Bank Lawyer's Blog

CFPB: In Search Of A Search Bar

2012-05-24T21:53:00-05:00

With my recent travel and work schedule, I'm just catching up with some of my regular reads from the past week. One of them, a post on The NAFCU Compliance Blog last week by Steve Van Beek, has a good compilation of, and links to, residential mortgage-related actions of the CFPB. Included are those related to mortgage origination and servicing and TIL/RESPA disclosures. It's necessary to track these issues, because, as Steve puts it, "[t]he CFPB will be pretty much changing every aspect of mortgage lending within the next couple of years." As we all know by now, Dodd-Frank is one of those changes we were all waiting for back in 2008, and, as we also know, all these thousands of pages of new regulations will ensure that nothing like what happened in the years leading up to the crash of 2008 will EVER happen again.

There's another reason that Steve's compilation and links are so useful.

It is truly amazing that a 21st century agency has not included a search bar on either the first or second design of their website.

Steve, if the CFPB installed a search bar, it would be easier to track its sausage making. If it was easier to track its sausage making, we might have a clue to what it's really up to. If we had a clue to what's it's really up to, we'd pack up and move to Belize.

Ignorance is bliss. After all, too much knowledge in the hands of the wrong people can turn a "New Sheriff" into a "Spouting Bull."

Both Sides of the Coin

2012-05-23T21:52:00-05:00

Although I don't ordinarily publish "guest posts," I've made an occasional exception for one or two friends, including former community bank president (and current banking consultant and mortgage lender) Pat Dalrymple. His recent "Banker's Hours" column in the Glenwood Springs (CO) Post Independent is republished here with permission. I think it may "resonate" with more than one community banker.

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"Getting to See the Heads and Tails of Bank Supervision"
---Pat Dalrymple

This week I got to watch the flip of the regulatory coin and see both heads and tails of bank supervision.

One side, we all saw: the two billion plus snafu at J. P. Morgan. Despite purportedly dramatically more stringent oversight, as mandated by the Dodd-Frank act, it’s “Deja Vu all over again” (to quote Yogi Berra) on Wall Street.

The other side involved an all too common tale these days: a retired executive, living in a free and clear luxury home in one of the best enclaves of a front range city, who got relieved of his life savings by a Bernie Madoff type. Even in the currently depressed market the property was probably worth a couple of million.

In this instance, the owner simply wanted to take out some cash equity to live on for a few years until it might be timely to sell the property. He wanted more than he could get from an FHA reverse mortgage, and certainly had the collateral to support the request.

He offered to put all of the interest in escrow in advance, and just draw the remainder over a five to seven year period. The proposal even included a provision for an annual appraisal, with draws curtailed if the property value should drop to cause the loan to value to exceed 50%.

Two banks turned it down because of lack of income and amortization (reduction) of the principal balance. Both agreed that it was a deal that they would have competed fiercely for, say, six years ago. Neither thought it was a bad loan.

But they couldn’t make it because the regulators would almost certainly criticize it.

Why do bank regulators show such disparity in oversight? Well, for one thing, because they can. It’s easy to rip a single little loan to a homeowner. On the other hand, they don’t understand what J.P. Morgan does half the time, any more than J.P. Morgan does.

The lady with the ultimate accountability for the JPM fiasco made $31,000,000 over the past two years. (Disclaimer: this is not a sexist statement. Most of the corporate poobahs responsible for the demise of Bear Stearns, Merrill Lynch, Lehman Brothers, et al were male members in good standing of the Old Boys Club. It just shows that, given an opportunity, gender is no barrier to being egregiously overpaid to perform incompetently)

And this highlights a continuing problem in our financial infrastructure. In the rarified air of Wall Street, the City of London, the Bourse, ordinary people are paid extraordinary, even obscene amounts to make big bets with other peoples’ money. Overpaid execs should probably have half of their over-compensation deferred pending big losses from bad decisions.

It probably won’t change though, despite Congressional dithering and candidate posturing. There’s too much money involved to turn off he spigot; the darn faucet’s broken.

So, small business people, scammed retirees, and other deserving people, good loan risks, will continue to walk into banks with hat in hand, walking out with empty pockets, while people like James Dimon (JPM CEO) continue to roll in so much cash that they could be sued for the next 20 years and still have enough to live on through three lifetimes after legal fees.

We’ve heard a lot of discussion about certain banks being too big to fail. It’s uncertain whether that’s true or not.

But one thing is certain: they’re too big to control.

Hedges and Hedgehogs

2012-05-21T21:41:00-05:00

I'm traveling for the next couple of days and will be off the air. Some interested readers have written to me and asked what I think about the OCC's memorandum in support of its motion for summary judgment, filed last Friday, in the ongoing lawsuit by United Western Bank to overturn the FDIC receivership into which it was placed over a year ago. A couple of people sent me copies of the memorandum, and I thank them for it. However, I was traveling over the weekend and will be again tomorrow, and given my schedule and typical commitments in the week before a holiday, I won't review all 87 pages of it until this weekend. I know it comes as a shock to those readers who expect me to shoot from the lip, but I'd like to take some time to parse this one and see how it responds to the plaintiff's motion and supporting memorandum. That shocking desire to be prudent in my analysis won't likely be repeated frequently.

However, I will respond in typical fashion to several requests for comment on the recent hedging loss by JPMorgan Chase. Jamie Dimon is still taking heat for it and rightly so. It was a public relations disaster and a black eye for banks of all sizes due to the fact that so much of the bank-hating public wants to occupy everything other than a library, and lumps community and regional banks in with the largest of the large on Wall Street. That said, the financial effect on the bank was not earth-shattering. It temporarily hurts profits, but does not imperil the bank. It's puzzling to me that a purported "hedging" position could suffer a $2 billion to $5 billion loss. That sounds like a speculative trade, to me, although it appears that Chase's public spin is that it was a horrendously executed epic fail of a botched hedge.

Whatever the intended transaction might have been, hedges aren't designed to "eliminate" risk, they're designed to "reduce" risk. If properly considered and executed, they should cap losses at predetermined limits assuming certain worst-case scenarios occur. If those scenarios do not occur, then in many cases the bank has paid for protection it didn't ultimately "need," just like insurance. On the other hand, some perfectly proper hedges can result in some gain for the hedger if circumstances turn out to be go the other way. It shouldn't be a huge profit (if the transaction is a true hedge of downside risk), but there can be gains realized. The only hedge that completely "eliminates risk" is "don't make any investments." You have to take some risk to make some return.

Someone should tell that to Barney Frank. He was interviewed by MarketWatch last Friday and displayed a woeful lack of knowledge.

Q: Another area some lawmakers are concerned about is the way the Federal Reserve and other regulators interpret the Volcker rule, which is designed to prohibit speculative trading by big banks. Some senators say the regulators’ proposal allowing for portfolio hedging is a large loophole for continued speculative trading.

A: A portfolio hedge is not a hedge; it is a speculative bet. A hedge is aimed at being neutral on a particular asset, aimed at neither losing or gaining. They are trying to make money. The hedge is to take the risk out. I agree that is a problem.

It is so much more complicated than that, Barney. However, a simple answer to your simple answer is to tell you that you wouldn't know a hedge from a hedgehog. In that respect, however, we'll have to give Barney the fact that he's no different than most members of Congress. That lack of knowledge never stops them from opining, though, does it?

Community Banks to Congress: You're Crushing Us

2012-05-20T21:47:00-05:00

According to community bank chairman William Grant, the burden of compliance with many tons of new regulations is crushing community banks. As a result, he claims, everyone should prepare for the phenomenon of the incredible shrinking bank biz. According to a recent Bank Safety & Soundness Advisor article (paid subscription required), Mr. Grant's recent testimony before Congress on behalf of the American Bankers Association was the polar opposite of "sunny."

“Without quick and bold action to relieve regulatory burdens we will witness an appalling contraction of the banking industry, at a pace much faster than we’ve witnessed over the last decade,” Grant said. “It is not unusual to hear bankers—from strong, healthy banks—say they are ready to sell to larger banks because the regulatory burden has become too much to manage. These are good banks that for decades have been contributing to the economic growth and vitality of their towns, cities, and counties but whose ability to serve their communities is being undermined by excessive regulation and government micro-management. Each bank that disappears from the community makes that community poorer.”

Perhaps anticipating the argumenht of the disintellctually dishonest pundits from the left of the political spectrum that bankers of all stripes want absolutely no regulations of their business, Mr. Grant claims that a basic problem with the deluge of regulations promulgated (and to be promulgated) in the wake of the abuses of the last decade is that their cost to banks outweighs their benefit to anyone.

“Banks appreciate the importance of regulation that protects the safety and soundness of the bank and protects the interests of our customers,” he said. “We know that there will always be regulations that control our business – but the reaction to the financial crisis has layered on regulation after regulation that does nothing to improve safety or soundness and only raises the cost of providing credit to our customers.”

[...]

“During the last decade the regulatory burden for community banks has multiplied tenfold, with more than 50 new rules in the two years before Dodd-Frank. Over the last decade 1,500 community banks have disappeared from communities. Each new law or regulation in isolation might be manageable, but wave after wave, one on top of another, will certainly over-run many more community banks.”

Grant also warns of something that other community bankers lay awake at night sweating: Dodd-Frank trickle down. Grant alleges that such fears are justified, and gives a specific example.

“We thought that the Volcker rule was something that only our colleagues in the largest banks had to attend to,” Grant said. “Instead, the regulators have proposed to implement the Volcker rule in a way that requires even a bank of our size to carefully examine any security we buy to manage our mix of assets and liabilities so that we do not accidentally do something that the implementing rule may not permit. We will also have to review every community investment we make for the same reason.”

The bank not only has to keep a close eye on securities and investments, but it also has to pay more attention to bank policies, he argues.

“Both asset and liability management and community reinvestment are basic banking activities that our regulators expect us to do day-to-day,” he says. “Now we have to develop policies and procedures to make sure we are evaluating those activities regularly in light of some 300 pages of technical regulatory guidance that is intended to address activities it wouldn’t even occur to us to conduct. These and other changes will have a pernicious impact on banks and their communities. They raise credit costs and litigation costs (for even minor compliance issues), lead to less hiring or even a reduction in staff, make hedging risks more difficult and costly, and restrict new business outreach. In fact, banks’ biggest risk has become regulatory risk.”

Personally, I expect regulators and some in Congress (primarily, those with strong ties to constituents in the community banking business) to pay some lip service to the need for a two-tired system of regulations to address this concern and to attempt to alleviate the "trickle down effect." I also expect that nothing substantial will be done to actually ensure that the crushing regulatory burden is alleviated. Talk is cheap and plentiful in the nation's capital. Effective action is a scarce commodity in a town where the acquisition and retention of power trumps all other considerations, especially a notion as outdated as "principle."

There's the additional problem that there is a strong desire by many in the federal regulatory agencies, in the political arena, and in some corners of the banking industry itself, to see a drastic reduction in the number of banks in this country. Proponents of a smaller industry include not only those afflicted with the nervous condition commonly referred to as "Socialistic Hysteria," but by banks who already have achieved a certain hefty size and think all this competition is bad for squeezing the most blood out the veins of consumers and business customers alike. If only we had fewer banks, the remaining banks would be more profitable. We've heard this argument for, literally, decades. I won't name names, but the singers of this ditty include some very, very high-priced lawyers who are currently being paid by the same community banks they think ought to be "down-sized."

Perhaps this view is overly cynical. However, if community banks (and I'm including credit unions in this category, because they have a stake in this regulatory burden crunch, and bigger banks have as little use for them as any other smaller competitors) want to derail this train, they'd better give it the cooperative, focused attention it deserves. They need to tell their legislative representatives that they're as mad as hell and they're not going to take it any more.

Or, they can decide that they've had enough, no longer want the cheese, and merely want out of the trap. Surrender is always an option.

A High Water Mark For American Lawyers

2012-05-16T21:42:00-05:00

Some great news for the American public was revealed recently: there is now one lawyer for every 257 Americans. I sure hope my 257 Americans can afford my hourly rate. As Edward Tan at Findlaw's Greedy Associates Blog opines, "If you're looking to hire an attorney, it's definitely a buyer's market."

Why so many shysters attorneys, you ask? Tan has a likely answer: Big Law (not to be confused with Big Love). "A combination of 'inept management and the weakness of the partnership model' were crucial factors in inflating the legal market, Bloomberg News reports."

Starting in the 1960s, big law firms grew bigger and along with the growth in numbers came a growth in hourly rates.

[F]rom 1985 to 2010, hourly rates began to skyrocket, especially in the top 50 law firms. Normal combined revenue for these firms based on the rate of inflation at the time should've been $6.9 billion. Instead they earned $48.4 billion.

Big law firms became big pyramid schemes, with a small number of partners at the top leveraging a larger number of (relatively) low paid associates. Of course, a starting salary of up to $160,000 per year plus a bonus and benefits may not seem like a pauper's wage to most Americans. Thus, law school admissions soared, and young people with the intellectual firepower to do a number of useful things for society instead decided to grab for the brass ring via treading the law firm gerbil wheel. Law schools became money-makers for many universities, and they were only too happy to keep up the charade that the good times in the private practice of law would roll on, in the same way that for many of us, residential real estate values would never head in any direction than straight up.

Unfortunately (for Big Law), big law firms have big fixed overhead costs, including those large associate salaries. When the economy took a tumble in recent years, that fixed overhead (and the inability to adjust quickly enough due to size and the conservative nature of many lawyers, among other factors) became an millstone around the neck of many big law firms. In addition, partners who are imbued with an "I-got-mine" mentality are not receptive to taking one for the team, so quickly imposing a shared sacrifice survival plan on a group of self-centered large egos is a hard task to accomplish. Tan mentions a half-dozen failed Mastodons, and more are on the way.

Over the long haul, "creative destruction" is good for any "business" or "profession." At least, that's what free market theorists tell us. In the interim, the lawyers (and would-be lawyers) being "creatively destroyed" are in for a lot of pain.

My wife always tells me it's better to be lucky than smart (although being both is occupying the sweet spot). In that case, I'm lucky that almost exactly twenty years ago, I decided that the big firm business model made no sense to me and I went in a different direction. While--believe or not--I feel sorry for many of the people strapped to the outside of this crushing wheel as it rolls forward (especially the young people), I also feel something else entirely for more mature folks who are bright enough to have seen something like this coming and, because they were too busy milking a cash cow, chose to do nothing.

We may never return to the ratio of 1:709 we had in 1950, but 1:257 seems to me to be the "high water mark," and there's nowhere to go from here but down.

Let Me Just Clarify That Point

2012-05-15T21:31:00-05:00

My post of the day before yesterday, concerning a "warranty" offered by Greenway Solutions that would cover a portion of losses suffered by a bank's business customer by reason of an online account takeover (provided the customer uses an approved online security product from a third-party vendor), caused Jon Meyer of Greenway Solutions to reach out to me. Jon wanted to discuss some points I raised in my story and to provide some clarification. After a very pleasant telephone conversation, I offered to supplement my previous post with additional information and clarification.

As to my question about the fees paid by the customer and the bank to Greenway Solutions, Chartis, and the security software providers, Jon informed me that Greenway Solutions will launch this solution with $24.95 per-month "all-in" pricing. In other words, the cost of the service is a total of $24.95 a month. The customer would pay that cost to Greenway Solutions, and that would be the only cost paid. Of course, the customer's bank could decide to pay that cost, if it wished to do so, for competitive reasons.

Jon also wanted to emphasize that business customers do not have the equivalent protection afforded to consumers by Regulation E (no liability for unauthorized funds transfers provided the customer reports the unauthorized nature of the transfer within time limits established by Regulation E). He also made the point that Article 4A, Section 202, of the Uniform Commercial Code provides little practical protection for unauthorized "payment orders," because in the vast majority of cases of account takeover, (1) the customer has expressly agreed in writing with the bank to be bound by any payment order, whether or not authorized, issued in its name and accepted by the bank in compliance with a security procedure chosen by the customer, which, under the Code, makes the security procedure "commercially reasonable"; and (2) the unauthorized payment order is usually made in compliance with such security procedure because the crooks have penetrated the customer's computer system and gained access to the information needed to compromise those security procedures. You'll continue to have lawsuits brought by victimized customers that allege that the security procedures of the bank were not "commercially reasonable," notwithstanding the terms of the applicable account agreement (perhaps because the security procedures do not comply with the mutli-factor authentication guidance of the FFIEC), but that fight is in most cases an uphill battle for the customer. Counting on banks to settle in order to avoid reputational risk is cold comfort. Therefore, I agree that there is value in "incentivizing" business customers to add additional software security solutions and to cover at least some of the financial risk with "insurance." Although I'm not endorsing Greenway Solutions' specific product, I'm in favor of exploring creative answers to a problem is that is not going to be resolved anytime soon.

As to my wisecrack about vendor's collecting fees and denying liability, Jon wanted me to point out that this stance is not unusual in the software security vendor "space" given the "price point" ($24.95 a month). I agree that it's not unusual. Technology service providers, especially those that collect relatively low monthly fees for providing a standardized product, will generally provide indemnification against intellectual property infringement claims that arise out of the use of their technology within the limitations on use contained in their license agreement, but generally aren't going to take on additional liability for indemnifcation that could result in the vendor incurring "bet-the-company" damages. Whether or not this is a reasonable position to take, my intent was to point out to banks that because of it, they need to make certain they aren't going to be on the hook for liability caused by the acts or omissions of the vendor or its product.

Plus, I was going for the cheap laugh. It's what I do.

I hope I've now clarified the pertinent points and can return tomorrow to my customary menu of ill-considered snark and off-the-cuff, half-baked opinions of inconsequentiality that my readers have come to expect from this blog.

Barney And The Spitz Make My Day

2012-05-14T21:50:00-05:00

As I watched ABC's "This Week With George Stephanopoulos" yesterday morning, I assumed that most of the press attention would be given to Barney Frank's meltdown against Tennessee Republican Marsha Blackburn, and I think that expectation was verified by today's frequent postings online of the video of that session. I loved the way Barney accused Blackburn of filibustering him when it was obvious that he did 90% of the filibustering and didn't shut up until they literally cut him off and went to a commercial. Man, that guy makes for some great theater! If you've got the stomach for it, here's the link: http://abcnews.go.com/watch/this-week/SH559082/VD55202126/this-week-0513-rep-barney-frank-and-rep-marsha-blackburn.

For me, however, the biggest treat was the way that The Comeback Kid, Eliot Mess, handled himself during the round table session, alternating between some reasonable observations and absolute moonbattery. Of the latter, my favorites include this exchange with Republican Hit-Woman Mary Matalin about Mitt Romney's economic policy:

SPITZER: They want to go back to medieval medicine, the blood-letting, leeches. They want to go back to the very crazy economics that brought us over --

MATALIN: What are you talking about, Eliot?

SPITZER: -- the cliff and created a cataclysm.

I'm sure The Spitz wanted to add "and they want to go back to using the Mann Act to persecute boys who just wanna' have fun." Matalin looked at him like he'd just consumed one of her children. I assume that when married women sit next to Spitzer and the word "leech" comes to mind, the image that accompanies it is not going to be Mitt's but Eliot's.

The always trenchant George Will was a off the panel for the day, and Ralph Reed of the Faith and Freedom Coalition was filling in, which was a strange insert from the bench, but it's major network television news, so someone must have thought the two were interchangeable parts. Reed tried to make a point about the current state of unemployment, but Eliot Mess cut him short with more of the same "cataclysmic" hyperbole.

REED: -- 15 percent of college graduates can't find a job.

SPITZER: Ralph, Ralph, you simply ignore the reality that the economic model that Romney wants to bring back gave us the cataclysm of a -- wait, it's deregulation. It's lower taxes for the wealthy, higher deficits, cutting infrastructure investment, making us less competitive, giving up our competitiveness to foreign nations, unilateral trade failure that does not serve the American public well.

You can see that when he used the tern "cataclysm," Matalin and Reed reacted poorly. Spitz also alleged that Keynesian economics has been working well for 70 years and "it will work in the next 100 years." No, I'm not making that up.

Concerning Chase's $2 billion "hedging" faux pas, Spitzer claimed that the Volcker Rule, even if finalized, would not have prevented this loss because Chase desires to commit suicide so that the federal government can rescue it again. I suppose Spitzer is accusing Jamie Dimon of being possessed by an adolescent "rescue fantasy."

SPITZER: Of course, the regulations as put in place after JPMorgan lobbied to eviscerate would not have precluded this because JPMorgan wants to be able to lose all the money it can so we can bail them out again. That's the problem. The incentive structure here is perverse. They can gamble with a federal backstop.

Matalin, obviously suffering from too many years in proximity to James Carville, made some interesting rejoinders, despite her insistence on giving Barney first billing over Chris.

MATALIN: This also reraised how ineffective Frank-Dodd (sic) is. As Barney said, the Volcker rule, which is still being formulated, they want to enforce something that hasn't been formulated and they don't even know when it would come into effect, as is the case with all of Frank-Dodd.

What's absent from Frank-Dodd (sic) is the -- what financial institutions need and they want. And they can't function without it. It is clarity, uniformity, cohesion, coherence, enforceability that's predictable. And none of that has happened.

"Clarity, uniformity, cohesion, coherence, enforceability that's predictable." Yes, that would be acceptable if we can't have the alternative: setting fire to the whole thing and burning it down to the ground.

Hilary Rosen, the political operative who claimed that Ann Romeny never worked a day in her life and was disowned by The White House, then claimed Matalin didn't want any regulation of the banks, and Spitzer revisited how great Glass-Steagall was, how he's a "true capitalist" (ignoring the cognitive dissonance of his love for Keynesian economics), his repeated beatings on federal preemption by the OCC, and just about everything other than the fact that Joel Steinberg put tacks in his seat in his third grade classroom and was never properly punished for that crime.

It's not that the Sunday morning network news shows are totally useless. It's just that they seem to devolve into sound-bite shouting matches, where distortions, glaring omissions, and outright lies are often countered with the same, where the parties engage in loud "crosstalk" that cancels one another out, and where the host eventually drills down on a critical issue by prefacing it with "We've got only 10 seconds left."

If we want to have a decent, serious discussion of critical issues, we need something akin to the format of the late Bill Buckley's "Firing Line," where, for example, Buckley and Keynesian economist John Kenneth Galbraith, a close personal friend of Buckley's whose political and economic views were the polar opposite of Buckley's, would sit side-by-side in swivel chairs and discuss and debate an issue for a solid hour, with no commercial interruptions. They also attempted to treat each other with courtesy and respect because they realized that a difference in ideas does not necessarily equate to a difference in character. As far as I know, neither of them knew a woman named Ashley Dupre.

Given the average viewer's typically short attention span, I assume such a show would garner a rating that might not be measurable. Nevertheless, it would come as a pleasant change of pace from what passes for serious discussion on network television (or cable television, for that matter) in the current age.

Filling A Gap With "Insurance"

2012-05-13T21:41:00-05:00

It's tough enough, on a daily basis, to make sense of what a portion of the trade press has to say about banking legal issues, but it's doubly tough when they cite section numbers and laws that don't exist. A story last week in The American Banker (paid subscription required) made a very valid point, and one I've harped on previously: commercial bank customers don't have the same protections that are afforded consumers by Regulation E when it comes to unauthorized transfers from their accounts. The reporter for The American Banker asserts that commercial customers don't have protection in excess of the basic requirements of "the universal commercial code's section 404 2A, which specifies that banks must supply a basic level of security for their commercial clients." I think he intended to refer to Section 4A-202 of the Uniform Commercial Code, and I expect that a lawyer he interviewed mentioned the correct section but something was lost in translation between ear and written notes. It happens.

Nonetheless, the article offers insight about how some customers (on their own or through their banks) are trying to add a measure of protection for unauthorized hacking of their bank accounts through a "warranty" product called EFTGuard, offered by Greenway Solutions and backed by insurance company Chartis. The warranty will cover up to $100,000 in losses from an individual account (with an aggregate limit of $500,000) as long as the bank's customer adopts "at least one of a handful of preapproved third-party security products." The companies listed in the article are IronKey, SafeCentral, Trusteer and Webroot. The banks pay $15/month per customer for the product, presumably to Greeway Solutions or the service provider, although the article doesn't state who receives that fee. The article also does not enlighten the reader as to what, if anything, the customer pays Greenway Solutions and/or Chartis and/or the service provider.

Whatever fees are paid and to whomever they are paid, here's a tip for banks deploying these third-party security products: whatever service the service provider provides, (1) test it before you deploy it widely, and (2) make sure your account agreements with your customer protect you from any liability arising out of or related to the customer's installation and use of the vendor's product. In one case I read about, a security product (NOTE: not one offered by one of the four companies listed above) that was designed to set up a secure "tunnel" between customer and bank for each online banking session, reportedly interfaced poorly with commonly used off-the-shelf software found on some customers' systems, causing "crashes" and other problems for those customers. As to the second point, my personal experience is that most vendors in this space are not willing to indemnify the bank from claims by its customers that use of the product damaged them in some respect (see the immediately preceding sentence) or that it simply doesn't work as advertised. A recent negotiation with one such vendor (again, not one the four listed above) went something like this:

Bank: "Please provide us with an obligation to hold harmless, defend, and indemnify the bank from such risks."

Vendor: "Here's a bucket of sand. Here's a croquet mallet. Start pounding."

As is typical of technology service vendors, once the salespeople stop gushing about how their product will not only ensure world peace, but will actually raise the dead, the risk management people tell you that they'll consider taking on indemnification obligations that have actual substance exactly two hours after the commencement of The Second Coming. Therefore, make sure the bank's contract with those of its customers who employ this product relieve the bank of risk. If the customers squawk, you can remind them that if they'd actually read any of the "boilerplate" license agreements they'd "clicked through" and used on their computer systems, they'd understand that the technology service business model is like the insurance company business model: collect fees, deny liability.

Of course, savvy customers will point out that in many cases, that seems to be the business model of banking. At which point, we can all have a good laugh and get on with seeing how long it takes cybercrooks to bust these latest "solutions."

The Silver Lining Of Overdraft Fees

2012-05-10T21:43:00-05:00

"I'm 1/32 'Elizabeth Warren' and it's that small sliver of me that compulsively exaggerates." Dennis Miller, via Twitter, May 10, 2012

Shannon Phillips, Deputy General Counsel of the Independent Bankers of Texas, wrote a blog post recently for Christopher Williston's The Missing Linc blog, entitled "Lies, Damned Lies and Statistics." With that title, you just know it has to be about the CFPB.

Phillips is concerned about the CFPB cherry-picking statistics from a 2008 study conducted by the FDIC on overdraft programs and interpreting them for negative effect. Now, accusing the CFPB of distorting the findings of the FDIC on overdrafts might strike some as akin to accusing Goebbels of having taken Hitler out of context when quoting "Mein Kampf". Of course, I wouldn't be one of those people because I'm always fair and balanced.

Shannon's beef is with the spin the CFPB, and its Reichsführer Director, "Recess Richie" Cordray, have been putting on a finding by the FDIC that 9% of overdraft users bear 84% of overdraft fees.Cordray described that 84% as "whopping." I assume he wasn't issuing a racial epithet, but was indicating that this was a "disproportionate" percentage in some respect. Although neither Cordray or Shannon made the allegation, the next logical step in the group-think that dominates the current crowd in power in D.C. is that the 9% being "whopped" are likely to be racial minorities and, therefore, overdraft programs as designed and administered by banks have a disproportionately negative affect on minorities, and...voila!...are discriminatory, unfair, or abusive. Then again, perhaps I'm merely leaping ahead of myself in a power-burst fueled by rampant cynicism.

Phillips suggests that there's another way to approach the lessons revealed by the FDIC's study.

While that statistic is true, that means that conversely approximately 91% of accountholders bore only approximately 16% of overdraft-related fees.

He also quotes from a comment letter to the CFPB from the IBAT.

According to the FDIC’s own statistics, we have an overdraft protection system in the United States that is working for nearly 90% of customer accounts. Instead of dismantling, overhauling or punishing banks for having a huge majority of customers with fewer than four overdrafts per year, the answer lies in the educating and providing clear disclosures to consumers – especially the 13.9% of customer accounts who overdraft their accounts five or more times per year. Once the dual goals of education and disclosure are accomplished, neither the CFPB nor the banks should meddle paternalistically in the lives of bank customers.

"Meddling paternalistically" is the life force of large federal bureaucracies. Without such meddling, they'd have no reason to exist.

Shannon notes that the comment period on the CFPB's recent solicitation of comments regarding overdraft programs ends June 29, 2012 and urges interested bankers to add their voices to a chorus of folks (including the 90% of responsible users of overdraft programs) before that deadline passes. Your guess is as good as mine as to whether the true believers in "behavioral economics," who think they know better how to protect consumers than do consumers themselves because the bureaucrats understand the unconscious motivations of consumers that diabolical banks exploit, will be receptive to considering bankers' viewpoints based upon the facts, but it's always worth a shot. Moreover, if you can get in a nice turn of phrase like "meddling paternalistically," you'll feel better, even if you don't exert an ounce of ultimate influence.

Tales Of Wells Fargo

2012-05-09T21:38:00-05:00

Wells Fargo just can't catch a break. Not only has the US Department of Justice told the bank that it might file a fair lending action against it for its allegedly discriminatory practices with respect to maintenance of REO, but the morons at MoveOn.org have decided to stage a public protest against Wells Fargo solely because they can't find Bank of America to kick around.

As for the DOJ claims, they appear to be based upon consumer advocates' claims that the bank takes better care of foreclosed-upon real estate it owns in neighborhoods where white people live than it does in areas where minorities live. I suspect that the bank will assert that (a) any rational real estate owner is only going to invest money in a piece of real estate where the owner has a realistic chance of recouping that investment through a higher sales price, (b) that such recoupment decisions are made on a property-by-property basis based upon objective data like recent comparable sales prices and fair market valuations, (c) that the economic reality-driven facts of life are that many more such properties are located in majority-white neighborhoods than in minority neighborhoods, and (d) there has been no intent to discriminate, merely to minimize losses, will fall on deaf ears. As we've previously noted, the DOJ is on a jihad against lenders based upon "disparate impact" theories that the DOJ knows, in its heart-of-hearts, are highly fragile when exposed to the light of logic, the kind of logic applied by the US Supreme Court. Justice will likely pursue Wells Fargo and try to squeeze some dough out of it before the highest court eventually shuts down this racket.

What's really bad news, though, is that Wells Fargo is having the Occupy fellow-travelers occupying its Denver downtown branch (deliciously ensconced in a high rise known as "The Cash Register Building," a landmark where the author of this blog once labored) as part of a protest against one of Wells Fargo's rivals, Bank of America. That protest is enough to confound even Occupy sympathizers like Denver Business Journal reporter Heather Draper, who's a self-confessed big bank hater.

This member of the media is confused. You want to draw my attention to BofA’s shameless practices by protesting Wells Fargo? No wonder the message of the 99 percent gets muddled.

Don’t get me wrong. It’s not that I’m on the side of the banks. I’m squarely in the “99 percent” and I understand and agree with the need to draw attention to corporate wrongdoing.

But in this case, I’d say a BofA protest at an entirely different bank is confounding, at best.

Why, you may ask with good reason, is MoveOn.org picking on Wells Fargo for the conduct of Bank of America? I'm glad you asked.

In the way of explanation, the MoveOn.org email said: “While Bank of America’s CEO and shareholders meet in Charlotte, N.C., tomorrow, the 99 percent is taking to the streets across the nation to protest BofA. As the economy declined, BofA made millions in profits by dodging taxes and foreclosing on homes, which hit communities of color especially hard. Bad publicity is like kryptonite to big corporations — that’s why thousands of people are protesting, marching, and raising our voices in solidarity to draw the media’s attention to BofA’s shameless practices.”

[...]

“Since there is no BofA branch in Denver, we will rally again at Wells Fargo, the major tax dodging, home-foreclosing, job-outsourcing bank in Denver,” said the email from MoveOn.org.

That explanation caused Ms. Draper to "laugh out loud." It caused me to wonder why MoveOn.org just doesn't move on down the road...into a ditch or, better yet, off a cliff.