Bank Lawyer's Blog

Time Out

Thankfully for me (and for the haters of this blog), I'm on vacation this week and intend to devote more attention to Jack Daniels Black, Hennesy XO, and the blackjack tables at The Bellagio, than to anything related to banks or to law. However, to send you off into the hiatus with a bang rather than a whimper, with the side benefit of irritating my progressive friends, I'll leave you with a link to a post from my friend Emily Zanotti Skyles' Naked DC blog about one of our favorite topics. Here's an excerpt:

Elizabeth Warren is for many things. Unrealistic bank prosecutions that the administration has no intention of following up on. State and Federal minimum wages that only large corporations can afford to pay, thus ensuring that Wal-Mart corners the market of unskilled laborers and college drop-outs. Expansion of collegiate affirmative action programs to include white females who claim to be Native American so as to take advantage of the increased hiring rates.

You get the drift.

Enjoy.

Beating The CFPB To The Punch

Community banks have been concerned that, although they might be exempt from direct supervision and enforcement by the CFPB, they would be recipients of a "trickle down" effect that would result when their primary federal bank regulator would attempt to demonstrate that it could stay abreast, or even ahead, of the CFPB when it comes to cracking down on unfair, deceptive, and "abusive" practices. Fraud, small banks understand, but they tend to fear zealots who may not be able to define an "abusive" practice with precision, but sure as shooting know it when they see it.

An article in the most recent issue of Bank Safety & Soundness Advisor (paid subscription required) indicates that community bankers' fears are not without some foundation.

In a recent Webcast, officials from the Fed along with the Federal Reserve Bank of San Francisco showcased a broadbased enforcement approach to UDAP rules and regulations, and some high expectations for how banks should be identifying and resolving complaints involving abusive or deceptive practices.

While some of the examples cited, including inflating borrower income on loan applications and charging "bogus points and origination fees" are clearly fraudulent, the net appears to be cast widely by the Fed.

Officials indicated they view as a kind of red flag banks pushing new or modified products and services to generate new revenue, especially if done in conjunction with third-party vendors where fees are shared.

“While searching for revenue is part of what a bank needs to do, there is also a need to make sure
there is compliance with UDAP and consideration of UDAP risk,” said Maureen Yap, the Federal
Reserve’s special counsel for fair lending.

And the officials underscored the idea that an act or practice does not have to violate another law to be unfair or deceptive. A potentially tell-tale sign of that: cases where revenue growth depends on consumers making what regulators and examiners feel are poor financial choices.

There you go: what an examiner "feels is a poor financial choice" by a consumer is the acid test. That gives a whole boatload of precision and certainty to the determination of what is and is not "abusive." Every bank will have to have a Potter Stewart on staff to make the call, I guess.

The potential burden is not going to be light.

For individual institutions, the potential coverage is huge, including not only all products and services, but every phase of the life cycle, including development, marketing, and loss mitigation activities.

One bank's "bogus points" scam, perpetrated by rogue loan originators, led to a determination that it had a "disparate impact" on minorities, and earned that bank a referral to the Justice Department. So, there's that potential liability to look forward to, as well.

What's a small community bank to do? Fed officials tried to be helpful.

Officials declined to address specific fact situations bankers posed during the March 5 webcast. They suggested that banks use the same sort of analysis that regulators do in assessing potential misconduct.

Yap said the Fed tells examiners to focus on the “INN” in determining whether conduct is unfair under the law. There must be “injury” to the consumer or group of consumers, the injury is “not reasonably avoidable,” and there are “no countervailing benefits.”

She said Fed examiners focus on the “MRM” to judge whether behavior is deceptive. Does the representation or omission “mislead” the consumer? Is the consumer response “reasonable”
given the representation or omission? Is the misrepresentation or omission “material”?

“The act or practice does not have to violate another law to be unfair or deceptive,” she said.
“If the prongs of the analysis are satisfi ed a UDAAP violation can be cited.” She said CA Letter 07-08 — a joint Federal Reserve/FDIC statement on consumer compliance exam procedures for UDAP — was “very instructive” in the types of questions bank should expect.

There's your heading on a course through the fog-bound waters of "abuse": think like an examiner.

And after you take that journey down a rabbit "warren" (pun intended), you can resurface and start walking like an Egyptian.

You've got your marching orders, folks. You can get with the program or you can get out of the business. Welcome to this brave new world.

Impeding Foreclosure Hurts Homeowners As Well As Lenders

According to a story at Housingwire, a recent study by research firm Corelogic concludes that those states with more cumbersome and lengthy foreclosure processes impose "hidden costs" on homebuyers.

"Extended disposition timelines impose operational costs on servicers, carrying costs on investors in the mortgages, and in some cases, significant legal risk and compliance costs," said Mark Fleming, chief economist for CoreLogic.

"The likely result is more expensive mortgages and possibly increased rationing of credit based on the additional costs of disposition, which may vary dramatically by local foreclosure process requirements," he added.

In the short run, however, all the homes tied up in foreclosure restricts supply and, for the immediate future, stablizes or actually increases home prices. In some states and regions (California, the South and the Southwest), a steep drop in REO, due to investor demand, has also helped housing prices.

Unfortunately, over the long run, in addition to the possible increase in borrowing costs in long-foreclosure states, the results are not favorable. An earlier Housingwire piece that addressed a study by LPS, claimed that judicial foreclosure states were lagging in recovery versus non-judicial foreclosure states. These studies support Housingwire's publisher Paul Jackson's long-asserted contention that housing markets would have recovered more quickly than they have if foreclosure was allowed to run its course and inventory was cleared more quickly. In other words, the desire to "do good" over the short term may be prolonging the pain and adding new pain to the residential housing market.

Republicans to Cordray: We Like You But We're Still Going to Kill You

Friends and colleagues from Ohio, including some bank regulators, have been beating me about the head and shoulders (with wet noodles, but it's still annoying) for the past couple of years about how I'm too tough on Recess Richie Cordray. They tell me he's a smart guy (no debate from me) and, more critically, a reasonable guy, who isn't going to push an ideological agenda to the point that certain other "committed" (unnamed) alternative Directors might be eager to do. As the crowning argument, they all point out that he's never claimed to be the "real" Last of the Mohicans.

Now that even die-hard opponents of the CFPB have blown air kisses to the Director, maintaining utter snarkery towards Cordray has become nearly impossible. Thus, I'll concede that the man is no Tin Lizzie.

[Lightning Bolt Sheers Sky Over North Texas]

Whew, that was close.

At this point, however, the fact that some influential Republicans think that Cordray is doing a good job as Director of the CFPB seems to be irrelevant to Cordray's future as head of the Bureau. Those same Republicans still want to drive a stake through the heart of the CFPB or, failing that, hobble it to the point that they can reduce its potential for "mischief" (as they define it). Cherokee Princess "She-Who-Bites-Ankles" would describe their desire as being one that seeks to turn a stallion into a gelding, but why quibble over the finer points? Republican Senators have stated that they will continue to block confirmation Cordray's appointment as Director until "structural changes" are made to the Bureau. The Obama administration currently predicts that it will agree to such changes on the day that Megan Fox stars as Ophelia in the next film version of "Hamlet" directed by Kenneth Branagh.

Given the ongoing litigation concerning Cordray's recess appointment, and the potential uncertainty over the effect of the recent D.C. Circuit Court of Appeals decision on Obama's NLRB recess appointments on the legitimacy of Cordray's recess appointment, this drama has a long way to go before it's played out. In the interim, however, even CFPB's opponents admit that Recess Richie is a good egg.

For all the good that will do him.

"Ability-to-Repay" Rule About to Crimp Entrepreneurs?

Rhonda Abrams, who writes about entrepreneurship, claims in a recent USA Today opinion piece that the CFPB's "Ability-to-Repay" rule will have what most social engineering legislation has: unintended consequences. For small businesses and entrepreneurs, one of those consequences will be that "getting a mortgage will become a whole lot harder soon."

And I'm betting it's going to be a heck of a lot harder for people who are self-employed or own a small business to qualify — assuming the business is run as a sole proprietorship, limited liability company or S corporation and income passes through to a personal tax return.

Why? The very sensible provisions were designed for people who receive paychecks rather than run businesses. Small-business owners and the self-employed are likely to have greater challenges with some of the provisions:

Among the problems for entrepreneurs, Rhonda points out the following:

• Verifying income for an sole proprietor or pass through entity depends on income shown on tax returns, rather than net worth (used as an alternative to tax return income in the "bad old" days of low-doc, no-doc loans). In addition, small business owners may show lower net income because they take aggressive positions on tax deductions and/or plow gross income back into the business. Fewer entrepreneurs may be able to provide the verification needed to satisfy the rule.
• Debt-to-income ratios may be tougher to meet because business debt shows up as personal debt, and, in the case of business lines of credit, the entire line shows up as debt even if no draw are made.
• Personal services businesses are often poor in hard assets but rich is goodwill developed by a highly skilled entrepreneur. In addition, entrepreneurs often live in high-home priced areas, and use their home as their office, which increases mortgage debt.

Abrams advises those entrepreneurs who've been thinking about taking advantage of low interest rates to buy or refinance, to do so this year. She also advises entrepreneurs to think twice about taking advantage of legitimate deductions that lower tax return reported income to the point where qualifying for a home mortgage loan may be jeopardized.

The abuses of the past engender remedies that cause disadvantages for some future borrowers, at a time when the country's problem is no longer that too many loans are being made but too few.

M&A; Litigation's Logical Consequences

Last week, we discussed a recent study that had shown that nearly every merger or acquisition transaction involving a publicly traded company last year had resulted in a lawsuit by class action attorneys aggrieved shareholders. Yesterday, the American Banker (paid subscription required) ran a story about one of the consequences of this litigation-by-the-numbers: increased underwriting scrutiny from D&O insurance carriers.

"With a pickup in M&A activity, it is the one thing that we are asking about in every meeting," Heather Hill, a regional underwriting officer in Zurich North America's Chicago office, said during a panel discussion in Greensboro, N.C., hosted by the North Carolina Bankers Association last week.

"We'd want to know about the types of banks they want to buy, the condition of those banks and the loan portfolios" that would be acquired, Hill said in an interview following the discussion. "A one-off situation is different from [acquisitions becoming] a strategic way for a client. Transparency is the overarching theme."

For instance, banks owned by private-equity firms can expect "significantly higher requirements" for liability coverage, Eric Marshall, the managing director for financial institutions at Travelers, said during the panel discussion.

Other consequences include higher deductibles and higher premiums.

This increased scrutiny and expense comes on top of increases caused by FDIC claims against former shareholders and directors of failed banks.

Bankers have endured several years of increased premiums to insure directors and officers because of the financial crisis and a high rate of bank failures in 2009 and 2010. A heightened risk of litigation from the Federal Deposit Insurance Corp., which has a three-year window to pursue claims against managers of failed institutions, has continued to drive rates higher, panelists said.

I suppose this is looked at as simply another cost of doing business by those banks that are aggressive acquirers. For more conservative potential acquirers, it’s another potential downside to doing a deal.

The Not-So-Secret Facts of Life

The LA Times obtained a bunch of documents from the FDIC pursuant to a FOIA request and uncovered some startling news: the FDIC is settling lawsuits against those it alleges caused banks to fail. Worse than that, the FDIC is agreeing not to issue press releases regarding many of the settlements. This earth-shattering news is labeled a "major policy shift" from the way the FDIC handled failed bank litigation that arose out of the last big bank meltdown, "when the FDIC trumpeted punitive actions against banks as a deterrent to others."

Before I address that last point, let's listen to some more suspicious minds support the Times theme that all of this "secret settlement" skulduggery smacks of some kind of plot to let evil-doers escape the lynch mobs that surely would have strung them up if only the FDIC had set public outrage en fuego by  trumpeting these settlements from the top of the Rocky Mountains.

Critics fault the government for going easy on banks in the aftermath of the financial crisis. At a Feb. 14 hearing, Sen. Elizabeth Warren (D-Mass.), founder of the Consumer Financial Protection Bureau, criticized FDIC Chairman Martin J. Gruenberg along with other bank regulators for their reluctance to make examples of Wall Street firms by taking them to trial.

Quoting "The Founder" is a go-to proposition for the Times, and one that lacks the punch that soundbites from other less usual suspects bring to the table. In addition, the Times' accusations range far beyond Wall Street banks. It's mostly (if not entirely) the little guys that are being pursued. God forbid they should get a break today from anyone other than MacDonalds.

Attorneys who have represented bank officials and the FDIC said regulators are now far likelier to settle cases before filing lawsuits than after the last spate of failures, when more than 2,300 institutions collapsed in the 1980s and early 1990s, bankrupting a fund that insured savings and loan deposits. That crisis grew out of Reagan-era deregulation, which allowed thrifts already hurting from 1970s inflation to make riskier investments, including commercial real estate deals that soured en masse during the second half of the 1980s.

Critics describe the FDIC's current practice of low-profile deal-making as a major departure from the S&L crisis.

"In the old days, the regulators made it a point to embarrass everyone, to call attention to their role in bank failures," said former bank examiner Richard Newsom, who specialized in insider-abuse cases for the FDIC in the aftermath of the S&L debacle. The goal was simple: "to make other bankers scared."

Newsom said he couldn't understand the shift, unless the agency doesn't "want people to know how little they are settling for."

The FDIC should disclose as much as it can, said Lauren Saunders, managing attorney at the National Consumer Law Center in Washington. "Transparency is always better, and serves as a deterrent to future misconduct."

Yes, let's deter the future conduct of owning, managing, and directing a community bank that concentrates on loan products that the regulators find are being originated and managed within the parameters of safety and soundness guidelines until, within a few months, the world falls apart in the greatest economic collapse since the Great Depression. Thereafter, although we feel compelled to go after many failed bank officials, directors, and third parties because we've got an obligation to recover whatever losses to the fund we are able whenever we can do so without being laughed out of court, we understand, in our heart-of-hearts, notwithstanding the posturing we might do for political or litigation purposes, that these times are different than late 1980s.

This is what neither the Times nor its talking heads understand (or, if they do understand, will admit): the facts are different this time. In the 1980s, there were a number of outright crooks involved in the banking and, especially, the thrift business in certain parts of the country, some wearing stetsons and cowboy boots, others clad in three-piece Armani suits. There were fraudulent appraisals, my-dead-cow-for-your-dead-horse swaps, 100 percent loan-to-value ADC loans on raw dirt, rapid multiple flips that would have taxed Shawn Johnson, and similar shenanigans. The damages were also limited to certain regions of the country where real estate bubbles were exploited (or partially created) by financial institutions who engaged in outright speculation until those bubbles burst. Also, many of the worst players were (relatively) smaller players.

In the latest debacle, the causes of losses are more complicated and the resulting economic consequences much more devastating and widespread. Many of the hundreds of banks that failed collapsed because they were steamrolled by the swiftness of the onset, and the depth, of the economic collapse triggered, in large part, by subprime residential mortgage loans, the complex web of securities they spawned, and the resulting residential real estate inflation. Commercial real estate wasn't the primary cause of the collapse this time, it was a casualty of the collapse. You can argue until you're blue in the face about the nuances of fiduciary duties and CRE concentrations, but in all but the low hanging fruit cases, the FDIC doesn't have smoking guns laying in plain sight to use to extract huge settlements or litigation awards out of either defendants or, more importantly, their insurance companies, who are fighting back.

As to the lack of a "deterrent" to future potential wrongdoers that allegedly results from not making settlements public, I wouldn't be concerned that "silent settlements" are encouraging prospective bank officers and directors to do anything. Those who haven't said "screw it" and opted to sip mai-tais in Cabo until they need their livers "Rolfed," or are seriously considering an alternative exit strategy, aren't chomping at the bit to jump feet-first back into subprime anything or to make CRE or any other product or service their concentration-of-choice, and their primary regulatory supervisors wouldn't let them go there even if they yearned to do so. "Other bankers" are plenty scared Mr. Newsome, without the need to read about FDIC settlements. At least, that's the story with the vast number of smaller banks in this country.

I suppose there might be some deterrent effect if the FDIC announced settlements against the officers and directors of the large Wall Street banks that helped create the mess we're in and which then failed, so that future Wall Street bankers would...oops...none of them failed. That's right: they were bailed out. My bad!

Buried in the story is the rationale for keeping mum (until FOIA forces disclosure) about settlements.

Defendants benefit by settling because they can avoid admitting guilt and limit the damages they might face in court. The FDIC benefits by collecting money without the hassle and expense of litigation. The no-press-release arrangements help close those deals.

Those are valid reasons, and they make sense for both parties.

Let's hope the Times drills a little deeper next time and strikes oil instead of gas.

Unaccountably Unaccountable

Famed criminal defense attorney F. Lee Bailey once a stated that if he were charged with a crime and was, in fact, innocent of that crime, he would prefer to be tried by a military court of justice. He thought that military officers were disciplined to apply the law and the applicable rules fairly. I have no idea whether Bailey's view is supportable or not. However, I do know that if I'm guilty as charged, my best chance of beating the rap is to be tried by a jury of my "peers."

They were charged with "defiant trespass."

But after a Common Pleas Court jury on Tuesday acquitted the 12 Occupy Philadelphia protesters arrested in a 2011 bank sit-in, the trial judge shook their hands and called them the "most affable group of defendants I've ever come across."

"I think what this really shows is that when the people of Philadelphia make a decision, they want someone accountable," said Aaron Troisi, a 26-year-old working toward a master's degree in education at Temple University. "Accountability and justice is not what they experienced with banks like Wells Fargo."

Troisi's view of accountability would be labeled "ironic" if he was just a tad more self-aware. Instead, I'd label it "clueless."

The defendants were found guilty by a judge in municipal court, but were given the right to have the case retried by a jury in Common Pleas Court. As so many defendants facing substantial evidence of their guilt have previously discovered (including The Juice and Robert ("Don't Do The Crime If You Can't Do The Time") Blake), when a group of your average citizens decides to apply the law to the facts, whatever feels right is likely to rule the day.

The original charges of trespass were brought by the Philadelphia District Attorney's Office after the defendants trespassed on private property (the inside of a bank branch office) as part of the nationwide Occupy This-and-That-and-Also-That-Thing-Over-There movement. It seemed like a slam dunk case, especially when the municipal court judge agreed. But after 13 hours of hard deliberation, the jury decided that it was an episode of "Boston Legal," where jury nullification is just part of the way a jury ought to roll. The linked article doesn't say, but I'm wondering whether, at any point in the defendants' counsel's summation, a rotund attorney stood up from the defense table, eyed the jury, uttered two words ("Denny Crane"), and then sat down. If so, the verdict makes sense.

The trial judge not only shook the defendants' hands, she told them to soldier on in "La Cause."

Afterward, Judge Nina N. Wright Padilla took the unusual step of coming down from the bench and asking all 12 to approach so she could shake their hands.

"I hope you continue your work in a law-abiding way," said Padilla.

In Philadelphia, "law-abiding" apparently does not apply to abiding by trespass laws, at least where the property owner is a large bank.

In an upside down world, the defendants displayed a firm grasp of logic.

"If this jury has found us innocent, then it must mean that Wells Fargo is guilty," said 71-year-old Willard R. Johnson, one of the 12 on trial.

I need to see the diagram of the syllogism that led Willard from Point A to Point B. On second thought, forget it.

According to the article, the jury bought defense counsels' arguments that the First Amendment protected the defendants and that even if the actions did violate the law, "the protest served a greater good for society that trumped the trespass charge."

"The greater good" trumps the rule of law. In Robert Bolt's play "A Man For All Seasons," Thomas Moore replies to his future son-in-law, Roper, a Christian zealot who claims that he'd cut down every law in England to get at the Devil.

Oh? And when the last law was down, and the Devil turned 'round on you, where would you hide, Roper, the laws all being flat? This country's planted thick with laws from coast to coast– man's laws, not God's– and if you cut them down—and you're just the man to do it—do you really think you could stand upright in the winds that would blow then? Yes, I'd give the Devil benefit of law, for my own safety's sake.

Beware of modern day zealots, who claim to "speak truth to power," and who would cut down any law that stands between them and "the common good."

Tracking A Troll

I'm going to hold off on further comment on the United Western decision for the time being while other people work to track down the abusive troll who drove off the rails over last Wednesday night's post on that decision. His IP address is 68.100.237.36, which belongs to Cox Communications. They've been notified and verified that they're looking into it.

Interestingly, on Friday, I had two visits to the blog in the early morning hours (prior to 7 am) from the troll's IP address, and the troll spent over ten minutes reading the pages I linked to in Thursday's post, including my 2007 post on the criminal nature of his conduct. I hope that he learned something. He was back over the weekend several times. He uses both a Mac operating system and a Windows system, so I assume he has a Macbook or iPad and also a desktop PC. I also know, for each visit, his browser, monitor resolution and color depth, Javascript version, entry and exit time, pages visited, and other information that will come in handy when the time comes to nail his identity down.

Interestingly, on Friday I received 11 visits to the blog from the OCC, and only four from the FDIC and FRB combined. All OCC visits were from IP addresses 199.83.40.33 and 199.83.40.34. I say "interestingly," because the only hateful comments I've received from federal bank regulators over the past few years have come from people employed by the OCC, one of whom is an attorney and who advised me after the summary judgment hearings in the United Western case last November that I "should keep a spot next to your plate tomorrow for a big helping of crow.  Mmmm….  Tasty." How did that guy know I was eating a raven for Thanksgiving?

The other contact from the OCC was by a person who posted a comment in January to another post using the IP address 199.83.40.34. He identified himself only as "Carl," but used the email address "[email protected]." A quick Google search revealed the likely name of an OCC attorney. I made a reply comment that called him out, by that full first name, for using an OCC computer to leave immature comments on a blog during working hours, and I heard nothing further from him. Of course, I suppose someone at the OCC using his gmail address and first name could have been setting him up. Maybe it's that kind of place.

The last visit from the OCC on Friday came via a link on this page on Investor Hub, where investors in United Western stock have been following the trial for some time. Guess where the troll's first visit from home on Saturday morning originated? Yes, from that same page at Investor Hub.

All this may be coincidental. This coward may be holed up in the Air and Space Museum or working the cash register at a 7-11. Nevertheless, if this clown is, as he alleges, with one of the federal banking regulators, then I hope his conduct is considered to be an aberration by that agency.

By the way, visitors, especially those with a law degree, really need to read and pay attention to my Disclaimer and Comment Policy.

Barring further developments, I'll be back to other topics tomorrow.

UPDATE 03.11.13: A reader emailed me to ask whether I wasn't being too harsh on this troll, but that my correspondent might feel differently if the troll had threatened regulatory retaliation. I thought I had made that clear in my previous post. "Don't think that people in the banking agencies forget your gratuitous insults." How, exactly, would you interpret that? You think I'm irritated because of name-calling? 

The Perils Of Trolling

Last night's post about Tuesday's United Western decision generated an attempt by an "anonymous" troll to leave an abusive comment this morning. I moderate comments, so it didn't make it past the "editor." In addition to some substantial "I hate Kevin" vitriol (some of it scatological), and threats that the regulators (of which the troll intimated he was one) would "get me" for my snark, it contained what I think are outright libelous per se statements regarding the former management of United Western and their outside counsel. The troll used a pseudonym and what I assume to be a phony hotmail account email address. I assume that the troll didn't realize that my blog service captures the unique IP address of all commenters, this IP address being one assigned by Cox Communications to a residence in the Annandale/Falls Church area of the Washington, D.C. suburbs. There's only one location with that assigned IP address, and it won't take more than  a John Doe subpoena to uncover the name of the account holder at that location.

I forwarded the comment and identifying information to United Western's attorneys. I assume that they'll take it from there. I think that it's time to remind the unhinged of the issues I raised in a post in 2007. In addition to other legal (and, if the troll is a lawyer, ethical) violations, the conduct constitutes a federal crime.

Please people: Get a grip. If my blog posts drive you so batty that you feel compelled to engage in illegal anonymous harassment, either seek professional therapy or...here's an idea...don't read this blog.