Bank Lawyer's Blog

The Ballad Of Lizzie Warren

The following song lyrics were sent to me today by a fan of almost-our-fearless-leader-of-the-CFPB, Elizabeth Warren. The composer requested anonymity, and in order to protect the guilty, I will honor that request. It seems a fitting song for a day when things go bump in the night.

The lyrics are intended to be sung to the tune of "The Ballad of Lizzie Borden" by the Chad Mitchell Trio. For those who need a brief refresher on that melody, please consult the embedded video below.

The Ballad of Lizzie Warren
“Lizzie Warren took an axe, and gave her banker 40 whacks,
And when the job was over and done,
She gave her lender 41.”

Yesterday in old Fall River, Mr. Warren’s homestead died,
And they got Lizzie Warren on a charge of foreclosure homicide
Some folks say she didn't do it others say of course she did
But they all agree, Lizzie Warren was a problem kinda kid

'Cause you can't foreclose your papa up in Massachusetts
Not even if it's planned as a surprise
No, you can't foreclose your papa up in Massachusetts
You know how neighbors love to criticize

Well, she evicted him last weekend when he thought he'd take a snooze,
And I hope the weathers warm now, 'cause he wasn't wearing shoes
Lizzie dispossessed him of his housing with the sheriff so they say
Then she got her mother in that same old fashioned way

But you can't foreclose your mama up in Massachusetts
Not even if you're tired of her cuisine
No can't foreclose your mama up in Massachusetts
You know it's almost sure to cause a scene

Oh the protesters really kept her hoppin on that busy Saturday afternoon
Chasing her up and down the stairwell while she hummed a ragtime tune
But she took her parent’s furniture in a manner that was neat,
And placed all their possessions and her parents in the street.

Now you can't foreclose your mama up in Massachusetts
And then blame all the damage on the mice
No you can't foreclose your mama up in Massachusetts
That sort of thing just isn't very nice.

Now it wasn't done for pleasure and it wasn't done for spite
And it wasn't done because the lady Lizzie wasn't very bright
She'd always done the slightest thing that the mortgage lender bid
They said, "Lizzie, throw their butts out!" so that's exactly what she did!

But you can't foreclose your parents up in Massachusetts
And then get dressed and go out for a walk
No you can't foreclose your parents up in Massachusetts
Massachusetts is a far cry from New York

Just Put On A Happy Face

Last Wednesday, I was on a panel with Joseph Lynyak of Pillsbury Winsthrop Shaw Pittman LLP and Dr. Marsha Courchane of Charles River Associates, at the biennial conference of the Harland Financial Solutions Network of  State & Federal Counsel. The topic of the panel's discussion was "Putting It All Together: A Forward Looking Discussion." Dr. Courchane gave us some distressing statistics concerning community banks, including (1) the top five banks' share of total industry assets has leapt from 33.8% at the end of 2005 to 42.6% at the end of 2010, and (2) in 2008, banks with less than $1 billion in assets had increased small business lending by $4.2 billion and single family residential lending by $17 billion, while in 2010, the same category of banks saw small business loan holdings fall by $8.9 billion and residential loan holdings fall by $19.5 billion. After she finished, I got a chance to give my view of the pressures I see on community banks and where I see the the industry headed. I'll give you the "CliffsNotes" version of my rant:

• According to the FDIC, community banks (banks with assets of $1billion and less) hold only 11% of the industry's assets, but make 40% of the small business loans. Since small businesses have traditionally accounted for the majority of new job growth, that's not great news for the economy.
• Since 2008, nearly 75% of the banks that have failed (309 out of 415 through October 21, 2011) have been community banks.
• Even prior to the creation of the Dodd-Frankenstein monster, there was a campaign by certain federal regualtors to reduce the size of the banking business. Over twenty years ago, then-Comptroller of the Currency Bob Clake was calling for the reduction of the size of the banking business, complaining that there were simply too many banks for the business to be profitable. We halved the number of banks since then. We're down from a peak of 13,000 independent banks in 1960 to around 6400 today. In the current crisis, certain voices within the federal banking agencies are again calling (soto voce this time around) for further reductions in numbers. How many is too may? Is 4000 the magic figure, or do we shoot for the Canadian Model and keep rolling until we're down to a handful?
• While current complaints about Dodd-Frank focus on its compliance costs and "diversion of human resources" costs, Dodd-Frank (and the feared CFPB it birthed) are only two negative factors that are beating down community banks. Others include:

Overly conservative examiners, zealously fighting the last war while simultaneously hindering new lending and the resolution of existing problem credits, and, in a number of cases, rendering problematic the survival of institutions;

Dwindling traditional sources of interest income, since (a) CRE is anathema; (b) quality small business borrowers are few and far between; (c) big banks are starting to poach small business borrowers they formerly disdained in order to deploy the cash that would otherwise stand idle; (d) historically low interest rates are expected to stay low for at least the next two years; and (e) net interest margins have shruken to the size of that portion of Charlie Sheen's brain that controls judgment.

Restrictions on fee income, including (a) debit card interchange fees, thanks to the Durbin Amendment (and no community banker I've spoken with thinks the exemption for smaller banks will "stick" in the market place over the long haul); (b) restrictions on overdraft fee income through regulatory "guidance" and class action litigation; and (c) the prospect of the president, in league with the CFPB, using the threat of "unfair" and/or "abusive" scare tactics to beat back unpopular fees like the recently proposed monthly debit card fees that the big banks tried to "float."

In other words, for the little guys, it's hard to make a buck, and where's the light at the end of the tunnel? Oh, yeah there it is. Unfortunately, it's the headlight on a locomotive with the throttle full open and headed our way.

What's the prospect? What all the pundits have been predicting: consolidation. The big-and-rich will get bigger and richer while the number of smaller independent banks will continue to shrink. I don't see the United States ever getting to the point where the only banks that exist are The Big Five, and there will still be niches where community banks will survive. However, unless circumstances change (and that's always a possibility), the future looks bleak to me.

After my little rant finished, Joe Lynyak commented that it was obvious that "Kevin's a glass-half-full kind of guy." I had to agree that I'm a cockeyed optimist. The audience's laughter was akin to that of troops in the trenches after a long siege. And we're only part-way through this particular war.

Balancing The Ledger At The FDIC

I'm attending the Harland Financial Services Network of State & Federal Counsel annual conference this week, and will not be posting again until next week. For some unknown reason, they asked me to speak at a couple of the sessions, so I'll be otherwise occupied.

If you're bored, you might spend part of this week speculating on the recent announcement by The White House that former Kansas City federal Reserve Bank president Thomas Hoenig (a Bank Lawyer's Blog favorite) has been nominated as vice chairman of the FDIC. He's a supporter of community banking and an opponent of the entire concept of "too big to fail," and a critic of Dodd-Frank, so community bankers were pleased with the nomination. Whether any nominations will be processed through the dysfunctional kindergarten known as "The US Senate" is the subject of much speculation in the press. On the other hand, it would be a nice change of pace to have someone at the FDIC who's not a consumer advocate in bank regulator's clothing.

Dimon In The Rough

With fringe elements of Occupy Wall Street and The Tea Party currently spazing out so far into the ether of the opposite ends of the political spectrum that they are likely to join hands on the far side of the moon, I think it's safe to say that for vast segments of the American public, when Jamie Dimon talks, nobody listens, especially when what he's talking about is how the Volcker Rule "might" make the largest American banks less competitive with their foreign counterparts. He could be right, he could be wrong (he could have sworn he saw a light coming on*), but I guarantee you that most people reading that interview at this moment in time don't care. They may in a year or two, but today they simply can't work up an ounce of concern that JPMoragan Chase's trading profits were down $900 million for the quarter and that the Volcker Rule might exacerbate that problem.

Also lost in the overriding barrage of white noise emanating form the fringes of inner space is Dimon's very sound admonition about unintended consequences (a topic near and dear to our black and withered hearts).

“Maybe excessive risk was taken by some people,” Dimon said, but added that regulators and the government shouldn’t do things without understanding the full implications.

Sorry, Jamie, that train left the station a long time ago and has been in run-away mode for a while.

Strangely (or not-so-strangely, for those who consider Dimon a thoughtful man), he feels the pain of the people who think he and his ilk deserved to be shot down without being given a running head start.

When asked about the Occupy Wall Street protests that have grown from a few citizens to a global movement, Dimon said he could understand why everyday Americans are upset.

“You have to be looking at Washington and the big banks and asking what is going on,” he said, adding that job creation is key to getting the economy back on track.

It's not merely that "everyday Americans" are looking at Washington and the big banks and asking "what's going on?" It's that they're looking and asking "Where'd I put that cattle prod and my box of spare of RPGs?"

*obscure reference to Radiohead's "I Might Be Wrong"

Energy Conservation Through Loan Underwriting

Because there aren't enough impediments already standing in the way of the revival of the residential mortgage market, two US representatives, Democrat Michael Bennett of Colorado and Republican Johnny Isakson of Georgia, have decided that now is the perfect time to introduce federal legislation to require Fannie Mae and Freddie Mac to include a borrower's "anticipated costs of energy" in the monthly cost of housing that's used in debt-to-income ratios to qualify (or disqualify) potential borrowers.

While lip service is paid to the idea that this radical change in underwriting requirements (which is likely to disqualify applicants who buy older, less energy-efficient homes) is required to properly underwrite mortgage loans (although it hasn't been deemed necessary in previous decades), the real reason for the requirement is gleaned from the fact that one of the major lobbying groups for the measure is the National Resources Defense Council. It wants to push its radical "greening" of America agenda by using home loan underwriting to "encourage" energy conservation. Isakson and Bennett claim that their so-called SAVE Act would "clear borrowers to finance cost-effective home energy upgrades as part of the mortgage." Really?

Community bank lender Tim Cornelison (a constituent of Isakson's) is dumbfounded and enraged that at a time when the residential mortgage market is hurting so deeply, "policymakers would consider including such a hazy variable into an already tight underwriting process."

"The idea that utility costs are not factored into the decision process on a mortgage is a misconception and comparing energy costs to taxes and insurance is insane. If you own a home you must pay taxes and if you have a mortgage insurance coverage is required and specified by the lender. Energy consumption varies greatly from household to household in identical residences," Cornelison said.

[...]

"Energy conservation is important but enforcement through underwriting is impossible," Cornelison said. "An underwriter's job is to assess risk and they are not trained to measure energy efficiency. Local governments should establish and enforce conservation regulations through building standards and energy codes that are appropriate for their communities."

A spokesperson for the NRDC doesn't focus on the basic issue of whether or not it's good for the economy as a whole at this point to throw more glue into the wheels of the residential mortgage underwriting process. Instead, like all true believers, he merely assumes that his cause is not only just, but trumps all other considerations. His only focus is on the fact that, mechanically, Freddie and Fannie could "get 'er done."

I was surprised that the US Chamber of Commerce also publicly backed this bill. I thought they were preoccupied with their never-ending campaign to ensure that meat-packing plants, vegetable farms, and restaurants in this country have a steady supply of illegal immigrants who, because they fear deportation, will work for the slave wages that those industries want to pay and under often miserable working conditions that unionized laborers wouldn't tolerate. The cynicism of all concerned is enough to turn a capitalist whore into a populist prude, albeit one armed with a pitchfork, a torch, and an AR-15.

Add Bennett and Isakson to the list of those who must not be given another term.

Community Bank: We'll Pay You To Use Our Debit Card

Having read recently on this blog of my initial impressions about Bank of America's $5-a-month debit card fee, Lauren O'Connell of O'Connell Consulting Group, Inc. thought I (and my readers) would like to know that one community bank (appropriately named "Community Bank") has turned BofA's scheme on its head.

Community Bank, which has 17 branches throughout Manatee and four other southwest Florida counties, is joining the outcry against bank debit fees by offering new customers the opposite: a monthly payment.

The $5 per month Community Bank is offering anyone who opens a Value Checking account is a direct response to the $3 to $5 monthly debit card fees larger banks are starting to charge, bank officials said.

“We needed to do something to help consumers who are under attack from behemoth national banks charging fees that just don’t make sense,” said Katie Pembles, Community Bank president. “People have a choice of where to bank, and at Community Bank, we thought paying people $5 per month rather than charging them $5 per month was a good way to set us apart.”

Pembles said Community Bank “doesn’t think we have to charge $5 a month to make an account profitable.”

Lauren e-mailed her take on the marketing campaign. She's a marketing consultant, and I take her views seriously.

Existing customers are not eligible, which breaks one of my rules - never give a new relationship a better deal than a current loyal customer. Sure it's done but it stinks when you're the current customer. How can a bank say - with a straight face - that they value their customers and build real relationships with them when they're willing to give a better deal to someone they've just met?

Another rule they broke - the offer is not yet prominently featured or promoted on their website, unless they updated it between now and when this email was released.

On the other hand, they have certainly gathered some attention by distinguishing themselves from the big banks who are charging "unbelievable" fees in reaction to the changing debit card landscape.

Such interesting times - choose your debit card pricing strategy carefully.

"Interesting times" indeed. I'd say whether or not Community Bank broke some marketing rules, it more than made up for it in scads of favorable publicity. However, I'm just your average bank shark, so what do I know about "marketing"?

 

I Can't Agree On Agreement

A reader commented that the letter by Peter Welch and five Democratic congressmen to Eric Holder that demands that the US Justice Department investigate big banks and their trade associations for price fixing on debit card fees, like the $5 fee announced by Bank of America, proves a point I made last night: members of Congress don't get basic business principles. While I think the fact that losing half their interchange fee income through the Durbin Amendment and the FRB's implementation of its provisions means that banks must look for ways to replace that lost income, and that monthly or "swipe" fees are a pretty easy place to start, is a no-brainer (which may explain why Congress can't grasp it), I think the more likely explanation for the demand letter is that it's nothing more than a cheap political publicity stunt. Welch and his cronies probably high-fived one another and yelled "MIssion Accomplished" as soon as the story was picked up by the wire services. They were "placing their marker" on the issue and couldn't find a convenient fire hydrant.

Maybe people within the Occupy Wall Street* crowd concoct scenarios where cloaked cabals of bankers sit around a conference room on Wall Street in the wee hours, and decide that the Dark Lord Baal demands that they all must charge a monthly debit card fee of $5 and, while they're at it, each must throw 42 virgins and 127 babies into a fire pit, but those of us who live our lives outside the pages of a Robert Ludlum novel understand that Wall Street bankers and horses have a lot in common. While they all may stampede in the same direction if startled, say by a bottle rocket exploding over their heads at night (not that my brothers and I ever did such a thing as teenagers), their normal course of conduct is to approach their peacefully grazing brethren and bite them in the haunch or kick them in the ribs because...you know...that's the way God made them. Conspiring to set the same fee on a product, when any one of them can steal business simply by undercutting the others, doesn't pass the laugh-in-your-face test. My guess is that Holder casts Welch's letter into the circular file and pours himself a stiff tumbler of Dewar's.

Then again, I sustain myself not by eating solid food, but by taking a straw and sucking the sweat from the brow of the proletariat. Thus, all Occupy Wall Street* aficionados should take what I say with a grain of salt (which they should throw over their shoulder, spin three times in a complete circle, and exclaim Vladimir Lenin's immortal line: "Any cook should be able to run the country." ).

*For bankers looking for a populist movement to get behind, on this morning's drive-time show, sports tak radio station KTCK's The Musers' Craig Miller announced the launching of his movement to protest the lack of an octopus exhibit at the Dallas Zoo. The name? "Octopi Dallas." Gordon Keith confessed that he's been too busy and distracted lately to launch his own movement, "Preoccupy Dallas." Either of those is worth a serious look.

 

MetLife Home Loans Sells Out

The lovers of the idea that United States needs just a few humongous banks that dominate our financial products must take hope from another unintended consequence of the wonderful world unleashed by Dodd-Frank, the CFPB, and the Federal Reserve Board: the consolidation of the mortgage origination and servicing businesses.

MetLife Bank, a division of insurer MetLife Inc., is selling the bank's mortgage business, citing uncertainty in the marketplace and a regulatory environment that requires excessive resources.

The company said devoting people and capital to handle the regulatory environment in the mortgage space "would divert these resources away from MetLife's primary focus on its global insurance and employee benefits businesses."

.[...]

In 2010, MetLife Home Loans ranked as the 11th largest mortgage servicer in the U.S., with its servicing business valued at $115.9 billion in the fourth quarter. The company also ranked 13th on the list of mortgage originators, holding 1.4% of the market and originating roughly $22 billion in mortgages last year.

If giants like MetLife find the post-Dodd-Frank regulatory regime too burdensome to justify continuing in the residential mortgage lending business, how do you think the pygmies (i.e. community banks) feel?

According to statistics I've recently reviewed, the top five residential loan originators originated over 70% of all 1-4 family mortgages in this country last year. How's that for a competitive environment? Only those with the size to fund huge compliance and in-house legal staffs and hire the most sophisticated outside legal advisers as needed, will be able to keep their heads above the break-even surface of a sea of regulatory red tape.

This is all entirely predictable to anyone with any basic business sense. Apparently, that doesn't include a majority of the members of the US Congress.

Getting Down With The Lizster

I was going to comment on the CFPB's new mortgage servicing examination guidelines. One of my favorite "concerns" of the CFPB is to ensure that delinquent homeowners are given all of the various alternatives to foreclosure. Do you think the CFPB will ding servicers who don't tell borrowers that one of the alternatives is to "make your damn loan payments on time"?

However, that hot topic will have to take a back seat because a reader sent me Liz Warren's potty-mouthed, beer-swilling video announcing her Senate run against Scott Brown. If Liz talked like this to me, I'd make mad, passionate love to her. And that would be a just punishment for both of us.

I want one of those "revenge vouchers."

Putting Your Money Where Your Rage Is

I was trying to decide which group, Occupy Wall Street or The Tea Party, better epitomized the "little ball of hate" approach to political discourse and I could not decide. Therefore, I've decided to join both groups, so that I can become a living, breathing version of Munch's painting "The Scream," 24/7/365. While Dean Wormer may have told Flounder that "Fat, drunk and stupid is no way to go through life, son," I'm pretty sure he never said a word about going through life "enraged."

According to The Puget Sound Business Journal's Kelly Giblom, big banks in this country are presently receiving boatloads of rage as a result of their recent adventures in fee-raising. At the same time, however, they're also the recipients of boatloads of something that doesn't seem to be consistent with rage: cash.

A flurry of data released today by the Federal Deposit Insurance Corp. shows those big banks have seen a significant jump in deposits in King County since last year. Meanwhile, smaller, state-based community banks have not seen a similar boost.

According to the FDIC, Bank of America had $16.47 billion in deposits on June 30, 2011, up from $15.39 billion the same day in 2010. JPMorgan Chase had $5.13 billion in deposits at the end of June this year, a $305 million jump from the year before. Wells Fargo and U.S. Bank also recorded large deposit gains of $632 million and $438 million, respectively.

Meanwhile, Washington Federal, the state's largest bank saw a more modest increase of about $4 million to record $2.55 billion in deposits on June 30, 2011. The state's second largest bank, Spokane's Sterling Savings Bank actually lost $71 million worth of deposits. It had $530 million in deposits in King County at the end of the second quarter.

I see Ariana Huffington's "Move Your Money" campaign has been a raging success (it never was in Texas, at any rate). Putting your money where your rage is directed is apparently something that defies the countervailing pull of cognitive dissonance. Of course, these statistics might also indicate that the reports of public anger and rage at the big, bad banks are being exaggerated by certain elements of the press and political class, and that much of what we see enacted on our television and computer screens is more political theater performed by an activist minority than reflective of widespread popular discontent. Whatever the truth, it's unlikely we're getting close to it by watching the main stream media.