Banking Law Prof Blog

Sentencing Today in One of “Largest Bank Fraud Schemes in this Country’s History.”

 
Lee Farkas, Chairman and principal owner of Taylor, Bean & Whitaker Mortgage Corp., received a 30-year sentence today in what prosecutors called one of the "largest bank fraud schemes in this country's history."

Points to consider: 

• Fannie Mae officials knew as early as January 2000 that the company was delivering bogus, non-performing, or worthless loans, but never reported the fraud to law enforcement or anyone outside the company.
• But for Fannie Mae's silence, Taylor Bean would have collapsed in 2002.
• The fraud scheme ultimately amounted to a $3 billion scam. Farkas duped some of the country’s largest financial institutions, sought federal bank bailout funds and contributed to the failures of Montgomery, Alabama-based Colonial Bank and its parent, Colonial BancGroup, once among the nation’s 25 biggest depository banks.
• The trial of Farkas and his co-defendants resulted in the only major criminal conviction stemming from the financial crisis.

Link to story "How Fannie's Silence Opened Way to $3B Fraud" by Tom Schoenberg:  http://www.bloomberg.com/news/2011-06-30/fannie-mae-silence-on-taylor-bean-mortgages-opened-way-to-3-billion-fraud.html

(ag) June 30, 2011, in Fannie Mae/Freddie Mac

New Guidance on Internet Banking Authentication

The Federal Financial Institutions Examination Council (FFIEC) yesterday issued supplemental guidance on internet banking authentication.  As both electronic banking and identity theft become more pervasive, the federal banking agencies encourage more extensive risk assessment and risk management measures.

Link:  http://www.fdic.gov/news/news/press/2011/pr11111.html

(ag) June 30, 2011, in Consumer Protection, Identity Theft

Two Approaches to Financial Crises

Brett McDonnell, University of Minnesota Law School, analyzes two approaches to understanding and preventing financial crises:  

• The Austrian approach, which opposes government intervention and blames central bank policy for most financial crises; and
• The Keynesian approach, which advocates active government intervention both to prevent crises -- and to end them.

The article concludes that the Dodd-Frank Act lies somewhere between these two: a flawed but mostly positive exercise in "cowardly intervention."

Link to article "Of Mises and Min(Sky): Libertarian and Liberal Responses to Financial Crises Past and Present":   http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1871285

(ag) June 29, 2011, in Dodd-Frank, Financial Regulatory Reform

New IMF Managing Director

Today, French Finance Minister Christine Lagarde was elected the new International Monetary Fund (IMF) Managing Director.  Her five-year term begins on July 5, 2011. 

Lagarde is the first woman to head the IMF.  She succeeds Dominique Strauss-Kahn, who has been accused of sexual assault on a New York hotel maid.

Emerging market countries had lobbied for the top IMF spot, but Lagarde's election maintains the tradition that the IMF Managing Director will be European.

Lagarde immediately tackles the problem of potential Greek default, urging Greece to adopt more austerity measures.

Link to article: http://www.reuters.com/article/2011/06/28/imf-idUSN1E75R0YO20110628  

Link to photo attribution:  http://en.wikipedia.org/wiki/File:UMP_regional_elections_IlM_2010-02-18_n07.jpg

(ag) June 28, 2011, in Global Markets

Mortgage Servicers Face High Costs of Property Maintenance

Mortgage servicers advance funds for property maintenance while awaiting resale after foreclosure.  This assumes the properties will eventually be capable of being sold at a profit. 

• What happens if the real estate market takes another three years to recover?
• How long will mortgage servicers keep advancing funds to keep properties maintained if there is no short-term possibility of recovering funds advanced?
• What happens if mortgage servicers stop advancing funds?

Link to article "Mortgage Servicing Faces Billion Dollar Secondary Crisis" by Jacob Gaffney:  http://www.housingwire.com/2011/06/22/mortgage-servicing-faces-billion-dollar-secondary-crisis

(ag) June 27, 2011, in Lending Issues/Real Estate

No Surprise: FOMC Maintains Target Interest Rates

The Federal Reserve's Federal Open Market Committee (FOMC) announces that it will maintain the target federal funds rate at 0 to 1/4%.  The FOMC "continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period."

Here's the FOMC's view of the economy:

"Economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected.  Also, recent labor market indicators have been weaker than anticipated.  The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan.  Household spending and business investment in equipment and software continue to expand.  However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed.  Inflation has picked up in recent months, mainly reflecting higher prices forsome commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable."

QEII (the second round of Quantitative Easing) ends at the end of this month. 

Link to FOMC Statement:  http://www.federalreserve.gov/newsevents/press/monetary/20110622a.htm

(ag) June 23, 2011, in Economy/Interest Rates

Steve Forbes' Recommendations for Greece

Steve Forbes talks about how to fix the Greek debt problem, saying that Western civilation as we know it won't end. He recommends:

"Debt restructuring: "There's not enough capital to pretend there's no problem," he says, suggesting banks and other creditors will be willing to negotiate and make "voluntary" rollover agreements and other steps to mitigate the fallout of default.

Flat tax: Bulgaria, Romania and Albania are among the nations who've adopted Forbes' favorite policy, which he says makes it easier to enforce collection, a huge problem in Greece.

Privatization: About $70 billion worth of state-owned enterprises have been identified as candidates for privatization.Ever the optimist, Forbes believes the financial markets are prepared for and can absorb a Greek default, and that problems in Greece should not mean the end of the European Union."

Link to article and video of interview:  http://finance.yahoo.com/blogs/daily-ticker/everyone-making-bungle-things-steve-forbes-rx-fix-111418626.html

(ag) June 23, 2011, in Economy, Global Markets

Link to attribution page for photo:  http://en.wikipedia.org/wiki/File:Steve_Forbes.jpg

ARMs Becoming Popular Again?

Adjustable Rate Mortgages (ARMs), which caused so much financial pain for borrowers during the financial crisis who could not afford suddenly higher monthly payments when their mortgage loans repriced, appear to be on the rise again.

Link to article "Borrowers Wade Back Into Adjustable-Rate Mortgages" by Tara Siegel Bernard:http://bucks.blogs.nytimes.com/2011/06/21/borrowers-wade-back-into-adjustable-rate-mortgages/

(ag) June 22, 2011, in Consumer Protection, Lending Issues 

Preferred Shares of Fannie Mae & Freddie Mac May Be Worth Something After All

An interesting article in today's Wall Street Journal reports that:

"The preferred shares [of Fannie Mae and Freddie Mac] have climbed more than 50% to 11 cents on the dollar from about seven cents in recent weeks. Some attribute the gains to a bet among investors that the Treasury may be willing to cut the dividend payments the companies are making on $163 billion in capital the government injected into the funds. They reason that a cut might help boost the companies' profits—and the value of the preferred shares."

Link to article "Betting on Fannie, Freddie:  Shares of Mortgage Companies, Left for Dead, Are On Rise" by Al Yoon: http://online.wsj.com/article/SB10001424052702303936704576399410629583314.html?mod=googlenews_wsj

(ag) June 22, 2011, in Fannie Mae/Freddie Mac 

OCC Issues Proposed Overdraft Protection Guidance

The Office of the Comptroller of the Currency (OCC) has issued proposed guidance for automated overdraft protection programs and direct deposit advance programs.  These rules are much more general than FDIC's guidance.

The comment period ends July 8, 2011.

OCC expresses concern about the following practices:

• Excessive reliance on fee income from overdraft protection programs; 
• Failure to impose responsible limits on customer costs and imposition of fees that cumulatively exceed a customer’s overdraft credit limit; 
• Failure to assess a customer’s ability to manage and repay overdraft protection before it is made available to the customer; 
• Failure to monitor overdraft protection usage to identify excessive usage and credit risks and to take steps to address credit risks;
• Failure to charge off overdrafts in a timely manner; 
• Failure to ensure adequate risk management of overdraft protection programs, with appropriate internal audits and compliance reviews; 
• Failure to monitor and control promotional and sales practices for potentially misleading statements; and 
• Payment processing intended to maximize overdrafts and related fees.

Link to Proposed Guidance:  http://www.gpo.gov/fdsys/pkg/FR-2011-06-08/pdf/2011-14093.pdf

(ag) June 21, 2011, in Consumer Protection

JPMorgan Chase Hit With $2 Million CMP

The Office of the Comptroller of the Currency (OCC) has entered into a consent Civil Money Penalty (CMP) Order with JPMorgan Chase.  The basis for the administrative fine is high-pressure sales tactics and false or misleading statements in connection with credit protection or debt cancellation products sold by Chase Auto and Chase Home Lending Divisions as well as Chase Card Services.

Link to Order:  http://www.occ.treas.gov/news-issuances/news-releases/2011/nr-occ-2011-70a.pdf

(ag) June 21, 2011, in Consumer Protection

Financial Crisis Reading List

"There are many villains in the story of the recent crisis and much written to name them,
describe them and even curse them. If you want to know how it happened, read “Thirteen
Bankers” and “All the Devils Are Here.” If you want to know how to fix the problem, I highly
recommend “Regulating Wall Street,” from New York University’s Stern School of Business. If
you want to understand why the American public refuses to ignore the injustices associated with
executive compensation in bailed out companies versus budget cuts borne by the middle class,
read Rolling Stone’s article “Why isn’t Wall Street in Jail?” If you wonder why “no one saw it
coming” then I suggest you read up on Brooksley Born or, a decade later, Meredith Whitney."

--Thomas Hoenig, "Financial Reform:  Post Crisis":  http://www.kansascityfed.org/publicat/speeches/hoenig-DC-Women-Housing-Finance-2-23-11.pdf

(ag) June 20, 2011, in Financial Regulatory Reform

Thomas Hoenig and "Too Big to Fail"

 
Thomas Hoenig, President of the Kansas City Federal Reserve Bank, who has previously served as an outspoken member of the Federal Open Market Committee (FOMC), has been very vocal about his views that Dodd-Frank exascerbates the "too big to fail" problem.  He's also a proponent of expanding the Volcker Rule to restrict financial activities that are not part of the core banking business.

As Hoenig preparesto leave the Federal Reserve in October, he has spoken recently on both topics.

Link to American Banker article  " Fed's Hoenig on the Failure to End Bailouts, and Why Another Crisis is Coming" by Donna Borak: 
http://www.americanbanker.com/issues/176_108/hoenig-basel-tbtf-future-1038513-1.html

Link to speech "Back to the Business of Banking": http://www.kansascityfed.org/publicat/speeches/Hoenig-MonetaryandTradeConference-05-24-11.pdf

(ag) June 20, 2011, in Too Big to Fail, Economy, Volcker Rule, Financial Regulatory Reform, Dodd-Frank

 

Bad News for B of A

CNN Money reports that not only is Bank of America stock down 35% over the past 12 months, B of A faces more real estate related losses that will require it to raise more capital and could even require another bailout.  

In the article "How Long Can BofA Shareholders Tread Water", Larry Doyle says:

"While BofA is heavily involved in virtually every segment of today's consumer, commercial and investment banking world, it remains a consumer banking franchise. As such, its stock price is a reflection of its consumer banking operations and, in turn, the health of the American consumer. Within these circles, BofA's mortgage operation is the real engine but also the real drag on the company. In fact, I view BofA as a proxy for the American housing market."

Link to article:  http://finance.fortune.cnn.com/2011/06/13/how-long-can-boa-shareholders-tread-water/

(ag) June 18, in Economy

No More Reverse Mortgages for Wells Fargo

Wells Fargo is getting out of the reverse mortgage business because it believes home prices could decline even more.

Link to article "Wells Fargo Exits Reverse Mortgages on Unpredictable Market" by Dakin Campbell and Laura Marcinek:  http://www.bloomberg.com/news/2011-06-16/wells-fargo-exits-reverse-mortgage-business-on-unpredictable-home-prices.html

(ag) June 17, 2011, in Economy, Lending Issues

Examination Findings for Fannie Mae and Freddie Mac

The Federal Housing Finance Agency (FHFA) has issued its Report to Congress for 2010.  

Fannie Mae and Freddie Mac experienced continuing credit losses in 2010 from loans originated during 2005 through 2007, as well as forecasted losses that are yet to be realized. FHFA's examination findings identify key challenges, including credit risk,operational risk, modeling risk, and retention of qualified leadership and personnel.

Fannie Mae and Freddie Mac also continue to play a critical role in facilitating liquidity for single-family and multi-family housing. Their share of new single-family mortgage production was more than 60 percent ofthe market in 2010.

FHFA's examinations of the 12 Federal Home Loan Banks (FHLBs) are also described in the Report to Congress.  All 12 recorded positive annual earnings in 2010. At year end, all met the minimum statutory leverage capital requirement of 4 percent of total assets. The financial condition and performance of the FHLBs generally stabilized in 2010, however, they continued to be negatively affected by exposure to private-label mortgage-backed securities (MBS) and declines in advances (loans to members).

Link to report:  http://www.fhfa.gov/webfiles/21570/FHFA2010RepToCongress61311.pdf

(ag) June 17, 2011, in Fannie Mae/Freddie Mac, Secondary Mortgage Market

Capital and Liquidity Standards - Impact on International Competitiveness

 
Federal Reserve Board Governor Daniel K. Tarullo spoke to the House Committee on Financial Services today.  His topic was "Capital and Liquidity Standards" and their relationship to international competitiveness.

Much of his testimony addressed implementation of Basel III standards and how new international standards on regulatory capital and liquidity will foster global financial stability.

Link to testimony:  http://www.federalreserve.gov/newsevents/testimony/tarullo20110616a.htm

(ag) June 16, 2011, in Capital - Basel III

CFPB: What to Expect in the First Six Months

The American Banker is sponsoring a web seminar on "CFPB:  What to Expect in the First Six Months."  The date is June 29, 2011.  Topics to be addressed include:

• What areas of Dodd-Frank and consumer protection is the CFPB likely to focus on first and what will that look like?
• How is the agency likely to work with, or in opposition to, other bank regulatory agencies?
• Does the CFPB's chief enforcement officer have actions ready to file?
• Is the new CFPB chief likely to play it safe to avoid a rollback of Dodd-Frank powers?
• Will the CFPB seek to impose death penalty-like fines on any regulated entities? 

Link to registration page:  http://view.sourcemediamail.com/?j=febb1176726c0574&m=fe931570716d007577&ls=fdfb1572766d047f731c7276&l=feca1571716c057b&s=fe2c15737762007d771c79&jb=ff9e1570&ju=fe891d70726705747c&r=0

(ag) June 17, 2011, in CFPB

No Mergers Until You Eat Your Vegetables

Bank regulators are slowing the pace of bank mergers by requiring banks to clean up their portfolios and achieve a good safety-and-soundness rating before any acquision is approved.  Regulators are also requiring more capital.

According to a Wall Street Journal article, "Bank acquisitions, which accounted for 8.1% of all U.S. mergers in dollar value in the expansionary era of 1995-2004, have since accounted for a declining share, sinking to 1.7% last year and 0.9% this year, according to Dealogicaccording to Dealogic, which tracks corporate transactions."

The Federal Reserve is taking the position that regulators "should discourage systemically consequential growth or mergers unless the benefits to society are clearly significant."  So, although no asset-size cap has been formally established through legislation to limit too-big-to-fail institutions, this regulatory policy is slowing consolidation and limiting growth.

Regarding capital requirements, the Wall Street Journal article says:
"Until recently, bank investors expected the capital buffer for the U.S. to be one or two percentage points more than the international standard of 7% of assets, bank analysts say. Now they believe it could hit two to 2.5 points more."

Link to article "Bank M&A Goes MIA in 2011" by Randall Smith and Gina Chon:  http://online.wsj.com/article/SB10001424052702304665904576385883522376402.html

(ag) June 15, 2011, in Capital, Too Big to Fail 

Call for Papers - Dodd-Frank Implementation

The Financial Institutions and Consumer Financial Services Section of the American Association of Law Schools (AALS) has issued a Call for Papers for the AALS Annual Meeting – January 2012.

The topic is "Rubber Hits Road: Implementing Dodd-Frank Amid Reform Fatigue."

For more information, contact: Professor Erik Gerding, University of Colorado at profgerding@gmail.com Abstracts are due no later than August 30, 2010.  

(ag) June 15, 2011, in Financial Regulatory Reform