Bank Lawyer's Blog

Fauxcahontas Hits The Deck Running

Most spanking new US senators have respect for the seniority system that's been in effect in the US Senate since Daniel Webster was making speeches that were actually eloquent. Most new senators tread lightly, with a sense of relative humility ("relative" being the operative word in a joint where the average ego makes Achilles look like Saint Francis of Assisi)and a realization that by storming out of the gate at the sound of the bell they might stumble, break a leg, and be put down. Then again, most US senators aren't a direct descendant of warriors of the Great Plains.

Sen. Elizabeth Warren isn’t wasting time wading into banking policy.

Less than a month into her new job, the Massachusetts Democrat, a new member of the Senate Banking Committee, is seeking information from regulators on why federal bank regulators halted a detailed review of foreclosure files this month.

In a letter sent to the Office of the Comptroller of the Currency and Federal Reserve on Thursday, Ms. Warren and Rep. Elijah Cummings (D., Md.), requested a detailed set of documents related to a foreclosure- review launched by the bank regulators in 2011.

[...]

In their letter, Ms. Warren and Mr. Cummings urged the regulators to provide information on the reviews’ findings – including how much several consulting firms were paid, and any conclusions about how much consumers were harmed.

The review was designed to address banks’ use of so-called robo-signers, a term for employees who signed off on numerous foreclosures and falsely claimed to have reviewed each case. Banks and regulators concluded that it was becoming far too expensive and not compensating homeowners. In recent weeks, regulators have reached agreements with 13 banks, in a pact now worth $9.3 billion.

The lawmakers said they agreed with regulators’ goal of making sure consumers receive aid more quickly. However, they argued that far more information about the settlement agreements should be public.

“Public confidence in the banking system has been badly undermined by a widespread concern that large financial institutions are not held fully to account when they break the rules—and that consumers are not sufficiently compensated,” they wrote.

Although the OCC and Fed refused to publicly comment on the cheeky request of She-Who-Hunts-At-Walmart, my understanding is that, under their breath, the bank regulators were discussing "a pound of sand" or something similar. Perhaps I didn't quite hear them clearly.

I understand why everyone is upset with the robosigning shenanigans, and I've many times blathered on this blog that robosigners deserve to be punished, including being fined and, where perjury has been committed, imprisoned. On the other hand, I'm not sure how the "compensation" argument continues to preoccupy the minds of lovers of The Great Spirit like Liz. I realize that the settlement exacted from the large loan servicers by the bank regulators required "compensation," but that seemed to me to be more of a purely political sop than an attempt to render justice. In a just world, lenders ought to be punished for falsifying documents and borrowers ought to pay their debts. Apparently,  "The Greatest Senator From Massachusetts Since Scott Brown" agrees with many that because of documentation or ministerial deficiencies, borrowers who had defaulted on their loans were "unjustly" foreclosed upon and should have been allowed to stay in their homes without having to cure those defaults, and because they weren't allowed to stay in their homes with the loan terms modified as necessary to accomplish that result, they are entitled to be "compensated."

I predict that over the next six years, Lizzie will inspire much talk of "pounding" and of "sand", most of it in the same declarative sentence.

I knew there was going to be a silver lining to Liz in the Senate. I never expected it to pay off so quickly. I sure hope Barney Frank wins John Carey's vacant seat so whenever blogging topics are ebbing, I can always go to my sure fire daily double.

San Bernardino Calls It Quits

San Bernardino County is the birthplace of the first serious consideration by a local government to implement a scheme concocted by former Clinton administration officials and private equity pirates to steal seize underwater mortgages from the lenders in order to write down the principal, refinance them into FHA loans, and sell those loans to new investors (enriching the investment bankers who would fund the scheme). It’s also the place that, when residents publicly objected to the scheme, thumbed its nose at its constituents and forged forward.

Fortunately for all that is right and holy in the land of fruits and nuts, San Bernardino recently came to its senses and abandoned the crackpot plan and opted to submit a request for proposal “seeking plans to address the mortgage crisis.” Given their track record, I suspect they’ll receive and seriously consider plans from the Hells Angels to turn foreclosed homes into profitable meth labs and from Maxine Waters to buy bad loans from whatever financial institution her husband owns these days. I mean, if you’re going to abuse the 14^th Amendment, you might as well throw all caution to the winds and just let fly with whatever comes to mind, whether tethered or untethered to reality.

Although the county’s CEO claimed that the threat of eminent domain was interfering with the ability of the county to work on other “solutions” with lenders and mortgage security investors, and that it was “wrong” to impose “unintended consequences” of the loan seizure scheme on residents who didn’t want it in the first place, anyone with an ounce of grey matter in his or her cranium knew of those negative aspects from the outset. Thus, the local yokels at county hall wasted a lot of time stirring the pot, to no avail. However, they have given the voters the appearance of “doing something” and in politics, appearance always trumps substance.

San Bernardino isn’t the first local governmental entity to attempt to play a fruitless populist (i.e., anti-bank) card to win a PR coup concerning the residential mortgage meltdown. We all recall those geniuses back East who have tried to hold lenders responsible for the condition of abandoned homes they don’t even own and for other consequences of economic and social forces beyond any lender's control. When will voters wise up and kick these time wasters to the curb?

You’re right: when Hell freezes over.

Hot Off The Press

Although scores of law firms are grinding out client alerts on last Friday's recess appointment kerfuffle and its potential impact on the CFPB, I'm already growing tired of the issue, largely because I'm easily bored and thinking about it also cuts into my Miller Time (or, more accurately in my case, Shiner Bock Time). Before putting it to bed for a nap, however, I thought I'd provide links to some decent discussions of the issue.

The first is put out by Pillsbury, and authored by Joseph T. Lynyak III, Rodney R. Peck and Michael J. Halloran. It expands on many of the themes Joe Lynyak communicated to me last week and that I included in a post from a couple of days ago. It does a good job of outlining the issues and potential consequences in terms even lesser lights in the bank law space (such as this author) find comprehensible. It states that it's intended only as a starting point. If so, you'll be off to a good start by reading it.

The folks at Ballard Spahr also issued a cogent preliminary analysis. Although the firm is conducting a webinar on February 4 on the topic (link provided in the client alert), and they'll save most of the "good stuff" for that, I especially liked the following observation, with which I agree:

We believe Canning’s political reverberations will extend beyond the fight over President Obama’s renomination of Mr. Cordray to include the revival of proposed legislation to convert the CFPB’s leadership from a single director to a board or commission. The legislation also calls for the Financial Stability Oversight Council to oversee CFPB regulations and would subject the CFPB to the Congressional appropriations process.

Finally, DavisPolk's client memorandum on the subject contains a section that discusses some interesting "wrinkles," including various arguments that might be offered to uphold the regulations issued under Cordray's watch. It's a worthwhile read, as you would expect, given that firm's consistently high quality output.

I'll be moving on to other topics in future posts, reserving the right to revist this burning issue as it slowly evolves.

Loan Buybacks: The Next Hand

The "repurchase risk" for single family mortgage originators that we've discussed for, literally, years here on the blog was, for the most part, a risk faced by those who sold loans to (or serviced loans owned by) Freddie Mac and Fannie Mae. They are the 800-pound gorillas in that space.

Add a new gorilla to the jungle. He's a Texas banker we've discussed many times before.

In 2002 billionaire banker Andy Beal had his Beal Bank sue the Federal Deposit Insurance Corp. in a lawsuit that accused the FDIC of originating faulty subprime mortgages to unqualified borrowers. For six years Beal pursued this quest against his very own regulator, until the FDIC agreed to pay $90 million in 2008 to settle the case.

Now Beal has found another seemingly impossible mountain to climb: getting big banks like Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase & Co., to repurchase potentially faulty loans that were sold during the housing boom. According to Katy Burne at The Wall Street Journal, Beal is working to bring bondholders together  to investigate potential misrepresentations and contract breaches by the banks that sold residential mortgage-backed securities.

[...]

Some of the soured assets Beal purchased at fire-sale prices were residential mortgage-backed securities that were sold in deals in which banks made representations and warranties about loan quality and promised to repurchase those loans if the representations were no good. But in order to investigate, potentially declare a default and maybe launch lawsuits, holders of the securities like Beal need at least 25% of the voting rights in a trust.

The Wall Street Journal reported on Wednesday that Beal Bank holds more than $1 billion of these bonds, has been in contact with more than 20 bondholders, and signed on enough investors in seven of the 93 mortgage-backed securities held by a Beal Bank unit to proceed. Beal has probably already made lots of money off these investments but through this strategy he hopes to make even more. He is not the first person to pursue this kind of thing. The biggest such effort has been led by Houston lawyer Kathy Patrick, who has worked for big institutional investors like BlackRock and Pimco to pursue put-back claims and famously struck an $8.5 billion settlement with Bank of America. But these kinds of claims have proven very difficult to pursue.

Still, Beal seems to relish taking on impossible tasks. He once walked into a Las Vegas casino and challenged some of the best poker players in the world to some of the highest-stakes games ever played. It’s unlikely he is bluffing over this mortgage move.

Well, he didn't just "walk into" a casino and challenge the world's best poker players. He set it up in advance. They knew he was coming. Moreover, although he took some of the world's best for seven figures over the first round, Phil Ivy won that back and then some in the final round. He's still a legend, but he doesn't need the embellishment. To say he's "not bluffing" is entirely accurate.

Following Andy Beal's beat down of the country's biggest banks is going to be a hell of a lot more fun than watching Aunt Fannie and Uncle Freddie grow gray and wither. Stay tuned.

Recess Richard In The Crosshairs?

Since Friday's decision by the DC Circuit Court of Appeals to invalidate Obama's recession appointments to the NLRB, my e-mail has been ablaze with speculation about the potential effect on banks, thrifts, and credit unions if the rationale applied by the court is also applied to Obama's recess appoint of Recess Richie Cordray as Director of the CFPB. Inasmuch as every pundit, bank lawyer, and crazy uncle will be blogging about this topic ad nauseum, I'm only going to make some preliminary observations, and then feed off the superior brain power of others. That's how I've made a living thus far and I see no reason to change at this late date.

The first observation is that Jay Carney is technically correct while at the same time laughingly intellectually dishonest. While Friday's decision was made with regard to specifically named defendants, none of whom were named "Cordray," all any existing or prospective plaintiff in a lawsuit against Cordray and the CFPB need do is file a complaint (or amend an existing one) to assert the same grounds, and Recess Richie's appointment is in jeopardy. Count on that movie coming to a theater near you, soon.

If the decision is upheld on appeal to the US Supreme Court (and bank on it, it will be appealed), the preliminary comments I've received break down between those of Steve Van Beek, Director of Regulatory Compliance for the NAFCU, who likely will have issued his own blog post already on thiis topic by the time you read this, and those of my friend Joe Lynyak of Pillsbury, who I'll quote (with permission) as follows:

The pertinence of this decision is that it also applies to the appointment of Director Cordray, and hence his appointment may be null and void.

This has two major consequences. First, in order for the CFPB to exercise most of its new authority, Title X of Dodd Frank specifically requires that a Director be appointed. Accordingly, a great deal of the CFPB’s actions since Director Cordray’s appointment—including the issuance of many regulations—may be void.

Second, and of particular concern to the mortgage industry, liability is now created in regard to the regulations issued by the CFPB as part of its Mortgage Initiative between January 10^th and January 21^st. That is because Section 1400(c)(3) indicates that all amendments made  to the lending rules as set forth in Title XIV become effective as of January 21, 2013 if regulations have not been issued. The pertinent section states as follows:

SEC. 1400. SHORT TITLE; DESIGNATION AS ENUMERATED CONSUMER

LAW.

(a) SHORT TITLE.—This title may be cited as the ‘‘Mortgage Reform and Anti-Predatory Lending Act’’.

(b) DESIGNATION AS ENUMERATED CONSUMER LAW UNDER THE

PURVIEW OF THE BUREAU OF CONSUMER FINANCIAL PROTECTION.—

Subtitles A, B, C, and E and sections 1471, 1472, 1475, and 1476,  and the amendments made by such subtitles and sections, shall be enumerated consumer laws, as defined in section 1002, and come under the purview of the Bureau of Consumer Financial Protection for purposes of title X, including the transfer of functions and personnel under subtitle F of title X and the savings provisions of such subtitle.

(c) REGULATIONS; EFFECTIVE DATE.—

(1)   REGULATIONS.—The regulations required to be prescribed under this title or the amendments made by this title shall—

(A)  be prescribed in final form before the end of the 18-month period beginning on the designated transfer date; and

(B)   take effect not later than 12 months after the date of issuance of the regulations in final form.

(2)   EFFECTIVE DATE ESTABLISHED BY RULE.—Except as provided in paragraph (3), a section, or provision thereof, of this title shall take effect on the date on which the final regulations implementing such section, or provision, take effect.

(3)   EFFECTIVE DATE.—A section of this title for which regulations have not been issued on the date that is 18 months after the designated transfer date shall take effect on such date. (Emphasis added.)

What this means is that virtually everything in Title XIV is now in force—and no one is in compliance—meaning that every loan being originated is in violation of numerous provisions of the Truth-in-Lending Act and RESPA (among others).

This exposure may cause the mortgage industry to strongly support the legitimacy of the Cordray appointment.

Steve's preliminary reaction (and I assume that he will expand upon this on his own blog) was "a different take."

According to the Fed and CFPB IG’s report, the CFPB has the authority to issue regulations (i.e., Reg E remittances, Reg Z and Reg X mortgages) for depository institutions without a Director.

I hadn’t fully thought through the “law is effective if the regulations are properly implemented” aspect as it relates to Cordray. That is an interesting angle. But, I’d think that the above would mean that credit unions and banks would be fine under the regulations as the CFPB had that authority regardless of whether they had a “Senate-confirmed Director” or not.

Steve referred me to a blog post from last year which discussed the ability of the CFPB to issue certain regulations with respect to FDIC- and NCUA-insured financial institutions to which those institutions were already subject at the time the CFPB was created, whether or not a "Senate-confirmed Director" was installed.

Joe's response to Steve's points is that "among other things, as a basic matter, if there was authority to issue new regulations, the only person authorized to issue them arguably would be the Secretary of the Treasury, who is in charge of the CFPB until the Director is appointed. The fact that Cordray signed and issued the mortgage regulations has a much force and affect (assuming the DC Ct. of Appeals decision is correct) as Jeffrey Dahmer."

His mention of Jeffrey Dahmer threw a wet blanket on my plans to go out for a dinner of short ribs on Friday night.

Steve's final word to me on Saturday was that "the mortgage brokers and nonbank mortgage servicers are the real ones who would be in deep do-do."

The CFPB didn’t have authority over those entities without a “Senate-confirmed Director” and, one could argue, they aren’t complying with Dodd-Frank as required by January 21, 2013. Depository institutions, on the other hand, would have the regulations (and the added 11 months and 9 days) to follow and comply with as the CFPB had authority (assuming the secret document from the file cabinet or similar) to issue the regs for banks and CUs.

Of course, there could be tons of nuances and issues that come up depending on which authorities (Dodd-Frank or existing TILA/RESPA) to issue certain provisions of the new requirements.

Luckily, my message to CUs is going to be simple – keep working on understanding and complying with the new regs. The other stuff will work itself out.

Steve's reference to a "secret document from a file cabinet" was prompted by an email to both of us from a well-known financial institutions attorney from the Pacific Northwest (who shall remain nameless to protect him from being identified as a reader of this blog, and well as to encourage his continued issuance of unrestrained hot opinions), who let loose with the following regarding Joe's comments concerning Tim Geithner being the only enforceable issuer of CFPB regulations in the absence of a "legitimate" Director:

Reading the Fed/IG material, I see they use the term "Senate confirmed" director as the trigger for CFPB authority. In the absence of a "Senate-confirmed" director, they say, the Treasury Secretary is authorized to perform all these functions. This required me to actually [gasp] read the law. Interestingly, 1066 refers to a Director "that is confirmed by the Senate in accordance with section 1011." Section 1011 doesn't say anything about confirmation, but uses the good old "with the advice and consent of the Senate." I assume (but have not checked my assumption) that a valid recess appointment would satisfy this requirement for the period during which the recess appointment was valid.

With that said, I have to think that the administration knew or suspected that a court would hold that Cordray never had the authority to begin with. What are the odds that they've planned for this all along, and will open the file cabinet and pull out a document in which Geithner delegated (last January) to Cordray the Secretary's authority authority to perform the functions in question. Thus, we can all breathe a big sigh of relief because all the rules were in fact, validly issued, and will remain in effect.

The One has us covered.

Obviously, the man is joking. Would an administration as upright and above-board as this one try to pull some half-baked, back-dated, robo-signed, authorization document out of a file cabinet (or out of its nether regions)? Perish the thought!

A number of talking (i.e., bloviating) heads, including this one, think that unless the SCOTUS overturns Friday's decision, the Republicans may have leverage to tweak FrankenDodd to create a CFPB commission structure that they think will somehow lessen the potential for an all-powerful federal regulator running amok, in return for which they'll stick in a retroactive legislative "fix" to validate whatever regulations the CFPB issued, no matter whose name appeared on the dotted line. Of course, at this early stage, it's way too soon to tell. Nevertheless, as my anonymous correspondent also observed: "One thing's for sure: it will be interesting." Indeed.

"The One has us covered." With what, I'm not certain, but watching and listening to Jay Carney, it's beginning to smell a lot ike flopsweat.

Steve's advice to credit unions is equally applicable to FDIC-insured financial institutions: "keep working on understanding and complying with the new regs. The other stuff will work itself out."

Rant Me A River

Steve VanBeek at the NAFCU Compliance Blog yesterday posted a nice list of links to the CFPB web site for each of the CFPB regulations on mortgage loans. He also took a shot at the CFPB's "creativity" in avoiding the Administrative Procedures Act.

The CFPB likes to make up its own rules.  Including their recent announcement that their rules are considered "issued" when they are posted on the CFPB's website rather than the normal Administrative Procedure Act timeframe of when the rules are published in the Federal Register.  

Well, as chance would have it, the CFPB's mortgage rules are slated for publication in the Federal Register for the following dates:

• January 22nd for Escrow Final Rule (link goes to actual Federal Register document)

• January 30th for Qualified Mortgage/Ability-to-Repay Final Rule (link goes to Public Inspection Desk)

• January 30th for High-Cost/HOEPA and Homeownership Counseling Disclosures (link goes to Public Inspection Desk)

The other regulations will be in the Federal Register at an even later date.  

Why does this matter?  The CFPB gave 12 months (and sometimes less) from the "issue date" to implement the majority of the new requirements.  Because the CFPB considers the "issue date" as the date of publication on the CFPB's website - rather than publication in the Federal Register - your credit union will have less time to comply with the final rules.  

Summary.  If the CFPB would have followed the normal Administrative Procedures Act process, your credit union would have 12 months - from the date of publication in the Federal Register - to comply.  

Unfortunately, Dodd-Frank gave the CFPB very strict deadlines for issuing their final regulations and the CFPB chose to alter long-standing rulemaking practices instead of using its exemption authority (like it did for other Dodd-Frank requirements) to ease the impact of these regulations.

Today, Steve was irked about the way the CFPB rushed through the enactment of the international remittances regulation. Instead of a thoughtful process, in which the CFPB listened to criticism of the proposed regulation and enacted changes before it went into effect, the bureau shot first and took names later. Naturally, this resulted in unnecessary time and money wasted by financial institutions, as well as inducing angst in financial institution personnel.

The process this regulation has taken has left everyone's head spinning.  The CFPB had opportunities to listen to industry feedback and make changes upfront.  Instead, they finalized the rules and only then did they realize they were not workable.  Unfortunately, the lack of operational experience and background at the CFPB was on full display.  They had a rule and were going to finalize it no matter what the consequences.

Steve's getting so ornery these days, especially about one of my favorite black holes of regulatory ennui, that I might have to start asking him to guest post here.

I wonder when the first lawsuit will allege that "issuing" rules by posting them on a web site is not valid rulemaking? What do you suppose the over/under is on that date?

CFPB Delenda Est!

Too Reasonable For The Top Job?

There may be legitimate reasons, about which reasonable people (and, in addition, the writer for this blog) might disagree, to oppose Mary Jo White for the head of the SEC. One of dumbest reasons is that she's an experienced corporate attorney who has represented big banks.

"If nominated by the president, however, she will undoubtedly face some opposition on Capitol Hill due to her time defending high-profile financial institutions and Wall Street executives," Compass Point said.

God forbid that the SEC might be run by someone with hands-on expertise in the subject matter. Better the top spot should go to a career academic or bureaucratic hack, especially if they're 1/32nd Chippewa/Cherokee/Choctaw/Fugawi.

"White would also face scrutiny from Democrats due to a statement she made during a recent panel appearance urging caution when prosecuting financial crimes: 'We must distinguish what is criminal from what is reckless behavior or bad business decisions and not bow to the frenzy…And I worry the frenzy overrides reason and judgment sometimes.'"

I can see why Senators of a certain stripe might blanche at the prospect that the full-out campaign to criminalize corporate governance decisions that's been running full bore since Enron ran aground should take a brief pause for thoughtful reconsideration. Not "bowing to frenzy" is positively un-American these days.

Mary Joe's been nominated by The One, and a majority of the Senate travels in the same boxcar as The Nominator. Thus, I think any "hard questioning" of Ms. White will likely not derail her confirmation, if the White House is serious about pushing her.

Not that you'd take any political prognostication I make to Vegas and lay down serious money on it. After all, I'm the guy who once thought Diana Taylor was a shoo-in for the Chairman of the FDIC.

De Novo Thaw?

The American Banker reported last week (paid subscription required) that where wise men fear to tread, the Amish rush in.

De novo banking could find a spark in an unusual place: Amish country.

A group of organizers has raised $20 million and is seeking regulatory approval to create Bank of Bird-in-Hand, named for the town near Lancaster, Pa., where it will be based. If approved, the bank, which would also target Mennonite farmers and small businesses, would become the first de novo bank to open in the United States in more than two years.

[...]

Bank of Bird-in-Hand's group has an specific niche; the "vast majority" of its target market is family owned farms with less than $500,000 in annual sales, the organizers said in an application to the Federal Deposit Insurance Corp. The group projects that farm loans will make up half of the proposed bank's loan portfolio.

No wise cracks about "two-in-bush" from me.

Ag lending has done well during the recent downturn, so that should be a favorable factor for the application. Naturally, anything that's doing well is subject to being crushed by bank examiners who live in mortal fear that today's gold will be tomorrow's lead. However, if you're picking a market niche and you can show the regulators that you've got the chops, they may not shoot you down solely on that basis. They've got plenty of other grounds to sink your application.

The linked article contains speculation that perhaps the filing of this application indicates that the oft-denied, supported-by-the-facts, theory that the FDIC has instituted a "de facto" moratorium on de novo charters (last one granted: 2010) is either false or is yesterday's news, and that this application may signal the dawning of a new day of de novo promise. If you believe that, we need to discuss your future investment in my proposed Bank Lawyer's Blog theme park on the asteroid Vesta.

There are some unique features about the proposed bank's business plan and community that separate it from the customary de novo proposal.

Farming communities east of Lancaster have few options for financial services, says Nick Bybel, legal counsel to the proposed bank's organizers. The two biggest banks, in terms of retail deposit market share, in the Lancaster area are Susquehanna Bancshares (SUSQ) and Fulton Financial (FULT). Each hold about a quarter of the market's deposits, according to June 2012 data from the FDIC.

The organizers "have reviewed recent de novo bank history and they've worked out a very conservative, prudent and thorough business plan," Bybel says.

The bank also isn't planning to offer Internet or mobile banking, which removes a potential sense of heartburn to the regulators. They had their fill of Internet-centric banks bursting into flames or spontaneously zombifying themselves in the past decade. On the other hand, it's not surprising that the Al Gore-invented "Internets," as well as mobile banking, are missing from the business plan, since the targeted customer base, the Amish, use neither the Internet nor cell phones.

And speaking of the Amish, before we all jump up and down with unrestrained glee over this portent of the opening of the de novo floodgates, let's not forget (as I'm sure the FDIC will not), that this is the same group of folks whose members have been accused of being involved in bootlegging unpasteurized milk and refusing to place warning triangle decals on their buggies. Not to mention renegade beard trimming.

No, the FDIC might determine that the entire potential customer base is seeded with too many potential Tony-Sopranos-in-suspenders-and-a-beard-like questionable characters to make it a safe bet for any FDIC-insured institution. That would be the safe play. I hope I'm wrong, of course. Any crack in the de novo dam would be welcome, even if it's delivered in a wild and crazy corner of the banking universe.

PATCO Played Out: A Few Lessons Learned

The last time we discussed the PATCO decision, the appellate court had found that the bank's security procedures to defeat account takeover were not "commercially reasonable," but had sent the case back down to the trial court to determine what legal responsibility the customer might have to prevent account takeover. Following that action, the bank and PATCO settled the case, so that burning legal issue was not resolved.

Recently, PATCO co-owner Mark Patterson and counsel Dan Mitchell were interviewed by Bank Info Security's Tracy Kitten about the lessons they think they learned from the case. Among those (along with my observations) are:

• PATCO approached the bank within the first month of the incident with a settlement proposal that turned out to be a heck of a lot less than what the bank eventually paid in settlement after three years of litigation. Both sides ended up enriching their legal counsel needlessly. Sweet!
• Community banks seem more willing to settle quickly than do larger banks. Mitchell and Patterson think that's because community banks are more concerned about the reputational risk if the dispute hits the press. Might this be a potential competitive marketing advantage for community banks? "Bank with us! We'll pay for your negligence!"
• Most cases of corporate account takeover are settled quickly, and off the radar screen. That certainly appears to be accurate from our personal experience. While many lawyers live to engage in disputes, bankers live to make money the old fashioned way: by doing business. It's hard to do business when you're the defendant and your customer is the plaintiff.
• Prospective litigation costs and reputational risk can be as much of a deterrent to bank customers pursuing litigation as they can be to banks.
• There's not much case law on these issues. Until there is, there is likely to be much jockeying for position, blustering and posturing by lawyers for both sides, unless responsible business leaders on each side of the table seize control early in the game and keep their eyes on the prize: salvaging the relationship (if possible) without breaking either the bank or the customer.
• Patterson thinks ACH should not be done by businesses, no matter how allegedly "strong" the security devices or procedures used. He claims that his business will use ACH only for tax payments. The reasons for his revulsion: the one-sided nature of the agreements prepared by the banks, which place almost all liability on the customer. Hey, that's why banks pay us the big bucks, Mark!
• Patterson and Mitchell do believe that customers have "some responsibility" for protecting their accounts from takeover. However, they claim that banks bear more responsibility than customers because they are "in a better position" to prevent and detect takeovers. While I don't disagree that banks should be more sophisticated in this area than the average small business owner, I'm still not willing to go as far as Patterson and claim that using a dedicated separate PC solely for online banking (and not for cruising Internet porn sites) is cost prohibitive for most small businesses. That simply doesn't pass the smell test for me. On the other hand, I'm an alleged elitist, so perhaps my view is slanted toward my liege lords and masters, "The Banks." Perhaps a refurbished eMachine for $250 is simply beyond the reach of the average small business. If that's the case, how much money would they stand to lose from any of their corporate accounts? Wouldn't cybercrooks just enter, laugh, and leave?

Whether you represent banks or bank customers, Mitchell's final words ring true.

I would bet my bottom dollar that there will be more lawsuits in the future in this area. What types of questions will come up really will depend on the unique circumstances of each case. But given the prevalence of corporate account takeover, you can bet that there will be more cases.

A Deal Is A Deal

AIG's moment of temporary insanity has passed. It's decided not to join a shareholder lawsuit filed by a company controlled by former AIG CEO Hank Greenberg against the US Government for bailing AIG out in 2008. Actually, Hank's company didn't allege that fact of the bailout was itself wrongful, just that the bailout terms set by the government were wrongful. Everyone understands that when you're going down like a torpedoed garbage scow, you always sue the guys who threw you a life preserver because they didn't reel you in quickly enough and you caught a nasty cold.

AIG's board of directors was apparently worried about reputational risk. Given the bad taste left in the collective mouth of the American public by the Wall Street bailouts, that's probably a justified worry. Politicians of all stripes were publicly uttering variations on the theme of "WTF?" on a daily basis. On the other hand, David Boies (yes, THAT David Boies), the attorney for Greenberg's company (which is the plaintiff in the litigation), thinks that the board's decision was not in the best interests of the shareholders. I assume that's a vague threat of a lawsuit against the directors of AIG. It seems to me that if Greenberg goes that route, he'll first have to win the lawsuit against the government in order to prevail against the directors. I'd think he'd have his hands full on with the suit against the government, without taking on the additional defendants. Then again, I don't swim in that specific shark tank, so I assume my rube-like perceptions and opinions are of little interest to the masters of the universe.

There were some other interesting, and even amusing, observations on AIG's board's decision. The Cato Institute's Mark Calabria astutely observed that big financial institutions rarely sue the federal government "because if they did, the government might not bail them out next time." Rim Shot!

On the other hand, AIG's CEO Robert Benmosche told CNCB that AIG believed that "a deal is a deal." Really, Bob? You danced with the bear and you still said that to a reporter without cracking yourself up? "A deal is a deal" as long as you're not the US government, which believes in honoring its deals unless it's politically expedient to renege on them, in which case it just litigates the resulting lawsuits for a decade or more until the public's interest in the outcome has been long since diverted to one or more other shiny baubles.

I understand the public relations downside as a reason to back off suing the US government. However, the "a deal's a deal" rationale simply doesn't hold water, based upon the nature of the devil with whom the deal was made.