Bank Lawyer's Blog

The New Boss Same As The Old Boss?

I'll be on vacation the rest of the week, but I wanted to leave you with a little video music entertainment to tide you over until after the Labor Day holiday. As many of you know, consumer advocacy groups have been orchestrating a campaign to try to pressure  the White House to appoint Elizabeth Warren as the director of the Consumer Financial Protection Bureau. Among the many weapons that Warrenn's supporters have rolled out is a rap video that's "gone viral" on YouTube, and which labels Warren "The New Sheriff." Following is a Bloomberg news report on the video and other aspects of the campaign.

You have to love the Left. If you oppose one of its heroes who happens to be female you're "sexist." That sure beats having to engage in logical debate based upon facts. If you dislike Sheila Bair, it's also because you're sexist (as one writer for Slate asserted). If you dislike Barney Frank, it's because you're a homophobe (as one my readers alleged in an email to me). If you dislike Maxine Waters, it's because you're not only a sexist, but a racist, as well (I haven't heard that one yet, but I'm expecting it).

I guess that makes anyone who hates me an "assophobe," and there's no lower form of animal life than one of those.

For those yearning to get a full taste of Warren's rap, here it is:

As you heard in Bloomberg's report, Professor Warren was "touched" by the video. However, she should keep in mind the last regulator that was billed as "The Sheriff" and how he went about being "touched."If she's also buying hookers, let's hope she's a bit more discreet about how she pays for them and where she transports them. The other Sheriff found himself the subject of less adoring, albeit more humorous, videos:

Do It, And Do It NOW!

A recent issue of Bank Safety & Soundness Advisor (paid subscription required) publicizes a trend that boots on the ground have been experiencing lately: "Federal regulators are increasingly inserting language into consent orders --instead of waiting to issue a Prompt Corrective Action-- that requires adequately capitalized banks to come up with immediate plans to merge, sell or liquidate their institutions..."

While an FDIC spokesman claims that the language is inserted "to give banks options to incorporate into their capital contingency planning." That's great if you're planning to kill your bank. As the investigation by Bank Safety & Soundness Advisor revealed, the time frames given to find new capital are short and failure to raise the capital within that time frame requires the bank to sell, merge or liquidate within an equally ridiculously short time-frame, which usually results in the bank being sold. It all looks like an exercise in regulatory self-pleasuring too no useful effect.

Brian McCormally, former Director of Enforcement for the OCC, claims he came up with the idea of inserting, "merge, sell or liquidate" language into consent orders in 1996 or 1997 "as a way to send a message to troubled banks that they should resolve their problems themselves, prior to a forced FDIC liquidation." Yes, I'm sure that thought never occurred to any bank board directors or senior management team prior to the first appearance of this provision in a regulatory enforcement order.

McCormally claims that this "heads up" was mutated into what's become a not-so-subtle signal to investors that if a bank has a "merge, sell, or liquidate" clause in its consent orders, it's on the FDIC receivership list. McCormally claims that this was expressly admitted by regulators at a recent CLE program about bidding on failed institutions. As McCormally rightly notes, that induces investors to wait until the institution  fails before investing in it in order to potentially get a much cheaper deal from the FDIC (assuming they win the bid). Thus, a "heads up" to a bank to raise capital makes it impossible for them to do so.

The regulators defend these actions as being "standard practice." It was also once "standard practice" to burn women at the stake as witches, but eventually we abandoned that practice as unwise. What are the odds it will happen in this case?

[sound of crickets chirping]

I suppose the bottom line here, and not one mentioned in the article, is that whether or not the insertion of the provision in cease and desist orders makes it theoretically harder to raise capital from potential investors, or whether the time frames to raise capital and/or merge, sell or liquidate the bank are impossibly short, banks that are receiving these orders are those deemed too small to save. Community banks, for the most part. There's a campaign to weed them out, reduce their numbers, and leave the world of commercial banking to a much smaller school of piranha. The regulators don't really expect these banks to raise capital and they don't expect them to survive. In fact, all of the actions of the regulators, starting with the examinations that proceed the consent orders, are mile markers on a death march. The "merge, sell, or liquidate" language is just another nail in the coffin for banks that have been marked for extinction a long time before the consent order is presented for signature.

Out of the Fields and Into the Big House

"...[W]e must take the crown in our hands, and go hunting in dry places and dark corners of the earth until we find the one man who feels himself unfit to wear it. Carlyle was quite wrong; we have not got to crown the exceptional man who knows he can rule. Rather we must crown the much more exceptional man who knows he can't."
---G. K. Chesterton

Earlier this year, Colorado appointed a banking commissioner, Steve Strunk, who came out of the banking industry and seemed to have a firm grasp on the practical burden on banks of many actions taken by bank regulators. He served notice that while he was going to be an enforcer of the law, he wouldn't be one who was clueless as to the effect his actions might have on the banks his department regulates.

Recently, Ohio appointed as the superintendent of the Ohio Department of Commerce’s Division of Financial Institutions Carolyn Bradford, a person who not only comes from the banking sector, but was retired and not even looking for the position. Those might be the best qualifications for the job I've ever seen, especially the fact that she can take the job or leave it and, therefore, isn't likely to be grandstanding to push her career forward on the backs of the banks she regulates. If we could get that policy instituted at the federal level, banks might be under a lot less regulator-induced distress than they are currently.

It’s still the basic rules and regs, and from that perspective the advantage is that I do have an understanding of the other side of the table. I’ve sat on the other side.

I think it helps me really relate to the issues and challenges that bankers are facing, and think it helps them to understand when I’m talking about a regulation that I have lived on their side of the street. And I think there is some credibility that is assigned to that.

I think she's correct. While only time will tell whether Mr. Strunk and Ms. Bradford's previous hands-on experience will make them better regulators, state banks in Colorado and Ohio have to be encouraged that the people in those slots will at least understand the difference between a bank and a stepping stone.

Overdrafts: The War Rages On

As all of us who have debit/ATM cards have recently experienced, banks who are bothering to comply with the changes to Regulation E on overdraft "protection" (and we assume that includes all banks that want to stay in business) have notified customers that if they want overdraft protection, they have to "opt in." According to a recent article in the Charlotte Business Journal, banks and consumer advocacy groups are engaged in toe-to-toe nuclear combat for the soul (actually, the pocketbook) of consumers who use overdrafts in connection with their debit cards as a financing device.

Many banks have tried to convince customers overdraft protection will save them from the embarrassment of having their debit cards turned down in the grocery line for insufficient funds.

[...]

Other banks have taken to aggressive marketing techniques to convince account holders to enroll in the program so they won’t have their cards declined in embarrassing situations.

Meanwhile, the Center for Responsible Lending this week posted a YouTube video, playing on the classic “This is your brain on drugs” public-service announcements from the 1980s. The center’s video shows a frying pan with hot grease, and a voice says, “This is overdraft fees.” Then a debit card is tossed into the hot grease. “This is your debit card on overdraft fees,” the voice warns.

This marketing jihad is being waged to reach a small percentage of banking customers, those who chronically use overdrafts.

Greg McBride, an analyst for Bankrate.com, tells the Charlotte Business Journal the messages will matter only if they reach a small group of bank customers. He says federal data show only 14% of account holders are responsible for 90% of all overdrafts. Usually those are individuals with low credit scores or limited incomes. The winner of the overdraft issue will be the one that effectively reaches that group, he says. “It boils down to whether those 14% opt in or not. If they opt in, then overdraft revenues won’t take the hit predicted in some doomsday scenarios.”

We should have a better idea of who's winning this nasty little war by the end of this year.

Several years ago, I offered up the view on another blog that people who paid overdraft fees on a repeated basis needed some serious financial counseling, because chronic overdrafts might be the most expensive way to "borrow" money that I could envision. That post prompted a Harley-riding, bandanna-wearing, red-hot, blue-collar young mama from the Midwest to open up a can of verbal whoop-ass on me by letting me know in no uncertain terms that (1) everyday working class folks like her needed overdraft protection to put food on the table for her babies between paychecks; (2) she was over 21, free, and not mentally diseased and could make her own decisions to pay the price if she darned well wanted to, thank you very much; and (3) she didn't need a white collar fancy-pants lawyer-nanny like me telling her what was or was not good for her. I asked her if she was strapped, and she allowed that she kept a .40 cal. Glock handy and could hit a man standing or running and why did I ask. I responded that I was now definitely in love. We became good friends.

Her point was that as long as the costs of overdrafts were clearly disclosed, most people with checking accounts aren't idiots in need of the "guhment" to watch over them. No one likes the tactics used by many banks in engineering the order of deposits to create large overdrafts and maximize fees and for which Wells Fargo recently took one on the chin in the city by the bay. On the other hand, as long as the rules are clearly understood, overdraft fees serve a purpose for a certain segment of the public and adults ought to be able to pay through the nose if that's how they want to roll.

I haven't asked her, but I'll bet she wouldn't think much of the recent FDIC guidance that requires banks to watch out for those customers who use overdrafts "excessively." My guess is that for those with a libertarian gene in the DNA, which includes many Americans, that smacks of paternalism.

The following is the YouTube video produced by the CRL. Personally, I thought the original image of an egg frying made the point much better. Plastic just sits there slowly melting, like Lindsay Lohan at a parole revocation hearing, which is hard to clearly see in just a few seconds. However, you can judge for yourselves.

Rollin' Up The Op Subs

One of the advantages of a national bank or federal thrift charter used to be that for those banks or thrifts that engaged in mortgage lending on a multi-state scale, the mortgage operations could be housed in an operating subsidiary that had all the benefits of federal preemption that were afforded the parent bank or thrift (as confirmed by the Watters v. Wachovia ruling). The operating subsidiary could be exempt from state licensing and examination  requirements, as well as many other pesky state law requirements. For regulatory reporting purposes, the assets and liabilities of the operating subsidiary are consolidated with those of its parent; however, for liability purposes (as long as the bank and operating subsidiary avoid pitfalls that might allow a plaintiff to "pierce the corporate veil"), the parent's balance sheet can be isolated from the legal risks imposed by the subsidiary's business activities, which in the consumer lending area can be substantial. In addition, as Kate Berry observes in today's American Banker (paid subscription required), the operating subsidiaries are also sometimes set up as stand-alone operations that can be sold quickly when times got tough, which in a cyclical business like residential mortgage lending, they do on a regular basis (although usually not as rough as we've been seeing for the past several years).

With the passage of Dodd-Frank, which eliminates federal preemption for operating subsidiaries, Ms. Berry discusses the brave new world of mortgage banking, which may necessitate the wholesale "roll-up" of a lot of operating subsidiary mortgage lenders.

Industry lawyers expect most institutions to go the roll-up route, partly out of fear that sooner or later the states would try to force operating subsidiaries — and, potentially, their individual loan officers — to get state licenses. The burden of satisfying 50 state regulators would outweigh the cost in legal fees of restructuring.

The SAFE Act also comes into play.

The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 required loan officers working at national banks and their operating subsidiaries to register with the Nationwide Mortgage Licensing System, a database run by the states.

Each loan officer gets a unique identifier (so all loans can be tracked) and undergoes a criminal background check under the SAFE Act.

The law has additional, more rigorous requirements for originators working at nonbanks: They must not only register but also be licensed in the states where they do business.

To do so, they must pass national and state exams and take at least 20 hours of continuing education a year.

Though most states probably would maintain the existing requirement that banks' operating subsidiaries only have to register with them, states have the authority to make operating subsidiaries meet the tougher licensing requirements, experts said.

That possibility could be the decisive factor in pushing national banks to restructure those entities.

"Right now, being a bank originator is a safe harbor," said Jeffrey Naiman, a partner at BuckleySandler. "Operating as a 50-state licensed entity has always been very difficult, but post-SAFE Act, it is becoming even harder."

As an added bonus, Dodd-Frank added to the house of horrors the dreaded Consumer Financial Protection Bureau.

Banks also are concerned that mortgage loan officers could ultimately face tougher standards when the job of umbrella enforcer for the SAFE Act is transferred from the Department of Housing and Urban Development to the planned Consumer Financial Protection Bureau in the Federal Reserve.

The CFPB may ultimately resolve the question of whether loan officers at bank subsidiaries need state licenses, said John Ryan, an executive vice president at the Conference of State Bank Supervisors.

"The line has already been drawn: Employees of federally regulated operating subsidiaries are registered; everybody else is licensed," said Ryan. "It might create a conflict with the SAFE Act to say that operating subsidiaries would have to be licensed when now they just have to be registered. So they might have to call in the CFPB."

If Elizabeth Warren is heading up the CFPB at the time it's "called in," bankers can expect the ultimate decision to be one that is not kind to their operating subsidiaries.If state banks have fumed for decades over the desire for Lebensraum shown by the preemption Nazis at the OCC and the OTS, wait until national banks and federal thrifts get a load of Reichsführer Warren and her ankle-biting storm troopers. National banks and federal thrifts will be rolling up op subs into the mother ship faster than Taylor Lautner sheds his shirt.

Is $24 Million "Getting Off Easy"?

Francine McKenna talks about the tale of two recent litigation settlements that arose out of the bursting of the subprime mortgage bubble. She thinks that KPMG may have gotten less than its just desserts in the settlement of a case brought by shareholders of Countrywide because, unlike similar litigation that involved imploded subprime originator New Century, no bankruptcy examiner's report was involved. Francine thinks that bankruptcy examiners have proven adept at rolling over large logs and rocks in the cluttered forest that these kinds of cases grow and revealing lots of nasty worms and grubs that the Big 4 audit firms would just as soon leave buried.

Most telling to me in her lengthy (and interesting) commentary is this passage from a July 2009 Bloomberg article, that cites portions of :

One specialist who complained about an incorrect accounting practice on the eve of the company’s 2005 annual report filing was told by a lead audit partner “as far as I am concerned we are done. The client thinks we are done. All we are going to do is piss everybody off,” the complaint said.

A spokesman for KPMG said that the statement was "taken out of context" in that "[t]he next sentence, which was omitted from the examiner’s report, 'indicated that the firm’s national office had already reviewed and signed off on the issue, complying with the firm’s normal procedure...'"

In  other words, if the national office makes the wrong call and the grunts in the field cry that the emperor has no clothes, their officers can legitimately tell the troops to "stuff it" and the firm is off the hook. Have I got that right?

And people think "Big Law" is a racket.

As Francine points out, Countrywide may very well have saved itself (actually, saved its acquirer, Bank of America) a load of cash by being acquired rather than having been wrung through the bankruptcy wringer where all the dirty laundry is hung out for everyone to see. I think she's right on the money.

Incidentally, Francine was yapping about New Century and the risk that loan buybacks posed to that company long before the subprime chickens came home to roost and lay something on New Century's shoulder other than golden eggs. She's a blogger well worth following, even if she's loathed by Big Audit, or, more likely, because she's loathed by Big Audit.

BankUnited's IPO: Too Soon To Judge

Some readers think the story that broke last week that BankUnited is considering an initial public offering somehow vindicates the FDIC's concerns that "private equity" is interested in nothing more than "hit-and-run" quick turnarounds, and is not to be trusted as acquirers of broken banks. I understand why they might think that way, but I think it's too early to tell.

Much of the initial buzz came from Bloomberg, and particularly from reporter Cristina Alesci, a beautiful young woman who may command attention as much for her plunging neckline as she does for her business acumen. At least, that could be an argument made by anyone who watches the video embedded in the linked article. Ms. Alesci states at one point that launching an IPO only 15 months after the BankUnited investment was made and making money on the deal so quickly somehow vindicates the FDIC's views on private equity. However, she also states (twice) that no one knows (at the time the report was broadcast last Friday) whether or not the private equity investors would be selling out or staying in the deal. The Wall Street Journal reported the next day that none of the private equity investors was selling out completely. To me, it's too early to tell whether this is a "cash out" or whether this is an opportunity to raise additional capital in the public markets to take advantage of buying opportunities and at the same time create a liquid market for the bank's stock so that an exit can be made when the time is right.

Much of the prejudice against private equity appears to be based on the fact that it desires makes money on its investments. Isn't that what investors in any bank seek to do? The critical issue in the BankUnited deal isn't that the private equity investors might make money from an FDIC-assisted transaction, but whether the loss to the FDIC insurance fund will be less with the deal that was done than it would have been without that deal. I'm going to assume that the loss will be less, and therefore, that the FDIC was right to do the deal in the first place.

That said, knowing the prejudices of the FDIC, the private equity investors would be shooting themselves (and any other private equity investors who ever wanted to do an assisted transaction in the future) in the foot by cashing out this quickly.

No, Let's NOT Do It Your Way

Because millions of my readers (actually, two) asked me what happened in my holy war against the content thieves at MyWayLending.com, I’ll give a brief update. After running down the contact information for the domain name registrant, I e-mailed that contact and demanded that the site stop stealing my stuff. His response was to keep stealing my blog posts but to remove my name as the author of the posts, which is an even more egregious violation of US copyright law than stealing the posts with my byline included.  As I predicted, the operators of that site appear to be possessed of less than finely honed ethical impulses.

In the words of Commodus in the movie “Gladiator,” that “vexed me. I was very vexed.”

Thanks to the quick investigative skills of columnist Alain Sherter at BNet.com, the CBS Interactive Network, I quickly obtained the name and address of the content thief’s internet service provider. For some reason, Alain reads my blog, although his political leanings are somewhere to the left of Leon Trotsky and mine somewhere to the right of Genghis Khan. As is the case with many professional journalists, Alain loathes copyright law violators. I sent a DMCA notice to the ISP demanding that the offending content be removed and within a week it was gone from the site.

I notified a few other bloggers that their content was also apparently being pilfered. I don’t know whether any of them took similar action, because none of them responded to my e-mail. When I last checked the site yesterday, the thievery still appeared to be going strong, but I appear to have been dropped as a victim.We'll see how long that lasts.

Next time -- if there is a next time -- I’m just going to find a firm of junkyard dogs and sue them ‘til the cows come home.

As I explained in a previous post, I’ve gone to publishing only excerpts in my RSS feeds. I’m sorry if it bugs any readers to have to visit the blog to read a full post, but a blogger’s gotta do what a blogger’s gotta do.

Another Wrinkle In The OneUnited Affair

In last night's post, I made the heinous error of blaming the OTS for the shortcomings of the FDIC. That's like slapping a little baby when you should be having Chuck Norris roundhouse kicking the baby's adult uncle in the face. Or, as alternative to Chuck, you could sic Ken Thomas on them.

Ken, a banking consultant, economist,and professor of finance at University of Pennsylvania's Wharton School, was quoted in the article I linked to yesterday. He's a blunt critic of the favoritism he believes was shown to OneUnited Bank in its campaign to get TARP money out the Treasury Department. According to the South Florida Business Journal, It turns out that's not the only thing about OneUnited and federal banking regulators that gets Ken's goat.

Three years before a congresswoman faced an ethics investigation related to OneUnited Bank, banking analyst Kenneth H. Thomas was mystified that regulators did not crack down on the bank for minimal lending in South Florida.

The nation’s largest African-American owned bank had only 17 loans totaling about $3 million in South Florida in 2005 and 2006, even though it had $77 million in deposits in the region, according to FDIC figures and an analysis by Thomas.

The Boston-based bank was rated “in substantial non-compliance” under the community reinvestment act in South Florida by the FDIC. It got a “satisfactory” rating overall, but Thomas filed comments arguing for a lower rating.

The passing grade may have been crucial to helping the bank qualify in 2008 for $12 million in troubled asset relief program (TARP) funds.

“There’s no way the bank should have passed,” said Thomas, who is based in Miami. “At the FDIC, someone just looked the other way and gave them the rating that the bank wanted – and that’s a satisfactory – because if they didn’t, that would have hurt the bank.”

The complaints by Thomas to the FDIC in 2007 had the same effect that a water balloon has on a raging forest fire. OneUnited Bank continued to make almost no loans in South Florida while it continued to suck up deposits from branches in the area, apparently in order to invest the funds elsewhere.

OneUnited has granted just three mortgages totaling $419,000 in South Florida since the start of 2008, according to court records. None of those loans were in Liberty City or Lauderdale Lakes, where the bank’s branches held $59 million in deposits as of June 2009.

“Oh my gosh. That’s tragic,” Miami-Dade Chamber of Commerce President Bill Diggs said. “If they’ve got that kind of money in deposits and they’ve only made three loans totaling $400,000, that is troubling to me.”

Oh my gosh, you're right, Bill. What's more, opening or acquiring out-of-state branches to use primarily as deposit-generating devices while you fail to make loans to the local community where the branches are located is a violation of law. Too bad federal law doesn't apply when the main squeeze of a powerful member of Congress owns a piece of the bank that otherwise would be subject to it.

I'm going to love to see what else crawls out from under the rocks that are overturned during this ethics investigation. I'm sure the FDIC can't wait, either.

"Deserve" Has Nothing To Do With It

A recent article in the American Banker (paid subscription required) posited that the ethical dust-up over Maxine Waters' alleged intervention with Treasury Department officials in order to obtain TARP money for OneUnited Bank, in which Waters' husband had a financial interest, "may add fire to a continuing debate over whether the government's system for awarding bailout funds was fair..."

What "debate"? Of course the system wasn't "fair." Flawed human beings picked winners and losers, and, as best those of us who watched the process up close and personal can determine, the "pickers" based their selection criteria on factors like whether the applicant's CEO wore a blue blazer with black slacks, whether the CFO's hairdo was as outdated as Sheila Bair's, and whether the recipient's Chairman sniffed the wine cork before or after he tasted the Pouilly-Fuissé. It couldn't have been based on objective criteria rigorously applied.

Here's an easy way for the House ethics panel to determine whether the selection of OneUnited was or was not "fair" vis-a-vis other insured financial institutions that sought TARP capital and were turned down. One lawyer who represented TARP capital applicants related that his clients were told by their primary federal regulator that they had to have a composite CAMELS rating of 1 or 2 to qualify. According to the American Banker, at the time it received TARP capital from the Treasury Department, OneUnited was "seriously undercapitalized" and had lost $33 million the previous year. Therefore, it must have received a very low rating for the "capital" and "earnings" portions of the CAMELS rating and could not have earned a composite 1 or 2 rating. Whether that's true or not should be easy to determine: just ask the FDIC, OneUnited's primary federal regulator.

The article also notes that institutions hit hard by Freddie and Fannie preferred stock losses were supposed to have been given "special consideration," and that this group included OneUnited. However, Joe Adler, the reporter who wrote the article, also notes that "numerous institutions hurt by Fannie and Freddie conservatorships were ultimately closed." He cites National Bank of Commerce in Illinois of one such bank that asked for TARP, was rejected, and failed in January 2009, and nine banks belonging to FBOP Corp. which also failed after failing to "qualify" for a TARP injection.

Banking consultant Ken Thomas is outspoken in his opinion.

"This is probably the most blatant example … of special attention or favoritism or whatever you want to call it..."It's too late for those banks that have already failed — the banks that didn't have the favoritism didn't know the right people and didn't have the connections."

I just hate when people beat around the bush and you can't figure out what the heck they're trying to say.

Others, like Atlanta attorney Robert Klingler, think that whether or not the process was fair really doesn't make much difference, because the voting public doesn't care and (I assume), if the voting public doesn't care, no one in Washington, D.C. will give a hoot, either. It's hard to argue that anyone that cynical about the federal government is wrong.

Still, there are some of us out here in the sticks who hope that some light is shed on the favoritism, for whatever small, inconsequential victory might result. Shining light on roaches at least freezes them in place for a bit, and when they're not scurrying about, they're not spreading disease.

At the end of the movie "Unforgiven," Clint Eastwood's character, William Munny, has shot his nemesis, "Little Bill" Daggett (played by Gene Hackman), in the liver and Little Bill lies bleeding out on a bar room floor as Munny points a Sharps rifle at his head and prepares to blow Daggett's head off. Daggett and Munny have a brief, albeit pithy, discussion of justice here on planet Earth.

Little Bill Daggett: I don't deserve this... to die like this. I was building a house.
Will Munny : Deserve's got nothin' to do with it.
[aims gun]
Little Bill Daggett : I'll see you in hell, William Munny.
Will Munny : Yeah.
[fires]

If "deserve's got nothin' to do with it," then I guess we'll all see the federal banking regulators in hell someday. In that case, I hope I'm the one who gets to hold the Sharp's.

UPDATE: 8/16/10: This post was revised to properly identify OneUnited's primary federal regulator as the FDIC, not the OTS. Blasting the OTS for this sad state of affairs is like Munny blasting Daggett in the face with the Sharps. The OTS is already drowning, and doesn't need me to throw it an anchor in order to sink. So, the bad cat in this case was a leopard, not a bobcat. My bad.