Bank Lawyer's Blog

Rent-a-Charter vs. Strategic Alliance

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

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

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

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

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

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

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

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

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

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

Fourth Corner Painted Into A Corner

2016-01-10T21:37:00-06:00

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

Clamping Down On Class Action Legal Fees

2015-11-29T21:58:00-06:00

A potentially disturbing warning has come out of California (paid subscription required): class action plaintiffs' attorneys' fees might [shudder] come to be based upon actual work done. While this isn't disturbing to American banks and other businesses who've been victimized by subject to class action lawsuits in which the plaintiffs are rewarded with a Pez dispenser and a signed copy of "Transcendental Meditation The Trump Way," while their attorneys rake in bazillions a tidy sum, it must be disconcerting to the vultures lawyers who run class-action firms. We'll try to say a prayer for all of them (my preference would be "Lead all souls to heaven, especially those most in need of thy mercy").

Typically, attorneys who represent plaintiffs in class actions—like employees accusing a company of discrimination, or customers claiming a product misled them—are paid a percentage of any money recovered for their clients. The payouts, which nationally average about 25% of the collected funds, can be substantial.

But a Berkeley, Calif., lawyer who has waged a decadeslong crusade to reduce class-action fees is pushing to pay lawyers based only on the hours they put into a case.

“Every dollar class lawyers get for their fee is a dollar the class doesn’t get for recovery,” the lawyer, Lawrence Schonbrun, said.

He lost his fight in two lower courts, but the Supreme Court of California decided earlier this year to consider the issue and could rule in the coming months. Mr. Schonbrun argues that California case law requires the hourly method to be applied, an interpretation that others dispute.

[...]

The California appeal stems from a 2004 wage-and-hour class action against staffing firm Robert Half. In 2013, a judge approved a $19 million settlement on behalf of 4,000 employees, who said they were denied overtime pay and other benefits. Using the percentage method, $6.33 million was slated for the plaintiffs’ attorneys.

Mr. Schonbrun, who represents one of the employees, is trying to convince the court that the lawyers should instead be paid according to the amount of work they put in.

But the plaintiffs’ lawyers say in a court filing that if their percentage-based fee is overturned, “class counsel will be less inclined to take on complex class action suits against large, well-financed institutions.” They haven’t been paid while the appeal works its way through the courts. Robert Half said it doesn’t have a stake in the fee dispute.

Being less inclined to take on complex class action suits against large, well-financed institutions" is a bad thing?

The CFPB would think so. Last month, it proposed to ban arbitration provisions that would prevent consumer financial class action lawsuits. The political left ant the trial lawyers' bar in this country have been making whoopee together for years, so that's to be expected. On the other hand, if trial lawyers only get paid for the actual hours they work, that still will act as a deterrent to class action lawsuits no matter what the CFPB does regarding arbitration provisions. I mean, why would a lawyer want to only get paid for what he or she actually does? Are you kidding me??

Before we get all misty-eyed about the folks who are taking this fight to the California Supreme Court, however, let's drill down a bit deeper into their motivation.

Mr. Schonbrun, who began his fight against high fees in the late 1990s, is part of an active field of so-called fee objectors, who step into class actions to challenge the plaintiffs’ attorneys’ fees.

Such objectors sometimes make side deals with plaintiffs’ lawyers looking to avoid prolonging a lawsuit, and they can be paid as much as $1 million, those familiar with the practice say. Mr. Schonbrun said he has filed objections in 150 cases and in some instances received more than $100,000 for his role in reducing a fee.

You read that right: some of the professional "fee objectors" cut deals with class action lawyers to ease up in return for the payment of some cold, hard cash. All sides of the bar in this struggle make hard examples of "soft and cuddly."

As usual, the people getting the short end of the stick are the plaintiffs.

Theodore Case, an American Airlines pilot in Atlanta who has been a plaintiff in a class-action labor dispute for more than 12 years, said he unsuccessfully fought against his lawyers to reduce their fee request of $15.5 million, based on a 30% calculation of a settlement. When paying a percentage, “the only people it benefits is the attorneys,” said Mr. Case, who received about $113,700 of the settlement money.

Disparate Impact: Full Speed Ahead

2015-11-11T22:04:00-06:00

The successor to the infamous Thomas Perez at the US Justice Department's Civil Rights Division, Vanita Gupta, has served fair warning that (as we predicted) the folks who run Justice intend to use the recent SCOTUS decision that validated "disparate impact" in the fair housing arena to pursue the statistically-proven racist scum in the quest to ensure that every one who wants one can get a home loan. She thinks that disparate impact discrimination is part and parcel with much broader abuses, like cops killing racial minorities and otherwise profiling minorities for disparate law enforcement abuse. America is racist, and Gupta's gonna root out racism wherever she can find the statistics to make her case.

“High-profile incidents across the country have thrust us into a national dialogue over the use of excessive force, racial profiling and stereotyping, officer and public safety and a festering lack of trust between police departments and the communities they service, particularly low-income communities of color,” said Gupta.

“But underneath so much of the unrest that we’ve seen in Ferguson, Missouri; Baltimore; New York; and cities across America," she said, "lies a foundation of systemic inequalities and discriminatory biases, built up over decades, not days."

She specifically pointed to lack of credit in affected communities as a root cause of this year’s troubles.

“To break down barriers to opportunity we must protect the rights of people to borrow money without bias or discrimination,” said Gupta. “Discrimination is a multiplying force. It can have a devastating domino effect on a person’s future economic prospects. And that is why equal access to credit is a fundamental part of our work. Credit provides the means for families to own a home, to buy cars so they can get to work, and to increase their earnings so they can invest in their own future.”

“Credit enables people to uplift their lives and build a brighter future,” said Gupta.

That's right: systemic racism in American society is rooted in a lack of credit availability for racial minorities, according to Gupta. If the federal government can ensure that every citizen can get credit, this country can overcome more serious problems which are the result of the "multiplying force" of that credit discrimination. How do they plan to do that? Suing banks on the basis of statistical analyses founded on flawed assumptions and squeezing cash out of them is only the tip of the enforcement iceberg. Gupta has much more "robust" remedies in mind.

“Whether mandating that a bank open a branch in a neighborhood neglected for years or requiring an auto lender to limit the discretion of its dealers, we recognize the value of resolutions that extend beyond the distribution of dollars,” said Gupta.

Of course, at the same time, Justice will use Operation Choke Point to drive payday lenders, auto title lenders, and other "high risk/high reward" lenders out of the market. That will leave all those great "small loan" programs that the FDIC tried to "encourage" banks to make a few years ago and that never gained traction because banks couldn't charge enough (most programs had a maximum APR of 36%) to justify the cost of administration and the serious problem of nonpayment. You can bet your life that they'll be resurrected, along with more creative solutions in the great game of credit redistribution.

And, of course, two guys named Guido and Louis (The Lip) will always be available on local the street corner to take care of the needs of the needy in an extra-judicial manner.

Are we having fun yet?

The Fed On MJ Banking: Nyet

2015-10-25T21:57:00-05:00

Over the summer, while I was downing cold beers by the barrel rather than blogging, the Federal Reserve Bank of Kansas City and the NCUA finally acted on the applications of Fourth Corner Credit Union for, respectively, a "master account" for access to the Federal Reserve System and for insurance of share accounts. In both cases, the answer was not only "No," but "Hell, No!" Fourth Corner sued both the NCUA and the Fed. last week, the Fed filed a Motion to Dismiss Fourth Corner's complaint that ought to send a chill down the spine of every bank in Colorado, Washington, Oregon and Alaska that thinks it can "work around" the federal banking regulators on the Supremacy Clause when it comes to banking a state-legal, federal-illegal marijuana business.

In broad strokes, the Fed alleges that federal law, in this case the Controlled Substances act, trumps state law on marijuana use by virtue of the Supremacy Clause of the US Constitution. This should be "Hornbook Law" to any bank regulatory attorney. The manufacture, sale, and distribution of marijuana is prohibited by the Controlled Substances Act. Therefore, "any affirmative action that Colorado has taken to facilitate the distribution of marijuana is preempted by federal law."

In the present case, Colorado attempted to grant TFCCU a charter that would, in effect, intentionally allow TFCCU to aid and abet violations of federal law by offering banking services to businesses engaged in the manufacture and/or distribution of marijuana. Such an act is preempted by federal law and is void and without effect...The Court would not aid other such attempts--such as if Colorado enacted a scheme to allow trade in endangered species or trade with north Korea in derogation of federal laws, and then chartered a credit union to handle finances for companies conducting such illegal trade...TFCCU is not an entity that can be recognized under federal law" and the credit union's complaint must be dismissed.

Beyond the "master account" and insurance of accounts applications at issue here, the Motion to Dismiss contains a broad condemnation for any existing financial institution--credit union or bank--that thinks that it is somehow safely avoiding federal criminal law prosecution and/or bank regulatory agency enforcement action because it follows the "FinCEN Guidance" issued in early 2014 that, in turn, followed the "Cole Memorandum" guidance provided to US Attorneys on prosecutorial discretion in the area state-legal marijuana businesses. The Fed contends that such "guidance" is not a protection from criminal prosecution (which the guidance itself states, if read carefully). Even if it affords such protection, the Fed makes clear that the Fed would not be bound by it.

The Fed also makes clear that it considers any financial institution that engages in providing financial services to a state-legal marijuana business to be engaging in aiding and abetting a criminal activity under federal law, and that federal law controls. Under that analysis, the Fed should, if it is consistent, take enforcement action against any Fed-member bank that is so engaged. I fail to see why the OCC, FDIC, or NCUA would take a contrary position.

An anonymous (naturally) critic from Dogpatch, U.S.A., attempted to leave a comment on the blog a few months ago that criticized my support of (the critic's phrase) "federal infallibility" regarding state marijuana laws. The poor soul apparently conflated "Papal Infallibility," a theological doctrine of the Roman Catholic Church, with the constitutional principle of "Federal Supremacy. The issue at stake is not who is "right" or "wrong" regarding whether the manufacture and distribution of marijuana for recreational use should or should not be illegal, it is whose law prevails when state and federal law conflict on this matter. My view is that federal law prevails and that any financial institution (and its directors, officers, and employees) that "banks" a state-legal marijuana business is running a serious risk of being hammered by different federal agencies for violating federal criminal laws.

If your credit union's or bank's business plan is "I feel lucky today," more power to you. I think that you're playing with fire and not wearing an asbestos suit.

Class Action Chum

2015-10-11T21:36:00-05:00

Financial institutions and class action lawyers mix as well as Donald Trump and Carly Fiorina, so the latest news from Ballard Spahr about a new "coalition" of sharks in Sin City is bound to cause bankers everywhere to break out in a nasty rash.

Approximately 50 cases have been filed recently in Nevada state and federal courts against furnishers of information and credit reporting agencies (CRAs) for alleged Fair Credit Reporting Act (FCRA) violations. It appears that consumer rights attorneys have teamed up with consumer bankruptcy firms to monitor credit reports over the course of a debtor’s bankruptcy case and then sue creditors and CRAs after discharge if the debtor’s credit report inaccurately reports debts after the bankruptcy.

As the alert notes, individuals who alleged that they have been harmed by the inaccurate reporting of a debt that has been discharged in a bankruptcy proceeding have a private cause of action under the FCRA against a creditor that failed to report to the credit bureaus that the debt had been discharged. Of course, the class action attorneys make a nice pile of cash, which has absolutely nothing to do with the matter. It's all about getting "justice" for the debtor.

Banks and credit unions will need to take this trend into account, and ensure that their reporting policies and procedures are hyper-vigilant so that inaccurate reporting to the credit bureaus does not occur. While this has been the case for some time in theory, in practice some institutions appear to have been relying on the theory that if the error is inadvertent, they might get a pass if they correct it as soon as they become aware of it. The "flurry" of new lawsuits makes it clear that the sharks are circling, that reporting inaccuracies are "chum," and that the the plea of "no harm, no foul" will be drowned out by the screams emanating from the bank's dismemberment by a veritable "sharknado" of vicious hammerheads and, perhaps, a few oversize "great whites."

Operation Choke Point Lawsuit: The Plaintiffs Are Still In The Game

2015-10-04T21:25:00-05:00

While some pundits think that Operation Choke Point is a dead issue, as evidenced by the FDIC's recent guidance that claimed that they were only kidding when they labeled entire lines of business as "high risk," the folks at Ballard Spahr note that the lawsuit filed by the payday loan industry against the bank regulatory agencies continues to forge forward. On September 25, the federal judge hearing the case "rejected most of the arguments in the agencies’ motion to dismiss," allowing the lawsuit proceed.

The agencies first challenged plaintiffs’ standing to sue. While acknowledging that the denial of banking services establishes one necessary element of standing (an “injury in fact”), defendants argued that the plaintiffs do not satisfy the two remaining elements, namely causation, a link between the defendants’ actions and the plaintiffs’ injuries, and redressability, evidence that a favorable ruling will redress the plaintiffs’ alleged injuries.

According to the defendants, the plaintiffs’ injuries resulted from independent decisions by their banks rather than the agencies’ guidance documents. Judge Kessler notes that the plaintiffs’ burden of eventually proving their “third party” causation theory−that the defendants’ conduct compelled the banks to deny them service−will be substantial. However, taking as true all of the plaintiffs’ factual allegations, as is required when deciding a motion to dismiss, she determined that the claims satisfy both the causation and redressability requirements.

The judge also found that the agencies' subsequent "guidance" that "urged" banks to take a risk-based approach on a client-by-client, rather than industry-by-industry basis, does not render the controversy "moot."

Although she agreed that the agencies’ subsequent pronouncements have largely superseded earlier Choke Point guidance, Judge Kessler rejected the defendants’ contention that this alone renders moot all of the plaintiffs’ claims. In particular, she notes that the plaintiffs claim they have been stigmatized and deprived of their ability to engage in a legally permitted business, all without constitutionally required notice and opportunity to be heard.

The judge dismissed claims based upon alleged violation of the Administrative Procedures Act, ruling that agency "guidance" is not final agency action. That is technically correct. However, as those of us who see the consequences of failing to follow agency "guidance," including the inclusion on examination reports of MRAs (matters requiring attention) for "violation" of "guidance," the way the agencies use guidance might be considered by a cynic as an end-around the APA. Luckily, I'm an optimist and would never suggest such a thing.

As I've previously assert, I think that the only thing that will ultimately drive a stake through the heart of Operation Choke Point will be a change in the White House in 2016. Until then, I hope that the plaintiffs continue to keep fighting the good fight.

Deja Vu, All Over Again

2015-09-23T21:51:00-05:00

Here we go again.

The city of Oakland, California is the latest municipality to sue one of the nation’s largest banks, accusing Wells Fargo (WFC) of allegedly steering minority borrowers into higher-cost loans, which caused rampant foreclosures and neighborhood blight.

According to a Reuters report, Oakland filed suit against Wells Fargo in a Northern California federal court, stating that Wells Fargo violated the Fair Housing Act by “targeting minorities” with high-cost loans, despite their ability to qualify for lower cost loans.

[...]

The lawsuit said many of the loans ended in foreclosure because Wells refused to refinance them on the same terms it granted to white borrowers.

The lawsuit said Wells steered minorities into various types of "predatory loans," including those with high interest rates, balloon payments and large prepayment penalties.

As is the case with all of these lawsuits, the bank said that it would "vigorously defend itself." I hope that vigorous defense includes a cage match involving Ronda Rousey, but that's likely too much to hope for.

Although a number of these suits have continued to drag on, the linked article notes the more customary outcome when the bank does not settle.

Wells Fargo secured a victory in court, when a U.S. District Judge dismissed a lawsuit brought against the lender by Cook County, Illinois, which also accused the bank of predatory lending

Yes, dismissal by the court is often the result. However, as we noted a couple of years ago, cities keep bringing these meritless suits because they think that they can squeeze a settlement out of big banks on the banks would rather settle quickly and reduce the reputational damage than pay trial lawyers, which no one in their right mind wants to do for any length of time. Also, as our prior post observed, the US Justice Department under the current administration has on occasion jumped into the fray on the side of the cities and helped to pummel the banks. That may stop in 2017, but there's still a lot of blood to be spilled before then.

Unfortunately, the more settlements that occur, the more municipalities pile on. Five years ago I alleged that the lesson to be learned was to never settle. I still believe that is the best approach to stopping this municipal extortion. On the other hand, it's not my bank being sued and it''s not my money being spent.

A Long, Hot Summer Of Foolish Things

2015-09-13T22:06:00-05:00

Among the many critical events that occurred this summer while I was pounding down Shiner Bocks by the busload and watching stupefied as the greatest self-aggrandizer since P.T. Barnum managed to vault to the top of the opinion polls by leveraging a condor's wingspan of hair and a face that looks like someone set it on fire with liquefied steroids and tried to beat it out with a rake into the most SPECTACULAR, FINEST, CLASSIEST, ENERGETIC, and HUUUUUGEST presidential campaign EVERRRRRR, the always amusing Supreme Court of the United States of America was proving everyone but left wing-nuts as wrong as Liz Warren about an Indian chief's skeleton in her family's closet when it determined, after a couple of previous misfires, that "disparate impact," indeed, applied to already shell-shocked residential housing lenders. While the opinion did sow some landmines in the statistical road to government-determined racial diversity in housing, the use of the doctrine itself as a basis to bring baseless actions against home lenders and to squeeze some juice out them for the benefit of those who will tend to vote reliably for the party that puts the chicken in all of their pots, was validated.

An excellent analysis of the decision, and potential legal issues to be considered by interested parties, can be found in this client alert by Joe Lynyak and his colleagues at Dorsey & Whitney. For the moment, I'm more interested in more fundamental concerns regarding the entire notion of "disparate impact." Another person who shares similar concerns is economist Thomas Sowell. He was interviewed in the Wall Street Journal on a wide range of topics, but the following is what Sowell, a man once so poor he pawned a suit of clothes for enough money to buy a knisch and a can of orange soda, had to say about disparate impact:

Or take “disparate impact,” the idea that different outcomes among different groups—say, that there are more male CEOs than female—is ipso facto evidence of discrimination. The Obama administration has used disparate impact to charge racism in housing, employment and other matters. In the absence of discrimination, the theory goes, people naturally would be dispersed more or less at random. Nonsense, Mr. Sowell says. “In various books I’ve given lists of all the great disparities all over the world, and I recently saw a column by Walter Williams in which he added that men are bitten by sharks several times as often as women.”

Differences in outcome is a matter that Mr. Sowell takes up in his new book, “Wealth, Poverty and Politics: An International Perspective,” out Sept. 8. Its theme, he says, is that “in a sense, there was never any rational reason to believe that there would be this evenness that they presuppose.” Some continents have more navigable rivers and deep water harbors than others. Some cultures value education highly, and some don’t. Underwhelming as the conclusion might sound to those with the urge to reorder society, many disparities arise simply because people are different, and because they make different choices.

Another problem is that the “disparate impact” assumption misidentifies where group differences originate. He sets up an example: “If you have people in various groups in the country, and their kids are all raised differently, they all behave differently in school, they do differently in school. And now they’re grown up and they go to an employer, and you’re surprised to find that they’re not distributed randomly by income.” It’s “just madness,” he says, to assume “that because you collected the statistics there, that’s where the unfairness originated.”

[...]

Why do we never seem to learn these economic lessons? “I think there’s a market for foolish things,” Mr. Sowell says—and vested interests, too. Once an organization such as the Equal Employment Opportunity Commission is created to find discrimination, no one should be startled when it finds discrimination. “There’s never going to be a time when the EEOC will file a report saying, ‘All right folks, there’s really not enough discrimination around to be spending all this money,’ ” he says. “You’re going to have ever-more-elaborate definitions of discrimination. So now, if you don’t want to hire an ax murderer who has somehow gotten paroled, then that’s discrimination.”

"A market for foolish things." Yes, we are.

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.