Boom, Bust & Recrimination: A Consumer Finance Investigation and Enforcement Blog

Citigroup Settles With SEC

2011-10-20T08:48:00.003-04:00

Yesterday, the SEC and Citigroup reached a $285 million settlement amid allegations that a Citi-owned broker-dealer had duped investers into a $1 billion off shore deal involving collateralized debt obligations ("CDO"). As reported here, CDOs are bundles of bonds that are tied to the performance of mortgages and other loans.

CDOs are one of the many financial products that performed well when the real estate market was booming but abruptly tanked when the market turned in 2008 and 2009. They are credited with being one of the market creations that nearly destroyed the global financial system. Are we still feeling the effects on a global scale? Ask Greece . . . or Portugual . . . or Britain for that matter.

From a legal perspective, Citi's problem wasn't that it sold a product that ultimately failed. It's problem, as alleged by the SEC, was that it used a subsidiary in marketing the products to its investors in order to give the appearance of an arms length transaction, and then Citi bet against the investment. In short, it was a "win-win" for Citi, which is not information that its investors were given.

With this settlement, Citi joins Goldman Sachs, who last year paid $550 million to resolve SEC charges, and J.P. Morgan Chase, who last year agreed to pay $153 million. To date, over a billion dollars has been paid to settle SEC related charges arising out of banking practices that allegedly contributed to the market melt-down.

Surprisingly, the linked article stops short of reporting that on October 28, 2008, collectively, Citi, Goldman Sachs and J.P. Morgan Chase received approximately $60 billion in TARP funds, which are commonly considered and referenced as a public "bailout." So, one could argue that they have merely repaid 1/60 of that money. Whether or not these settlements should hurt the institutions; whether they do hurt; and whether or not the United States can afford to make them hurt are three questions that continue to be open for debate, but some level of recrimination is happening...and has been for a while. Too big to fail? Maybe. Maybe not. But, necessary? It would appear so.

We're Back!

2011-09-23T09:00:00.003-04:00

After a short late-Summer hiatus, we are back to reviewing the consumer finance investigation and enforcement scene and are gearing up to tell you all about it. First though, a quick celebration. Approximately one year ago, BB&R launched, and we had no idea what to expect. In the ensuing year, we have added approximately 60 posts and have received over 7,000 hits. So, for those of you who have paused to read something that we have written or have clicked through to some of the links that we have provided. We appreciate you, and hope that you will enjoy the new content this year.

Now, let's get up to speed:

1. When we left you, Richard Cordray had just been nominated by the President to be Director of the Consumer Finance Protection Bureau. Congress took a late Summer break and returned to convene confirmation hearings in September. Here, Bloomberg brings us up to speed on the goings on at the hearings. Good stuff, unless you want to see something actually happen.

2. Do you find yourself wondering which rules the CFPB is now enforcing? They have been specified. A list of transferor agencies whose existing rules the CFPB now enforces can be found, here, and the Federal Register has published a list of the specific rules, here. The CFPB has not yet begun its own rulemaking, but it would be a mistake to confuse this agency with one that has no power, because focused enforcement of the existing rules is itself a monumental task that could bring about substantial change in our consumer finance industry. And, try not to forget that all 50 State Attorneys General are now formally empowered to enforce the same rules. If that doesn't make the hair stand up on the back of your neck, then you just aren't paying attention.

3. Admittedly, we are a bit late reporting on this, but if you have not yet read Fourth Circuit Judge Wilkinson's opinion in Horvath v. Bank of New York, et al., then you should take the time to read the opinion. It concerns a legal challenge to a foreclosure that included claims arising out of all of the arguments de'jour concerning mortgage fraud and the general ills of the industry. Writing for a unanimous panel, Judge Wilkinson notes that the arguments de'jour are merely "distractions" in what is really a "simple commercial case" that involves negotiability of commercial instruments. It is truly a paean to the principles of negotiable instrument law, and a fine example of a court staying true to its mission. In a couple of particularly meaningful moments in the opinion, the Court: (1) disposes of the argument that, by “splitting” the note and deed of trust by transfer of the note to an entity other than the original lender, the note holder has somehow lost the right to foreclose on the deed of trust, and instead the Court held that assignment of the note in blank, carried with it the underlying security set out in the deed of trust and gave the holder the right to foreclose on the security; and (2) denounced as absurd the notion that somehow the term “Lender” in the Deed of Trust could only permit the original lender to invoke the power of sale. The court concluded that the term “Lender” must be construed as applying to any subsequent purchaser of the note and deed of trust. We don't see a many opinions like this. It is a must read.

We at BB&R continue to be amazed by the ripples...wave-action, really, that continue to flow out of the financial meltdown that occurred three years ago. We have come through one recession and appear poised to fall into a second. Most economic metrics are not encouraging, and a political solution, if one exists, seems impossible in the present partisan climate. The Boom is clearly over. We aren't sure whether the Bust has it its floor just yet. But, we are certain that the recriminations will continue. Good times.

Teachers Teach...Will the Director Listen?

2011-07-21T14:16:00.005-04:00

Rare is the day that we post twice, but the Designated Transfer Date is not just any "Thursday," and the open letter that four Harvard professors wrote to the Director of the CFPB is sufficiently interesting that we thought it worth bringing to your attention without commentary...other than to say that there may be a reason these folks are Harvard professors. Read this. It's worth the time, and let's hope that Professor Warren and General Cordray read it as well.

Here We GO!

2011-07-21T08:58:00.004-04:00

Well, it's here. The Designated Transfer Date has arrived. Don't believe us? Take a look here, and here, and here. And, were it not for all the predictable summer time talk about the debt ceiling, Rupert Murdoch and, ahem, Casey Anthony, the front page of every news paper and major news outlet would be touting the fact that today is the Designated Transfer Date. Instead, there isn't even a reference on the New York Times web edition front page. However, if you are interested in how the Bureau has evolved from the pages of Dodd-Frank, Article X, into the functioning agency that launches today, this article, authored by Elizabeth Warren, is a must read.

But wait you say, the Consumer Financial Protection Bureau does not have a Congressionally confirmed leader. It doesn't matter. And, wait you say, the Bureau doesn't have all of the powers that Congress intended it to have when Dodd Frank was passed one year ago today. Again, it doesn't matter. Today is the day that the lights go on, and all of the transferees from other enforcement agencies officially begin their new quest for equity in the realm of the consumer finance industry.

Never mind that the Bureau has been quietly active for seven or eight months. Never mind that Elizabeth Warren and her deputies (See Richard Cordray) have been speaking before any group of business people numbering more than three for the past six months, and never mind that the Bureau has been playing an active an important role guiding settlement negotiations and deals in connection with the great robo-signing scandal of 2010. No...today is the day everything changes. It is the day that we will all look back on as the dividing line between the "good 'ole days" and the hard life. For those of you who haven't seen "Armageddon," this scene sort of typifies the effect that many industry insiders believe the Bureau will have on the consumer finance industry. And, many politicians warn that no Bureau director will be confirmed until and unless certain powers that Dodd-Frank conferred upon the Bureau are rolled back. Principally and, again, predictably, the politicians are concerned that the Bureau is too independent...uh, we mean too powerful. Now, the sound bytes that you will hear will include the word budgetary "oversight," but the real issue is control. He who holds the purse strings also holds the power...right? If unclear on that, then just ask the chair of the House Ways and Means or Senate Appropriations Committees. With the Bureau's budget being calculated as a percentage of the Fed's overall budget, it is completely independent of the Congressional budgetary hammer...and, thereby, independent of the work-a-day politics that we see from 5-11 p.m. nightly on CNN, FOX and MSNBC. But, budgetary control is not all that the House of Representatives wants. It also wants to force feed a five person panel to replace the position of "Director" of the Bureau. Really? A five person panel is a good idea to head up a government agency? Only the House could come up with such a completely lame brained idea. Without regard to whether we endorse the Bureau or its mission, this much is clear, if I were writing a blog post in which I describe the worst possible way to design a regulatory enforcement agency, it would start with...absolutely right...a "five person panel" directing it. Imagine if EPA or MSHA or OSHA were led by a five person panel? Could the Bureau become any more politicized?

To all this, we at BB&R echo Frankie Goes To Hollywood and say "Relax."First, the Bureau became a reality last summer, before the midterm elections. While the midterms changed a lot, they did not change the fact that Dodd-Frank was passed. They did not change the fact that Article 10 exists, and they did not change the fact that the intended architecture is an independent Bureau. If not independent, then it cannot fulfill its mission, because the fact is that consumers will never...ever...be on equal footing with the financial industry. Period. The Bureau's political independence may level the playing field a bit, but even complete independence wouldn't level it completely. Second, whether or not Richard Cordray is immediately confirmed, the Bureau will not be without leadership. Cordray, the former Ohio Attorney General who led the charge in the robo-signing scandal before losing his election last Fall and nearly immediately being pulled into the fold at the Bureau (and as an aside, anyone who believes that Cordray will be easier to deal with than Elizabeth Warren...well, there is this bridge that we would like to sell to you). Cordray will take the reins whether he is confirmed or not. In fact, as I write this piece, he is likely sitting in the same office, behind the same desk where the eventually confirmed Director will sit. Third, the Bureau has teeth. It has a budget, and money, and enforcement powers, and it has them with or without a confirmed director. Now, there may be some new rule writing and, thereby, new rule enforcement powers that will be delayed ("delayed," not precluded) by the "we won't confirm" tactics, but trust us there are plenty of regulations to be enforced until a confirmed director takes the oath.

The Bureau is our new reality in consumer finance. Its first enforcement action(s) will come within days or weeks. The yellow caution flag has been lifted; we are now under green; and it's about to get interesting.

Game Changer: New York State Appellate Court Issues Decision With Potentially Devastating Impact On Mortage Industry

2011-06-16T17:26:00.007-04:00

As any proud member of the Hokie Nation knows, special team's success can devastate your opponents by rapid momentum reversal and scoring. On June 13, 2011, the Supreme Court for the State of New York, Appellate Division, issued an opinion in the case of Bank of New York v. Silverberg that could have the same effect, only this time it is defaulted borrowers that are blocking mortgagees' punts.

The case involved an effort by Bank of New York ("BNY") to foreclose a residential mortgage where BNY was the undisputed holder of the mortgage, but where BNY was not the holder of the note. The borrower defendants successfully argued that BNY had no standing to foreclose because, in effect, a mortgage without a note is a nullity. Mortgages, they argued, are merely security for a note and, without proof of the existence of a debt owed, BNY could not demonstrate an interest in the action sufficient to confer standing. Thus, for the moment at least, the borrowers prevailed.

While the case was ostensibly about standing and the elements required to foreclose on a mortgage, the most interesting and potentially devastating part of the case is related to how BNY came to be a mortgagee who did not also hold the note. Enter Mortgage Electronic Registration Systems, Inc. or "MERS" as it is more commonly known. For those of you who regularly live and work in this space, you are already familiar with MERS and may already be familiar with the issues raised by the Silverbergs in their dispute with BNY. For those that aren't the MERS system, its history, purpose, industry scope and the related importance of this case requires too lengthy an explanation for a reasonable blog post. However, Justice Leventhal does an excellent job outlining it in his opinion, and I commend his explanation and recitation to you.

What one must take from this decision are the following points: (1) it appears consistent with the law; (2) given the realities of the past 8-10 years in the mortgage industry, the practice of multiple sales of mortgages, the advent and practical implications (on record keeping) of securitized mortgages; (3) the misapprehension - by many - of the basic elements of assignment law and application of the U.C.C.; and (4) the fact that MERS is the mortgagee on something approaching 60 million mortgages in the United States; and (5) courts may not adjust the law of commercial paper and property rights merely because a generation in the finance industry devised a method to save money by bypassing local filing fees and streamlinging their ability to transfer mortgages.

If the logic and analysis in this case is picked up by judges and courts in other jurisdictions, and we believe that (at least to some degree) it will be, the impact upon mortgagees who are MERS assignees could be...well...at least as substantial as an ill timed blocked punt.

Now, to be clear, we at BB&R believe that BNY can take steps to "fix" the situation in which it currently finds itself vis-a'-vis the Silverbergs by obtaining the original note and convincing its current holder to assign it to BNY. However, that will require some effort and, if BNY or other mortgagees are required to do it with respect to all MER's assigned mortgages, it will require substantial effort and expense, and there is no guarantee that many mortgageds will even be able to identify the note holder so as to effect a transfer. If BNY is successful in finding the note and getting it assigned, then it can win. In the mean time, the Silverbergs keep their residence free of charge. Probably not a great trend for the real estate industry.

New Rules: Bring Originals

2011-06-15T17:59:00.002-04:00

In recent months, we have all read much about the thwarting of mortgage lenders' and servicers' efforts to foreclose on defaulted notes when judicial and quasi-judicial officers demand original notes and deeds of trust as evidence of an existing debt.

Initially, borrowers met with some sporatic success by pressing this "show me the note" defense. This defense entails borrowers that are actually in default contesting foreclosure proceedings by arguing that lenders and servicers produce the original note and deed of trust, implying that an authenticated but non-certified copy of both is somehow incompetent evidence of the existence of a debt. And, in the wake of the robo-signing scandal in which some lenders and servicers have been caught using affidavits that were signed in mass and without appropriate review, some courts have embraced the "show me the note" defense.

However, in at least one trial court in North Carolina there now exists a perceived requirement that a foreclosing party's evidence of existence of a debt is insufficient as a matter of law unless it includes the original note and deed of trust. In the particular referenced court, it was not the borrower that raised the issue. Rather, the court did it, suo sponte. This despite an appellate court decision that was brought to the court's attention, holding that an affidavit supporting the existence of a debt and that authenticates copies of the note and deed of trust is sufficient and competent evidence of existence of a debt.

So, for any North Carolina practitioners who read this post, "new rules" may be afoot in North Carolina, and they may stay there for a while, so if the original note and deed of trust are available, it may be a good idea to bring them to any foreclosure hearing or appeal...just in case. However, the problem is that many of these mortgages were bought and sold several times. Some of them were even sliced up and made part of the dreaded securitized mortgages that brought down Bear Stearns, Lehman Bros. and that almost brought down AIG and a slew of other major banks. So, as one might expect, actually putting hands on an original note or deed of trust may be a bit more difficult than it sounds.

Meanwhile, the borrower opposing the foreclosure in the North Carolina court...the one that hasn't paid a penny against the loan since 2009 avoided foreclosure (at least today) and, for now, the lender continues to carry the debt.

Road Block!

2011-05-10T07:39:00.005-04:00

In a letter to the White House that was surprising only in that it did not arrive earlier, Senate Republicans have announced their intent to filibuster ANY appointee proposed by the White House to lead the Consumer Financial Protection Bureau.

With a scant 72 days remaining before the Designated Transfer Date, the problem, it seems, is not "who" will be appointed director but rather "whether" there should be a director. The Republicans' letter is focused on accountability and budgetary oversight. Specifically, their wish is to revise the architecture of the CFPB to allow for a board of directors to replace the position of director. Equally importantly, they also seek to move budgetary control away from Treasury and give it to Congress.

Credit.com reported on the filibuster threat here, and in doing so one of its reporters called the development "regrettable." Frankly, we do not find it nearly so regrettable as we do predictable. Republican thought leaders have been voicing these concerns for months and, frankly, since they cannot block confirmation, the filibuster is the only weapon that they have to use as leverage to negotiate any change. Politics aside, unless the intent of the letter is to begin a dialogue as to whom should be the appointee (and to make sure that Republican voices are heard and considered) it seems to us that the letter is exceedingly unlikely to achieve anything more than to become confetti for the next D.C. parade. Point being, the CFPB has been and is being implemented by an unconfirmed "appointee." Elizabeth Warren is widely regarded as the President's top draft pick to run the Bureau. If Republicans stonewall by employing the filibuster, then it will give the White House the cover that it requires to merely continue Ms. Warren in the job that she has been performing for several months without Senate confirmation. By comparison, the liklihood that the CFPB will be run by a board of directors or that Congress will be given budgetary control approaches zero.

However, if Republicans are using the letter to start a public conversation that will end with negotiation over who the nominee should be, then that just might work. With sincere respect to Credit.com, we wouldn't call that regrettable, we would call it smart strategy that may effect moderate leadership at the CFPB.

AT&T v. Concepcion: Has the worm turned?

2011-04-27T15:00:00.003-04:00

AT&T v. Concepcion (which has nothing to do with the map of the Paraguaian province to the left) is a case that came down today from the U.S. Supreme Court. It has considerable significance in the world of consumer class action litigation and, by extension, also in the world of consumer finance. Access to the briefs and other materials considered by the high court can be found on the SCOTUS blog, here.

At its core, Concepcion holds that the Federal Arbitration Act preempts a California law that rendered unenforceable any arbitration clause that contained a class action waiver. In other words, prior to Concepcion, California courts more or less treated availability of class litigation as more of a right than a matter of procedure, and arbitration clauses that contained class action waivers were seen as a denial of the right to litigate (whether in court or before an arbitrator) as a class. Today, the Supreme Court ruled otherwise. What makes Concepcion such a meaningful case is that jurisprudence surrounding enforcement of arbitration clauses has been evolving at the state level around the country over the past decade, and many states, including BB&R's own North Carolina, have controlling cases with rules that are similar in many respects to California's pre-Concepcion rule. All of those states are now faced with determining how Concepcion applies to their rules related to contract unconscionability.

The Wall Street Journal blog seems to be of the opinion that Concepcion will serve as a high water mark of sorts for consumer class action litigation because, it implies, everyone will run quickly to rewrite their contracts to include both arbitration clauses and class action waivers. The idea is that companies are more than happy to expose themselves to individual arbitration claims for $30.75, but a putative class of 2,000,000, each with a claim for $30.75 is an entirely different animal altogether. Consider this, if you were a consumer would you be more likely to initiate an arbitration over $30.75 or eat it. Conversely, if you were a consumer that received an "opt out" notice regarding a class action settlement related to the $30.75 claim that you had against ABC Bank, would you be more or less likely to opt in when all you had to do was sign your name and await a check in some amount? Regardless...says the Supreme Court.....if you execute a contract and it contains an arbitration clause and a class action waiver, you will not avoid enforcement of the arbitration clause due to the mere existence of the class action waiver, even if your claim is only for, say, $30.75.

Now, our friends at the WSJ make good points, and Concepcion is certainly a hurdle that the class action bar will have to clear, but consumer class actions aren't dead...not by a long shot. The people who bring and litigate those claims are among the most creative in the legal world. They will find the weaknesses in Concepcion, and they will exploit those weaknesses. Turns out, hundreds of millions of dollars can serve as quite an incentive.

Federal Banking Enforcement Up Sharply in 2010

2011-04-26T17:50:00.004-04:00

Last week, the Bureau of National Affairs printed a must read review of the 2010 enforcement actions by federal banking agencies. The article, entitled "2010 Bank Enforcement Actions: A Hardened Government Attitude" contains a sobering account of the federal government's 2010 enforcement activity, penalties assessed, consent orders executed and, perhaps most importantly, enforcement trends as compiled by the authors.

That the article was not published until mid-April 2011 is likely not so much a comment on its importance (it is important) as a comment on the amount of time required to obtain the enormous amounts of information and data that were crunched into nine single spaced pages. Bottom line: If you work in the world where finance and law intersect, represent players in the financial industry, are interested in understanding why "recrimination" is in the title of this blog, or would like a view into what we can expect from the Consumer Financial Protection Bureau and/or the states' Attorneys General in the coming months and years, this is required reading. Thanks to my partner and leading banking law expert, Don Lampe for turning us on to this excellent piece of journalism.

If the current trends continue, it appears that our major banks have no more chance to avoid recrimination and enforcement than the Pink Floyd's plaintiff children have to avoid "education" and "thought control" in "The Wall Part 2." And, at the risk of stretching the metaphor, the "teacher" will not "leave those kids alone."

CFPB and NAAG release joint statement of principles

2011-04-12T13:20:00.003-04:00

Yesterday, the CFPB and the Presidential Initiative Working Group of the National Association of Attorneys General announced a joint statement of principles, which the Consumer Finance Protection Bureau describes as "the first step in forging a new partnership between federal and state officials to protect consumers of financial products and services." The statement, which is available here, sets out the following principles that have been agreed between and among NAAG and the CFPB:

1. Develop joint training programs and share information about developments in federal consumer financial law and state consumer protection laws that apply to consumer financial products or services;

2. Share information, data, and analysis about conduct and practices in the markets for consumer financial products or services to inform enforcement policies and priorities;

3. Engage in regular consultation to identify mutual enforcement priorities that will ensure effective and consistent enforcement of the laws that protect consumers of financial products or services;

4. Support each other, to the fullest extent permitted by law as warranted by the circumstances, in the enforcement of the laws that protect consumers of financial products or services, including by joint or coordinated investigations of wrongdoing and coordinated enforcement actions;

5. Pursue legal remedies to foster transparency, competition, and fairness in the markets for consumer financial products or services across state lines and without regard to corporate forms or charter choice for those providers who compete directly with one another in the same markets;

6. Develop a consistent and enduring framework to share investigatory information and to coordinate enforcement activities to the extent practicable and consistent with governing law;

7. Share, refer, and route complaints and consumer complaint information between the CFPB and the state attorneys general;Analyze and leverage the input they receive from consumers and the public in order to advance their mutual goal of protecting consumers of financial products or services; and

8. Create and support technologies to enable data sharing and procedures that will support complaint cooperation.

Our view is that the two organizations have already exhibited signs of being both serious about this cooperative endeavor and relatively effective in pulling it off. One need only look to the Financial Services Committee's concern regarding the CFPB involvement and consultation with the associated group of 50 attorneys general in connection with the national mortgage documentation issues to see evidence of that effective cooperation.

Ms. Warren....or Marshall Dillon

2011-04-05T17:06:00.006-04:00

For for the unindoctrinated, visiting your grandparents' homes may have been more about sitting on plastic covered sofas or eating crumpets with tea. You would have no idea who these two heros pictured to the left are. For me, it was a steady stream of Gunsmoke (and Clint Eastwood, but that is a different post entirely)...and the venerable Marshall Matthew Dillon. A law man with fast hands, whose words were his bond and whose principles were unassailable. Fast forward now from the '50s, '60s and '70s (yes, for those of you who thought that Cheers, Friends, E.R. and N.Y.P.D. Blue had good runs, try a show that aired for twenty years on television (and nine separately on the radio)) all the way to 2011, where we find that our newest most venerable "sheriff," Elizabeth Warren of the Consumer Financial Protection Bureau, is being criticized for allowing the CFPB to participate in some manner in the separate federal and State investigations into mortgage lenders and servicers who are embroiled in the mortgage documentation investigation regarding practices such as "robosigning." It seems that Ms. Warren appeared before the House Financial Services Committee and testified that the CFPB had a lesser role in the investigations than it may have (a "lack of role" that we here at BB&R can embrace insofar as the State investigations are based almost exclusively on State law that is not only "not federal," but often is specific to the particular State and different amongst them). That was all fine, until some on the Committee learned that the CFPB is actually being consulted by federal agencies such as the DOJ and FBI in connection with mortgage servicing related investigations and also being consulted by the 50 State A.G. coalition. For her part, Ms. Warren's reaction was at least as tough as Marshall Dillon's would have been, while being as coy as an undercover Andy Sipowicz. As reported by The Hill, she wrote a letter responding to her critics in which she bluntly explained the principles and ideals behind the CFPB involvment, but declined to explain precisely what that involvement is, due to ongoing nature of the investigations. Okay, so no one really gets to mislead Congress, no matter how easy or well-intentioned it may be, but that isn't what captured our attention. And, anyone who is seriously complaining on the one hand about effective information sharing between and amongst the fledgling CFPB and federal agencies such as the DOJ and FBI whist bruising their knees jumping on the bandwagon of similar information sharing where terrorism is concerned....well, they should just consider being quiet--but that isn't what caught our attention either. What caught our attention is the implicit acknowledgment in all this that is relevant to BB&R, mortgage services and every single person in the consumer finance industry and/or who practices law in the world of consumer finance...what caught our attention is the fact that the Designated Transfer Date is still over 100 days away, and the CFPB and State Attorneys General appear to already be effectively cooperating, sharing information and consulting one another toward a common end--and without any real indication of thought by Ms. Warren or anyone on her still growing team of clammering for credit (of course, with no announcement in the States' A.G.s' investigations and negotiations, it is to early to formally conclude that there is actually credit to share...but there will be). Is this the first cooperative effort? And, can we gauge the likely success of future interaction and cooperation by this effort? We'll see. Oh, and for those of you who are lucky enough to know of Gunsmoke, I've learned this of Ms. Warren: Festus, she's not.

2011-04-04T10:06:00.002-04:00

Late last week, rulings were issued in a cluster of cases that BB&R has been following. The rulings, in class action law suits against the former Wachovia (purchased in early 2009 by Wells Fargo), while not the first major rulings to emanate from mortgage-related business models being pursued at the time of the meltdown, came out of the United States Federal District Court for the Southern District of New York, which, is one of the more relevant U.S. District courts in the country, because it catches a relatively high percentage of major financial industry-related cases.

You can read about the rulings here. While some of the claims will be allowed to go forward, the multiple dismissals and sharp reduction of the number of claims is a good example of agressive advocacy and limiting exposure within otherwise dangerous cases by patiently using the court's procedural process and forcing Plaintiffs to meet certain benchmarks before rushing to settle. For those "court watchers" in our readership, the subject cases are In re: Wachovia Equity Securities Litigation, case number 1:08-cv-06171; Stichting Pensioenfonds ABP v. Wachovia Corp. et al., case number 1:09-cv-04473; FC Holdings AB et al. v. Wells Fargo & Co. et al., case number 1:09-cv-05466; and In re: Wachovia Preferred Securities and Bond/Notes Litigation, case number 1:09-cv-06351; in the U.S. District Court for the Southern District of New York.

Will the real Ms. Warren please stand up?

2011-04-01T15:27:00.003-04:00

"Will the real Slim Shady please stand up, please stand up, please stand up." It is that refrain that rang out through the Grammy Awards several years ago. The point of the song is that there are "posers" who pretend to be something that they are not...and that they shouldn't do that. Now, as the above attached video demonstrates, Eminem expresses that idea more colorfully than we will here, but lets be clear, I've been watching, reading about and listening to Elizabeth Warren closely for nine months, and have determined that she is a chameleon.

She not only changes colors, but appears to change her entire message to suit her audience. Take, for instance her appearances on HBO's decidedly liberal "Real Time" program, which you can watch here and CNBC's "Squawkbox" here, and compare it to the message that she was hawking that was reported on in yesterday's "Deal B%k" post, by New York Times reporter Ben Protess, in which Ms. Warren consderably softened her anti-industry rhetoric in a speech at the U.S. Chamber of Commerce's Capital Markets Summit of earlier this week.

While in the "lions' den," as it were, Ms. Warren even went so far as to suggest that the Consumer Financial Protection Bureau would help the financial industry by easing some unnecessary regulations. For instance, as Mr. Protess reported, she said: “'The lesson seems clear: Rules should be focused, and those that are not useful should be revised or eliminated,” she said, adding that the bureau would not primarily focus on writing new regulations. Ms. Warren said she even agreed with the chamber’s recent proclamation that the bureau should work to “prevent duplicative and inconsistent regulation of Main Street business.” That is why, she said, the bureau’s top priority is to “consolidate the duplicative and burdensome” mortgage closing documents."

Really? The bureau will not primarily focus on writing new regulations? That doesn't sound particularly similar to what she has said in other venues and before different audiences. Now, BB&R has never been a vocal critic of Ms. Warren. In fact, she is quite capable, and her combined expertise with respect to consumer finance issues and uncanny ability to refine those issues and present them in a manner that lay people can understand are impressive. And, so far, the people that she is choosing to populate the new Bureau are not altogether objectionable. However, make no mistake, the Bureau is not being set up to protect any aspect of the industry. Its constinuancy is the consumer...period. To think otherwise is to be naieve and, therefore, transparency is important. While we are not suggesting that she go looking for a fight, being straight with the industry and dealing with whatever consequences may arise is one measure of determining whether and to what extent we, all of us, can rely upon what she says.

To the extent that is a litmus test (for anything), and it is not at all clear that it is, she may not be passing at the moment.

Breaking news from the world of consumer finance regulation

2011-04-01T14:31:00.003-04:00

In an unusual announcement issued today by the Consumer Financial Protection Bureau, the powerful new regulator of all things consumer finance has communicated an intent to withhold any rule-making or new regulatory announcements, investigations and administrative action until a Director is formally nominated and confirmed by Congress. Due to the divisiveness of the issues related to the very existence of this new Bureau much less who should run it, prognosticators are expecting the a nomination fight to last months and possibly stretch into late 2012.

In a demonstration of solidarity with the announcement and the Bureau, the 50 State Attorneys General have all signed a document pronouncing their intent to put a stay in place relative to new consumer finance related regulation until such time as the first Bureau Director is finally approved by Congress. And, a Republican Member of the House of Representatives has introduced a bill that would protect (through civil immunity) credit card companies, banks, pay day lenders and even credit unions from civil actions by consumers (whether organized by class or individually) for regulatory transgressions during this interim period when there sort of is, but really isn't, a new regulator in place. And, in yet another demonstration of the power of the automobile lobby, Congress has exempted car dealers from regulation by and under the Dodd-Frank Act, which may well mean that the proverbial "used car salesman" will be the one "outlaw" that will be beyond the control of D.C.'s newest consumer sheriff.

Oh, and April Fools!

Of course the CFPB is not going to wait for Congress to approve a nominated director. The rulemaking is going to start even before the Designated Transfer Date. The State Attorneys General cannot even get together on how to deal with the robo-signing foreclosure-related issues. They won't be agreeing to any stay of investigation or enforcement. And, no, there will be no immunity for the industry. The depth and breadth of the lawsuit related fallout from the mortgage/foreclosure crisis and related financial meltdown has yet to be determined with any certainty. In fact, ironically, the only true statement above in this post is the part about car dealers being exepted from Dodd-Frank. As capable of evading rational explanation as that may be....its actually true.

Enjoy your April. As we get closer to May, the CFPB Designated Transfer Date of July 21 is going to come into focus, and the craziness will begin.

A Missed Opportunity?

2011-04-01T13:32:00.005-04:00

So, three weeks have passed since our last entry here at BB&R. We were off the rails for a bit, but are firmly back on them now, and there are things happening that may interest you.

For instance, the White House has announced that its Chief of Staff, William Daley (yes, of the Chicago Daleys) will not participate in the search to identify a nominee as the first Director of the Consumer Financial Protection Bureau. According to this Bloomberg report, the decision was made largely because Mr. Daley is a former J.P. Morgan Chase executive committee member, which makes him too friendly with the bankers. While this appears to be a good decision (albeit because Mr. Daley already has a reasonably demanding job, rising gas prices, a sluggish economy, an Executive Administration, and somewhere between two and three wars currently on his plate--and not because of his perceived bias), it seems like a missed opportunity for the White House.

So far, the President has done little to disabuse anyone in the industry of the idea that the CFPB will be a powerful protector of consumers at the expense of the industry, or that those who run the bureau will lean decidedly more to the left on consumer issues than center or right. Would Daly's involvement have helped to placate some in the industry and bring more legitimacy to the process? Perhaps. Our bet is that it was Daly himself who chose to stay out of the ring on this one. It's going to be a bruising battle.

CFPB enforcement chief speaks at State Attorneys General National Conference

2011-03-09T09:20:00.004-05:00

Richard Cordray, the Consumer Financial Protection Bureau's new chief of enforcement, addressed the States' top legal officers this week at the National Association of Attorneys General ("NAAG") Winter conference in Washington, D.C. The text of Mr. Cordray's comments is attached here, and it outlines the CFPB's top five areas of focus.

Broadly stated, according to Mr. Cordray, the CFPB's vanguard missions are: (1) to ensure that consumers are provided with timely and clear information so they can make responsible decisions about financial transactions; (2) to protect consumers from unfair, deceptive, or abusive acts and practices, and from discrimination; (3) to reduce unwarranted regulatory burdens by identifying and addressing outdated, unnecessary, or unduly burdensome regulations (e.g. "Two distinct federal agencies are responsible for administering the Truth in Lending Act and the Real Estate Settlement Procedures Act. These two agencies have had discussions, going back for fifteen years, about harmonization and simplification of the mortgage disclosure forms mandated under each law – which you no doubt have noticed kills whole forests to provide the paper for ordinary real estate closings. Now, the Consumer Bureau is aiming to accomplish within one year what has been contemplated but not achieved for a decade and a half – and we think we have made real progress even before that one-year clock has started ticking. Success in this enterprise will mean clearer and more focused information for consumers, along with reduced costs for lenders – a true win-win for the American economy."); (4) to enforce Federal consumer financial law consistently, without regard to the status of a financial services provider as a depository institution, in order to promote fair competition; (5) to make sure that markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.

In closing, Mr. Cordray emphasized the partnership that the CFPB intends to and, in fact, has begun to forge with the State Attorneys General, which he indicated is "not just because the Dodd-Frank Act generally provides for [Attorney General] authority to enforce the consumer bureau’s governing statute and related regulations, but also because we can be more effective and efficient by working with [the Attorneys General] to police the financial marketplace."

Recent U.S. history is replete with examples of turf protection and unwillingness of even intra-federal agencies to cooperate fully and share information with one another (think SARs, Hurricane Katrina, 9-11 and the Christmas Day bomber). The State Attorneys General will each have their own individual focus and their attention will be given to those issues that are most prevalent in their State. It will be interesting to see what happens when the CFPB priorities do not correlate with a State Attorney General's priorities.

Not all fees are equal

2011-03-04T08:25:00.006-05:00

In the world of consumer finance, not all fees are equal. Overdraft fees, payday loan fees, credit card fees, mortgage related fees and debit card fees are just a small handful of the types of fees that customers have historically paid. And, they are all considered relatively soft targets for law makers and regulators because, let's face it, no one likes paying fees. The Consumer Financial Protection Bureau is already taking aim at the "fee" related profit centers, and it doesn't even have oversight power yet.

However, lest we forget, major financial players are not the only ones issuing debit cards or charging related fees. Their availability is now ubiquitous, which means that curbing fees will hurt mid-market players like credit unions and community banks. Turns out though, even mid-market players have lobbying help. Thusly, as reported here, yesterday, William Cheney of the Credit Union National Association, appeared and testified before Congress regarding the impact that new Dodd-Frank regulations, including reductions in debit card fees, would have on what was characterized as a segment of the industry that serves 92 million Americans, and that had little to do with the financial crisis. A colleague, Gerber Federal Credit Union President John Buckley Jr., also testified. He explained that the debit card fee reductions would result in an annual $210,000 loss for Gerber Federal. Whether and to what extent $210,000 annually means more to Gerber Federal than repeated $2 or $3 debit card fee means to the average American is unclear.

Regardless, it is beyond reasonable dispute providing the convenience of debit cards is not free. There are associated costs, and why exactly is it wrong for provision of such a service to be a profit center? Customers are not forced to take or use debit cards, and certainly are not forced to withdraw cash from other bank's ATM machines. Can fees be high as a percentage of withdrawal? Sure. Depending upon the size of the withdrawal. Then again, there is no fee if one just goes to the bank, which was the only option until the 1990s.

Now, we aren't trying to pull a muscle racing to the defense of credit unions, however, it may be worthwhile to remember that debit cards are not a right. They are a service that customers choose to use. There are less expensive alternatives available. And, there is nothing complex, hidden, deceptive or secret about most or all of the fees attendant to the convenience of debit cards. When we are at ATM machines, we are forced to manually "accept" them. If we choose to punch the "yes" button instead of the "no" button, do we retain the right to later complain or demand that they be reduced?

There are many arenas within consumer finance in which there is a demonstrated need for protection, and we have a new 1200 person agency cranking itself up to do just that. But, should debit card fees really be a focus?

Heck, if a customer doesn't like debit card fees, then she can always go buy checks....oh, wait...

Group Think: When is the sum less than its parts?

2011-03-03T13:20:00.007-05:00

Pursuit as a group has its advantages. One need look no further than wolves or porpoises to understand the advantage of pack hunting. And, it can be appealing to apply pack hunting mentality to consumer finance disputes and claims. Consumer finance class actions are on the rise, and even the most defensible have well-known and largely unavoidable risks.

However, consumer class action is not the subject of this post. No, this one goes instead to the wisdom of banding together a disparate group of Plaintiffs whose claims are factually connected, but all of which have sufficient uniqueness to preclude certificaton of a class, and whose claims are based upon individualized conduct and advanced against different defendants.

This is the circumstance in the companion cases of Thompson v. Bank of America, et al. and 2433 South Blvd. v Bank of America, et al. now pending in the Federal Court for the Eastern District of North Carolina, and which were recently the subject of motions to dismiss. The Plaintiffs, a group of over 60 different individuals hailing from 20 different States and the District of Columbia, and many of whom have different counsel, banded together and sued several different defendants on the basis of numerous claims, many of which require specificity in pleading. Their claims arose out of three different failed coastal land development projects, two of which are in North Carolina and one of which is in South Carolina.

Are there efficiencies to be gained by banding together and pursuing defendants as a pack of like minded individuals? To be sure. Are there cost savings to be had? Likely, yes. However, when pleading misrepresentation and fraud claims, which enjoy a heightened level of practical scrutiny and which require specificity of pleading, the attendant problems should quickly become apparent. How do different property owners plead fraud-related actions against lenders for an alleged scheme arising from alleged statements, representations, action, reliance, etc... that allegedly emanated from different people at different times to different people at different times, concerning different properties and all toward the same end? The answer is it's tough. So tough, in fact, that the 4th Circuit has rejected group pleadings in precisely the type of context the Thompson and 2433 South Blvd. plaintiffs have attempted. (Juntti v. Prudential-Bache Securities, Inc., 1993 WL 138523 (4th Cir., May 1993)). The message? Aggregated allegations fail two of the essential purposes of the Rule 9(b) specificity requirement: (1) they are insufficient to provide a defendant with fair notice of the claim against him; and (2) they are insufficient to protect a defendant from harm to his reputation or good will.

The moral? Group litigation can be a siren song. If your plaintiffs are not sufficiently similarly situated to be certified as a class, then pleading complex claims together will be, at best, difficult and, at worst, a nightmare that results in a Memorandum and Recommendation to dismiss all claims by all plaintiffs, as the Thompson and 2433 South Blvd. plaintiffs recently experienced.

Caveat emptor.

There Is Only One Number One (even if for just one week)

2011-02-25T10:21:00.004-05:00

At the risk of spraining our elbows whilst patting ourselves on the back, BB&R is proud to report that we were this week's Practising Law Institute's top ranked Corporate and Securities Blog, as reported here.

How we caught the attention of PLI's corporate and securities group is anyone's guess, but if this means that someone believes that we have something worthwhile to say, then we'll take it. In that regard, we'll also keep trying with what promises to be an interesting post later today or tomorrow that will be dedicated to our litigation-minded readers. Thanks, PLI.

CFPB Hires Industry Insiders

2011-02-18T09:54:00.005-05:00

Well, alright, maybe not exactly "best friends" in the vein of a boy and his dog, but it appears that Elizabeth Warren doesn't intend to completely exclude industry insiders from the ranks at the Consumer Financial Protection Bureau. As reported here, yesterday Ms. Warren announced two significant hires, Rajeev Date, a former Deutsche Bank and Capital One executive, and Elizabeth Vale, a former Morgan Stanley executive, to the respective positions of Associate Director for Research, Marketing and Regulations and Liaison to Community Banks and Credit Unions.

These hires follow a spate of hires in January, which saw the implementation team surpass 100, and may be viewed by the industry as tempering Ms. Warren's choice of Richard Cordray as the Bureau's Director of Enforcement. However, neither hire should be surprising. Neither Mr. Date nor Ms. Vale is actually running a Bureau division, and one of the first things that Ms. Warren did after her appointment as Special Assistant to the President was to extend an olive branch of sorts to the finance industry. The ability of that olive branch to withstand the weight of regulation and enforcement is yet to be determined.

Not So Fast: Today's Post Part Deux

2011-02-16T15:42:00.004-05:00

It seems that Elizabeth Warren too has also noted all the budget talk this week, and has taken particular umbrage to some talk out of House Members of revamping Dodd-Frank so as to move the Consumer Finance Protection Bureau into Treasury and thereby avoid the pesky problem of its independence and untouchable Federal Reserve based funding.

Our take: This was destined to be discussed, especially when microphones are in the vicinity, but what is being discussed is not a tweak so much as a fundamental change to the law that would require approval in the House AND Senate. Moreover, the President would have to approve. Now, the House has spent time this year reading the Constitution aloud and voting to repeal the health care law, so who knows what it may do, but the Senate and White House? Uh, not so much.

Budget Time But Will The CFBP Be Touched?

2011-02-16T09:24:00.005-05:00

The Super Bowl is over; in Egypt the street cleaners are out in force; the rest of the Middle East is smoldering; Iraq and Afghanistan are relatively quiet for the moment; and credit card debt jogged up a bit more in January than expected while defaults dropped. In other words, the news cycle is wide open, which can only mean that its budget time! Ahh, yes, the wonderful week long buffet of pundits and politicians talking all money all the time (Google is showing 71 news articles available in real time right now).

Of course, one of the main topics of any "cut" conversation is the Dodd-Frank Act and the House majority's intent to preclude implementation-related spending, which Bloomberg reports could reach as high as $6.5 billion.

Much of this cut-related clamour is fairly focused on Dodd-Frank provisions that extend beyond consumer finance regulation. However, it is fair to say that the Consumer Finance Protection Bureau is in the cross-hairs...or is that really even possible? Current estimates are that the 2011-12 budget for the Bureau will be around $450 billion (give or take $50 billion), which is calculated as a set 10% of the Federal Reserve operating budget. That means the CFPB's budget is likely beyond direct Congressional control, except that Dodd-Frank does contain a provision allowing for the CFPB to request a couple hundred million more from Congress in budget appropriations starting in 2013 (so the House could whack those requests, assuming that the party in control doesn't change in 2012). The CFPB's allotted percentage is set to increase to 13% in fiscal year 2013, by which time the1,225 "new" hires at CFPB should be in place and working to propound, investigate and enforce a new world of rules and regulations. And, yes, this budget dwarfs other consumer protection-related budgets such as those enjoyed by the FCC and SEC, but then the CFPB assumes responsibility for regulating, investigating and enforcement for several existing federal agencies, including the FDIC, FCC, OCC, HUD and other reasonably important agencies.

What is interesting is this: As with several of the most important hires to date, many, if not most, of the rank and file at the CFPB will undoubtedly be moving over from existing posts at existing agencies whose consumer protection responsibilities will be assumed. Many of those agencies, such as the SEC and FDIC are clearly affected by other Dodd-Frank provisions, but we have not seen word one about any offset associated with the fact that so many at the CFPB will not really be "new" federal hires. In fact, at this point it is a bit unclear just how "new" the Bureau will be when juxtaposed against its amalgamative characteristics. Curious.

CFPB--and Misinformation

2011-02-15T10:35:00.003-05:00

One of the risks of creating a regulatory, investigatory and enforcement agency such as the Consumer Financial Protection Bureau, and of founding it in connection with a complicated set of new financial reform laws is the proliferation of misinformation. From time to time, we at BB&R run across such misinformation, which often emanates from industry sources where the otherwise unindoctrinated go to edify themselves...or so they think. Here is one such example, an auto dealer blog in which the contributor is allowing as to how rough the CFPB is going to make the lives of auto dealers, and how quickly the regulations are going to fly. Of course, because the blog entry makes no mention of the fact that auto dealers are specifically excluded from the CFPB's jurisdiction, we infer that perhaps the contributor may have overlooked that fact. Now, this is not particularly unusual and it would not have even caught our attention but for the fact that there is a robust series of "comments" following the blog entry. Several who appear to be affiliated with the auto dealer industry lament the coming regulations and enforcement and theorize that the CFPB's main purpose is to protect the military, and themselves opine that if auto dealers are careful to stay within regulations then they will be safe. Some of which is true. If auto dealers stay within existing regulations, then they should be able to do their business without molestation by the government. Of course, those rules and regulations have nothing to do with the CFPB, and if auto dealers look to the CFPB as their regulator, then they do so in error. Also, while the military is certainly one aspect of the CFPB focus, protecting the military is by no means the vanguard mission...though based upon how quickly these commentators became concerned about the military angle implies, and we sort of infer, that those in the military might do well to be wary of auto dealers.

The message is this: As with everything else in life, don't believe everything that you read in connection with the new world of financial regulation and enforcement. Yes, the world is changing, and, yes, it is going to be more challenging to live in the consumer finance industry in 2011 than it was in 2006, but thriving will not be made impossible. That said, blind faith in people who simply don't know what they are talking about will put you in a pretty good position to fail.

Director Search Begins In Earnest

2011-02-14T10:01:00.002-05:00

First, a plug. One of the many things that writing a blog brings into focus is that there are many, many "news" outlets whose primary goal seems to be talking, even when there is apparenlty nothing to say. It takes some time, but the real leaders, those with foresight and access, and those who actually say something when they talk, can be found. Boomberg Businessweek at www.businessweek.com is one of those outlets. Here at BB&R, we have linked to Bloomberg more often than to any other single outlet. And we recommend that you read it, assuming that you have time after reading us.

Of late, Bloomberg recently reported that Elizabeth Warren has begun the search for a Consumer Finance Protection Bureau Director. While the early reports are that no job offers have been extended, and the White House has been quick to indicate that it is nowhere near ready to announce a nominee, Ms. Warren's first meetings have been with three prominent State Attorneys General, including Roy Cooper of North Carolina, Tom Miller of Iowa and Martha Coakley of Massachusetts. The word is that Ms. Warren was seeking counsel on the type of experience or qualificationst that a CFPB director should have.

As we said, Bloomberg is a great news outlet, but it is exactly that...a news outlet. That means that the good reporters there get tips, confirmations, quotes and report the facts. We are not encumbered by such an onerous process. And, while Bloomberg is relegated to saying that the "implication [of such meetings] is that an attorney general could be a leading candidate," we say... Really? No kidding? A law is passed that specifically contemplates, and effectively requires, communication and cooperation between a new federal agency and the offices of 50 State attorneys general; enforcement is one of the agency's primary missions; and we are to believe that a State Attorney General could be a good candidate? Perhaps even at least as qualified as a Harvard law professor or a former member of Congress? And, to think, this notion seems to have arisen even after Ms. Warren tapped Richard Cordray as the Bureau's chief enforcement officer? To this notion we say...uh, yeah. Assuming that the politics will work, it would be entirely consistent with all that has happened to date if President Obama were to nominate a State attorney general to run the agency. Further to that thought, it is naieve to believe that Ms. Warren: (a) did not take Generals Cooper, Miller and Coakley's temperature on their willingness to serve; and/or (b) seek their opinions as to who should be nominated (i.e. who they believe that they can work with effectively).

If nothing else, Ms. Warren's recent meetings, and the others that she is sure to have in coming weeks and months, is continuing evidence of a concerted enforcement coordination effort. So, while we cannot see the tidal wave just yet, it sure does appear that the waves are breaking a bit farther out than normal. It may be time to start looking for high ground.

CFPB Enforcement Chief Talks to the Wall Street Journal

2011-02-10T18:05:00.003-05:00

In an interview published in the February 9, 2011 edition of the Wall Street Journal (Jean Eaglesham), the chief of enforcement for the Consumer Financial Protection Bureau, Richard Cordray (former Ohio State Attorney General), stated that the Bureau intends to use its enforcement powers “immediately” once the designated transfer debt is reached. The designated transfer date is July 21, 2011. The article quotes Mr. Cordray as stating that his new responsibilities are “in many ways doing on a 50-state basis the things I cared most about as a state attorney general, with a more robust and a more comprehensive authority.” The article further quotes Mr. Cordray’s response to the question of how soon the Bureau would bring enforcement actions, that he “would see to it that we will be ready with some of our priorities immediately.” The article states that Mr. Cordray identified as high priorities on his enforcement agenda mortgages, credit cards, and student loans. However, the article states that Mr. Cordray stated that the Bureau will set its “priorities accordingly.”

As this blog has been reporting, the CFPB continues to emphasize preparation for enforcement. The Bureau entered into memoranda of understanding with state mortgage regulators and the Conference of State Bank Supervisors establishing state and federal coordination and cooperation for the supervision of providers of consumer financial products and services. Professor Elizabeth Warren, White House special advisor, appointed Mr. Cordray to head up the enforcement arm of the Bureau. While the consumer financial services industry has heard this promise of increased enforcement before, any past subtlety is gone in favor of promises of quick and aggressive enforcement, perhaps on the model of the EPA, which launched investigations and enforcement actions almost immediately following its empowerment and subsequent to passage of the Clean Air and Clean Water Acts. Of course, this is not to be confused with rule-making, which will likely be slowed to some degree by the "speed bump" provision requiring an SBA panel to review any new rules that will have broad impact on a significant portion of the industry. So, industry participants should clearly be investing time and focus in the coming months to ensuring that their policies, procedures and the terms of their agreements meet existing federal and State statutory and regulatory requirements. To the industry we say, heed this not at your peril, because Mr. Cordray does not have a reputation or history of being slow to act.

-- contributed by Stephanie Shaw