I'm traveling this week on business and will have little or no time to blog. I'll leave readers with some links to material to keep themselves occupied with actual worthwhile reading for a change, instead of the superficial snark you normally trip over here.
Rob Blackwell, Washington Bureau Chief of American Banker sent me a link to one of the paper's articles from Friday's edition in which reporter Cheyenne Hopkins sets readers straight to the fact that all the hoopla in the MSM about the "imminent" settlement between major loan servicers and state and federal regulatory and law enforcement agencies is a bit of smoke blowing. There are a lot of balls still in the air and anyone of them dropping could derail any "global" settlement. The article is outside the paper's firewall, so people who don't subscribe get a chance to sample the inside scoop presented daily to those who foot the bill.
The ABA Banking Journal had a recent excellent piece by Executive Editor Steve Cocheo entitled "Time to Reinvent the Community Bank?" The answer is "maybe." It's a great analysis of the problems that confront the traditional community bank today. You'll understand why many community bankers who've been in the game for years are starting to feel like the mouse who decides he no longer wants the cheese, he just wants out of the trap.
Finally, the analysis in a recent Banking Law Jouranal by King and Spaulding attorneys Jeffrey Telep and Jane Chen of FinCen's final rule on the confidentiality of SARs is definitely worth a read. All those SARs banks file that end up in the gullet of FinCen's pet goat are, nevertheless, extra special super secret under the law, and regardless of the fact that the vast majority of SARs result in a fit of inertia by law enforcement agencies, if a bank inadvertently leaks the mere existence of the SAR (much less any of its contents) to an unauthorized third party, the bank can end up "rendered" to a third world hell hole where water boarding is what people do for fun on spring break.
"Wrongful disclosure, deceptive trade practices, right of title, negligent representation, predatory lending, servicing transfers," said Anne Sutherland, executive vice president and general counsel at NationStar Mortgage. "As you all probably well know, contested foreclosure litigation is increasing."
As a result, she said delays in the foreclosure process, alongside servicer fees and attorney fees, are steadily growing.
Ohio lawyer Jennifer Monty (we assume she's not The Full Monty) gave some guidance about another growth area, this one the manufactured "right" to a HAMP modification. Those modifications are discretionary, but HEY! Don't let an inconvenient truth stand in the way of trial lawyer spin doctoring. Sue first, back-and-fill later. Monty also revealed that the Justice Department may be looking into whether HAMP modifications might have been denied on a prohibited basis that might violate ECOA.
"The DOJ will look at neighborhoods that are being denied modifications as well as other factors that could be in violation of this law," she said.
Makes a servicer glad it decided to play ball with the Obama administration and participate in HAMP, rather than just telling the government to stick it in its ear and foreclosing, doesn't it? No good deed goes unpunished.
Apparently, servicers are also running afoul of the Fair Debt Collections Practices Act. One lawyer described the use of the FDCPA by some lawyers "as somewhat of a bandwagon business." The band must be playing sour notes. According to Florida Lawyer Daniel Consuegra, it's easy to violate the law.
...[I]if servicers leave a message with their intention to collect debt and someone besides the targeted consumer hears the message, the servicer has violated third party disclosure requirements. If a servicer leaves a message on a borrower's cell phone, the borrower can claim the servicer used up minutes and cost the borrower money. Even if the servicer hangs up and the borrower has caller ID, the borrower can claim harassment based on the number of calls they received.
As if all this ammunition wasn't enough for plaintiffs' lawyers, they've got a Big Bertha in the reality that, for most servicers, the economics usually make a quick settlement the preferred outcome, regardless of the merits of any individual complaint.
"You have to settle these cases," he said. "Settle fast. Settle often."
For borrower's counsel, it appears that the land inhabited by mortgage loan servicers will remain a target rich environment.
In a letter to the American Banker (paid subscription required), ICBA CEO Cam Fine tells readers why the Durbin Amendment's exemption for banks under $10 billion in assets simply won't work.
The exemption will not protect community banks or their customers because the Dodd-Frank Act shifts control over routing debit card transactions from issuers to merchants, allowing them to bypass small financial institutions and negating any benefit for exempt community banks and credit unions. Further, large retailers will be able to steer customers to use the rate-controlled cards issued by the largest financial institutions. Ultimately, the market will, over time, drive pricing for community banks in line with rates required at larger institutions.
Banks will raise fees and/or limit services to make up for the lost revenue from debit card interchange fees. It's as simple as that. It's also something that anyone could have seen coming.
The winners, according to Fine? "...big-box retailers. Large merchants will use the new government pricing restrictions to minimize their costs and shift transaction costs to consumers."
Dodd-Frank was supposed to address the causes of the financial collapse and ensure that "it never happens again." As hubristic as that goal might be, it's hard to conflate financial reform with Durbin's special interest excursions into fine tuning private market pricing of services in favor of big-box retailers who line his PAC's pockets with campaign contributions. I guess the commercial banking PACs just didn't cough up enough cash to engage Durbin's "principles" on this one.
The bankers will simply have to look elsewhere to buy the support necessary to remove this provision from the law. Fortunately for them, they're getting backup from most of the federal bank regulators. Moreover, this is one issue where credit unions and banks are speaking with one loud voice.
A word of caution to anti-Durbin forces, however: the man is not made of granite. We all remember his crying jag on the Senate floor when certain folks jumped him for comparing American interrogators at Gitmo to Pol Pot, Nazis, and other odious historical pariahs. So, if you're going to beat him up verbally, make sure you're using kid gloves. I mean, not everyone can control their emotions as well as...say...John Boehner.
You know this fight is going to be a long charge uphill into withering machine gun fire. On the other hand, as someone who was intimately involved in successful litigation many, many years ago against the OTS and FDIC, when every one on our clients' side of the table decided to sue only after reaching the point where they all made like Howard Beale and started reaching for firearms, I have to wish them well.
United Western Bancorp has challenged regulators' seizure of its chief subsidiary, United Western Bank, in a lawsuit filed Friday in U.S. District Court in Washington, D.C.
United Western Bancorp has challenged regulators' seizure of its chief subsidiary, United Western Bank, in a lawsuit filed Friday in U.S. District Court in Washington, D.C.
The Denver-based holding company insists federal regulators prematurely pulled the plug on the bank in January, saying the company had been in frequent communication with regulators about progress it was making on capital-formation efforts.
"We are trying to reverse this situation" by asking the court to remove the Federal Deposit Insurance Corp. as receiver and to return control of the bank to United Western, said Michael McCloskey, United Western's executive vice president and chief operating officer.
"We believe the government acted in an arbitrary and capricious fashion and lacked any basis in applicable law," McCloskey said.
Of course, the terms "arbitrary and capricious" and "without any basis in law" are terms of art. They constitute the high bar over which United Western and the other plaintiffs must vault in order to triumph over the bureaucrats. Mr. McCloskey's been well educated in "applicable law" in this area. Even to people without a legal education, however, the burden of proving that the OTS so acted will be difficult to bear.
Naturally, the OTS claims that it had ample grounds to request the appointment of a receiver and the FDIC is imitating Marcel Marceau, as it usually does in the face of "pending litigation." What else is new?
Although a complaint is about as far from a statement of objective fact-finding as anything emanating nightly from the bloviators on MSNBC or Fox News, the complaint in this case is well written (as you would expect, given the pedigree of the lawyers involved). The first goal of any complaint is to survive a motion to dismiss, and I think the plaintiffs' counsel does as good a job as I've seen in this area, where the law tilts heavily in favor of the regulatory agencies (as it must, or the system would grind to a halt). At least we Sith, who toil for the Dark Side of the Force, find it entertaining. Unscrambling eggs, as one commenter described what unraveling the receivership and subsequent assisted sale of United Western would entail, is a brain teaser that intrigues bank law nerds. Nevertheless, I assume that plaintiffs' counsel are charging by the hour, and not on a contingency basis.
Even if the plaintiffs eventually prevail in this card game where the legal deck is stacked against them, the FDIC will merely blame the resultant mess on those (by then) dead and gone dweebs at the OTS. They either acted too slowly (IndyMac, BankUnited, pick-your-fried-thrift) or, in this case, too quickly. "Boy, are we glad those "maroons" are out of business!" Head-shaking and tut-tutting will be wide spread.
No lessons will be learned. No one will be left standing to punish. The hive will endure.
Two more stories surfaced today on HousingWire that prove the truth of old adage, "all the loose nuts fall and roll to the west coast."
The first concerns the introduction of a bill in Oregon that purports to "prohibit a lender from in any way transferring a mortgage loan for half a decade after the deal closes. In addition, the lender cannot transfer servicing rights or obligations for the same time period." When asked about it today, I repeated the sentiments of mortgage broker Michael Dolan: "I'm not concerned at all. (The bill) is so outlandish it can't pass." Then again, Michael, it IS Oregaon.
The other story involves a California couple that defaulted on their home loan but refused to move out. That's when the fun began. By the time the fun was finished, the couple's attorney was cited for contempt. In the following excerpt, "Canejo" is the foreclosing lender, "Pines" the attorney for the borrowers, and "the Earls" the borrowers.
But Canejo obtained a writ of possession from the court on the home, and the Earls were evicted in July. But, according to court documents, Pines and the Earls prevented the foreclosure sale after Conejo spent money to remodel the property. In October, they had a locksmith change the locks on the property, and the Earls moved back in.
Conejo obtained a second writ of possession from the court a week later, but both Pines and the Earls attempted another break in December 2010 but was thwarted by the Sheriff's Office.
The judge found Pines in contempt of court, based, in part, upon the following statements he made in a court hearing last November.
"Regardless of what the court does here today, we're going back to the cycle where we are going back to the property," Pines told the court, according to documents. "We are getting a locksmith and we are moving back in."
The court replied, "I certainly hope not. That is a blatant violation of the court order."
"Well then I think you should hold a contempt hearing, and I welcome that," Pines said, continuing to press for a contempt proceeding because of he wanted to give the case media attention, he said.
Beware what you "welcome." Beware, also, taunting judges in open court. They tend to react poorly.
A couple of recent posts by Anthony Demongone at NAFCU Compliance Blog are worth a read, regardless of your charter type. The first concerns (in part) the Office of Servicemember Affairs within the Consumer Financial Protection Bureau. The head of that office is Holly Patreus, wife of General David Patreus, currently head of US and NATO forces in Afghanistan, and someone who has "clout." Ms. Patreus served fair warning in recent testimony before Congress and in other public pronouncements that when it comes to consumer lenders trying to mess with members of the US military, she intends to man the barricades. Anthony points out some implications.
Her testimony is a good reminder for me to repeat something I mentioned before. The existence of her office within the CFPB will shine a light on the intersection of servicemembers and financial services. The SCRA will receive more attention. The DoD "MAPR" regulations will receive more attention. Servicemembers now have a visible champion on the Hill, and those who feel aggrieved have a place to voice their complaint.
Anthony then links to some materials that supply guidance on the DoD regulations, the SCRA, and other pertinent matters. While some of the materials are addressed to credit unions, they should be useful to consumer lenders of all types.
Regardless of what bankers may think of the CFPB, it's a losing proposition to disregard the legitimate concerns of service members. All financial institutions would be well advised to pay attention to Ms. Patreus.
Today, Anthony discussed this week's congressional hearings on the impact of the Durbin amendment (regarding debit card interchange fees). He linked to a video by the NAFCU that runs tomorrow in select locations, and that is posted on Youtube. Even bankers, who spend a lot of time complaining about credit unions, ought to agree that its well done.
Remember the old proverb: "The enemy of my enemy is my friend." Occasionally, it's true.
Paul Muolo of National Mortgage News is not the kind of columnist who pulls his punches. Saturday's headline, "President Obama to the Housing and Mortgage Industries: Drop Dead!", told you all you needed to know about where Paul was heading with his reaction to Friday's announcement that the Treasury Department planned to poison Fannie Mae and Freddie Mac, killing them softly over a span of less than a decade rather than handing them a blindfold and a last cigarette and then blasting them with rifle fire. You should read the column for yourself, although I will say that I agree with his lists of winners and losers. Unfortunately for those of us who represent community banks, as far as the commercial banking industry is concerned Paul lists "megabanks" in the winners column. The TBTF get richer and the poor remain too-small-to-give-a-fig-about.
According to a story at this morning's Housing Wire online, the ICBA thinks that the Obama administration's plan is bad for community banks.
Community banks say the Treasury's proposed housing market reforms will privatize the secondary mortgage market to the detriment of community banks that use GSE loan products to fund loans to consumers in small towns and rural areas.
"A reliable secondary market is essential so that the nation's Main Street community banks can continue to offer residential mortgages to their customers," said Jim MacPhee, ICBA chairman and CEO of Kalamazoo County State Bank in Schoolcraft, Mich. "While reform should focus on preventing future crises in the housing market and embracing the common-sense underwriting standards long practiced by community banks, it should not eliminate all government involvement in the secondary market while turning it over to Wall Street."
MacPhee said the Treasury's plan as it stands would simply transfer power to large banks insured by the Federal Deposit Insurance Corp., while removing some of the government mortgage products that community banks and their customers rely upon.
"Its future structure should not foster further consolidation in the mortgage market, which would only result in higher mortgage costs and fewer consumer options," MacPhee added.
"Consolidation." Get used to word, folks, even if it makes you slightly nauseous.
The Great Recession, the other after-effects of the popping of the mortgage and real estate "bubbles," The Glory of Dodd-Frank, the FDIC's failed bank resolution policies (and de novo bank, bank merger, and "distressed" bank enforcement policies), and now the plan to eliminate the walking dead men named Fannie and Freddie, all fuel the consolidation train. It's pulling out of the station and starting to gather some steam. If you're a community bank, you have to think about the relative risks of hopping aboard or being run over.
Then again, you could stick your head in the sand and pray for a miracle.
The American Banker's Editor-at-Large Barbara Rehm's latest column (paid subscription required) is reason enough to subscribe to that trade publication, if you're not already doing so. Barbara brings to light something that we didn't see during the last banking crisis, perhaps because in the 1980s, there were so many wild and woolly cowboys riding savings and loans off cliffs that state banking regulators didn't think that they should get between the federal banking regulators and the state banks that were free-falling to their inevitable collision with a hard surface. This time around, state regulators are speaking up.
Community bankers who argue federal regulators are being too tough on them have a surprisingly vocal ally: state commissioners. Like their federal counterparts, the state commissioners are committed to ensuring banks operate prudently and customers are protected from abuses. Many just think the job could be done more reasonably.
"I don't necessarily disagree with some of the things [federal regulators] are saying, but they are using a sledgehammer to kill a gnat," said Mississippi Banking Commissioner John Allison.
Heavy-handed federal bureaucrats who enjoy bullying small bankers? Who would have ever thought such an animal existed?
As was the case during the last meltdown, the federal regulators, especially the FDIC, argue that they should be driving the bus, because it's the FDIC's money, not the state's money, that's at risk when a bank fails. That's a legitimate point and one that state bank regulators I speak with concede. The complaint, however, is not that the feds are driving the bus, it's that they're driving it too fast and too aggressively.
The questions this raises for policymakers include: Is the dual banking system being weakened? Are talented bankers being prevented from managing their way out of a mess? Will that further concentrate the banking business? Will it thwart economic recovery?
These aren't unimportant issues to community bankers, or the larger economy, because notwithstanding the fact that the biggest banks are national banks (where they enjoy their federal preemption and the fact that they have only one primary regulator), approximately 80% of the total number of banks in this country have a state, not a federal, charter. Most small town banks are state banks, and, therefore, many smaller communities are feeling the pinch o when federal regulators beat down and (as has been happening with hundreds of them over the last few years) close down state banks.
Apparently, things have been getting a bit tense between the state and federal regulators lately.
Some state commissioners are refusing to sign enforcement actions initiated by the Fed or FDIC, saying they are simply too severe. This is not a frequent occurrence, but it is happening.
"Whatever you have to say as a state regulator really doesn't matter," said Tom Gronstal, who just completed nine years as Iowa's banking commissioner.
Gronstal said he has complained about it to federal regulators. "They were polite the first few times I said anything. They didn't really believe me. After that they just didn't want to hear it. They have their system and they are going to run with it."
According to Barbara, state officials are not blaming the local federal officials with whom they interact, but the Borgs in D.C.
Topping the list of complaints is that Washington is preventing field examiners from exercising judgment, or as one state commissioner put it "using any common sense."
"The federal regulators paint banks with a broad brush and the state regulators look at them individually," said Mick Thompson, who has led the Oklahoma banking department since 1992.
Thompson said, and other commissioners agreed, that an assessment of management talent is key to determining how much rope to give a bank. "It all goes back to management," he said. "If we have confidence in management, we are going to work with them a little bit more."
Federal officials nesting in our nation's capitol naturally deny that state regulators have any cause to complain, one even expressing bewilderment as to why they might be saying such things. Of course, they also express absolute confidence in Hosni Mubarak's continued hold on power in Egypt.
Boiling down the state regulators' complaints about the federales to their bare bones, they appear to be the following:
If every troubled bank that is examined is hit with low ratings per a one-size-fits-all policy that disregards management's ability to recover, the low rating itself will make it virtually impossible for the bank to raise capital needed to work its way out of its problems. In other words, the clampdown becomes an accelerator of an inevitable death spiral.
The restrictive clamps put on banks by enforcement actions are impeding the lending function, which not only hurts the banks' chances of recovery, but the economy's chances of working its way out of the malaise in which it wallows.
The federal regulators are, intentionally or not, killing the community banking business in twos, threes, and fours-or-more at a time, which, in turn, is hastening the concentration of the banking business. As Connecticut's banking commissioner, Howard Pitkin, puts it, "If the federal government doesn't recognize that they have regulation run riot, the whole thing is going to go away and we are going to have large banks, which will not serve anybody's interest except for the very largest businesses." Howard, I hate to say it, but for all of the populist doublespeak that spews forth from certain quarters of D.C., that may very well be the hidden agenda.
As someone who's represented both the elephants and the hamsters of the banking business during the last three and one-half decades, I hope I'm wrong. I hope articles like Barbara's engender some serious dialogue, reflection, and cooperation between state and federal regulators to save those community banks that may be salvageable by some solution short of a bullet in the head. Given the fact that I receive e-mails from federal bank regulators like the following, this one from someone who asked that his/her name not be used, I'm not holding my breath:
Kevin, good capitalist that you are, I am sure you realize these institutions went under mainly because they made too many loans to people with no ability to pay them back when times got tough. [The federal banking regulator for which this individual works] didn’t cause them to fail. All the agency did was mercifully put those banks out of their misery (and into the loving hands of the FDIC) when they had already ruined themselves.
That's what you're dealing with, state bankers and state bank regulators. Every bank that fails does so solely because of its own ineptitude. The only mistake regulators make is not closing them down quickly enough. Nothing the regulator does contributes to the failure of any bank, other than not cracking down on the bank soon enough. Anyone who says anything to the contrary is sneer-worthy.
Speaking of which, below is rare footage of Sheila Bair's conversation with a state bank regulator who simply won't get with the program and join the hive.
Here's a tidbit I'd like to pass along in between shifts helping Darth Vader build the Death Star:
Francine McKenna wrote a column for Forbes yesterday that discussed a story published on Tuesday in The Legal Intelligencer and written by attorneys Dianne S. Wainwright and Jonathan S. Ziss, that's entitled "FDIC Professional Liability Group Set To Pursue Audit Firms." The story, and Francine's column, since she interviewed the authors for additional insights, contain a good discussion of potential liability claims by the FDIC against auditors and potential defenses to those claims. Toward the end of the Intelligencer story are these interesting facts about the carnage that might be in the offing for more than just auditors.
As of Dec. 14, 2010, the FDIC has authorized suits against 109 individuals for D&O liability with damage claims of approximately $2.5 billion. This includes two filed D&O lawsuits naming 15 individuals. The FDIC also has authorized four fidelity bond and attorney malpractice lawsuits. The FDIC has not, as of mid-December, authorized suit against any audit firms based on violations of the standard of care. But that is neither to suggest nor to predict that such cases are not coming.
According to sources in the professional liability insurance and professional liability defense communities, in a good number of bank failures the FDIC has established a fulsome dialogue with the former auditors. This is typically centered around the auditors' work papers, whether produced informally or in response to a subpoena. There is, therefore, reason to conclude that this particular litigation pot is first coming to a boil. Look for claims in districts most rife with failed banks, such as Florida (42 failed banks since 2008) and Georgia (51), as opposed to, say, Pennsylvania (three).
As receiver, the FDIC has three years for tort claims and six years for breach-of-contract claims to file suit from the time a bank is closed. If state law permits a longer time, the state statute of limitations is followed. Given this limitations period, this story is long from over.
As Ziss told Francine, the FDIC will likely sue first in cases where the facts are most favorable for reaching a judgment (or settlement) that is beneficial to the FDIC and where the losses allegedly caused by the auditors' acts or missions are substantial. In other words, it's always best to first pick the low-hanging fruit to send a message to people who might have more formidable defenses that the FDIC means business, so you might as well pony up and avoid as much pain as possible. That's a smart strategy.
Francine closes her column with a quote from some know-nothing shyster from the sticks that, surprisingly, makes sense to me, even two days later.
Kevin Funnell a lawyer with the Dallas office of Bieging Shapiro & Burrus LLP and the author the Bank Lawyer’s Blog also thinks auditor anxiety is warranted.
"The fact that the FDIC is gearing up to go after auditors should be a red flag to all professionals, including attorneys and appraisers, who represented or worked for banks that fail."
According to Ziss and Wainright, attorneys should already be afraid, since the FDIC has authorized some malpractice lawsuits against failed banks' legal counsel and has not yet authorized suits against auditors. Therefore, it's not just "auditor anxiety" that I think is justified, it's "bank professional service provider anxiety." This is only the opening quarter of a ball game that could become very nasty and paranoia may be warranted. In fact, as William Burroughs once observed, "Sometimes paranoia's just having all the facts."
In the last analysis, the individual person is responsible for living his own life and for "finding himself." If he persists in shifting his responsibility to somebody else, he fails to find out the meaning of his own existence. ---Thomas Merton
Observations like that are one of many reasons Merton was considered a mystic. In an age populated with the professionally aggrieved and perpetually entitled, taking responsibility for your own screw ups, much less your own life, is an esoteric notion.
Yesterday, when I read The Fraud Blog's Tracy Kitten's latest post on bank account security breaches, the complaints of the unnamed community banker rang true on a couple of major points. They echoed what I've been hearing from bank security officers officers over the past several years, in response to some high profile cases where cybercrooks have penetrated a bank business customer's IT system and used keylogging malware to steal user names and passwords, which in turn are used by the crooks to gain access to the customer's bank accounts online and transmit a lot of money from the customer's bank accounts to the crooks.
"I absolutely believe that it's fair to ask commercial customers to ensure security of their transactions outside the bank's portal," this banker tells me. "I feel like the bank ought to take responsibility if there's any intrusion into the bank's system that impacts our customers. But I feel like the customer is responsible for everything outside the system of the bank."
[...]
"I'm not sure there is a way to protect a customer," he adds, "if their actions put their network at risk."
It's not merely that bankers "feel" the customer ought to be responsible when its own ignorance of proper information technology and/or online security is the direct cause of the criminals gaining access to the keys to the magic kingdom. Most banks have (or should have) online banking agreements with their customers that specifically make the customer responsible for any such losses and hold the bank harmless from the same.
Here's the second point which struck me as completely consistent with my own experiences and conversations with bankers: no matter how strong the bank's legal position might be vis-a-vis a customer's claim, from the standpoint of adverse public relations and the cost of dreaded trial lawyers and related expenses, the bank often decides to settle.
The bank's president, who asked to remain anonymous, says the institution decided to settle this case to save the legal expense of a lengthy trial.
Many customers apparently have a mindset that it's entirely the responsibility of the bank to protect the customer from the customer's own stupidity. The customer uses the same computer to do its online banking that it employs to surf internet porn sites and/or click on links contained in those unsolicited, yet strangely provocative, e-mails from that hot Russian babe, "Yulia," who's just dying to show you her assets on a live web cam if you'll just click on the link. As a customer's lawyer told a reporter in a case in Texas last year, his client expects that when you put cash in the bank and a bank robber steals it, the bank makes the customer whole, so why should this situation be any different? The fact that the customer dropped his keys to the front door of the bank and to the specific vault within the bank that contains his money on the sidewalk in front of a felon, well, those facts won't stop a trial lawyer with chutzpah and the ability to keep a straight face from costing the bank a load of adverse tale-spinning in the public media and a boatload of painful billing by the bank's defense counsel. Thus, like the bank in Ms. Kitten's post, many banks will eventually settle.
And the only people who come out whole are the lawyers for both sides.
Once again dear readers, is this a great country, or what?
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I'm traveling this week on business and will have little or no time to blog. I'll leave readers with some links to material to keep themselves occupied with actual worthwhile reading for a change, instead of the superficial snark you normally trip over here.
