Bank Lawyer's Blog

Canaries, Coal Mines, and the CFPB

Credit union consultant Marvin Umholz has given me permission to republish a section of his most recent email newsletter that states my concerns about the recent crackdown by federal banking regulators on banks that provide payment processing services for online payday lenders better than I could state them. This is an issue that is of growing to concern and confusion. Enjoy:

 

Assault on Online Payday Lenders is Canary in the Coal Mine for CFPB Threat 

Credit union officials and community bankers should be tracking the level of harassment that the CFPB and the Federal Deposit Insurance Corporation (FDIC) are currently engaged in against payday lenders, especially those active in online payday lending.  To the CFPB and the consumer activist groups that are its primary constituency overdraft fees are indistinguishable from payday loans.  The payday lenders current predicament is the canary in the coal mine alarm singing out about future CFPB “deception, debt traps, dead ends, and discrimination” enforcements.  Those within the financial community that cheer when the CFPB chases down its non-bank prey will wish that they hadn’t when it is their turn to be the person of interest to the CFPB pack of frenzied “consumer watchdogs.” 

A September 26^th article in the American Banker www.americanbanker.com/issues/178_187/cfpb-denies-tribal-payday-lenders-appeal-to-stop-investigation-1062446-1.html provided part of the saga.  It said, “The Consumer Financial Protection Bureau on Thursday denied an appeal made by several Native American tribal leaders who were seeking to block a civil investigation into their online payday lending practices.  The CFPB published www.consumerfinance.gov/guidance/petitions-to-modify-or-set-aside both the denial and the original appeal made by online lenders, Great Plains Lending, MobiLoans and Plain Green, that offer small-dollar loans to tribes.  In denying the appeal, CFPB Director Richard Cordray said tribal protections do not restrict the CFPB from investigating any lender for potential violations of federal laws on areas such as marketing and collection of small-dollar loan products.  The CFPB said it would proceed with its investigation and the civil investigation demand orders issued against each lender on June 12.  ‘The Consumer Financial Protection Act ‘broadly authorizes the bureau to issue a CID to any person the bureau has reason to believe may have information relevant to a violation,’ said Cordray in the denial to the appeal.  ‘And the CFPA’s provision governing the issuance of CID’s has an even broader scope, authorizing the Bureau to issue a CID to any person, whether or not a provider of financial products and services...’The CIDs provide adequate notice of the purpose and scope of the Bureau’s investigation,’ Cordray said.  The governing statute ‘does not require a detailed narrative, and it is well settled that the boundaries of an [agency] investigation may be drawn quite generally.’”  In other words, the CFPB can investigate whomever it wants, whenever it wants, and it doesn’t have to justify its actions to anyone.  This CFPB-criticizing curmudgeon must surely be on the agency’s targeted-for-CIDs list to obtain his extensive knowledge of where many of the credit union industry’s skeletons are hidden.

The FDIC played its hand in the online lending conflagration as also reported on September 27^th by the American Banker www.americanbanker.com/issues/178_188/fdic-urges-banks-to-assess-risk-in-dealings-with-online-lenders-1062478-1.html.  That article said, “The Federal Deposit Insurance Corp. sought to ease concerns about its view of banks’ affiliations with online lenders, saying institutions correctly managing their third-party relationships ‘are neither prohibited nor discouraged’ from processing payments for legal entities.  Those that are operating with the appropriate systems and controls will not be criticized for providing payment services to businesses operating in compliance with applicable law,’ the agency said in a letter Friday to all institutions it supervises.  Several GOP lawmakers and industry representatives have relayed complaints to the agency from online lenders, claiming that the FDIC is forcing banks to cut ties with certain lenders at a time when some lenders are allegedly operating without valid licenses and in violation of state usury laws.  Advocates for the lending industry say that, as a result of the FDIC’s actions, even online lenders that are following all relevant laws are losing access to the automated clearinghouse, or ACH network.  But the FDIC indicated that it is not out to harm a specific industry…Online lenders – including those operating offshore as well as some that claim sovereign status through affiliation with Native American tribes – have been the subject of intense scrutiny from state authorities as well as the Department of Justice for allegedly exceeding state interest rate caps, operating without proper licenses and debiting funds from borrowers’ bank accounts without authority to do so.”  The net result is that both the banks and the online lenders are considered by the FDIC to be guilty until proved innocent.

The FDIC’s September 27^th letter to financial institutions was entitled, “FDIC Supervisory Approach to Payment Processing Relationships With Merchant Customers That Engage in Higher-Risk Activities.”  Its highlights as presented by the FDIC included:

·         “Financial institutions that provide payment processing services directly or indirectly for merchant customers engaged in higher-risk activities are expected to perform proper risk assessments, conduct due diligence to determine merchant customers are operating in accordance with applicable law, and maintain systems to monitor relationships over time.

·         Proper management of relationships with merchant customers engaged in higher-risk activities is essential.  Financial institutions need to assure themselves that they are not facilitating fraudulent or other illegal activity.  Institutions could be exposed to financial or legal risk should the legality of activities be challenged.

·         FDIC’s examination focus is on assessing whether financial institutions are adequately overseeing activities and transactions they process and appropriately managing and mitigating risks.  Financial institutions that have appropriate systems and controls will not be criticized for providing payment processing services to businesses operating in compliance with applicable law.”

Interestingly in the body of the letter it stated, “The FDIC is aware that some payment processors or merchants may target institutions that are unfamiliar with the related risks or that lack proper due diligence or controls to manage these risks.”  The likelihood that such bad actors might turn to “unsophisticated” credit unions for these transactions just increased. 

The FDIC letter also said, “Higher-risk activities are those that tend to display a higher incidence of consumer fraud or potentially illegal activities than some other businesses.  Higher-risk activities are typically characterized by high rates of return, high rates of unauthorized transactions, consumer complaints, or evidence of state or federal regulatory or criminal actions against the business customer, which indicate that the activity needs to be reviewed to determine whether fraudulent or illegal activity is occurring.”  In the September 17^th separate letter to certain inquiring lawmakers FDIC Chairman Martin J. Gruenberg provided an illustrative list of types of potentially high-risk merchants that included, but was not limited to, telemarketing entities, debt consolidation and forgiveness programs, online gambling-related operations, credit repair services, government grant or will-writing kit providers, online tobacco or firearms sales, pharmaceutical sales, sweepstakes, and magazine subscriptions, as well as online short-term lenders.  What? No marijuana dispensaries? 

Once again financial institutions are being tasked by their regulators with law enforcement duties regarding customers.   And if one of the criteria for higher-risk activities is being under the activist states’ or interventionist federal government’s scrutiny or allegations then there are a lot of big banks that are now by definition high-risk.  The inquisition has gotten so out of control and hazardous that a new issue-focused trade association, the Washington, DC-based Third Party Payment Processors Association www.businesswire.com/news/home/20130822006211/en/Newly-Formed-Party-Payment-Processors-Association-Objects, has recently been organized to fight back against the risk-adverse regulators.  The federal government has become so huge and so intrusive that businesses have no alternative than to spend money to defend themselves from government’s arbitrary looting.  Thank goodness for lobbyists – at least the ones on your side.

On The Sideline Of The Disparate Impact Game

A recent opinion piece by Rick Sharga on the Housing Wire site amusingly highlighted the potential "disparate impact" on minority groups of the CFPB's own "Qualified Mortgage" rules, especially the debt-to-income rules. The lone commenter to the article claimed that the regression analysis done by the CFPB would take into account the "variable" of the DTI. As one economist who makes a living picking apart government-performed regression analyses told me once, "variables, and the weight assigned them, are a game." Unfortunately, it's a game that is expensive, both to play and to the lenders who almost always settle rather than pay the fees and costs involved in fighting it out in court. As we've discussed many times, when you litigate with the federal government, you're dancing with a bear. You stop when the bear gets tired.

To me, while amusing, Rick's point and the commenter's point are beside the point. The US Supreme Court will soon decide whether "disparate impact" can be used in connection with the Fair Housing Act as a matter of law. If it decides that it cannot, then all the debate about regression analysis becomes moot in this context.The government, including the CFPB, will have to go back to what they used to have to do: find an intrent to discriminate.

Betting on outcomes with the SCOTUS seems to me to be a dicey proposition these days. My batting average has not been good. Therefore, I won't predict. Obviously, I'm rooting for a ruling that strikes down the extension of the doctrine to the Fair Housing Act.

If Congress thinks that it's a good idea that such a theory apply to housing discrimination, it can always amend the Fair Housing Act to make that intent clear. Extending the doctrine through the creative actions of ideologues in the executive branch who want to push the envelope and shake down banks with the power of the pocketbook is something else entirely.

Not Everyone Hates Lawyers

Tomorrow and Friday I'm attending the Independent Bankers of Colorado annual convention at the Keystone Resort in Colorado, and on Friday I will be a co-moderator, along with Christian Otteson of our firm, of a "hot topics" panel of representatives from the OCC, FDIC, FRB, and CFPB. I have promised to avoid all (or at least, most) snark. If you're in the neighborhood, drop by and say hello. It's high altitude, so catch me before the start of the cocktail hour if your expect coherence. Regular readers understand that coherence is a sometimes thing at this blog even at sea level at noon.

Before I signed off the week, I wanted to pass along two emails I received in response to a couple of last week's posts. One will be anonymous and the other, by credit union consultant and newsletter author Marvin Umholtz, will be with full attribution. Marvin merely asked me to spell his name right and correct any typos.

Here's the first, sent by a former community bank CEO who's been involved in litigation with bank regulators:

Re: The Law Is A Jealous Mistress article a couple of days ago

I couldn't really tell if you were serious or just venting but thought I'd let you know my perspective.

I think I told you when we had lunch that I used to tell Aggie jokes until my kids went to A&M.

I am the same way about lawyer jokes now that I've been on trial.

One of my friends who is a lawyer sent me a book titled "The Trial" by Franz Kafka. It's a little dated but the story is somewhat similar to my own. So close in fact that my lawyer friend said he sort of regretted sending it to me after he did it. Like most legal matters there are no real "winners" and the story in the book is even worse.

One quote, however, stood out and I could relate to it exactly.

- “I once read a very finely worded description of the difference between a lawyer for ordinary legal rights and a lawyer for cases like these. It ran like this: the one lawyer leads his client by a slender thread until the verdict is reached, but the other lifts his client on his shoulders from the start and carries him bodily without once letting him down until the verdict is reached, and even beyond it.”

People who tell lawyer jokes have only dealt with lawyers of the first type. I've been a beneficiary of the second  type and will be forever grateful.

Hang in there.

I'll do that, and thanks for the kind words.

Marvin had some pithy comments not only about that post, but about the future of community banks and credit unions.

I have been meaning to pop an email to you all week concerning your September 17th post about the legal profession's ups and downs.  I particularly enjoyed the literary reference to "A Man for All Seasons."  In the absence of the rule of law (man's law) the constitutional checks and balances are too easily toppled and replaced by an overzealous executive branch (dictators and despots) and a dangerously partisan Congress (thank goodness they are gridlocked!).  One can always hope the current Supreme Court will remember why it exists -- to rein in the other branches.  Thanks for spreading the word and keep up the "lawyering" despite all of the attorney jokes.

I also appreciated the September 11th entry, especially the sharing of the observation: "Other experts interviewed by Kline state that the industry will continue to shrink for the oft-cited reasons of regulatory burden costs, a lousy yield curve, higher capital requirements, tepid loan demand, and the reluctance, or sheer inability, of smaller banks to invest in the technology needed to compete."  That was a very appropriate (but also disturbing) capsulizing of the current strategic environment.  Those oft-cited reasons are indeed the most compelling external influences on strategy.  It describes the credit union operating environment, too, only more so.  There are still 2,200 credit unions with less than $10 million in assets.  I can't imagine they can cut it.  Only the 1,400 credit unions over $100 million have much of a chance at all.

As the libertarians like to say -- free minds and free markets.

And as residents of a state that now permits the recreational use of marijuana like to say -- smoke 'em if you've got 'em.

Y'all have a good rest of the week.

Evanston and Chicago: A Tale Of Two Cities

The punch a federal district court judge connected to the face of Chicago may knock some teeth out of the jaw of Evanston. At least, that's the slant of Evanston Now.

I haven't read Evanston's ordinance, but from the lengthy description of it in the linked article, it seems to be crucially different than Chicago's ordinance. Chicago made mortgagees, as well as owners, responsible for the upkeep of properties and to pay registration fees. Evanston appears to make mortgagees responsible to register and maintain the properties only after they have "taken control" of the property. Prior to that event, the city may hire a contractor to maintain the property and issue a lien against the property for those expenses, but that conduct seems as if its certainly permissible under constitutional principles. Again, I have not studied the two ordinances, but from the press reports, the differences between them seem critical.

If I were Evanston, I would not be sweating the recent decision in Chicago. The assistant director of Evanston's Health Department, Carl Caneva, seems to agree.

“As of right now that does not affect how we act or how our ordinance is in effect,” Caneva said. “We are a home rule city and we have our own ordinances.”

That's a bit of a lawyer-like response, but we'll let it pass for now. The ultimate issue isn't that Chicago and Evanston are different municipalities with their own ordinances, it's whether Evanston's ordinance suffers from the same constitutional defects as Chicago's. If it does, than sooner or later a lawsuit will seek to overturn it. While the article does drill down on that aspect, it appears from a drive-by look that it does not.

The Hype About Rising Interest Rates

The Guardian's Hiedi Moore recently wrote a very insightful piece that cuts through the conventional wisdom that's often picked up by an uninformed main stream media like a knife through hot butter. Her insight is into the actual cause of the dropoff in home mortgage refinancing.

Rising interest rates are not wrecking the housing recovery; what's wrecking the recovery is that house prices are rising faster than the ability of people to afford them. Maybe we thought we could cheat history, and that a housing recovery would bring about an economic recovery. That can't happen. The housing recovery can't start until the economic recovery begins.

Unfortunately, the economic recovery is overblown; in fact, the economy is stagnant, and there's no evidence of any progress despite years of stimulus by the Federal Reserve.

Similarly, the housing recovery was an illusion: the best housing stock has gone to large private investors, not individual homeowners.

Heidi points out that even rising interest rates remain at historic lows. The problem is not that rates are too high, it's that potential homebuyers can't afford the homes that are available for sale. Why? Because they aren't making enough money.

Personal incomes have collapsed since the recession, meaning households – many still struggling with heavy debt – can't afford the sudden rise in house prices and are not applying for mortgages any more. Anyone who manages to buy a house for the first time right now is not feeling rich: the National Association of Realtors found recently that 42% of first-time buyers have to make sacrifices to afford a new home.

This echos what Housing Wire's publisher Paul  Jackson has been saying for years: the housing market won't be fixed by government-sponsored loan modifications, but by jobs. Real jobs. Jobs that pay people a sufficient income to afford house payments. Like 1992, It's The Economy, Stupid.

Heidi makes two other points that bear watching. One is that banks may be lowering lending standards to chase declining demand. If that's the case, I haven't personally experienced it. I'm currently applying for a home loan and the increased underwriting requirements for paperwork and verification of every nit-picking detail is enough to drive you to drink, if you weren't already inclined, which, thank god, I am. If lenders are loosing their standards, you could not prove it by me.

Heidi also sticks a pin in the notion that we are in the midst of a housing price bubble.

There's no bubble right now because many people can't get the homes they want. Paradoxically, that will create less of a bubble even though housing prices are growing at bubble rates.

All-in-all, I agree with her conclusion that until more people have jobs and money to spend on housing, none should believe "the hype about interest rates."

Banking On Mary Jane

For all you smokers, jokers, and midnight tokers who were planning on cashing in on that lucrative, and now legal (under state law), commercial marijuana business in the Mile High State, you'd better not go looking for a bank loan to finance your crop, or any other aspect of your business, for that matter. At least, not yet. The Denver Business Journal's Heather Draper explains why.

Voters in Colorado and Washington state last fall legalized recreational marijuana sales in those states.

But under current federal banking laws, financial institutions aren’t allowed to provide services to marijuana-related businesses because pot is considered a controlled substance and is still illegal under federal law.

There is hope on the hazy horizon, however.

U.S. Deputy Attorney General James Cole told Congress on Tuesday that the government needed to deal with the absence of banking services for marijuana businesses and that “we’re working on it,” the Associated Press reported.

Denver Mayor Michael Hancock, after inhaling deeply and holding...holding...holding...exhaled a sigh of relief.

"The current inability of these cash-only businesses to legally access banking institutions creates accountability barriers and exposes them and our neighborhoods to unnecessary safety risks, including serious criminal activity," Hancock said.

The mayor then tucked into a bag of brownies and made short work of them.

For those who ordinarily think of bankers as a conservative lot, you should know that when it comes to making money, financing legalized drug businesses is as satisfying as Cheech and Chong in their prime.

“We have maintained since medical marijuana became legal in the state that this had to be resolved at the federal level,” Don Childears, president and CEO of the Colorado Bankers Association, said in an earlier interview. “The marijuana community finally concluded we were right. The key point is that I don’t know how a government regulates or taxes these entities if they can’t follow the money.”

[...]

“The voters of Colorado have spoken,” Barbara Walker, executive director of the Independent Bankers of Colorado, said in July. “The need to offer banking services to these businesses isn’t pro-pot, it’s pro-pragmatism.”

As long as the loan officers don't lose their train of thought while doing onsite inspections, I'd say that in the future, pot and the prime rate are going to go together like Bogart and a roach clip.

The Law Is A Jealous Mistress

Time for some recycling.

One thing about having a professional career that's not a complete bust: the profession is a time vampire. Doctors, lawyers, and accountants all understand that what they do for a living sucks minutes out of their lives that they can never recover. You'd better be doing it well and you'd better enjoy it, and there'd better be some overriding reason to do it other than for the money. There will never be enough money to justify the brain damage and the simple, irretrievable loss of time.

In the throes of another hectic week last week, I had to listen to a client moan about "those damn lawyers" again. He also told me the old joke about a half-full bus of lawyers going over a cliff as being "wasted space." The first 250,000 lawyer jokes I heard, I could tolerate. Once I hit 250,001, for some strange reason, I began to tune them out.

Lawyer bashing: It's rampant. It's reflexive. It's popular to honk that lawyers use "loopholes" in the law, or "courtroom tricks," to get the guilty off the hook. They twist words to help heartless businesses screw the common man. They're tools of greedy, selfish interests rather than paragons of virtue who fight for the rights of the "common man." 

In other words, they represent clients. Even clients like those who complain about lawyers, yet hire them to their dirty work.

I suppose if my ultimate sense of self-worth depended upon the opinion of strangers, I'd be in deep dog do. Fortunately, I have enough self-love for any two people (another reason that I need all the help from God that "She" can spare), so I consider the disparagement of entire groups of professionals based upon prejudices (rather than knowledge) to be as noteworthy as many people consider my blog posts. In other words, of not much value.

Still, being a member of a despised profession becomes tiresome.

It's not just lawyers that people hate, however, it's the "system" in which they work. What kind of "justice" can be dispensed if it goes to the party with the best advocate that money can buy? Look at O.J. Look at Robert Blake. Look at Casey Anthony. Look at that Neighborhood Watch guy. Look at the myriad of "truly guilty" people who get off because of "clever lawyering." It stinks!

I had a professor in law school who told his students that if we came to law school seeking knowledge of the means to absolute justice, we were in the wrong place. Instead, we should be seeking a PhD in Philosophy or Theology. For most of us, "justice" is the proper functioning of a legal system that human beings have erected to keep most of us engaging in "self-help." If we don't like the system, then we should persuade enough voters to change the system, and "have at it." He'd been teaching at the law school for 50 years, and he hadn't been presented with a viable alternative. Eventually, he died waiting.

I agree that abuses by the malpractice bar and the class action bar enrage many people. I recognize that it "seems" unfair when an F. Lee Bailey outfoxes an underpaid, less experienced prosecution team. I'm open to any rational discussion of ways to curb these abuses (such as hiring F. Lee Bailey to proclaim "I come not to defend The Juice, but to bury him!"). However, at some point the ignorance of many people about the purpose of the legal system we've adopted in this country and its superiority in preserving the freedoms we take for granted over other systems of "justice" that mankind has heretofore concocted, becomes so overwhelming that I can no longer restrain the urge to hurl curses worthy of Monty Python:

Many Our Fathers and Hail Marys must then be said for my penance.

You want to live in Japan or Botswana, where there are fewer lawyers? Well, go live there. If you have a better system in mind to dispense civil and criminal justice, then propose it to the legislators of your choice and "let's have at it." 1,000+ years of common law tradition be damned, let's hear YOUR brilliant idea for resolving civil and criminal disputes without those evil lawyers being involved.

[sound of crickets chirping]

Yeah, lawyers are jerks.

Life's a bitch.

Get over it.

And as long as I'm on a roll: To all the folks I've chatted with over the years who think it's simply fine to trample on or ignore the law because they answer to a "higher power," did any of you who claim to be "righteous" ever take to heart the "render unto Caesar what is Caesar's" passage of the New Testament? If you did, did you even understand it? Oh, you did and now you want to argue with me about its meaning. How utterly lawyer-like.

As my response, I'll let a passage from a "lay text," the play and movie "A Man for All Seasons," speak for me. In it, Sir Thomas More responds to demands by his daughter Margaret, her fiance, Roper, and More's wife, Alice, that Moore arrest Richard Rich (who will later betray Moore and bear false witness against him, sealing his doom):

MARGARET Father, that man's bad.

MORE There is no law against that.

ROPER There is! God's law!

MORE Then God can arrest him.

ROPER Sophistication upon sophistication!

MORE No, sheer simplicity. The law, Roper, the law. I know what's legal not what's right. And I'll stick to what's legal.

ROPER Then you set man's law above God's!

MORE No, far below; but let me draw your attention to a fact-I'm not God. The currents and eddies of right and wrong, which you find such plain sailing, I can't navigate. I'm no voyager. But in the thickets of the law, oh, there I'm a forester. I doubt if there's a man alive who could follow me there, thank God . . . (He says this last to himself)

ALICE (Exasperated, pointing after RICH) While you talk, he's gone!

MORE And go he should, if he was the Devil himself, until he broke the law!

ROPER So now you'd give the Devil benefit of law!

MORE Yes. What would you do? Cut a great road through the law to get after the Devil?

ROPER I'd cut down every law in England to do that!

MORE (Roused and excited) Oh? (Advances on ROPER) And when the last law was down, and the Devil turned round on you-where would you hide, Roper, the laws all being flat? (He leaves him) 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-d'you really think you could stand upright in the winds that would blow then? (Quietly) Yes, I'd give the Devil benefit of law, for my own safety's sake.

ROPER I have long suspected this; this is the golden calf; the law's your god.

MORE (Wearily) Oh, Roper, you're a fool, God's my god . . . . (Rather bitterly) But I find him rather too (Very bitterly) subtle . . . I don't know where he is nor what he wants.

ROPER My god wants service, to the end and unremitting; nothing else!

MORE (Dryly) Are you sure that's God? He sounds like Moloch. But indeed it may be God- And whoever hunts for me, Roper, God or Devil, will find me hiding in the thickets of the law! And I'll hide my daughter with me! Not hoist her up the mainmast of your seagoing principles! They put about too nimbly!

Of course, More was put to death when the law (both man's AND God's) was ignored by the powerful. That possibility worries me far more than "clever lawyering."

Where's Snowden When You Really Need Him?

In a performance worthy of Dean Wormer's Double Secret Probation, the US Treasury Department gave a classic runaround to St. Louis Business Journal reporter Greg Edwards when he had the temerity to ask Treasury why it is keeping the names of bidders in its auction sales of "TARP stock" a big fat secret.

Originally the Treasury spokesman, who identified himself as Adam, said he would get the answer from the department’s lawyers. Having received no response by Thursday, we called again. The inquiry was duly noted, I was told.

Today I made another effort, aware of the three-day weekend’s approach. The line rang and rang before I got a voicemail recording that told me public affairs was “not available.” Perhaps the weekend already has begun for taxpayer-funded government workers.

Edwards relates an email from a reader (I assume a banker) who was also being stonewalled.

“I have called and emailed the U.S. Treasury several times to try to find out when certain auctions would occur and who had won auctions I read about after they took place. I have never heard back from anyone.”

As one outraged St. Louis banker reminds us, this is taxpayer money we're talking about.

Yes, well, so it is. As if that ever meant a thing to the people who play with it. File a FOIA request, Greg. Then pull out a pillow, a blanket, and a quart of Ripple, and settle in for a long and peaceful slumber while you wait for denials, the redaction of all critical information, and a Westminster Abbey-sized load of smoke to be blown up your nether regions. After all, this is your federal government at work, and accountability to the taxpayer is definitely NOT its long suit.

Now You See Them, Now You Don't

The American Banker's Alan Kline wrote a very interesting article last week (paid subscription required) about a subject we've been focused on for the last several years: the incredible shrinking banking business.

Since mid-2010 the total number of banks has fallen by 11.4%, by far the largest three-year drop since the mid-to-late 1990s, according to data from the Federal Deposit Insurance Corp.'s most recent Quarterly Banking Profile.

Failures, mergers and charter consolidations have all played a role in the decline, but less so than in the prior three-year cycle. Twenty-three fewer banks failed between June 2010 and June 2013 than in the three years prior, and there were 107 fewer mergers in the most recent three-year span.

What's really driven down the numbers of late is the lack of startups. No new banks have opened for business since mid-2011 and only 23 have come online since 2008, according to the FDIC. Contrast that with the five years leading up to the financial crisis, when an average of 156 new banks opened each year — or roughly one bank for every two that failed or were merged out of existence.

The unacknowledged "war on de novos" by the FDIC and other federal banking regulators has been a hot topic on this blog for some time. The effects of the undeclared "moratorium" on de novo bank approvals are manifesting themselves. While many observers expected the number of banks to decline due to mergers, it turns out that the lack of de novos is as much, if not more, at fault.

Other experts interviewed by Kline state that the industry will continue to shrink for the oft-cited reasons of regulatory burden costs, a lousy yield curve, higher capital requirements, tepid loan demand, and the reluctance, or sheer inability, of smaller banks to invest in the technology needed to compete. None of those factors is exactly an incentive to start a new bank from a business perspective, even if the regulators were eager to grant new charters. Thus, there is nothing on the horizon to suggest that the number of banks will not continue to decline.

Which, according to those in love with the Canadian model, is a great prospect.

A Good Policy Is (Sometimes) Hard To Find

A number of readers, all banking law attorneys  with experience in the subject matter ranging from a dozen to fifty years, wrote or called me to discuss my post of last week on the refusal of the FDIC to sue "favored sons and daughters" who served on the board of directors of a failed bank. None of my correspondents had ever heard of the FDIC policy that was quoted by an FDIC spokesperson in the newspaper story to which I linked in that post. According to that FDIC official, a "1992 policy bars the agency from suing officers and directors for general negligence if the loans in question were made while a bank was rated two or better on the FDIC's internal five-point scale for assessing banks. At the time its offending loans were originated ShoreBank was a two." The only published FDIC policy I could find from 1992 on the subject does not discuss the "2" rating aspect at all. Some of us assume that the FDIC official might be referring to an internal interpretation of that published policy or, perhaps, to another internal policy that has never been published.

More than one correspondent floated the possibility that the spokesperson, or someone else with whom he spoke at the FDIC, simply made the whole thing up. We would never suggest that, and assuming that is not the case, you still have to wonder what policy is being discussed. The reason for the astonishment of many of us who represent, and have represented for decades, directors of failed banks is that we find it hard to believe that there have not been instances over te past 22 years where "loss loans" that have formed the basis for claims by the FDIC against those directors were made when the bank was CAMELS-rated 1 or 2. Thus, the "policy," if it exists, may not have been applied consistently. If it has not applied consistently, why not? Political connections or an inside connection with the FDIC or a sister agency couldn't play any part in the decision, could they? None of us are saying that they did in this case or in any other case. What we are saying is that what appeared to at least one business reporter to be suspicious appears to many of us who work in this area  to be worthy of two raised eyebrows.

Until the actual policy is made publicly available, the questions raised by the reporter and others will linger. The FDIC might do itself a favor by either disavowing what its spokesperson said about the existence of such such a policy (and explain the actual reason the FDIC decided not to sue the directors of the failed bank) or produce an actual 1992 policy to that effect and explain why it was not made public.