Bank Lawyer's Blog

Jamie Takes His Shots; Sheila Gets Constructive

I guess Jamie Dimon just got tired of taking shots from people he considers to be, intellectually speaking, a few fries short of a Happy Meal. While sometimes criticized for being an apple polisher for the left, he recently made it clear to an audience in Columbus, Ohio, that he's an equal opportunity "disparager" of politicians from both sides of the aisle.

He earned applause for comments on the importance of improving urban public schools, and the political ineptitude in Washington, D.C., hammering policy-makers on several occasions for "reams of bad policy."

"I don't blame Republicans or Democrats," he said. "I blame them all."

I guess Jamie's still bent about being kicked around in a House hearing a few years ago. He's usually treated with kid gloves by most pols, so it's understandable that he was shocked when someone actually threw a high hard one at his head in public. Still, his blame game has a lot of players.

He also had blunt advice about building a strong company.

"Fire the a--holes," he said to laughs. "They will destroy your companies."

OK, so if you fired all the a--holes in Congress, you'd have a barren wasteland. Come to think of it, that sounds pretty much like what we have with all the a--holes still in place. I guess that also applies to most big banks, as well, though, doesn't it?

A--holes: We're what made America great.

While Dimon's remarks didn't come as a shock, recent remarks by another character who made her bones during the last banking meltdown did stun this observer, because they actually made sense (paid subscription required).

[Sheila Bair] [t]he former chairman of the Federal Deposit Insurance Corp. is calling for a legislative solution she argues could significantly diminish regulatory burden on community banks: giving regulators the power to exempt institutions with less than $10 billion of assets from existing and new regulations.

Community bankers are lobbying for specific exemptions from specific provisions of law. Bair thinks that approach is too narrow.

Bair said bankers should push for a broader solution, one that could fix many of those problems and future ones that arise. She said too often regulators feel like they have to start applying regulations geared for larger institutions to smaller ones.

"There is this fear that if you don't do something you are going to look weak if you aren't dealing with the small banks the same way as big banks," she said.

But if Congress provided an explicit directive to regulators to consider granting small banks an exemption from rules they implement, that trend could begin to turn around. It would allow regulators to craft streamlined rules for small banks, effectively giving a stamp of approval to a two-tiered regulatory system, a concept that many lawmakers already endorse.

 "This might inform more of a two-tiered approach," Bair said. "It's clean, simple, easy to write… I don't know why anyone would object to it."

It would also empower regulators to act rather than having them return to Congress asking for an exemption. That is currently the case with the Volcker Rule, a Dodd-Frank provision that places limits on bank investment in private equity and hedge funds. Fed officials have asked Congress to exempt small banks from the rule.

As Bair also points out, her suggested approach seems to take the subject of community bank regulatory relief out of bitter partisan arguments over "rolling back" the "reforms" of Franken-Dodd. Even Princess Fauxcahontas might support such an approach, especially if she's on her meds when it comes up for a vote.

Critics raise legitimate concerns, including whether $10 billion is too low a threshold, and whether exempting broad swaths of regulations from such legislative coverage could gut the effectiveness of the "relief" intended to be granted to smaller institutions. Other commentators raised my major concern: regulatory discretion means that regulators can decide not to act or to act ineffectively. They could also use their discretion to act in ways that promote something other than what objective observers would consider a proper goal (such as punishing gun dealers, online dating services, porn stars, payday lenders, or that annoying guy in the back of the bus who won't give up his seat to an obviously expectant mother).

Even with those concerns, her proposal is worth considering. Since, in the past, we've dumped on her like a DFW public works dump-truck with a load of sand-and-salt barreling down an icy freeway in February when she acts in ways we think may be "unwise" (Can you say "industrial bank moratorium"? I knew that you could!), we'll give her her props when she casts a pearl before this swine.

Choke Point: Not Dead Yet

I'm not the only one who's skeptical about the effect of the FDIC's recent letter that appears to end that agency's participation in Operation Choke Point. Former FDIC Chairman Bill Isaac claims (paid subscription required) that if that program is dying, it's not going to be a quick death. His example is an "early warning" that some folks may not be getting the message the FDIC claims it intended to send.

Bloomberg reports that Early Warning, a fraud prevention company owned jointly by several large banks, is cutting off some lenders’ access to valuable account data. Until now, the data had been available for both banks and nonbanks to use in their underwriting and fraud detection practices.

We don’t have all the facts yet, but Early Warning is reportedly telling its customers that it is cutting off lenders that charge high interest rates. The change "reflects both the wishes of our data contributors as well as various regulators," a company spokesman told Bloomberg. Early Warning’s primary metric for denying the service under its new guidelines is a rule that limits its lending customers to those that offer products with an APR at or below 36%.

Bill claims that none of his contacts at federal banking agencies admit to having any sympathy for the position of Early Warning. They claim that it does not embody regulatory policy.

In fact, Bill asserts, it flies in the face of regulatory policy.

Regulators want lenders to do more to determine the ability of subprime customers to repay their loans. Cutting lenders off from Early Warning’s data undermines subprime lenders’ power to properly underwrite loans.

We can all agree that abuses in short-term lending need to be curtailed. The rub here is that access to Early Warning has made short-term lending more responsible, not less.

When lenders can verify that the identity of the customer matches his or her bank account, they are able to quickly weed out first-party fraud — that is, loan applications by individuals or groups that have no intent to repay. That means lenders are able to improve fraud scoring, which in turn leads to lower default rates and ultimately means better pricing for borrowers. Having access to this valuable data is especially important for the more innovative players in the space, which are using advanced analytics and modeling to determine pricing.

In addition, Early Warning can give lenders the opportunity to stop automated clearing house withdrawals for borrowers whose accounts do not have enough funds. That is an important protective measure for customers who face expensive insufficient funds fees, bounced check fees or overdraft charges if the lender makes a payment attempt on the account.

As I've said repeatedly, you can't make this stuff up.

Perhaps a more encouraging sign (dimly lit as it is) is the apparent receptiveness of Attorney General nominee Loretta Lynch to "listen to reason" on the issue of Operation Choke Point. At least, she seemed to indicate that she is open to a serious consideration of the concerns of her opponents during her confirmation hearings. That's a slim reed, so we won't grasp it firmly. She also has a brief banking background, which indicates that her grasp of the issues might be based on something other than pure ideology (as compared to, say, those of the Massachusetts Mohican). At any rate, can she be worse than Eric Holder? Don't answer that question. It's too early to tell.

Eric The Zombie Killer

Like the Windy City, the Empire State wants to make sure that when voters complain about run down neighborhoods, abandoned buildings, and general urban malaise, they know who to blame. No, not Teflon-coated pols. Instead, everybody's favorite whipping boys: mortgage lenders.

The State of New York doubling down in its efforts to fight back against the rising tide of zombie properties, which are homes that are vacant or abandoned during the foreclosure process.

New York Attorney General Eric Schneiderman announced on Monday that he plans to resubmit an expanded version of a bill he first introduced in 2014 to the state legislature. Schneiderman’s bill, called the Abandoned Property Neighborhood Relief Act, is designed to reduce the number of zombie homes by informing homeowners of their right to stay in their home until a court orders them to leave.

According to Schneiderman’s office, the bill will also require mortgage lenders and servicers to identify, secure and maintain vacant and abandoned properties shortly after they are abandoned. Under current state law, lenders and servicers aren’t required to secure and maintain vacant properties until the end of the foreclosure process.

The bill would also create a statewide registry of zombie properties, designed to help local governments with the enforcement of property maintenance laws.

Additionally, if Schneiderman’s bill becomes law, any fines levied against banks, lenders or servicers for violations of the state’s abandoned property laws would be directed into a fund, which would be used by local governments to hire additional code enforcement officers.

Making lenders legally responsible for properties that they do not legally own is a scam that's been around, in one form or another, for years. It's generally been considered a bad idea by mortgage lenders, which is an understandable reaction from a business standpoint, since it increases the risk and cost of lending in areas that attempt to impose such liability. Chicago fought the FHFA in court over an ordinance that tried to do the same thing that Schneiderman's bill would try to do. Last year, Chicago settled with the FHFA, after the FHFA won at the district court level and the city recognized that the FHFA was not legally compelled to comply with such a law. While the FHFA agreed to voluntarily register properties with the city, "the city will not require Fannie and Freddie to comply with the city’s vacant and abandoned building ordinances and will not fine the FHFA for ordinance violation."

Expect New York's law, if enacted, to generate a similar reaction from the FHFA.

I just love the smell of litigation in the morning. It smells like...attorneys' fees.

Another interesting aspect of the proposed bill is the following Catch 22.

Schneiderman’s bill requires lenders and mortgage servicers to periodically inspect properties with delinquent mortgages to determine if the property is occupied.

But the bill also makes it unlawful for a lender or servicer, or a person acting on their behalf, to enter a property that is not vacant or abandoned for the purpose of “intimidating, harassing or coercing a lawful occupant” in an attempt to get them to abandon the home.

That high wire walk, as well as the bill's other provisions, ought to discourage lenders and/or make them price the high risk into the cost of loans made in New York. Ultimately, it's the customer who always pays the price.

As if there weren't enough reasons to move to Texas, Eric the Red gives New Yorkers one more.

Julian Is Julienned

Juilan Castro, the head of HUD, has taken his lumps lately over his amateur-hour performance on The Daily Show. Apparently, he just can't catch a break. Last week, he had the misfortune to appear before the House Financial Services Committee where he suffered the ultimate humiliation. No, not being grilled by Republican hit man Jeb (Clampett) Hensarling. That's a badge of honor with Castro's crowd. Rather, it was having to listen to Maxine Waters publicly praise him that had to cause him to spit up a little bit in his mouth. I know that she had that effect on me.

U.S. Rep. Maxine Waters, D-Calif., Ranking Member of the Financial Services Committee, was one of the few to praise Castro.

"Secretary Castro, although today you will likely take a fair amount of criticism from my colleagues on the other side of the aisle for your decision, I’d like to take a moment to remind them that when the private sector virtually left our struggling housing market during the worst of the crisis, the FHA stepped up and provided the liquidity that kept it afloat. Despite the steps toward recovery the economy has taken since then, the housing sector continues to suffer from a tight lending environment – and a strong FHA is still very necessary," said Waters.

"I would also note that FHA is far from bankrupt, holding approximately $40 billion in reserves, continuing to generate revenue, and taking critical steps to recover its capital reserves, which are projected to show a positive balance in 2015," she added.

You heard that right: when the private sector collapsed, the FHA hung in there. Of course, the FHA had no choice. It couldn't file "bankruptcy" like a private entity, even though it was insolvent, because its insurance is backed by the full faith and credit of the United States, it is required to fulfill its statutory purpose of providing mortgage insurance to back mortgages to qualified borrowers (many of whom turned out to be unqualified, but that's another story), and it has been used by clowns like (the Bridge Over Troubled) Waters to apportion housing credit to a constituency that appreciates the fact that the FHA being the lender that loans where angels fear to tread and votes accordingly. I think that putting Freddie Mac and Fannie Mae into conservatorship and pumping government money into those giant slush funds for progressive housing policy ("A Chicken In Every Pot and An Illegal Honduran Gardner In Every Malibu McMansion") did more to prop up the housing market than FHA insurance. Then again, who am I to argue with a brainiac like Maxine.

Hensarling and his henchman on the Republican side of the far divide are a bit perturbed with recent actions by the Master of the Selfie Stick in the White House, who reduced the annual mortgage insurance premiums for FHA by 50 basis points, from 1.35% to 0.85%, at a time when the FHA has still not restored its capital reserve ratio to the legally mandated level of 2%. In fact, it's 0.41%. The $40 billion that Maxine crowed about is supposed to over $200 billion.

Castro's response was as dynamic and on point as were his masterful responses to John Stewart. [Editor's Note: The previous sentence was sarcastic, for those readers who seem to take everything I write here in dead earnest.] Castro said that everything's great, we've never been better, nothing to see here, let's all fly to Colorado and score some "Hashey Bars."

Hensarling was not amused.

"With all do respect (Castro), we have heard that before, and you are sincere. But this committee has been told that once, twice, three times, and it hasn’t proven true,” said Hensarling. “Once again, you are in violation of the law and that has got to stop."

Except, Jeb, it won't stop. You know it, and so does everyone else with an IQ above that of a chunk of week-old Limburger cheese. The Republican-controlled house could pass legislation to punish the FHA, perhaps even threatening its funding. Even if the majority in the House did pass such an unpopular measure, Democrats in the Senate would likely thwart its progress in that chamber with procedural maneuvers, and the Perpetual Campaigner would veto it even if both houses pass it. By the time that useless exercise has run its course, there will be a new occupant in the house-is-not-a-home at 1600 Pennsylvania Avenue and Castro will be back to doing what he does best: looking dynamite in Armani formal wear.

Yes, we know: this is all about press releases for 2016. Keep up the good work.

I Left My Equity In San Francisco

When a government takeover plan is so whacked that even a city official in San Francisco thinks that it's whacked, you know that it's officially jumped the shark.

San Francisco’s controller discouraged city lawmakers from going forward with a proposal to use eminent-domain to help homeowners avoid foreclosure, citing federal limitations and risks to the city’s borrowing costs.

“The city’s participation in an eminent-domain program will likely have broader negative impacts on the city’s participation in financial markets, at least for an initial period,” controller Ben Rosenfield wrote in a report released Thursday.

Rosenfeld had been asked by the city's Board of Supervisors to look into a proposal that the City by the Bay join the quixotic quest of the City by the Backside (Richmond) to seize underwater mortgages through the power of eminent domain, write the principal balances down to current fair market value, and, its proponents hope, benefit homeowners who then can then lower their monthly mortgage payments as ride rising home values upward as the economy continues to recover. The only people who get screwed under that arrangement are lenders, but to hell with those capitalist pigs, goes the reasoning.

Ben noted in his report that mortgage giants Fannie Mae and Freddie Mac have made it clear that cities that use eminent domain for such purposes would threaten the safety and soundness of those two formerly insolvent entities (and Uncle Freddie and Aunt Fannie certainly know unsafe and unsound actions when they engage in them, don't they?). Therefore, "[p]recluding any participation from Fannie Mae and Freddie Mac, the use of eminent domain would seem to be an inviable option." An "inviable option," indeed. Rosenfeld also observed that the eminent domain scheme "hasn’t yet been proven in any jurisdiction in the U.S."

It's doing great on Planet Bizarro, however.

A proponent of the plan was "disappointed" (i.e., threw a hissy fit).

“I’m disappointed that they seem to have bought into Wall Street’s scare tactics about eminent domain,” Avalos said in a statement. He said he plans to call a hearing soon to review the report.

I wonder if, at that hearing, he'll threaten to "socialize" mortgages? That would be the cherry on the top of this fruitcake.

Luetkemeyer Resumes Choking Choke Point

God bless his Middle American heart (paid subscription required): Missouri Rep. Blaine Luetkemeyer "reintroduced legislation Thursday that would block regulators from ordering banks to end relationships with customers without cause, in response to" Operation Choke Point. Readers likely recall Rep. Luetkemeyer's introduction of the same bill last year which, because of Democratic control of the Senate, went nowhere. I suppose that he's encouraged by both the Republican takeover of the Senate and the FDIC's recent retreat (on paper, at any rate) from its hand-holding with the US Department of Justice in jointly bar-arming the windpipes of "disfavored" businesses so that they could not breathe in the rarefied air of the US banking system.

"I am reintroducing the Financial Institution Customer Protection Act because this legislation needs to be codified into law so that other agencies don't ever fall into this illegal and abusive practice," Luetkemeyer said in a press release.

The bill would forbid financial agencies from pressuring banks to cancel accounts unless there is a "material" reason and would mandate a formal rule defining reputational risk. The bill would also tweak language under the Financial Institutions Reform, Recovery, and Enforcement Act, narrowing violations covered under the law from those "affecting" financial institutions to those "by" or "against."

That last "tweak" would hinder the Justice Department's use of Section 951 of FIRREA to go on fishing expeditions against banks and businesses on the basis of investigation certain fraudulent or concealed actions that allegedly pose an ill-defined "reputational risk" to banks (and that, thereby, "affect" them), as opposed to actually being directed "against" the bank or undertaken "by" the bank itself. The DOJ was using the lower standard of Section 951 to pursue civil remedies (civil money penalties) rather than the higher standard to prove criminal wrongdoing, as a way to squeeze banks and the nefarious payday lending, gun-dealing, porno-purveying, online-hooking-up businesses they serviced to stop doing business together.

Even if the bill makes it through both the House and the Senate (where it will receive the gentle ministrations of War Chief Warren), you have to wonder whether the Perpetual Campaigner in the White House will veto it, and, if he does, whether the Senate has enough votes to override that veto. I'm skeptical.

Nevertheless, with Eric Holder slipping out the DOJ's back door, keeping the pressure on the DOJ (and the federal bank regulators) may bear additional fruit, if not this year, then in the next few years.

Another Step Back?

Ballard Spahr has one of the best initial analyses of last week's Financial Institution Letter in which the FDIC "encourages institutions to take a risk-based approach in assessing individual customer relationships rather than declining to provide banking services to entire categories of customers, without regard to the risks presented by an individual customer or the financial institution’s ability to manage the risk." In other words, the FDIC took another step back down from its participation in the Department of Justice's Operation Choke Point. The first step was taken last summer, when the FDIC obliterated its list of "risky businesses" by category. The FDIC claims that banks under its supervision should evaluate the risk of a business on a customer-by-customer, not industry-by-industry, basis.

The firm also discusses an internal FDIC memorandum to its examiners. Apparently, the FDIC is attempting to head off any rogue examiners who, like the former head of supervision in Atlanta, tried to put all payday lenders out of the banking system because he didn't favor that line of business as a matter of personal moral preferences.

The internal memorandum states that FDIC examiners: 

• Should not use “informal suggestions” to make recommendations or requirements for terminating deposit accounts or for criticizing a bank’s management or risk mitigation associated with deposit accounts that does not rise to the level of a recommendation or requirement to terminate accounts
• Must put in writing in the report of examination (ROE) their criticisms of a bank’s management or risk mitigation associated with deposit accounts
• Cannot base recommendations for terminating deposit account relationships solely on reputational risk to the bank

The memorandum further mandates that before recommendations or requirements for terminating deposit accounts are provided to and discussed with a bank’s management and directors, they must be made in writing and an FDIC Regional Director must approve them in writing. It also requires such findings to be “thoroughly vetted with regional office and legal staff” before they are included in the ROE or supervisory actions are pursued.

I suppose that this means that from now on, when a payday lender is blackballed by an FDIC-regulated institution, you'll know it's either the result of the institution's own analysis of the risk posed by that specific lender, or, at least, that the persecution has been authorized at high levels of the FDIC, not merely by a lone-wolf, piss-ant field examiner. That ought to give everyone comfort.

As the firm concludes, this latest guidance, while welcome, is not a "Get-Out-Of-Jail-Free" card for payday lenders, porno kings and queens, gun dealers, online dating services, and other "undesirables." As a practical matter, banks that want to do business with them will still be subject to heightened due diligence requirements. Although Ballard Spahr does not put it this way, I will: such businesses will still, for practical purposes, be considered "guilty until proven innocent." The customer will have to be able to demonstrate that it is one of the "good payday lenders" before the risk will likely be judged to be acceptable to the bank.

We'll have to see how this shakes out. While these signs are favorable, until there is a change in the White House, I'm from Missouri on whether we've actually turned a corner.

Prince Julián: The Unbreable Being of Lightness

Housing Wire's Trey Garrison, not a man to mince words, outdoes himself in a recent snark attack on HUD Secretary Julián Castro’s recent appearance on The Daily Show with John Stewart. Like Trey, I also "find Stewart’s faux hipster 'smarter than thou' thing and his mugging for the camera to be a stale schtick." However, I also have to agree with Trey that compared to Castro, Stewart is an Einstein of housing policy. That would be fine, if Castro was the brother of Cuba's Raoul and Fidel. He's not. He's supposed to be our nation's fearless leader of "all things housing." As such, he ought to have a basic grasp of housing policy issues, both fundamental and complex.

Here's what he's got to offer.

The Daily Show
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According to Trey, instead of schooling Stewart, Castro "looked like an NFL mascot asked what defense to run in the final seconds."

Castro should have corrected Stewart that we are not talking about derivatives, but the secondary mortgage market. And that the mortgage market wouldn't work without a functioning secondary mortgage market.

[...]

[T]hese were basic questions and he got caught pushing empty spin."

While also taking potshots at Secretaries of State Clinton and Kerry, and the human pincushion, "Diamond Joe" Biden, Garrison saves his most damning epithet for direction at Castro: "politician."

Now he’s being touted as a possible VP candidate for whomever wins the Democrat 2016 nomination.

You don’t have to be the sharpest tool in the shed to be vice president, if history shows anything.

As an empty suit with a big smile, a blank slate, and demographic appeal, Castro may be the tool they’re looking for.

But for me and where I sit in the housing and mortgage finance space, I will continue to expect more from our leaders.

If Trey keeps this up, he's going to make me start to sound like Thomas Merton in comparison.

Expecting more from our leaders: a perpetual past time since 1776. As for the HUD Secretary, I don't expect any more from him than he displayed to Stewart. A guy who defends TARP by pointing to HAMP knows on which side is intellectually dishonest bread is buttered, and it's not on the side of "Truth, Justice, and the American Way." He's playing to his constituency, and that constituency isn't interested in anything more than bringing the bacon home to the special interests who love government largess with a populist flavor. As George Bernard Shaw famously quipped, "A government that robs Peter to pay Paul can always depend on the support of Paul."