Bank Lawyer's Blog

Regulators Driving Consumers To The Unregulated

As federal regulatory agencies continue to pile regulations onto the backs of the banks, thrifts, and credit unions they regulate, a not-so-funny phenomenon is occurring, according to consultant Susanna Tisa: "all manner of nonbank entities [are] rushing in to offer services that fill the demand – from alternative consumer options like payday loans, online lending and other small-dollar credit to commercial financing provided by business development companies, private investment funds and other shadow bankers."

Over 20% of U.S. households are using alternative financial services such as payday loans at least some of the time. Small and midsize business loan originations from online lenders, merchant cash advance providers and other alternatives have grown a reported 64% in the last four years. The global shadow banking system grew by $5 trillion in 2012, to reach $71 trillion.

Consumers and businesses have turned to these lightly regulated alternatives, usually at much higher cost, as regulated mainstream banks are discouraged from lending to anyone but the most creditworthy. Policymakers say they want to bring "underbanked" young adults, immigrants, entrepreneurs and other groups into the traditional banking system for safer consumer options, small-business growth, a sound banking system and other laudable reasons. But today's rules and aggressive enforcement work against these goals.

Tisa also points out that banks that have attempted to venture into these troubled waters, with such products as "cash advance loans," have been slapped up the side of the head by their primary federal bank regulators. Yet, where there's demand, there will always be suppliers. Tisa's point is that those suppliers are increasingly the "lightly regulated."

She asserts that with the "explosion" of interest by the "lightly regulated," the problem of effective regulation is compounded.

There are simply not enough regulators, examiners or hours in the day to chase down, eradicate or sanction all the abusive practices that can emerge in this exploding market.

Perhaps, but that won't stop the CFPB from giving it the old college try. Expect The Adjustment Bureau to be expanding in years to come like Elvis' waist line in the years immediately prior to his keel-over at Graceland. They may not be able to define "abusive" with Aristotelian precision, but they know it when they see it, and when they see it...well... It. Just. Hacks. Them. OFF!

Tisa does not discuss the fact that in addition to being squeezed out of direct participation in making high-risk loans to high-risk borrowers, regulated financial institutions are being squeezed out of permitting some of the "lightly regulated" with access to the banking system. As we've discussed, if you can't regulate it directly, you can always deny it the ability to exist. That drastically reduces the concern with an insufficient number of regulators. You don't need an examiner to examine a lifeless carcass.

Tisa ends with an appeal to reason.

[T]here must be constructive ways to take some of the pressure off and gradually redirect a portion of the demand back to regulated institutions. Banks and regulators should begin a new conversation, starting from the viewpoint of the disenfranchised consumer and business customer, and factoring in the likely economic scenarios that would unfold if these customers are not served by banks.

A practical conversation could be about setting "safe harbor" parameters that allow banks to design reasonable services for all American consumers and companies – not just the most financially robust – and replacing reactive regulation and "gotcha" enforcement with guided innovation.

In an alternative universe, those intelligent suggestions might have a chance. In the one we inhabit, the chances are slim to none.

Is There Something Wrong With Aunt Fannie?

While the US Department of Justice is busy trying to squeeze perfectly legitimate businesses out of business, and working feverishly to avoid enforcing federal drug laws in order to accommodate the voters of a swing state, it appears to be mysteriously absent from recent allegations that Fannie Mae may have more than one rotten apple in its bottomless barrel.

A metro Denver real estate broker has sued the Federal National Mortgage Association (Fannie Mae), claiming that her contract work with the federally-sponsored company dried up after she tried to report fraud.

In her federal complaint, Karen Frisone alleges that the fraud involved kickbacks, attempted bribes and a fake office scheme by other Denver brokers.

Frisone, at one time a top broker of FNMA REO properties in Denver, claims that a Fannie Mae official tried to solicit a bribe from her and when she not only didn't play ball, but reported that another brokerage was getting more than its fair share of listings due, she alleged, to fraud, Fannie Mae terminated her contract. Litigation has ensued, and Aunt Fannie has issued the typical response: Frisone's claims are "without merit."

I suppose that response might have more of an impact if it weren't for the fact that Frisone is not the only one singing the same sad song about how they've got The Fannie Mae Fraudster Blues.

The case mirrors a case in Irvine, Calif., where a former employee of Fannie Mae was indicted in 2013 on charges that he solicited illegal payments from a broker, as reported by the Los Angeles Times. That office’s supervisor was fired in June.

The nefarious doings in Tinsel Town may be an isolated case. Frisone's allegations may be unsupported. Fannie Mae may be as pure as the driven snow.

Pigs may fly.

Whether or not the allegations ultimately turn out to have a basis, you would hope that the DOJ would be in the thick of an investigation as to whether or not Frisone's allegations are true. After all, Fannie Mae, and its red-haired step-cousin twice removed, Freddie Mac, are wards of the state, having been in conservatorship since before The One became The One. If there are kickbacks and bribes being paid, that would speak ill of the ability of the Feds to manage their affairs. I know, that's a harsh allegation, but there you have it.

Let's hope AG Holder can resist his illicit love for disparate impact and his gut-wrenching aversion to payday lending long enough to cast a piercing glance at Fannie Mae's minions in the Mile High City before they're covered in a thick haze of (perfectly legal) cannabis smoke. If there's something wicked there, it might be nice to actually stop it before it spreads to a Red State, where sober people might be harmed.

Go Together Like A Fish And A Bicycle

I have received unconfirmed reports this weekend that HUD has requested certain large mortgage loan servicers to send marketing materials to HUD borrowers reminding them to sign up for health insurance under the Affordable Care Act, aka "ObamaCare." As one unidentified commenter put it, considering the Claymation Death Match struggles between those large servicers and the federal government on a number of fronts, asking them to carry the Feds water on such a cluster-FUBAR is either a "ballsy move" or a demonstration of fatal hubris. I vote for the latter.

If this report is correct, it's the kind of strong-arm tactic typical of a crowd suckled on the mother's milk of South Side Chicago bare-knuckled local politics. After all, the large servicers have what the federal government can only dream about: an efficient information distribution system.They're also susceptible to arm-twisting, as evidenced by the billions recently coughed up for robo-signing, enforcing their investors' legal rights under loan documents by foreclosing when borrowers failed to make payments, and otherwise performing the job they are contractually obligated to do. You can understand why the ACA Gang That Couldn't Shoot Straight, led by Queen Kathleen and the Web Masters of Oz, would want to enlist the services of for-profit entities who, when their customers visit their web sites, are presented with a message other than The Blue Screen of Death.

The fact that mortgage loan servicers soliciting their borrowers to sign up for health insurance in order to save the ACA's (and the Democrats') bacon inspires "WTF!!??" reactions on so many levels should not impede the continued pursuit of this scheme, if it in fact exists. After all, the "Perpetual Speechifier" is a lame duck, so his attitude, and those of the minions at his beck and call, has to be "What are you gonna do about it, huh? Not vote for me the next time I don't run?"

I wonder if and when the main stream media will pick up on this thread to see if there is any meat on the bones?

 

Your Nonsensical Wish Is Our Unfortunate Command

Well, that didn't take long. Last month, we discussed the new "guidance" from the OCC and the FDIC that was designed to prevent banks regulated by those agencies from continuing to make deposit advance loans. According to a recent business press article, some giant banks have taken the guidance to heart.

U.S. Bank and Wells Fargo are killing off payday-loan-like products that have drawn warnings from regulators.

[...]

Minneapolis-based U.S. Bancorp will stop offering its product, Checking Account Advance, to new checking customers starting Jan. 31 and end the program entirely on May 30.

[...]

San Francisco-based Wells Fargo & Co. will stop offering Direct Deposit Advance loans on accounts opened after this month and will end the service in the middle of the year. The bank said it is still finalizing details of the discontinuation.

While the banks are making all the politically correct noises about finding alternative products to replace the ones the regulators have killed, don't bet on them coming up with anything viable. By "viable," I mean loans that allow the bank to earn a return commensurate with the risk. Any loan that actually makes business sense will be killed by the regulators. It's the name of the game these days.

SIFMA Condemns Condemnation

Of all the issues that the Securities Industry and Financial Markets Association has to worry about, one of its biggest concerns (according to National Mortgage News) is the cockeyed scheme of municipalities to condemn underwater mortgage loans.

Local proposals that involve using eminent proposals to remedy under water mortgage concerns top the list because of their potential for market disruption, he said when asked about the group’s top real estate finance concerns after its recent State of the Industry meeting.

According to SIFMA EVP Randy Snook, the mere threat of such action may impair the availability of credit in the lucky cities whose governments have decided that the abuse of the police power is the way to roll when you're out of legitimate ideas to clean up your bankrupt community.

“It may ultimately discourage mortgage lending” as it threatens to reduce the value of mortgage securities after their purchase and hurt a key funding source for the real estate finance market, says Snook, who oversees business policies and practices for SIFMA.

Rising home prices and a reduction in underwater mortgages as well as other types of borrower relief obtained through modifications have reduced the need for the proposals, he said, when asked if the housing recovery has lessened the concern.

Advocates like the American Civil Liberties Union continue to try to push eminent domain proposals forward despite fierce opposition, and both sides have filed lawsuits to back their positions.

It's nice to know that 2014 is starting with the best news possible: trial lawyers will continue to eat.

Choke Point Starts Choking

Operation Choke Point has strangled its first victim hit its first public target, according to a recent Ballard Spahr client alert. The allegations are serious, because, as the firm notes, all are based upon an underlying allegation of violation of criminal law, in this case, that the bank knowingly participated in a wire fraud scheme. Based upon that alleged "knowing participation," the Department of Justice brought claims under FIRREA and the Anti-Fraud Injunction Act and squeezed a settlement out of a tiny North carolina bank of $1.2 million in penalties and a consent order pursuant to which the bank promised to change its evil ways.

The bank made the mistake of becoming involved with a "Targeted Company," a payday lender (other "Targeted Companies" being credit repair organizations, mortgage assistance relief companies, telemarketers and Internet-based businesses), and allegedly processed ACH payments for the payday lender through a third party payment processor. The following activities by the payday lender were alleged by the DOJ "as fraudulent activity or, at a minimum, warning signs of illegality":

• Some loan agreements included single-payment disclosures under the Truth in Lending Act (TILA) even though they allegedly "hid[ ] in small print and in confusing language" steps required to pay off the loans. The legality of this practice under TILA is the subject of ongoing litigation in a lawsuit brought by the FTC.
• Some loan agreements required consumers to authorize recurring ACH payments, in alleged violation of the Electronic Funds Transfer Act (EFTA). While the CFPB is aware that many lenders require ACH payments on installment loans where the borrower fails to pay by other methods, it has not, at least yet, asserted that these arrangements violate the EFTA.
• Some loan agreements violated the FTC rule limiting wage garnishments.
• Some loan agreements of tribal, offshore and other so-called "choice-of-law" lenders provided for interest at rates prohibited by the law of the states where borrowers resided (but likely permitted by the law of the jurisdiction where the lender was located or licensed).
• In some cases, complaints of unauthorized transactions exceeded thresholds established by NACHA, and in other cases overall return rates were quite high (more than double the 15 percent threshold recently proposed by NACHA).

The bank also agreed to a number of restrictions in its future dealings with third party payment processors, including a ban on dealing with "High Return Originators." Not coincidentally, the threshold for "high return" classification happens to be the same as that contained in a NACHA proposal (0.5 percent for unauthorized debits, 3 percent for data quality returns, and 15 percent for total returns). As the authors of the client alert point out, that's a potentially low threshold in a business (payday lending) where the loans are being made to low credit quality, high default types of borrowers. On the other hand, if the desire is to choke off an entire industry (payday lending) from its access to the banking system, then setting unrealistic low thresholds accomplishes that purpose.

Other onerous requirements for doing business with Targeted Businesses via a payment processor include drilled-down due diligence in connection with money services business licensing under state law (or certification from state licensing authorities that licensing is not required) and with FinCEN; compliance by the third party payment processor with all deceptive trade practice and similar state and federal laws and NACHA rules; and verification that no party associated with the third party payment processor is now or ever has been a member of the Tea Party (perhaps I'm confusing that last requirement with one imposed by the IRS on 503(c) applicants).

The firm concludes with some sober reflections.

Operation Choke Point and the DOJ lawsuit will certainly make it harder for unscrupulous Target Companies to operate. Lawfully operating Target Companies may also be affected, however. If the consent order is read to require banks processing ACH transactions to ensure that their customers comply completely with all applicable law, many banks may discontinue providing ACH services to all Target Companies. Accordingly, we hope that clarification is provided that the duty on banks is to ensure that their ACH customers have a lawful business model, a thorough due diligence investigation discloses no apparent and continuing violations of applicable law, and any grounds for concern are promptly investigated and resolved.

The CFPB lawsuit against CashCall was ground-breaking. The DOJ lawsuit against Four Oaks Bank is earth-shattering.

That "many banks may discontinue providing ACH services to all Target Companies" is not a far-fetched prospect. It's happening, as we speak.

I wonder if, by the time 2017 rolls around, and Eric Holder and his cohorts at the DOJ are forced to find honest work, there will be any payday lenders left.

Don't Bother Me, I’m a Banker

Another guest blog post from former community banker and mortgage banker, Pat Dalrymple, this one on the folly of the fear of increased compliance risk causing community bankers to forgo the revenue generated by a sensible residential mortgage banking line of business.

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Community bankers are quick to bemoan the touted demise of the home town financial institution, but seem unable to do anything about it. In fact, the majority of small bank CEO’s will probably tell you that, over the next five years or so, the CB side of the business will be acquired and merged out of existence.

Bought by whom?  Merged with what?

Very few big banks are expanding; in fact, they’re shrinking as fast as they can, throwing everything but the cannon overboard to lighten the ship.  Private capital is extremely wary of getting into banking with a small vehicle.  Community bankers may find, possibly to their chagrin, that they’re going to be around for some time.

The smaller banks have generally done a good  job of marketing in their trade areas.  Indeed, their success in embedding themselves in their communities should be the envy of every marketing professional.  This is a significant competitive advantage that, for some reason, they’ve failed to exploit.

Many banks have been strangely, remiss in serving their customers in their major borrowing need : residential mortgages.  The traditional community bank attitude, which still clings like a barnacle to the hull of small banking, is that “we don’t do that, we don’t know how to do it, and we don’t really want to do it.  Go across the street to the S&L or mortgage company”. 

When the Great Meltdown hit in 2008, thousands of mortgage brokers left the business, because the alternative and sub-prime products were no more.  A second exodus came with the new restrictive consumer protection and documentation regs; for a lot of practitioners, robust regulation  simply wasn’t fun. This did, however create a vacuum that was one of those business opportunities that come along every generation  or two.  Unaccountably, community banks, even those with mortgage departments, failed to take advantage of it.  They were probably too mesmerized by watching the train wreck to think.

Those brokers that remain, unfortunately for bankers, are the cream of the crop.  They’re competent, professional and ethical.  The robust residential loan business being fed to the conduits by mortgage brokers is a major factor in big banking’s return to profitability.

Yet small banks, especially those in smaller communities or market areas, can beat the brokers hands down, if they choose to do so.  Because of its market preeminence, a bank can, almost without trying, quickly become a mortgage broker on steroids.

In addition to “Don’t want to”, and “Don’t know how to”, write down “Afraid to”.   Compliance regs, as promulgated by the Consumer Financial Protection Bureau are scaring little banks out of their pants.  On one hand, a somewhat puzzling reaction, since compliance has become the business of banking.  Still, adding any more rules can be daunting.  And, if you’re not afraid of the CFPB, you don’t understand the situation.

A good friend is the CEO of a community bank that’s profitable, growing, actively lending and with virtually no problem loans.  It also brokers residential mortgages for its bank customers, so I thought it might be a good  example of how to do it..

He addresses the compliance issue by not doing most of it.  His bank brokers only to wholesalers that do all of the disclosures. 

Are his customers nonplussed when their bank passes their mortgage app along to a wholesaler for funding?  That question elicited a polite dumb question answer: “Why would they go across the street when they can get their money through their own bank?”

Is it worth the effort to get into the business?  Well, there’s a simple way to find out.  Just take the last 12 months of mortgage recordings in your market area and see how many loans your customers got from others.  The results could be surprising, even shocking.  Figure that you should be able to get a fairly high percentage of those deals.  Multiply that number by the lender paid compensation offered by the wholesalers, and you know what may have been left on the table over the past year.

Finally, it’s ridiculously easy to crank up the activity.  Many, if not most, small banks are under-utilizing staff right now, and the wholesale lenders love banks.  They’ll kiss the proverbial ring for the community bank’s business.

Simply stated, banking is the business of making a profit on the movement of money.  Why let somebody else make a profit on that movement, off of your customers, at your expense?

The Objective Approach

For those of you who were worried about how the new QRM rule that went into effect last Friday might adversely impact the availability of mortgage credit for all but the most fiscally fit borrowers, you need worry no longer. Richard Cordray assures us all that the CFPB is keeping its finger on the pulse of the mortgage market. All market participants have to do is tell the CFPB what's happening and it will put all that information through the black box that the CFPB keeps hidden from view behind a curtain at an undsiclosed location and, after shaking, stirring, slicing, and dicing, out will be expectorated the unvarnished truth, and nothing but the truth.

How do we know all this?

"Trust us," says Richard.

"We all can monitor the market as it moves forward to see how it is actually affecting things. And we want the Realtors and others to bring information to us on how it is affecting the marketplace. We will be open-minded in considering what that means," Cordray said.

"Open-minded." Yes, that's the first characteristic that pops into my head when I think of the CFPB.

As long as you're not one of those low-life subprime, payday-like ensnarers of the fog-brained, you've got nothing to worry about. Come to us, unburden yourself, and go about your business. We're "fact-driven." We have no biases. We have no preconceived notions. We want only to do what is best for all concerned.

And while you're at it, have another delicious brownie. Fresh out of the oven. Straight from our Colorado connection.

How To Choke Payday Lenders

The war by the Obama administration on payday lenders, Native American online lenders, and other forms of politically incorrect businesses which provide financial services to the fog-brained amongst us, has a code name: "Operation Choke Point." Inasmuch as the targeted businesses are not actually illegal, the federal government can't force them to stop serving their customers. Instead, the federal government, including the all-too-willing federal banking regulatory agencies, are forcing banks to stop providing such businesses with access to the nation's financial system. According to Michael Patrick Leahy at Breitbart News, the operation is "secret." Well, apparently, it's not-so-secret any longer.

The operation is headed by political operatives and career bureaucrats at the Department of Justice, the FDIC, and the new Consumer Financial Protection Bureau ("CFPB"). It appears to be the latest example of the Obama administration's successful efforts to weaponize the apparatus of the federal government against people and industries it opposes ideologically.

[...]

It also appears to have been kicked off in secret by the Department of Justice, FDIC, and the CFPB in early 2013 without the requisite statutory authority. Officials at the Department of Justice have withheld information about the program from Congress, though they have eagerly shared details with federal financial institution examiners authorized to supervise and discipline the nation's banks and related financial institutions.

On August 22, thirty-one members of Congress sent a letter to Attorney General Eric Holder and FDIC Chairman Martin Gruenberg , requesting a briefing of Congressional staff members on the project, the details of which were so obscure they did not yet know it had obtained the status of a federal initiative and was called 'Operation Choke Point.'

In the letter, which was organized by Congressman Kevin Yoder (R-KS) and Congressman Blaine Luetkemeyer (R-MO), the members of Congress stated "[i]t has come to our attention that the DOJ and the FDIC are leading a joint effort that according to a DOJ official is intended to 'change the structures within the financial system...choking [online short term lenders] off from the very air they need to survive.' "

"We are especially troubled by reports that the DOJ and FDIC are intimidating some community banks and third party payment processors with threats of heightened regulatory scrutiny unless they cease doing business with online lenders," the letter read. "As a result, many bank and payment processors are terminating relationships with many of their long-term customers who provide underserved consumers with short-term credit options," it continued.

The members of Congress warned Holder and Gruenberg that these actions were undertaken by their respective agencies without statutory authority. "Your actions to 'choke off' short-term lenders by changing the structure of the financial system are outside your congressional mandate," they wrote. "With the enactment of the Dodd-Frank Act, Congress acknowledged the need for short-term credit products and did not try to limit online lender's or storefront operators' ability to offer such products."

Congress, they wrote, actually wanted to limit these type of actions."Dodd-Frank also included a specific provision designed to prohibit the Consumer Financial Protection Bureau from imposing rate limitations on short-term loans. Neither Dodd-Frank, nor any other legislation passed by Congress, has given the DOJ/FDIC or any other federal agency the authority to 'take away the very air' that online lenders 'need to survive.'

In response, a DOJ representative met with Congressional staff but refused to give them any information about the operation, telling them that it was none of their business. In fact, that representative also refused to give the staffers her name, although Leahy claims she's been outed. Another DOJ representative reportedly met with bank examiners to brief them on how to put a choke hold on third party payment processors and other "bad actors" that have been targeted.

Representatives of the targeted businesses are not amused.

Peter Barden of the Online Lenders Association agrees that the Obama administration's influence on bank regulators has overstepped its legal authority. "It should also send a troubling message to banks that at any point regulators can force them to stop processing legal transactions simply because they don't like a particular merchant or industry," he said.

There's a lot more in the linked article, and while Breitbart News is well-known to be a partisan right-wing publication, the facts should be disconcerting to anyone concerned about abuses of executive power, especially at the federal level. As a Washington Times editorial cited by Leahy observes, trying to destroy legal businesses in this fashion, as opposed to pushing a legislative solution or at least engaging in open, transparent rule-making, is bad precedent.

"[Our] system of checks and balances was put in place to prevent such abuses. Mr. Obama is determined to lend himself as much power as he can. If Congress won’t assert its constitutional authority by blocking such behavior, it will never retrieve the power and authority the Constitution gave it."

We'll see. In an election year, I don't see Congress, with a Senate controlled by the Democrats, doing much of anything. Republicans might make some noise, but that will have little impact in the partisan atmosphere that exists in that branch of government. On the other hand, it does give opponents of secret government programs to strangle legally operating businesses on ideological grounds extra incentives to seek a change in the composition of Congreess in 2014 and of the White House in 2016.

Horton Hasn't Heard A Who

When we mentioned in passing in yesterday's post the difficulties that Colorado-based marijuana businesses were having in securing commercial banking services, we weren't aware that the Denver City Council has launched itself into the fray with an elan that can only be displayed by governing bodies that have absolutely no ability to influence the outcome, other than to muck it up. You know, like those municipal governments that are committing their cities to years of steep litigation costs by pushing the envelope of their police powers through the condemnation of underwater mortgages. Denver's City Council's actions aren't that destructive, but they are that useless.

By a 13-0 vote Monday, council members approved a proclamation urging “swift federal action” to help bank and other financial institutions serve legal marijuana operations.

“Please Washington, please grow up and let this business be a business and have a normal banking relationship like any other business,” said District 6 Councilman Charlie Brown. “This is absurd, this is ridiculous,” he added, referring to the current cash-only system.

Charlie Brown then exited the council chambers for a little kite flying, which ended badly with his cannabis-themed kite fatally entangled in a very large tree. We also understand he had an unfortunate incident while attempting to place kick a football, which can happen when you play football after toking some fine Telluride Top Shelf Leafy Green.

It is a tad ironic for a council member in the capitol city of a state that expects the federal government to either change its laws or to publicly announce that it will stop enforcing them simply because that state "demands it," to tell the feds to "grow up." Sticking your thumb in your mouth and crying at the top of your lungs because the rest of the world doesn't give you what you want when you want it is the epitome of childishness.

“We want to make sure they hear us, sort of like Horton Hears a Who,” said District 7 Councilman Chris Nevitt, who introduced Monday’s proclamation. “All of us have to shout as loudly as possible so the elephant can hear what we’re trying to say.”

"Sort of like Horton Hears a Who." Yeah, that's what we want our elected municipal officials doing: acting "sort of like" a Horton's Who. After all, "a person's a person no matter how small," eh, Horton? Even small people with tiny craniums filled with cerebrums that, unlike most hominids, have surfaces that are perfectly smooth rather than convoluted.

Colorado Bankers Association President Don Childears explains the obvious to the oblivious.

“It’s simply this issue of state and federal law being in conflict.”

Yes, and until Congress decides to pass a law that changes the federal criminal code, just to please the people of Colorado, or the US Justice Department decides to treat federal drug laws with the same attitude as it treats federal immigration laws, every the "Who" in the Mile High City can continue to shout until his or her weed-damaged lungs cause him or her to collapse in a fit of terminal hacking. They'll be shouting into a void. Time will pass quickly for them, though.

It does make for a most excellent public relations stunt, though. Which, as we all know, is what "governing" is all about these days.