Bank Lawyer's Blog

A Good Man(trap) Ain't Hard To Find

Back in 2006, we discussed the problems that one bank had when it installed what was then a relatively new technology called a "mantrap" in a branch located in a predominantly black neighborhood. Activists found the entire idea of bank personnel trapping a robber who just stole a wad of cash from the bank in a vestibule located between a rock and a hard place to be an obviously racist outrage. We were hard-pressed to find the discriminatory connection, but at the time, the bank deactivated the mantrap and opted instead to post signs asking those entering the branch to doff hats, hoods, and sunglasses. Apparently, no rappers banked there, because that strategy to deter would-be thieves generated no protests.

Fast-forward eight years and we find that unrepentant banks are still employing mantraps and...well...trapping men.

A bank robber nearly got away with the heist Thursday, until employees hit a button and trapped him between the bank's two outer doors, state police said.

He was caught in what police call "a mantrap," Sgt. Paul G. Shavack said.

The suspect tried to escape the electronically locked enclosure, attempting to smash the break-resistant glass of the windows and doors, Shavack said.

He managed to cause some damage – but didn't escape – growing frustrated and wearing himself out as bank staff looked on, Shavack said.

Police soon arrived and arrested Stephen D. Dunfee, 38, of the New Castle area, without incident, he said.

Dunfee's mug shot indicates that he doesn't appear to fit any obviously protected group (unless dumbass is now a category of homo sapien entitled to special consideration), and he is bereft of hat, hood, or shades. I think we might have passed beyond the era of mantrap sensitivity into a new time when all robbers are trapped equally without regard to race, creed, color, gender, sexual orientation, or terrestrial origin, a time when being sandwiched in a bank branch vestibule is not only considered unobjectionable but...dare we say it...right and proper.

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I am off the rest of this week to participate in two sessions at the D+H Connections Annual Users Conference in Orlando, Florida. I will see you on the flip side of the Labor Day holiday weekend. Have a nice holiday.

 

De Novo Territory Still A Wasteland

*The collateral damage caused by a non-existent condition that actually exists--the oft-denied FDIC mortorium on de novo bank approvals--includes bank M&A activity. According to the American Banker's Robert Barba and industry participants that he interviewed, a vital portion of the bank "M&A food chain" has been eliminated.

"It was normal for your bank to get bought and, two or three years later, sit around a kitchen table, decide to start a bank, plot to get local shareholders," said Timothy Chrisman, principal of executive the search firm Chrisman & Co. in Los Angeles.

"It was a feeder source," Chrisman added. "It was the process of community banking and that has changed dramatically."

The consequences of this change might be unintended, but are important.

A smaller banking industry facilitated by acquisitions and few new entrants has various ripple effects. In the short term, a lack of second-act opportunities could stymie activity as bankers hold on to what they have. In the long run, it will lead to a consolidated industry with less innovation and a deteriorating customer experience, some advisers say.

Less innovation in an industry not known as "cutting edge" to begin with is not a good thing.

Other observers cite the longer period of strict FDIC scrutiny after formation and higher capital requirements for de novos, and the fact that the costs of regulatory compliance in the post-Franken-Dodd world, as also discouraging potential de novo applicants from proceeding. Spending hundreds of thousands of dollars on an application that stands a slim chance of being approved would call into question the business savvy of a de novo's sponsors. Needing so much capital and asset "heft" to not only secure regulatory approval but to afford the ongoing regulatory burden throws additional wet blankets on the idea of traveling the de novo highway.

"The belief that exists now is that it would be hard to prosper as a de novo," said Wesley A. Brown, a managing director at KPMG Corporate Finance. "Bankers starting a new bank 10 years ago would have done it with enthusiasm. The idea that they can thrive has been shaken."

A FDIC spokesperson quoted by Barba denies the existence of a formal or informal FDIC moratorium,which is consistent with the FDIC's forked-tongue consistent position on the issue. Instead, the FDIC contends that there are so many "weak bank" charters available that starting a de novo is less attractive. That this position serves the FDIC's interests in steering would-be de novo applicants to purchase a marginal existing shop rather than start a new one, thereby rescuing a potential failure from the jaws of a future assisted sale, is purely coincidental.

Because the old paradigm of sell and start afresh appears dead, senior management's impetus to support a sale is often lacking. On the other hand, where the shareholders force a sale, there's also less likelihood of the seller's management jumping ship and starting a competitor. These factors work to lessen M&A activity on the one hand and encourage some M&A activity on the other hand.

While some of the industry participants think we could see a pick-up in de novo activity in two or three years, I heard the same think two or three years ago. Predicting the future is always hazardous business, and I could be surprised that de novo activity eventually resumes. My honest few is that I simply don't see it happening, unless the FDIC and other federal banking regulators have a change of heart, in reality and not merely as a matter of bureau-speak for public consumption. I think that the number of banks will continue to shrink, and that survivors will grow larger and larger in order to not only prosper, but to survive.

*Photo source wolenter.com

HMDA Data Drill-Down

Attorney Warren Traiger thinks that the proposed CFPB changes to HMDA will be "a
fair lending game changer" (paid subscription required).

Information that is currently proprietary, like applicants' credit scores and debt-to-income ratios and loan fees and interest rates, will now be shared annually with the CFPB and other regulators. The proposal will also allow regulators and potentially the public to analyze mortgage lending practices by applicants' age as well as by race, ethnicity and sex.

[...]

Regulators will no longer need to wait until examination time to assess a lender's compliance with the anti-discrimination laws, since they will have annual access to a panoply of sensitive data from almost every mortgage lender. Agencies will be able to routinely crunch and compare data from across the industry and in any geographic area.

Moreover, it may be only a matter of time until the enhanced data becomes public. While the CFPB has delayed consideration of what data should be released, its proposal states that "public HMDA data [should] be modified only when the release of the unmodified data creates risks to applicant and borrower privacy interests that are not justified by the benefits of such release to the public." In other words, protecting the privacy of mortgage applicants will be the only limit on how the data is released.

Warren warns that what all this looks like is a replay of 1991, when the initial release of HMDA information ignited a firestorm of "fair lending mortgage litigation and regulatory enforcement actions that continue unabated to this day." In the past, at least lenders could argue that raw data of discrepancies in loan denials between ethnic, racial, gender or age groups could not alone prove discrimination because of a lack of "control variables." Warren contends that the additional data regarding the credit profile of applicants and details of the mortgaged property will make it harder to make the argument that there are a lack of "control variables." Obviously, that's the intent of the new requirements, which are mandated by Franken-Dodd.

Warren suggests that lenders use the expected interval until the effective date (expected to be January 1, 2017 to run the numbers using the new categories to see if they show disparity in approval rates, do some digging into the story behind the numbers with respect to any disparities shown, and change training, underwriting, or other practices to correct any potential problems before the regulators or a class action lawsuit beats you to the punch. He omits prayer as a potential course of action, which I assume is the result of secular humanist bent of the American Banker, the trade publication in which his opinion piece was published last week. He also omitted one of my favorite remedies for all things even tangentially related to the CFPB: get out of mortgage lending and consumer financial products and services altogether. Unless, of course, you like feeding the families of class action trial attorneys, regulatory enforcement lawyers, and those "saints-in-the-making" at the CFPB who might not be able to define "abusive" with any degree of precision, but, as with pornography, know it when they see it.

FinCEN: All's Well With Marijuana Banking

Apparently, FinCEN chief Jennifer Shasky Calvery has surveyed the battleground that is marijuana banking, decided that the battle has been won, and is telling the world to "move along now, nothing to see here" (paid subscription required).

There are 105 U.S. financial institutions providing banking services to marijuana dispensaries and other pot businesses, a top federal official is expected to reveal in a speech Tuesday.

[...]

Marijuana shops, which generate large amounts of cash and can be targets of thieves, have been lobbying for more access to the mainstream financial system. The guidelines were meant to encourage financial institutions to do business with the industry provided they met certain criteria, and Fincen Director Jennifer Shasky Calvery is expected to declare that the agency's goal has been achieved.

"From our perspective the guidance is having the intended effect," Shasky will say, according to a copy of her prepared remarks that Fincen provided to American Banker. "It is facilitating access to financial services, while ensuring that this activity is transparent and the funds are going into regulated financial institutions."

Reporter Kevin Wack points out what Ms. Calvery does not: 105 financial institutions is less that 1% of the total number of financial institutions, which means that 99% of all financial institutions won't do business with marijuana businesses that are legal under state law as long as dealing in marijuana is illegal under federal law. Most financial institutions in states like Colorado and Washington, where recreational marijuana sales and use are legal under state law, will simply not do business with purveyors of flammable and/or edible hemp-related products.

So, if the "intended effect" of the FinCEN guidance was to encourage financial institutions to bank marijuana businesses, it's difficult to see how she can make that statement with a straight face. In fact, our inside sources tell us that upon leaving the venue of her speech, Ms. Calvery was kidnapped by "Black Ops" storm troopers of the OCC and waterboarded until she coughed up the names of the Gang of 105.

There will be blood...

On another positive note, Ms. Calvery assured bankers that all those SARs they've been filing, including those "Cheech & Chong SARs" that related solely to the weed-related, are not being eaten by FinCEN's pet goat.

Between January and March 2014, teams across the country reviewed more than 180,000 of the more than 290,000 suspicious activity reports that were filed, according to the speech, which also details how the reports have been used to catch various kinds of criminals.

"So, as you can see, BSA reporting does not go into a 'black hole' as suggested by some in the financial industry," Shasky will say.

Well, knowing that 38% of the SARs filed are not reviewed doesn't exactly fill me with anything other than inertia. How about you? Are you all fired up, ready to go (file a SAR)? As to the 62% of SARs that were actually "reviewed," Ms. Calvery does not tell us with what kind of detail those reviews were performed. A cadre of anal-retentive Einsteins parsing the nuances with electron microscopes is one thing. A crew of high school students getting their community service credits in the bag while sitting in a SAR-filled bullpen sipping Red Bull and giving each other wedgies is another thing.

I'm still betting that there's a goat involved.

Tarullo Intrigued

John Gorman wrote commentary in the American Banker last week that ought to add to community bank directors' already high level of angst. Gorman discussed a recent speech by Fed Governor Daniel Tarullo, in which Tarullo spoke favorably of a paper by two law school professors (the road to hell is paved with such papers) in which the good professors argue that directors of too big to fail banks should be held to a higher fiduciary duty than bank directors are held today. The focus of the professors was on the implied duty of "board oversight" of bank operations. The professors' paper "proposed board oversight responsibility for the level of risk-taking by an institution, and the application of a simple negligence standard to this board responsibility."

Shareholder loss and/or systemic harm in the traditional sense — decline in stock price or bankruptcy, for example — would not be required for a stockholder to sue the board. Rather, the triggering event would be a "significant loss" at the firm resulting from an alleged breach of a board's risk oversight responsibilities. (The example given is the $6 billion "London Whale" trading loss incurred by JPMorgan Chase.) Judges would determine if the board-approved risk management processes, including its assessment of the appropriate level of risk and potential risk outcomes, were reasonable. This broadened fiduciary duty would apply only to those firms "capable of imposing systemic loss."

As Gorman points out, the duty of "oversight" is an adjunct to the duty of loyalty rather than the duty of due care. The business judgment rule (discussed here) generally protects directors from judicial second-guessing as long as they aren't "grossly negligent." As it has been previously interpreted in most jurisdictions, the duty of oversight does not generally provide a sustainable basis for a claim of breach of fiduciary duty unless the directors of the bank , in effect, simply ignored red flags. The professors want to change all that for systemically important financial institutions.

Gorman notes the problem with this approach.

Broadening a board's fiduciary responsibilities with respect to risk oversight would expose a board to liability for good faith judgments as to risk management, and would require boards to function in a management capacity. This would be expensive and inefficient, and would undoubtedly discourage capable persons from serving on bank boards. It will also ultimately be ineffective — risk and adverse risk outcomes cannot be eliminated, just as the business cycle has not and cannot be eliminated. Altering the fiduciary duty of oversight to require board "ownership" of risk management, would merely provide a prima facie basis for the filing of a lawsuit against many boards. As we know from the current corporate litigation environment, shareholder lawsuits that are not dismissed are settled (the risk that a judge or jury will rule against them and impose personal liability, is one that a board absolutely will not assume), and the primary beneficiaries of legal settlements seem to be the attorneys.

Many community bank directors who read this might be tempted to shrug it off. After all, if the enhanced duty of oversight applies only to the systemically important, why should I worry? Because as experience informs us, these heightened duties inevitably trickle down to the rest of the banks, even the "too small to save." And it is a director of the too small to save that is most at risk of the FDIC pursuing litigation against him or her if the bank fails. The too big to fail don't fail. Their directors may face litigation from shareholders, but they've got the policy coverage and financial heft to protect the directors. Community bank directors don't have that near certainty. The only certainty they have is that if failure occurs, the FDIC will push every theory available to find a breach of fiduciary duty and a pot of gold at the end of the D&O policy rainbow.

It's nice that Mr. Tarullo is intrigued by this new theory. However, let's hope that his attention span is short and that his focus soon turns elsewhere. Like to regulatory relief, for example.

That Leopard Print Dress Will Look Great Over An Orange Jumpsuit

Our never-ending quest to bring bankers the most current bank-related news often goes under-appreciated by many in the intended audience. Disgruntled compliance drones who desire this blog's author to throw them a bone they can gnaw on until they crack it and suck down the sweet marrow; white-belted, white-shoed retail banking salesmen who desire that I open the door on the path to riches beyond all dreams of Croesus; a Gen Y young dope on punk (or was that a young punk on dope?) whose daddy made him CEO of his very own (actually, Dad's very own) home building company who wants me to serve him a free lunch and give him money for nothing and his chicks for free: all these, and many, many more current, former, and soon-to-be-former readers daily flip me the bird in their rear-view mirror as they "unsubscribe" with extreme prejudice because I either offend their refined sensibilities or--much, much worse--my content "is no longer relevant."

Inasmuch as I spend, literally, several nanoseconds each evening blowing blog posts out of my nether regions carefully crafting each and ever syllable you read on these pristine pages, these criticisms hit home in a way that, for example, a client refusing to pay a monthly invoice would never do. Therefor, in an attempt to reach even my most demanding readers, I offer this evening a story that will resonate with each and every human being, whether bound tightly or only loosely tethered to the world of commercial banking. This is a story as old as the internet and as timeless as Instacam. This is the story of the egg-sucking selfie.

A woman from West Frankfort, Ill. made police work easy when she allegedly stole a colorful, leopard-pattern dress from a small boutique, then posted a picture of herself wearing it on Facebook, police said on Monday.

Danielle Saxton, 27, allegedly took a dress and other items from Morties Boutique on July 11, and was spotted walking away from the store by the owner's son, said owner Gay Williams Morton and police.

The store described the stolen items on Facebook. News travels fast in the small southern Illinois town, and within about two hours, someone sent a link to Saxton's Facebook post, where she'd posted a "selfie" with the message "Love my dress," Morton said.

[...]

Saxton was charged with theft and with failure to appear in court on a warrant in another case, according to West Frankfort Police Dispatch Supervisor John Hampton. He did not know the charge in the earlier case.

The article also reports that Saxton has an unlisted phone number. I guess she was trying to lay low and fly under the radar screen.

There's a valuable lesson for every banker and those who covet their goods and wives: "Stupid is as stupid does" and no matter how dumb you think bank robbers are, they are apparently comparative Einstein's in comparison to dress shop thieves.

Don't ever tell me again that the content of this blog is no longer relevant. Hear me now and believe me later: it has NEVER been relevant.

With luck, it never will be.

 

From now on, the only leopard-pattern dress we want to see on these pages is one that encases Sofia Vegara.

Read My Lips: "No Targeted Businesses"

Apparently suffering from an attack of sudden-onset common sense, the FDIC issued revised guidance last week on payment processor relationships that eliminated the concept of "targeted businesses" that the FDIC considers to present a heightened risk of consumer fraud. As we disccussed in January, among the "targeted" companies were not only the usual suspects, like payday lenders and telemarketers, but such head scratchers as online dating services. We assume that the FDIC was shining a spotlight on illegal "escort services" that often act as a front for prostitution, but in its customary "why use a jeweler's awl when a sledgehammer will do" approach, it cast a wide net around otherwise legal businesses.

In its press release accompanying the revised guidance, the FDIC accused the rest of the world of failing to grasp its nuanced approach to making the world safer through social engineering.

The lists of examples of merchant categories have led to misunderstandings regarding the FDIC's supervisory approach to TPPPs, creating the misperception that the listed examples of merchant categories were prohibited or discouraged. In fact, it is FDIC's policy that insured institutions that properly manage customer relationships are neither prohibited nor discouraged from providing services to any customer operating in compliance with applicable law. Accordingly, the FDIC is clarifying its guidance to reinforce this approach, and as part of this clarification, the FDIC is removing the lists of examples of merchant categories from its official guidance and informational article.

Apparently, bankers are too dense to understand the FDIC's guidance's "original intent," and so, like Antonin Scalia does with US Constitution, the FDIC issued "Payment Processor Relationships For Dummies" so that the Alfred E. Neumans among the proletariat would finally get it through their thick skulls that the FDIC will not, ever, tell you in advance that a line of business is problematic. Instead, they'll wait until your next examination and then bitch-slap you for serving any members of the "non-targeted" group. That way, Jeb Hensarling can't smack them on the behind like a non-housebroken puppy with a rolled-up copy of their written "guidance" (which, as the FDIC repeatedly asserts, is "not binding like an actual regulation"). It's the way of the regulatory world in the era of "All Fired Up! Ready to Go!"

We're sure that the fact the previous version of the guidance that listed targeted businesses provided one of the bases for the lawsuit filed against the FDIC, OCC, and FRB in June by payday lenders and a trade group had absolutely nothing to do with this recent "clarification." Perish the thought!

In response to to all of this, I echo the immortal sneeze of John "Bluto" Blutarsky.