Bank Lawyer's Blog

Short Break

I'm attending and speaking at Harland Financial Services Connections Annual Conference in San Diego this week. I'll be "off-blog" until after the Labor Day holiday. I hope everyone has a good holiday weekend.

San Bernardino To Residents: Thanks For Sharing, But Get Lost

Notwithstanding public opposition, San Bernardino recently decided to move forward (paid subscription required) with exploring a plan concocted by Wall Street wizards (previously discussed here) to use public funds to line their own pockets through the condemnation of mortgages on underwater homes.

During an hour-long meeting, the county's board of supervisors listened as 18 citizens, local activists and mortgage lenders all objected to a plan initially proposed by a San Francisco venture capital firm Mortgage Resolution Partners to use eminent domain to purchase and refinance loans.

Some homeowners voiced their mistrust of the venture capital firm and questioned its relationship with county officials. A few Realtors and lenders who also are homeowners in the county are also concerned that if the county uses eminent domain to seize loans, lenders would pull out of the market, reducing accessing to credit for future borrowers and potentially dragging down home prices.

The County Board of Supervisors then gave those testifying the finger and "unanimously passed a resolution authorizing its staff to create a request for proposal, a formal mechanism for considering plans to address the glut of underwater borrowers." The supervisors are apparently tone deaf when it comes to listening to their constituents sing a song of warning. According to the linked article in the American Banker, some of the testifying residents excoriated certain county officials. Still, those complaints didn't deter the County from proceeding to see what they could do to strong-arm lenders into coughing up mortgage loans at bargain prices.

There's a slight problem with this approach, according to one layer who specializes in eminent domain law. It runs afoul of the California constitution.

In California, any party to an eminent domain case can request a jury trial to determine the value of the property or loan being condemned, says Rick Rayl, an eminent domain attorney and partner at the Irvine law firm Nossaman LLP.

"I think the concept is an interesting one but it just doesn't work financially," Rayl says. "The entire plan depends on the initial loans being acquired at well below their face value and well below the value of the underlying property."

Where there's an ideology, there's a way, Rick. No little piece of aged parchment is going to stop these folks from doing what they know is best for all concerned. Constitutional roadblocks are for pansies, not for Panzers. They'll roll right over those minor speed bumps like they weren't even there.

On the other hand, sending out an RFP is a long way from actually doing anything substantive. There's still plenty of time for the supervisors to claw their way back to reality. Let's hope they stop munching poppies and clear their heads before they cause even more damage to a county that can ill afford it.

Schooling The Novices

Several blog readers have "bugged" me about the recent articles concerning the eyebrow-raising expenditures of the CFPB that were recently lambasted by the conservative watchdog group Judicial Watch. MarketWatch ran a story last week on the group's findings and CNNMoney (and some of the trade press) picked up on the kerfuffle this week. When I say "bugged," I mean asked me to engage in grave and heinous snarkbaggery on the CFPB, in a fashion they've come to expect. However, after carefully considering the matter and giving the CFPB the benefit of the doubt, I've decided to be not only judicious in my comments, but generous, as well.

Who am I kidding?

Among the more amusing findings was the expenditure by the CFPB of $4,500 in tuition to send six CFPB lawyers to a basic banking law class. While the CFPB claimed that these expenses were merely to pay for ongoing continuing legal education requirements imposed by the various state (and DC) bars in order to retain a license to practice law, the choice of the basic course overflows with irony.

In pursuing the invitation to enroll, Enforcement Attorney Christina Coll emailed Acting Litigation Deputy Deborah Morris on May 4, 2011, saying: "This looks like an awesome agenda for a banking world novice like me." While Ms. Coll's salary is unknown, according to records previously uncovered by Judicial Watch, other Enforcement Attorneys received starting salaries as high as $173,000 per year.

The fact that CFPB paid to train its attorneys in banking law fundamentals at taxpayer expense appears to contradict congressional testimony from then-interim CFPB head, and current Massachusetts Senate candidate, Elizabeth Warren in 2011 regarding the experience level of the agency's highly paid attorneys.

During a May 24, 2011 hearing, U.S. Rep. Ann Marie Buerkle asked why starting salaries at the agency exceeded Office of Personnel Management (OPM) standards by up to 90%: "How do you justify that kind of a disparity in salaries between a government worker and the folks that are going to be hired by your regulatory agency?" asked Rep. Buerkle. Warren defended the salaries, saying the consumer bureau is competing with the financial services industry for talent and "we'll never be able to pay like the financial services industry pays."

I, too, have to obtain CLE credits each year. I do so by teaching, writing, and speaking on an area of the law related to "banking." That's one of the reasons that this blog title contains the words "bank lawyer." I'm living proof of the theory that if you sit a monkey at a typewriter for decades, he'll eventually bang out something readable. On the other hand, to claim that you need to pay high salaries to attract hired guns with the necessary banking law expertise who then need to attend a basic course on banking law that's taught buy outside "experts" because the hired guns are "novices" on the law of the industry they're supposed to be experts on, strikes some as odd, others as downright laughable.

Warren might have a point regarding the private sector salaries if we were discussing people possessed of the degree of expertise that Ms. Warren implied the Bureau was seeking. If you're hiring a banking novice for $173,000 a year, you're overpaying, whether you're comparing the CFPB to the private sector or to a government agency. Moreover, twenty-one starting salaries of $225,000 and more does seem a bit steep, even for the most powerful, lightly supervised federal bureaucracy ever created.

The criticism of $465,000 in expenditures for sign language services might have an explanation. I expect that this contract originated when Cherokee Princess Liz ("Fauxcahontas") Warren was expected to lead the charge. She likely wanted to ensure that she could fully protect her "peeps" from the depredations of predatory lenders and the lawyers who love them. I get that. In addition, the CFPB has only used $54,000 of the $465,000 thus far. Unfortunately, an anonymous source claims that this amount was not used to assist an actual person with disabilities, but to train the CFPB's pet orangutan Koko to sign "I Love Liz," "Banks Are Bad," and "Workers Of The World Unite! You Have Nothing To Lose But Your Chains!" Unfortunately, I cannot verify that claim.

One of my correspondents claimed that their favorite part of the CNNMoney article was the "clarification" at the end.

Clarification: While Judicial Watch criticized the CFPB for using taxpayer dollars on these expenses, the CFPB says it does not use taxpayer money since it is funded by the Federal Reserve.

Yes, the CFPB is funded by the Federal Reserve, which is required by law to turn over its annual net income, after paying dividends to its member banks and making certain other deductions, to the US Treasury. Therefore, every dollar wasted by the CFPB is one less dollar saved for the US taxpayer. That makes the "clarification" contention by the CFPB disingenuous, at best. However, let's give the CFPB the benefit of the doubt. They wouldn't know that the Federal Reserve pays tens of billions of dollars a year into the US Treasury unless they had a basic understanding of the way the US banking system works, and, as we've seen, their employees are "novices" when it comes to such matters.

CFPB delenda est!

Angelo? I Don't Know Any "Angelo"!

This is a not-so-shocking revelation:

A Democratic committee chairman overrode his own subpoena three years ago in an investigation of former subprime mortgage lender Countrywide Financial Corp. – excluding records showing that he, other House members and congressional aides got VIP discounted loans from the company, documents show.

The procedure to keep the names secret was devised by Rep. Edolphus Towns, D-N.Y. In 2003, the 15-term congressman had two loans processed by Countrywide’s VIP section, which was established to give discounts to favored borrowers.

After Republican Darrell Issa became the committee chairman, he issued a new subpoena and obtained the records he needed to confirm that Towns and four current House Republicans (as well as others) got "FOA" (Friend of Angelo) loans from Countrywide.

For several months in 2009, Towns refused to issue a subpoena for VIP loan documents to Bank of America, a position that became politically untenable after it was revealed in the media in August 2009 that he himself had two Countrywide loans.

The Issa committee report confirmed that the VIP section processed a 30-year, $182,972 loan to Towns for a vacation home in Lutz, Fla., and a $194,540, 30-year mortgage for his Brooklyn residence.

[...]

The original Towns subpoena had asked for all files that went through the Countrywide VIP unit, and specifically mentioned House members and aides. Bank of America sent a spreadsheet that identified 18,000 files that listed a borrower’s employer, but without names to maintain privacy.

The spreadsheet identified several files listing the House or Congress as the employer. Since the vast majority of the employers in the spreadsheet were of no interest to the committee, committee Republicans – then in the minority – and majority Democrats each drew up a separate list of loan files to be turned over by the bank.

The Republican list totaled 3,000 files and included borrowers listing the House as an employer. Towns narrowed the files to about 300 and excluded references to the House. It was Towns’ truncated list that went to Bank of America.

You have to hand it to these pols: when it comes to covering their own backsides, they can really be quite ingenious. When it comes to accomplishing anything useful for the American public, however, they're gasbags filled with inertia.

The four named Republicans all claim that they didn't receive preferential treatment and/or don't remember ever getting a loan from Countrywide and/or have recently been returned to Earth after being abducted by aliens and it was a doppelganger, not a human being, who obtained the FOA loan.

Is it surprising that when you Google this topic, up pops the Charlotte Observer (and Fox News, the Wall Street Journal, and the New York Post) but not the New York Times or the Washington Post? Of course not. As we observed last December, the FOA program abuses are "old hat," and although there's been much smoke generated over the program, when it clears, no one will have suffered any adverse consequences, political or otherwise. It's just business as usual in the hallowed halls of Congress.

Debtors Prison

The anti-lender bias in a large portion of the main stream media (and in a good chunk of the banking trade press, for that matter) is no better exemplified than by this recent article in the St. Louis Post-Dispatch, in which reporter Jim Gallagher waxes apoplectic about payday lenders throwing hapless consumers into "debtors prison."

The Bill of Rights in the Missouri constitution declares that “no person shall be imprisoned for debt, except for nonpayment of fines and penalties imposed by law.” Still, people do go to jail over private debt. It's a regular occurrence in metro St. Louis, on both sides of the Mississippi River.

Here's how it happens: A creditor gets a civil judgment against the debtor. Then the creditor's lawyer calls the debtor to an “examination” in civil court, where they are asked about bank accounts and other assets the creditor might seize.

If the debtor doesn't show, the creditor asks the court for a “body attachment.” That's an order to arrest the debtor and hold him or her until a court hearing, or until the debtor posts bond.

That's analogous to having the police arrest a person who's been charged with contempt of court for not showing up for a court hearing (which this is, by the way), or reporting for jury duty, or for giving a judge the finger. It's not throwing someone in the slammer because he or she hasn't paid a debt. It's throwing them in prison because they've disobeyed the law.

Critics of "body attachments" aren't swayed by such arguments, though. To them, the practice is pure evil, squared.

The practice draws fire from legal aid attorneys and some politicians. They call it modern-day debtors prison, a way to squeeze money out of people with little legal knowledge.

Debtors are sometimes summoned to court repeatedly, increasing chances that they'll miss a date and be arrested. Critics note that judges often set the debtor's release bond at the amount of the debt and turn the bond money over to the creditor -- essentially turning publicly financed police and court employees into private debt collectors for predatory lenders.

“You wouldn't want to be spending taxpayer money to collect $400 and $500 debts. Don't the county police have something better to do?” asks Rob Swearingen, attorney for Legal Services.

Sure they do. There's a donut with each officer's name on it waiting at the local Dunkin', but every once in a while, the police have to do what they were originally intended to do when police forces were first created by kings: prevent the aggrieved from engaging in self help.

The purpose of the post-judgment hearings that are discussed in the story is obvious: to permit the creditor to determine whether the debtor (against whom the creditor holds a judgment rendered by a court) has any non-exempt assets against which the judgment can be satisfied. These procedures have been around for a long, long time, and until the Occupy My Cranium crowd decided that 99% of the population should get something for nothing and their chicks for free, nobody seriously objected. Now, however, the horror of the coming Zombie Apocalypse is exceeded only by the horror of creditors expecting to be repaid the money they've loaned.

Much is made of the fact that the governor and attorney general of Illinois were so "outraged" by "body attachments" that they led the charge to enact a law that "restricts body attachment for civil debt." It's not until nearly the end of the very long, slanted article, full of human interest sob stories of debtors who pay as much attention to court orders as they did to their debts, that the nature of that "restriction" is discussed in any detail.

The new law in Illinois forbids body attachments in private debt cases if the defendant doesn't appear for an examination hearing. Instead, the judge may issue a second summons, threatening a contempt of court action. Only if the defendant skips again can an arrest be ordered.

Debtors can't be repeatedly summoned for examinations unless the creditor has evidence that the debtor's circumstances have changed. And bond money can no longer be routinely turned over to creditors.

The law also changed the practice of summoning debtors by mail. Now the summons must be given to them personally, or to someone at their home. Missouri requires service to the person or someone in the household over age 14.

That's not exactly suppressing the right to summon debtors to court for examination or throwing them in jail if they ignore the court. While it may require more than one "no show" now to merit arrest, and while crafty creditors' counsel who play games with the system to try to pressure debtors into coughing up some cash will have a much harder time doing so, the "outrage" displayed by the Illinois AG and Governor seems more fueled by populist posturing by politicians and their supporters in the press corps who love to stoke the fires of class warfare than it does over any sense of fundamental fairness. The contempt for, and mischaracterization of, long-standing judicial processes designed to ensure that creditors have adequate remedies to collect the debts owed to them and to enforce judgments rendered by courts is more than a little cynical.

Then again, it's an election year.

On a related matter: I wonder if I can concoct a way to secure a body attachment on Scarlett Johansson?

In Georgia, The Business Judgment Rule Is Alive And Kicking

This past Tuesday, a federal district court judge in Georgia found that in The Peach State, at least, officers and directors aren't liable for ordinary negligence. As discussed in a recent blog post by Kevin LaCroix, the business judgment rule is apparently alive and well in Georgia and it protects both officers and directors.

In an August 14, 2012 opinion in the FDIC’s lawsuit against former directors and officers of the failed Haven Trust bank, Northern District of Georgia Judge Steve C. Jones affirmed that Georgia’s business judgment rule is applicable to the actions of bank directors and officers. Based on that determination, Judge Jones dismissed the FDIC’s claims against the directors and officers for ordinary negligence and breach of fiduciary duty. Judge Jones also ruled that the FDIC must replead its gross negligence claims against the former directors and officers to provide specific allegations as to each defendant’s alleged involvement in or responsibility for the alleged wrongdoing.

[...]

In his August 14, 2012 opinion, Judge Jones granted the defendants’ motions to dismiss the FDIC”s claims for negligence of for breach of fiduciary duty. He determined first that, contrary to the arguments of the FDIC, t was appropriate to consider the business judgment rule at the motion to dismiss stage. Judge Jones then went on to conclude that “when Georgia’s business judgment rule is applied to claims for ordinary negligence, Georgia courts hold that such claims are not viable.” He also specifically confirmed that the business judgment rule is applicable in the banking context. Based on these determinations, Judge Jones dismissed the FDIC’s claims for ordinary negligence and breach of fiduciary duty (based on ordinary negligence).

Judge Jones denied the defendants’ motion to dismiss the gross negligence count, finding that “the complaint has alleged in a collective/group manner sufficient facts for which a jury might reasonably conclude that Defendants were ‘grossly negligent’ as defined by Georgia law.” However, noting that the “factual allegations must give each defendant ‘fair notice’ of the nature of the claim” against them, Judge Jones ordered the FDIC to replead its gross negligence claim “to provide specific allegations as to each Defendant’s involvement or responsibility for the alleged wrongs, decisions, approvals, transactions and loans referenced in the original Complaint.”

As Kevin also points out, this ruling is consistent with earlier rulings by the same judge in connection with claims by the FDIC against former officers and directors of another failed Georgia bank. Those rulings are significant for a number of reasons, among them the fact that, since the state of Georgia is apparently the elephant graveyard of community banks that concentrated in commercial real estate lending, these rulings could affect claims made against the officers and directors of failed banks where the FDIC has not yet decided to file suit, and might influence the decision of the FDIC as whether it's advisable to even file some lawsuits.

Kevin discusses briefly a recent decision by a federal district court in Florida that Florida law precludes the FDIC from pursuing claims of ordinary negligence against former bank directors, although the decision does not address the liability of former bank officers for ordinary negligence. As we've discussed previously, federal district courts in California have come to opposite conclusions on the applicability of the business judgment rule to former bank officers in that state. Thus, in some states, the state of the law appears to be "unsettled." We await federal appellate court decisions on these issues with interest.

For those interested in this topic, I'll be on a panel at the Harland Financial Services Connections Annual Conference with good friend Joe Lynyak of Pillsbury on August 28th in San Diego, discussing the lessons that failed banks can teach the officers and directors of "good" banks. I'll be giving a variation of the same presentation, this time with my law firm colleague Christian Otteson, at the Missouri Independent Bankers Association annual convention's "Hot Topics" session on September 11th. The MIBA insisted that only bald guys address them on this topic and Christian and I were pleased to oblige. Finally, I'll be the keynote speaker (flying solo this time) at the National Association of Federal Credit Union's Regulatory Compliance Seminar in Seattle on October 23rd with a version that's geared toward giving tools to credit union compliance officers that they can use to protect their officers and directors (including themselves) from the NCUA's gentle second-guessing, which can be disturbingly similar to the FDIC's. Following that speech, I'll likely retire the topic for awhile in order to prevent myself (and my audience) from the onset of sudden narcolepsy. Unless, of course, someone in Honolulu would like another dose, in which case, I'll make the sacrifice.

CFPB Solicits Undercover Brothers (And Sisters)

Not content with exercising its virtually unchecked "right" to probe into every nook and cranny of a financial institution's affairs (including those protected by attorney-client privilege) in the bright light of day, a recent article in The Washington Times disclosed that our favorite federal watchdog is recruiting operatives "to go undercover to pursue cases against banks, credit card companies and other financial companies."

“As needed,” one recent recruitment ad stated to potential investigators, “establish and conduct surveillance activity to develop both intelligence and evidence to further investigations. Utilize surveillance activities to identify subjects, their activities and their associates, corroborate source information and collect evidence.”

In keeping with its consistent pattern of paying its minions above market wages, annual salaries for the spies will range from $98,000 to $149,000. Surely, that's not too much to pay folks who will be putting their lives on the line 24/7/365 in situations where, if their cover's blown, an angry teller could stuff an exploding die pack down the front of their boxers or briefs.

The recruitment effort also makes clear that while working under enforcement lawyers, investigators would be assigned to “delicate matters, issues and investigative problems for which there are few, if any, established criteria.”

"Delicate matters." As delicate as ferreting out the exact percentage of Cherokee DNA in Liz Warren's personal genome? As delicate as building switchbacks up Joe Biden's backside to delicately remove his head? As delicate as Leonard Nemoy's task in his episode "In Search Of: Maxine Water's IQ"?

Perhaps not THAT delicate, but still...

And how are we, the average citizen, who might unknowingly befriend such a sleuth and find ourselves caught between our personal concupiscence and our tattered sense of right and wrong in a trap sprung on us by a mole who betrays our trust and, like a Pod Person, screams our guilt to a crowd of brain-eating CFPB zombies, to be assured that we won't be "entrapped" or otherwise have our rights abused by these agents of the KGB CFPB?  The CFPB responds soothingly: "Trust Us."

“Investigative work conducted by our staff will be covered by Consumer Financial Protection Bureau policies to ensure all practices comply with applicable laws and regulations and protect individuals’ privacy rights,” said bureau spokeswoman Moira Vahey.

Yes, you heard her correctly: she's saying "No worries, mate! We'll police ourselves."

One is reminded of Otter's famous line to Flounder in the movie "Animal House," after the frat brothers had wrecked Flounder's brother's Caddy: "You F***ed up! You trusted us!"

A similar plan at the Department of Health and Human Services was scrapped last year after some members of Congress complained that it amounted to spying. Health officials wanted to send “mystery shoppers” into doctors’ offices to gauge Medicaid and Medicare patients’ access to primary care physicians.

Thus, there's hope that in an election year, the CFPB's plan will generate enough publicly partisan sniping to at least delay the start of "Operation Recess Richie On The Down-low" until a new Congress can clip the wings (and tail, wings and beak) of the CFPB. Then again, the article notes that the FTC last year approved an operation that sent undercover adolescents into their local Game Stop or Best Buy sans adults to try to purchase "M"-rated video games, so there is precedent for this sort of high-level espionage operation.

Because this involves a left-wing operation by The Leviathan, the usual suspects who customarily scream publicly about any government interference in our lives (like spying on potentail al-Quaeda members or using the words "under God" in the Pledge of Allegiance) are not-so-strangely slient.

The American Civil Liberties Union (ACLU), which has criticized many federal government surveillance activities, declined to comment on the consumer bureau recruitment ad.

CFPB delenda est!

A Modern-Day Diogenes, In Search Of One Honest ATM

One of the pleasures of writing a blog for the sheer hell of it is the connection I make with like-minded, off-kilter bankers and bank lawyers from all over the world, including, most prominently, South Park, Colorado. I recently received an email from a group of bank lawyers in a state south of the Mason-Dixon Line who have been running into one of my favorite Bête Noires: lawsuits over missing ATM external notices. It was too amusing not to share.

To protect them from the type of hate mail I receive on a regular basis, they'll remain anonymous. Here's their email, only slightly edited to protect the guilty.

Kevin,

I thought you would enjoy this one. We are involved in a number of ATM fee disclosure lawsuits for financial institution clients (you know “the sticker is not on the outside of the machine so you owe me damages and most importantly, attorney’s fees”).

We have now seen 7 identical complaints filed, three in [our state] this week. Same plaintiff, same lawyer. Apparently the plaintiff, who is a New Yorker (according to the pleadings), is on a summertime tour of southern ATMs.

As one of my partners said: “This guy is the Diogenes of ATMs—traveling the world looking for an ATM with a fee notice, but apparently unable to find one.” To which another replied, “Maybe it’s just a North-South thing, him being a New Yorker, sojourning through the South for some July heat . . . and suffering the pains of withdrawing money from at least seven different Southern ATMs, operated by 7 different banks, all of  which apparently  lack a notice to his satisfaction . . . .”

 As to how he is doing it, after some research we found this photo:

Finding one honest ATM appears to have taken its toll on Superman.

Before Her Time

Today's brief press reports that OCC Chief Counsel Julie Williams is retiring next month brought to my mind a blog post from January 2005. Long before Liz Warren rode off the Cherokee reservation and into our hearts, Julie was a strong advocate for the simplification of consumer disclosures. It's hard to believe that an attorney so often villified by the politcally correct for her (effective) support for the federal preemption "rights" of national banks (and, before that, of federal savings and loan associations) could be considered ahead of the curve on a consumer rights issue, but the facts are always an antidote to the poison of ideological cant.

Here's the post, in its entirety. It's worth another read, if only for her advice to throw lawyers out of the room.

***************************************************************************************************************************

In a speech today, Acting Comptroller of the Currency Julie Williams calls for nothing short of a revolution: consumer disclosures that actually disclose useful information in an understandable manner!

As Williams notes, the entire point of consumer disclosures that are mandated by federal law is to provide consumers with important information so that that they understand the risks of the loan or other transaction into which they are entering, and can weigh those risks for themselves. If they can't understand the disclosures, they won't be able to properly weigh the risks.

So how is the US Congress doing in achieving that goal through the use of the numerous disclosure forms that it has required over the years? According to Williams, "this system is on the verge of breaking down." Why? "Not because  consumers are getting too little information, but because they are getting too much information that's not what they're really after; and because the volume of information presented may not be informing consumers, but rather obscuring what's most helpful to understanding of financial choices."

The burden on the banking industry of complying with such disclosure obligations is enormous, especially on smaller community banks. Williams contends that compliance with Gramm-Leach-Bliley privacy notices alone involves hundreds of millions of dollars annually. Such burdens, Williams also contends, threaten the viability of the community banking system.

What should be done? Williams has suggestions for all parties:

• For Congress: "First, that Congress should consider more emphasis in financial services legislation on articulating the goals to be achieved through a particular consumer protection disclosure regime, rather than the precise elements of mandated disclosures. And, second, that Congress should look for opportunities to require, and please provide adequate time for, regulators to include consumer testing as part of their rulemaking processes." In other words, quit having lawyers draft the rules, and let consumers have input, so that the rules will be in a format that consumers understand. Williams uses the FDA process for drafting consumer labels on food products as a prime example of the way in which the process ought to work.
• For the regulators: "Admit that we can’t throw a bunch of lawyers – however talented – into a room and expect that they are going to come up with consumer disclosures that are understandable to most people." Instead "embrace consumer testing" in the design of consumer disclosures. Interestingly, Williams goes on to advise that regulators need to be prepared to "police" the banking industry to correct bad practices that might evolve, but are not anticipated or covered by existing disclosures or specific regulations. She specifically mentions Section 5 of the the Federal Trade Commission Act that bars unfair or deceptive trade practices as an important tool in this approach, and that was the subject of a recent post on this blawg.
• For the bankers, while she "feels the pain" of their regulatory burden, she remains troubled by continued resistance of banks' marketing departments to fully inform customers, who, if they actually understand the risks, might then decide "NOT TO BUY" a service or products from the bank. "The tension here is that shorter, focused consumer disclosures can meaningfully reduce regulatory burden, but, if they are done well, they will also empower consumers to make some decisions that a particular bank may not like." That's the price the banks have to be willing to pay.
• Finally, she calls upon consumer advocacy groups to stop merely calling for more disclosure, and to focus on better disclosure. They need to put their effort where their mouths are, and help all sides find out what information consumers really need and how better to make disclosures of that information understandable.

This is all good common sense. What are the odds that she'll inspire any progress? Stay tuned.

Concentrate On This

Last October, when MetLife left the mortgage origination and servicing business, I pointed out the sad fact that 70% of the home loans originated in 2010 were made by five large financial institutions. Since then, the concentration of power has only accelerated. On top of the dog pile is Wells Fargo, which made one-third of all home loans in the first six months of 2012. Wells, Chase, and U.S. Bancorp combined made half. According to a recent Bloomberg article, this concentration is starting to worry people in high places.

The concentration in the mortgage business has drawn warnings from the inspector general for Fannie Mae and Freddie Mac, the head of Ginnie Mae, Fitch Ratings, and congressmen, including one from Wells Fargo’s home state, about growing risks to borrowers, taxpayers, investors, housing markets and the financial system. Scenarios include a setback or strategy shift at Wells Fargo that could choke off credit for homebuyers and compel the U.S. to again pump in money to keep the housing market from seizing up.

“A concentration of issuers creates an oligopoly,” said Bill Frey, head of Greenwich Financial Services LLC in Greenwich, Connecticut, whose firm invests in, creates and trades mortgage bonds and advises bondholders. The result will be “higher mortgage costs for generations, as well as slower economic growth. Housing is the keystone of our economy.”

While there's the obvious sense of irony when Aunt Fannie and Uncle Freddie bemoan the concentration of power in the residential lending sector resting in hands other than their own, our amusement shouldn't deter us from taking their warnings seriously. Notwithstanding those "experts" who think that the U.S. would be better off if there were just a few big banks left, akin to the situation in "Hoser Land" Canada, many of us in the land of the free prefer a "more's the merrier" approach to banking.

“The nation benefits from a broadly distributed mortgage- finance system,” said Stevens, whose organization represents more than 2,400 firms involved in housing. “If the market is too concentrated on one company, and if they were to change their strategy around mortgage originations or got into financial trouble and had to leave the market altogether you could have market disruptions.”

[...]

Edward J. DeMarco, acting director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, has said he’s concerned about concentration and urged officials in a May speech to consider changes. Freddie Mac -- with Fannie Mae, the recipients of nearly $190 billion in government aid --bought 82 percent of the single-family loans it purchased in 2011 from 10 firms, filings show, with 40 percent from Wells Fargo and JPMorgan.

Fannie Mae and Freddie Mac rely on Wells Fargo and other large servicers to collect payments for the loans they guarantee. That makes them vulnerable to the business practices and financial health of a few large banks, said Steve A. Linick, the Federal Housing Finance Agency’s inspector general. The top 10 serviced 75 percent of single-family mortgages guaranteed by Fannie Mae, according to company filings.

“A limited number of servicers poses a safety and soundness risk to the enterprises,” Linick said in a phone interview. This “ultimately could cause losses to taxpayers.”

The effect on servicing has also drawn the attention of Ted Tozer, president of Ginnie Mae, a government-owned corporation that guarantees mortgage bonds holding loans backed by the Federal Housing Administration and other agencies.

“If the quality of servicing deteriorates, you have to deal with it and that puts a lot of oversight responsibility on us, no question about it,” said Tozer, whose Washington-based operation guarantees more than $1 trillion of mortgage-backed securities. “That’s one of the big challenges.”

So, many "experts" agree this concentration is a bad thing. Therefore, what do they propose to do about it? The answer, for the time being, is Nada.

For now, regulators and lawmakers are more focused on keeping money flowing into home loans and are unlikely to force change, according to Bart Naylor, who works on financial policy at Public Citizen, a Washington-based advocacy group.

“To the extent a regulator wants there to be a thriving mortgage market,” they may defer to the largest lenders, Naylor said. “However, they should be cautioned that leading market share has led to oblivion.”

In other words, don't expect anyone to move to oppose this concentration anytime soon. In the interim (if the "interim" ever truly ends), expect the big to get bigger, concentration to continue unabated, and the lovers of the Canadian bacon banking system to have reason to feel warm and fuzzy.

It's not a question of our "fearless leaders" being asleep at the switch. It's that they see the train barreling down the tracks, know that there's a good chance that it may run off the rails, yet, instead of throwing the switch, they avert their eyes and pray for divine intervention.

I don't like the looks of this trend.