Bank Lawyer's Blog

The Underbelly Of The Mt. Holly Settlement

2015-05-28T22:04:00-05:00

The settlement of the Mt. Holly disparate impact case before it could be decided by the US Supreme Court were suspicious. At the time, it was thought by many that the US Justice Department had helped to engineer that settlement so that its (and HUD's and the CFPB's) use of that questionable doctrine in fair lending claims could continue for a while longer. The last thing the Feds wanted was for the SCOTUS to decide the matter, because they were worried (correctly) that it would strike down its use. At the same time, the banking industry wanted the SCOTUS to render a decision, because it thought that the court was more likely than not to strike down the doctrine's use in the fair lending context. The last thing that banks wanted was for the parties to the case to settle before the SCOTUS could render its decision (which is exactly what happened).

Recently, a rock has been overturned that has exposed a bunch of creepy-crawlers that work not for the federal government, but for the big banks that wanted the SCOTUS to rule in the Mt. Holly case. According to a former senior executive of Chase, that bank tried to get him to use his board position with a non-profit housing organization to "scuttle" the funding of the settlement. Moreover, the former executive, Wayne Trotman, at the time the mid-Atlantic market president of Chase, alleges that when he refused to breach his fiduciary duty as a member of the board of directors, the bank retaliated by firing him.

The fact that Mr. Trotman is an African-American adds not only to the radioactivity of the alleged wrongful conduct, but also substantial irony to those actions, if Mr. Trotman's allegations are true. While Chase counters that Trotman's claims are "baseless," Trotman's lawyers claim that they have "substantial evidence" to support them.

Obviously, the first thing that Trotman has to prove is that Chase pressured him to use his board position to scuttle the settlement. According to the linked article, which cites Trotman's Complaint, he claims that he was instructed to do so by Chase's Associate General Counsel, via email, even after he refused on the grounds that it would breach his fiduciary duty. The Complaint later states that another Chase attorney told him that he should not honor the request (which was also the position of his supervisor). Apparently, the ball started rolling in Jamie Dimon's office after he (and the heads of other large banks) received an email from Tim Pawlenty of the Financial Services Roundtable uirging the bankers to find ways to derail the settlement long enough for the SCOTUS to render a decision. There does not appear from the kinked article to be any order from Dimon that Trotman do anything, but, then, that's what subordinates are for: read the CEO's mind and "get 'er done" while retaining deniability for those residing at the top of Mt. Olympus.

The harder nut to crack for Mr. Trotman may likely be proving the causal connection between his decision to be an honorable man and not to breach his fiduciary duties, and his subsequent termination by Chase. It's impossible to determine that connection solely from the linked article, although I assume that the "substantial evidence" referenced by Trotman's lawyers indicates that they think that they can carry the water on that claim. The man worked for Chase for 19 years, received a "meets expectations" review shortly after the incident (although Chase substantially cut his bonus from the previous year, in which he received the same rating), then six months later received a mid-year performance rating of "poor" and was fired 14 days later without being provided an opportunity to improve. On its face, it looks like there might be fire with this smoke.

On the other hand, we haven't seen Chase's formal responsive pleading. In one press report, a Chase spokesperson told a reporter that Trotman 's position was eliminated in a "reorganization of markets." That spokesperson also claimed that Chase would "fight this in court." I guess that beats fighting it in the streets.

Obviously, it's too early to tell what the outcome of this lawsuit might be. The smart money in these situations is on a cash settlement with nondisparagement and confidentiality provisions in the settlement agreement, so that the "reputational risk" is mitigated and the whole sordid affair is swept under a rug.

Still. When it comes to picking a champion inducer of the gag reflex, it's often tough to choose between Big Banking and Big Government.

Banks: Targets of Opportunity

2015-05-17T21:45:00-05:00

Conservative economist Larry Kudlow claims that while bank-bashing didn't work for the Labor party in the recent UK elections, banks in the US should gear up for a round of groin-kicking from both sides of the US political spectrum as the US presidential election race heats up late this year and next. According to Kudlow, the intellectual dishonesty inherent in this tactic is apparent.

Few will admit it, but unaffordable, undocumented mortgage quotas came out of Washington, not Wall Street. And Fanny and Freddie enforced them. And while the Fed’s ultra-easy money destroyed the dollar, it also caused a bubble in home prices.

Yes, banks made risk-management mistakes. But when will the firing squads stop? You know, you can’t have a decent economy without banks.

But when will you ever hear a politician say that?

Let me guess.

[Sound of crickets chirping]

Kudlow lists the usual suspects: Lizzie Warren, Bernie ("The proletarians have nothing to lose but their chains") Sanders, and, lately, Hilarity Clinton, but also notes that Republicans are also jumping on the anti-bank bandwagon.

Of all people, former Florida governor Jeb Bush bashed banks while in New Hampshire.

But wait, didn’t Jeb’s brother preside over the big bank bailout? Oops.

Former Texas governor Rick Perry is slamming the banks. So is former HP CEO Carly Fiorina. She actually said, “I agree fully with Elizabeth Warren.”

As Kudlow responds: "Huh?"

What's next for Carly? Is she coming out as 1/32 Huron? Will she change her last name to "Simon" and make her campaign song "Nobody Does It Better?"

Kudlow thinks that there are valid reasons for a politician to defend banks.

Banks do make business loans, which have picked up quite a bit. They do provide mortgages, though the terms are more difficult. They do offer credit cards, decent ATM machines, car loans, farm loans, and student loans. Even though the Fed has decimated interest rates, they do allow large savings accounts. And they do, after all, connect savings with investment. (I think that was their original purpose.)

Kudlow would get rid of the Ex-Im bank, as well as the "conserved" Aunt Fannie and Uncle Freddie. He doesn't say how he'd finance the US residential mortgage market without Fannie and Freddie, and I'd like to hear his ideas on that issue, because right now, those two broke (yet cash-generating) behemoths are pretty much all there is in the secondary mortgage market in this country, at least for conventional loans.

But I digress.

While sarcastically claiming that he'd never defend banks, he ends with a warning to pols.

Sometimes British politics leads our politics. And if bank-bashing didn’t work in the U.K., maybe politicians here should let it go, and instead focus on pro-growth measures like flat-tax reform, free trade, deregulation, and sound money. Just for a moment, why not leave banks alone?

Because they're easy scapegoats, Larry. Like lawyers, everybody loves to hate them, and for the cynics we have in D.C., who value power over truth (even those--or, perhaps, especially those--who claim to speak truth to power), they are low-hanging fruit.

Study Contends Community Banks Need Relief

2015-05-05T21:32:00-05:00

A recent study released by the University of New Orleans backs up what many have been contending: "Community banks in Louisiana and throughout the United States are rapidly disappearing, and federal laws meant to protect the country from another megabank bailout have saddled smaller financial institutions with disproportionately large costs."

The number of community bank charters plummeted 53.3 percent from 1993 to 2014, while the number of non-community banks jumped 17.6 percent, according to National and Regional Trends in Community Banking. The study was conducted by the University of New Orleans.

The causes include consolidation in the banking industry, competition from online banking and the crushing burden of “too big to fail” federal regulations, said Kabir Hassan, lead author of the study. The regulations are not working as intended to prevent the economy from being crippled if one of these megabanks fails.

“Actually in my reading, they have institutionalized it even further,” Hassan said. “And what it means is, when the law is made for a big bank, who suffers? The small, mom-and-pop community banks.”

[...]

Hassan spoke at a community bank meeting organized by Gulf Coast Bank & Trust Co. Sen. David Vitter, chairman of the U.S. Senate Small Business and Entrepreneurship Committee, also spoke at the meeting in Baton Rouge.

Vitter said he hopes to distribute the study’s findings as widely as possible, starting with the Senate Banking Committee.

Although the downward trend in community banking is well-known, when these complaints are brought to Washington, D.C., there are typically two responses, Vitter said. The Washington-type experts deny it is happening or say it’s an unintended consequence.

“Well, it really doesn’t matter if it’s intended or not. That doesn’t change the reality,” Vitter said.

Obviously, Vitter is an ally of community banks in their quest for "regulatory relief." It will be interesting to see how his fellow members of the Senate Banking Committee, including everyone's favorite populist, Lizzie Warren, react to the study. With a yawn and a shrug, is my guess.

As the linked article points out, the loss of community banks has potentially serious consequences for small business lending. Traditionally, community banks have been the primary source of small business loans. While some commentators believe that alternative non-bank sources (including peer-to-peer lending) will eventually substantially supplant community banks, even if true (which I doubt), that's not going to happen overnight. I recall reading in the late 1990s prognostications that the internet would make soon branch banking obsolete. Several years later, the federal banking regulators were telling consultants and bank lawyers that they'd better not bring any more "internet-centric" bank charter applications for approval, because the bloom was off that rose. While the internet, and mobile, banking channels may one day replace brick-and-mortar branches, change happens more solely than many "true believers" expect, and severe dislocations for customers can result while the paradigm is shifting.

I think regulatory relief for community banks ought to be getting more "play" in Congress than we've seen thus far. More statistical support like the UNO study may help it gain traction. Let's hope so.

Don't Ask, Don't Tell

2015-04-26T21:33:00-05:00

You may recall last year's pronouncement by the head of FinCEN, Jennifer Shasky Calvery, that 105 financial institutions were, thanks to the amazing guidance provided in February 2014 by FinCEN, servicing state-legal, federal-illegal marijuana businesses. Apparently, less than 10% of those are in Colorado, land of the free and home of the dazed, because according Colorado Rep. Jared Polis, only eight commercial banks and two credit unions in that state are banking the pot biz, and none of them want to be publicly named.

I assume that they don't want to happen to them what happened to publicity-challenged MBank out of Oregon. As recently related in published reports, that Oregon bank announced in January that it was open for (marijuana) business not only in Oregon, but in Colorado, and that it had the "tacit approval" of the FDIC to bank the unbankable. Within less than a week, because it was supposedly "overwhelmed" by the response from Colorado marijuana businesses, it pulled entirely out Colorful Colorado. Now, it's announced that it has pulled out of the entire marijuana business nationally, even in its home state of Oregon, apparently haven satisfied the munchies and gotten a good night's sleep. Like the Colorado exit, the industry-wide exit is supposedly due to the unexpected response of unbanked pot sellers and the bank's determination that "the bank is not big enough to provide and support all of the compliance components required."

It may be pure coincidence, but it appears that any time a bank is publicly "outed" as a banker to the stoned, the bank pulls out of the business. None of the 105 institutions cited by Ms. Calvery or the ten cited by Mr. Polis was named. Had they been, how many of them would have "pulled an MBank"? Most, if not all, is my guess.

Unlike banking payday lending, a perfectly legal business that the regulators are trying to eradicate, banking marijuana selling, a blatantly illegal business (under federal criminal laws), is just fine with the federal banking regulators as long as the bank flies under the radar screen. It's OK to service an illegal drug business as long as you (A) file the right kind of Cheech & Chong SAR or SARs, and (B) don't ever, ever, let anyone but the illegal business owners and bank officials know about it. Do you think that this state of affairs breeds cynicism and contempt for the rule of law? Me, too.

"Don't Ask, Don't Tell." It was bad policy for the US military and it's no better for the US banking business.

Subprime May Return, But Will It Be In A Pine Box?

2015-04-06T21:35:00-05:00

Former community banker and occasional guest poster Pat Dalrymple is a columnist for a Colorado newspaper who has a former insider's view on the sometimes wild and wacky world of commercial lending. You didn't think it was either wild or wacky? Read Pat's latest column.

He’s baaaack.

No, neither Jason, nor Freddie, nor Arnold has returned after having been absolutely, irrevocably annihilated in the last episode.

Rather, it’s subprime, the evil force that terrorized America, from Wall Street to Main Street to Elm Street, that may be coming soon to a closing near you.

A residential mortgage lender has announced that it’s making loans of up to $2 million that don’t require tax returns or employment verifications. Nor does it set a minimum time from a short sale that the borrower might have had. Bankruptcies and foreclosures require only two years’ seasoning after the event. Income is verified through bank statements, and an income-to-debt ratio can be as high as 50 percent.

The loan to value ratio is capped at 85 percent, but no mortgage insurance is mandated. A 700 credit score will qualify a borrower for a $2 million loan, and only 500 is necessary for a mortgage up to $750,000. And, to top it all off, cash-out refis are OK.

Sounds kind of scary, doesn’t it?

Pat parses the underwriting risks, and comes to the conclusion that money can be made on this type of lending, "subprime" or not, and that from an underwriting standpoint, it's not "scary" at all. To him, the business reward can outweigh the risk. However, the "scary" fly in the ointment is something far more terrifying than a default on an undercollateralized loan. It's something that utters the horrifying names "trial lawyers" and the Cherokee princess known as "The Spawn of She Who Dances With Donors" (h/t Dennis Miller) in the same fetid breath.

The new regulations that have come online in 2014, and this year say that lenders have a so-called “safe harbor” if they make loans underwritten to conforming, i.e., Fannie Mae, guidelines. These loans are called “qualifying mortgages.” If a loan is outside that qualifying mortgage safe harbor it means that a borrower, whose house is in foreclosure, can actually allege that the lender did not adequately assess the borrower’s ability to repay when making the loan, and sue the lender.

If the suit takes place during the first three years of the life of the loan, and the borrower is successful, that borrower can collect from the lender all the interest and fees paid during those three years, plus attorney fees (this last phrase is kind of important). After three years, there’s no cash settlement; the amount is simply offset against the foreclosure.

For a big lender, there has to be a goodly number of these cases before the company is at risk, and the likelihood of that is less in a recovering economy. But those three little words, “plus attorney fees,” really gets the attention of the class action bar.

And then there’s the regulatory risk, which could be considerable. No law or reg says a lender can’t make loans that are not “qualifying mortgages.” But the assumption of the Consumer Financial Protection Bureau, the federal big-dog regulator, is that these loans can be traps to abuse consumers. And no lender wants to spark the attention of the CFPB.

This agency has enormous power. It answers to nobody but Congress, which isn’t exactly the best manager of anything. And the bureau can levy enormous fines, called civil money penalties, on the companies and people who work for these businesses. Just one CFPB audit can pull the plug that can send a lender down the drain.

A lender venturing outside the safe harbor can be like a Methodist missionary taking pictures in North Korea.

You’re definitely being watched.

Coloring outside the lines used to be dangerous because you could lose your shirt if you didn't manage the elevated risks with dexterity and price the product appropriately to compensate for the fact that the "earners" had to more than makeup for the "non-earners." In that respect, the economics were pretty much the same as those governing a Mafia family, so most subprime lenders "got it." Today, it's much more dangerous because you may have to face your two biggest nightmares: a lawyer with an cause of action that might have actual merit, and a government bureaucracy staffed by true believers and accountable only to God/Gaia/Zeus/Baal/Richard Dawkin's Eternal Nothingness/[Insert Name of Favorite Cosmic Muffin or Nihilist Here].

That should scare away all but the psychopathic, the suicidal, or the moronic. Or, perhaps, that rare fellow who looks into the muzzle of the .44 Magnum and says to himself, "Ya' know, come to think of it, I AM feeling lucky today!"

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.

De Novo Logjam "Open"?

2015-03-25T21:52:00-05:00

No sooner do we post an article about how the dearth of new bank charters appears to be a critical (if not the critical) factor in the phenomenon known as "the incredibly shrinking community banking universe" than out of the chute pops a new community bank (paid subscription required).

Primary Bank is just the second new bank to be approved in more than four years, and charts a potential path for other applicants to follow. The approval, which was reported last week, came more than a year after regulators signed off on Bank of Bird-in-Hand in Pennsylvania in late 2013.

"This does now open the logjam. Now the [Federal Deposit Insurance Corp.] has a process, and as long as future applicants follow that process, they should be in good shape," said Donald Musso, president and chief executive of the consulting firm FinPro, which worked with the new bank's organizers to move the application.

Musso said he is in conversations with four other clients possibly interested in filing de novo applications, although nothing is official yet.

The regulators are "working really hard in trying to open the doors for new de novos to form, but the standards are pretty high," he added. "You need $20 million-plus of new capital, which is a lot of capital. You've got to have enough capital to make it to profitability."

"A lot of capital." Ya' think? When I started working on de novo bank charters, back when Andrew Jackson was trying to bring down the Bank of the United States, you needed a tenth of that amount. Of course, a dollar went a lot farther then, as my buddy Tom Sawyer5 used to say.

American Banker reporter Joe Adler correctly observes that two banks in four years "hardly makes a trend." He also notes that the community in which the new bank is located suffered the sale of local banks, leaving it "local bank free." Also, the new CEO is a heavyweight in the banking industry and a former governor of New Hampshire is a board member. The bank's business plan appears to be conservative, focusing on small business loans, with no home mortgages and, I assume (although the article does not state this), little or no commercial real estate lending and certainly not much acquisition and development lending.

Consultant Byron Richardson also notes that private equity investors do not appear to be chomping at the bit to dive into de novo banks.

Richardson said a critical obstacle to new-bank formations lately has been finding investors willing to earn a slow rate of return in the face of heavy capital requirements and other regulatory burdens.

"A founder or organizer is not just going to put their money in a mattress," he said. "Part of the equation is: How much capital will the regulators require? But then with the cost of complying with the regulatory burden… how much money can the bank itself earn?"

On the other hand, the lead investor in Primary Bank said that he wasn't phased by the "regulatory burden".

"There has obviously been some concern with Dodd-Frank and regulations, and some people say, ‘That's why there's not banking activity,'" [William] Greiner said. "Our going forward is testament to the fact that we can see opportunity. We're not focused on some of the noise per se."

Unless, of course, the "noise" raises to the level of a diving-bombing Stuka. We'll see how the bank continues to ignore the regulatory burden "noise" as time marches on. Focusing on business rather than consumer loans is one way to lower the noise level.

Another factor involved in this de novo that may limit the pool of potential investors is the large number in the group.

"Most banks start with five, eight, maybe 10 individuals…. I felt it was important, given the environment, to have a bigger, broader group. We talked about having potentially 50 investors in that initial round," he said. (They ultimately raised an initial $3 million from 133 individuals.) "I thought if we could get 50 community leaders, business owners, professionals, to come and take a stake in this bank, it would make a statement that it's not a club… but really a community-based initiative," he added.

I agree with Greiner that the FDIC loves that aspect. Broad-based community investment groups tend to be more conservative, more focused on the long-term needs of the local business community that the bank will serve than on using the bank to make profits, ratchet up stock values through growth of assets and ROE, and cashing out in five years or so. If that's going to be a requirement going forward, however, it will dampen the enthusiasm of a number potential capital sources.

While this latest approval may, indeed (as Musso asserts), "open the logjam," we'll see how wide that opening is, and whether it remains open. At present, color me "skeptical." We may see a few more of these in the next couple of years, but I simply don't yet see a wave on the horizon that yet appears to be worth riding.

No Regrets

2015-03-15T21:32:00-05:00

A few years ago, we commented on the case of a Texas banker who had finally had his fill of regulators beating him down for the act of engaging in a legitimate and profitable line of business (small business lending) and who turned in his charter and became the love that dares not speak its name (but we will): "A nonbank."

Not surprisingly, the nonbank is doing just fine, thanks for asking (paid subscription required).

Such cases have been rare up to this point.

Such cases have been rare up to this point.

Having distance from bank regulation has been a boon to Depping and Ascentium in recent years. The company earned $14 million last year, and its total funded volume topped $1 billion in November. Originations should reach $630 million this year, representing a jaw-dropping 36% increase from 2014, and Ascentium is considering going public in the next year.

"I've been in this business a long time, and our results now are better than they've ever been," Depping said. "Our portfolio statistics are second to none."

Ascentium's success is noteworthy because it essentially relies on the same business plan as Main Street Bank, the Kingwood, Texas, bank Depping ran without incident for six years before regulators flagged its operation as being too risky.

There's nothing particularly complex about Ascentium's business model. It raises money from investors, including Luther King Management and Microsoft co-founder Paul Allen's Vulcan Capital, and lends it to a variety of small businesses around the country — funding everything from medical practices to trucking firms.

Loans average roughly $60,000, with very few exceeding $150,000, Depping said.

Ascentium packages many of its credits into securitizations. The senior classes of its 2012 and 2013 tranches are rated "AAA" by DBRS and "Aaa" by Moody's Investors Service, while the junior classes were upgraded earlier this year. Moody's has also lowered its cumulative net loss estimate for the securitizations to just 2%. A third securitization, consisting of $303 million of loans and leases, closed earlier this month.

This from a bank whose business model was labeled by the FDIC as riskier than traditional banking, so risky that the regulator hit the bank with an enforcement order. Yet, here is the successor, making money hand over fist in an economy that is hardly pre-crash robust.

As experts in the linked article note, "concentration" causes regulators heartburn. That's because many of the community banks that failed in the last downturn had concentrated on commercial real estate lending, especially acquisition and development lending. When the economy hit the skids and real estate values plummeted, many of them bit the dust. Nevertheless, single-minded discouragement of asset concentration fails to account for the fact that some management teams not only can "concentrate" on a line of business and manage their risks appropriately, but their laser-like focus and degree of sophistication on a specific area could very well mean that an attempt to "diversify" into other areas might increase, not decrease, the risk.

We wondered whether the "take-this-charter-and-shove-it" approach might gain a little traction. It does not appear to have done so. Still, there's at least one Texas banker, and a group of savvy investors, who are pleased as punch to be free from second-guessing by folks whose business acumen wouldn't power a cockroach on a popsicle stick one revolution around the inside of a tomato can.

Texas Banking Commissioner Chuck Cooper put it nicely.

"Some people work better in a less-regulated environment," Texas Banking Commissioner Charles Cooper said. "I'm glad Mr. Depping's venture is doing well."

So are we.

The Mistress of Spin

2015-03-03T21:38:00-06:00

A reader recently emailed that she was surprised by how brazenly Elizabeth Warren speaks out of both sides of her mouth. The specific event that caused her incredulity was Warren's initial public support of regulatory relief for community banks and her subsequent assertion that community banks didn't need regulatory relief because they were doing just fine financially. After telling her that speaking out of two sides of a mouth is a gift commonly demonstrated by those born with a forked tongue, I pointed out that Ms. Warren's been stretching the boundaries between lies and damned lies for, literally, years.

Back in 2008, she went on the warpath (this was in the days before anyone called her questionable claim of Native American ancestry) over what she claimed on her blog (yes, Liz was a blogger) was a proposal by national banks to claim preemption from all state foreclosure laws. The fact that those banks were claiming preemption only over extended foreclosure moratorium and similar laws, not the general binding nature of each state's foreclosure process law requirements, didn't enter her discussion. Instead, she made this spurious allegation as to the position of the banks:

State laws are pre-empted whenever a national bank holds the mortgage, so the states can't make them follow the local rules. Pre-emption has been used successfully by the credit card companies to fight off state regulation, so now the banks want to escape local restrictions on foreclosure as well.

That was not the position of the banks regarding foreclosure laws at the time. It was also not the position on national bank preemption of either the OCC (which issued preemption regulations and opinions) or of the federal courts. In fact, the then-applicable OCC regulation specifically stated that state debt-collection and foreclosure laws were not preempted. Warren's characterization that the banks were arguing that they were preempted from all state foreclosure laws and, therefore, could, apparently, seize homes at will, was false. Of course, as a practical matter, some national banks did, in fact, seize homes without due process (even those on which they did not hold a mortgage), and even the owner's pet parrots, but that was through incompetence, not intent.

While intellectual dishonesty has served her, and will continue to serve her, well as a US Senator, Ms. Warren's ability to let no fact stand in the way of a populist narrative should come as no surprise to anyone who's been paying attention to her public pronouncements for any length of time. I mean last year, she blamed the 2008 financial meltdown on Ronald Regan. Next up: ISIS was created by Billy Graham.

Choke Point: Not Dead Yet

2015-02-22T21:49:00-06:00

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.