Bank Lawyer's Blog

Boom Times in the Great Republic

Last year was a great year in Texas for new bank charters. According to The Dallas Business Journal, this year looks even better.

The pipeline of new Texas banks is set for an explosion in 2007.

Some 19 separate organizing groups now are seeking permission to open new banks in Texas. In 2006, seven start-up Texas banks opened their doors.

Despite big-bank expansion and a continuing parade of newcomer institutions, bank organizers see plenty of room for new banks in the Lone Star State.

"They may not have all the luster other industries have, but for the most part, they've been profitable, there have been very few failures, and it can be a very safe investment with very good returns," said Byron Richardson, an Atlanta-based bank consultant currently assisting on start-up banks planned for Denton and Frisco.

Texas is not all alone, however.

In Georgia last year, 21 new banks started in business. That trailed only California (22) and Florida (23) in total new institutions. The same growth that makes those states good places to start a bank apply to Texas as well.

It's nice of the Dallas Business Journal to concede that other states might be equally as nice places to start a bank. I'm sure that it said that through clenched teeth, though.

The article also notes a few bank organizing groups who have attempted to speed up the process by buying existing bank charters in rural areas, and moving them to metropolitan areas. I think that makes sense, but the prospects can be slim. You have to know where to look, and it helps to have a local player with his ear to the ground. Unfortunately, unless you find an unusually motivated seller, the premiums can be unreasonably high.

Therefore, unless the economy tanks, don't expect this charter boom to stop soon down here in God's country.

Of course, this is all excellent news for bank lawyers.

Gluttons For Punishment, And Begging For More

I don't frequent the S&M scene, so any of you "discilplinarians" out there can "correct me" if I get this wrong, but isn't a "masochist" someone who gets all a-tingly in their appendages over someone smacking them around? Isn't it someone whose boat you float by the infliction of pain? If so, does that make Wells Fargo a "masochist"?

Wells Fargo might be the next bank to distribute credit cards to checking account customers who don't have Social Security numbers -- namely, undocumented immigrants.

The contentious issue captured national headlines last week after Bank of America announced plans to expand its pilot credit card program throughout Latino-heavy Los Angeles County -- prompting outrage and applause from coast to coast.

Now, Wells Fargo & Co., which operates 250 branches in Arizona, is contemplating a similar program.

"We are exploring the possibility of offering unsecured credit cards to Wells Fargo checking account customers who do not have Social Security numbers," said Marge Rice, vice president of regional banking communications for Wells.

"Wells Fargo recognizes a great need for equal access to financial products and services for all customers who want to build credit, establish financial security and achieve the 'American dream,'" she said.

The Good Ship Marge would have continued to sail right onto the rocky shoals of political correctness and multicultural diversity, but she struck a mine sown by the SS Tancredo and took on water. Salvage operations will await less stormy weather.

Now, the firestorm of criticism that was stirred up by Bank of America over the past couple of weeks might have led a reasonable person to conclude that now maybe isn't the perfect time to publicly announce another program to issue credit cards to illegal aliens undocumented guest workers who, thus far, have managed to survive in the shadows of this large American economy, meeting their credit needs through the services of a guy named Paco. If you thought that, you are simply ignorant of the Tales of Wells Fargo. Reaching out to the illegal immigrant undocumented guest worker populace is a time honored tradition for the boys that ride a stage coach with no suspension. A rocky ride through a hail of gunfire is nothing to these guys. They've been at this since before English Bob started killing Chinamen.

The San Francisco-based bank in May 2001 became the first financial services company in the country to accept the Matricula Consular, or Mexican ID card, as valid identification for opening accounts.

In Wells Fargo's defense, the initial impetus for acceptance of Matricula Consular cards came from the police. The public police, not the private police, such as...well...Wells Fargo.

The move was prompted by law enforcement officials in Austin, Texas, who asked financial companies to develop outreach programs encouraging Latinos to use bank services because they were being targeted, robbed and murdered by criminals looking for cash on hand. To date, Wells Fargo has opened more than 1 million accounts using the Matricula card.

It appears that what Wells Fargo thought was a request by local police in that hippie commune that some Texans call Austin (but was likely a prank call by Matthew McConaughey following a massive bong hit while partying on Willie Nelson's tour bus) was eventually expanded into a multi-state "outreach" program that has netted Wells Fargo one million accounts from the "credentially challenged." I believe that might be one or two more illegal immigrants undocumented guest workers than reside in all of Travis County, Texas, but certainly not by much.

And Wells Fargo is not stopping there.

This week, Wells Fargo launched a nationwide Spanish-language version of its financial literacy program aimed at inspiring 10 million Americans to purchase homes.

Unfortunately, the program consists of cards with Spanish on one side, English on the other, and phrases such as the following:

El Banco de América huele muy malo.
("Bank of America smells very bad.")

El Banco de América robó los pantalones de mi pequeño hermano.
("Bank of America stole my little brother's pants.")

Dejo todas mis posesiones a los Wells Fargo.
("I leave all my possessions to Wells Fargo".)

Notwithstanding this building bandwagon, not everyone is ready to jump on.

JPMorgan Chase & Co. has no plans to offer a similar credit card program, said spokeswoman Mary Jane Rogers. Officials at Compass Bank were not prepared to comment for this story.

I used to bank at Compass. I assume that the officials were preoccupied with trying to simultaneously tie their shoes and chew gum. I also assume that they'll all be up on their Spanish, pronto, even if some cranky analysts think that 3 times book value is way out of whack.

Warehouse Lenders Feeling The Subprime Pinch

The spreading plague of subprime lender meltdowns (most recently discussed here) is infecting not only the originators and buyers of subprime loans, but banks who lend to the originators, as well. According to The Wall Street Journal (paid subscription required) "[a]s more subprime lenders face losses or bankruptcy, big banks also face another problem: Many lent money to small firms like ResMae so that those firms could make more mortgage loans to borrowers. It isn't clear how much of these loans will be paid back to the banks."

What's your guess?

On August 14, "Accredited Home Lenders Holding Co., a subprime mortgage lender based in San Diego, reported a loss of $37.8 million for the fourth quarter, partly due to heavy repurchases of dud loans from large loan buyers, compared with a year-earlier net income of $43.3 million.

"Accredited uses credit lines from eight financial institutions to fund its mortgage lending. Those lines of credit contain covenants that could allow the lenders to demand prepayment of the outstanding balance if Accredited has two consecutive quarters of losses, the company said.

"Accredited already has received waivers in some cases on those covenants and will need to seek more waivers from the lenders if the company remains in the red during the current quarter, it said."

As long as a warehouse bank sees a light at the end of the tunnel, it may stick with the borrower. However, at some point, that dog will no longer hunt. As most bank attorneys understand from sad experience, the more "invested" in the borrower a lender might be, the more leverage the borrower may achieve in extracting concessions from the bank. As we also know, even in those circumstances, lender forbearance can have a relatively short shelf life.

The problems of warehouse banks that fund mortgage originators haven't received as much "play" in the press as the problems of subprime lenders and the Wall Street firms that are parsing the fine print to force buybacks. It will be interesting to see how this plays out. When I say "interesting," I mean that in the same sense as the interest most peole show in watching Britney Spears melt down in public. It makes you slightly ill, but for some reason you still watch.

Meanwhile, the most recent edition of National Mortgage News' e-mailed "Daily Update-Weekend Edition" included a chart with a scorecard  that contained the names of 13 "defunct" subprime lenders. As columnist Paul Muolo noted, "It's not a pretty picture." Paul also has some perverse "good news/bad news" about the continuing troubles in subprime lending by HSBC.

Heads began rolling there on Thursday and it's likely that more will follow. But there is some good news there as well (sort of). HSBC bought subprime giant Household International back in 2003 for $14.4 billion. It now has bad debt reserves of $10 billion on the unit, which is called HSBC Finance. Add the $10 billion to the $14.4 billion and you get $24.4 billion. What's so good about this? It gets National Bank of Australia off the hook for the worst mortgage company purchase of all time. In 1997, NAB paid $1.2 billion for HomeSide Lending of Florida, only to liquidate the company a few years later. Joe Pickett ran HomeSide and was -- and still is -- a Fannie Mae director…

Paul's a "glass-half-full" kind of guy, and a wise acre. You have to love that.

It's good to see, though, that many of those connected to Fannie Mae have such a good track record. At least FNMA's board canceled $44.4 million in bonuses to current and former officers of the association, even though they've done such a splendid job of running the joint. That brightened a dayotherwise  full of gloomy news.

Dada dada dada TJ Maxx you should go!

Yes, TJ Maxx should "go." Straight to jail. Do not pass "GO." Do not collect $200.

The ever-growing hacking and identity theft scandal at one of Massachusetts largest retailers, TJX, parent of TJ Maxx, has given impetus to a bill introduced by Rep. Michael Costello in the Massachusetts legislature that, according to The Wall Street Journal (paid subscription required), "would make any company, be it retailer, bank or data processor, financially liable if it is the operator of the system that is hacked." While many states (not including Massachusetts, incidentally) have passed laws that require a business whose system is compromised to notify consumers that their personal information has been accessed, this is the first state law that would assess financial responsibility to the business whose system's security is breached.

The bill is being supported by credit card banks, who have taken the brunt of TJX's systems breach, and previous breaches of other retailers' information security systems. Among those costs have been the cost of re-issuing credit cards, freezing, closing and reopening accounts, and fraud charges. According to an article in last month's The American Banker (paid subscription required), the Massachusetts Bankers Association played an important role in drafting Rep. Costello's bill. Because they've been picking up the tab, credit card banks have had an incentive to make their own information security systems more robust. As The Wall Street Journal notes, banks "have instituted an assortment of computer-security systems, including encryption, to thwart thieves." Of course, it also helps that information security measures are required of banks by safety and soundness guidelines. Now, banks want the same "incentive" (i.e., financial exposure imposed by law) to motivate retailers to stop slacking off when it comes to information security measures and when it also comes to stepping up to the table with cash when those measures are circumvented.

The response of retailers has not been, shall we say, exactly ecstatic.

Jon B. Hurst, the president of another Boston trade group, the Retailers Association of Massachusetts, said retailers already cover some of the costs related to breaches. “Fraudulent activity is part of the reason why we have what is, in many peoples’ opinion, outrageously high interchange fees,” he said.

Mallory Duncan, the general counsel for the National Retail Federation, said the card associations’ Payment Card Industry data security standard already puts a large financial burden on retailers, even when there are no breaches.

The bill could actually make the payment system less secure by taking banks off the hook, Mr. Duncan said. “Carried to its logical extreme, this gives … [banks] incentives not to carry out their responsibility and monitor for fraud.”

He said he does not know of any state that requires retailers to pay banks’ costs for data breaches.

The "outrageous interchange fees" is a non-starter. Consumers and the legislators they elect don't care about that esoteric argument. It's tough to "follow the money" when all the outraged voter cares about is that TJX allowed their personal information to be stolen and their credit card information to be used fraudulently. The consumers' concern for nuance extends only to the following extent: "I see a sturdy live oak right over yonder. Let's get us a rope and hang him."

Mr. Duncan's "logical extension" might be supportable on Planet Mongo, but here on the third rock from the sun, we all recognize that the incentive for banks to maintain consumer and customer data securely is because they are required to do so by law. Now, banks are simply asking to level the playing field, Mr. Duncan. Being a logical extension kind of guy, you should see the justice of that point, eh?

Spin meisters: a tiresome lot.

Other "experts," such as Avivah Litan, a consultant ("Hide the kids and the silverware!") with Gartner, Inc., was quoted by the American Banker as stating that she's "never seen the government step in like that...It's a collective responsibility." "Collective"? What are you doing, channeling the spirit of Karl Marx? Well, don't cry for Maxx, Av-va-vi-vah, but you need to stop watching reruns of Lost and venture back to the real world. The "responsibility" for a retailer's information security system is the retailers. When its breached and information is stolen, it ought to be the retailer's responsibility to make the other damaged parties whole. In your world, it may "take a village," but in the world of civil litigation, it's dog-eat-cat, and every villager for himself. Moreover, in this field, the private sector remedy, to assign liability to the party most responsible for the loss-the retailer whose system was breached-via private contractual remedies, is broken.

Back to The Wall Street Journal:

Among those who would benefit the most from a statutory law would be small-to-medium-size banks that don't handle the transaction volumes of their much bigger national counterparts. When they have sued retailers to recoup their losses, they have failed.

After a security breach in 2004 at BJ's Wholesale Club Inc. in Natick, Mass., the Pennsylvania State Employees Credit Union asked a federal court to order the retailer to pay $100,000 -- the financial institution's tab to cancel and reissue 235,000 Visa credit cards. But a federal judge threw out the case arguing that the credit union wasn't a party to a private contract between Visa International Inc., BJ's and its processing bank, Fifth Third Corp., which outlines who is liable for fraud.

Two other banks -- TD Banknorth Inc., of Portland, Me., and Sovereign Bank of Philadelphia -- also sued and lost their case against BJ's on similar grounds.

Some of the private contracts do require retailers to reimburse the credit-card-issuing bank for losses when financial data of customers are breached and their cards are compromised. But banks say that the recovery process is so cumbersome that it is nearly impossible for them to recover their full losses.

MasterCard Inc. has had such written agreements for years and Visa USA Inc. began incorporating a similar policy late last year. "Under that process banks end up recovering $1 a card on average," says Bruce Spitzer, spokesman for the Massachusetts Bankers Association. Card-replacement costs range from $5 to $20 per card. "That's why we're pushing for a state law," he says. Visa says under its new process, banks should be able to recoup their losses in about seven months.

7 months? You think credit card fees are high now, retailers?

I would agree that legislation always should be a last resort where an adequate private sector remedy is available. However, I would also agree that a failure to take responsibility for your failures results in all kinds of unpleasant consequences, including the intervention of that body to which Daniel Webster referred when he said "When the legislature is  in session, no man's property is safe."Nevertheless, this is what you get when you don't voluntarily adopt the security measures that other businesses, such as the banks you groan and moan about, adopt, and, when those measures don't work, you try to avoid accountability. Some schoolyard bully comes along and beats you like a rug, and you cry like a baby.

Of course, it might also have been better had not the Attorney General of Massachusetts decided to initiate a vendetta for personal reasons public policy considerations.

Massachusetts's new attorney general, Martha Coakley, herself a victim of credit-card fraud earlier this year, is leading a civil investigation involving as many as 30 states, into the security breach at TJX.

Bend over and grab your ankles, TJX. This is going to hurt you a lot more than it's going to hurt me. And when you receive a stroke, I want to hear you shout, "Thank you mam! May I have another?"

For retailers who sell in more than one state (like, say, TJ Maxx) it might also be preferable to have one national standard for liability for information security breaches. That way, you only have to look one way for the Greyhound Bus that's about to flatten you, and not 50 ways.

Enter Barney Frank. According to a recent article from CNET News:

Congress may be eyeing similar legislation on a national scale. U.S. House of Representatives Financial Services Committee Chairman Barney Frank (D-Mass.) has said he supports the concept. However, it is unclear what sort of language will end up in a new data-security bill Frank is drafting, said a committee aide who asked not to be named.

A spokesman for Christopher Dodd (D-Conn.), the chairman of the Senate Banking Committee, was less certain where that chamber may be headed. Dodd "intends to work with his colleagues on the committee and in the Senate to further examine current risks to financial data, and also examine what steps Congress can take to better protect the data and consumers," spokesman Marvin Fast said.

Well, that was underwhelming. Then again, whenever Barney Frank "eyes" something, that "something" ought to become just a wee bit uneasy. I know I would, but maybe that's just me.

A final point: I hope bankers realize that when the bill says "any commercial entity," that means banks. While this Massachusetts law might help some credit card banks avoid losses when a retailer's systems are breached, those same banks, and all other banks, have to understand that this bill, and others like it, will also impose liability on them when their systems are breached. If you want to stick it to retailers (and let's be honest, who doesn't), be prepared for the same law to put the hammer down on your head when you deserve it. No one, least of all retailers, will want to hear you whine about it if that happens.

On the other hand, you can always cry on the shoulder of your local bank lawyer, especially when the meter's running.

Lay Your Cards Down

Last year we discussed how banks in this country have been aggressive in attempting to service the financial needs of illegal immigrants undocumented guest workers, much to the surprise of many citizens who assumed that you needed to prove that you are a U.S. citizen, or at least a legal resident, to obtain a loan, open up a bank account or obtain a credit card. The answer is no, you don't. For more detail, read the previous post and the articles linked in it.

Whatever the side of the fence you fall down upon, or even if you straddle the fence, you should understand (assuming that you're sentient and possessed of even semi-competent reading comprehension skills) that this is a hot button topic to a large segment of the populace. There are difficult issues involved, which, of course, means that a big chunk of the citizenry thinks that it's all very simple. People are here illegally, kick them out. End of discussion. Naaa, naaaa, naaaa, I can't hear you! I can't hear you!

You know, the typical discussion that goes on involving practically any issue of public policy in this country today.

Recognizing that whenever one discusses illegal immigrants undocumented guest workers, one is walking through a potential mine field of verbal assault and knee-jerk reactions (unlike less touchy subjects such as, say, the role of religion in politics, evolution versus intelligent design, George W. Bush, and "Brittney: More Beautiful Brown, Blond or Bald?"), banks need to be cognizant of the negative reaction that might be engendered should they appear to be assisting people who are breaking our laws. For every group you'll please with such efforts, you're just as likely to enrage an equally large group of existing or potential customers. As a matter of common sense, you would think that a bank would do focused marketing without a lot of general hoopla that would raise the ire of the "other side of the coin."

Then again, you could take the approach of Bank of America, which is to publicly stick your finger in the eyes of customers who might be offended by your proactive marketing to illegal immigrants undocumented guest workers and gently cajole them with a softly whispered "Yo Mama!"

Bank of America Corp., the second-biggest U.S. bank, has begun selling credit cards to customers who lack a U.S. Social Security number or credit history, opening the business to immigrants who may be in the country illegally.

The bank, which has its credit card operations in Wilmington and employs about 10,000 workers in Delaware, said it expanded the program to 51 branches in Los Angeles County, Calif., last week after testing it at five locations there. Lending specialists at the Charlotte, N.C., company decide an applicant's qualifications rather than relying on credit scores and other traditional measures.

That was last week. Today, Bank of America is on the defensive, ducking and bobbing to avoid bricks thrown by the usual suspects.

Bank of America Chief Executive Kenneth Lewis defended the program on Thursday in The Wall Street Journal. This came after some groups called for a boycott of the No. 2 U.S. bank by assets. They say their efforts are bearing fruit.

William Gheen, director of the National Illegal Immigration Boycott Coalition, said his group has collected hundreds of e-mails from people vowing to cancel accounts and move mortgages. The group said it has more than 11,000 signatures on its petition calling for a boycott of Bank of America.

"What Bank of America is doing is illegal, or should be," Gheen said.

In what I've previously described in connection with litigation filed against international banks by victims of terrorism, Bank of America has adopted the "Baghdad Bob Defense."

For its part, Bank of America has not seen "any unusual business activity" resulting from responses to the pilot program, spokeswoman Alexandra Trower said.

"Nope. No problems here."

In his opinion piece in yesterday's The Wall Street Journal (paid subscription required), Ken Lewis also assumed the famed three monkeys passive defense posture.

"Let me be clear: Bank of America does not deliberately market financial products and services to illegal immigrants," he wrote.

He and others argue that it aids anti-terrorism efforts to bring illegal immigrants into the mainstream so that they can be"monitored" by federal authorities. I suppose that they assume that al-Quida leaders like Osama bin-Laden suddenly suffered brain seizures that lowered their IQs to the levels of chilled perch, and that "sleepers" would suddenly come forward to establish documented relationships with U.S. financial institutions that would aid U.S. authorities in tracking them down.

He failed to convince his critics.

"After September 11th, we were told that money was the lifeblood of terrorists, and that we should do everything possible to block their access to financial resources," Rep. Tom Tancredo, a Colorado Republican and prominent illegal immigration opponent, said Thursday in a statement.

"Today we are hearing a far different message," he continued. "I hope the (Bush) Administration will shut down this reckless and illegal program."

Tancredo then called for the nuclear (or was that "nucular"?) bombing of B of A's holy places, including its Charlotte Corporate Center, The Esalon Institute, and a hot tub in Malibu containing David Geffen, Jeffrey Katzenberg, Barbara Streisand and the mummified corpse of Cesar Chavez.

Not all of the criticism was fevered, however. The law students at the University of Illinois who author The Journal of the Business Law Society blog had a thoughtful piece yesterday about the "loophole" in the U.S. Patriot Act that permits Bank of America to escape violating that statute. The authors argue that these outreach efforts to "bank the unbanked" are undermining not only the Act's goal of tracking terrorists, but also U.S. anti-money laundering efforts generally. They also criticize the IRS policy of issuing tax identification numbers (ITINs) without rigorously determining the citizenship status of the applicant. Once you cool off from the heat generated by this burning issue, it's worth a dispassionate read.

It's A Wide World, After All

A couple of weeks ago, MasterCard jumped on the illegal immigrant undocumented guest worker bandwagon and announced a program that will allow immigrants to transfer remittances "back home" to their "native lands" and allow the recipients to have access to those funds using cellular telephones. Remittance recipients would be notified of the remittance via text messages on their cellular phones, and then could access those funds using Mastercard products such as prepaid cards that don't require a bank account.

The reason that this is so attractive is that in many parts of the developing world, you may not have a paved road, a bank branch, or fiberoptic cable handy, but everybody seems to have a mobile phone. It's bringing bank-like services to the unbanked, wherever they might be.

This sounds all so terribly cutting edge, and in many respects it is. Nevertheless, people in other parts of the world have been working on the marriage of mobile telephones and banking (and bank-like) services for some time now.

Take the case of Fundamo, for instance. Based in South Africa, and started by CEO Hannes van Rensburg, and Neil Hinrichsen, former Managing Director of Netscape's South African operations, in 2000 the company developed software that, according to this article in the South African Financial Mail, today permits a wide range of banking transactions trough cellular phones.

The software powers a variety of applications, including person-to-person payments; payments in retail environments; purchasing of airtime; and business-to-business applications such as mobile payments for the delivery of goods such as beer and cement in Africa.

[...]

Large customers include Celpay, owned by FirstRand, which is a financial services company operating in both Zambia and the DRC. The company provides mobile banking and payment solutions for banks looking to offer access to financial transaction services to their customers. The services are accessed through the use of GSM cellphones and point of sale (POS) devices using mobile operators as the delivery channel. In operation for a little over three years, the company processes more than 3m transactions a month in the DRC alone.

MTN and Standard Bank have launched a mobile banking joint venture, MTN Banking, giving Standard Bank access to MTN's subscriber base and offering MTN an opportunity to grow its subscriber base and revenue. Powered by Fundamo technology, MTN Banking's first product is the MobileMoney transactional account.

MTN Banking has also been launched in Uganda, where both MTN and Standard Bank already have a large market share. From there they will look at penetrating countries like Nigeria, where only 10% of the population is banked and there is only one branch or ATM for every 41,900 people.

One bank branch or ATM for every 41,900 people? Talk about a continent that (A) needs cell phone banking today, and (B) might represent some serious long-trem growth prospects for banking (assuming the not insignificant social and political problems of a good portion of the continent can be resolved). In the U.S., aren't there 41,900 bank branches for every person?

I don't know the folks that run Fundamo well, although I've corresponded from time to time with Mr. van Rensburg, who, thanks to the miracle of satellite television, is almost as much of a Denver Broncos fan as he is a fan of rugby. I don't own stock in the company and I'm not touting it. I realize that there are other companies in this space, and mobile banking services in othercountries, as well.

Nevertheless, Fundamo intrigues me as a perfect example of the fact that when it comes to technology applications, some (not all) U.S. banks that I've come into contact with (and I do a lot of work in technology contracting and outsourcing) often take a proprietary attitude that is short-sighted. For some, if it isn't happening here in this great land I like to call "Amur-ka," it isn't happening anywhere. Sure, Al Gore invented the Internet, but it appears that the rest of the world has not been squatting on its haunches, waiting slack-jawed for Uncle Sammy to show it the way. Wherever there's a need, there always appears to be local a geek or two (or more) trying to fill that need (and maybe create the next Microsoft in the process). It's happening in the most unexpected places.

Banks in this country that are looking for interesting technologies and applications to boost the reach of their business could do worse than to extend their gazes beyond their navels.

Junk Fax Claims Aggregators Continue Losing Streak

The one woman wrecking ball named Brandee Caswell continues her dead-on imitation of Eliot Spitzer kicking a prostrate Wall Street investment banker like a mangey cur dog, as she piles up another win against junk fax claims aggregators in Colorado. We previously featured Ms. Caswell's Zena, Warrior Princess-like jihad against those nefarious bottom feeders who would dare to try to make a business out of taking assignments of claims from victims of junk faxers, and then suing those junk faxers. She's won in state court, she's one won in federal district court, and, on February 7, 2007 (which, unlike December 7, 1941, will hereafter be known as a day that will live in infintesimality), she won the biggest blow yet against junk fax claims aggregating dirtballs.

A federal appeals court has issued a key decision that could put Colorado companies trying to profit from junk faxes out of business.

The Feb. 7 decision by the 10th Circuit of the U.S. Court of Appeals said people who receive junk faxes can't "assign" those faxes to businesses that try to collect damages on them. The court, upholding a lower court ruling, said such companies have no standing to act on behalf of individual fax recipients.

[...]

The appeals court panel also ruled that Colorado courts have jurisdiction over junk-fax cases. Colorado judges long have held that junk faxes can't be assigned under state law.

The federal appeals decision upholds a lower federal court ruling, in cases involving Consumer Crusade and U.S. Fax Law against iHire Inc., made by Chief U.S. District Judge Lewis Babcock in 2005.

The Colorado Court of Appeals made similar rulings on assignability and standing last fall in a couple of cases.

Ms. Caswell showed neither sympathy nor the slightest hint of mercy for the bruised posteriors she had, once again, "disciplined" with a cat-o-nine tails, an eight-man scull oar, and a lovely pair of size 5 Seduce3026 Thigh Boots with 5" heels.

"This should be the end of them; I hope it is," said Brandee Caswell, an attorney at Denver law firm Faegre & Benson LLP. Caswell represented the defendant in the federal appeals case, iHire Inc. of Maryland.

Although this has not been confirmed, inside sources tell us that the above "stern statement" from Ms. Caswell engendered immediate domination requests from 5 members of the British House of Lords and one gnarled hermit from the Outer Hebrides.

There is a slight loophole, however, through which junk fax aggregators might try to slither.

Because the state and federal appeals court rulings apply to individuals assigning junk faxes, but not businesses, Consumer Crusade and U.S. Fax may try to pursue cases where businesses assign faxes, attorneys said. But some defense attorneys doubt that will happen.

"In theory, the door is open a crack for businesses, but in practice, it's shut very tightly," Caswell said.

"And," she added when out of microphone range, "if any of you scumbags try to test that theory, you'll find that it's my practice to stand behind that door with a flamethrower, a spiked croquet mallet, and a starving pit bull named 'He Hate Me', so DON'T...EVEN...THINK...ABOUT...IT! My practice will put more than a crack in your sorry theory! GET IT? GOT IT? GOOD!"

I might be wrong, but I'd say that it might be time for all junk fax haters, like the authors of this blog, to ride another carousel pony, especially in the 10th Circuit. The junk fax claims aggregation business has been derailed by a young woman who not only kicks glutius maximus, but doesn't even stop to take names.

Zoot Suitability

You, me and Dupree may think that it's a bad idea to require banks and other financial institutions to require their loan officers to consider the "suitability" of their loan products for each and every loan applicant, but a "power that is" does not.

Barney Frank, in an interview last month with a newspaper in his home-away-from-home, San Francisco, made it clear that there's a new marshal in Dodge and, in addition to getting rid of those smelly cows down at the stockyards ("I mean, the smell! My gawwwwd!"), and giving downtown a thorough dusting, he's gonna' drive the bad guys back where they belong: to human refuse receptacles like Crawford, Texas (but only after Mother Sheehan and Jane Fonda's bio-diesel bus have floated away to safety on a river of Mother's tears).

For the American mortgage market, it could be the hottest buzzword of the year: suitability.

That's because Congress has a new top legislator for mortgage matters, Rep. Barney Frank, who believes that "you shouldn't lend (home buyers or refinancers) more than they can afford to pay back, and you don't lend them more than their house is worth."

Frank, a 14-term Massachusetts Democrat, is the new chairman of the House Financial Services Committee  --  the primary originator of banking and mortgage-related federal legislation. In an interview, he made it clear that a top priority this year will be enactment of a nationwide lending-standards law designed to protect consumers from deceptive, unfair and predatory mortgage practices.

Lending money to people whose income indicates that they cannot pay it back, and lending more than the market value of the collateral for the loan, used to be called "unsafe and unsound underwriting." These days, it's called "C & D Paper." In the case of FDIC-insured institutions, the "C&D" might eventually be called "Cease & Desist" and the paper might cause a nasty diaper rash when it's eventually applied to the sole unpleasant task for which it remains useful. But I wander away from the topic of Barney's tough love.

Frank said the specific elements and tests involved in creating national consumer protection standards for the mortgage field are still under discussion by Democrats and Republicans on the Financial Services Committee. One bedrock principle he thinks will be essential, however: Stricter liability for brokers, lenders and the bond investors who buy pools of mortgages.

According to Frank, "you can't just make a loan and then sell it" to investors, forget about it and expect no legal liability for putting people into a mortgage that never made sense for their situation.

Stay tuned.

Do we have to? If so, can we at least put some Orville Redenbacher in the microwave (or, perhaps, the cat), settle back with a case of Shiner Bock, and use the picture-in-picture feature to keep an eye on American Idol?

If Barney thinks he can ram a "strict liability suitability" standard through Congress this session, he's obviously smoking some excellent Acapulco Gold and, speaking "Frankly," I want access to it. If he's serious about trying, he'd better start watching Celebrity Death Match, because he'll rapidly find his claymation alter ego in the ring with Rosie O'Donnell's (bank lobbyists play hardball in a manner that makes Chris Matthews look like your ancient Aunt Bessie), and she won't treat him nice and gentle, like she did The Donald. I mean, remember what Pam Anderson did to Tommy Lee? The bankers will make Barney look like a one-legged man in a butt-kicking contest.

Not that I'm egging anyone on.

Princess Diana: A Candle Blowin' In The Wind

It's official: Diana is departing.

Although Gov. Eliot Spitzer had asked her to stay on as the state's superintendent of banks, Diana Taylor said yesterday that she will step down to join Wolfensohn & Co., a Manhattan private investment firm.

Christine Anderson, a Spitzer spokeswoman, called Taylor's announcement "a great loss," but said he completely understands the decision. Spitzer is getting close to deciding who will replace Taylor and will make an announcement soon, she said.

The American Banker called this one back in mid-December. Even the perceptively challenged bloggers at this rant rag smelled the scent of burning secret code books wafting out of Albany last month when Taylor's top legal beagle split for the FDIC. We can't blame Spitzer for wanting to retain the services of the delightful delicious delectable desirable dependable Ms. Taylor. I mean, what's not to like (other than her nasty habit of obtaining restraining orders to thwart certain would-be suitors from Texas)? It seems, however, that Ms. Taylor may not be as wild about Eliot as he is about her.

Taylor said she was flattered by Spitzer's offer to reappoint her, but believes that "the governor ought to have his own people in there."

Her leaving logically indicates that she believes that she and the Spitz are not the same kind of "peeps." It would be an oddball, Beauty-and-the-Butthead kind of combination in any event, if you step back, take a big hit on the bong, and think it through.

In addition, Ms. Taylor admits that she lacks staying power.

Taylor, who was appointed four years ago by then-Gov. George Pataki, said she has been banking superintendent "for a long time, and if you look at my history, I don't do anything for a very long time. Four years is about the max."

Usually, a resume that indicates that your career path is a revolving door with 4 years being your commitment max-out date, doesn't pass the human resources consultants' smell test. However, an exception is always made where the candidate is a dish.

I'm bitterly disappointed that Diana failed to seriously consider my open offer for a position as my one-and-only "special assistant." On the other hand, how long has she been dating Michael Bloomberg? More than four years? If so, it's not a question of IF she'll eventually come around and "listen to reason," but only WHEN her surrender to the Hegelian unfolding of our mutual destiny finally comes to pass. Of course, the fact that  Mike Bloomberg is not only the mayor of New "Yawk" City but a friggin' billionaire could continue to impede my diabolical plans to possess Princess Diana the natural course of events.

Say...Anyone have the telephone number of Wolfensohn & Co.?

No reason. Just askin'.

Grab bag Friday

Quck hits for the end of the week:

In honor of a Big 4 accountant trying to weasle free advice via a comment to yesterday's post on this blog, I'd like to point readers to a blog I enjoy called Re: The Auditors. Francine McKenna mainly roasts Big 4 audit firms, and although there's plenty of meat for the grill in those stockyards, she occasionally finds the time to turn her flamethrower on big time lawyers and their firms, as well. She was in the belly of the beast for two decades, so she's got the "street cred" to take her shots and she's often right on target. Big 4, you can run, but you can't hide from Ms. McKenna.

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John Walker of Minding The Law's Business got the same belly laugh that I did out of a recent "controversy" that played out in The Wall Street Journal between a practicing lawyer and some law professors over the failure of law schools to teach lawyers sufficient practical substance about the practice/business of law. As John put it, the whole discussion "was such a large rabbit trail that dealt with a symptom and not a problem that I expected to run into Grace Slick’s 10-foot large Alice along the way." He has enough pithy snark about "on the job training" and the "holier than thou" assertions by certain professors that law school is a breeding ground of "high ethical standards," to satisfy those who appreciate irony. On the other hand, he also "speaks truth to gasbags" about  how lawyers ought to be approaching their business. As for my own two cents, I think that my generation, that of the Boomers, is running the biggest con job in history on future generations, and law firms are only a small part (although a very telling part) of the con. The big law firm business model is broken, but the powers that be don't care because, as one of them told me, "I got mine." Generations X and Y, get smart, and get smart fast. You're being sold not only a bill of goods about how law firms should be run, you're being sold down the river on a large scale.

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My most recent post about chickens (and elephants) coming home to roost in the form of massive buyback requests made by loan purchasers of loan originators receives more support, this time from yesterday's The Wall Street Journal (paid subscription required).            

Efforts by major banks and Wall Street firms to unload bad U.S. housing loans are speeding up a shakeout in the subprime mortgage industry. As more Americans fall behind on mortgage payments, rollover Merrill Lynch Co., J.P. Morgan Chase & Co., HSBC Holdings PLC and others are trying to force mortgage originators to buy back the same high-risk, high-return loans that the big banks eagerly bought in 2005 and 2006.

Merrill demanded in December that ResMae Mortgage Corp. -- which in 2006 sold it $3.5 billion in subprime mortgage loans, or loans to borrowers with poor credit records -- buy back $308 million of loans whose borrowers had defaulted. In a filing this week for bankruptcy law protection, ResMae said those demands "crippled" its operations. The Brea, Calif., company said that repurchase requests were "severe and unexpected."

As more subprime lenders face losses or bankruptcy, big banks also face another problem: Many lent money to small firms like ResMae so that those firms could make more mortgage loans to borrowers. It isn't clear how much of these loans will be paid back to the banks. Wall Street firms also are increasing their own internal generation of subprime loans by acquiring smaller mortgage loan originators or processing companies.

That is the downside of trying to make all the ca-ca run downhill. Sometimes, it hits a clogged drain and backs up.

Its always nice to have representations, warranties and indemnifications in a loan sale agreement. It's also important to consider-before you sign the agreement-whether your seller has the financial heft to stand behind those obligations if everything goes to hell.

A reader who's an attorney in this part of the world (well, Oklahoma, which is close enough), and an old hand in the mortgage banking business, wrote to me recently of his bemusement with loan originators crying in their beer now that they have to honor their buyback obligations.

I think the originators never thought it would ever happen.

At some point I'm sure the Street may regret their foray into the C&D mortgage business.  But still, they have a very myopic view of things today. We should always remember that when the street syndicated mortgage loans in the old days, they always described (at least in house) the interest-only and principal-only bonds they created as "toxic waste".

"The old days." Man, we all sound like the codgers I used to sneer at when I was young and knew it all. Now, like Socrates, the wisest among us recognize how ignorant we truly are.

You'd think that the banking regulators might also be concerned about FDIC-insured instituions that are heavy sellers in the mortgage markets. Do they have capital sufficient to support the volume of their originations and sales if times get tough? I guess we'll find out.

Ya'll (even you subprime mortgage originators) have a good weekend.