Bank Lawyer's Blog

Paying For The Great Wall: Let The Banks Do It

Customarily, you'd have to work harder than El Chapo's Narc-Anon sponsor to find common ground between me and the Golfer-in-Chief on any issue, but leave it to The Candidate with the Cockatoo Do to move that Sisyphean boulder up the slope and on to level ground. For all of you who've been wondering like me (and most other Americans, as well as many Mexicans) how The Orange Man plans to get Mexico to pay for The Great Wall along the Rio, he's made it clear: American financial institutions will carry his heavy water.

Under the proposal detailed on Trump’s campaign website, the Republican would rely on a section of the Patriot Act to effectively force banks and money transfer companies to determine whether a person trying to send money abroad is a legal resident of the U.S.

That section of the law was written to crack down on terrorist financing and requires banks and other financial institutions to verify the identities of people opening accounts and doing business with them.

Trump has vowed on his first day in office, he would expand that requirement to include wire transfers and require that no foreign person living in the U.S. can send money outside the country without first proving their legal status.

The businessman predicts that Mexico will agree to pay for a border wall within a matter of days to keep money flowing over the border. 

The Trump campaign has also floated increasing visa fees, cancelling visas, and establishing trade tariffs against Mexico as ways to pay for a border wall, but cutting off remittances is the centerpiece of his plan. 

Usually, the words "centerpiece" and "Trump" are used to refer to the living blonde-furred creature he wears on his cranium, the one that sometimes rears back on its hind legs and bays at the moon, Megan Kelly, or any other thing or person who displeases the the former lead singer for Devo. In this case, it refers to banks and other financial institutions, as well as other money transmitters like Western Union, doing what all federal government agencies otherwise responsible for keeping the word "legal" in "legal immigration" have failed to do since the 1930s: ferret out who's here legally and who is here on the down-low.

Naturally, banks are doing back-flips in anticipation of the expense and liability of that job, not to mention the back-breaking prospect of adding a ton or two to the already crushing compliance burden it will entail.

But banks and other financial companies say they do not want to get involved on the front lines in a contentious immigration battle, arguing there are questions about how effectively such a policy could be implemented.

“It should not be for the banking system to be the police or the immigration task force,” said one banking lobbyist. “I don’t think it should be left to banks to report that someone has come in to remit money to whatever country, and it may or may not be legal. That’s not our role.”

[...]

Banks contend that they do not have a method of establishing the legal status of a person in the U.S. A person can open an account or send money abroad simply by showing an Individual Taxpayer Identification Number, which is given out by the government to people lacking a Social Security number, including people who are in the U.S. illegally.

The banking lobbyist said Trump’s proposal is not yet being taken seriously by the industry because it is still several steps away from even beginning to look like a reality.

I assume that same lobbyist a year ago scoffed at the notion that a bloviating clown prince like The Donald could ever beat a well-funded, well-connected, "heavyweight" like The Jebster for the Republican Party's presidential nomination. Underestimating this carnival barker is a common blind spot this election season. He's like a nightmare from which you can't wake up no matter how loudly you scream. Let's take him seriously, no matter how many knots that ties in your nether regions, and make sure that he understands that any banker, even those who live in Colorado and consume mass quantities of EdiPure Raspberry Jellies, who was thinking of holding their nose and voting for him are going to vote for the Wicked Witch of the Chappaqua, or otherwise "Go Green," "Libertarian," or even "Liberace," unless he drops this harebrained scheme to build The Great wall on the backs of America's banks. In fact, bankers could get some assistance in making this point from their MSB brethren, as The Change We Were Waiting For recently noted.

“The notion that we are going to track every Western Union bit of money that is being sent to Mexico, good luck with that,” Obama told reporters. 

I amaze myself when I say this, but "Right On, Mr. President."

As the linked article points out, there are so many ways to circumvent the money transmission barrier that Trump proposes that banks, despite the money and labor it would cost them, would be about as effective in stopping money flowing from Mexican illegal immigrants in the U.S back home to Mexico as the US Border Patrol is at keeping out undocumented immigrants in the first place. In other words, it wouldn't work.

Not that reality ever stopped a megalomaniac.

The Marijuana Minefiled Continues To Claim Banks

No matter how many times commentators like this curmudgeon warn banks that decide to dip their toes in the toxic waters of banking marijuana businesses, some banks not only don't "get it," they don't get it that they don't get it. At least, they don't until the regulators whack them upside the head.

The latest slow learner is apparently Millennium Bank, a small ($73 million) bank in Des Plaines, Illinois. According to the American Banker's Kevin Wack (paid subscription required), in March 2016, that bank entered into a consent order with the FDIC and Illinois banking authorities that "a source familiar with the matter" claimed "stemmed from the bank's involvement in serving pot businesses." As consultant Steven Kemmerling notes, there is no "template" for banks serving marijuana businesses to navigate the mysterious waters of the FinCEN "guidance" issued in March 2014, which purported to give financial institutions a path to serving marijuana businesses that were engaged in state-legal, federal-illegal activities. The consent order itself does not mention marijuana, and its numerous requirements could be interpreted as an indictment that the bank in question did not have even a basic BSA program required to meet applicable law and regulation. Kemmerling anticipates additional consent orders "as regulators continue to refi9ne how to safely bank marijuana." In other words, the smoke has not yet cleared on how to break federal criminal laws without, you know, getting your writs slapped.

The fact that the consent order (found here) nowhere uses the word "marijuana" indicates that the bank regulators are not anxious to admit that they are tacitly permitting (according to the article by Mr. Wack) 301 banks to engage in activities that are literally illegal. As Alabama Law Professor Julie Anderson Hill pointed out in an excellent law review article that we discussed last year, the regulators who fudge on these activities face another potential risk.

If the Federal Reserve provided payment services to a cannabis credit co-op, the Federal Reserve and its employees would be engaging in money laundering. They might also be conspiring to manufacture and distribute marijuana, aiding and abetting the manufacture and distribution of marijuana, and acting as accessories after the fact for the manufacture and distribution of marijuana. 

When marijuana advocates ask the bank regulators for "clarification," they are praying for rain in Death Valley. What's needed is action from the US Congress, action that would make banking state-legal marijuana businesses also legal under federal law. At that point, more "clarification" on BSA procedures might actually be useful. Don't expect Congressional action this year.

Incidentally, all those banks that are chomping at the bit to get their hands on drug money might want to consider the long-term effects of legalized recreation marijuana use. Trail blazer Colorado is experiencing some kick back from being the Mile High State.

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I am giving a one-hour webinar for BankersHub on July 19 on the banking and credit union regulators' expectations for technology service agreements. You can find information here.

Enhanced Recordkeeping Proposal: Kill It Before It Multiplies

One of BLB's favorite gadflies, Bert Ely, was at it again last week (paid subscription required). This time, his incredulity was focused on an FDIC proposal to require the country's largest banks (those with over two million deposit accounts) to implement more "robust" (and expensive) systems for determining more quickly, upon failure of the bank, whether a deposit is inured, uninsured, or partially insured. While Bert concedes that the proposed rule initially burdens only 36 banks, "one could imagine a scenario when this regulation could easily be extended to all banks." "One" could. It's called "trickle down" regulation. The CFPB's "race to the overbearing bottom" is a classic example. Therefore, argues Bert, "all banks" should oppose it.

While Bert criticizes the difficulty and expense (FDIC estimates the 36 banks will have to spend $328 million in system upgrades) of the proposal, his real criticism is that, based on recent history, the "proposed rule bears no relationship to reality."

Inasmuch as the FDIC has had the power (since the enactment of FIDICA in 1991) to protect the uninsured deposits of a failed bank if that was a less costly alternative to letting the uninsured depositors "eat cake," and since the panicked lines of depositors at IndyMac in 2008 encouraged The Care Bair and her successor to favor to overwhelmingly favor protecting all depositors in subsequent failures (in 482 of 512 post-IndyMac failures, Ely asserts), there is little likelihood that the FDIC would not protect all depositors from a public relations standpoint. Moreover, Ely argues, because protecting all depositors usually protects the "franchise value" of the failed bank, acquiring institutions are usually motivated to pay enough for the deposits and non-mortally wounded assets of the failed bank that liquidation and "stiffing" the uninsured depositors is not likely to ever be the least costly alternative.

Bert also argues that liquidation "can be very disruptive to the failed bank's lending and other nondeposit relationships. He cites the 2009 liquidation of New Frontier in Greeley, Colorado, as one instance in which local businesses were negatively impacted. Being familiar with that specific example, I can vouch for the veracity of Ely's opinion. Finally, Bert argues that the FDIC's recent concern with the continuing liquidity of banks (especially large banks) in crisis situations would be hampered by liquidations in which uninsured depositors were not paid, and might induce uninsured (and even insured) depositors in other banks to stage runs (ala IndyMac).

All-in-all, says Bert, this proposal is a bad idea and "the FDIC should kill it."

Amen.

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.

Barney Bites Bernie (And Neel)

Now that hell has frozen over, I find that all kinds of amazing things are occurring, one of which has created the danger of ripping a huge hole in the space-time continuum: I find myself in agreement with Barney Frank.

While watching the PBS News Hour this past Thursday night, who should pop up but the former House Banking Committee Chair and favorite Bank Lawyers Blog Bullseye, Barney, who was interviewed by Jeffrey Brown about Frank's reaction to statements by Neel Kashkari, currently president of the Federal Reserve Bank of Minneapolis and former Bush Bailout TARP Toolmaker, and the ever-cranky Bernie Sanders, Gen Y's favorite "Democratic Socialist," about "To Big To Fail Banks." Sanders also alleged that the way to break up big banks is to reimpose the Glass-Steagall on commercial banks. Frank, now that he's out of the political arena and no longer feels compelled to be what every politician feels he or she must be, i.e., a caster of shade upon of the truth, was remarkably critical of two gents who are spouting the Democrat Party line about the evils of Wall Street's "TBTF" banks.

Barney may have gained some objectivity, but he's lost none of the pungent-tongued arrows from his verbal quiver.

In the first place, both Senator Sanders and Mr. Kashkari continue to evade the biggest question. That is, how big is too big? The crisis which touched off when Lehman Brothers couldn’t make its payment, Lehman Brothers was about $650 billion in assets. We have banks four and five times that size

And the question is, does everybody have to be smaller than Lehman Brothers is today? But that would have consequences. Getting there would be a problem. By the way, it should be very clear, Glass-Steagall doesn’t do it. There is a disconnect between Senator Sanders insisting that the banks be broken down to the point where they won’t by their own size threaten, if they have too much debt, to undermine it.

And Glass-Steagall — Glass-Steagall would reduce — it wouldn’t do anything to Goldman Sachs and to Morgan Stanley, which are almost Glass-Steagall-ized themselves. But looked at Citicorp, or J.P. Morgan Chase, or Bank of America, Wells Fargo, even if they were subject to Glass-Steagall, they would still be well beyond the size that Lehman Brothers was.

There is just a disconnect between saying we’re going to do Glass-Steagall and getting the banks down to a size where, if there was a complete failure, you would get damaged by it.

The entire response above by Frank is remarkable for the fact that he's right. It's obvious that he's not been spending his time since retirement sampling the wares of Mar Jane-related "legal" businesses in Colorado.

Frank also jumped all over Kashkari's comparison of the 2008 meltdown to the S&L crisis of the 1980s, and Kashkari's statement that the reason the S&L crisis didn't bring the economy down was because none of the S&Ls was "too big to fail." Again, Frank asks why Kashkari won't tell us how big is too big? He also correctly notes that the bailout of the S&Ls cost a lot more than the bail out of big banks in 2008, although he does not also observe that this was because the 2008 TARP allowed the big banks to survive, while the S&L "bailout" allowed them to fail (or most of them, at any rate (outside the Southwest Plan thrifts), and established the Resolution Trust Corporation, staffed by the FDIC, to liquidate their assets. If the politicians, including Frank, had stayed out of it in the 1980s and let the initial bailout template concocted by the former Federal Savings and Loan Corporation play out, there's a chance that the money from that bailout might also have been largely repaid.

Frank says the primary risk is not size but "indebtedness," and on this point he's got a point. However, I disagree with his assertion that his bloated namesake, Dodd-Frank, has dealt successfully with the risk of bank's engaging in excessive borrowing and hinky derivatives that made "The Big Fail" such a hit (his misapprehension of the effect of the Volcker Rule has been lambasted previously), and his assertion that now, no bank is too big to fail. 

If a large institution can’t pay its debts, it fails. It is not too big to fail. It is put out of business, by law. No federal official can advance any money to pay its debts under the law until it is dissolved.

TARP also required legislation to create, and the wide-open authority it provided the federal government to bail out banks was induced by panic among folks at the highest levels of the federal government (including Frank) of immanent widespread economic collapse. We'll see how effective Franken-Dodd is when the next crisis hits, as it inevitably will. There's no prohibition on a future panicked Congress changing the rules on the spur of the moment to do what Frank claims can never again be done.

To prove that I haven't completely turned to the dark side, I think his statements about overturning Citizens United are bunk. Nevertheless, all-in-all, startlingly, he makes a lot of sense.

Regulatory Abuse: Let's Make It More Transparent

Last week's release of a report by the FDIC's Inspector General that outlined the allegedly thug-like behavior of some FDIC lawyers and supervisory personnel against banks that dared to engage in tax refund anticipation lending, a business that the Care Bair found distasteful on moral grounds (notwithstanding that the line of business was legal), generated the expected smoke, blown up the public's backside by all the usual suspects. A couple of articles in the American Banker (paid subscription required) by reporter Lalita Clozel nicely outlined the sturm und drang for those of us with short attention spans.

The agency allegedly used a number of strong-arm tactics -- including rigged examination reports, selectively leaking information to a competitor, and hampering a firm's acquisition plans -- in order to force the banks from offering such loans.

The inspector general's report concluded that the actions "involved aggressive and unprecedented efforts to use the FDIC's supervisory and enforcement powers, circumvention of certain controls surrounding the exercise of enforcement power, damage to the morale of certain field examination staff, and high costs to the three impacted institutions."

Among the criticized actions of the FDIC were the actions of an FDIC attorney, who allegedly "abusively threatened" banks in person and on the phone. I'm not sure what "abusively threatening" a person entails in this case, but in my 41+ years of practicing law, most of it representing financial institutions, I've been threatened on rare occasions by government attorneys, and invariably the person doing the threatening is what is often referred to in legal circles as a "classical parum canis asinum" ("punk ass little bitch"). People with actual courage don't threaten, they simply "do." With a few notable exceptions, the overwhelming majority of bank regulatory agency attorneys I have dealt with over the years have not been "abusively threatening," and among those few that have issued threats, some of have done so under what they thought was the protection of anonymity.

Clozel sets forth a bullet point list that summarizes many of the other criticized actions of the FDIC against the banks in question and against the FDIC's own examination staff. The FDIC disputes almost all of the allegations of the inspector general, although it does assure the IG that it will take several steps "to improve both internal and external communication." In other words, when the boys and girls in D.C. tell the field staff to screw a bank, they'll make sure that it's communicated clearly. The FDIC also alleged that it will update its "appeals process" so that banks that are being shot at by FDIC supervisory and legal staff can appeal up the food chain to the officials who set the rein of terror in motion in the first place, so that they can say that the agency paid lip service to due process while they all sit around and laugh at the appeal.

The FDIC also claimed that it "does not condone" the "aggressive behavior of at least one employee" and that this employee "has since left the agency." No doubt to join ISIS. It's comforting to know that when it comes to taking action on abusive action of one of its employees, the FDIC is always quick to throw under the bus those who are no longer employed by the agency.

In a Congressional hearing, at which the IG testified about the matter, Republican and Democrats split predictably. The Republicans were "troubled" by the alleged abuse, while the Democrats were "troubled" by tax refund anticipation loans themselves. As we've seen with both parties, depending on the issue, each believes that in some cases, the ends justify the means.

Fred Gibson, the FDIC's Inspector General, expressed an additional concern that many share, and that may apply with even more force to the CFPB. He said that the FDIC should have released guidance, rather than create "rules by enforcement." This concern was echoed by Rep. Sean Duffy, the Chairman of the House Subcommittee that conducted the hearing.

"It is hard enough to comply with rules that are put out that people are trying to read and try to comply with but it is even harder when you have a regulatory body of our financial industry that tries to enforce first and give guidance later. We should know what the rules are, the rules of the game should be clear."

If you make the rules of the game clear, then (A) people can challenge them on the basis that they are arbitrary or lack substantial support, or (B) the agency is then bound by the rules in lieu of personal taste (or, in the case of tax refund anticipation loans, distaste). That takes all the found of regulating.

This all was nice theater, and you have to give the Mr. Gibson and his staff a hat-tip for spitting into the wind. Nevertheless, if anyone thinks this will change the FDIC's conduct going forward, your smoking some of that legal/illegal Colorado hemp. The only thing that will do that is a change in the White House in November. Then again, Sheila Bair, who started this "trickle down" abuse in 2008 (according to the IG's report) was a Bush II appointee.

Stressing Stress Testing

A recent White Paper from the consulting firm Invictus discusses what those of us who represent community banks have been aware of for some time now: the requirements for "stress tests" that were supposed to apply only to those "Too Big To Fail" banks are "trickling down" to community banks. The buzzwords that apply to banks both large and small are "forward-looking risk analytics." While Invictus notes that bank regulators initially publicly stated that stress testing was only for the Big Guys, their actions belied their words (or, they simply changed their minds).

Regulatory actions in the waning months of 2015 should serve as notice that ignoring forward-looking analytics will lead to lower CAMELS scores, more examiner scrutiny and higher regulatory capital requirements. The new current expected credit loss model (CECL), which is expected early in 2016, is also a forward-looking tool.

Behind the scenes, however, regulators began changing their own methods for examining community banks, relying more and more on forward-looking analytics. In recent months, with signs that community banks are again accumulating higher concentrations of risky commercial real estate loans, regulators are reminding community banks that stress testing is indeed required to manage concentration risk in their portfolios and to develop realistic scenarios for interest rate risk management.
Regulatory actions in the waning months of 2015 should serve as notice that ignoring forward-looking analytics will lead to lower CAMELS scores, more examiner scrutiny and higher regulatory capital requirements. The new current expected credit loss model (CECL), which is expected early in 2016, is also a forward-looking tool.
The large banks have already adopted forward-looking risk analytics and are using the results with regulators. Although community banks are not subjected to the same stress testing requirements as the large banks, the regulatory trend is in the same direction. Those community banks that fail to incorporate new analytics into their risk management systems will find it difficult to communicate effectively with regulators.

The White Paper traces recent public issuances by the FDIC, FRB, and OCC in this direction. A specific red flag is the December 2015 joint agency guidance on CRE concentrations. Those of us who represented community banks and their directors in the aftermath of the last meltdown, when commercial real estate brought a number of community banks to grief, took special note of that guidance. It's "guidance" in the same way vendor management guidance is merely "guidance." Try violating it and see how "sticky" the wicket gets. You'll be up to your eyeballs in MRAs on the your next report of examination...or worse.

Even if you thinkl your CRE isn't all that "concentrated," Invictus thinks that you ought to seriously consider hoping on this forward-looking train.

Even if your bank doesn’t have CRE concentrations, use forward-looking risk analytics to stress test your capital, your strategic plans and any potential acquisition you might be considering. Present the results to regulators. Invictus’ clients that have used stress testing results with examiners have seen their capital requirements decrease, their management piece of their CAMELS composite increase, and their strategic plans win fast regulatory approval.

At the very least, it's worth pausing for a moment and, while you stoop to smell the roses, thinking about whether you might benefit from this approach (if you haven't already adopted it).

Trickle Down Guidance

From the FDIC's Office of Inspector General comes an interesting little tale that may have slipped by your attention while you and the family were reveling in the latest bloviations from the walking, talking hairdo that is THE GREATEST SHOW ON EARTH, I PROMISE YOU!!!

The entire incident was triggered by a false alarm about a possible security breach of a third party service provider (TSP) that turned out to be some pesky adware. However, the FDIC IG, operating on the premise that no (non)crisis should ever go to waste, used its investigation of the incident to uncover sloppy security breach incident response policies and procedures by all concerned, including not only the bank and TSP, but by the FDIC's own Risk Management Supervision field office (RMS) as well.

The entire "Case Study" by the IG is less than two pages long, so I won't reiterate it in detail. However, I will use it to bleat about a couple of additional points of my own. The first concerns the application of the FFIEC Interagency Guidelines Establishing Information Security Standards to TSPs.

The Case Study observes:

The InteragencyGuidelines require FIs to develop and implement a risk-based response program to address incidents of unauthorized access to customer information. The Interagency Guidelines also provide that FIs’contractual arrangements shall require that TSPs implement appropriate measures to meet the Interagency Guidelines objectives.

I recently had a TSP respond to a financial institution's request that its agreement for technology services with the TSP (which services would give the TSP access to nonpublic personal information (NPI) of the bank's customers) contain a provision pursuant to which the TSP agreed to protect the security of the NPI with the brilliant argument that the TSP was not a financial institution and, therefore, was not required to comply with the Interagency Gudelines. I not-so-patiently relied that the Guidelines "recommended" that my client make them apply to the TSP via a contractual provision and, since my client took such "recommendation" seriously and incorporated such a requirement into its vendor management policy, if the TSP wanted to do business with the financial institution, its could either agree to the provision or not do business with the institution. The TSP's business people conceded the point and it added a provision to the agreement designed to meet this requirement.

This seems like a fairly common requirement, yet the TSP was a technology service provider that does a lot of work with banks. In the course of the discussion on this point, it was evident that if the vendor's representatives were telling the truth (I accepted their assertions at face value, since it did not alter my client's position whether or not they were truthful), we were the only bank to ever ask for this provision. If that is correct, then the regulators need to be a lot more diligent in their vendor management reviews, because there are a lot of agreements with this TSP that don't comply with the "recommendations" of the Interagency Guidelines. On the other hand, it was the TSP's lawyer putting forth this position, so maybe it was a bald-faced lie.

The IG's Case Study also noted that "[t]he Interagency Guidelines The federal banking agencies, including the FDIC, conduct periodic information technology (IT) examinations at FIs and their TSPs." Other regulatory guidance, such OCC Bulletin 2013-29, "recommends" that financial institutions place in their agreements with TSPs an acknowledgment by the TSP that such examinations are permitted and that the TSP will cooperate in the conduct of the same. I have always considered this a "belt-and-suspenders" approach, designed to ward off unnecessary delay, since the Bank Service Company Act gives the federal bank regulators this power to examine third party service providers. On the other hand, I have had a contract negotiator for one of the country's largest technology service providers tell me that their attorneys have taken the position that the law does not require the TSP to allow the bank's regulator to conduct such an examination. The TSP only permitted them out of the goodness of its heart, I suppose. Regardless, the agreement with the TSP should always have a provision that requires that the TSP to permit, and to provide reasonable cooperation in connection with, such examinations.

A final few nuggets I gleaned from the Case Study: (1) a contract with a TSP needs to require full cooperation with the financial institution in the event of security breach and other provisions that are designed to permit the financial institution to be able to meet its obligations the recommendations under another set of guidelines, the Interagency Guidance on Response Programs for Security Breaches; (2) as part of their initial and ongoing due diligence and monitoring of technology services providers, institutions would be well-advised not to neglect the TSP's security breach incident response programs, and make sure that the TSP complies with "cybersecurity best practices;"  and (3) just as the bank has a regulator looking over its shoulder and second-guessing it, so does the regulator. I'm not claiming that this is necessarily a bad thing, but you wonder how much of the effort in this area is directed toward placating Monday Morning Quarterbacks.

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.

2016: Year Of The Merger

Respected bank analyst Dick Bove told CNBC last week that the United states is in for a tsunami of bank meregers in the coming year.

"In the United States, I think you will see a huge wave of mergers in banking in 2016," Bove, who is the vice-president of equity research at Rafferty Capital, told CNBC.

"The regional banks are going to be buying each other and I would expect to see 2016 being one of the biggest years for bank mergers that we have seen in the last decade," he later added.

If the activity that I have seen thus far in my little corner of the universe is any indication, you can take Bove's prediction to the bank. Community and regional bank M&A lawyers are going to be plenty busy in 2016.

In addition to customary reasons for consolidation that we've talked about over the past few years, including the crushing regulatory environment post-Franken-Dodd, there's another that I haven't heard discussed, but that ought to be thrown in the hopper of any bank owner who has been fantasizing about cashing out and sipping Margaritas in Mazatlan.

Bove was also bloviating last week (this time to CNN) about how problems in the oil patch spell trouble for banks that bank the "Awl Bidness," and that those kinds of problems have, in the not-so-distant past, spread beyond the oil states and caused a wider economic recession. There are differences this time around from the 1980s on Texas, but Bove is still "concerned" that even big banks outside of Houston and Dallas could feel the pinch. Chase's Jamie Dimon disagrees.

Even Wall Street banks are facing questions about the impact of falling oil prices.

While just a small fraction of their total loan portfolio is directly tied to energy lending, Bove estimates around 20% of their investment banking revenue comes from energy.

JPMorgan Chase(JPM) CEO Jamie Dimon, in a call with analysts this week, acknowledged there may be "slight negatives" for the bank related to commercial and real estate trouble in Dallas, Denver and Houston.

Yet the big banks are well diversified. That means they should benefit from the anticipated boost to consumer spending caused by lower oil prices.

The oil price slide is "not going to be a big deal" for JPMorgan, Dimon said.

Dimon did such a good job of calling the last recession in advance that I think that we all can rest easy based solely on his judgment, right? Yeah, that's what I thought, too.

Even if it's unlikely that oil-related industry woes will, alone, take the US economy down another black hole, you have to wonder whether, coupled with the global stock market retreat caused by China's reckless debt-funded economic expansion finally grinding to a halt and sliding backward, and what the ripple effects of that might be, if now might be the time to pull the plug, while the US economy, while not partying like it's 1999, sure as heck isn't slumbering like it's 2009. It's at least worth more than a passing thought.