Bank Lawyer's Blog

Another Step Back?

2015-02-04T21:51:00-06:00

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.

The FDIC's Left Hand Slaps Its Right Hand

2014-10-21T22:03:00-05:00

I'm on vacation for a week, so y'all will be spared further abuse until at least the 29th. Before I bow out, however, I'd like to give a hat tip to the FDIC for its exercise of pure chutzpa and sublime soft-shoe-shuffling in attempting to dance away from a letter from one its officials that flat-out told a bank that the entire payday lending biz is problematic (paid subscription required).

The Federal Deposit Insurance Corp. told an Ohio bank early last year that doing business with payday lenders is generally unacceptable, according to a letter released Friday by House Republicans.

[...]

The newly released FDIC letter was written in February 2013, before the agency's actions had become the focus of public controversy. It was sent to the bank's board of directors, and signed by M. Anthony Lowe, the FDIC's Chicago regional director. The name of the Ohio bank that received the letter is blacked out in the version that was released publicly.

"It is our view that payday loans are costly, and offer limited utility for consumers, as compared to traditional loan products," the letter states.

The letter expresses concern about the bank's processing of transactions on behalf of one particular payday lender – the name of that company is also blacked out. It states that the bank's relationship with this payday lender "carries a high degree of risk to the institution, including third-party, reputational, compliance and legal risk, which may expose the bank to individual and class actions by borrowers and local regulatory authorities."

"Consequently, we have generally found that activities related to payday lending are unacceptable for an insured depository institution," the letter states.

Sounds like the critics of Operation Choke Point have a point, doesn't it? Not so fast.

The FDIC responded to the release of the letter by throwing Mr. Lowe under a bus.

The February 2013 letter is not reflective of FDIC policy," Barr said. "Because we have been asked many questions, the FDIC issued guidance in September 2013 making clear that financial institutions operating with the appropriate systems and controls are neither prohibited nor discouraged from providing services to customers complying with applicable federal and state laws."

"We have made this policy clear to our bank supervision managers and examiners, and worked hard to make sure that the policy is being followed," he continued. "We have asked banks to report any communications they've received that do not appear to be consistent with our guidance to the FDIC's management, ombudsman or inspector general."

Those banks who send such reports to the FDIC can expect nothing but the most lax examinations and favorable regulatory treatment on a go-forward basis. At least, they can until every member of the board and senior management is mysteriously felled by attacks by rabid Snow Monkeys imported from Sierra Leone.

So, according to the FDIC, Lowe was an outlier who didn't understand the actual policy, which had not yet been written, although he should have known the content of the then non-existent policy because, after all...well...ummm...Shut Up! Shut Up! Shut Up!

Just another day in Wonderland.

And people actually make this a conscious career choice?

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.

Read My Lips: "No Targeted Businesses"

2014-08-03T21:59:00-05:00

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.

A Two-Front War

2014-06-12T21:56:00-05:00

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.

ICBA Tries To Break The Choke Hold

2014-04-10T21:31:00-05:00

The ICBA is starting to gag on Operation Choke Point. Before it and its members pass out from lack of oxygen, it's demanding that the Department of Justice loosen its grip on the windpipes of its members.

In a letter Tuesday to the DOJ, Independent Community Bankers of America president Camden Fine argues that the investigation known as Operation Choke Point has an overly broad scope and is hurting community banks' ability to compete with their larger peers.

[...]

[T]he ICBA letter suggests that the Justice Department is singling out smaller banks. "The indiscriminate targeting of community banks offering these services also places community banks at a competitive disadvantage with large banks," Fine writes.

The only lawsuit filed so far as part of Operation Choke Point was brought against a small bank in North Carolina, but large banks have also gotten subpoenas, according to sources.

As the linked article points out, huge banks have received investigative inquiries, but only a little bank has had an actual enforcement action taken against it. Bullies always start out with the smallest member of the group, hoping to intimidate those who might actually be able to fight back to be intimidated.

As the article also discusses, the complaints of the ICBA mirror those previously made by the ABA. Unlike the ABA, however, the ICBA's complaint includes the fact that community banks are being singled out for the harshest treatment. That distinction makes sense, inasmuch as the ICBA focuses on smaller banks, while the ABA leans more toward the interests of the bigger banks.

Both trade groups, however, make the very valid point that law enforcement authorities, and bank regulators, would do a lot less damage to banks and legitimate payment processors if, instead of beating up the banks they regulate, they went after the "bad guys" among the payment processors. If they did so, they might alleviate concerns of many that what the folks at the top are after is not a few bad apples, but entire industries engaged in perfectly legal businesses that "the enforcers" find "distasteful."

Choke Point Starts Choking

2014-01-20T21:55:00-06:00

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

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

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

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

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

The firm concludes with some sober reflections.

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

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

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

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

Don't Bother Me, I’m a Banker

2014-01-15T22:06:00-06:00

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

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

Bought by whom? Merged with what?

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

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

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

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

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

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

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

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

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

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

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

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

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

CFPB Doing An End-Around Dodd-Frank

2013-10-20T21:53:00-05:00

The Wall Street Journal on Friday discussed the continuing efforts of the CFPB to circumvent to clear intent of the Dodd-Frank Act, which does not permit the CFPB to regulate the credit practice of automobile dealers. It's doing in the same way it (and other financial institution regulators at the federal level) regulates retail merchants, tribal online payday lenders, and other "unsavory" sellers of goods and services that people desire: by pressuring the banks that service them to act as the CFPB's deputy sheriffs.

Big banks, responding to demands from the U.S. consumer finance regulator, are turning up pressure on auto dealers to prove that they aren't unfairly marking up the cost of car loans to women and minorities.

The scrutiny is setting off a bigger battle in Washington over the role of the U.S. Consumer Financial Protection Bureau, which was prohibited from policing car dealers at its creation in 2010.

[...]

The CFPB does oversee banks and other lenders, and in March the agency warned them they had to ensure that car loans complied with fair-lending laws. The move has banks actively confronting dealers about their lending practices, raising the ire of dealers who say the regulator hasn't provided evidence that a problem exists.

Of course a problem exists! Automobile dealers are making money! That simply can't be right.

According to letters from banks to dealers that were reviewed by the WSJ, banks are apparently using the flavor of the moment of the Obama administration: disparate impact. If the bank performs a statistical analysis and determines that, for example (as did our favorite champion of consumer rights, Bank of America), of all loans sent by a dealer to the bank, female borrowers were charged a dealer discount (markup) of one-third of one percent more than were male borrowers, then that must be evidence of discriminatory lending on a prohibited basis. It's the same theory that consumer advocates at the US Justice Department and HUD have been pushing the past few years and that they will continue to push until the Supreme Court tells them to knock it off.

One dealer complained "There is no way to know why the bureau believes there is a problem in this area—or what standards it is using to measure lender compliance with the law." The bottom line standard is that the Bureau knows it when it sees it, pal. It then will perform a perfectly unbiased regression analysis to back up a claim of disparate impact. Where's there's smoke, there's fire, even if the fire, and the smaoke, are caused by the CFPB rubbing a bank and a dealer together until sparks fly. In the case of automobile dealers, it can't do this directly, so it expects the banks that it supervises to do the job for it.

Although the article notes that a couple of senators are making noises about why the CFPB isn't giving the public a chance to comment on these standards, I wouldn't hold your breath that Congress will take any action. Even Democrats who recognize the inherent end-run the CFPB is doing around the partisan Dodd-Frank Act determination that automobile dealers were off limits, there's no public relations upside to taking the side of a business that consumer advocates are painting as just another profit-hungry leech, sucking the blood from the proletariat. That's something only "Repthuglicans" would do.

I think we'll have to await the SCOTUS ruling in Township of Mount Holly v. Mt. Holly Gardens Citizens. K&L Gates partner Melanie Brodie told an audience last month in Dallas, if the Supreme Court strikes down the use of disparate impact under the Fair Housing Act, it's likely to have a "crossover effect" on the ability of the CFPB to use the same theory under the Equal Credit Housing Act. One way or another, let's hope we get some "certainty" in this area, soon.

I'm attending the Harland Financial Solutions Network of State & Federal Counsel 2013 Conference this week, and speaking on a panel with Rick Eckman of Pepper Hamilton LLP and Keith Rabenold, Deputy GC of Harland Financial Soultions, on technology service agreements and third party relationship issues. Therefore, I'll be "off-blog" until next week.

The Writing On The Wall Is In ALL CAPS

2013-10-09T21:35:00-05:00

As reported today by The Wall Street Journal (via Housing Wire), Chase "has launched an internal review of its commercial-lending clients that is expected to result in the elimination of relationships with companies that pose a greater risk of fraud or money laundering and are viewed as risky to J.P. Morgan's reputation." Payday lenders, pawnshops, check cashing businesses, and "certain automobile delaers" are on the chopping block. According to the folks at Seeking Alpha, what those business share is a common trait: political incorrectness. Although the WSJ article stated that the businesses that have already been cut off were not disclosed, Seeking Alpha noted that Cash America already publicly disclosed that its relationship with Chase has gone by the boards.

Those who think that this cutback by Chase is totally unrelated to the push by the FDIC and other federal regulators (and NACHA) to squeeze banks out of the payday lending servicing business, which, in turn, squeezes payday lenders out of their business, since a lack of access to the banking system means they can't process their payments, are likely smoking hemp. The FDIC recently "clarified" its position on this issue by paying lip service to the concept that banks could process payments for "higher-risk merchants" as long as they properly managed the risks (whatever that means), the folks at Ballard Spahr cut to the chase about the implications of what the FDIC thinks is "higher risk."

The FIL asserts that higher-risk activities are typically characterized by high rates of return, high rates of unauthorized transactions, consumer complaints, and regulatory or criminal actions. The FDIC's reference to high rates of return comes amid reports that the Department of Justice is taking the position that rates of return exceeding 3 percent should raise red flags. In our view, any focus on return rates is questionable and overly broad in the context of a product serving a population with serious credit and liquidity problems.

I guess the regulators would prefer that the "population with serious credit and liquidity problems" be served by organized crime, at least until the the ideologues loose in our financial and political systems achieve their goal of government control of the financial system.

As we've speculated previously (as have others), the regulators don't like certain lines of business and don't want anyone involved in those lines of business, whether they're banks or non-banks. They're going to do everything they can to make sure that those businesses are hamstrung and, eventually, driven out of business. Certainly, they're doing what they can to make it "risky" for banks to finance those businesses or to process their payments. I assume that the major offense of such businesses is that they charge high rates and fees to compensate for the higher risk of non-payment presented by the "borrowing base," which makes perfect business sense but violates a basic tenet of fairness in a world where an unelected group of bureaucrats gets to decide what is and what is not "fair" and to manage the allocation of credit in the economy according to their perceptions of "fairness."

We'll see how well those banks who, unlike Chase, decide to stay in these "risky business lines" effectively manage the risk in the view of their primary federal regulator. We've already been informed by one bank that their primary federal regulator told them that with respect to the "risky business" for which it was processing payments, the lender had to ensure that the business was operating in accordance with all federal, state, and local laws, including verifying that each branch office had all necessary permits from the applicable municipal authorities. Ponder that requirement for a minute and tell me why the bank could not rely upon what has previously been deemed to be satisfactory assurance by the regulators: the representations, warranties, and indemnifications of the business, backed up by sufficient due diligence (including evidence of insurance) to make sure the business could stand behind those representations, warranties, and indemnifications. Even Chase wouldn't have enough resources to verify that every branch of the third-party customer was, in fact, properly licensed and permitted under municipal ordinances.So much for the rule of reason applying to "risk management."

If this doesn't unsettle you, you're likely not a proponent of the free enterprise system, and think this all heading down the right path. The rest of us are "concerned."