Bank Lawyer's Blog

Due Process: Delayed And Denied?

In November of 2012, an administrative law judge recommended that all charges brought by the Comptroller of the Currency against Patrick Adams, the former CEO of Dallas-based T-Bank, be dismissed. As we noted at that time, the road to vindication for Mr. Adams was long, hard, and expensive. What's shocking to us is that the long road is still not finished for Mr. Adams, notwithstanding the fact that ALJ found against the OCC on every one of its allegations, and, more critically, that although 12 CFR 109.40 provides that the Comptroller "shall render a final decision within 90 days after notification of the parties that the case has been submitted for final decision" (final submission was in early April 2013), the Comptroller has failed to render such a decision. Instead, the Comptroller has extended the 90-day period four times, most recently in May of this year, despite, according to a former OCC Deputy General Counsel who helped draft the OCC's enforcement procedures, no apparent authority to do so.

The troublesome nature of this process was recently discussed by attorneys Jerry Buckley, Robert Serino and Ann Wiles in an article for Consumer Financial Services Law Report. As noted in the opening paragraph, "Mr. Serino was formerly deputy chief counsel of the Office of the Comptroller of the Currency and established that agency’s enforcement program." Thus, their comments are not merely the rantings of a man once described by a reporter for a trade press rag as "a Texas curmudgeon." They are expressions of concern by people with knowledge of the process, one of whom had a hand in crafting the process that's being abused.

While focusing on general concerns in addition to Mr. Adams' specific case, the authors spend time discussing Adams' situation because, as they put it, it highlights the need for "additional procedural protections" to protect an individual facing enforcement action by a federal banking agency. They do a good job of running through the sequence of events, and the various facts that concerned the ALJ prior to making his decision, so I won't reiterate all of them. You can (and I encourage you to) read them in the linked article. At this point, the most disconcerting injustice to me is the failure of the Comptroller to issue a final decision "despite a statutory requirement to do so within 90 days."

But others would argue that the case against Mr. Adams highlights a lack of procedural protections for individuals who may suffer significant reputational harm, damage to their careers, and significant expense in defending themselves, only for it to be ultimately found that an enforcement action was not warranted.

By "others," the authors can include me and other bank regulatory attorneys I've heard from on this matter, including other former federal bank regulatory agency attorneys who are now in private practice. They can also include Texas Representative Pete Sessions, Chairman of the US House of Representatives Rules Committee, who, on June 20, 2014, sent the Inspector General of the Treasury Department a letter that requests an investigation by the IG into the handling of Mr. Adams' case.

It's irrelevant what OCC supervisory and enforcement personnel think of Mr. Adams. What's critical to the functioning of a process that claims to be "due" and "fair" is that the rules be followed by the government. A regulatory body that seeks to enforce the law but fails to follow it lacks credibility. The members of that agency who fail to follow the law deserve an Inspector General's investigation and any consequences to them that result. If that view engenders more anonymous troll-like hate mail that threatens me with regulatory retaliation and violates federal law, as was the case the last time I criticized the OCC, then I'll risk it.

The ALJ determined that the charges should not have been brought. We all realize that the OCC likely doesn't agree with that determination, but the Comptroller could have issued a decision within 90 days that decided not to follow that ruling. Then, Mr. Adams could have appealed that decision and had a resolution. Instead, by failing to follow its own rules, the OCC keeps the man in limbo indefinitely. Under whose sense of fundamental fairness is this appropriate? Vladamir Putin's?

I'll close with the same paragraph I used in my November 2012 post on this subject, because I still wonder where the government's lawyers who are involved in this matter stand. Do they really think that this is the way to handle this? Do they really think that this is fair and reasonable?

As I've contended previously, with great power comes great responsibility. When you have the power to ruin an individual's life, you need to make damn sure that you're doing "the right thing" before you start down that road. I don't see any concern with that "aspirational goal" in this case.

On the other hand, I think it's always useful for both government attorneys and those who oppose them to keep in mind the following ethical consideration, which, though "aspirational" in nature and part of the since-replaced Model Code of Professional Responsibility, embodies what the legal profession has long held to be proper conduct by those lawyers who wield the power to wreak havoc on the lives of the regulated:

EC 7-14 A government lawyer who has discretionary power relative to litigation should refrain from instituting or continuing litigation that is obviously unfair. A government lawyer not having such discretionary power who believes there is lack of merit in a controversy submitted to him should so advise his superiors and recommend the avoidance of unfair litigation. A government lawyer in a civil action or administrative proceeding has the responsibility to seek justice and to develop a full and fair record, and he should not use his position or the economic power of the government to harass parties or to bring about unjust settlements or results.

Secondary Smoke Allergy

I'm not sure if it's the collateral paranoia engendered by Operation Choke Point, the fact that regulators are on a crusade to root out evil wherever they see it (and they know it when they see it), or if somebody simply got ahold of a bad batch of weed, but the way banks are treating any business remotely (and I mean "remotely") connected with the (state) legal marijuana business has officially jumped the shark. It's time to untwist the knickers and take a deep breath.

We discussed not long ago a Texas promoter of a conference on legal marijuana businesses being cut off by his bank. More recently, we've discovered that Wells Fargo has thrown one of its Washington customers under the bus because he publishes a magazine with the word "marijuana" in the title.

Last week, Marijuana Venture magazine publisher Greg James said he was informed that Wells Fargo Bank would not accept deposits from the limited liability company that publishes the magazine.

Never mind that Marijuana Venture merely writes about the legal cannabis industry and does not promote marijuana use. "We are simply running stories on how to navigate the industry and promoting best of breed business practices," James said.

[...]

James is not the first person in Washington to find it difficult to work with banks because his business has at least some connection to marijuana. A banker told one Seattle-area entrepreneur who grows medical marijuana to stop bringing cash that reeks of weed into the branch. But James' business has nothing to do with the growing, processing or sales of actual marijuana. He's publishing a magazine about marijuana.

I get the "cash that reeks of weed" repugnance. After all, the largest banks only desire "cash that reeks of greed." That stink smells like a whiff of heaven to them.

James makes the valid point that once you start down the slippery slope of "unbanking" publishers of newspapers and magazines that are focused on discussing legal marijuana issues, you're not just on a slippery slope, you're riding a waxed toboggan down the slope.

James wonders whether banks would not deal with the Puget Sound Business Journal because the paper reports on the marijuana business. And what about the Denver Post, which has a marijuana editor?

I assume that the Post's marijuana editor had just consumed an entire bag of "Hashey's" bars and was "unavailable for comment."

The longer the federal bank regulators take to issue guidance on this issue, the longer it will take for the smoke to clear. Even though no one expects the regulatory agencies to put their seal of approval on banking MJ businesses themselves, they could give banks some comfort about banking the businesses that serve those businesses, like the landscape company that irrigates the plants or the electrical contractor that services the heat lamps. At the very least, they could assure quivering masses of protoplasm like Wells Fargo that the risk posed by Marijuana Venture is acceptable, especially compared to the risks of, for example, banking folks who are actually on OFAC's SDN list.

BancSouth Wins Big

A recent Eighth Circuit Court of Appeals decision in favor of BankSouth bodes well for financial institutions who understand their obligations under UCC Article 4A and take those obligations seriously. Unlike consumer customers, who are pretty much protected against unauthorized funds transfers by Regulation E if they examine their monthly bank statements and promptly inform their banks of any unauthorized transactions, business customers whose bank accounts are compromised by cybercrooks have much less protection. As the 8th Circuit points out, the inquiry in such instances is focused on whether the bank and customer had agreed upon commercially reasonable security procedures that the bank would use to determine whether or not a purported funds transfer was authorized by the customer and, if so, whether or not the bank employed those security procedures in good faith. If the bank meets that two-pronged test, the business customer is stuck with liability for any unauthorized transfer.

The controversy usually arises when an employee of the business customer has fallen for a "phishing" scheme, clicking on link in an email that causes malware to be downloaded that allows the crooks to learn the user name and password that the employee uses to log in to the online banking system of the bank. In the BancSouth case, that apparently occurred. However, regardless of how access to the password and user name was obtained, the focus of the court was, as it should have been, whether the agreed upon security procedures used by the bank were commercially reasonable and employed by the bank in good faith. In this instance, the court (and the trial court) found that they were.

While the customer's attorneys argued that the use of a user name and password was "one-factor authentication" that is contrary to FFIEC guidance that advises that "multi-factor authentication" processes should be used, the court countered that argument by finding that the bank offered "dual controls" for wire transfer (separate persons must authorize the initial funds transfer request and the confirmation of that transfer order), the customer opted not to use such a procedure on the grounds that it was "inconvenient." More cautious banks not only offer dual controls, they require it unless the customer signs a separate agreement or waiver under which it indemnifies the bank from any claims, loss, or liability arising out of unauthorized transfers from the account under a single-control authorization process. BancSouth had such a waiver and the customer signed it.

BancSouth's online banking agreement also contained an indemnification provision that is common in online banking agreements in one form or another, pursuant to which the customer agreed to indemnify and hold the bank harmless from claims, losses, liabilities, costs and expenses, including reasonable attorneys' fees, arising out of the bank's provision of services, as long as the bank fulfilled its obligations. The appellate court ruled that this provision provided a sufficient basis for the bank to pursue a claim against its customer for payment of attorneys' fees, and overturned the trial court's denial of a counterclaim by the bank for such fees. Again, well-drafted online banking agreements ought to contain a similar provision.

Dan Mitchell, an attorney who has been involved in other high-profile litigation on this subject, and another commenter, had some cogent observations on the implications of this decision.

Perhaps most significantly, Mitchell said, the decision could be a blow to companies trying to recover cyberheist losses from their banks. Bancorp South had asserted at the trial court level that its contract with Choice Escrow indemnified it against paying legal fees in such a dispute. The trial court dismissed that claim, but the appeals court said in its decision that the bank could recover the costs from the escrow firm.

"The bank had asserted a counterclaim that the customer should pay the bank’s legal fees," said Mitchell, who battled similar claims in which Patco — a Maine construction firm — successfully sued its bank over a $588,000 cyberheist. "There’s no other federal circuit court case other than Patco that has gotten up to that level. The appeals court said the bank can now pursue its legal fees against the customer. And that may end up being the important part of this opinion in the long run if [plaintiffs are] looking at not only have to pay their lawyers to pursue a loss but also those of the bank."

Charisse Castagnoli, an adjunct professor of law at the John Marshall Law School, said the appeals court decision means that indemnification is now the ‘law of the land’ in the 8th Circuit.

Castagnoli said she expects two results from this decision: that banks which don’t already have these clauses in their online banking agreements will add them; and that cyberheist victims will think more cautiously about bringing a lawsuit.

"This is the first time a court has ruled on fee shifting, and that will certainly have a chilling effect on litigation," Castagnoli said.

The opinion contains other nuances that are worth considering. The linked article from Brian Krebs' excellent blog contains a link to the opinion.

A Distinct Lack of Interest

In a think piece in yesterday's American Banker, attorney Michael Reyen discusses that fact the City of Richmond, California's "Seize The Mortgage" plan through the use of eminent domain has been stymied by the failure of the plan's supporters to obtain the supermajority approval necessary to obtain City Council approval to move forward with the half-baked scheme. As a result, its supporters are trying Plan B: partnering "with another community to form a joint powers authority and carry out the plan."

To date, it has not had any takers.

Why not? According to Reyen, because other municipalities fear (rightly, in my opinion) the costs and risks of litigation, and because the FHFA has threatened to pull Uncle Freddie and Aunt Fannie out of any municipality that starts seizing mortgages through such a means. As to litigation, although a federal court dismissed a lawsuit filed by mortgage loan securities trustees, the court did so "without prejudice." In other words, the issue was not yet "ripe," but if Richmond proceeds to actually implement the plan, "ripeness" will permeate the air like the scent of a thousand dead armadillos in the middle of an Amarillo blacktop in mid-August.

The negative reaction of the FHFA and mortgage securities investors would be even more consequential over the long haul.

The FHFA has stated that it may initiate legal challenges against any local or state government that sanctions the use of eminent domain to restructure mortgage loan contracts in a way that affects FHFA’s regulated entities, Fannie Mae and Freddie Mac. It has also said that it may act by order or regulation to “direct the regulated entities to limit, restrict or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts.” This amounts to a death sentence for residential mortgage lending in any municipality in which the FHFA limits, restricts or ceases business activities.

Notwithstanding these "strong headwinds," Reyen thinks that the idea is not yet dead, and cites the interest of Irvington, New Jersey, in pursuing the scheme. In my view, the headwinds will only become stronger if these plans move forward. In addition, as the economy continues to improve and real estate values eventually recover, the "need" for such "creative" measures to assist underwater borrowers will be harder to justify. That won't stop true believers from believing in it, but it may finally crater any practical chance of any such plan being seriously pursued to the point of "ripeness."

Another Non-Problem Not Resolved

New York State Superintendent of Financial Services, Gentle Ben Lawsky, recently issued a press release that announced a solution to a "major" problem that did not exist.

"In discussions with our Department, Ocwen has agreed to no longer seek gag rules as part of settlement agreements or loan modifications with borrowers,” Benjamin Lawsky, superintendent of Financial Services, said.

“Additionally, the company has stated it will not enforce gag rule provisions in existing agreements. We are gratified that Ocwen worked constructively with us to resolve this matter, and our Department intends to review this issue at other financial institutions,” Lawsky added.

The Chief Investment Officer of Ocwen, John Britti, shed some light on how pervasive this instance of consumer abuse had become.

“Ocwen does not require non-disparagement clauses in mortgage loan modifications in the absence of any borrower legal claims, which is the case in the overwhelming majority of our modifications.”

Britti did note, “In the rare occasion where there is a legal dispute – and these represent only a fraction of one percent of the loans in our portfolio – more often than not we are able to work out an amicable resolution with the borrower.  In those cases, we generally request the settling party to agree to refrain from publicly disparaging the company in the future.”

And it is this point that Ocwen is fixing. 

“To clarify, Ocwen has never required non-disparagement clauses for mortgage modifications. Our agreement with the DFS deals with the highly unusual situation where there is a legal settlement agreement with a borrower, representing a fraction of one percent of our portfolio," Britti said in a statement on the matter.

Anyone with a shred of understanding of civil business litigation in the United States, and with a scintilla of intellectual honesty, would acknowledge that non-disparagement provisions are common in litigation settlement agreements generally, not merely in litigation that involves residential mortgage loans. I guess that "anyone" would not include Gentle Ben Lawsky. That's not surprising, since, as we've previously noted, his hands-on business and private practice litigation experience is severely lacking. On the other hand, he's got plenty of political and bureaucratic experience, and it's self-evident that he knows as much as his role model, Eliot Spitzer, about issuing press releases full of preening self-promotion.

Unless Ocwen is flat-out lying, Ocwen required non-disparagement provisions only in connection with litigation settlement agreements, where the servicer had been sued by the borrowers and the parties were settling that litigation, a settlement that may involve a loan modification. Again, this is not an unusual provision to include in the settlement of any litigation. Moreover, loan modifications where litigation was involved included only a small percentage of all loan modifications. In all other loan modifications, a non-disparagement provision was not required by Ocwen.

Apparently, Lawsky has succeeded in having Ocwen agree to cease doing something that it was not doing in connection with the overhelming number of loan modifications, and to agree not to enforce existing non-disparagement provisions in the small fraction of loan modifications that involved the settlement of civil litigation, which Ocwen is willing to do because the number of affected loans is inconsequential and it's got bigger problems with Lawsky to address.

Great job, Ben! Of course, to use the term "or" in the phrase "Ocwen has agreed to no longer seek gag rules as part of settlement agreements or loan modifications with borrowers” is more than a tad misleading, since Ocwen wasn't seeking "gag rules" (whatever that means in the context of an agreement between two private parties) in connection with loan modifications unless a settlement agreement was involved. Where's UDAAP when you need it? Oh yes, it doesn't apply to regulators, only to the regulated.

A Two-Front War

The opponents of Operation Choke Point (a group also known as "The Heimlich Maneuverers") have recently decided to proceed against touch points within the Executive Branch through the other two branches of the federal government. On the judicial front, the payday lending industry filed a lawsuit against the Gang of Three (OCC, FDIC, and FRB) for "illegally" forcing banks that they regulate to choke off access to the financial system to "disfavored" businesses (including, apparently E-Harmony.com, inasmuch as the FDIC has determined that online dating services are "high risk." According to friends that use online dating services, there may or may not be a high risk of illegal activity associated with them, but there sure is plenty of bald-faced lying).

I hope the payday lenders enjoy dancing with a bear.

In the US Congress, House Financial Services Committee Chairman Jeb Hensarling (with a name like "Jeb," you simply know he's from Texas) wrote to Janet Yellen to express his "concern" about the use by the federal bank regulators of the nebulously defined concept of "reputation risk" as a pretext for forcing banks to stop serving legitimate business (for example, payday lending businesses) that the regulators, subjectively, determine pose "undue reputation risk." Hensarling's questions to Yellen are an obviously transparent attempt to set the stage for an argument that the regulators can't define "reputation risk" any better than they can define "obscenity," except they know it when they see it.

While Hensarling harasses Yellen, his running buddy at the House Oversight and Government Reform Committee, Chairman Darrell Issa, decided to poke a stick in the eye of the FDIC (paid subscription required).

Issa sent a letter Monday to FDIC Chairman Martin Gruenberg charging that the agency has been working closely with the Department of Justice as part of its law enforcement effort to root out fraud through the payments processing system.

The California Republican says he doubts testimony by Richard Osterman, acting general counsel at the FDIC, during a House Financial Services Committee hearing last month, in which Osterman repeatedly downplays the FDIC's role, referring to the initiative as a Justice Department program.

"Documents produced to the Committee by the Department of Justice call into question the sincerity and truthfulness of Mr. Osterman's testimony. In fact, the FDIC has been intimately involved in Operation Choke Point since its inception," the letter says.

Calling the FDIC's Acting General Counsel, in effect, a liar might actually prod a tart response from the FDIC. We'll see. Issa wants requested documents delivered to his office by a week from next Monday.

In case people were confused about what Issa's concern about a love match between the DOJ and the FDIC might be, he explained.

"The committee has obtained substantial evidence suggesting that as a result of coordinated actions by the FDIC and the Department of Justice, banks are terminating relationships with entirely legitimate and licensed businesses," the letter adds.

In other words, he'd like the FDIC to hand over a smoking gun that proves his point and also supports his allegation that Mr. Osterman's testimony was less than "sincere" and "truthful." What are the odds the FDIC will produce such documents?

There is little doubt to a cynic that the fact that these serial counter punches are coming in such a short sequence is not coincidental. The opponents of Operation Choke Point, especially of the role of the federal banking regulators in picking winners and losers in the game of gaining access to financial services, without affording any of the parties, banks or their customers, with due process, are pushing back. This is only the early stages of what promises to be a nasty tussle.

Stay tuned.

Empty Gestures

In a flurry of activity right before the current year's legislative session ended, the Colorado Senate and House passed, and the Colorado Governor signed, a law (previously discussed here) that creates a form of "cooperative bank" that is intended to finance the state-legal, federal-illegal marijuana business in Colorado, the first state in the country to go "all in" on legalizing recreational marijuana use. There's just one slight problem with the scheme: it hasn't got a prayer of going anywhere.

“We don’t think it will do anything other than allow the state to say, ‘We’ve tried everything we can think of and it won’t work, so Congress it’s now up to you,” said Don Childears, president and CEO of the Colorado Bankers Association.

“They’ll never get access to the Federal Reserve System, and if they can’t do that, the co-ops will never be formed,” Childears said.

The final version of the law requires the approval of the Federal Reserve Board before the first cooperative can open its doors for business. What possible political upside is there for the Fed to approve the funding of the state-legal but federal-illegal marijuana business in Colorado?

[sound of crickets chirping]

No, there's nothing but potential downside to the Fed in that decision as long as the sale of marijuana remains illegal under federal law. Getting the Colorado marijuana business off a cash-only basis would make tracking and taxing the business much more easy, and would limit the potential criminal risks of, and to, such businesses, but from a public perception standpoint, the Fed has absolutely no reason to stick it's neck on the chopping block so that rabid opponents of easing restrictions on marijuana businesses, like Dianne Feinstein (yes, THAT Dianne Feinstein), can jump down its throat, haul it before Congressional hearings, and generally screw with it in public.

No, what's needed is that either Congress needs to change federal law or the Attorney General needs to remove the substance from the list of dangerous substances. The latter course would require a public process that would involve the input of other federal agencies, as well as an expected raft of criticism from drug law liberalization opponents. What's in it for Eric Holder to undertake that exercise in self-abuse?

[sound of crickets chirping]

As to the chances of Congress changing the law, Childears says they are slim to none.

Childears said he wasn’t optimistic Colorado’s new cannabis co-ops law would motivate the U.S. Congress to tackle the thorny issue.

Efforts to legalize marijuana banking has the support of only 7 percent of theU.S. House of Representatives now, He said.

If four states were to legalize marijuana for either medical or recreational purposes every election, it would take at least six years to get to a level where Congress would take it seriously, he said.

Childears said he visited recently with U.S. House Majority Leader Eric Cantor, R-Virginia, who told him that he didn’t see marijuana banking as a priority for most members of Congress.

“Cantor told me a number of them feel that, ‘You made your bed, now lie in it.’ It’s a Colorado issue,” Childears said.

You know, with all the other problems this country faces, Cantor's feelings are not without cause.

So, why was the law passed and signed? Marijuana business spokesperson Mike Elliot explains.

“HB 1398 is likely not a solution to the banking problem, but an opportunity to move the conversation forward,” Elliott said.

Thus far, this has been a decidedly one-sided conversation. No one outside of Colorado appears to be interested in listening.

Martha Makes Good On Her Threat

Well, Martha Coakley gave Mel Watt only a couple of weeks to fold, and when he didn't, she made good on her threat to sue the FHFA.

Coakley followed up on her threat of litigation and filed a lawsuit against the FHFA and the GSEs in Suffolk Superior Court. The complaint alleges that Fannie and Freddie, currently under FHFA conservatorship, are refusing to comply with the Massachusetts law called “An Act to Prevent Unnecessary and Unreasonable Foreclosures.”

[...]

One of the provisions of the law, which was passed in August 2012, prohibits creditors from blocking home sales to non-profits simply because the non-profit intends to resell the property back to the former homeowner. Coakley says these foreclosure buybacks are exactly what the GSEs are preventing.

[...]

In the complaint, Coakley alleges that two of the FHFA’s policies violate state law. The suit alleges that Fannie and Freddie’s “arm’s-length transaction” policy prohibits property sales to non-profits who resell to the original homeowner.

The suit also alleges that the GSEs “make whole” policy has the same effect, as it prevents Fannie and Freddie from accepting anything less than the outstanding loan amount from the former homeowner or anyone seeking to resell or rent to the former homeowner.

Fannie and Freddie are in conservatorship because too many borrowers haven't repaid mortgage loans that Fannie and Freddie bought and packaged into mortgage backed securities that they then sold to investors, including, among other types of entities, pension funds that thought they were buying a safe, "government-backed" investment. The FHFA, which regulates those two entities, has a duty to the investors (and to Fannie Mae's shareholders, who've been shafted by the government's refusal to stop sucking up all of Fannie's profits, even though all of the government bailout money spent on Fannie and Freddie has been repaid in full) to try to recoup the maximum amount possible from the mortgages that it holds. Not letting defaulting homeowners benefit from a less-than-full-repayment liquidation of a loan makes sense from that policy standpoint.

Coakley believes that state legislation that pushes local economic recovery goals (or homeowner relief social policy goals, depending on your perspective) should be able to trump the policies of the a federal regulator regarding two wards of the federal government. This will be an interesting piece of litigation from the perspective of whether or not the FHFA must amend its policies to comply with such a state law. I don't see any upside for Watt to compromise on the current policies until a court tells him he has to back off and comply with Masschusetts law. At that point, he can tell the investors and shareholders that he had no choice: the judge made him do it.

It's also interesting from the standpoint that Watt and Coakley appear to be on the same side of the fence when it comes to social policy. Watt was a liberal Democrat when he was in the House of Representatives. Moreover, he recently gave a speech that indicated that Fannie and Freddie were going to expand their efforts to provide financing to borrowers with less-than-pristine credit. That was a move that caused a blinding flash of "deja vu all over again" to appear before the eyes of critics of the federal government's housing finance policies that many allege led to the subprime housing bubble and the resulting 2008 economic collapse. However, it was also an indication that rather than winding down Fannie and Freddie and creating a different sort of national residential finance market (which was where we seemed to be heading under Watts predecessor, Ed DeMarco), we may be back on the road to officially re-establishing the two mortgage finance giants as the only game in town, something they've unofficially been since the collapse occurred (and prior to that time, to be honest).

Regardless of the way Coakley's lawsuit plays out, we have the sneaking suspicion that the brave new world of residential mortgage finance may look like the brave old world.

High Risk, Low Reward

Notwithstanding the fact that I'm on vacation this week, it is critical that I keep you informed of the latest intellectual speculation on the theory of how dumb bank robbers might be, a topic of consistent interest to readers of this blog. According to the editors of the Lake County News-Sun, "bank robbery is not the thinking man's game."

In an opinion piece in this august publication, the editors profile one William Rozelle of North Chicago, apparently not a graduate of MIT.

According to police, Rozelle allegedly flashed a knife and walked out with $87,000 in cash — that’s a lot of cash lying around a hometown bank.

But if police reports are true, he also immediately hot-footed into history as one of the worst bank robbers ever. Before demanding the cash, Rozelle allegedly filled out an account application using a state ID card and his Social Security number. The bank’s video system caught several photos of him that are more detailed and clear than some high school class photos.

Police later nabbed their suspect in his car.

The editorial claims that Rozelle snatched the title of dumbest bank robber from previous champ Patrick Johnson.

On July 21, 2008, the 33-year-old Johnson entered a Bank of America branch in Ocala, Fla. His robbery note was written on the back of his personal checks which prominently featured all of his personal information. His getaway vehicle was a waiting taxi.

The editors conclude that bank robbers "are not much on the thinking part of the crime." That's probably a safe observation. Most Americans would agree that when it comes to committing robbery and never having to pay the price, the best place to be is inside a bank located on Wall Street, in the corner office, forty-five stories above ground level. Those guys and gals "are much on the thinking part" and they NEVER go to prison, do they?

Disparate Impact Ate My City

Another broken city, buried under a mountain of economic malaise caused by its own mismanagement, is attempting to blame its woes on a big bank, and, in the process, squeeze some money out of it.

The city of Providence, R.I., is suing Santander Bank in federal court claiming the bank has refused to make prime home loans in minority neighborhoods.

[...]

The city is claiming that Santander, a Spanish banking giant with U.S. headquarters in Boston, deliberately cut back on lending to qualified homebuyers in minority neighborhoods in recent years while increasing mortgage lending in predominantly white areas.

[...]

Providence alleges that Santander has followed a pattern of discrimination across its New England footprint. The lending declines, the city says, are not the result of economic conditions. While Santander mortgage originations in minority neighborhoods fell, other banks, including Citizens Bank, made home loans in much greater numbers in the same areas.

Such practices, dubbed 'redlining' over allegations that some lenders used red highlighters on maps to outline off-limits neighborhoods, violates the federal Fair Housing Act as well as the Equal Credit Opportunity Act. Providence is demanding a jury trial and is seeking an injunction against Santander as well as unspecified compensatory and punitive damages.

“We categorically reject this accusation and will vigorously defend ourselves against the legal action," Santander said in a statement. "However, we are willing to work with the City of Providence to allay its concerns."

In other words, "we we'll pay blackmail, as long as it's not exorbitant."

This suit is based on the same "disparate impact" theory that the Department of Justice, HUD, and various municipal nirvanas like Cleveland and Baltimore have been using to offer misdirection to the fact that, as I once put it so amiably, "[c]rime, poverty, high taxes, a business-unfriendly environment, a lack of cohesive vision for the future and the will to implement that vision even if it existed, all might have had something to do with" each city's current woes. The fact that the municipalities are being kicked out of court on the issue of causation doesn't deter them. After all, it's the taxpayer picking up the tab.

In a recent article in the American Banker (paid subscription required), lawyers Valerie Hletko and Ann Wiles discuss the potential impact on disparate impact lawsuits filed by municipalities, of the US Supreme Court's decision Lexmark International v. Static Control Components, which doesn't address disparate impact but, nevertheless, throws a giant monkey wrench into the gears of this litigation juggernaut. According to Hletko and Wiles, "the court held that, in order to have standing to sue under a federal statute, a plaintiff must fall within the statute's 'zone of interest' and also show 'proximate cause.' In other words, a plaintiff's injury must flow directly from a violation of the statute, and the plaintiff must be the party Congress wanted to protect in enacting the statute."

The Supreme Court said in Lexmark that the Lanham Act's stated purpose of preventing injury to a commercial interest in reputation or sales requires "no guesswork." Nor does the FHA's. The FHA's statement of purpose is "to provide, within constitutional limitations, for fair housing throughout the United States." It protects integrated housing patterns and persons discriminated against in housing transactions on the basis of race, color, national origin, religion, sex, familial status and disability. It does not protect the tax receipts of municipalities.

Justice Antonin Scalia's 9-0 opinion acknowledged that the Supreme Court's earlier standing discussions now look "misleading" in light of Lexmark. While Lexmark has yet to be applied to the FHA, this higher standard is likely to eviscerate standing for a range of theories of liability. While banks will have to wait for another disparate impact case to make it to the Supreme Court for a ruling on whether disparate impact claims are viable under the FHA at all, they may now avoid FHA disparate impact claims brought by plaintiffs alleging daisy-chain standing well outside the statute's zone of interest.

I don't know whether Santander is going to roll over and play dead or come out swinging. If it takes off the gloves, one of the first punches thrown has got to be based on the Lexmark decision.