Bank Lawyer's Blog

House Ethics: An Oxymoron

While right-wing bloggers are making a lot of noise about the failure of the House Ethics Committee to move forward on the Maxine Waters ethics investigation (last discussed here), Jordy Yager at The Hill points out the inconvenient truth that the Republicans have been in control of the House, and its Ethics Committee, for six months and still haven't done a darned thing about any of the ethics investigations. That includes not only Waters, who was accused of intervening with the Treasury Department to get some TARP for a savings bank in which her husband had an interest, but also the sexual harassment charges against former Democrat Eric Massa.

Three days after Rep. Eric Massa (D-N.Y.) resigned, then-Minority Leader John Boehner (R-Ohio) introduced a measure demanding that the House Ethics Committee issue a final report on the scandal by June 30, 2010.

Nearly a year after that deadline, with Boehner now the most powerful person in a Republican-controlled House, the Ethics Committee still has not issued its findings on Massa and has shown no sign of doing so, sparking a fresh round of criticism that the secretive panel is bogged down in its own inefficiency.

Boehner, who has repeatedly stated his intention to hold members to “the highest ethical standards,” last year rebuffed then-House Speaker Nancy Pelosi’s (D-Calif.) comments that she would “drain the swamp” of corruption in the House. 

“The fact is that the swamp has not been drained,” Boehner told reporters last July.

No, John, the swamp isn't drained. A new group of snakes and crocs took control, but it's the same old swamp. You can stop assigning blame to others for this state of affairs and start looking in the mirror for culprits.

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I'll be "otherwise occupied" for the next few days, so I'll wish you all a Happy Independence Day. Try not to let anything blow up in your hand or poke your eye out. Unless it's simply too much fun to resist.

Payday Lenders Persist

I've been writing for the last few years (most recently here) about the futile attempts of the Ohio legislature to put payday lenders in that state out of business. I described those efforts as playing "whack-a-mole." In their latest incarnation, payday lenders have popped up in the tried and true business of pawning, like those tatted-up protagonists of the History Channel's Pawn Stars (appropriately located in Sin City). And not content to operate quietly in the shadows, stiffing the working stiffs who hock grandma's dentures to buy some bread or pay the rent, some payday pawnsters are pushing their luck.

Payday lender Cash America International Inc. reportedly is backing draft legislation to raise state limits on pawn loan rates in Ohio. The company has been augmenting its Ohio payday loan stores with pawn shops so it can boost revenue that took a hit from H.B. 545, it said.

After all, a lending business can barely survive on a mere triple-digit APR, so I feel Cash America's pain. Still, some pawn shop operators think raising this issue at this time is bad for business.

“There is a sleeping dog here, and we’d just assume let him lie,” said Jim Tucker, who pared his First National Cash Advance payday shops by half to three after H.B. 545 passed. “The best thing that can happen is nothing.”

On the other hand, consumer advocates who want to squash payday lending altogether have run smack dab into a gaping yawn from the state legislature. Its members are more concerned about budget issues than crusading. It seems to me that Cash American is pushing its luck.

The linked article from Columbus Business First demonstrates how private enterprise, whether in the middle of the mainstream or nibbling around the edges, always seems to find a way to shuck and jive around every effort of social engineers to construct a more economically "just" social order.

Under the Small Loan Act, a two-week $200 loan would incur fees and interest charges of at least $17.15, which equates to an annual percentage rate of 223 percent. The same loan made under the Ohio Mortgage Loan Act would have an APR of at least 220 percent. The payday lending license that was done away with allowed annualized rates up to a 391 percent.

[...]

Some payday lenders also have charged fees on payday loan checks and then charged customers fees to cash them, said Tucker, whose small payday loan company is based in Worthington. Tucker chose not to do that, but instead started a car insurance agency to bring in extra income, he said.

“I thought that was stinky,” Tucker said of the practice.

Well Jim, as we all know, when it comes to the smell of cash, one man's stench is another man's perfume. The bottom line appears to be that as long as there's a demand, there will be plenty of suppliers, regardless of legislative roadblocks thrown in the way.

Florida Bar Gets Stern With Stern

The FUBAR caused by the sudden discharge of the law firm of David J. Stern by Fannie Mae, Freddie Mac and other lenders has morphed into a myriad of headaches for courts, lenders, borrowers and other affected parties in Florida over the past six months (including, incredibly, causing an apparent shortage of lawyers). Stern's also been locked in a Celebrity Deathmatch-like struggle with former clients over unpaid legal fees. To put a cherry on top of Stern's Snafu Sundae, on June 17th, the Florida Bar (the association that governs lawyers, not to be confused with The Florida Beach Bar and Terrace in the land down under) announced that it had filed a complaint against Stern "for allegedly violating the bar's rules by failing to produce documents as ordered by the court in February."

Stern's lawyer posited a couple of plausible defenses.

Stern's attorney Jeff Tew told The Palm Beach Post his client was fired from SunTrust in mid-December 2010, before the Feb. 16 order was issued. Tew also said it was possible Stern missed the notice among 10,000 pieces of incoming mail everyday.

Or maybe his dog ate the order.

I don't care how much money Stern made in his stint as "The Florida Foreclosure King." No amount of money could compensate him for the shock-and-awe of the offal storm that has been raining down on his head since "robo-signing" became a national catch phrase.

This entire episode ought to be a case study in the inherent risks of running a foreclosure mill.

The Four Horsemen Slow To A Trot

My recent Tourette's-like verbal ejaculations about the potential enforcement tsunami that may soon be issuing from the CFPB enforcement folks, led by former Ohio Attorney General Richard Cordray, inspired one of my long-time readers and correspondents, a regulatory attorney with a state banking agency, to write me with a different view of Mr. Cordray. Edited to protect his or her identity (since an admission that you read this blog is definitely an "admission against interest"), and to remove certain views better left between the two of us, the following is the essence of my correspondent's dissenting opinion:

I attended [a recent banking convention].  Rich Cordray was the featured speaker.  Needless to say, it wasn't exactly a welcoming crowd...  It's no secret Cordray considers the CFPB a short-term gig until the next gubernatorial election in Ohio.  I believe he said he planned to stay in D.C. until the end of 2012 and then return to Ohio to run for governor.  He asked the industry folks a lot a questions like why do short sales take so long, etc.  After his speech/discussion, I approached him one-on-one to discuss how CFPB plans to regulate non-bank lenders such as payday lenders...  He told me that CFPB could help with Internet and Indian tribe payday lending, but he made no broad sweeping promises of pre-empting state regulation or sounding the death knell for that industry.  He spoke rather of assisting the states in areas where our jurisdictional authority is limited.  He struck me as very intellectual, thoughtful, perhaps even a bit introverted.  I don't see a guns-a-blazing kind of guy. Sorry! That was Mark Dann--Cordray's predecessor!  If anything, I think Cordray may be too nice.  It's well known in Columbus, OH that he lost the AG's office because he refused to go negative in the TV ads [unlike his political opponent, who did run negative ads that were apparently effective].  I guess I just don't see Rich Cordray as the big bad wolf.  That being said, I agree with you that he will pick a few good winnable cases and let the lawyers loose.

Not quaking in my boots--

Based on a history of back-and-forth e-mails over the years, I have a lot of respect for my correspondent's judgment. He or she may be right about Cordray, and my concerns (and those of many community bankers, to judge by my e-mail and personal conversations) may be overblown. If so, I'll be very happy to have been proved dead wrong.

Until then, I'm keeping handy a fifth of Jack Daniel's Black, a couple coils of concertina wire, and a Glock 23 with an extended clip and a chambered round. After all, a lawyer can never be too well prepared for The Apocalypse.

To paraphrase the late Hunter S. Thompson, "This is the 21st Century, Bubba, and there is no such thing as Paranoia. It's all true."

At Least It's An Ethos

As readers not living in Minnesota may not know, the state government of Minnesota may shut down soon as the result of a budget crisis. Big Labor is telling Big Banks, specifically US Bank and Wells Fargo, that if school districts turn to them to borrow money during the shut down, the dastardly banks better not even THINK about charging ANY interest on those borrowed funds, or they will face the wrath of the kind of rationalists who put Jimmy Hoffa under a New Jersey bridge abutment. The SEIU circulated a petition to its members asking them to sign on to a grim warning to those two big banks:

When our nation's banks were in trouble it was working families who bailed them out. Now we need you to do the right thing and live up to your place as leaders in our financial community.

That would be a stupid argument even if the alleged "facts" were not fabricated. The truth ("You can't handle the truth!") of the matter is that neither Wells Fargo nor US Bank was "bailed out" by US "working families" (the top 1% of taxpayers pay more income taxes than the bottom 95%, and the top 1% are not considered "working families"). As reported in October 2008, Wells Fargo's Chairman Richard Kovacevich told Hank Paulson that Wells Fargo didn't need no stinkin' TARP. In response, Hammerin' Hank made Dick an offer he couldn't refuse, so Dick took one for the team. As for US Bancorp, its CEO, Richard Davis, famously declared that TARP was a "big fat lie."

"We were told to take it so that we could help Darwin synthesize the weaker banks and acquire those and put them under different leadership," Davis said..."We are not even allowed to mention that. ...We were supposed to say the TARP money was used for lending." He went on to say he would be "darned" if US Bancorp were to become part of of the "collateral damage" from the government's "sloppy attempt at nationalizing the [banking] industry."

But don't let facts get in the way of propaganda, SEIU. After all, you're feeling the pinch of your decreasing membership every time the Obama administration cracks down on employers who hire illegal immigrants, so we realize that you can't let truth stand in the way of a good spin around Pravda Park on the Goebbles-mobile while spouting a variation on the theme of "schools can't afford to pay [the banks'] profits." Who then, is supposed to "pay the banks' profits?" What's that you say, SEIU? Banks aren't supposed to make profits? Banks are either public utilities or eleemosynary institutions? Charging interest to borrowers on money lent is un-American? The banks need to screw their shareholders based upon lies and nonsense?

Here's another suggestion about how to "do the right thing": Instead of paying attention to Big Labor, let's all start paying attention to The Big Lebowski. After all, there are worse things in life than "socialists."

Walter Sobchak: Nihilists! [Expletive deleted] me. I mean, say what you like about the tenets of National Socialism, Dude, at least it's an ethos.

Oil Poured On Troubled OCC-OTS Waters

Late last year, the odds were running 10-to-1 against a smooth transition of OTS employees into the fabric of the comfy OCC sofa before the OTS was relegated to the dustbin of history (as was its predecessor, the Federal Home Loan Bank Board in 1989). In fact, at that time, one inside source described the entire process as "rocky." Recently, however, according to the American Banker (paid subscription required), it appears that while things aren't as smooth as a baby's behind, at least they're no longer as rough as Chuck Norris' beard.

As the transfer date nears and their fates have become more certain, ... many employees are happy to have jobs and some are even hopeful about new opportunities.

"There is, from what I can see, a feeling of reconciliation," said Kip Weissman, a former OTS attorney who represents thrifts at the law firm Luse, Gorman, Pomerenk & Schick.

"Happy to have jobs." Yes, in an era where the OTS and other federal banking agencies have been shutting down community banks like the regulators were being paid by the piece, it's nice to have a federal government job. It's always nice to be in the one growth industry in an otherwise stagnant economy.

Former OTS attorney and current private practitioner Lawrence Kaplan says that things are even better than OK when it comes with the public's favorite group of regulators: lawyers.

"People know they're moving on and they have jobs. They have interesting jobs, they've been meeting with their counterparts, their new colleagues, and people among the lawyers — who I probably deal with more — are very excited."

That's good to hear, isn't it? I hope that once everyone gets settled in at the OCC, they find a soul-mate with a great personality, good teeth, and their own automobile.

Toward the end of the article, reporter Kate Davidson quotes an anonymous source who nails the factor that likely inspired the OTS survivors to settle down and get with the program.

"There is certainly recognition among our employees that Congress could have just abolished the agency without at least the protection of saying you've got a job," said the anonymous employee. "At least people have a job, and they're certainly cognizant of that and they're thankful for that."

Yes, in an economy where the national unemployment still exceeds 9%, the fact that these folks still have jobs is good news for them. For the rest of us, it means we can stop tossing and turning in our beds at night, worried sick that these folks might be less than ecstatic in their new life in regulator land, and can start focusing on more critical matters, like whether or not Barney Frank might be influenced by a fundraiser. Is that possible???

Wal-Mart Getting The Last Laugh

Last summer, Wal-Mart was scooping up small business borrowers through its Sam's Club unit. This summer (paid subscription required), Wal-Mart is stealing another march on bankers by focusing on consumers.

The retailer next week will begin rolling out automated versions of its MoneyCenter offices, which provide a range of financial services to shoppers.

The "MoneyCenter in a box" concept will feature ATM-like machines positioned in Wal-Mart stores that do not have full MoneyCenters, said Jane Thompson, the outgoing president of Wal-Mart's financial services unit.

According to TowerGroup's Brian Riley, bankers should quaking "[b]ecause if Wal-Mart starts linking their kiosks to doing reloadable gift cards, they have the power to move a lot of transaction money."

Ya' think?

Wal-Mart has more than 1,000 MoneyCenters throughout the country that provide check cashing, bill payment, wire transfers and other services. Manned by customer service agents, they are one of the most profitable areas in Wal-Mart stores, Thompson said.

Companies with a hand in financial services have been trying to encourage self-service as a way to control labor costs, while potentially keeping longer store hours. Kiosks are also a way to blend Internet banking and financial services functions with shopping in the physical world.

"If you take a Wal-Mart shopper, if maybe they want to buy a washing machine and they want to transfer funds online without having to get to their home computer, or maybe they don't have easy Internet access, they can do that now within a Wal-Mart," said James Van Dyke, the president of Javelin Strategy and Research. "It makes a lot of sense for a limited segment of the population."

As we observed two years ago, the FDIC may have done Wal-Mart a favor by derailing its application to acquire a Utah industrial loan company charter through Sheila Bair's passive-aggressive "moratorium." Unhindered by federal examination bobble-head dolls looking over its shoulder and second-guessing every move it makes in a regulatory world gone tight-sphinctered in the wake of Dodd-Frank, since it withdrew its application in 2007, Wal-Mart has been rolling out the bad news for banks in the area of cheap consumer financial services world faster than Lady Gaga changes extra-terrestrial outfits. With their size and pricing power, they are formidable when it comes to delivering cheap financial services to a mass market. Banks may have kept Wal-Mart from entering the banking business through the front door, but that hasn't slowed the Behemoth of Bentonville down much. The side- and back-doors look mighty friendly.

So much for the ICBA's "popping champagne corks" over its "defeat" of Wal-Mart in 2007. You should watch out when you do that, because the ricochet can put your eye out.

The Same Old Song

While the focus of John Byrne, the EVP of ACAMS, is on BSA, money-laundering, and similar compliance issues, the question he poses in the title to a recent article in the ABA Banking Journal extends to all areas of bank compliance: "Why Are We Still Fixing The Same Things?"

Are we in a time warp?

 
Without pointing out what specific regulators have said, it is incredible to me that basic issues such as maintaining an effective program of compliance are deficient. We are told that bank management needs to determine if compliance reporting to the lines of business (lobs) is a good idea-it is not, not before and not now. And these other perennials still come up:
 
• Outsourcing the "function" is not outsourcing the responsibility.
• Affiliate work should reflect U.S. laws, not local standards.
• Audit oversight needs experience with U.S. law and OFAC requirements.
• The more thorough the audit, the better your examiners can rely on the report.
 
For exam problems, federal agencies are telling the industry that in 2011 we are still deficient in the following ways:
 
• Customer risk-rating methodology is inconsistently applied across the customer base
• Officer and directors are not being properly identified nor screened for PEPS (politically exposed persons) and negative news
• BSA training is clearly inadequate and there is no escalation to notify senior management of past-due employees who have not completed the required annual BSA training.
• Cost-cutting is resulting in a lack of AML oversight.

John has an idea why these same old compliance problems keep popping up.

What is interesting (or frustrating, depending on your point of view) is that some of the root causes have been stated many times before:
 
• Elevation of the business line over the compliance function
• Offering products without adequate controls in place
• New technologies such as prepaid access
• Compliance programs that are not commensurate with the risks

John calls these "gaps" in compliance "inexcusable in 2011." I'd have to agree. So, apparently, do the regulators. Otherwise healthy banks, and even banks that are in the death spiral because of assets quality and capital deficiencies, are being hammered by compliance examinations that not only add insult to injury, but pose the very real risk to the bank, and possibly its  management and directors, of civil money penalties. Just take a look at the list of civil money penalties imposed by the FDIC in April of this year for compliance failures.

With the enactment of Dodd-Frank and the advent of the CFPB, compliance will not get any easier, less expensive, or less risky. Banks need to be on top of their game in compliance. At least, those that want to continue to operate profitably need to be.

A decent place to check how your compliance programs stack up, and perhaps pick up some tips you hadn't considered, may be next month's webinar from Bankerstuff on Target Compliance Management, presented by former Federal Reserve Board Supervising Examiner and long-time bank compliance professional Mary Thorson. Whatever the approach, and wherever bank management and board members think compliance ought to rank on the list of their current concerns, rest assured that the subject remains at the top of the bank regulators' lists.

A-Venting We Will Go

Every once in awhile, I receive such an excellent rant from a reader who functions (or malfunctions) in the higher reaches of a community bank that I must take a knee, catch my breath, and say a quick prayer of thanks to both the Hairy Thunderer and the Cosmic Muffin. Today was such a day.

In an only slightly edited form (to protect the guilty), here was my first e-mail of today, thoughtfully composed and spewed by a frustrated senior member of the board of directors of a community bank lodged snugly in the heartland of America :

I can buy an ATM that takes deposits, images checks and delivers cash for $50,000. No health care, no workman's comp, no vacation, no 401K, no lunch break, no lawsuits, no whining. Regulation is making technology much more attractive despite the cost. Don't get me started on the 'talking' ATM's that will cost at least $10,000 each to upgrade (to comply with the ADA in case a blind person in a taxi needs money at midnight...it's a civil rights non-discrimination issue don't you know)

Two banks in our area of the country "agreed" to "settle" Fair Lending claims/investigations (or face daunting litigation) by opening branches in minority neighborhoods that, absent Fair Lending's required enlargement of MSA's to encompass entire county boundries, would not be in their market area. One can agree the areas are underserved by banks; two (minority owned community) banks in the areas failed. Unfortunately, community banks do not have the deep pockets of Boeing to litigate and each bank that settles makes it easier for DOJ to get the next bank to comply. The appropriation of community bank capital (in more ways than this) is stunning.

Why has 'banking the un-banked' become such a rallying cry? Maybe low to moderate income folks don't need a bank. Maybe they need access to their cash without paying high fees to get it. (Remember the cash payroll? An envelope with money in it. Our bank discontinued it decades ago. It was a sad day.)

 

 

I feel your pain. You can rant me a river any old time.

Passing The Buck

In the midst of his customary withering flame roasting of the Obama administration, columnist Mark Steyn mocked a particularly telling pronouncement by an economic "expert" at the highest levels of the federal government. Steyn skewered the White House for trumpeting the sale of the Treasury Department's stock in Chrysler to Fiat as a way to lower the federal deficit. Steyn observed that if that's the way to prosperity, then "[i]f every business in the U.S. were to be nationalized and sold to foreigners to cover another three hours’ worth of debt, this summer’s 'Recovery Summer' would be going even more gangbusters."

I’d ask one of Obama’s egghead economists to explain it to you simpletons, but unfortunately they’ve all resigned and returned to cozy sinecures in academia. The latest is chief economic adviser Austan Goolsbee, the genius who in 2007, just before the subprime hit the fan, wrote in the New York Times that this exciting new form of home “ownership” was an “innovation” that had “opened doors to the excluded” and was part of an “incredible flowering of new types of home loans.”

Where have all the flowers gone? Not to worry. By now, some organization of which you’re a member has already booked Professor Goolsbee to give an after-dinner speech at your annual meeting where you’ll be privileged to get a glimpse of his boundless expertise for a mere six-figure speaking fee.

Those of us who represent directors and officers of failed banks are well aware that the FDIC is pursuing those individuals on the theory that they were grossly negligent in not anticipating the economic meltdown and in not building a banking business plan that could have withstood the fix we've been in these last few years, and the fix in which we're likely to wallow for at least a few years more (or, if we're unlucky, for a lot longer than that). Thus far, the FDIC appears to have focused most of its efforts on low-hanging fruit, folks who could have taken Warren Buffet's entire net worth and blown it on a three-hour spree at a "Gentlemen's Club." There are some of those folks out there, as there are in any business; however, all of them were approved to man the helm of their own Titanics by federal banking regulators, including, in many cases, the FDIC.

With hundreds of bank failures so far and hundreds more to come, eventually the FDIC will be drilling down to the bedrock of former officers and directors who simply were in the wrong business at the wrong time, and who will be judged with the benefit of 20-20 hindsight. Meanwhile, guys like Goolsbee get a pass on their blatant errors in judgment, based on the fact that they're fallible human beings, albeit sometimes spectacularly so. In other words, most of us, including the people who regulated the banks that failed and, theoretically, had access to data and high level economic analyses that the average community bank did not, didn't see this train coming down the tracks and when they finally did see it coming, they didn't really understand how bad it was going to get (including our beloved Care Bear).

Or did they? A few years ago, not long after Lehman collapsed and sparked the panic that led to TARP, McCain abandoning the campaign trail to look lost in D.C., and the change we'd been waiting for swiftly arriving, a retired federal banking official contacted me to tell me that not only did the federal banking regulators have folks who knew that the end had to come soon and that it would not be pretty, but when those folks tried to sound the alarm, they were slapped down like unruly children (before the age of entitlement outlawed slap-downs). In his case, he claimed that he'd issued repeated warnings of the impending crisis starting in 2003, and twice briefed the head of that federal banking agency, once in 2005 and again in 2006. Not only was he told to shut up about it, he was "effectively removed" from his position and forbidden from publishing any analyses for two years. How do you like them apples?

You hear stuff like that and you wonder who was grossly negligent? Of course, no one likes a Cassandra, and they are seldom, if ever, heeded, especially if the doom-sayer's counterparts are saying "What, Me Worry?" On the other hand, if federal banking agencies were privy to analyses generated by their own employees that said that they needed to start stepping on the brakes of this careening car before it runs into a ditch (or off a cliff, as it turned out) and they suppressed those analyses and muzzled the employees who tried to sound the alarm, how much more culpable for the resulting failures are those bureaucrats than are community bankers who didn't know such analyses existed?

Congress and the federal banking regulators have been working over time since this crisis began to make certain that the spotlight of shame remains firmly fixed elsewhere (other than the OTS, the weakest scapegoat of the bunch, which has been made a burnt offering to an angry political god). Shouldn't someone investigate the investigators to see who knew what, when they knew it, and what they did about it (or, rather, failed to do about it) when they knew it?

Yes, I do know what the term "fat chance" means.