Bank Lawyer's Blog

While The Legislature Is In Session

The crackpot scheme being considered by some municipalities to seize residential mortgages through the power of eminent domain in order to write down principal balances to current depressed market values, then sell the written down mortgages to investors, thereby using governmental power to punish existing mortgage loan investors but make a favored new class of investors (and the investment bankers who originated this scheme) rich, has generated plenty of push-back, including, as we recently noted, threatened legislation at the national level. An additional roadblock was recently discussed by Dana Berliner, one of the attorneys on the losing side of the US Supreme Court's 2005 Kelo decision, in which, as Berliner observes, "the Court ruled that the mere possibility of 'economic development,' i.e. increased jobs and tax dollars, in a city justified taking private homes and transferring them to a private developer." That opened the floodgates for schemes such as the seizure of mortgages scheme. However, the SCOTUS left the door open for the states to prohibit this practice.

Although it denied federal constitutional protection for individual’s rights, the Court took care to note that if states wanted to provide more protection to property owners, they could do so.

The states took the Court up on this suggestion.  Forty-four changed their laws in response to the decision, and all 44 made it more difficult to condemn property for the benefit of other private parties. 

[...]

Fortunately, the post-Kelo changes in state constitutions and state statutes will prohibit such shenanigans.  Cities claim that the benefit of these condemnations will be that they will make the cities economically better off and make the housing markets there stronger.  But when states prohibited condemnations for economic development in the wake of Kelo, they prohibited the use of eminent domain based on the vague and frequently inaccurate guesses of municipal officials about what might generally make their city better off economically.  California prohibits eminent domain for economic development (and did even before Kelo).

After also explaining the inconvenient truth that seven years after the Kelo decision, nothing has been built on the property seized from homeowners by the city of New London, Connecticut, Berliner finishes with a flourish.

Finally, this proposal mainly takes property from banks, pension funds, and impersonal investors, tempting us to ignore the danger it represents.  Such apathy is short-sighted.  The legal principles involved are the same as if the city tried to take property from private individuals.  When state and local governments began justifying the taking of property for “economic development” in the 1950s, it started by condemning shopping malls from big corporate owners; it ended by condemning tens of thousands of individual homes and businesses, including the little pink house at the center of the Kelo v. City of New London decision.  The proposed use of eminent domain for mortgages violates state statutes and state constitutions.  If it can happen to mortgage investors, it can happen to you.

As we've claimed previously, Judge Gideon Tucker's oft-quoted (and Mark Twain-appropriated) maxim continues to ring true: "No Man’s life, liberty or property is safe while the legislature is in session." That applies to legislatures at the national, state, and, now, local levels.

An Act of War: Against Banks

Supporting terrorist groups worldwide is a very bad thing. Killing your own people when they publicly oppose the existing government is a very bad thing. Building a nuclear weapon and threatening to annihilate your neighbors is a very bad thing. Having a president who wears a bomber jacket, sports a three-day growth of beard, and goes by a moniker that sounds like "I'm-A-Major-Whack-Job" is a very bad thing. However, launching denial-of-service attacks on bank webistes is beyond the pale.

The website glitches and outages that affected Bank of America and Chase last week are rumored to be just that sort of attack. In fact, financial fraud sources say both banks were hit with denial-of-service attacks likely backed by Iran.

Experts say banks better brace themselves, and they're right. With the U.S. election approaching, institutions can count on more DDoS attacks sponsored by nation-states.

Nation "states"? It sounds one nation "state" to me. I suppose this is to be expected from a government with whom this country and its ally, Israel, have been waging an undeclared war that, according to some sources, includes the introduction of destructive computer viruses into Iranian computer systems and the delivery of bullets to the heads of Iranian scientists.

The experts were correct about banks bracing themselves for further attacks, because following the date the above-linked blog post was posted, Wells Fargo was also hit. What are banks supposed to do?

A fraud alert issued Sept. 17 by FS-ISAC, the Federal Bureau of Investigation and the Internet Crime Complaint Center, suggests 17 steps institutions should take to mitigate risks posed by cyberthreats...

Among those steps:

• Educate employees about phishing e-mails and suspicious attachments;
• Monitor site traffic spikes, which could indicate a DDoS attack;
• Limit employees' ability to remotely access internal networks and work-related e-mails from personal devices.

[...]

"Traditional preventive measures, such as bandwidth over-provisioning, firewalls and intrusion prevention systems, continue to provide some protection. However, traditional measures are ineffective against today's DDoS attacks," the FS-ISAC says, calling for the use of layered defenses.

[...]

Banks and credit unions should ensure that their tellers and other branch personnel are well-educated about all the security steps the organization is taking and can communicate that information clearly to customers.

As if banks didn't have enough to do merely trying to survive the terror imposed by the CFPB. Now they have to deal with cyber-terror launched by a nation whose leaders make even Liz Warren seem rational in comparison.

Perez Pays Off St. Paul

The American Banker broke a story today that shocked no one, although it angered a few. It discusses a letter sent by four Republican congressmen to Attorney General Eric Holder that accuses the head of the Justice Department's Civil Rights Division,Thomas Perez, of "buying off" the City of St. Paul in a case that was to beheard by the US Supreme Court. St. Paul withdrew its appeal in return, the congressmen allege, for the agreement of the Justice Department not to intervene in another lawsuit against the City of St. Paul that could have cost the city millions of dollars. Perez was concerned that the SCOTUSwould de-fang his ability to use "disparate impact" arguments in fair lending cases, a tactic that many observers consider to be of questionable merit, but that Perez has used (and the CFPB threatens to use) to extract giant settlements from lenders who would rather pay something now to settle than to fight to the bitter end and make defense lawyers rich.

As we discussed in April, there was rampant speculation at the time the city withdrew its appeal that Perez had placed pressure on the City of St. Paul to withdraw. This is the first time I recall reading that there was a smoking gun to show a "quid pro quo" that would explain the city's action in dropping an appeal of a decision that went against it and will cost it serious money.

The letter to Holder also cites emails at Justice that reveal some internal dissent over the deal. Perez allegedly told some attorneys to draft a memorandum recommending that the Department of Justice not intervene in the suit against St. Paul without mentioning the Supreme Court case. Being career attorneys who apparently place personal integrity above political ideology, they mentioned the case anyway. On the other hand, what is surprising to me is that Perez thumbed his nose at his boss and is apparently getting away with it.

The GOP lawmakers did not place blame on Deputy Assistant Attorney General Thomas Perrelli, who was Perez's superior. They stated that Perrelli gave instructions that the department's decision about the Fair Claims Act case should be based on the merits, but that those instructions were not followed.

Then why wasn't Perez fired? Try doing that in the private sector and see how long before the bloom is off your personal rose.

The American Banker states that it's been investigating this issue for some time. However, its FOIA requests have resulted in nothing useful being turned over by Justice. On the other hand, documents released by the City of St. Paul show Perez strong-arming the city attorney, then meeting privately with the mayor one week before the city dropped its appeal.

Naturally, the Justice Department defends its actions as being consistent with its policy of global litigation settlements, being nice to puppies, and remembering your mother's birthday. They are as believable as Bernie Madoff, but inasmuch as they're all attorneys, they're shameless spin doctors and everything they say, they say with a straight face.

I hope this little kerfuffle has a longer shelf life than the usual story of government sleaze, but it's an election year, and unless the American Banker keeps probing, it's likely to be buried in more pressing matters, and the Justice Department will continue to beat banks and other lenders with the drumstick of "disparate impact."

Unnecessary Outreach

The FDIC is trying to tickle private equity's funny bone. At least, we assume that's the FDIC's intention in recently announcing a series of "outreach shops" to assist private investors who want to buy assets that the FDIC has acquired from the hundreds of banks that have failed in the past four years.

The goal of the series is to reach out to individuals and firms that may have a desire to invest in these types of assets, but lack the know-how or experience to do so.

"We believe that expanding the investor pool will assist in minimizing losses to the Deposit Insurance Fund," said Pamela Farwig, deputy director of the division of resolutions and receiverships.

The workshops will run a half day and are slated to take place in Chicago, Los Angeles and New York.

Those in attendance will learn more about structured sales and the pre-qualification process used to acquire assets from failed banks.

The FDIC wouldn't have to put on series of "outreach shops" to "expand the pool of private investors" for assets the FDIC has been mismanaging if they hadn't decided that private equity was evil because it was driven by the profit motive, and discouraged so many potential investors from acquiring whole failed banks, albeit with loss sharing. That negative attitude drove potential investors like the legendary Wilbur Ross to decide to take his investment capital to more hospitable climes.

If there's a way to maximize losses and minimize returns, you know which sector of the economy you can always turn to. No, it's not the private sector.

On the other hand, many investors did very well in the 1990s buying assets of failed savings and loans from the RTC. Those buyers didn't have to do their buying in the midst of the economic malaise and political and regulatory uncertainty that currently afflicts the nation; however, if profiting at the expense of a government agency revs your engine, I encourage you to give it a go. Let the "someone" the FDIC reaches out and touches be you.

No Longer Troubled Waters

Late last week, Maine Waters beat the rap, to the surprise of none of us who consistently smell the rancid atmosphere permeating the the hallowed halls of Congress.

California Democratic Rep. Maxine Waters won't be charged with ethics violations following allegations she steered a $12 million federal bailout to a bank where her husband owns stock.

House Ethics Committee members said Friday at a hearing their investigation found no violation by Waters, a senior member of the House Financial Services Committee. She could become the panel's senior Democrat next year, or the chairwoman, if Democrats win control of the House.

A well-connected D.C. based lawyer emailed me late Friday, "This decision proves that morality and ethics do not exist in the nation's capitol." To me, that was always a self-evident truth, but I'll accept his assertion that it's further "proof" of the lack of both qualities in Congress.

Last year, when I last looked seriously into this "investigation," I discounted the assertions of some observers that the hiring of Billy Martin might be bad news for Maxine.

I doubt Maxine is losing any sleep over Mr. Martin's investigation. After all, even if he finds that the process hasn't been so soiled that the investigation should be dismissed, the House Ethics Committee still has to proceed forward. They haven't been able to do that so far and there's no reason to suspect that Mr. Martin's scrutiny will prod them to overcome their bitter partisan gridlock.

Martin determined that the process did not violate due process, but then went on to determine that he could not conclude that Ms. Waters violated House ethics rules. Technically, gridlock was eventually broken, but it still appears that a member of the House who sits on a financial services panel can intervene with bank regulatory officials to benefit a bank in which her husband has invested, and walk away without a scratch.

On matters like this one, I hate being right. There's a smidgen of an optimist that remains buried in me, eternally hoping that the cynical me is wrong.

As a silver lining in this dark cloud, Waters' Chief of Staff was recommended for a tap on the wrist.

However, the ethics panel said that Waters' chief of staff, Mikael Moore, did take actions in Congress in an attempt to help the bank and that he violated House standards of conduct. Moore, who is also Waters' grandson, likely will receive a letter admonishing him for his conduct but will not face more severe punishment, such as a reprimand, by the full House.

Moore complained that Martin and the Ethics Committee were holding him to an "impossible standard." When you have moral vision akin to Stevie Wonder's ocular vision, I guess you can never set the ethic's bar high enough to be able to limbo under.

So, the final version of the "truth" is that when Waters set up a meeting between the Treasury Department and officials of OneUnited, a savings bank in which her husband had a material investment, she thought she was helping a coalition of minority-owned institutions, not OneUnited, even though the only bank officials who showed up at that meeting were OneUnited officials and the only matter discussed was OneUnited getting a healthy portion of that yummy TARP pie (which it subsequently obtained). However, her grandson and Chief of Staff helped OneUnited specifically, without Waters knowledge or approval, and, therefore, he gets a letter or reprimand in his personnel file, or something like that. 

This is all very believable, don't you think?

"Congressional ethics" is as much of an oxymoron as "honest lawyer."

There's one more perversely nice aspect of this turn of events. With the retirement of Barney Frank, Waters will be the ranking Democrat on the House Financial Services Committee. If the Democrats manage to retake control of the House, she'll be chair of the committee. Either way, every time she opens her mouth and spews forth her inanities, she'll be providing reams of blog fodder.

No Harbor Is Safe

A good deal of the trade press reporting about Recess Richie Cordray's congressional testimony today focused on the QRM safe harbor versus rebuttable presumption conundrum that only lawyers would love. Attempting to sound Yoda-like, as befits a disciple of the light side of The Force, Cordray explained to apparently confused congresspersons (and are there any other kind?): "I don't think safe harbor is truly safe."

Then why not call it a "Sorta Safe Harbor," or a "Better Than A Kick In The Groin Harbor," or "That Harbor That Might Protect An Aircraft Carrier But Sure As Hell Won't Protect That Dinghy You're Floating In, Hoss"?

Cordray is splitting hairs, as only those with a license to steal can manage to do on a consistent basis with a straight face. He explained that while he thinks the CFPB will adopt "bright line rules" that are intended to protect lenders who make "Qualified Residential Mortgages" from legal liability, that protection is not fail safe, because this country is populated with more lawyers than cockroaches, and a borrower's lawyer can always assert that the lender didn't "really" meet all the qualifications for a safe harbor. So can a government lawyer, for that matter. Having made his bones by concocting claims to use to pursue bankers and other vermin when he was the Ohio Attorney General on the make for the governor's mansion (until he inconveniently lost the governor's race), he knows what he's talking about.

In a nation with one lawyer for every 300 people, no harbor is ever free from the tempest generated by a plantiff's trial lawyer in need of of money or publicity, whether that lawyer works for the private or the public sector.

Crushed By The Same Bootheel

Steve Van beek at the NAFCU Compliance Blog put together a short slide deck and accompanying fact sheet that contains an eye-opening list of burdens placed upon credit unions by the CFPB. While the list was developed for credit unions, its equally applicable to community banks. Here's an excerpt from the Fact Sheet:

10 – Number of current proposed rulemakings to amend mortgage regulations

7 – Number of times Regulation Z and Regulation X were changed in the prior 36 months (prior to Dodd-Frank)

2780 – Number of pages of proposed rules issued since July 9, 2012

20 – Number of new notices required solely by the CFPB’s two mortgage servicing proposed rules

100 – Finalized exemption for remittance transfers under Regulation E

1000 – Proposed exemption for periodic statement requirement under Regulation Z (credit union would need to service less than 1000 mortgages)

The slide deck digs a little deeper into those numbers, but the summary is sufficiently depressing.

Recently, the trade and popular presses have been featuring articles recently about how the regulatory burden is beating down the community banking business. Add credit unions to your prayer list.

All of this ignited  yet another eruption from Camden Fine of the ICBA, who appears to be letting his inner child out of its crib and giving it free rein to bay at the moon. Of course, I love that stuff. I found the following portion of his latest rant especially enjoyable.

And the saddest thing of all is that I get calls from heads of regulatory agencies, the Treasury and the administration asking, “Why aren’t community banks lending more?” and “What can we do to help?” Really? How sad is that? There are times when I just want to say, “Are you kidding me? This is a joke, right?” But the sad reality is that it is not a joke, it is real. And that reality is crushing Main Street community banks, small businesses and the customers they serve across America.

Once again, I say: The enemy of my enemy is my friend. Save the cross-border warfare for another day and focus on a common enemy. They'll be plenty of time later to screw with the other side of the competitive fence. If we don't focus and marshall our forces quickly, there won't be enough of the little guys left to make screwing with one another worthwhile.

UPDATE 09.20.12: I've corrected a misspelling pointed out to me by one of my readers, a self-confessed "grammar Nazi."

Catch 22

Beating up Bank of America has become a national sport (one which this bolgger occasionally plays). However, every banker's blood boils vicariously when he or she reads about the latest Fair Lending Act lawsuit (with a pinch of alleged ECOA violations thrown into the soup for flavor) filed by the ironically named "Justice Department" against B of A. The Justice Department alleged that violations occurred because the bank required home loan applicants who relied on Social Security disability payments to meet "extra burdens," including providing letters from doctors that documented that income.

 

"Loan aplicants with disabilities should not be subjected to invasive requests for medical information from a doctor when they applying for credit," said Thomas Perez, assistant attorney general in the Justice Department's civil rights unit.

 

Perez is the same guy who's been pushing the envelope on "disperate impact" claims. At least, he's been pushing them until they reach the US Supreme Court, at which point he backs off, and urges others with similar claims to back off, because he understands that the SCOTUS is likely to blast him out of the water. It's much easier to bring these cases with no SCOTUS precedent, so you can use the prospect of paying millions of dollars to defense lawyers as a cudgel to extract ransom from financial institutions who would rather settle than fight a protracted battle with an unaccountable enemy. That's what Bank of America apparently decided.

An especially irksome aspect of this latest case is raised by the bank.

 

"The government's position has been inconsistent regarding whether a doctor's note should be requested," the bank said in a statement. "HUD determined this policy is in compliance for its loans, yet suggests it somehow violates the Fair Lending Act for non-HUDS loans. Same statute, same alleged conduct, different result. We're being accused of wrongdoing by the government for following a policy the government approved."

 

Welcome to 1984.

One More Black Eye For Payday Lenders

Brian Krebs posted a provocative entry today on his blog concerning a potential link between a web site that sells personal information on Americans and that may be obtaining much of its information "from a network of hacked or complicit payday loan sites." Just what the payday lending business needed, more bad publicity.

Users can search for an individual’s information by name, city and state (for .3 credits per search), and from there it costs 2.7 credits per SSN or DOB record (between $1.61 to $2.24 per record, depending on the volume of credits purchased). This portion of the service is remarkably similar to an underground site I profiled last year which sold the same type of information, even offering a reseller plan.

What sets this service apart is the addition of more than 330,000 records (plus more being added each day) that appear to be connected to a satellite of Web sites that negotiate with a variety of lenders to offer payday loans.

Krebs has done some decent detective work, which is way more effort than slackers like the author of this blog would ever undertake, unless someone was paying me to do it, of course. He talked to a number of people whose personal information is being sold, and located one who gave him the name of the payday lending "referral" site she used. Krebs has reached out to that site but, to no one's surprise, he's heard nothing in response but the sound of crickets chirping. Anyone interested in that name should read Krebs' blog post.

Krebs also discusses potential criminal liability for selling someone else's social security number without their consent. Any payday lending sites that are engaged in such activities probably understand that they're skating on thin ice and simply don't care. It may also be the case that the payday lending site information systems have been hacked.

Krebs' last piece of advice to individuals is likely sound, but also likely to cause heartburn to banks.

The next time you call your bank or interact with a company that asks you to authenticate yourself by reciting some or all of your Social Security number, birth date, mother’s maiden name — or any other personal information that you may assume is private — remember that services like this exist. Whenever possible, I think it’s an excellent idea to insist that these entities authenticate you using alternative questions and answers that are truly private to you and to you alone.

The potential problem I see with that approach is that it might be difficult to automate a process to obtain truly unique questions and answers on a person-by-person basis. I'm by no means technologically sophisticated enough to know if that's the case, but I suspect it would be more costly to program a process in which truly unique questions were created by the user as opposed to a relatively small menu of standard questions (mother's maiden name; first job, name of best friend, etc.). Nevertheless, the continued activities of those who push the envelope of what's legally permissible continues to create headaches for the law abiding.

Targeting TAG

ICBA CEO Cam Fine pulled off another Howard Beale impersonation today, this time over a Wall Street Journal editorial that opposed the extension of the TAG program, which is set to expire at year end. Cam's fires have been especially stoked by the fact that the WSJ refuses to publish the position of the ICBA and its allies that the transaction account guaranty program helps community banks at a time when they need all the help they can get, while the Too Big To Fail banks and Wall Street firms that the WSJ (allegedly) speaks for have gotten the lion's share of government bailout largess. Cam rightly points out that TAG is a risk primarily to the FDIC, not to the American taxpayers, since the FDIC is funded by assessments paid by FDIC-insured financial institutions. He ignores the fact that, ultimately, the American taxpayer backs the FDIC insurance of accounts, but his essential point is correct.

Here is the meat of his argument:

And while detractors point out the largest banks hold the bulk of TAG deposits, this should come as no surprise—they hold most of all the nation’s deposits. The four largest banks alone hold 40% of the nation’s deposits, a dangerous concentration that continues to grow. This is all the more reason why extending TAG is so important: if the program is allowed to expire, the largest banks will still hold over $1 trillion in TAG deposits, yet only the first $250,000 of each account will be explicitly insured. The rest will enjoy an implicit guarantee, based on the banks’ too-big-to-fail status. If the author is so concerned with government backstops for the private sector, he should be doubly troubled by the thought of the American taxpayer underwriting all those concentrated deposits in the absence of a bank-funded TAG program.

Although they might hold fewer TAG deposits because of their scale, community banks do more with less. In addition to helping small businesses, farmers and municipalities meet payroll and other recurring expenses, community banks use their limited TAG deposits to support relationship-based lending in local communities. This type of banking is fundamentally different from the transaction-based banking practiced by large banks, which use deposits for all kinds of investments that do nothing for local communities. This further illustrates why any flight of deposits from smaller banks due to a TAG expiration would be so devastating to local communities.

He makes valid points. Anyone who reads this blog knows how concerned I am about the increasing concentration of banking assets and deposits in the largest banks, as well as the continued decline in the number of community banks in this country. I also think too little has been done to save community banks from being steamrolled. Moreover, we're still wallowing in a severe slump, so extending TAG for another few years shouldn't pose a threat to the American taxpayer. If the Fed can continue to punish savers by keeping interest rates on savings deposits at ridiculously low levels through 2015 to help out the big banks, surely there's justification for extending TAG until the economy improves.

On the other hand, at some point, TAG will end. Bankers need to think about life after TAG, and advance planning can never start too soon. Community banks may win this round (although, they need to start pressing their elected officials to move quickly if this is to be accomplished by the end of 2012), but I sincerely doubt that they'll get another extension.