming or first, it makes no difference) named George W. Bush, and the promised land would now be within our reach. Alleluia!

This is the same LA Times that prior to the the 2004 elections editorialized that Bush had the presidency only due to "accident of birth and corruption of democracy." They need to make up their minds. He's either an evil genius or a dolt. He can't be both.

As to the OCC, if it's part of a vast campaign by the Compassionate Conservative and his willing minions to Haliburtonize the world (and beyond?) through the aegis of federal preemption, they've been at it for a heck of a lot longer than the last five years. This story could be a Robert Ludlum novel, only a lot less entertaining.

P.S. If the OCC annoys the LA Times, pity the poor Office of Thrift Supervision when they finally figure out that on the issue of federal preemption, the OTS makes the OCC look like a collection of state bank supervisors on Rohypnol.

Paranoia strikes deep
Into your life it will creep
It starts when you're always afraid
You step out of line, the man come and take you away

We better stop, hey, what's that sound
Everybody look what's going down
Stop, hey, what's that sound
Everybody look what's going down
Stop, now, what's that sound
Everybody look what's going down
Stop, children, what's that sound
Everybody look what's going down
---Stephen Stills, Buffalo Springfield

FTC Settles CardSystems Solutions Charges

In a story we've been following for some time, the CardSystems Solutions Inc. data security breach debacle took another step to a resolution yesterday when the Federal Trade Commissions announced that it had settled charges that CardSystems broke the law by failing to adequately protect consumer's personal information from data security breaches.

"CardSystems kept information it had no reason to keep and then stored it in a way that put consumers' financial information at risk," said FTC Chairman Deborah Platt Majoras.

The company stored information from the magnetic strip of credit and debit cards - account numbers, expiration dates and security codes, the agency said. The commission also said CardSystems had insufficient passwords to keep a hacker from taking control of its computer network.

CardSystems' assets have since been bought by San Francisco-based Pay By Touch. The settlement requires Pay By Touch to implement a comprehensive security program and obtain independent audits every other year for 20 years.

As the FTC noted in its press release on the settlement, CardSystems still faces millions of dollars in claims in private litigation arising out of the security breach. And vendors wonder why I'm so "obsessed" with data security and breach notification provisions in IT services agreements.

It's just an unreasonable personal quirk, I guess. After all, a data security breach only cost CardSystems Solutions the entire company, so I suppose I'm merely overreacting.

Jumping Hurdles

As Dennis Miller might say, "I don't want to get off on a rant here, but..."

From the New York Law Journal:

A senior in-house lawyer at the New York Life Insurance Co. has resigned after the company discovered in recent weeks that he had never been licensed to practice law.

Michael A. Watson, 44, first joined the insurance giant in 1996 and had been promoted last July to first vice president and deputy general counsel. One of five deputies, he was responsible for the unit of the company's legal department focused on investments, mergers and acquisitions and financial transactions.

In a statement issued yesterday, New York Life spokesman William Werfelman said Mr. Watson had resigned immediately after admitting he was not licensed. He declined to describe how the company discovered Mr. Watson's status.

[...]

Before joining New York Life, Mr. Watson was an associate in the New York office of Richmond's Hunton & Williams, where he focused on project finance. He also was an associate at New York's Milbank, Tweed, Hadley & McCloy, which he joined after graduating from Columbia Law School in 1986.

I'm not defending the fact that Mr. Watson may have been practicing law without a license (as the article notes, that's at least a misdemeanor criminal offense in most states). On the other hand, what do you want to bet that the guy simply couldn't pass the bar examination, notwithstanding the fact that he had the brains, knowledge and professional judgment to graduate from an Ivy League law school, perform as a lawyer at two top tier law firms, and handle the load as deputy general counsel at the largest mutual life insurance company in the country? Perhaps he simply never took the bar examination in any state, but that would be unlikely for a person who made it successfully through three years of examinations at Columbia and had the class standing to be hired right out of the chute by Milbank, Tweed. It seems more likely to me that he tried and failed (maybe more than once) and then simply was so embarrassed and/or concerned about the consequences of his failure that he did the wrong thing.

You can't excuse it, but you can at least attempt to understand why it happened. The article points out other instances where elite law firms have been fooled in the past by other apparently competent professionals who, in fact, were not licensed.

On the other side of the country, even as we speak (or read without our lips moving), Kathleen Sullivan is in the midst of another try at passing the California Bar Examination. Who?

Kathleen Sullivan, former dean of Stanford Law School and a former Harvard Law School professor, is considered such a legal superstar that news of her flunking the California bar last year made the front page of the Wall Street Journal. She remains a full law professor at Stanford and is associated with a private law firm.

Although she is licensed to practice law in New York and Massachusetts, the California Supreme Court last month removed her from litigation over a $500 million licensing dispute because she was not a member of the state bar.

The constitutional scholar, who has argued several times before the U.S. Supreme Court, wasn't eager to talk about the setback, declining to say how much she studied for the bar or how close she came to passing. "That is all past," Sullivan said.

She took a special bar exam, shorter than the regular test, for lawyers licensed elsewhere. Only 28 percent obtained passing scores.

Only 28% passed? I mean, it's great to try to protect the monopoly, but c'mon! The linked article is full of other instances of people of skill who couldn't pass the exam.

Over 31 years have passed since I passed my first bar examination on the first try, so I'm not approaching this from the standpoint of sour grapes. Yet, I remember very bright, accomplished classmates of mine who failed it on the first try. In the middle of the examination that I took, the man sitting next to me had a nervous breakdown and had to be led away babbling and laughing by proctors, because he couldn't focus with the clatter of typewriters washing over us (that surely dates me). I didn't lose more than a nanosecond's worth of concentration while he freaked out. As you can see, my lack of human compassion made me perfect for the life I've chosen.

Might there be a better way? I would hope so, but I don't know what it might be.

All I know is that the current method has flaws.

By the way: Good luck, Kathleen.

Banks Finish On Top In Oregon

While banks may have slipped into second place as one of the major sources of consumer complaints in New York, on the "Left Coast" they still top the bad boy list. From Oregon comes this news via the Associated Press:

Banks and phone companies remained at the top of the list for consumer complaints in Oregon in 2005, while health care made the top 10 for the first time.

Attorney General Hardy Myers said auto repair dropped off the list last year, while health care — including physicians, medical discount cards, pharmacies and dentists — made its debut at No. 8.

Construction contractor complaints moved up a notch to No. 9, followed by a perennial scam — Nigerian money transfer and counterfeit check schemes — to round out the annual list.

I always take it as a bad sign when banks remain more of a pain to consumers than all Nigerian fraudsters combined. A dead heat with Baby Bells is nothing to write home about, either.

Myers noted that identity theft does not appear on the top 10 list because it is prosecuted as a crime and does not fall under civil consumer protection laws handled by lawsuits or regulatory action.

However, Myers said identity theft “continues to be the fastest growing crime in the world.”

Well, now I feel better. If identity theft had been on the list, it might well have edged banks out of the top spot. Then again, maybe not.

I wonder if "health care," which debuted at no. 8, might be "number 8 with a bullet"? Now, that would something to crow about.

Can't wait for next year's list to come out. Keep your fingers crossed that banks will soon be chanting, "We're Number 2! We're Number 2!"

Making Accountants Accountable

On February 3, the federal banking regulators adopted a final Interagency Advisory that prohibits financial institutions from agreeing to include limitation of liability provisions in external audit engagement letters.  I discussed the proposed Advisory last May, and there's no need to reiterate the details of the final Advisory, which for the most part follows the the substance of the proposed Advisory.

The final Advisory states that it does not apply to:

• Non-audit services that may be performed by financial institutions’ external auditors;
• Audits of financial institutions’ 401K plans, pension plans, and other similar audits;
• Services performed by accountants who are not engaged to perform financial institutions’ Audits (e.g., outsourced internal audits, loan reviews); and
• Other service providers (e.g., software consultants, legal advisors).

While I understand that external audit engagements currently are the subject of special concern (especially in light of the fact that similar requirements are already imposed on independent audits of public companies by Sarbanes-Oxley), I think that the primary rationale of the regulators - that such provisions "may weaken the external auditors' objectivity, impartiality and performance," and, therefore, because "the reliability of audits" might be negatively affected, safety and soundness concerns are involved - would apply to many types of engagements of outside service providers. For example, the reliability of outsourced internal audit, major technology services, and non-audit services could all be "impaired" if the such limitations are included in their engagement agreements.

Frankly, as an attorney whose code of professional responsibility makes it unethical for him to limit or to attempt to relieve himself from the consequences of his malpractice, I'm not overwhelmed with sympathy for other professional service providers who wish to negotiate such limits to protect themselves. Nevertheless, I seriously doubt that a professional auditor is seriously incentivized to do less than the best professional job that he or she can do for a client because of limitation of liability provisions in an engagement agreement. I've been a professional service provider for over 31 years, and I've worked with many auditors, and most are driven by the same forces that drive all successful professionals: to do the best job they can. It's simply the way they're built. They're also subject to professional state-supervised credentialing and supervision, mandatory continuing education, and brutal competition.

I wish I could say the same for all other types of service providers, especially some of the software, applications service and other IT service providers that I've encountered over the years. Some are good and some are bad, but I see almost every single one of them fighting hard to include in their "engagement agreements" the types of limitation of liability provisions (and worse) that bother the regulators when dealing with external auditors. As I've previously discussed in connection with the proposed Advisory, "[i]f a third party service provider is effectively shielded from the major consequences of its failure to perform competently, it may not be adequately motivated to perform as competently as it would be without such a shield."

If the regulators' rationale applies to external auditors, why not to all service providers to financial institutions? As I said last September when discussing this issue, "it might be of assistance, especially to smaller institutions that lack bargaining power, if the banking regulators took notice of which vendors were and which were not willing to "step up to the plate" and provide their bank customers with adequate recourse in the event of failures to perform. Letting the banks, or the vendors themselves, understand that those vendors who are not willing to give banks adequate protection will not, over the long haul, be acceptable as service providers to banks, may cause a 'paradigm shift' among vendors. Obviously, there is a limit to what the regulators are able to do, but the 'little guys' could use some help in this area."

In other words, external auditors are a nice start, but they're only a start.

Never Say "Never Again!"

Speaking of nontraditional mortgage products...

OTS Director John Reich gave a wide-ranging speech to the Exchequer Club in New York City last Wednesday in which he continued to warn about Pay Option ARMs.

I do believe there is a market for this product in situations where the loan product is properly structured, fully disclosed, appropriately marketed, well underwritten, and safely managed. That said, given the structural complexities and possible payment increases when the loan terms are reset, this product is not appropriate for unsophisticated borrowers or those with weaker credit capacities. I believe that some negative amortization products may offer qualified borrowers with greater financial flexibility than traditional products, which is beneficial to borrowers capable of understanding and managing the possible risks attendant to this product. While it is not a product that should be offered to all borrowers, I would not want to deprive qualified candidates from a homeownership opportunity by declaring this product off limits.

We expect the institutions we regulate to approach innovations in the mortgage market with caution and with thorough due diligence. We expect them to set concentration limits as a percentage of capital and, as a result, manage them successfully. As a regulator, that is our recommendation as well as our expectation.

He and John Dugan have beating this drum steadily for some time now, long before the proposed guidance on this type of lending was issued in late December. That beating is not unrelated to the concern the federal bank regulators have also expressed over commercial real estate (CRE) lending, most recently embodied in the proposed guidance issued on that subject (comment period ends March 14, 2006). Reich also briefly summarized the regulators' concerns about CRE.

The proposed guidance sets out thresholds for assessing whether an institution has a CRE concentration requiring heightened risk management practices. It focuses particularly on concentrations in those types of CRE loans that are vulnerable to cyclical commercial real estate markets. Institutions with these types of concentrations are expected to hold capital higher than regulatory minimums and commensurate with the level of risk in their CRE lending portfolios.

While savings banks’ CRE lending exposure is generally limited, we support the principle of robust risk management and commensurate capital in the presence of higher risk loan concentrations. In the past, weak CRE loan underwriting and depressed CRE markets have contributed to significant bank failures and instability in the banking system. While underwriting standards are generally stronger now than in the past, higher concentrations in CRE loans at some institutions remain a concern.

FRB Governor Susan Bies also weighed in earlier this month with a speech before the Financial Services Institute that dealt with this and other "risk management issues."

The agencies share a concern that some institutions’ risk-management practices are not keeping up with the growth in their CRE exposures. The guidance describes the key risk-management elements for an institution’s CRE lending, because banks, in order to attract new business and sustain loan volume, may be inclined to occasionally make some compromises and concessions to borrowers. As supervisors, we want to ensure that loan-to-value standards and debt-service-coverage ratios are meeting the organization’s policies--and that there is not an increasing number of exceptions to those standards and ratios. We also continue to monitor whether lenders routinely adjust covenants, lengthen maturities, or reduce collateral requirements.

Additionally, the guidance reemphasizes that institutions should have capital levels appropriate for the risk associated with their CRE concentrations.

[...]

A bank with significant concentrations may need to both strengthen its control environment and hold capital well above regulatory minimums. In certain cases, it may be prudent for an institution to reduce its concentrations. This is particularly important, since CRE lending in recent years has occurred under fairly benign credit conditions and, naturally, those conditions are unlikely to continue indefinitely. From a risk-management and capital perspective, institutions should employ stress tests and other exercises to help identify CRE vulnerabilities, including potential correlations with non-CRE exposures that might move in the same direction during a downturn.

In case it's escaped anyone's attention, the federal bank regulators are determined to avoid a repeat of the 1980s. At the very least, if there are wide spread bank failures in the future, they aren't going to occur because a large number of banks have undue concentrations of their assets in commercial real estate loans or other "risky" mortgage products. "Robust risk management and commensurate capital" tells you all you need to know about that subject.

If you're into either line of business, you'd better have your risk management procedures well thought out and well documented, and you'd better be able to convince a skeptical audience that you've got your "downside" (and backside) covered. Even the experts, however, should expect that for the foreseeable future, you'll be expected to maintain additional capital to cover the additional perceived risk (and it's the regulators' perceptions, not yours, that will govern).

It's not like everyone hasn't had plenty of warning.

American Bankers Association Resources On The Deposit Insurance Reform Act

The American Bankers Association (whose slogan is "We're The Good ABA. The One Without Lawyers") has a handy online chart that summarizes the Federal Deposit Insurance Reform Act of 2005, signed into law on February 8 as part of the Deficit Reduction Act of 2005. Those documents and other related links are found on a page on a reference page of the ABA's online site.

They don't call this blog your convenient source for one-stop shopping for nothing.

The Clock Is Still Ticking On Nontraditional Mortgage Guidance

The federal financial regulatory agencies today extended from February 27 to March 29 the comment period on the proposed guidance on nontraditional mortgage products, about which I posted last month. Initially, the regulators were going to adopt this guidance without allowing comments, but bank trade groups convinced them to allow an initial 60-day comment period. Those same trade groups once again prevailed upon the regulators to permit another 30-day extension. The only substantive comment received thus far that I could find is this supportive comment by the Conference of State Bank Supervisors. Apparently, the regulators are going to give financial institutions they regulate, and other interested parties, a sufficient opportunity to chime in before they lower the boom.

Therefore, if you've been itching to weigh in, don't feel rushed. You've got plenty of time to enlighten the regulators.