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.

De Novo Deep Freeze Thawing? Not So Fast!

2016-01-31T21:54:00-06:00

Although SNL's Nathan Stovall tantalizes readers with the headline "De novo market could be warming up," I think that--reading between the lines--the De Novo Deep Freeze of the past 8 years is not going to be thawing this year.

Stovall cites the recent de novo charter approval of California's Core Commercial Bank. However, that bank's investment adviser's CEO, Edward Carpenter, while stating his belief that "you can expect to see more applications in the relatively near future," warns that the path to approval of a de novo charter is a rocky one.

[T]he application process for de novos is "considerably more difficult" and requires much greater preparation now than before the credit crisis...

[...]

"We believe that a new bank requires more capital than it did in the past. It requires a stronger and deeper management team than it did in the past. And it needs to make a more persuasive case than was often made in the past about community need."

Core Commercial, like the two other most recent de novos, Pennsylvania's Bank of Bird-in-Hand and New Hampshire's Primary Bank, "plans to target a fairly narrow customer base as well, catering to small and medium-sized businesses that might feel disenfranchised by the nation's largest institutions." I assume that the geographic market area is also relatively focused, and that the applicants had to prove with more than lip service that the community was not being adequately served by existing financial institutions.

While Carpenter seems optimistic (and, I'm sure, stands ready to assist other potential clients with their de novo needs), others, including some regulators, are less pie-eyed.

Candace Franks, commissioner of the state banking department in Arkansas, acknowledged that de novo banking activity certainly slows during a recession, but said prior downturns have been followed by a "generous" era of de novo applications. She said that certainly hasn't been the case this time around. Franks, the immediate past chairman of the Conference of State Bank Supervisors, said the lack of de novo activity is "very concerning to us," particularly in rural areas like Arkansas, where community banks serve as the engine of small business activity.

Some observers have argued that regulators were hesitant to grant new charters since many banks that failed during the crisis were de novos formed in early 2000s. The Federal Reserve discussed the issue on a handful of occasions. Robert Mahalik, director of applications at the Federal Reserve Bank of Dallas, said at a conference in April 2014 that he saw no hint that new charter activity or approval would be on the near horizon.

Stoval also discusses other disincentives that may restrain a de novo deluge.

While regulators might be easy to blame for the dearth of de novos, Stevens noted that bankers have not painted a very attractive picture for parties considering entering the industry, often complaining about heightened regulatory burdens. Such rhetoric could serve as a deterrent to potential investors.

Some advisers say there simply are not many investors looking to form new banks. DD&F Consulting Group President Randy Dennis, who has helped launch a number of de novos in his career, said there is a whole new breed of investors that want to put money to work in the banking sector, but some are concerned they will not be able to receive regulatory approval. He further said the higher capital requirements facing de novo banks have limited investor interest.

[...]

...Tom Brown, longtime bank investor and CEO of Second Curve Capital LLC, said at a conference in mid-November that he understood why there is so little investor interest in forming a new bank charter. He believes the capital constraints on de novos make it difficult for investors to earn adequate returns on their capital.

"Who in their right mind would start a bank today? The FDIC requires $35 million in capital to start a bank. And no one can pencil out an annual rate of return on $35 million in the next five years, so you're not seeing new chartered banks," Brown said at the event.

Well, obviously the investors in Core Commercial, who we presume are not insane.

Noted bank attorney Walt Moeling of Bryan Cave also is cautiously optimistic. He thinks the prospects of additional de novo applications is "real," but that there numbers will be far less than in the past.

All the observers seem to agree that the application process will not be easy. The organizers will need to present a convincing case, based on hard data, of the need for the new institution. Capital will be king, and as Tom Brown asserts, the more capital required, the more difficult it is to earn a decent return on equity, especially when private investors have places to place their capital where the returns are larger, quicker. Management will also be critical, with both expertise and probity playing critical roles. Finally, the application process is likely top much more time-consuming and expensive than it ever has been.

And, of course, once the doors are opened, what you have is a community bank, trying to make money in a Post-Franken-Dodd world chock-full of Maxine Waters, Elizabeth Warrens, and other "progressive" ideologues who will look over your shoulder 24/7/365 to "guide" you on the path to righteousness, if not necessarily to profitability.

Lawmen Sue To Stop The (Reefer) Madness

2015-03-23T07:09:37-05:00

You would think that when all a state wants to do is let weed-lovers light up, their neighbors would just chill and let them have serious conversations, along the lines of the following:

The Dude: It's like what Lenin said... you look for the person who will benefit, and, uh, uh...

Donny: I am the walrus.

The Dude: You know what I'm trying to say...

Donny: I am the walrus.

But, no. The neighbors can't get their redneck noses out of Colorful Colorado's smokin' hot ganja biz.

A few months ago, Oklahoma and Nebraska sued Colorado in the US Supreme Court, asking Clarence Thomas to speak up loudly enough, and Stephen Breyer to venture back from his exploration of Martian law long enough, to stamp out Colorado's raging forest fire of legalized recreational pot sales. The wind blows east and south out of the Rockies, and those states apparently are worried about the deleterious effects on their citizens of second-hand smoke. Banks in Colorado didn't need another reason to avoid banking the recreational MJ business, but that lawsuit certainly didn't lessen the risk.

Recently, Sheriffs in Nebraska and Kansas, joined by six traitorous Colorado sheriffs, filed yet another lawsuit against Colorado's governor (appropriately named "Hickenlooper") over the same issue (legalization of recreational pot sales).

“This suit is about one thing — the rule of law,” Larimer County Sheriff Justin Smith said in a news release. “The Colorado Constitution mandates that all elected officials, including sheriffs, swear an oath of office to uphold both the United States as well as the Colorado Constitutions.”

The last time we saw federal supremacy thrown around so much it involved the OCC's march-to-the-sea over the blazing husk of the 10th Amendment in defense of the right of national banks to thumb their noses at guys like Eliot Mess, the"Sheriff of Wall Street." At that time state bank regulators and law enforcement officials weren't so keen on the federal supremacy clause (or the National Bank Act). Now that Franken-Dodd and the Cuomo v. Clearing House Corporation decision have put chinks in the preemption armor of national banks, that particular reason for hating federal preemption doesn't have as much steam. People who hate federal preemption in this situation are not people who want to save the state from those who would use federal preemption to break state laws, but people who want to break federal law in order to engage in a state-sanctioned activity.

Some legal experts think that the latest lawsuit has a chance of success of somewhere between "slim" and "none."

Sam Kamin, a law professor at the University of Denver, was skeptical of the sheriffs’ argument. He said no law requires local officers to act as de facto federal drug agents.

“Of the four (lawsuits), this is the one with the least merit,” Kamin said. “They have targeted not just the (marijuana store) regulation piece but they’re also essentially saying Colorado can’t legalize marijuana. No one has ever gone that far.”

Even if true, that leaves three more lawsuits that continue to add to the risk of banking marijuana businesses, whether or not they are "legal" under state law.

No Regrets

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

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

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

Such cases have been rare up to this point.

Such cases have been rare up to this point.

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

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

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

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

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

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

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

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

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

Texas Banking Commissioner Chuck Cooper put it nicely.

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

So are we.

CFPB's Mini-Me

2015-01-25T21:39:00-06:00

Melanie Brody and Anjali Garg of K&L Gates warned us last week about a new trend in perils for those who wish to provide financial services to consumers.

At the end of 2014, the New York Department of Financial Services (“DFS”) became the first state regulator to settle a case using its authority to enforce the federal Consumer Financial Protection Act (“CFPA”). In Benjamin M. Lawsky, Superintendent of Financial Services of the State of New York v. Condor Capital Corporation and Stephen Baron, the DFS claimed that indirect auto lender Condor Capital Corporation (“Condor”) and its sole shareholder, Stephen Baron, violated both New York State law and the CFPA’s prohibition on unfair, deceptive, or abusive acts or practices (“UDAAP”) by, among other matters, overcharging consumers and deceptively retaining credit balances due to them. The settlement requires Condor and Baron to admit to New York and federal violations, pay an estimated $8-9 million in restitution and pay a $3 million penalty, and surrender all of Condor’s state lending licenses.

Although several state attorneys general have leveraged Dodd-Frank’s state action provisions to enforce and seek remedies under the CFPA, the Condor case marks the first time a state regulator has used them, and it will likely prompt other state regulators to do the same. In his press release announcing the settlement, Superintendent Lawsky said, “This case demonstrates that the Dodd-Frank Act provides a powerful new tool for state regulators to pursue wrongdoing and obtain who were abused. We hope other regulators across the country will consider taking similar actions when warranted."

Not content to destroy financial service business in New York, Gentle Ben Lawsky wants other states to join in the fun. An added attraction for state regulators is the press this type of unprecedented action achieves, which is useful in establishing your bona fides as the logical successor to Eliot Mess as "The New Sheriff of [Insert Name of Street Here].

The entire client alert is worth reading and I encourage you to do so. It explains concisely the types of claims that state regulators and attorneys general can bring under Franken Dodd and the remedies (pain) that they can pursue against financial institutions. For those with shorter attention spans, here are Ms. Brody's and Garg's take-aways (with footnote references omitted):

First, subject to the limitations applicable to national banks and federal savings associations, the provisions bestow much of the CFPB’s enforcement powers on every “state attorney general” and “state regulator” in the United States. A pessimistic person might think of this as the creation of hundreds of mini-CFPBs. As if this were not alarming enough, the state action provisions do not contain language limit ing state actors’ authority to residents of their own states, and a number of state actors, including the New York DFI, have already used the provisions to seek remedies for out-of-state consumers as well as their own residents.

Equally or maybe even more concerning is that the CFPA’s UDAAP prohibitions are broadly defined and could potentially be used to challenge a wide range of conduct that, in many cases, is not expressly prohibited by state law. Although most states have a statutes prohibiting unfair and deceptive acts and practices (“UDAP”), few, if any, expressly prohibit “abusive” conduct. Further, in many cases, state regulators do not have authority to bring state UDAP claims. Moreover, whether or not a practice is viewed as a UDAAP is often influenced by subjectivity. Ideally, state actors will align their UDAAP interpretations and enforcement policies with those of the CFPB and Federal Trade Commission, thus giving institutions a more uniform view of the types of conduct that could be challenged; theoretically, however, the state actor provisions could open institutions up to hundreds of subjective interpretations.

Finally, the CFPA’s remedies are considerably stronger than the remedies most state actors can seek under state law, providing a means for state actors to both recover very large monetary awards as well as severely disrupt an institution’s business. In the Condor case, for example, in addition to the financial restitution and penalties, the New York DFS obtained a temporary restraining order that stopped Condor from obtaining new business in any state, froze the company’s assets, enabled the DFS to inspect Condor’s documents and access Condor’s business premises and storage facilities, and allowed the DFS to secure and take control of the business’s premises. Ultimately, the DFS achieved a settlement that will completely shut Condor down and obtain penalties and restitution for the company’s consumers.

Bad actors need to exit the stage. The problem with Franken Dodd is that it puts a lot of power in the hands of true believers, with inadequate checks and balances on the natural consequences of the truth of Lord Acton's assertion that power corrupts. While the author's of the article rightly advise financial institutions to take a close look at their compliance capabilities, I also think that banks and other financial institutions that don't have the resources to devote to a "robust" compliance infrastructure (which will be trying to sail the fog-shrouded waters of "abusive" and "unfair" without running aground) might also be advised to take a step back and reconsider the extent of their involvement in providing consumers with financial services. These mine fields are becoming increasingly dangerous.

More Depth On Legal Issues Surrounding Marijuana Banking

2015-01-04T21:58:00-06:00

University of Alabama Law Professor Julie Anderson Hill has posted a draft of a work-in-progress, an article for an upcoming Case Western Law Review Symposium Issue, entitled "Banks, Marijuana, and Federalism." In it, she explores the legal issues surrounding banks providing banking services to state-legal marijuana-related businesses in more depth than you'll see on the pages of this rag. While it requires some polishing (including the addition of a specific discussion of Fourth Corner, the Colorado cannabis co-op, in a section in the later portion of the article that she discusses in passing earlier in the article), I found it to be a valuable addition to the analysis of the risks to banks that want to provide services to such businesses.

Here's a portion of the "abstract" of the article provided by Professor Hill, which summarizes her approach and conclusions:

This article explores the root of the marijuana banking problem as well as possible solutions. It explains that although the United States has a dual banking system comprised of both federal- and state-chartered institutions, when it comes to marijuana banking, federal regulation is pervasive and controlling. Marijuana banking access cannot be solved by the states acting alone for two reasons. First, marijuana is illegal under federal law. Second, federal law enforcement and federal financial regulators have significant power to punish institutions that do not com-ply with federal law. Unless Congress acts to remove one or both of these barriers, most financial institutions will not provide services to the marijuana industry. But marijuana banking requires more than just Congressional action. It requires that federal financial regulators set clear and achievable due diligence requirements for institutions with marijuana business customers. As long as financial institutions risk federal punishment for any marijuana business customer’s misstep, institutions will not provide marijuana banking.

Among the many fascinating (to a nerd like me, at any rate) observations made by Professor Hill was the following potential problem with the Federal Reserve approving Fourth Corner's access to the federal reserve payments system:

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.

As long as they don't process payments for payday lenders, online dating services, or Smith & Wesson, they should be safe from prosecution under the "prosecutorial discretion" mantra chanted by the present executive branch monks until the current administration vacates the White House. The problem with that approach is that the statutes of limitation will not have expired by the time new Attorney General Ted Cruz decides to wage a little MJ jihad on every Justice Department and federal bank regulatory agency official who looked the other way when some bankers in Colorado or Washington lit up a fat boy and followed the money.

I also agree with her conclusion that, while action by the U.S. Congress is necessary, it's not enough. A change in attitude by federal bank regulators will also be required, whether of not we get a federal legislative fix. If due diligence requirements make it too risky and expensive to bank these businesses, then marijuana businesses are going to find themselves continuing to face problems that only a third-party payment processor or payday lender could truly appreciate.

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.

Ben Goes Private

2014-11-13T13:58:17-06:00

One of our favorite regulators, "Little Ben" Lawsky, has let word slip out that he's planning to leave his post as New York Banking Jeffe next year to take a job in "the private sector." He won't reveal exactly what part of "the private sector" he intends to inflict himself upon. However, we've long been a fan of his broad base of experience in how businesses, especially banks, operate on a granular level. The Wall Street Journal linked above sums that "private sector" experience up nicely.

Mr. Lawsky previously served as Gov. Cuomo’s top aide during both his governorship and his term as New York State Attorney General. Prior to that, Mr. Lawsky was a prosecutor in the Manhattan U.S. attorney’s office and served as chief counsel to New York Democratic Senator Charles Schumer.

If he wants to fill the small slippers of his idol, Elliot Mess, he might be aiming for a short stint as a talk show host that no one watches, or, perhaps, as a busboy in a brothel. However, if he intends to really make his own mark on the world, we have the following suggestions of employment for which we assume he is well qualified:

Whatever private sector job he chooses, we're absolutely certain that he'll simply nail it.

Another Non-Problem Not Resolved

2014-06-15T21:55:00-05:00

New York State Superintendent of Financial Services, Gentle Ben Lawsky, recently issued a press release that announced a solution to a "major" problem that did not exist.

"In discussions with our Department, Ocwen has agreed to no longer seek gag rules as part of settlement agreements or loan modifications with borrowers,” Benjamin Lawsky, superintendent of Financial Services, said.

“Additionally, the company has stated it will not enforce gag rule provisions in existing agreements. We are gratified that Ocwen worked constructively with us to resolve this matter, and our Department intends to review this issue at other financial institutions,” Lawsky added.

The Chief Investment Officer of Ocwen, John Britti, shed some light on how pervasive this instance of consumer abuse had become.

“Ocwen does not require non-disparagement clauses in mortgage loan modifications in the absence of any borrower legal claims, which is the case in the overwhelming majority of our modifications.”

Britti did note, “In the rare occasion where there is a legal dispute – and these represent only a fraction of one percent of the loans in our portfolio – more often than not we are able to work out an amicable resolution with the borrower. In those cases, we generally request the settling party to agree to refrain from publicly disparaging the company in the future.”

And it is this point that Ocwen is fixing.

“To clarify, Ocwen has never required non-disparagement clauses for mortgage modifications. Our agreement with the DFS deals with the highly unusual situation where there is a legal settlement agreement with a borrower, representing a fraction of one percent of our portfolio," Britti said in a statement on the matter.

Anyone with a shred of understanding of civil business litigation in the United States, and with a scintilla of intellectual honesty, would acknowledge that non-disparagement provisions are common in litigation settlement agreements generally, not merely in litigation that involves residential mortgage loans. I guess that "anyone" would not include Gentle Ben Lawsky. That's not surprising, since, as we've previously noted, his hands-on business and private practice litigation experience is severely lacking. On the other hand, he's got plenty of political and bureaucratic experience, and it's self-evident that he knows as much as his role model, Eliot Spitzer, about issuing press releases full of preening self-promotion.

Unless Ocwen is flat-out lying, Ocwen required non-disparagement provisions only in connection with litigation settlement agreements, where the servicer had been sued by the borrowers and the parties were settling that litigation, a settlement that may involve a loan modification. Again, this is not an unusual provision to include in the settlement of any litigation. Moreover, loan modifications where litigation was involved included only a small percentage of all loan modifications. In all other loan modifications, a non-disparagement provision was not required by Ocwen.

Apparently, Lawsky has succeeded in having Ocwen agree to cease doing something that it was not doing in connection with the overhelming number of loan modifications, and to agree not to enforce existing non-disparagement provisions in the small fraction of loan modifications that involved the settlement of civil litigation, which Ocwen is willing to do because the number of affected loans is inconsequential and it's got bigger problems with Lawsky to address.

Great job, Ben! Of course, to use the term "or" in the phrase "Ocwen has agreed to no longer seek gag rules as part of settlement agreements or loan modifications with borrowers” is more than a tad misleading, since Ocwen wasn't seeking "gag rules" (whatever that means in the context of an agreement between two private parties) in connection with loan modifications unless a settlement agreement was involved. Where's UDAAP when you need it? Oh yes, it doesn't apply to regulators, only to the regulated.

Empty Gestures

2014-06-10T21:50:00-05:00

In a flurry of activity right before the current year's legislative session ended, the Colorado Senate and House passed, and the Colorado Governor signed, a law (previously discussed here) that creates a form of "cooperative bank" that is intended to finance the state-legal, federal-illegal marijuana business in Colorado, the first state in the country to go "all in" on legalizing recreational marijuana use. There's just one slight problem with the scheme: it hasn't got a prayer of going anywhere.

“We don’t think it will do anything other than allow the state to say, ‘We’ve tried everything we can think of and it won’t work, so Congress it’s now up to you,” said Don Childears, president and CEO of the Colorado Bankers Association.

“They’ll never get access to the Federal Reserve System, and if they can’t do that, the co-ops will never be formed,” Childears said.

The final version of the law requires the approval of the Federal Reserve Board before the first cooperative can open its doors for business. What possible political upside is there for the Fed to approve the funding of the state-legal but federal-illegal marijuana business in Colorado?

[sound of crickets chirping]

No, there's nothing but potential downside to the Fed in that decision as long as the sale of marijuana remains illegal under federal law. Getting the Colorado marijuana business off a cash-only basis would make tracking and taxing the business much more easy, and would limit the potential criminal risks of, and to, such businesses, but from a public perception standpoint, the Fed has absolutely no reason to stick it's neck on the chopping block so that rabid opponents of easing restrictions on marijuana businesses, like Dianne Feinstein (yes, THAT Dianne Feinstein), can jump down its throat, haul it before Congressional hearings, and generally screw with it in public.

No, what's needed is that either Congress needs to change federal law or the Attorney General needs to remove the substance from the list of dangerous substances. The latter course would require a public process that would involve the input of other federal agencies, as well as an expected raft of criticism from drug law liberalization opponents. What's in it for Eric Holder to undertake that exercise in self-abuse?

[sound of crickets chirping]

As to the chances of Congress changing the law, Childears says they are slim to none.

Childears said he wasn’t optimistic Colorado’s new cannabis co-ops law would motivate the U.S. Congress to tackle the thorny issue.

Efforts to legalize marijuana banking has the support of only 7 percent of theU.S. House of Representatives now, He said.

If four states were to legalize marijuana for either medical or recreational purposes every election, it would take at least six years to get to a level where Congress would take it seriously, he said.

Childears said he visited recently with U.S. House Majority Leader Eric Cantor, R-Virginia, who told him that he didn’t see marijuana banking as a priority for most members of Congress.

“Cantor told me a number of them feel that, ‘You made your bed, now lie in it.’ It’s a Colorado issue,” Childears said.

You know, with all the other problems this country faces, Cantor's feelings are not without cause.

So, why was the law passed and signed? Marijuana business spokesperson Mike Elliot explains.

“HB 1398 is likely not a solution to the banking problem, but an opportunity to move the conversation forward,” Elliott said.

Thus far, this has been a decidedly one-sided conversation. No one outside of Colorado appears to be interested in listening.