Bank Lawyer's Blog

Ex Post Facto Expertise

2016-03-06T21:55:00-06:00

Several years ago, I expressed some amusement (in a "gallows humor" sense, I admit) about the fact that the CFPB was sending attorneys to classes to obtain basic knowledge about bank law after they were hired. Ideological purity, I assume, was the primary job qualification. Therefore, I take it as a perversely encouraging sign that the Adjustment Bureau's former General Counsel and Acting Deputy Director (a different position than "In Real Life Deputy Director") last week announced that she was quitting the agency and jumping feet first into the dung heap of the financial services business.

Meredith Fuchs, who recently stepped down as acting deputy director of the Consumer Financial Protection Bureau, is joining Capital One as the bank’s senior vice president and chief counsel on regulatory issues, according to a report from TheHill.com.

Fuchs served as general counsel at the CFPB before she was named acting deputy director in July 2015 after Steve Antonakes stepped down as deputy director.

The revolving door between the regulator and the regulated is so common in the fever-ridden Potomac Tidal Basin that it hardly raises an eyebrow in a cesspool that might soon be ruled by a man possessed of aeronautically engineered hair and the debonair demeanor Al Bundy. Still, there is something just a bit askew when the resume of the person who was the General Counsel and then Acting Deputy Director of an agency with such extensive power and authority over financial services lists a single job in the financial services industry after she leaves that agency. Perhaps you can find such a job there.

I'm sure that Capital One is looking for "insight" into the attitudes and workings of the CFPB and, when ethical waiting periods have expired, access and even credibility, when necessary, to perhaps lessen the impact of the next blow from the CFPB's cudgel. I'm sure that Ms. Fuchs will provide it. Her resume marks her as an extremely bright and talented lawyer. Let's hope that when the door swings back to the regulatory side and she re-enters government service, she has a lot more hands-on experience with the financial services businesses that she's regulating than she had the first time around the block. Maybe she'll start a trend at the CFPB: know something about the business before you start regulating it. The regulated might want to see if things improve with an approach other than on-the-job training.

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.

Funnel Accounts: Be Very Afraid

2015-11-22T21:45:00-06:00

While slaving away for "The Man," alert reader John Thomas warned me that FinCEN's black ops storm troopers are hot on my trail and to run for cover before they scooped me up and waterboarded me, not for any useful information I might cough up but just for the sheer pleasure of watching me drown.

Funnel account activity was the standout trend in Suspicious Activity Report (SAR) filings in 2014, according to the latest report from the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).

FinCEN’s second annual SAR Stats, published Wednesday, highlights how FinCEN uses SARs to track down criminals through their use of the financial system. It was based on SARs filed from March 1, 2012, through Dec. 31, 2014.

FinCEN defines a funnel account as an account that receives multiple cash deposits, often in amounts below the cash-reporting threshold, and from which funds are withdrawn in a different geographic area with little time between deposits and withdrawals.

According to FinCEN, funnel account activity was mentioned almost 10,000 times in SARs in 2014.The same references occurred no more than 123 times in 2012 and 2013.

While it eventually occurred to John that FinCEN had misspelled my name, I doubt that would have deterred them for long. Upon receiving that warning, I stopped the practice of making multiple cash deposits, and now make a cash deposit only when checks received total $9,999.99, which given my astoundingly low billable hourly rate and dearth of clients will mean that I am making deposits only twice a year. In addition, I have bribed FinCEN's pet goat, Elizabeth Maxine Waters-Warren, with a family concoction: funnel cake. I have thereby assured myself that any SAR with the name "funnel," "funnell," or "kevin" eventually will go the way of most SARs: into a compost heap.

Thanks for the heads up, John. You saved my bacon, or at least, my cabrito.

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.

Ponzi Not Gone(zi)

2015-03-10T21:52:00-05:00

Nearly five years ago, we discussed the risk that Ponzi schemes posed to banks and the need for the BSA/AML personnel of the bank to be skilled on detecting the warning signs. The recent judgment against PNC in St. Louis ought to hammer home that point.

A jury in federal court here on Monday awarded $491 million in damages in a civil lawsuit sparked about seven years ago by the collapse of a Clayton-based company selling prepaid funerals.

[...]

After a five-week trial, the jury awarded $355.5 million of compensatory damages and $35.5 million in punitive damages against PNC Bank and $100 million more against Forever Enterprises, the latter being a defunct family-owned holding company.

The suit is based upon the "bad conduct" of officers of a company (NPS) that sold prepaid funeral contracts. PNC's predecessor bank acted as the trustee of the contracts.

NPS promised customers across the country that money from prearranged funeral contracts would be held in trust. Claims were supposed to be funded by life insurance policies payable to the trust. But federal authorities found that company officers and others spent some of the money on lavish lifestyles instead.

Beginning in the early 1990s, liabilities exceeded trust assets, the plaintiffs said, and NPS could pay for funerals only by using cash from new contracts.

More than 97,000 victims — customers, funeral homes, insurers and financial institutions — lost money, federal officials have said.

The officers went to prison. PNC has now taken it in the shorts, financially speaking, although the bank has vowed to appeal. I expect any right-minded financial institution would rather pay lawyers millions to fight a nearly half-billion-dollar verdict than to meekly pay it. After all, you need to send a message to potential plaintiffs' lawyers that you need to come strapped (again, financially speaking) if you're gonna' mess with PNC. In addition, the bank might actually be sincere in its "respectful" position that the jury screwed the pooch (judicially speaking) and that it can win on appeal (even if "win" means paring the size of the verdict down to an amount that won't choke a Clydesdale).

Regardless of the outcome on appeal, the verdict demonstrates why banks need to be locked and loaded when it comes to spotting potential Ponzi schemes. That might be a harder task in a state like Colorado or Oregon, where recreational marijuana use is legal and all of this stuff gets lost in a cloud of smoke, man, and then....ummm...ahhhh... What was I saying?

Oh, yeah: "Beware the Ponzi" or "Man, that rug really tied the room together."

Compounding Your Errors

2015-01-08T21:45:00-06:00

Because we've been relentless in our coverage of Bank of America's repeated foreclosure faux pas over the years, it's only fair to welcome to the slap-fest BofA's erstwhile partner in slime, CitiMortgage. Like the bank America love's to call its own, Citi also knows that when it comes to generating bad publicity for banks in general and big banks in particular, nothing works better than breaking into and looting a house the bank does not own.

Until this year, Honesdale attorney Jeffrey S. Treat thought he had seen everything in the wild world of home restoration, flipping and landlording.

CitiMortgage and its agents confused his handyman’s special — a small, long-vacant foreclosure he purchased for cash at 1526A Thackery Ave. in Scranton — with a home it foreclosed on two doors down.

In several visits from June through July, the bank cleared Treat’s building of its contents, including tools, building materials and replacement windows.

The bank changed the locks and crudely padlocked and posted the home.

This came as a great shock to Treat, who had no mortgage on the home and no relationship with Citi.

Unable to reach an agreement with the bank or the company that did the property clean-out, Safeguard Properties of Valley View, Ohio, Treat sued them and CitiMortgage Inc. of O’Fallon, Missouri, for the $3,500 estimated worth of what they removed and $5,000 for trespassing and damages.

A spokesman for Citi said Safeguard Properties and Treat are trying to resolve the issue. But Treat is past negotiating and is preparing for court.

“I don’t live there, and it was just tools, lumber and whatnot, but it’s just bizarre that this would happen,” he said. “It’s my place and all these people were in there and they took my stuff. Yeah, I feel violated.”

If you're going to pick on an individual to abuse in this fashion, who better than a lawyer? Sure, people love to loathe attorneys, yet as a group, they have the annoying habit of not being intimidated by big institutions, knowing their way around a courthouse, and, most unfortunately of all for giant financial institutions, matching bankers tit-for-tat when it comes to displaying your inner A-hole.

Not that Jeff didn't have provocation to sue the beatitudes off of Citi, you understand.

All summer, there were subtle and not-so-subtle clues that a big bank was about to pounce on his property. Treat tried to warn everyone, but never suspected a confused mortgagor would trespass, break into his property and remove everything in it.

It started when he found oversized sheriff’s sale notice on the house, citing a CitiMortgage foreclosure. He called the big law firm handling CitiMortgage’s foreclosures.

“You got the wrong house,” he said. He researched Citi’s actual foreclosure, found the property they wanted was two doors up, which he said was in much better shape than his dusty gut-job. He thought that was the end of it.

He continued working on the property, often with help from his father-in-law, who is retired and enjoys the activity. Through the summer, the grass was mowed regularly.

Treat concluded his father-in-law was taking care of the lawn.

His father-in-law thought Treat was taking care of the lawn.

They never discussed it.

Turns out, it was probably CitiMortgage and Safeguard Properties.

“That shows you what kind of guy I am,” Treat said. “I didn’t even thank my father-in-law for the work I thought he was doing, otherwise I would have known that Citibank was treating my property as though it was theirs.” He gets wind of people on his property and makes a visit, finding the locks changed, the home cleared and a padlocks attached from the outside.

The neighbors watched it happened, thinking Treat fell behind on his payments.

Treat broke into his own property, saw his stuff was gone and replaced by a Safeguard sign-in clipboard where employees logged their visits and what they had done. Treat’s tools, replacement windows, even bags of cement were gone. Treat put up a sign to CitiMortgage and Safeguard, telling them to that it is not their house.

The bank's contractor, who stole Treat's tools, could have settled up by just paying a premium on the "conservative estimate" Treat gave it for the value of those tools. Instead, it decided that nickel-and-diming was the way to best address the "reputational risk" that the federal bank regulators claim is of major concern when a bank engages in questionable activities, like processing payments for an online dating service or a payday lender. We assume that breaking and entering might also qualify as "high risk" of damaging a bank's reputation.

Treat sued them for five large in small claims court.

Citi could still have cut its reputational losses by cutting Treat a check. I mean, going to small claims court when the only issue involves an amount that Treat claims is "not even an hour of fuel in a corporate jet" seems like bullying the little guy, especially when the question of liability is cut-and-dried. However, according to the linked article, both the bank and its contractor have hired lawyers to contest the proceeding. I hope they show up at the right courthouse. Their track record does not give one encouragement. I suggest the use of a seeing eye dog.

You have to wonder who at the bank is making the judgment call to slug this one out. Treat's getting all the favorable press, and whether or not he gets the full monty financially when he gets his day in court, he's already exacted his pound of flesh in the court of public opinion. The negative publicity hit has got to be costing Citi more than simply paying the guy a few grand and keeping this embarrassing episode out of the newspapers.

Things could have been worse, I suppose. Treat could have had a pet parrot in that house.

MJ Law 101

2014-12-07T21:41:00-06:00

Being hooked up with a Colorado-based firm, I've given a lot of thought (and blog space) to the intersection of law (particularly banking law) and marijuana. As a result of these deep thoughts I'd like to say...uh...ummm..yeah...

What?

Dude!

It turns out I'm not the only one hanging out at corner of Bank and Bong Streets. So has professor Sam Kamin of my former place of abasement, The University of Denver's Sturm College of Law. According to a recent article by the editor of the The Denver Post's "The Cannabist" column, Professor Kamin will teach a course entitled "Representing the Marijuana Client." The description of the course does not describe whether the emphasis will be on representing clients who are under the influence of marijuana, are engaged in the state-lawful, federal-unlawful marijuana-related business, or are, themselves, marijuana. Taken literally, a "marijuana client" could be a joint, a roach, an edible, or merely a pipe bowl of stems and seeds.

Among the topics addressed in the course description will be "banking," and we assume that does not refer to a type of turn performed by an airplane, but, rather, the legal issues surrounding a commercial bank providing services to a marijuana-related business. As we recently pointed out, that aspect of the course can summed up rather quickly: it's illegal under federal law.

See, we saved potential students some time and money. We here at bank lawyers blog are all about mentoring.

On the other hand, as Kamin rightly points out, the issues involved are many and complex.

When I was on the Amendment 64 task force and just thinking about an edible — what can be in it, who’s determining what’s in it, what the dosage is, how you indicate the dosage, how you make sure it’s safely packaged, how it can be advertised,” he said. “Every small piece of it has so many regulatory issues, so if you’re working in that area, running a MIP (marijuana-infused product manufacturer) or something, the state, local, federal regulations of that are mind-boggling.”

As they are if you're trying to bank one of those businesses.

We wish Professor Kamin and his students well, because, this is an issue that is not going to simply disappear in a cloud of smoke. Moreover, it's not an issue confined to Colorado, but one that affects a growing number of states. Therefore, Kamin's closing statement is very cogent.

“It’s an expertise our students will have and others won’t,” he said. “There’s a lot of demand for this — and we’re trying to position our students well to fit in there.”

Yes, when it comes to marijuana, there has always been a lot of demand. As long as the students who take the course do not (even casually) partake of the subject matter, they might actually be able to render some useful advice to those in need of it.

State Nullification: Inhale Deeply

2014-11-23T22:04:00-06:00

When we asked a couple of months ago whether the Cannabis Co-operative Credit Unions that have been authorized by Colorado law were "dead on arrival," we thought that the answer was "yes." Yet, there appears to be a beating heart and hopeful heart in this body, inasmuch as the State of Colorado recently granted the first such charter.

There are a couple of catches, however. First, the NCUA still has to grant deposit insurance, which may be a couple of years away (although Colorado law allows the co-op to open its doors as long as it has "applied" for NCUA insurance). The second is that state law requires that the credit union have access to the Federal Reserve system via a master account. One of the attorneys for the credit union asserts that the credit union has a "right" to a master account. I'm not so sure, but I guess we'll see, won't we?

This development comes on top of anecdotal evidence that a few banks are providing financial services for marijuana-related businesses and that the federal banking regulators know about it and are "tacitly" approving the same (in other words, not writing up the bank in an examination for engaging in this activity, as long as they have the right "risk-management policy" in place). If those instances denote a trend, then apparently "prosecutorial discretion" is waxing in areas other than illegal immigration. Apparently, you have to be involved in a much more heinous business like legal payday lending, check-cashing, legal gun-selling, deposit advance lending, overdraft protection, and legal online match-making before you offend the ethical sensibilities of the US Justice Department and the federal banking regulators. Engaging in organized drug financing in violation of federal criminal statutes is not worth the while of the current occupants of the executive branch of the federal government.

On the issue of whether or not recreational marijuana use ought to be decriminalized at the federal level, I'm an evangelical agnostic. I believe deeply, based solely on divine revelation and natural law informed by reason, that there are valid arguments on both sides of the issue, and I'm willing to listen to rational argument both for and against the proposition. However, the fact remains that what Fourth Corner Credit Union and those who assist it in servicing marijuana-related businesses is illegal under federal criminal laws. They are violating federal drug laws, and, arguably, engaged in a conspiracy to do so. There are a number of convicted felons whiling away their days in federal penitentiaries for having engaged in organized activity to promote the cultivation, harvesting, processing, distribution, and sale of marijuana, and the "processing" of funds derived from such activities.

This nation once almost went to war with certain states (South Carolina being the most prominent) over the theory of "nullification," whose advocates asserted that states could "nullify" within their borders the application of federal laws with which the state disagreed. President Jackson was prepared to use federal troops to invade any state that tried to put that theory into practice. Although the specific issue at that time involved tariffs, and today it involves the use of drugs, one hundred and eighty years later we seem to be on the verge of the same war, in which certain states think that they can, by changing their state laws on drugs, somehow nullify the effect of federal drug laws within their borders. A critical difference today is that the federal authorities are not only not prepared to combat the nullification effort, they appear to be accommodating it.

With several states, and the District of Columbia, enacting recreational marijuana use legislation earlier this month, and with more states expected to consider similar legislation in 2016, the issue is not going away and it's not just a problem for Colorado and Washington state. Personally, I think it would be better for the respect for the rule of law to have a debate in Congress over the merits of changing federal drug laws, or, at the very least, to have the Justice Department go through the process of considering the removal of marijuana as a Schedule 1 controlled substance. Moreover, for those financial institutions and those that aid and abet them in financing marijuana-related businesses, January 2017 could bring the second coming of a John Ashcroft wanna-be as Attorney General, and the worm could turn. If that happens, the discretion of prosecutors may be to nail your hide to the side of a barn. After all, I remember when "open bank assistance" and "forbearance" were not dirty words for bank regulators. Times change. Stuff happens.

Actually, I don't expect such cautionary advice to concern those most at risk. They're too busy inhaling and munching.

CFPB Shocked To Discover The Rules of Discovery

2014-11-16T21:35:00-06:00

Thanks to Marvin Umholtz, I recently discovered the fact that the CFPB suffers from the same psychological ailment that struck the OCC a few years ago: "transparencyphobia."

A federal judge forced the Consumer Financial Protection Bureau to obey the same rules of discovery in civil litigation that apply to everybody else even if government officials are annoyed by them.

Judge John E. McDermott rejected a motion by CFPB. As a result, the bureau's officials were required to submit to depositions — cross-examinations of witnesses conducted under oath but outside the courtroom — in a case filed by the bureau.

The Adjustment Bureau had sued, in federal district court, a document storage firm that holds attorney-client privileged information for bankruptcy lawyers. The defendant wanted to conduct normal discovery procedures, including depositions of CFPB officials. The CFPB balked, as did the OCC in a case discussed on this blog several years ago (a discussion that brought this blogger anonymous threats of regulatory retaliation). In this case, the judge was no more sympathetic to the government's fear of the spotlight than was the judge who ruled against the OCC.

But CFPB balked, telling the court that the bureau has an inherent right to “nondisclosure” and that “even the disclosure of purely factual material may be protected by deliberative process privilege.”

The CFPB added that “requiring the bureau to designate any individual to appear at deposition would only serve to annoy, oppress, and cause undue burden on the bureau.”

[...]

McDermott's Sept. 15, 2014, order forced CFPB to provide a witness for an October deposition. Samuel Gilford, a CFPB spokesman, told the Washington Examiner that the Morgan Drexen case was the only time a bureau official has submitted to a deposition.

As the reporter notes, that's likely because the CFPB usually pursues defendants through administrative enforcement actions and extracts settlements from them prior to things getting nasty. In only a relatively few cases has the CFPB filed civil litigation. Apparently, the crack trial attorneys at the bureau weren't aware that the federal rules of discovery apply to the oppressor as well as the oppressed. A level playing field is apparently a novel concept to them.

This is somewhat surprising because it's not a novel concept.

“I do not think that there is legal support for the conclusion that there is a blanket prohibition on taking depositions of federal agency employees,” said Jonice Gray Tucker, a partner with BuckleySandler LLP, a Chicago-based law firm that provides legal counsel to financial service companies.

James Copland, director of the Center for Legal Policy at the Manhattan Institute in New York, said all plaintiffs, including federal agencies, should be treated identically. “I don’t think that civil enforcement action should be treated any differently due to a federal agency,” he said.

Moreover, it's not as if legal commentators hadn't been telling the CFPB that it had to comply with federal rules of discovery.

A March 14, 2013, securities enforcement and litigation update published by the WilmerHale law firm in Boston also said that once an agency goes into court, it must abide by federal discovery rules, including submitting to depositions.

The ability of both sides to depose each other, WilmerHale argued, levels the playing field. “Several recent court decisions strongly suggest that the playing field levels once the agency ends up in litigation,” the law firm wrote.

WilmerHale cited five cases since 2012 that affirmed federal agency officials aren't exempted from depositions.

Among the five was a 2012 case involving another federal agency, the U.S. Securities & Exchange Commission, titled SEC v. Merkin. Of that case, the WilmerHale update said “the court determined that 'like any party litigating in federal court, Merkin has the right to take a ... deposition from the SEC.'”

So, what gives? Why did the CFPB try to pull something that seems over-the-top, even for an agency that pushes the envelope of unaccountability? According to Ms. Tucker, it may be a case of "inexperience."

Tucker suggested that CFPB’s aggressiveness may be a result of having “more junior staff attorneys [who] may be less experienced. In addition, some staffers are relative newcomers to consumer financial services issues.”

In addition, she said, “this can present challenges because, in making day-to-day decisions, some of the enforcement staff may not yet fully understand the businesses they are regulating or how much effort goes into responding to their requests.”

That can “result in situations where the staff take positions that are not completely reasonable, or take actions that are perceived as more aggressive than they may have intended,” she said.

Oh, I think the positions taken were just as aggressive as they were intended. When you truly believe that you're doing God's work, it's always a shock when the heathens don't see things your way. In addition, many of the regulators apparently believe that if the public understands that the way in which they "reason" their way to a decision to screw with a member of the regulated is just as dysfunctional as they sausage-making manner in which Congress makes legislation, they might decide to take up arms and burn the house down. Or worse, adversely affect their government pensions.

Then again, Ms. Tucker's speculation regarding inexperience is consistent with the fact that the Adjustment Bureau's lawyers have also found it very valuable to take basic bank regulatory courses in order to learn what experienced bank lawyers learned decades ago. Perhaps basic courses in civil procedure should be added to the curriculum, along with a few lectures on the principles of due process. It couldn't hurt.