Bank Lawyer's Blog

In Search of Foreign "Precedent"

Last week, while researching another topic altogether, I was linked through the magic of Google's algorithms to an old Volokh Conspiracy post that discusses U.S. Supreme Court Justice Stephen Breyer's remarks of eight years ago to the American Bar Association, in which he defended his previous citations to the courts of foreign countries to back up his opinions. Justices Scalia and Thomas have been particularly snarky over the years in their criticisms of Breyer's use of foreign decisions, so, apparently, Breyer felt the need to justify his consulting the decisions of the highest courts of Botswana, Nepal, and the Planet Zardoz in his search for useful precedent.

Breyer thinks that his references to foreign courts aid the spread of the rule of law.

"To tell you the truth, in some of these countries, they're just trying to create these independent judicial systems to protect human rights, contracts. If we cite them sometimes -- not as binding, I promise, not as binding --well, that gives them a little boost sometimes . . . It sort of gives them a leg up for the rule of law."

As I thumb through my copy of the U.S. Constitution, looking for "giving a shout out to foreign courts" as an enumerated function of the judicial branch, and absorbing the overwhelming ego implicit in Breyer's observation, it dawns on me that this is a good notion, because there is one court that needs Breyer's help. A good court. A court on which I, personally, would be humbled and honored to serve.

The Jedi Council

That little green guy in the center? Brilliant, I tell ya', brilliant. But, as you can see, he needs a "boost" that only either the yellow pages for greater Los Angeles or a citation by the U.S. Supremes could give him. Sure, he's a little dude (2.2 feet, according to his official biography), but he's DEEP, man! Know what I mean?

"Powerful enough to defeat Sidious, you are not... Twisted by the Dark Side, young Skywalker has become. The boy you trained, gone he is... Consumed by Darth Vader."

Bottle THAT and sell it, Justice Breyer! You Supremes could make a frickin' fortune.

"Stare decisis, I do not employ. As I go along, up it I make."

Revisiting A Bleak Midwinter

I'm spending time with family over the holidays, so posting will be light. I'm re-posting one of my favorite Christmas posts from the past. Have a wonderful holiday week.

Winter's Night
--Thomas Merton

When, in the dark, the frost cracks on the window
The children awaken, and whisper.
One says the moonlight grated like a skate
Across the freezing river.
Another hears the starlight breaking like a knifeblade
Upon the silent, steelbright pond.
They say the trees are stiller than the frozen water
From waiting for a shouting light, a heavenly message.

Yet it is far from Christmas, when a star
Sang in the pane, as brittle as their innocence!
For now the light of early Lent
Glitters upon the icy step -
"We have wept letters to our patron saints,
(The children say) yet slept before they ended."

Oh, is there in this night no sound of strings, of singers!
None coming from the wedding, no, nor
Bridegroom's messenger?
(The sleepy virgins stir, and trim their lamps.)

The moonlight rings upon the ice as sudden as a footstep;
Starlight clinks upon the dooryard stone, too like a latch,
And the children are again, awake,
And all call out in whispers to their guardian angels.

In the Bleak Midwinter, Glouscester Cahthedral Choir

Check Cashing: An Opportunity For Profit Or Problems?

The American Banker revealed the conundrum that many financial institutions face in the present perfect storm of political correctness: is it possible to serve the underbanked without being served a load of grief yourself in return? I suppose if a bank wants to serve the underserved gratis, that would be just fine with federal bank regulators consumer advocates. Eventually, banks would go broke, but then the federal government could run the whole banking show and parcel out credit and banking services to those who "deserve" them: those who wouldn't be able to secure them if free market "inequities" apply. Naturally, the FDIC would then sue the directors and officers of the failed banks for breach of fiduciary duties, so all would be well in Cloud Cuckoo Land.

Payday lending, overdraft protection, tax refund anticipation loans, and risk-based pricing on auto loans are all on the target list of the regulators. The FDIC tried to get FDIC-insured institutions to make small-dollar loans to the "underserved," but banks that tried it couldn't figure out how to make any money on it, at least at the relatively low rates the regulators wanted them to charge. Now, a number of banks are cautiously offering, or considering offering, check cashing services for non-customer consumers who don't have bank accounts with any financial institution, and those banks are worried about whether this potentially fertile field, currently plowed by store-front operators and the likes of Walmart, will turn out to be salted with land mines.

"A lot of our clients are wondering if they should get into serving the underbanked and, if so, how do it to without getting into trouble," [bank consultant Don] Shafer says. "They know there are hundreds of thousands of underbanked customers out there that aren't using their products."

KeyCorp added check-cashing in 2005, but the Cleveland company's managers knew the service would draw regulatory scrutiny, says Rodney Drake, vice president of consumer segment strategy. Key executives debated whether the service would "pass muster" or get the company in trouble, he says.

So far, Key has dodged any bullets. Unfortunately, that doesn't mean much in a world where the CFPB can determine a practice is "abusive" based upon the brain fog induced by poverty. So far, the CFPB is unavailable for comment on check cashing. Apparently, it's too busy figuring out how to gut arbitration provisions in consumer financial contracts.

6th Circuit Takes A Ruler To HUD's Hands

The mortgage banking group at Ballard Spahr made some interesting observations about a recent US 6th Circuit Court of Appeals decision on the anti-referraL fee provisions of RESPA. The appellate court upheld a district court decision that found that the defendants, a real estate agent who had referred the home buyer-plaintiffs to a title company jointly owned by the owners of the title agency and a second title company, fell under the safe harbor of RESPA's express provisions, even though they did not satisfy all of the safe harbor requirements that were listed in a "policy statement" issued by HUD. The court refused to give a "policy statement" Chevron deference. In other words, the court was telling HUD that if you want to adopt regulations that have the force of law, adopt regulations in accordance with the APA. The defendants met the three conditions for the safe harbor expressly provided by the statute and if HUD wants to expand that list, it needs to do something more than issue a policy statement. Otherwise, the court will acord the "policy statements" the same deference as the lunch menu at Taco Bell.

You could view that decision as undercutting my contention that banks should treat seriously "guidance" issued by bank regulatory agencies. As the regulators themselves will, on occasion, admit, such guidance does not, technically, have the force of law. However, I continue to believe that bank regulators take the position that their guidance encompasses what they believe to be standards that embody safety and soundness principles. We have seen bank's cited in reports of examination for violating "guidance." While it may be true to assert that if the regulator were to pursue civil money penalties or more serious sanctions based on violations of guidance, a bank may have an argument that such guidance does not have the force of law and cannot form the basis of such a penalty, does any banker really want to be in the position in which the defendants in the 6th Circuit Court of Appeals case found themselves, winning each round of the litigation, but having to continue to the pay the massive attorneys' fees and costs of litigation that go along with dancing with a bear? Even if you win, you lose.

The better path to take is to pay attention to the "policy" and comply with it if you can do so. It will avoid much pain over an extended period of time.

As for HUD, and the current regime in D.C., the authors of the linked client alert have a telling parting shot.

Last year, in Freeman, et al. v. Quicken Loans, Inc., the U.S. Supreme Court refused to follow a HUD policy statement interpreting the prohibition on unearned fees in RESPA Section 8(b). The court labeled HUD’s interpretation a “palpable overreach” that went “‘beyond the meaning that the statute can bear.’”

"Palbable overreach." A motto that our federal government apparatchiks live by. No matter how many times they have their hands slapped, I expect them to keep "overreaching."

DOJ: Fond Of FIRREA

A concoction of Congress from the financial crisis previous to the most recent financial crisis is proving to be a big hit with prosecutors at the US Department of Justice. As Winston & Strawn lawyers Dan Webb and Robb Adkins explain, the DOJ has grown fond of FIRREA. In fact the DOJ "has filed more FIRREA actions in the past few years than it did in the first 20 years of the statute's existence."

The statute also sought to protect banks by providing enforcement authority to combat the perceived fraudulent conduct of individuals and third parties against financial institutions. Accordingly, Section 951 of the statute, codified at 12 U.S.C. 1833a, permits the U.S. attorney general to bring a civil action against anyone who violates 14 enumerated criminal statutes affecting a financial institution.

Some of these criminal statutes, such as bank fraud, clearly affect a financial institution. Other enumerated criminal statutes, such as mail and wire fraud, do not expressly concern financial institutions; therefore, for those offenses, the government must additionally prove that the fraud is one “affecting a federally insured financial institution.”

Prosecutors love FIRREA because it's a civil statute with a lower burden of proof than a criminal statute (preponderance of the evidence versus beyond a reasonable doubt), it provides the ability to issue pre-filing administrative subpoenas, and it has a hefty 10-year statute of limitations.

So far, so what, you might ask.

As an older statute is repurposed for new application, the DOJ finds itself asserting untested theories in an attempt to conform the law to the facts. Perhaps nowhere is this more starkly demonstrated than in a series of recent cases in which the DOJ brought action against financial institutions under FIRREA, putting at issue the statute provision “affecting a federally insured financial institution.” The “affecting” provision is not defined in the statute and, due to limited litigation in its first 20 years, no court cases had addressed the provision until recently.

 

In support of its recent FIRREA actions in financial crisis cases, the DOJ has asked the courts to interpret the  “affecting” requirement as permitting an action against the financial institution for allegedly engaging in fraud  that affected itself. See, for example,United States v. Bank of New York Mellon, 2013 WL 1749418 (S.D.N.Y. 2013). Defendants have argued, among other things, that “affecting” a financial institution under FIRREA means harming or victimizing the financial institution, and that the financial institution itself cannot have “affected” itself where the government’s theory is that it is the perpetrator, rather than the victim, of the alleged fraud. Thus far, the DOJ has been successful at the district court level, but appellate courts have yet to weigh in on this legal theory.

 As the authors caution, lawyers representing defendants must now be especially careful in responding to administrative subpoenas, since they are not secret (as are, for example, grand jury subpoenas)and could be used to gather information for "parallel investigations" that involve criminal penalties. Overall, they warn, "given that FIRREA is no longer being viewed by the DOJ as a statute designed to protect financial institutions from fraud, but rather to file actions against them for fraud, practitioners must proceed cautiously in responding to administrative subpoenas and assume that the financial institution may be a target of the investigation."

Yes, with an activist DOJ using FIRREA as another arrow in its quiver to punish "Too Small To Save" banks and those who serve them, assuming that you may be a target is always a wise assumption.

CFPB Targets Arbitration

In what we are sure is nothing more than the start of a "disinterested, objective" look at the use of arbitration provisions (especially those that contain class action waivers) in consumer financial services and products contracts, Richard Cordray held a "field hearing" on the subject last week in Dallas. Advocates for banks defended the use of such provisions, while consumer advocates attacked them as the devil's spawn.

While federal law already expressly prohibits arbitration clauses in most home loan contracts, the CFPB is still interested in learning more about how arbitration clauses are impacting consumers and the financial services industry in other financial agreements. The bureau began studying the issue, prompting consumer advocates and local banking professionals to weigh in at the Dallas field hearing.

[...]

Shannon Phillips, deputy general counsel for the Independent Bankers Association of Texas, raised concerns that a broader requirement for the use of arbitration agreements would harm smaller banks that are already reeling from excessive regulation.

Phillips says smaller banks have already been ‘caught in the backwash’ of regulations designed to curtail the practices of big banks, and a newfound focus on arbitration clauses would only further frustrate their bottom lines and compliance costs.

“Not having arbitration clauses when they’re needed is going to increase their costs,” he noted.

"Caught in the backwash of regulations." That statement alone made Shannon's testimony blog-worthy.

Other panelists characterized the clauses as absolute bars in obtaining consumer relief.

Ellen Taverna, a senior legislative associate with the National Association of Consumer Advocates, cited the case of an active military member who was wrongfully foreclosed on while overseas as an example of a case where a pre-drafted arbitration clause kept his case out of court.

Taking a one-off example and making that the basis for sweeping policy pronouncements is a favorite tactic of advocates of the expansion of governmental power. Nothing new here, except that I assume the use of the term "pre-drafted" indicates that Ms. Taverna prefers dispute resolution provisions that are "post-drafted," so that no one actually knows what they might contain until they're employed, then the participants just make it all up on the fly. All contract provisions, to be enforceable, must be "pre-drafted," no?

Class action waivers also came in for a thumping.

Jess Sharp, managing director at the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce..."took aim at class-action disputes, saying "There is very little recovery through class actions; consumers are not really benefiting."

In response, Richard Frankel, an associate law professor at Drexel University School of Law, argued that class actions “are an important means for changing business practices … and that spreads out to the entire community.”

By "the entire community" he must mean class action plaintiffs' counsel, since in most cases, they end up with the largest single chunk of cash, while the class plaintiffs often receive some nice parting gifts and a promise by the defendant not to do something that it never admitted doing in the first place.

Both Phillips and Sharp urged the CFPB to approach the subject matter with a sense of practicality.

[Sharp] said the focus of any study should be on how the different types of dispute resolution stack up against each other. “We need to focus more narrowly on the outputs," he indicated.

Consumers do as well or better in arbitration when comparing their outcomes to the courts, he explained.

Phillips agreed, arguing that arbitration is not the more complex solution. “To say that arbitration is more complicated than litigation means you have never been in litigation,” he noted. As an example, he cited one consumer case that began 10 years ago and remains in litigation today.

While Phillips is likely correct to assert that"to say that arbitration is more complicated than litigation means you have never been in litigation," I don't think that will have much persuasive power with the CFPB. These are the folks who hire people to regulate banks who they then need to send to school to learn what bank regulation is all about. Appeals to practical experience may fall on deaf ears.

No, I'm assuming that this is one of the early salvos in a war that will end only with the death of arbitration provisions, and specifically class action waivers, in consumer financial agreements, regardless of SCOTUS decisions that favor them and regardless of a legislative history at the federal and state level that promotes arbitration over litigation. I fear that this is merely another exercise in "finding facts" to support a foregone conclusion.

I hope I'm wrong, but I won't bet against myself.

SIGTARP's The Real "New Sheriff In Town"

A reader sent me a link to a Washington Post article about a  federal agency that, when it comes to bankers, knows evildoers when it sees them, and when it sees them, does everything it can to make sure they serve time.

At a time when the government is being criticized for not holding senior bank executives liable for crisis-era crimes, a little-known federal agency is compiling a growing list of criminal convictions.

Since 2008, the Office of the Special Inspector General for the Troubled Asset Relief Program has pursued criminal charges against 107 senior bank officers, most of whom have been sentenced to prison. Created to supervise the government bailout of the auto and financial industries, the agency has found dozens of cases of bank executives who misused bailout funds.

SIGTARP has a staff of 170, a budget of $41 million and an enforcement track record that rivals agencies twice its size. The agency’s work has resulted in $4.7 billion in restitution paid to the government and victims. Lawmakers are holding SIGTARP up as a model and questioning why other agencies are not producing similar results.

Of course, few, if any, of those broke-back bankers tread on the sidewalks of Wall Street when their heinous crimes were committed, but what the heck: the little fish are always easier to net.

SIGTARP has a strong record, but the office has mainly taken down community bankers, not Wall Street titans, for brazen acts of fraud, some observers say. “The amount of direct evidence of banker wrongdoing in these smaller bank cases is easier to show,” said Mark Williams, a former bank examiner who teaches finance at Boston University.

Still, he said, “these SIGTARP cases set an important precedence that bad banker behavior will not be tolerated and [will be ] aggressively prosecuted.”

That's what these cases show? I beg to differ. I think they show that the bigger you are, the firmer you stand. If you've got the money and the heft, you appear to be bullet proof. For the rest of the banking industry, the lesson is that if you're going to commit a crime, then, for heaven's sake, don't do it on a too-small-to-save financial institution. Dream big!

As definitive proof that SIGTARP's zealousness may be directed against the least troublesome class of crooks, Liz Warren has singled out the agency for special praise.

In October, Sen. Elizabeth Warren (D-Mass.) lauded the work of the inspector general in a letter asking financial regulators to disclose the extent of their efforts to pursue cases against individuals.

Although Warren credited the Office of the Comptroller of the Currency, the Federal Reserve and the Securities and Exchange Commission for achieving “landmark settlements” with banks for crisis-era misdeeds, she said that “a great deal of work remains to be done” at the agencies.

Hit with Liz Warren's praise: that has GOT to hurt.

My point isn't that SIGTARP isn't putting away bankers (or those close to them) who have committed crimes. My point is that the bankers they're putting away are low-hanging fruit. We saw droves of them jailed (some, more than once) in the aftermath of the savings and loan crisis of the late 1980s.Texas, for example, was at that time chock-full of venal, crass, and not-as-bright-as-they-needed-to-be-to-get-away-with-it banking bad actors. A prosecutor could stretch his arms yawning and knock a couple to the ground. Heck, a prosecutor could go "crook hunting" with Dick Cheney in those days and even Cheney could bag a few (albeit after peppering the prosecutor's mug with buckshot).

What would be world-class impressive would be to start slugging it out with some big bank masters of the universe who are bright, clever, rich, well-connected, and just as criminal, slap some cuffs on them, and put them through a public shaming. Then you'd have something to really crow about. Until then, bask in the glory of Wapo puff pieces inside The Beltway. Outside, the rest of the world is less than impressed.

CUs Knock-Knock-Knockin' On Heaven's Door

Because it's Monday and I'm a "Little Miss Sunshine" kind of guy, the kind of guy who wants every bank executive to get off on the right foot each and evey week, I need to pass along an upbeat article that was sent to me today by a credit union industry representative. As this correspondent said so well, "You can substitute 'community banks' for 'credit unions' in the article and it works just the same."

It's a cheery little piece by Credit Union Times Executive Editor Heather Anderson. She's been in the credit union business for her "entire career" (and although she won't confirm how long that might be, we assume it's at least "a while") and she thinks that credit unions are headed the way of the Do-Do Bird and Vanilla Ice: into oblivion. Why? Here's her reasons:

• Breakdown in barriers to entry into the business. She mentions prepaid debit cards as spelling the end of checking accounts as we know them.
• Check cashers and payday lenders sucking NSF and overdraft income wells dry.
• Free spending (and investing) baby boomers dying off and being supplanted by Gen Y scrooges who won't borrow to buy cars or houses and will live in Mom's and Dad's house until they move into the retirement home.
• The good times are gone and they ain't never coming back, no how, no way.
• The regulators need to help credit unions be innovative with "new" products and services, which is like telling Elizabeth Warren that an unaccountable giant federal bureaucracy may morph from the New Sheriff into the New Caliphate. It simply doesn't compute.

So, all-in-all, Heather thinks credit unions, and by analogy, community banks, are toast.

I was going to get Heather a tasty box of almond toffee for the holidays, but I may change that gift to a lump of Anthracite. She may need it to warm the cockles of her disheartened heart.

Logjam Not Broken By Bird-in-Hand

Back in January, I expressed the hope that the FDIC wouldn't smack down the only de novo bank application that a chance in a thousand of being approved, simply because the applicants included, and intended to serve, members of the Amish community, a band of renegades well-known for international unpasteurized milk trafficking. We understand that when it comes to asking the question "Got Milk?" even the Colombians and the Mexicans ask it with an air of humble supplication.

Well, the FDIC let this one pass on by (the first in three years) and that makes the folks at Bank of Bird-in-Hand as happy as if they had Two-in-Bush (yes, I broke my previous promise to leave that one alone). The organizers indicated that their experience may be a template for the process that other successful de novo applicants will have to follow, including:

• Board members who not only had previous experience as company directors, but experience specifically as a bank director.
• A "thorough" application process (an eighteen-inch thick application, versus a three-inch thick application for a de novo twenty years ago);
• A review process akin to an 18-month long proctoscopy, only without the pleasant chit-chat with your doctor's nurse.
• A business plan that will be scrutinized with an electron microscope by Olympic-caliber second guessers unhindered by the burden of actual private sector banking experience.
• 8% leverage capital ratio's maintained not for the first three years, but for the first eight (making it extremely difficult for all but those who deal "sub rosa" in illegal milk products to make a decent ROE).
• Sacrificing your first born male child to Moloch.

Look, this approval is not a harbinger that the de novo floodgates are opening. Rather, it's evidence of how tough it will be for de novo applications to be approved, and how unique the circumstances of the individual de novo banks will be that are eventually approved. If you're spending into seven figures (or, at the very least, high six figures) on a process that's "iffy," you have to have the mentality of a riverboat gambler, a saint, or a blithering idiot to go through it when recent history demonstrates that many may feel that they are called, but few are actually chosen.

The linked article discusses a letter of protest about the de novo application and approval process, and requirements, from the IBCA and the American Association of Bank Directors. Those organizations decry the difficulties strewn in the path of such applications, and claim that it's depriving smaller communities to access to needed credit. If so, the arguments are falling on deaf ears. The attitude won't change without legislation, and how likely is that to happen in the frozen tundra of D.C.?

[Sound of crickets chirping]

As the American Banker's Alan Kline asserted several months ago, the decline in the number of banks in this country (the overwhelming majority of them community banks) since the onset of the last economic meltdown has been dramatic. It's also due as much or more to the lack of de novo charter approvals as it is to mergers and acquisitions. It's a trend that will continue and one to which those of us who serve that industry had better either adapt or find something better to do. Like heckling Liz Warren for a living, or something equally as emotionally satisfying, if not as lucrative. Whatever we do, accepting reality is not really an option for those who want to survive.

US Senate Gets Interested In Emminent Domain

While a great deal of chatter today centered around the American Banker article by Kate Berry and Jeff Horwitz about the unholy alliance of HUD, George Soros, and an advocacy group that makes its money by suing banks on trumped-up grounds of racial discrimination, that article is only the first of a series. I want to read the rest of the series to see if the butter is as rancid as it appears to be from the first installment.

My immediate attention was drawn today to the news that a bi-partisan group of Senators is taking on the eminent domain madness that has swept up municipalities like Richmond, California into the vortex of unintended consequences. The straw that apparently broke the solons' backs were letters sent by Richmond to some mortgage loan investors that threaten to us the power of eminent domain if the loan owners don't sell their loans to the city. That prompted four senators to write a "strongly worded" letter to HUD demanding that HUD step in and tell Richmond that if it pursues this course, it can kiss FHA loans in that city goodbye. That's what the FHFA did regarding Fannie Mae And Freddie Mac financing.

To the surprise of no one (including, I strongly suspect, Kate Berry and Jeff Horwitz), HUD's response was tepid. HUD is "monitoring the situation." The senators are demanding more than that from HUD.

Good luck with that, senators. HUD's apparently too busy concocting "disparate impact" regulations and working hand-in-glove with professional "non-profit fair lending advocacy groups" to squeeze settlement money out of reputation-risk-averse big banks to actually help to save mortgage lending in Richmond, California. With this crowd, ideology trumps the market place.