Bank Lawyer's Blog

Starting Down The Road To Perdition

Via Houston's Clear Thinkers comes word of George Mason University's Don Boudreaux's response to Harvard law professor Elizabeth Warren's call (free registration required) for Congress to create a federal Financial Product Safety Commission to regulate "inherently unsafe consumer financial products" such as credit cards and  single family residential mortgage loans, based upon the model of the U.S. Consumer Product Safety Commission, which screens "every toaster, washing machine, and child's car seat sold on the American market." You know it's a great idea when it's advocated by John Edwards (aka "The Breck Girl" aka "The Anti-Anne Coulter").

Boudreaux wants the Commission to put first things first.

If such a commission does its job, I suggest that the first dangerous financial product that it attacks be Social Security.  Not only are Social Security's returns lousy; not only are its "customers" never vested their "contributions"; not only does the institution providing it have no sound plan to keep it solvent; not only does this institution intentionally mislead its clients about its insolvency (witness its discussions of the illusory "trust fund") - but its "customers" are forced to buy it. That is a dangerous financial product!

Yeah, I can see Edwards getting behind that position, can't you? Funny response by Boudreaux, though.

I agree with Tom Kirkendall's observation that the commission is "a bit like using a sledgehammer on a problem for which a scalpel is more appropriate." I also appreciate the comment to Kirkendall's post: "My auntie was almost electrocuted by a subprime mortgage while she was making toast."

I think that Professor Warren's comparison of mortgages and credit cards to a child's car seat reflects the mind set of many who favor federal government intervention in this area. The traditional goal of making an adult consumer responsible for his or her own financial decisions, and insuring that the law and regulatory scheme do their best to ensure that the consumer receives adequate, accurate information in an understandable form to make a fully informed decision (should he or she decide to fully inform themselves), is contrary to what appears to be the goal of people like Chris Dodd, Barney Frank and now, John Edwards. Those boys (and girls) believe that the average consumer is too stupid, the financial products too complex, and the sellers of the products too shifty and venal, to permit "full disclosure" and caveat emptor to be the applicable doctrines. They approach the problem by asking the question, "If George W. Bush was the borrower, how useful would the concept of 'full disclosure' really be?" Well, if you set up a straw man like that, the answer is obvious. The only way to ensure that "the right thing" is done is to set up a federal agency to pre-judge the safety of the product before it is offered to the cretinous consumer.

This stuff makes Chuck Schumer's proposed imposition of a "suitability standard" on loan officers look like an almost reasonable middle ground.

It's doubtful that the proponents of this scheme have any expectation that it will be enacted in the foreseeable future. In Edwards' case, it's likely just another credential to add to his resume as he seeks to set himself apart from the Democratic front runners, and make himself more attractive to the far-left wing of his party's base. You need to be nominated before you can run for office. For others, well, you have to start the ball rolling somehow, and Professor Warren's proposal is a starting point. While this won't see the light of day in Congress this year or next, it's not likely to simply go away, either.

Get Me Some Visine! I've Got A Blot In My Eye!

The brain trusts in New York formed a commission last month to try to determine how to maintain New York City as the financial hub of the universe, and the very next month the New York legislature passed a bill designed, obviously unintentionally, to drive New York state-chartered banks to switch to a federal charter (paid subscription required).

A bill moving through the New York legislature barring the application of universal default to cardholder accounts would apply to a broader set of practices than similar bills that have passed or are under consideration in other states.

Both houses of the state legislature passed the bill this week, and it is expected to be sent to Gov. Eliot Spitzer soon for his signature. Though similar to a bill then-Gov. George Pataki vetoed last year, this year's version goes beyond prohibiting issuers from increasing a borrower's interest rate solely because a cardholder is delinquent on another credit account - the most common definition of universal default.

This year's version of the bill also would ban card companies from using any decline in the cardholder's credit score to increase interest rates. Industry representatives say that provision is too restrictive.

"It goes beyond the scope of the practice of universal default … by impacting the ability to make a decision based on credit record," said Mike Smith, the president of the New York Bankers Association. "We feel this is not reasonable and not in line with the national practice."

But Assemblyman Peter Rivera, who sponsored the bill, said the new language is necessary for consumer protection, and that he felt "confident" that Gov. Spitzer would sign the bill.

Spitzer's not tipping his hand, but if he does sign it, a lot of people with large brains think that if he does, he'll be making a big mistake. So does the walnut-sized cerebrum of Bank Lawyer's Blog.

"It would limit a creditor's ability to lend money and create significant safety and soundness concerns," said L. Richard Fischer, a partner with the law firm of Morrison & Foerster LLP.

Ronald R. Glancz, a partner at Venable LLP, noted that the bill would not affect national banks or federal thrifts, which do not have to follow state consumer protection laws.

"This New York law would be preempted by the National Bank Act, and I suspect the majority of issuers of credit cards are national banks," he said.

Mr. Smith said he was concerned more state banks would switch to a national charter if the bill were enacted.

"This bill will further distance New York in terms of the state charter," he said. "The use of credit records is fundamental. We are concerned this law will further encourage institutions to move away from the state charter."

Assemblyman Rivera laughs in the face of the danger of charter switching.

National banks that do not follow the law "will have a blot in their eye if they try to go around this bill by their federal charter," Assemblyman Rivera said.

I'm not ashamed to admit that I burst out laughing out loud at that "blot in the eye" remark. See, this is what happens when you try to boost a problem child's self esteem by electing him to the legislature. Memo to Rivera: National banks don't give a flying fig about a "blot in the eye" (whatever you may think that means). They won't even have enough respect for you to honk their horns as they run over your sorry carcass and those your state chartered banks in their exercise of the competitive advantage offered by federal preemption principles.

As to state chartered banks that do credit card business outside of New York, if they don't fancy a national charter conversion, they can always hope that their state, if it gets bitten by the same bug that chomped on New York's legislators, might opt for the approach taken by one of my favorite states, the land where a guy named "Bugsy" got a "blot in the eye," only his was from a firearm.

There has been activity in other states; roughly 12 have proposed similar legislation this year to ban universal default. Last month, Nevada became the first of those states to enact such legislation this year.

The Nevada law defines universal default as a clause that allows an issuer to increase the interest rate if the cardholder makes a late payment to another issuer or creditor.

That definition is consistent with how most of the industry defines universal default, Mr. Fischer said, and it does not raise the concerns posed by the New York bill.

The Nevada law "is one that would certainly cause a lot less concern," he said. "The Nevada law is a good law. It's absolutely fine."

And where else can you marry your desire for a reasonable definition of "universal default" with your dream of playing Texas Hold 'Em with Jennifer Tilly?

The Beat(ing) Goes On

I used to have post this only once every six-to-twelve months. Now, it appears I'll have to do it every three-to-four months. Eventually, I'll have to do it weekly. The deluge of requests for free advice are once again proving that there are legions of the illiterate cruising cyberspace looking for a hand out and, rest assured, looking for it in the wrong places. At the risk of repeating myself, let me repeat myself:

Unfortunately, it's time to post another rant for the benefit of those of you who cruise cyberspace asking for free legal advice. Do you understand that what I do for a living is to render legal advice in return for money? That's what the private practice of law is: rendering legal advice to people who pay me to render that advice. It's not dissimilar to a doctor charging you for medical advice, an accountant for tax advice, a real estate broker to represent you in the sale of your home, or Divine Brown to render unto you what she rendered unto Hugh Grant. Let's review: A service provider renders a service in return for which a client agrees to pay him or her money. Moola. Legal tender. Scratch. The root of all evil.

Please, for the umpteenth time, for the love of whomever or whatever you worship or mock: Read My Disclaimer!

Here is, verbatim, my most recent post on this topic, from April 3, 2006. It's worth rereading, so please do so:

Apparently, I'm going to have to repeat this post every couple of months until it sinks into the noggin of every reader who suffers from comprehension impairment.

From October 30, 2005:

I thought that my Disclaimer was fairly clear, but l"d like to reiterate something: I don't intend to render legal advice through this blog. If you are not already a client of my firm, please don't ask for legal advice from me by sending me an e-mail or leaving a comment. If you need legal advice, hire an attorney to give it to you and pay them for their services, as you would any other service provider. This blog is intended as my personal commentary on legal issues affecting banks (and certain other issues that might interest me). The content of this blog is not legal advice. If you haven't done so, please read the Disclaimer and my Comment Policy.

As my biography and the posts to this blog should indicate, I represent banks. I'm not interested in answering questions or comments of people who dislike banks or, God forbid, want to sue them. Although I may question some things that individual banks may do from time to time, I like banks. This economy could not function without them. There are many, many litigators who love to sue banks, but I'm not one of them. If you need one of those lawyers, you won't find him or her here.

Thank you.

Here's more, from a post in February:

Attorneys are knowledge sellers. That's what we do. You need legal advice? Don't ask me as the author of this blog to give it to you unless you and my law firm have an attorney-client relationship. If we do, and you're a client, expect me to charge you for it. If you're a reader who's not a client, don't send me an e-mail with a question such as, "Do you know a good free source where I can find the laws of these 23 states on the topic of whether or a not a bank chartered under the laws of Y state needs to be licensed in those states to do Z"? No, I don't. Hire an attorney to render that advice and pay him or her to render it. Also, if you're a bank's employee, I won't give you a "sample form" of an agreement so you don't have to pay your bank's regular attorney to draft it. You'll pay a garage mechanic to fix your car, or a restaurant to cook and serve you a burger, but paying for legal advice somehow sticks in your craw? Amazing.

If you send me an e-mail message that contains a litany of complaints against a bank, contains defamatory statements (and if you're going to accuse a bank of "steeling" at least learn to spell the word correctly), or otherwise talks about a problem you're having with a bank, I will delete it as soon as I get the first inkling of what it concerns. I don't want to know the details. Really, I'm not interested. You must believe me when I tell you that such communications fill me with inertia.

I also won't allow comments along the same lines to be posted. How much more plainly and simply can I state these simple policies?

Finally, why in the ever-loving world would you think an attorney would respond with legal advice to an anonymous e-mail? What planet might such a correspondent be from? One in our galaxy?

Ranting is over for this 24-hour period. Resume your normal activities.

Bad, Bad Bank Regulators

Banking wonks inside the beltway were sniggering the froth off their Caramel Macchiatos last week over Washington Post columnist Al Kamen's report (free registration required) that a couple of women removed their blouses for money at a golf outing attended by FDIC personnel. Al didn't mention whether the women were or were not wearing anything other than the ta-ta's the Good Lord gave them when they suddenly went blouseless, but we assume the worst (or the best, depending upon your point of view), because it's a federal government bank regulator and who better to promote a little "Girls Gone Wild" action than people who can come down on a banker like a ton of bricks for not having the examiner-preferred number of columns on a spread sheet in a BSA report exhibit? Would I lie about that?

It's getting to be the time of year when Bank Lawyer's Blog starts dreaming about its annual golf outing. We're especially fond of Putt-Putt golf courses that also feature a Speed Zone, because when we're stinking drunk, we prefer not only to be able to blast a golf ball through a clown's mouth, but to get in a go-cart and pile drive a nine year-old punk into a retaining wall at 70 mph.

As for the "no shirt, no shorts, no problem" crowd (I might have gotten part of that slogan wrong), we at Bank Lawyer's Blog are afraid that our personnel do not usually merit payment to parade about the environs sans chemise. In fact, at some point in our annual outings, bystanders become more than willing, even eager, to pay us not to remove any articles of clothing.

Then again, they don't know what they're missing.

No More Monolines

A recent discussion with a mortgage banker whose been toying with the idea of forming or buying a bank reminded me of the recent announcement by another mortgage broker that it was temporarily withdrawing its application for a new bank charter.

One of Washington's largest mortgage brokers has temporarily withdrawn its application to form a new bank, in part because of a tighter regulatory climate surrounding home loans.

Homestone Mortgage Inc. President and CEO Keith Tibbles said the five-year-old lender pulled back the application after the Federal Deposit Insurance Corp. recommended changes to the bank's initial business plan.

"They felt like we should broaden some of our lending areas," Tibbles said, adding that Kirkland-based Homestone plans to resubmit its application soon.

[...]

Homestone filed its application for a bank charter several months ago, with hopes that transitioning from a mortgage firm to a bank would expand Homestone's footprint and help it tap into the Puget Sound region's booming banking market.

It's a move with which state regulators are relatively familiar, due to state banking rules that make it relatively easy for mortgage companies to convert to banks.

By operating as a bank, a mortgage company can significantly reduce the amount it pays for the funds used to back mortgage loans. Golf Savings Bank, Pacific Crest Savings Bank and Seattle Savings Bank were all originally mortgage institutions, according to Brad Williamson, director of the banking division at the state Department of Financial Institutions.

For all the talk of "broadening lending areas," Brad Williamson hit the nail on the head as to why mortgage bankers want to operate as a bank: leveraging FDIC-insured deposits and Fed or FHLB borrowings, as opposed to money raised from other sources. The borrowing cost savings are significant.

I have no personal knowledge of this application, what trouble it ran into, or why it was withdrawn. The regulators aren't discussing it, and Mr. Tibbles alleges that it was a question of "timing."

According to Tibbles, timing may have played a big role in the FDIC's reservations about Homestone's application. With the nation's housing market slumping and the subprime mortgage sector in the midst of a severe correction, Tibbles said the FDIC was concerned that Homestone is too heavily invested in residential mortgages.

According to Tibbles, Homestone is "very concentrated in residential," and the FDIC recommended that its new bank place more of an emphasis on commercial loans to balance its portfolio.

"As part of our business plan, they would like to see us get into commercial lending sooner" than the company had originally planned, Tibbles said.

Using the FDIC's definition of subprime lending, Tibbles said subprime loans account for roughly 5 percent of Homestone's year-to-date loan volume of $438 million.

Despite the small share, Tibbles said those totals were enough to raise FDIC eyebrows at a time when banks nationwide are struggling to recover from the subprime sector's collapse.

"In the absence of the subprime issue," Tibbles said, "we would probably be up and running."

Homestone's application setback may also signal increased regulatory scrutiny on the state level. The Puget Sound region has seen roughly 10 startup banks since 2005 and, as the market gets more crowded, regulators are taking an even closer look at new applications.

"In the last couple of years there's been so many (startups) that we need to make sure the business plan is followed pretty closely," Williamson said.

I have no doubt that the recent subprime residential market meltdown, and the downturn in the overall residential real estate market, hurt the application's prospects. However, for a number of years, the regulators have discouraged applications for new charters, or for approval of acquisitions of existing institutions, where the business plan calls for rapid growth through basically one type of loan or other banking product. The regulators have discouraged "monoline" business plans for the last five or six years, at least. They feel more comfortable with traditional business plans where the product mix is diversified. Obviously, any plan that emphasizes residential real estate lending is going to receive closer scrutiny today, but it would receive a closer look even if the residential mortgage market was as hot today as it was several years ago.

Some people might think that the lender might have been better off looking at a federal thrift charter, since the mission of that charter is to provide home loans, and the OTS is an agency with a lot of expertise in regulating mortgage lenders. If a mortgage company wants to operate on a multi-state basis, federal preemption of state licensing and examination requirements will also add significant savings. That's would be a valid alternative. Yet, the FDIC will also have input into a new federal thrift charter, so its concerns will have to be addressed. More important, my personal experience is that the OTS is just as concerned as is the FDIC with "monoline" business plans that emphasize "undue" concentration on single family residential lending. One has only to look at the difficulties that publicly traded REIT American Home Mortgage Investment had from 2001 through 2003 in acquiring a federal thrift. The OTS shot them down twice, reportedly for just such concerns. American Home Mortgage finally acquired a federal thrift last October, but the news release announcing the acquisition almost overwhelms the reader with the word "diversify."

I'd expect that Homestone will take a page from American Home Mortgage's revised play book and come back to the table with a business plan that, just like Nancy Pelosi, celebrates diversity. Homestone certainly isn't giving up.

Looking ahead, Homestone hopes its next application will be approved quickly and that the bank will be up and running by year's end.

I Was Shooting For an "R"

This is disheartening.

Wal-Mart Bares Its Fangs

Wal-Mart today proved beyond a doubt that its critics fears that it would have used a Utah ILC charter to expand into general retail banking were justified.

The Bentonville, Ark.-based retail giant (NYSE: WMT) has relaunched its Money Center concept nationwide, and introduced the Wal-Mart prepaid Visa card. The national kickoff was held on June 21 at Wal-Mart's Gresham Road store in East Atlanta, the first redesigned Money Center open nationally.

Wal-Mart expects to have 15 Money Centers open in Georgia by year's end, and will open 1,000 Money Centers in stores nationwide by the end of 2008.

The announcement is part of the continued push by the retailer to capture more of its existing customers' money with a broad array of services inside the trademark big blue box. Other services already offered by Wal-Mart include pharmacy, optometry and a prior, more limited version of the Money Center.

"We're assisting customers outside mainstream banking," said Rosalind Brewer, Wal-Mart's Southeast division senior vice president.

[...]

The center re-launch for the company is focused around a prepaid, Wal-Mart branded Visa debit card. The prepaid card -- which customers can buy with a $20 minimum deposit -- acts as a checking account tied to the card. Customers can add money to the card through Wal-Mart Money Center ATMs, and Money Center branches nationwide. The accounts are insured by the Federal Deposit Insurance Corporation, and customers can add up to $3,000 on the card.

[...]

The card accounts are managed by GE Money Bank, which already offers Wal-Mart's credit cards.

Predictably, Wal-Mart's critics in the community banking ranks were quick with a "We told you so."

Wal-Mart has never hidden its banking ambitions, but it has arguably masked them from time to time. In 2005, Wal-Mart said it would seek permission to open a bank in Utah that would process credit and debit card transactions for its 4,000 American stores. At the time, it vowed that it would never use the bank to enter the consumer financial services business.

[...]

Ronald K. Ence, vice president for Congressional relations at the Independent Community Bankers of America, a trade group, said Wal-Mart’s intentions suggest that the company misled the public when it said repeatedly that it did not plan to enter the consumer banking business.

“Clearly this was their intention all along,” he said. “The proof is in the pudding.”

The pudding is likely to taste sour for community bankers. As The New York Times notes:

Given Wal-Mart’s penchant for squeezing costs out of every business it enters — from changing oil to dispensing prescription drugs — the move is expected to jolt the financial services industry.

With plans for 875 new money centers by the end of 2008, Wal-Mart’s presence would be roughly equivalent to Citibank’s in the United States, and its daily foot traffic would dwarf that of most credit unions, check-cashing outlets and convenience stores. While it may not immediately threaten those businesses, Wal-Mart’s pricing power and proximity may give it an advantage in serving the tens of millions of consumers who do not have a checking account or are unlikely to set foot in a bank.

That's one reason why the Wal-Mart financial centers will be bi-lingual.

This only adds fuel to the raging fires of hatred that burn within the souls of community bankers for all things Bentonville. It's why bankers won't rest until federal legislation is passed that bars Wal-Mart from a front door entrance to the banking business, and why they won't rest in their efforts at the state level to thwart Wal-Mart's foray into financial services  wherever possible.

Walking a Marketing Tightrope

The business press in Bank of America's "home state" of North Carolina (sorry California) has focused on the obvious risk (which, being obvious, even Bank Lawyer's Blog was able to discern) that target marketing banking services to illegal immigrants undocumented guest workers might cause a loud and rather embarrassing marketing "backfire" for the bank.

When Bank of America announced in February a pilot program offering credit cards to those without social security cards or credit histories, it found itself in the middle of the immigration debate.

On one hand, banks are trying to reach and serve members of an "unbanked" population, estimated at 12 million to 20 million people nationwide. Immigrants comprise a substantial portion of this category, and many of them may be illegal.

Therein lies the Catch-22 for a bank: Immigrants are a substantial demographic with increasing buying power, and it's a population that is largely captured right now by predatory lenders. But reaching out to the population also brings with it the risk of public scrutiny.

This is a point we've been belaboring for some time now. Blatant marketing to a targeted group that everyone knows (wink, wink) is composed mainly of illegal immigrants is playing with fire. Not the kind of fire that keeps you warm at night, either. The kind of fire that Ricky Bobby was worried about in Talladega Nights ("Help Me Tom Cruise!").

The article does make the valid point that while Bank of America and other banks targeting illegal immigrants Cone Heads from France are not likely motivated by thoughts other than of hundred dollar bills dancing in their heads, getting such wanna-be citizens out of the financial underground and into the mainstream commercial banking system will surely benefit them.

Immigrant populations, including but not limited to Hispanics, are often targeted by predatory lending practices because of language barriers and issues with credit, ranging from having no established credit to impaired ratings.

Hispanics often pay with cash and do not have banking or credit accounts, says Gloria Shanahan, a Spanish-speaking public affairs officer covering North Carolina for the Department of Housing and Urban Development.

Getting them regular checking accounts and a credit card will take them out of the clutches of the predatory types and into the soft, pillowy, welcoming melons of BofA and other large banks where they can be treated to the convenience of overdraft charges, late fees, NSF charges, universal default, and a fee charged for every bodily function (and some spiritual ones).

Critics of the program say in offering the credit cards to those without social security numbers, the bank has opened its business to immigrants who may be in the United States illegally. Some accused the program of threatening national security, and some -- including the Raleigh-based Americans for Legal Immigration PAC -- called for boycotting the bank.

Kenneth Lewis, the chairman and CEO of Bank of America wrote in a commentary for The Wall Street Journal in February, that while many people in the country do not have Social Security numbers, 84 percent of the participants in the pilot program did. The other 16 percent had government-issued identification that met the requirements, according to the bank.

Of course, when you accept Tops bubblegum baseball cards with Sammy Sosa's picture on it as proof of identification, one doesn't have full confidence that some unintentional mistakes won't be made.

Seriously, though, folks, we've made this point before (but repetition is a sign of genius): banks accepting ITINs, matricula counsular cards, and other alternative forms of identification are not doing anything illegal.

In fact, the U.S. Patriot Act of 2001 allows banks to accept the matricula card, an identification issued by the Mexican consulate office to its nationals living outside of Mexico.

While that's true, it still doesn't make it smart. Reasonable people can disagree on this issue, and are doing so vociferously. If you're a banker who wants to put his bank in the middle of a potential backlash, jump right in.

 

Guidance on SARs and the Safe Harbor

Professor Ann Graham reminds her readers of the Guidance recently issued by FinCen with respect to Suspicious Activity Reports (SARs). FinCen addressed three issues that it believed required clarification:

• The BSA requires institutions to provide SAR "supporting documentation" as requested by FinCen and appropriate law enforcement or supervisory agencies;
• What constitutes “supporting documentation” under SAR regulations; and
• When legal process is required for disclosure of supporting documentation.

As Professor Graham observes:

The Guidance reiterates the Bank Secrecy Act (BSA) requirement to retain documentation to back up Suspicious Activity Reports (SARs) for five years and emphasizes that the Right to Financial Privacy Act (RFPA) provisions that require a federal government agency to provide a financial institution with evidence of appropiate legal process, including notice to the customer, before obtaining financial records clearly DO NOT APPLY to Suspicious Activity Reports and Supporting Documentation provided to FinCEN, law enforcement, or supervisory agencies in the exercise of their "supervisory, regulatory or monetary functions".  There is safe harbor protection in the BSA for both mandatory and voluntary disclosure of SAR-related information.

Professor Graham also has some practical advice as to what this Guidance means for banks and other financial institutions. The post is short and sweet and well worth the read.

A caution about the "safe harbor" granted to banks that file a SAR is warranted. Six months ago,  The American Banker (paid subscription required) ran an article that indicated that the "safe harbor" isn't always ironclad. The article recounted some instances where courts have held institutions liable for filing a SAR notwithstanding the apparently broad language of immunity contained in federal legislation and its implementing regulations.

On the face of it, the Annunzio-Wylie Act would appear to grant total immunity to the defendants, but this immunity has been tested in court with mixed results. Most notably, in 2003, the Arkansas Supreme Court ruled that the law did not protect a bank that filed a suspicious activity report maliciously.

In that case, the court concluded that Bank of Eureka Springs filed a false report to punish a delinquent borrower that had filed for bankruptcy. The borrower was awarded $400,000.

Also discussed is a lawsuit pending in state court in South Dakota by a former employee of a bank who was indicted for fraud, but the charges were later dismissed. The plaintiff believes that the indictment was the result of a SAR filed by the bank, which, the plaintiff contends, knew that the information contained in in the SAR was false. Unfortunately for the plaintiff and her attorney, the BSA prohibits disclosure of SARs to the people who are the subject of the SAR. Thus, proving that bank ever filed a SAR, much less one containing knowingly false statements, will be a high hurdle for the plaintiff to jump.

Nevertheless, banks should be wary of filing a SAR primarily as a retaliatory action against anyone, in relying on the safe harbor to shield them from the consequences of their inappropriate use of the SAR process. Mark Barnes, an Indianapolis attorney, offers banks some sound advice.

Before filing a suspicious activity report, he said, a bank should make sure it does not appear malicious, document the reasons for filing, and present a balanced picture by including all relevant information, including any evidence that would support the subject's innocence.

"If they do that, we feel very strongly that a bank will be able to claim a safe harbor," Mr. Barnes said.

Agreed. If they don't do that, the safe harbor may protect them, but the bet is not a sure thing. There's always the risk that even in a safe harbor, your ship might run aground.

Successful Marketing Leads To A C&D;

In Los Angeles, a branch manager for Innovative Bank focused on bringing in business from Koreatown, where the branch was located, and was quite successful. So successful, in fact, that the FDIC and California bank regulators became alarmed at the rapid growth of the branch and the fact that so much of the business involved large cash deposits and transactions. The upshot was a Cease and Desist Order issued by state and federal regulators, largely as the result of concerns about violations of the Bank Secrecy Act.

Innovative Bank, which in April entered into a consent decree with the Federal Deposit Insurance Corp. and the California Department of Financial Institutions, has been working for months to rectify weaknesses regulators found in numerous areas.

Since December, the Oakland bank has brought in a new chief financial officer and a new executive to oversee compliance with the Bank Secrecy Act, appointed two new directors with banking expertise, and made several policy and operational changes.

[...]

Regulators were "a little alarmed" about the growth in Innovative's Los Angeles branch, [Vice President Richard] Choo said. Another concern was the amount of cash transactions at that branch. Cash deposits are typical of that market, Choo added. Deposits from Innovative's customers, many of which were in retail and wholesale businesses, were typically larger, with a lot of them in cash from people of Korean and Middle Eastern descent, he said. Cash is the preferred currency for thousands of small businesses in Los Angeles' Koreatown.

The branch "did quite well," Choo said. "The branch manager did a great job of marketing."

[...]

Regulators are not targeting Asian banks specifically, said Maureen Young, a partner at Bingham McCutchen LLP in San Francisco who advises on regulatory and compliance matters. Rather, dealings with offshore individuals or companies have been identified as a high-risk activity for BSA purposes. On the West Coast, a lot of the businesses that deal with offshore transactions are Asian.

Young said she is also seeing a lot of enforcement actions against smaller, cost-conscious institutions on the West Coast. "What the regulators are finding is that some of these banks have grown but have not put appropriate resources into BSA," she said. "That strategy tends to backfire. When regulators come in and find they haven't invested enough in software ... personnel and training there is trouble."

It's not only West Coast banks that are running afoul of BSA. Banks in other parts of the country are being subjected to increased scrutiny for BSA compliance, as well. Some of the horror stories related to me by clients and readers are frightening enough to make the principal author of Bank Lawyer's Blog regrow some of the hair missing from the highest reaches of his cranium. Some of the hoops that BSA personnel are being made through jump through are rigorous, and, in some cases, borderline unworkable. Yet, you have to play the cards that are dealt you, and if BSA hoop jumping is the game you're playing you'd better know how to play it well (or at least well enough to avoid losing your shirt).

A couple of brief warnings from an old hand:

1.    Go for "real world" experience when hiring BSA personnel. Anyone can read the law, the regulations and the guidance (sorry, lawyers, but your skills aren't unique in this regard). The golden nuggets you need to unearth are those people who have practical, hands-on experience with BSA compliance issue identification and solutions.

2.    Software solutions are going to be required for banks of any substantial size and/or complexity. However, notwithstanding the pressure by senior management to get something implemented NOW, resist the temptation to short cut your due diligence on service providers. Some solutions are definitely better than others, and it is well worth your while to think through what you need and how the proposed solution will, and will not, meet that need. Also, spend some time making certain that your agreement with the vendor is well thought out and negotiated. Some banks are signing whatever software license and other agreements the vendor puts in front of them, without careful consideration of the business and legal risks. When a vendor tells you "No other bank has ever asked us for that," you can accurately respond, "You'll never be able to say that again, will you?" Don't get yourself locked into a bad agreement for an extended term. That's jumping out of the frying pan straight into the inferno.

UPDATE: JUNE 19, 2007: Banking Law Prof Blog profiles a recent report by Fried Frank's Tom Vartanian (former General Counsel of the Federal Home Loan Bank Board) and Dominic Labitzsky called "Bank Enforcement Trends," published in the June 4, 2007 edition of the BNA Banking Report. Among the trends noted are the increased focus by bank regulators on enforcement actions concerning BSA compliance and record retention matters.