Bank Lawyer's Blog

Pot, Meet Kettle

Since shortly after the onset of the financial meltdown and housing market collapse in 2008, a populist narrative has been that mortgage lenders and servicers have deprived defaulting borrowers of their rights by "robo-signing" documents and outright fraudulent manufacturing of note and mortgage assignments and similar practices in foreclosure actions. The narrative has a factual basis.

However, not all of the fraud may have been perpetrated by lenders. Recently, allegations have been made that at least one Florida lawyer falsified note assignments to make it appear that the notes had been assigned to a bank other than the one that initiated the foreclosure proceedings.

The allegations against Kalogianis center on promissory notes, the document in which a borrower promises to repay the lender. Promissory notes often change hands as mortgages are sold and resold. Many lenders went out of business after the housing crash. Because it was not always clear whom a borrower owed, promissory notes often were stamped with a "blank endorsement'' — whoever the promissory note was endorsed to would be legally entitled to foreclose and collect any money due.

"It's like a blank check,'' Weid­ner said.

In cases defended by Kalogianis, the companies seeking to foreclose said they filed promissory notes with blank endorsements. But at some point, the motion says, the notes in four of the cases were altered to show they had been endorsed by "Bank of New York, as trustee.''

In the fifth case, a blank endorsement was altered to show Wells Fargo had signed it, the motion says.

One company, BAC, lost its case against a Kalogianis client in 2014 when Kalogianis argued at trial that only Bank of New York could foreclose because it was the one that had endorsed the promissory note. (The case has since been reopened.)

Kalogianis denies the allegations and asserts that the lender falsified documentation and "was trying to 'turn the tables'' on him rather than lose the case."

"It is the plaintiff's own improper conduct … that should be reviewed,'' he said.

Another impediment for the lender is that there is no eyewitness who saw the alteration of the assignments, and there exists no clerk's office video which would reveal the alteration. The lender asserts that it must have been Kalogianis who altered the assignments because no other person who might have had access to the documents had a motive to falsify it. I'm not sure that's a winner. Remember, just like on "Cops," all suspects are presumed innocent until found guilty in a court of law. Moreover, if Kalogianis can prove his allegations that the lender engaged in other document fraud, then a judge could determine that any falsification of the assignments to show the Bank of New York as the assignee may just as well have been made by the lender rather than Kalogianis, perhaps as a desperate "Hail Mary" maneuver.

The Tampa Bay Times reporter does devote considerable space to recounting the colorful history of Mr. Kalogianis, including a couple of previous ethical complaints, his unsuccessful run for US Congress, and the fact that he worked his way through law school as a male stripper. So many of us worked our way through law school as strippers that I fail to see what bearing that might have on the lender's allegations.

Other than the allegations of a couple of clients of Kalogianis, both of whom alleged that the lender in their cases had "committed fraud," there is no similar recounting of the colorful past of the lender or any of its legal counsel. Perhaps they are all Carmelite nuns and monks who spent their law school years and beyond grappling with the dark night of the soul and had no time or inclination for strip bars or the US Congress, nearly identical fora in the popular imagination.

Certainly, the lender's motion in this case might be more persuasive if, as was the case with a motion brought by another foreclosing lender against Kalogianis, he was allegedly caught on camera.

This week, Bayview Loan Servicing, which is foreclosing on a Kalogianis' client on behalf of Bank of America, obtained a video of a man it says is Kalogianis looking at court files in the Pasco clerk's office. The video appears to show him removing a small object from an accordion folder, stamping a page in a court file and returning the object to the folder.

Kalogianis' attorney's defense is "nothing to see here" and "I'm rubber, you're glue, whatever you say bounces off me and sticks to you."

"I can't see anything incriminating other than a lawyer doing a diligent search, going through files looking for mortgage fraud,'' Cohen said of the video. "After all, it would not be unusual to find mortgage fraud on the part of Bank of America and its legal agents in that they've already stipulated to being responsible for tampering with evidence resulting in payment of billions of dollars of fines to avoid a possible criminal prosecution.''

Cohen said that Kalogianis has won "many cases'' in which promissory notes had not been stamped or signed by any lender.

"Why in the world would he want to do something that could potentially hurt his client by putting a stamp on a note?'' Cohen asked "Simply stated, there was no need for Constantine to stamp anything to win the case.''

Forging or altering public records, including court records, can be a felony punishable by up to five years in prison.

As I have discussed many times in the past, the last point is important. Anyone, lender, borrower, or their respective counsel, who falsifies public records ought to get the book thrown at them from a criminal law perspective. Winning or losing a foreclosure case should be collateral damage. At this point, we have nothing to judge but allegations and press reports, but we'll be following this one to see what, if anything, shakes out.

The CFPB's Worst Nightmare: The US Constitution

A couple of months ago, we discussed the possibility that a case involving the CFPB and PHH Mortgage might go against the CFPB, including a potential finding that the CFPB's very existence (as created by the Franken-Dodd Monster) is unconstitutional. The prior blog post linked to a Forbes article by former White House official Susan Dudley in which Ms. Dudley listed the various arguments on which a finding of unconstitutionality could be based.

Long-time bank lawyer (and current Dorsey & Whitney partner) Joe Lynyak gave his analysis of the same topic in an article in the Westlaw Journal's "Bank and Lender Liability" entitled "The Constitutionality of the CFPB —An Exegesis." That's an imposing title, but at only four pages, it's worth a read, especially if, like this blogger, you've been wishing upon a star that the CFPB might, at best, take a long walk off a short pier, or, at worst, get its extremely large, flapping wings clipped.

Joe lists a number of the same arguments against the CFPB that Ms. Dudley also discussed, including:

• All authority is vested in a single director with extraordinarily broad power, no oversight by a board or commission, and tenure that can be shortened only by removal by the president "for cause."
• Unique existence as a bureau" within the Federal Reserve, an independent entity whose budget (and, therefore, the CFPB's budget, which the Federal Reserve is mandated to fund) is immune from Congressional oversight or control or, for that matter, any oversight or control by the FRB.
• "Broad administrative authority to examine and supervise a wide range of consumer financial firms, with administrative hearing authority to enforce orders requiring corrective measures. Favorable hearing determinations by an administrative judge can be summarily reversed by the director."
• The ability of the bureau to exercise such broad enforcement authority over any "unfair, deceptive, or abusive act or practice," which "need not be illegal; instead, it may be merely unfair in the view of the bureau."
• The ability of the CFPB ignore the due process rights of people and entities subject to its jurisdiction by regulating via enforcement orders — a practice that in many cases obviates the responsibility to extend the protections afforded by the Administrative Procedure Act (the In every instance
  governmental agency power has remained subject to acceptable levels of oversight by the three branches of the federal government —at least until now. APA affords the opportunity for public comments and dialogue prior to the exercise of an
  agency rulemaking)."
• The CFPB's"position that statutes of limitation do not apply to its enforcement activities, with the result being that targeted institutions have been sanctioned for conduct occurring well beyond the five-year federal agency statute of limitations governing agency enforcement actions that seek monetary penalties."

As to the PHH case, Joe does what many weak-kneed commentators often fail to do: he offers an actual opinion.

As to whether the CFPB’s current structure can withstand a constitutional challenge¸ it is suggested that the correct answer to that question is no. Although the necessities of a federal agency’s administrative mission concededly require flexibility, in the CFPB’s case the outer parameters of permissible agency boundaries have been far exceeded.

A review of the somewhat patchwork set of judicial decisions addressing this issue indicates that courts balance several factors against an infringement on the president’s right to dismiss agency officials without cause.

[...]

In light of the clear efforts of consumer proponents of the CFPB to statutorily insulate the bureau from any meaningful oversight, it is very probable that the CFPB will be found to be unconstitutionally structured.

After dropping that "hot sports opinion" on his audience, he then offers some insight into what festivities might ensue as supporters and opponents of The Adjustment Bureau attempt to either resurrect it or to decapitate it, drive a stake through its heart, and set the remains on fire.

Importantly, should the CFPB’s structure be struck down, the bureau’s prior actions and interpretative pronouncements (now spanning more than five years in length) arguably will become void. Also (and absent judicial mischief that might create a solution to the absence of a reasonable degree of executive oversight), any corrective measures to remedy a constitutional infirmity relating to the CFPB must be considered and adopted by Congress.

Finally, if the CFPB is found to be operating on a constitutionally infirm basis, legislative efforts to defend the bureau will encounter an interesting role reversal.

In the past few years, critics of the CFPB have attempted to amend the bureau’s statutory structure. These attempts have been soundly defeated by supporters who have effectively filibustered any such efforts. (The most frequent attempts for statutory changes have involved proposing a commission form of agency governance, as well as imposing congressional oversight through the budget process.)

Even though it might be relatively simple to minimally modify the CFPB’s structure in order to pass constitutional muster, opponents of the bureau could filibuster any attempt to cure the statutory difficulties without obtaining the concessions demanded by critics. Although this result seems highly likely if the CFPB is found to be unconstitutional, the belief that the bureau has brought about a paradigm shift in consumer protection may prevent consumer advocates from both anticipating this result and compromising sooner rather than later.

I'd pay for tickets and movie theater popcorn prices just to see all that unfold.

On Independence Day, it's pleasant to contemplate the possible demise of a tyrannical overlord, especially one whose minions clothe themselves in the mantle of "doing god's work," the US Constitution be damned.

B of A Questions New Lawyer Salary Increases

Last week, we made an obscure reference to the fact that some of the nation's largest law firms have opted to raise the starting base salaries of their new associates from $160,000 per year to $180,000 per year. While many law school graduates come roaring out of the chute with a Mt. Everest of debt and an ant-hill's worth of job prospects (the result of what has been, for a number of years, a law school shell game), the nation's largest law firms still fight over the top students from the elite law schools, and for those lucky few, the pickings are rich and the competition is fierce. Apparently, the brain trusts that maneuver our private practice Titanics between the icebergs of fatal hubris and a wised-up corporate clientele decided that the time had come to butter their babies' biscuits with more moolah. Like lemmings, where a few go, the rest will surely follow.

Who would have thought that the initial push-back from clients would have come from a sector of the economy not known for being the first to any "space" but the feeding trough: big banks?

Bank of America Corp.’s top lawyer recently sent an email to a group of law firms calling the increases in associate lawyer pay unjustified, making it clear the bank wouldn’t help firms absorb the cost.

“While we respect the firms’ judgment about what best serves their long-term competitive interests, we are aware of no market-driven basis for such an increase and do not expect to bear the costs of the firms’ decisions,” David Leitch, Bank of America’s global general counsel, wrote in the email, reviewed by The Wall Street Journal.

A Bank of America spokesman declined to comment.

The linked article from The Wall Street Journal discussed other aspects of standard big law firm business practices that have annoyed clients. Among those is training inexperienced lawyers on the client's tab by billing them at rates that give clients sticker shock.

The chief litigation officer for a Fortune 100 company said $180,000 for a first-year isn’t justified, pointing by way of comparison to a lawyer in the company’s litigation department with 20 years of experience who doesn’t make that much money. “Why would we ever think a first-year associate is worth that?” the lawyer said, adding that they recently denied a firm’s request to charge $400 an hour for a first-year.

In the normal course of a lawyer's career, she or he should become much more efficient as she or he becomes more experienced. In addition to paying an hourly rate that seems excessive, the clients may also pay for more hours that it will take the "newbie" to complete the task. Apparently, the "chief litigation officer" who was cited thinks that it's the law firm's job to bear the cost of training the new lawyers until such time as their experience level permits them to deliver "value" for the buck(s) charged. If the firm wants to pay a new lawyer 15 grand a month, that's its business. If the firm expects to pass that cost along to the client, it appears that Bank of America and other large purchasers of Big Law legal services are saying "fuggedaboutit.!"

The article also discusses ways in which big banks and other businesses have been working in recent years to staunch the bleeding of outside legal costs. This discussion might be of interest to community and regional banks, as well. In addition to trimming the number of firms used, the clients have explored alternatives to traditional hourly billing.

Historically, law firms charged their clients in only one way: by the hour. While many in-house lawyers grumbled about the arrangements, saying they encouraged inefficiency and led to eye-popping bills, they mostly paid them.

But within the last decade or so, companies have pushed back. They now routinely demand “flat-fee” arrangements for a single piece of work, like a lawsuit or a transaction. And many have stopped paying for photocopies and legal research, items that were once rubber-stamped.

In-house lawyers have also ramped-up their resistance to paying for the most junior lawyers, often saying they won’t pay for first- and second-year lawyers even if they are staffed on assignments. Such lawyers, the thinking goes, are too often billed out at hundreds an hour to perform relatively menial tasks, like reviewing documents.

As another large corporate general counsel puts it, what ultimately matters is the "value" delivered by the lawyer to the client. Is the result and/or the advice worth what the client pays for it? Regardless of a lawyer's hourly rate or law firm compensation, when the client gets the monthly bill, does he or she think they have been "well served" by that lawyer? Obviously, that's a business judgment call; however, if the sentiments expressed in the linked article are any indication, many business clients are going to be appraising the "value" of inexperienced, but highly paid, lawyers with a critical eye, especially regarding first year lawyers who may be billing at an hourly rate commensurate with that of a lawyer in a smaller firm with, literally, decades more experience in the subject matter.

Countrywide: Closed For Good

Maybe it's the fact that in another six months or so, the regime change here in the Land of the Free will lead many of the the current crop of enforcers in D.C. out the revolving door and into the loving arms of Big Law, where those wet behind the ears begin the learning curve with 15 grand a month of pocket money. Maybe it's the fact that they knew all along that they were pushing the envelope and, when called on it, they simply shrugged, smiled, and said "Ya' got me!" Whatever the reason, the U.S. Justice Department appears to be throwing in the towel several years earlier than my initial expectation, as a result of the US Second Court of Appeals decision that squashed the Justice Department's fraud claims against Bank of America that arose out of the former Countrywide Mortgage's so-called "Hustle" subprime loan program.

According to The Wall Street Journal, this week, the Justice Department sent letters to various former officers of Countrywide, including the infamous Angelo Mozilo (aka "The Tan Man"), that told them that Justice would do some justice by not filing any civil law suits against them.

Government lawyers sent letters within the past week to Mr. Mozilo and other Countrywide executives advising that the investigations against them were closed, and thanking them for their cooperation, these people said.

“We are pleased to see this investigation concluded without any further claim against Mr. Mozilo,” said his lawyer David Siegel.

I'll bet they are pleased. Mr. Siegel was sufficiently courteous to refrain from thanking the Justice Department back for providing years of legal work for defense counsel that has now resulted in the close of the investigation without criminal charges or civil lawsuits being pursued. For litigation attorneys, this is called "stroking the long ball." And, as ESPN's Sport Center loved to tell us, "Chicks dig the long ball."

To the "Occupy [Insert Venue Here]" crowd, this latest outrage will be further proof that the system is rigged in favor of fat cats and the bureaucrats who stroke them. On the other hand, those of us with actual experience in this area saw this coming years ago. From a September 22, 2009 blog post that discussed the outlook for folks like Angelo ever doing the perp walk:

Unlike the last round, when the savings and loan industry went into a tailspin, proving that CEOs and other senior executives knew about and encouraged, much less actively participated in, the fraud is tougher to prove in connection with the subprime mortgage mess. I recall a number of instances involving failed Texas thrifts in the late 1980s where there was ample evidence that thrift owners and senior executives were swapping dead horses for dead cows, making stock loans to an owner of another thrift to purchase 100% of the stock in his own S&L in return for the borrower causing his S&L to purchase a bunch of participation interests in the lender's portfolio of exquisitely ripe carcasses known as acquisition and development loans (in which the lender funded 100% of the acquisition and developments costs AND all of the interest reserve, leaving the borrower with as much equity in the collateral as a US congressperson's integrity). This time around, the CEO's and Chairman's muddy paw prints aren't stamped all over the lender's records.

"The problem is finding the executives' fingerprints on the consumer files," said Peter Henning, a law professor at Wayne State University. "Angelo Mozilo may have set the tone at Countrywide, but there is no way you're going to find his fingerprints on any of those mortgages."

Even Marg Helgenberger of CSI couldn't find enough CEO DNA in these files to make a case. I'd like to watch her try, though.

If you want to become completely bent out of shape about the relative lack of suffering inflicted on Wall Street and its cronies over their role in the meltdown, consider the fact that no one in Congress has had their wrists slapped, either. Barney Frank and Friend-of-Angelo Chris Dodd even managed to get their names emblazoned on a piece of "financial reform" legislation for all eternity, masking for future generations (who seem to have short memories in any event) the major roles those two actors played in the drama. When it comes to skating, it seems to me that most of the culprits had their blades finely honed.

Let's hope that the late British physician, Havelock Ellis, was wrong when he said “Every society has the criminals that it deserves.”

Defrauding Yourself: A New Frontier Of Legal Theory Temporarily Closed

As we discussed a few years ago, the current administration's Department of Justice has been a huge fan of FIRREA, using its civil money penalties potential to squeeze blood out of bank turnips on the theory that a bank committed a "fraud" that "affected" a federally insured financial institution, that "affected" insitution being the bank that (allegedly) "effected" the fraud. It's a useful theory that permits the DOJ to avoid having to prove anything "beyond a reasonable doubt," as would be the standard in a criminal prosecution, but only by the lesser "preponderance of the evidence" standard applicable to civil lawsuits. Using FIRREA also permits the DOJ to issue pre-filing administrative subpoenas in order to go on "fishing expeditions" (which, unlike grand jury proceedings, are not subject to secrecy protections of the law). Moreover, the statute of limitations under FIRREA is a long 10 years, so there's a nice long period of time to beat potential defendants about the head and shoulders without having to actual file a lawsuit against them and to put your evidence where your threats are: in front of a judge.

As we said in 2013, defendants have vigorously opposed the ingenious use of FIRREA.

Defendants have argued, among other things, that “affecting” a financial institution under FIRREA means harming or victimizing the financial institution, and that the financial institution itself cannot have “affected” itself where the government’s theory is that it is the perpetrator, rather than the victim, of the alleged fraud. Thus far, the DOJ has been successful at the district court level, but appellate courts have yet to weigh in on this legal theory.

Recently, a federal appeals court did weigh in and, while not deciding that this stretching of the concept of "affecting" was out of bounds, nevertheless poked the DOJ in the eye. Outrageously, the US Second Circuit Court of Appeals in New York actually overturned an award against the Bank of America on the grounds that when the claim is based on "fraud," the government actually has to introduce evidence of fraud. Imagine that!

The appeals court panel threw out a $1.27 billion penalty against Bank of America over mortgages sold by its Countrywide unit, in what had become known as the “Hustle” case a civil lawsuit that the U.S. attorney’s office in Manhattan filed against Bank of America in 2012. It alleged that a precrisis Countrywide program called Hustle had generated shoddy mortgages and then misrepresented those loans when selling them to Fannie Mae and Freddie Mac, which had to be bailed out by the government during the financial crisis.

The panel said the jury’s findings in 2013 that the loans sold to Fannie and Freddie were below the quality that had been promised might be considered an “intentional breach of contract.” But it said those transgressions didn’t constitute fraud, overturning the jury verdict that had been a signature win for government officials widely criticized for bringing few cases tied to the 2008 crisis.

Josh Rosenkranz, who represented Ms. Mairone, said the ruling shows “this case was a massive government overreach from inception,’’ in which prosecutors “tried to take an allegation of garden variety breach of contract and turn it into a fraud with crushing and career-ending penalties.’’

[...]

“Critically, the Government presented no proof at trial that any quality guarantee was made with fraudulent intent at the time of contract execution,” the panel said. “In essence, the Government’s theory would convert every intentional or willful breach of contract…into criminal fraud.”

At a hearing in December, U.S. Appeals Judge Reena Raggi questioned whether the government was stretching the bounds of what constitutes fraud. “What you’re asking for is a major change in how we view breach,” Judge Raggi said at the hearing.

I guess the government stretched the bounds to the breaking point.

The DOJ will likely appeal the decision. The battle is also likely to last for a few more years, at least. Given the unpredictability of which clown might be chosen to run the circus this November, there is no guarantee that a change of administration would have any effect on the use of FIRREA by the DOJ to find banks defrauding themselves here, there, and everywhere "by a preponderance of the evidence." However, it's nice to see someone occasionally slap the backs of the federal government's "massively overreaching" hands.

Fourth Corner: Staying Power or Sampling The Product?

When last we checked in January on the trials and tribulations of Fourth Corner Credit Union, a state-chartered Colorado credit union formed to provide financial services to the marijuana industry, the credit union had been denied an injunction by a federal district court in Colorado to force the Federal Reserve Bank of Kansas City to grant the credit union a "master account." It needs that master account to gain access to the banking system. The district court judge ruled that the court was not going to compel the Fed to grant access to a credit union that would facilitate illegal money laundering under federal criminal laws (albeit an activity that is fine and dandy under Colorado law). The court also "hinted" that if it ever got to the merits of the issue of whether Colorado marijuana laws trumped federal marijuana laws, the Supremacy Clause of the US Constitution would lead the court to favor federal law.

On April 29th, the credit union appealed the district court's decision to the 10th US Circuit Court of Appeals in Denver. I have not reviewed the appellant's brief, so all I have to go on regarding the arguments to support the appeal thus far are the public statements of the credit union's spokesperson as reported in The Denver Post. Those statements don't fill me with an excess of hope that the credit union's appeal will be successful. The arguments seem to be:

• The Justice Department and FinCEN are "hypocritical" for issuing guidance that would lead banks to believe that they can successfully avoid prosecution under federal law if they follow the guidance without actually allowing them to do so.
• The government bureaucracy moves slowly, so drug money can't be laundered through the banking system and is, thus, "unsecured," and that "scares" the spokesperson.
• A decision was rendered by a Colorado district court judge that marijuana buds were covered under a general liability insurance policy, a decision that the court made clear involved solely state, not federal, law.
• The US Supreme Court declined to hear a lawsuit filed by the states of Nebraska and Oklahoma against the state of Colorado, a decision that was based solely on jurisdictional grounds, in that the alleged harm is being caused by individuals, not by a state, and, therefore, the SCOTUS does not have jurisdiction to hear the case. The attorneys general of Nebraska and Oklahoma can refile the case in federal district court.

There may be fine legal arguments made by the credit union that support its contention that the Fed must issue it a master account. If so, they are not making it into the main stream media. If all it's got is what I read in the newspaper, I'd recommend that the CU roll 'em if its got 'em, don't Bogart the joints, slap a few Cheech & Chong cd's in the boom box, and "get mellow," because the future is looking somewhat gloomy in the real world.

Then again, come November, we have absolutely no idea what kind of wild card the electorate might draw for the Oval Office. We might actually get a president and Congress that will take the Thai Stick by the lit end and burn down the barriers to a full monty of a Mary Jane-friendly society. Or, those of us who haven't rolled a joint in nearly a half century might be compelled to nestle down in the high country with a M249 SAW, a bale of concertina wire, a half-dozen claymores, plenty of bottled water and Tostitos, and several pounds of Ghost Train Haze and Blue Dream. And yes, unlike our former president and future first man, in such circumstances, we would plan to inhale.

Will PHH Clip The CFPB's Wings?

In a recent hearing before a federal appeals court, some of the justices appeared to be sympathetic to arguments by mortgage giant PHH Mortgage that the CFPB is unconstitutional. In Forbes, Susan Dudley, Director of the GW Regulatory Studies Center and a former White House official in the "W" administration, explores the arguments in favor of knocking the CFPB off its high horse and finds that they might have traction. She cites the following critical passage from PHH's brief:

The Director is not answerable to the President, as he is removable only for cause. Nor is Congress able to rein in the Director using its power over the purse, as he has the sole power to fund his agency from the Federal Reserve System’s operating expenses, and Congress is prohibited from reviewing the Director’s budget determinations. The Director is not checked by the deliberative decision-making process of a multi-member commission structure, nor is he checked by a short tenure, as he serves a fixed five-year term. And far from a limited scope of power, the Director wields vast authority under eighteen statutes previously enforced by seven different agencies. Never before has so much power been accumulated in the hands of one individual so thoroughly shielded from democratic accountability. The combination of these unprecedented structural features violates the separation of powers.

As Dudley correctly observes, the CFPB is unique. Other federal regulatory bodies are either executive branch agencies or independent commissions. In either case, they are subject to executive and/or legislative control directly or through an oversight body composed of members selected by the president and confirmed by Congress. Most are also subject to control through the appropriations process, giving another body control of the purse strings.

The CFPB is controlled not by a commission, but by a single director (currently, King Richard Cordray, Champion of Jeopardy) who is subject to removal by the president only "for cause." Other agency heads can be removed for wearing a tie with an offensive motif. calling the First Lady "Babe," or for an infinite variety of spurious reasons. Moreover, the CFPB's budget cannot be controlled by Congress. The FRB, is required to fund it by law, and Congress has no oversight.

This lack of checks and balances has concerned us since the CFPB sprang from the nether regions of Lizzie Warren, who deliberately concocted the Adjustment Bureau to be completely outside the control of anyone other than the reichsführer who runs it on any given day, which Warren originally intended be herself. The Director would be guided only by his or her knowledge of what was best for all consumers, applying truth, justice, and anti-abusiveness as Gaia gave him or her to see the light.

About six months ago, I attended a conference at which one of the panelists was a millennial former member of the CFPB's enforcement "arm" who recently rushed out the revolving D.C. door into a high-paying job with a banking law firm where he, naturally, advised those being persecuted prosecuted by the CFPB. In addition to possessing his generation's endearing narcissism and lack of respect for his elders, he scoffed, with a self-satisfied smirk, at concerns about the lack of controls over the CFPB because the Adjustment Bureau had been around for several years "and nothing horrible had occurred." One of the older panelists interjected one word: "Yet." I might have added: "Ask PHH."

As Dudley points out, even if the appeals court rules in favor of the petitioner, there are half-steps between nothing and abolishing the CFPB in its entirety as being an unconstitutionally created monster of Franken-Dodd. It could strike down the sole director structure; it could strike down the provision of Franken-Dodd that permits the president to fire the director only for cause; it could strike down the funding structure; it could do none of the above or all of the above. Whatever it decides, the decision is almost certainly to be appealed. By the time it reaches the SCOTUS, who knows what the composition of that august body might be, given the insanity that is the current season of "Election 2016"?

Nevertheless, Dudley asserts that "the future of something President Obama considers one of his main accomplishments is hanging in the balance."Here's hoping that the U.S. Court of Appeals for the District of Columbia Circuit gives the CFPB a little nudge in the "right" direction.

Residential Mortgage Lending: The Bloom Is Off The Rose For More Than Just The Big Banks

My friend, Colorado community and mortgage banker Pat Dalrymple's, latest "Banker's Hours" column in the PostIndependent Citizen Telegram again struck a chord with me. With permission, here it is, in case it also hits home with you:

We hear that the TBTF (Too Big to Fail) banks are getting out of the mortgage business. Can this really be true? Weren’t they reputed to be the culprits in the recent Great Recession that was reportedly triggered by all of the toxic mortgages they originated?

Well, they haven’t left the building entirely, but they’re not in residence like they once were. Here are some fairly dramatic stats:

Wells-Fargo, the nation’s No. 1 mortgage originator, funded $125 billion in mortgage loans during the fourth quarter of 2012. During the same period in 2015, that number was down to $47 billion.

Chase, the second ranking lender, did $51 billion in the last three months of 2012. In 2015, that number had shrunk to just under $23 billion. These are dramatic swings in banking, and show major ramp down of what was once a core business.

And it’s not just the big guys that are backing away from the iconic American Dream of financing home ownership. In 2007 banks made 74 percent of home loans in the country. By 2014, their share had dropped to 52 percent. At the same time, the share of nonbanks, which includes online lenders like Quicken Loans, had increased from 23 percent to 43 percent.

What’s happened? Just business; mortgage lending isn’t as profitable for banks as it once was. Interest margins on home loans held in portfolio are thinner than other lending lines. Since the Great Meltdown, the private bond market has virtually dried up for mortgage-backed securities. The cost of originating mortgages has skyrocketed, and regulatory risk has become, in the eyes of some former mortgage lenders, intolerable.

The increased cost of doing business is graphically demonstrated by the fourth quarter of 2015: Net gain on mortgages originated was down 60 percent, from $1,238 per loan to just $493. This is because lenders spent billions on re-tooling for the new RESPA-Truth in Lending disclosure protocol mandated by the Consumer Financial Protection Bureau that came online in October of last year.

As for regulatory risk, we’ve all heard of the multi-billion-dollar fines levied against the big banks for their role in originating and packaging the famous rotten mortgages that were at the root of the financial crisis. But the risk for banks is ongoing.

For example, PHH — a nonbank mortgage originator, seventh largest in the country last year at $37.57 billion — was just hit with a $109 million fine, which is certainly an attention getter. But the way it happened has lenders shaking in their Guccis. It was alleged that PHH had illegally taken kickbacks from mortgage insurers through customer referrals. The case went to an administrative law judge, who suggested a fine of $6 million.

To appreciate this story, we need to understand what an administrative law judge is. This person is trained in the law, but isn’t a real judge, as in a courtroom. Rather, he or she is employed by the agency bringing the charge. People who have been subjected to this process have likened it to walking into the Godfather’s study, who says, “Don’t worry about a thing, Joey, my consigliere here will give you a fair and impartial hearing.”

In the PHH case, the capo of the CFPB interpreted the law differently than it had been heretofore applied, so he must have said, “Geno, you were too soft on them.” He decided that the violations went back much further than the tame judge deemed, way back even before the CFPB was created, and increased the fine up to the $109 million.

Think the Mob has a long memory?

All of these factors are making big lenders think twice about being in the business. It may be the slack will be picked up by small banks, credit unions and online lenders. The jury’s out on that question.

Rent-a-Charter vs. Strategic Alliance

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.

Fourth Corner Painted Into A Corner

This past week, a federal district court judge in Colorado slapped down, hard, Fourth Corner Credit Union. In the process, the judge was equally hard on the federal government that has done a half-baked job in dealing with the problem of state-legal marijuana businesses inability to to obtain access to the nation's financial system because their activities largely remain illegal under federal criminal laws.

As regular readers may recall, Fourth Corner Credit Union is a state-chartered credit union in Colorado that was formed in 2014 by (in the lofty rhetoric of the credit union's attorneys) "ten courageous citizens" to provided banking services to the "compliant, licensed cannabis and hemp businesses and to thousands of persons, businesses and organizations that supported the legalization of marijuana." In order to effectively operate, however, Fourth Corner needed a "master account" from the Federal Reserve Bank of Kansas City. The FRB-KC turned down Fourth Corner's application for such an account on several the grounds, including that federal law preempts state law and that the FRB KC won't grant a master account to a financial institution that is engaged in the facilitation of illegal activities (like the laundering of the proceeds illegal drug sales). Fourth Corner sued for a mandatory injunction by the court that would compel the FRB KC to grant the master account. The district court denied the motion, dismissed (with prejudice) the credit union's complaint, and awarded the FRB KC its reasonable costs.

That had to hurt.

Although the court declared that it did not need to reach the issue of federal preemption, it observed in a footnote that "[i]t is clear, however, that Congress has the power to prohibit cultivation, distribution and use of marijuana notwithstanding compliance with state law." In other words, even though I didn't have to decide the issue, if I had, I would have upheld federal preemption of state law.

That blasted the "Supremacy Clause" of the US Constitution (Article VI, Paragraph 2)! It's so inconvenient.

In the course of its opinion, the judge blistered the backsides of federal regulators, with special emphasis on FinCEN and the US Justice Department for their "guidance" on this issue. Fourth Corner alleged that such guidance provided federal "authorization" to serve marijuana-related businesses ("MRBs"). The judge didn't buy it (anymore than I did).

The problem is, the FinCEN guidance and Cole memorandum do nothing of the sort. On the contrary, the Cole memorandum emphatically reiterates that the manufacture and distribution of marijuana violates the Controlled Substances Act, and that the Department of Justice is committed to enforcement of that Act. It directs federal prosecutors to apply certain priorities in making enforcement decisions, but it does not change the law. The FinCEN guidance acknowledges that financial transactions involving MRBs generally involve funds derived from illegal activity, and that banks must report such transactions as “suspicious activity.” It then, hypocritically in my view, simplifies the reporting requirements.

In short, these guidance documents simply suggest that prosecutors and bank regulators might “look the other way” if financial institutions don’t mind violating the law. A federal court cannot look the other way. I regard the situation as untenable and hope that it will soon be addressed and resolved by Congress."

Since next year is a presidential election year, "soon" is not likely to be prior to 2017. Until then, to repeat ourselves, any bank that serves marijuana related businesses "is playing with fire and not wearing an asbestos suit."

playing with fire and not wearing an asbestos suit. - See more at: http://www.banklawyersblog.com/3_bank_lawyers/2015/10/over-the-summer-while-i-was-downing-cold-beers-by-the-barrel-the-federal-reserve-bank-of-kansas-city-and-the-ncua-finally-ac.html#sthash.qKIhqoJx.dpuf

playing with fire and not wearing an asbestos suit. - See more at: http://www.banklawyersblog.com/3_bank_lawyers/2015/10/over-the-summer-while-i-was-downing-cold-beers-by-the-barrel-the-federal-reserve-bank-of-kansas-city-and-the-ncua-finally-ac.html#sthash.qKIhqoJx.dpuf

playing with fire and not wearing an asbestos suit. - See more at: http://www.banklawyersblog.com/3_bank_lawyers/2015/10/over-the-summer-while-i-was-downing-cold-beers-by-the-barrel-the-federal-reserve-bank-of-kansas-city-and-the-ncua-finally-ac.html#sthash.qKIhqoJx.dpuf