Bank Lawyer's Blog

Trickle Down Guidance

2016-02-21T21:30:00-06:00

From the FDIC's Office of Inspector General comes an interesting little tale that may have slipped by your attention while you and the family were reveling in the latest bloviations from the walking, talking hairdo that is THE GREATEST SHOW ON EARTH, I PROMISE YOU!!!

The entire incident was triggered by a false alarm about a possible security breach of a third party service provider (TSP) that turned out to be some pesky adware. However, the FDIC IG, operating on the premise that no (non)crisis should ever go to waste, used its investigation of the incident to uncover sloppy security breach incident response policies and procedures by all concerned, including not only the bank and TSP, but by the FDIC's own Risk Management Supervision field office (RMS) as well.

The entire "Case Study" by the IG is less than two pages long, so I won't reiterate it in detail. However, I will use it to bleat about a couple of additional points of my own. The first concerns the application of the FFIEC Interagency Guidelines Establishing Information Security Standards to TSPs.

The Case Study observes:

The InteragencyGuidelines require FIs to develop and implement a risk-based response program to address incidents of unauthorized access to customer information. The Interagency Guidelines also provide that FIs’contractual arrangements shall require that TSPs implement appropriate measures to meet the Interagency Guidelines objectives.

I recently had a TSP respond to a financial institution's request that its agreement for technology services with the TSP (which services would give the TSP access to nonpublic personal information (NPI) of the bank's customers) contain a provision pursuant to which the TSP agreed to protect the security of the NPI with the brilliant argument that the TSP was not a financial institution and, therefore, was not required to comply with the Interagency Gudelines. I not-so-patiently relied that the Guidelines "recommended" that my client make them apply to the TSP via a contractual provision and, since my client took such "recommendation" seriously and incorporated such a requirement into its vendor management policy, if the TSP wanted to do business with the financial institution, its could either agree to the provision or not do business with the institution. The TSP's business people conceded the point and it added a provision to the agreement designed to meet this requirement.

This seems like a fairly common requirement, yet the TSP was a technology service provider that does a lot of work with banks. In the course of the discussion on this point, it was evident that if the vendor's representatives were telling the truth (I accepted their assertions at face value, since it did not alter my client's position whether or not they were truthful), we were the only bank to ever ask for this provision. If that is correct, then the regulators need to be a lot more diligent in their vendor management reviews, because there are a lot of agreements with this TSP that don't comply with the "recommendations" of the Interagency Guidelines. On the other hand, it was the TSP's lawyer putting forth this position, so maybe it was a bald-faced lie.

The IG's Case Study also noted that "[t]he Interagency Guidelines The federal banking agencies, including the FDIC, conduct periodic information technology (IT) examinations at FIs and their TSPs." Other regulatory guidance, such OCC Bulletin 2013-29, "recommends" that financial institutions place in their agreements with TSPs an acknowledgment by the TSP that such examinations are permitted and that the TSP will cooperate in the conduct of the same. I have always considered this a "belt-and-suspenders" approach, designed to ward off unnecessary delay, since the Bank Service Company Act gives the federal bank regulators this power to examine third party service providers. On the other hand, I have had a contract negotiator for one of the country's largest technology service providers tell me that their attorneys have taken the position that the law does not require the TSP to allow the bank's regulator to conduct such an examination. The TSP only permitted them out of the goodness of its heart, I suppose. Regardless, the agreement with the TSP should always have a provision that requires that the TSP to permit, and to provide reasonable cooperation in connection with, such examinations.

A final few nuggets I gleaned from the Case Study: (1) a contract with a TSP needs to require full cooperation with the financial institution in the event of security breach and other provisions that are designed to permit the financial institution to be able to meet its obligations the recommendations under another set of guidelines, the Interagency Guidance on Response Programs for Security Breaches; (2) as part of their initial and ongoing due diligence and monitoring of technology services providers, institutions would be well-advised not to neglect the TSP's security breach incident response programs, and make sure that the TSP complies with "cybersecurity best practices;" and (3) just as the bank has a regulator looking over its shoulder and second-guessing it, so does the regulator. I'm not claiming that this is necessarily a bad thing, but you wonder how much of the effort in this area is directed toward placating Monday Morning Quarterbacks.

Rent-a-Charter vs. Strategic Alliance

2016-02-15T21:58:00-06:00

In June 2004, I wrote a post about schemes by non-bank lenders, especially payday lenders, to "partner" with banks and thrifts in ways that would allow the non-banks to use the bank's or thrift's status to "preemept" "inconvenient state laws, such as those pesky usury limits. As I said at the time:

Apparently, the state-chartered banks involved in this practice are counting on the continued lack of objection by the FDIC, and the continued sympathy of state banking regulators who are eager to increase the number of state-chartered institutions that they regulate. In my opinion, this is a risky course.

I also pointed out at the time that national banks and federal savings banks could rest assured that their primary federal regulator would be scrutinizing their business arrangements with non-banks like Elizabeth Warren looking under her bed every night for a bad banker looking to steal all the cash she has hidden in the sock that she keeps under her pillow.

According to a recent client alert from Chapman and Cutler LLP, this bad old idea not only refuses to die, but has engendered state officials to take action to stop it in its tracks. While the alert discusses the State of Pennsylvania going after payday lenders who've aligned themselves with Native American tribes (which has been a problematic marriage for quite some time), it has wider implications for similar arrangements. In this instance, the Commonwealth of Pennsylvania alleged that the "true lender" for regulatory purposes was not a bank in Delaware that would have been exempt from Pennsylvania usury limits and licensing requirements but the non-bank website "originator" that did most of the origination work and derived most of the economic benefits from the loans. The authors note that in other jurisdictions, the court decisions have not been in lockstep on the issue of preemption, arrangements like the one challenged here are likely always to put the lenders in the regulatory crosshairs.

No clear rule has emerged although regulatory challenges almost certainly are more likely to be made when excessive interest rates and/or abusive sales or collection practices are involved. In this case, the loans imposed interest rates of 200% to 300%.

The alert notes that even though the court's decision involved only a motion to dismiss Pennsylvania's action, and that is a long way from a judgment on the merits, the red flags for financial institutions involved in such relationships are clear "because it demonstrates that plaintiffs will continue to raise the “true lender” theory and courts will not necessarily dismiss at an early stage (for failure to state a claim upon relief can be granted) “true lender” claims solely because a bank is the named lender on the loans, at least where there are allegations that the originating bank does not have substantive duties or an economic interest in the program."

In order to mitigate the risk of claims based on the “true lender” doctrine, companies that engage in internet-based lending programs through an arrangement with one or more banks should consider how the programs are structured. For example, consideration should be given to operations where the bank has substantive duties and/or an economic interest in the program or loans. We are aware that some internet-based lending programs are considering structural changes of this nature.

The firm also advises institutions to make certain that they comply with regulatory guidance governing relationships with service providers. They cite FIL-9-2016 and related FDIC guidance. I'd also suggest taking a look at the OCC's Bulletin 2013-29.

Or, for a change of pace, a bank considering one of these schemes might decide to take its entire capital to The Bellagio in Vegas, walk up to nearest roulette wheel, and lay it all on "00." I mean, if you like dancing along the razor's edge with insured deposits, you might as well go all-in. Plus, you get free booze as long as your money lasts. To hedge your bet, you might want to hold back enough to buy a one-way ticket to Havana (regular flights from the States start soon) just in case that method of income-generation doesn't work out as well as a strategic alliance with a non-bank payday lender.

CFPB Spin Is Unspun

2015-03-29T21:50:00-05:00

For those readers who have failed to parse the nuances of the CFPB's 728-page report to Congress on mandatory arbitration provisions in consumer contracts (mandated by Franken-Dodd), Ballard Spahr has you covered. They've not only read it, they've distilled the essence of the CFPB's analysis of the reams of statistics it compiled into the phrase "figures don't lie, but liars figure" (my characterization, not necessarily the law firm's).

To absolutely no ones surprise, the CFPB does not like consumers being obligated to arbitrate their claims rather than exercising their Gaia-given right to send the children of class-action plaintiff's attorneys to an Ivy League school for both undergraduate and post-graduate degrees. The brainchild of a demagogue who not only created a Native American ancestry for herself out of the whole cloth of "grandma always told me," but who also awakens in the wee hours from fevered dreams of toddlers falling into punji-stake-lined pits of "tricks and traps" set by commercial banks and their fellow travelers, the CFPB looks at the statistics regarding consumer arbitration and sees what its creator sees: unremitting evil.

Unfortunately for the CFPB's ideological imperative, Ballard Spahr concludes otherwise: "In fact, the study confirms that arbitration does benefit consumers."

Please read the entire client alert. For those who have actual lives, here are some highlights.

"The data demonstrate that arbitration is faster and more economical than litigation."
The costs of arbitration borne by a consumer are less than the filing fees for a lawsuit.
"Even when consumers initially paid a modest share of the fees, in 56 of 123 arbitrations examined by the study, they were reimbursed in the arbitrator’s award for at least some of the fees."
"According to the CFPB’s own statistics, arbitration was thus a factor in only 8 percent of the class actions studied."
"[I]n 60 percent of the class actions, the putative class members got nothing. And none of the class actions went to trial. By contrast, of 341 cases that were resolved by an arbitrator, in-person hearings were held in 34 percent of the cases, and there were at least 146 cases in which arbitrators reached a decision on the merits of the parties’ claims. The CFPB has it backwards—it is class actions that are a barrier to consumers obtaining meaningful relief in arbitration."
"In arbitrations where consumers obtained relief on their affirmative claims and the CFPB could determine the award amount, the average grant of relief to the consumer was $5,389, meaning an average recovery of 57 cents for every dollar claimed. Based on 73 of 74 individual federal court claims in which a judgment was entered for the consumer, the average amount awarded to the consumer was $5,245. So consumers fare just as well in arbitration as in court, and perhaps even better."
Class action plaintiffs' lawyers, on the other hand, made out like bandits. "Attorneys’ fees awarded to class counsel in settlements during the period studied amounted to a whopping $424,495,451."
"[T]he study’s Achilles’ heel: like the CFPB’s preliminary study issued in December 2013, it fails to examine the actual experiences of consumers who have gone through arbitration. In ascertaining whether consumer arbitration is in the public interest, real consumers’ actual experiences with arbitration and class action proceedings is at least as important as a telephone survey asking randomly selected consumers about their awareness of arbitration clauses in their credit card contracts, if not more so."

The "fact-driven" CFPB apparently ignores the facts. Instead, it opts for conclusions that are best summarized by the following representative headline from the left-leaning (i.e., "mainstream") magazine Time: "CFPB Says Mandatory Arbitration is Bad for Consumer.

Although the CFPB promises to meet with all "stakeholders" before adopting regulations on these provisions, that's like a vigilante posse in Wyoming during the 1880s saying they'd give a cattle rustler a fair trial before they hung him. Expect the CFPB to try to pound a stake through their heart. Meetings are window dressing to paper over a foregone conclusion with the appearance of due deliberation.

Eric The Zombie Killer

2015-02-18T21:55:00-06:00

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.

I Left My Equity In San Francisco

2015-02-10T21:47:00-06:00

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.

FHFA Takes A Baby Step

2014-11-30T21:51:00-06:00

Even though she managed to lose the governor's race in heavily-Democratic Massachusetts to a Republican (thereby earning the disdain of Democratic strategist David Axelrod), and even though a federal district court last month dismissed her lawsuit against the FHFA and its wards, Fannie Mae and Freddie Mac, on the basis that the court system doesn't have the right to "second guess" the FHFA's business judgement (isn't that a novel concept!), Massachusetts AG Martha Coakley still had the gall to issue a public statement about the FHFA's recent decision to back off its policy of refusing to consent to the write-down of loan principal where a foreclosed house is sold back to the defaulting owners.

“The reversal by FHFA of Fannie and Freddie’s policies, which we have long advocated for and brought suit over in part, alters some of their rigid policies to help keep people in their homes,” she said in a statement Tuesday.

To help keep people in their homes who didn't pay their loans as they agreed to pay them and who are getting a better deal than they originally bargained for, at the expense of Uncle Freddie and Aunt Fannie, both of which have been de facto nationalized. I guess that would be a Progressive's orgasmic night dream were it not for the fact that Coakley had absolutely nothing to do with the policy reversal and, more telling, the "reversal" will not help that many homeowners remain in their homes.

However, the impact of the change could be limited. It will only apply to the 121,000 homes that Fannie and Freddie have already foreclosed on and own, a provision that’s intended to curtail any incentive for borrowers in good standing to default. That narrow scope is unlikely to quiet the drumbeat for the FHFA to make bigger changes intended to help a larger number of borrowers who owe more than their homes are worth.

Foreclosed-upon borrowers will also still need to find the cash or financing to buy the old home back at market value, a tall order for those with tarnished credit histories.

“This is a ‘feel-good’ type of policy. It’s directionally helpful to a small number of homeowners that ran into trouble, but at the end of the day, I don’t look to this to have a major policy impact,” said Clifford Rossi, a finance professor at the University of Maryland.

[...]

The new policy in effect reduces mortgage principal, albeit for a small number of foreclosed-upon borrowers. Some nonprofit groups said that Fannie and Freddie would be better served to reduce the borrower’s principal before a foreclosure.

Fannie and Freddie wouldn't be "better served" by such a policy, although delinquent borrowers, Nanny-State lovers, and the fake Native American politicians they so love to lionize would definitely be "better served."

Speaking of which, the fact that 1/32 Cherokee Princess Fauxcahontas went all "jihad" on Mel Watt last week obviously had more to do with this latest publicity stunt than any dismissed lawsuit by a pol who couldn't beat Abu bakr al-Baghdadi in a race for Prime Minister of Israel. You could see the flop sweat flying off of Watt's brow at that Senate hearing like angel dust in the aftermath of a Lindsey Lohan sneezing fit. It's not pretty when a cougar eats her young.

The FHFA's position has long been that it does not want to engage in any process which encourages borrowers to default in order to gain what are, in effect, write downs of underwater mortgages. This is, in theory, especially important in light of the fact that Fannie and Freddie are in conservatorship and, ultimately, it's the American taxpayer on the hook (leaving aside the fact that both entities have become cash cows pouring their profits into the US Treasury). This is only a baby step toward fulfilling the call for widespread write-downs for political ideological humanitarian reasons, but then, every long journey begins with the first step, no matter how tiny. Between now and 2017, it would not be at all surprising to see the pace quicken and the stride lengthen.

What's Good For The Bank Is Good For The Bank Lawyer

2014-11-09T22:13:00-06:00

Recent articles in the Wall Street Journal (paid subscription required) point out an inconvenient truth for many bank law firms: as third party service providers, they, too, must ensure that their information security systems are "up to snuff."

Big banks are demanding that their law firms do more to protect sensitive information to ensure that they don’t become back doors for hackers.

Once given special status as trusted third parties, lawyers, particularly those who get access to sensitive bank information, now are more likely to get full background checks. The number of compliance checklists for law-firm technology systems and security procedures has ballooned. And law firms big and small increasingly are getting on-site audits to check who has access to documents and office servers.

[...]

The demands come as financial regulators are paying more attention to third-party vendors. Benjamin Lawsky , the superintendent of New York state’s Department of Financial Services, last week sent a letter to dozens of banks requesting information on security risks relating to law firms, accounting firms and other third parties.

Law firms “can have access to a very large volume of sensitive data on a recurring basis and that makes them a point of vulnerability,” Mr. Lawsky said.

When "Gentle Ben" Lawsy speaks, lawyers better listen. Not because he possesses any special insight into the banks he regulates (his background in actual banking is non-existent), but because he's demonstrated that he intends to follow in the footsteps of his role model, Eliot "Mess" Spitzer, by pursuing publicity-laden enforcement actions against victims that the public loves to loathe. Banks and lawyers might as well have a bulls-eye painted on their foreheads.

Thus far, it appears that big banks and their big firm minions are first in line for proctoscopic examinations. However, how long will it be before the "trickle down" theory of bank regulation that we've seen prove itself again and again since the creation of Franken-Dodd and its dark spawn, the CFPB, will spread this "closer look" process to smaller banks and their law firms? Not long, I think, even if you measure the passage of time in dog years.

It's hard to argue that law firms for banks of any size should be cut any slack. The Interagency Guidelines Establishing Information Security, the relevant regulatory guidance on third party relationships (such as OCC Bulletin 2013-29), and basic ethical requirements to protect the confidentiality of client information, should have impelled lawyers for banks to take information security in an online world quite seriously long before this point. In many cases, engagement agreements between law firms and bank clients already specifically require that law firms take the kind of security precautions that big banks are requiring of their law firms. True, "one size does not fit all" may be as true of bank law firms as it is of the banks they represent, so, perhaps, not every law firm will need to have inn place all of the precautions described in the linked article.

Some firms instruct attorneys not to open documents sent via email unless they are in a secure environmentin the office, or using a firm laptop on an encrypted line. For particularly sensitive matters, firms might restrict work to stand-alone computers that don’t connect to the Internet, said Mary E. Galligan, a Federal Bureau of Investigation veteran who now is a director of cyberrisk services at consulting and accounting firm Deloitte & Touche LLP.

Mobile devices are a particular focus. Many firms can wipe data from smartphones and laptops that are lost or stolen, and most firms install some level of encryption.

Law firm Davis Polk & Wardwell LLP in recent weeks added a new precaution: Lawyers must have a special application installed on their smartphones to open attachments sent to their firm addresses.

On the other hand, those security measures make sense and many of them are not unreasonably expensive to implement. Those firms that don't want to encounter a nasty (and expensive) surprise would be wise to take this concern seriously, and prepare for such an examination, whether or not one is ever actually performed.

Poison "IvI"

2014-11-02T21:54:00-06:00

*Kevin LaCroix discussed a recent federal district court decision that adds to the number of court rulings that the "Insured versus Insured" (IvI) exclusion in banks' D&O insurance policies does not preclude officers and directors of a failed bank from making a claim for coverage under the policy based upon claims of the FDIC as receiver against them for their alleged acts and omissions as officers and directors of the bank. This issue has come to the forefront again as a result of the waive of (mostly community) bank failures following the economic collapse of 2008. As was the case in the previous wave of savings and loan and bank failures in the late 1980s and early 1990s, insurance companies have attempted to invoke the exclusion in order to deny liability, arguing that the FDIC as receiver "steps into the shoes of the failed bank."

(As a side note, my Contracts professor in law school asserted that insurance companies have a very simple business model: Collect Premiums. Deny Liability.)

Kevin explains the exclusion in the specific policy.

The IvI Exclusion provided in pertinent part that the policy does not provide coverage for any claim against an Insured “brought by or on behalf of any Insured or Company [including the Bank] in any capacity.” The exclusion had a carve-back that preserved coverage for “a Claim that is a derivative action brought or maintained on behalf of the Company by one or more persons who are not Directors or Officers and who bring and maintain such Claim without the solicitation, assistance or active participation of any Director or Officer.”

The insurance company in the case discussed by Kevin asserted that the IvI barred coverage for claims asserted by the FDIC since the FDIC was itself the "Insured." The judge denied the motion for summary judgment filed by the insurance company and granted the FDIC and defendants' motion of summary judgment on the basis that the exclusion was "ambiguous" and could not, therefore, be used as a basis to deny coverage.

Judge Guilford went on to note that “the insurance company has the ability, as a repeat party to these contracts, to ensure that ambiguities are eliminated over time.” The insurer “had the opportunity to make clear in the Policy that the IvI Exclusion applied to the FDIC-R, and it could have done so with a simple statement.” Judge Guilford noted that, in fact, the carrier “provides an optional regulatory exclusion – not included on the policy here – that explicitly names the FDIC.”

Without thrashing through the weeds in a manner that would interest lawyers rather than bankers (and the lawyers can read the opinion via the link provided by Kevin), the takeaways for officers and directors are as follows:

Read your policy and obtain professional, independent help to ensure that you understand it and that you get the best possible protection. As the court points out, the "regulatory exclusion" could have left the defendants high and dry if the insurance company had inserted it in the policy, Understand what could bite you in the nether regions and shop around if you have to.
Get the protection you need before you need it. Your best opportunity to obtain the most favorable policy will be when things are going swimmingly, not when you're taking on water faster than you can bail out the dinghy.
While the trend of court decisions appears to be in favor of the insureds and against the insurer on the issue of IvI in the context of FDIC receivership claims against former officers and directors, the issue is far from settled. Kevin points out that contrary rulings do exist (one in the Northern District of Georgia, one of the less favorable regions to be from if you plan to run a bank into a ditch) and that there appears to be questionable reasoning in some of the favorable rulings. Therefore, expect insurers to continue to litigate the issue until doing so will open the door to a can of whoop-ass sanctions and a complete failure to pass the lying-with-a-straight-face test.

*Photo's Source: Barrett Insurance Agency

Uncollaring The Porn Biz

2014-10-07T22:01:00-05:00

Any banking regulator who thought that the porn business was going to take auto-erotic asphyxiation lying down (or kneeling, or bending over an ottoman, or suspended upside down from various Cirque du Soleil circus apparati) now knows better. In yet another litigious response to Operation Choke Point (paid subscription required), a trade group for payment processors sued a federal banking regulator for pressuring banks that "serviced" purveyors of pornography to "choke the chicken" (that laid the golden eggs).

In a court filing Thursday, the Third Party Payment Processors Association alleged that FDIC examiners coerced and intimidated banks to end their relationships with companies that processed payments for porn businesses.

The examiners' push happened shortly after the FDIC's release in 2011 of a list of industries that it said warranted heightened attention by banks, according to the court papers. The list of industries included pornography, ammunition sales, payday lending, purveyors of racist materials, dating services, Ponzi schemes and coin dealers.

[...]

"FDIC examiners' targeted enforcement against the pornography industry was the advent of its improper practice of moralistic regulation over the banking industry," the filing argues. "Regulators did not target the pornography industry because there was evidence of fraud relative to that industry."

On the record, the FDIC refused to comment. Our usually unreliable inside sources, however, have speculated that if certain bionically-augmented female porn stars had merely agreed to accompany highly-placed FDIC officials on a whirlwind "Around The World In 80 Minutes" tour, all this "choking" might have by-passed the bottleneck of the porn business. Apparently, when certain "professional escorts" claim in their online ads that they are "classy," they mean that even they can only limbo so low.

As we discussed a couple of months ago, the FDIC has taken the position that it never intended to warn banks away from certain lines of business, and that any bank that thought so was "misinterpreting" the FDIC's original guidance that listed certain lines of business as being high risk. Any dummie should have understood that merely classifying a line of business as being "high risk" doesn't mean that a bank shouldn't bank that line of business, but should merely be prepared to justify, during subsequent examinations, exactly why the bank decided to jump into bed with pox-ridden harlots and to sell its soul to the Prince of Darkness. No worries, mate!

As the American Banker's Kevin Wack also notes, the FDIC has contended that any bank that choked a porn business (or spanked a porn monkey) did so solely as an independent business decision, with no pressure or influence at all from the FDIC. Any rumors to the contrary are vile calumny that will be met with an icy stare, followed by carpet napalm bombing via the FDIC's reserve force of Vietnam War-era B-52s.

So, for the porn business, according the FDIC, the banking choke collar is off. Unless, of course, the porn is for a BDSM audience. Then collars will be perfectly appropriate attire.

CFPB Cracks Down On "Marketing Services Agreements"

2014-10-05T21:48:00-05:00

One of the first posts I inflicted on an unspecting public, way back in 2004, when "W" was King and the bubble had not yet burst, was a rant about bogus referral arrangements that violated the anti-kickback provisions of Section 8 of RESPA. And although HUD itself once stubbed its toe over Section 8's threshold, both HUD and state regulators have been all over various schemes that attempt an end-run around RESPA's prohibition on referral fees.

With the late-night creation of Franken-Dodd, we now have the gentle ministrations of everyone's favorite benign Grandpa of a federal regulator, the CFPB, applied to Section 8, and as a recent MoFo alert advises, CFPB promises to be (in the lyrics of Jimmy Webb) a "harsh mistress."

The CFPB entered into a Consent Order with a title company (Lighthouse) on the basis that "marketing service agreements" for "advertising" with real estate companies were, in reality, disguised referral fee arrangements. Lenders who attempt similar arrangements with real estate-related businesses, in which compensation can be related to the volume of loan business referred to the lender should take a lesson.

As evidence of the violations, the CFPB cited the following:

Lighthouse failed to determine, or document a method for a determination of, the fair market value of the services it received under the MSAs.

Lighthouse determined the fees it paid under the MSA, in part, based on the number and value of referrals received by the related counterparty.

Lighthouse did not monitor whether it was receiving the services for which it contracted.

The number of referrals provided to Lighthouse by counterparties was significantly greater if Lighthouse had entered into an MSA with the counterparty.

In sum, the CFPB asserted that Lighthouse was unable to provide a legitimate fair market basis for its pricing under the MSAs and believed that there was a strong correlation between the pricing for each counterparty and the number of referrals Lighthouse received per the subject MSA’s.

Lighthouse paid a $200,000 penalty and the CFPB imposed a $5.00 cap on the value of any consideration that the title company to "referral sources." A fiver isn't likely going to generate beaucoup business for Lighthouse, is my completely obvious conclusion.

MoFo's "takeaways" are insightful.

As expected, the CFPB will look beyond the face of an MSA and consider the facts behind implementation, performance, and payments as between the settlement service provider and the referring party.

The CFPB in the Consent Order created a broad definition of “marketing services agreement,” a term that is not defined in RESPA.

The CFPB emphasized that an objective determination of “fair market value” of marketing services to be rendered must be performed with written documentation of the determination that is retained and available for review.

In the fair market value analysis, the CFPB frowned on the settlement service provider’s consideration of what other title companies in the market were willing to pay to referral sources for marketing services.

The necessity of monitoring MSA performance to ensure that services contracted for are actually delivered.

MSAs that result in more business being referred to the settlement service provider than is referred by the same referral sources not pursuant to MSAs provides evidence of a violation of RESPA §8(a). How the CFPB determined these differences is not clear from the Consent Order.

Any real estate services businesses that are starting to realize that when the CFPB is on the case, there will likely be no way to ever run this dodge again get a gold star for "perception." The last takeaway asks how the CFPB could have determined how much business is referred by the same source with a "marketing services agreement" and without such an agreement. I assume the authors of the alert are displaying a dry sense of humor. As everyone knows, with the CFPB being such a self-professed "data-driven" regulator, they'll always be able to find pertinent data, even if the hiding place is an orifice on their own body.

I don't think this is the beginning of the end of these types of arrangements. I think this the end. Period.

The again, there are always those living in caves who always are the last to hear. Thus, there may be a few more Consent Orders before "marketing services agreement" as ingenuously disguised referral arrangements finally become extinct.