Bank Lawyer's Blog

Bank of America Does It Right

Having blistered America's Bank for a social media faux pas, it's fair to give it a hat tip when it uses social media well. What the bank has done well is a video that it produced with Kahn Academy. For those not familiar with Kahn Academy, here's some background from 60 Minutes. Personally, I'm a fan of what Kahn and his cohorts have been doing to teach young people (and adults, for that matter) what many take to be tough subjects, like "Math" (gag, choke).

The latest effort with B of A is a video to teach consumers the difference between a debit card and a credit card, and the advantages and downside of each. While professionals in the banking industry might think it's simplisitic, I think it's effective in teaching the basics. It's not necessary that the average consumer be a banking geek; he or she just needs to know enough to make informed decisions. Kahn Academy (with B of A's help) is, in my opinion, making that happen. When I viewed the video again this evening, it had over 1,200,000 views. That's a lot viewing for a subject that is devoid of twerking or a character named "Katniss."

You can judge for yourselves. The video can be viewed here.

Time Well Spent

Having snatched defeat from the jaws of victory in the 2008 presidential election, Sen. John McCain understands two things: (1) you never choose a running mate vetted by Cheech and Chong, and (2) as a RINO, you can never, ever, be too far to the left of center. In his latest bit of political grandstanding, Senator McCain has made some public sputterings about introducing legislation to prevent large banks and other corporations from deducting the massive fines and settlements that are extracted from them by the federal government. Apparently, the thought of Chase writing off the $13 billion the government extorted extracted from it for the sins (mostly) of the broken banks it bought at the behest of the FDIC to save that agency from forking over quadrillions, gave the senator flashbacks to the night Sarah Barracuda told him that she was "Going all rogue, and like, stuff." 

The beauty part of this legislation is that it gets some sweet pub for a man who's time has not only passed, but has passed with the speed of a Manny Pacquiao left jab, without having a chance of actually being passed. As the linked article observes, with D.C. in gridlock, Dracula will see the light of day before a piece of populist catnip like this bill will. Therefore, McCain can join hands with Liz Warren, one of his co-sponsors, and sing "Kumbaya," without any actual harm being done. Other than to the image of the Senator, that is. I suppose that when constituents start every conversation with a quizzical look and the query, "Your name again?", any publicity is good publicity.

When they've finished not passing this bill, perhaps the good senators might take up the task of not passing a budget bill.

Many of us have reached the point where we'd seriously consider our own nuclear option for the US Senate, an option that has nothing to do with filibusters.

Eminent Domain Has A Fan In The Garden State

Several readers sent me links to various articles like this one, which discuss yet another busted municipality's plans to get rich quick via the use of the power of eminent domain to seize underwater mortgages and write down the principal balances so that a select group of homeowners can reap the benefits of the municipality's police powers at the expense of mortgage loan investors. This time, the police state charge is being led by a burg on the right coast rather than the left, Irvington, New Jersey.

The city's mayor proclaimed that this plan is better than others because the city plans to only hose private label security owners rather than holders of Fannie Mae, Freddie Mac or Ginnie Mae mortgage-backed securities. That obviously appeals to folks who believe that private business has no place in the residential mortgage markets in the first place, mortgage lending being a function akin to a public utility, where loans ought to be rationed out via a command and control system micromanaged by government bureaucrats.

Smith said the city will try to avoid being sued through "friendly condemnation," which offers incentives to the mortgage owners if they agree to avoid litigation.

"Incentives"? In New Jersey, that means you won't end up as part of a concrete foundation pier of a warehouse. How about the "incentive" of never having to lend again in Irvington, N.J.? If the city proceeds with this asset grab, that ought to be an easy incentive to realize.

One of the creators of this scheme, a college professor (tell me you're not surprised), inadvertently damned the entire scheme with this bit of truth-telling.

According to Cornell University law professor Robert C. Hockett, eminent domain is one of the few tools available to take over and write down an underwater mortgage because it gives municipalities the power to circumvent mortgage contracts, acquire loans from bondholders, write them down and give them back to the bondholders.

"Some government instrumentality is going to have to do this," said Hockett, who helped create the approach. "No private actor can get around the contracts, but a public actor can."

That's right: the scheme uses government power to "get around" contract rights. The 5th and 14th Amendments to the US Constitution be damned. The power of eminent domain ought to be used sparingly and only when there is a pressing need for the government taking private property for public purposes, not to benefit a few. The outrage on the left over the Kelo v. City of New London decision in 2005 has turned full circle. It's not right to seize private property of homeowners to benefit a private commercial development but it's just fine to seize private property of mortgage investors to benefit a small group of homeowners.

That's why the ACLU, which, as another article on the proposal notes, "has frequently found itself opposing eminent domain proposals," is supporting the taking Irvington.

The difference in Irvington, [ACLU-NJ Executive Director Udi] Ofer said, is “racial justice,” creating a real-estate free market by making loans available to local residents at rates that are normal elsewhere..

In other words, the ends justifies the means.

Hypocrisy: "The practice of professing beliefs, feelings, or virtues that one does not hold or possess; falseness."

"Nothing But Attorneys" Not A Good Thing For Cuban

Mark Cuban, "Shark Tank" reality show star, failed reality show dance contestant, owner of the NBA's Dallas Mavericks, and bazillionaire, is not known for his small ego or a reticence to speak his mind. Still, it's amazing how much smack he has been talking about the SEC and its attorneys since he won his trial on insider trading charges. Not long ago, I heard an interview with him on a Dallas sports-talk radio station in which he called out SEC lawyers by name and mocked and blistered them in terms that even this blog's owner might have found a bit too "tart." On the other hand, he's stinking rich and he believes that the bureaucrats tried to ruin him without justification, so I get it.

USA Today recently published an interview of Cuban by the original "News Babe," Maria Bartiromo, in which Cuban showed that his ire against the SEC and its lawyers is not fading with the passing of the time. Excerpts:

Q: The SEC initially said you used a private tip to avoid a loss on the sale of your 600,000 shares of Internet company Mamma.com shares back in 2004. How did they get this so wrong?

A: Confirmation bias. They ignored fact after fact. Even those written by SEC agents. Instead of dealing with facts, they misrepresented and mislabeled testimony and documentation and ignored the obvious.

Q: Do you think it's that the SEC doesn't have the right resources and people overseeing business and the securities industry or are they just trying to make examples of high profile people?

A: I think they exemplify what type of organization you should expect when you have nothing but attorneys and in particular former prosecutors running the show. From every dealing and observation I have had of the SEC, it is obvious that lawyers run the show. There is a culture of trying to win, not trying to find justice. There is a culture of looking to find their next job. I always say that SEC equals "Swiftly Enhanced Careers." There is no business sense that I can find. That has, in my humble opinion, led to a bloated entity that has no idea what resources it needs, no concept of what its true goals should be or how to get there. They don't know how to make markets fairer or better at creating capital for business. They just know how to use the courts to litigate matters. (The SEC declined comment.)

Q: You refused to settle and went to trial. You had to spend more money on lawyers than on the potential fines you would have had to pay. Why was this so important to take this to the mat.

A: Because I hate to be bullied. I love this country. The idea that the people who over the first six years of my case ran the SEC could just ignore facts and care only about winning and losing and have no interest in justice, turned my stomach. I have the resources to fight. I felt compelled to take up that fight.

One of the lessons here is that when taking on the federal government in bet-your-life-and/or-fortune litigation, it helps to have a billion or more in assets to fund the defense. I guess when Marc bashes lawyers, he means "government lawyers." He obviously doesn't hate all lawyers since he and his brother, a lawyer, seem to get along.

There aren't many community bankers with Cuban's resources. They have to fight their battles against their federal regulators, when a dispute leads to civil enforcement actions, as best they can. Even when the government repeatedly loses and still keeps on trucking, regardless of the facts, it can always hope that it can bleed the defendant into a settlement. That's not a reasonable prospect when you're facing a Cubanesque opponent.

Therefore, whether or not you like the guy, you can cheer him on. You might even live vicariously through him.

One Banker Who's Learned The Lesson Of Chase

U.S. Bancorp's Richard Davis, a man never to be confused with the likes of Charlie Sheen when it comes to self-preservation and the exercise of plain old prudence, was quoted not long ago in an article in the American Banker (paid subscription required) to the effect that it would be a frosty day in the land of Beelzebub before his bank ever ventured where Chase is sorry it ever went.

"In the old days it was about credit risk, and uncertainty about who you would acquire as it relates to long-term, systemic credit surprises," Davis said at the Bank of America Merrill Lynch Banking & Financial Services Conference in New York on Tuesday.

"But it is all about compliance now and as you've seen in this environment, you will be held accountable from day one for the company you buy," says Davis, who is U.S. Bancorp's chairman and chief executive. "And you can be held accountable for things up to 10 years in the past, even if they were approved back in the old rules that have changed."

[...]

"Anyone who is going to do a deal needs to be very careful that they are not bringing a virus into a healthy room," Davis says.

While the article notes that Davis has long been cautious about the unintended consequences of acquisitions (a virtue not possessed by our federal legislators), he believes that the "little guys" will be engaging in M&A.

"You might see a 10 and a 10 trying to get to 20, or a 10 and a 15 thinking about 25," Davis says. "You'll see a lot of fours and twos getting to six."

Obviously, he's talking about the billions of dollars in assets possessed by the banks who will be merging.

I think that he's right. The biggest will grow organically, but the less-than-behemoths will grow by devouring both compatriots and their children. It's not a question of "if," it's only a question of "when."

Disparate Impact Receives Another Stay Of Execution

Leftist envelope stretchers throughout this great land they like to call "The People's Republic" breathed a huge sigh of relief last week when Mount Holly (NJ) Township settled a fair lending lawsuit filed against it only a couple weeks prior to oral arguments before the US Supreme Court. Consumer advocates cheered the development and lenders felt the bitter bile of disappointment rise in their throats, since advocates of the theory of "disparate impact" in the application of fair lending laws and opponents of that theory both understand that once the SCOTUS gets its hands on a case that it can actually decide, the theory is doomed.

The last time around this merry-go-round, when the City of St. Paul, Minnesota settled its fai r lending case before the SCOTUS could rule, the US Justice Department was reported to have worked behind the scenes to induce St. Paul to act like its New Testament namesake and turn the other cheek. Thus far, there have been no reports of similar bribery arm-twisting sweet-taking by the Justice Department, although that might be because the head honcho of the Justioce Department's Civil Rights Division, Thomas Perez, who was leading the charge on stretching disparate impact beyond the breaking point, has moved over to the Labor Department, where he can plague employers with a more solid footing of legal precedent to support his disparate impact ideology.

Banking trade groups were singing the blues.

"We respect Mount Holly Township's decision to settle, but we're disappointed that the Supreme Court has once again lost the opportunity to address whether disparate impact claims are appropriate under the Fair Housing Act," Frank Keating, president of the American Bankers Association, said in an email Thursday.

[...]

"I think it is extremely disappointing that a clear reading from the Supreme Court on this very important issue will not be forthcoming, at least in the near term," Ken Markison, vice president and regulatory counsel at the Mortgage Bankers Association, said Thursday.

That perspective was echoed by Steven Zeisel, general counsel at the Consumer Bankers Association. "We were hoping that the court would look at the case, but the parties did what the parties did, so we're just going to have to wait for another opportunity," he said.

With "another opportunity" not on the horizon, the most cogent warning for lenders came from attorney Paul Hancock.

"This issue isn't going to go away."

On the upside, fair lending attorneys for banks and other lenders will have the ability to send their kids to Ivy League schools and vacation in Aruba for at least another four or five years. Or, until a Republican is elected to the White House.

A Not-So-Modest Proposal

Oakland, California's city government appears to be as dysfunctional as a group of politicians can be, meaning they're ability to govern is akin to the battlefield brainpower of George Armstrong Custer. In considering what the reporter never specifically describes as anything other than Richmond, California's "out of the box anti-foreclosure proposal," one councilman's declaration that he needed more time to consider "the intricacies" of the proposal prompted another council woman to assert that such a declaration was "disingenuous." That's a fancy word for "lying." That, in turn, prompted a heated denial by the accused and an accusation by the Council president that the accuser was a trickster who was trying to promote the proposal by circumventing the committee process. Apparently, parliamentary rules were, once again, getting in the way of ideological goals, and as we all know, the ends justify the means.

At no point in the article (which described itself as "analysis") is it mentioned that the "proposal" is the use of eminent domain by Richmond to seize underwater mortgage loans from investors. We've been warning about not only the questionable constitutionality of the proposal (and others like it), but the detrimental effects the adoption of such a plan might have on homeowners and prospective homeowners in Richmond who ever want to be able to obtain a residential mortgage loan in the future. According to the article, our warnings are valid.

Kevin Stein, an associate director of the California Reinvestment Coalition, which has worked closely with the Richmond City Council on its plan to help struggling mortgage holders said, “We’re here because too many people are losing their homes.” He added, as soon as Richmond broached the subject earlier this year, banks and their surrogates moved to punish the city’s treasury by effectively redlining the community. The pressure dissuaded Wall Street from purchasing some of Richmond’s municipal bonds.

What did you expect, Kevin? Did you think that bankers and mortgage loan investors were going to roll over with their paws in the air and accept their beating without fighting back? If you think Wall Street's reluctance to buy Richmond's bonds is pronounced now, just wait until Oakland passes an eminent domain plan and starts seizing mortgage loans. Not only will the city be buried by an avalanche of well-funded litigation, but trying to get a mortgage loan in the city will be a difficult and, if available, very expensive task. Just ask Richmond about "litigation risk."

It's been suggested that these pols are merely playing political theater, catering to a voter base that is somewhere left of the late, great Mao, and that they actually know that the plan will never fly. I'm not convinced that is true. I think many of these folks have consumed the Kool-Aid and will do much damage before, like San Bernardino's city council, the voters throw the bums out. Before they do so, however, much mischief may occur.

Stern: Down But Not Broke

Although, once again, I'm traveling on business this week, I have torn myself away from lesser matters to follow the latest news in the battle of The Sunshine State against "The Foreclosure King," David J. Stern. In April, we discussed the fact that the Florida Bar had filed a complaint against Stern that sought to take away his law license. As we observed at that time, perhaps a former assistant AG was correct when she predicted that Stern had made so much money from his foreclosure "practice" that he wouldn't care if the state took away his license to practice law.

It looks like we'll get a chance to see whether or not that sentiment is correct, because recently, Palm Beach County Circuit Judge Nancy Perez recommended that Stern be disbarred. The judge found that Mr. Stern had visited "massive injury" on the state's foreclosure system. In addition, she appeared to be particularly galled by Mr. Stern's claim that his deteriorating financial condition impaired his ability to withdraw from pending cases, an assertion she called a "misrepresentation."

The linked article lists all the money Stern made from selling his foreclosure-related enterprise before it went belly-up, and the amount of money he paid for real estate in Florida, which, apparently, he still owns. Nothing pays like running a foreclosure mill and bailing out at right time, I guess. The state may be winning its battle, but the only people who seem to care are the folks doing the pursuing. The pursued seems impervious to the financial consequences of the end-game.

In this case, "justice" might not only be exceedingly slow, but exceedingly irrelevant.

OCC Ups The Ante On Third Party Relationships

The OCC issued new guidance on third party relationships last Wednesday. The new guidance, found in Bulletin 2013-29, rescinds and replaces OCC Bulletin 2001-47, which many banks have used as the "template" for structuring their vendor management programs and as a checklist for what they need to address in their contracts with third party vendors. While I haven't had a chance to absorb all aspects of the revised guidance, I have a couple of quick impressions. The first is that by including an extensive section toward the latter part of the guidance that includes specific duties for a bank's directors, as well as "senior management" and "business line management," the OCC is sending a message to banks that it expects third party relationships and vendor management to ultimately be the responsibility of the bank's board of directors. While, strictly speaking, this was always the case (see, for example, the statement on page 1 of Bulletin 2001-47 as to the responsibility of the board of directors and management to "properly oversee and manage" such relationships), by going into detail as to the specific duties of the directors and senior management in the latest guidance, the OCC is making it clear that (1) it expects banks to be "drilling down" in terms of due diligence and management, both upfront and ongoing, on the risks of third party relationships, and (2) that if those relationships cause loss to the bank of any type (reputational, operational, and strategic risks are all discussed), then the OCC will be looking all the way up the food chain at the bank to assess blame and, if warranted, impose penalties.

Here's a telling line: “A  bank’s failure to have an effective third-party risk management process that is commensurate with the level of risk, complexity of third-party relationships, and organizational structure of the bank may be an unsafe and unsound banking practice.” The emphasis is the OCC's, not mine.

There will be a lot of commentary on the new guidance in the near future. Banks of all kinds, not merely national banks, ought to pay attention to it. The OCC (and the other federal banking regulators, in our view) mean business. Vendor management, and third party relationships generally, must be addressed at the highest levels of the bank, because if a relationship turns "sour" and the bank suffers adverse consequences (even a "hit" to its public image), you can bet your bottom dollar they'll be assessing responsibility and consequences from the top down.