Banking Law Prof Blog

"Consumer Financial Protection Bureau: Besieged At Every Turn"

 
Photo:  Elizabeth Warren, President Obama, Richard Cordray - Nomination of a CFPB Director

Today, I gave a presentation at the Southeastern Association of Law Schools (SEALS) annual conference entitled "Consumer Financial Protection Bureau:  Besieged at Every Turn."

Link to my powerpoint slides:  Download SEALS Consumer Financial Protection Bureau Presentation

(ag) July 27, 2011, in Consumer Protection, CFPB

$85 Million Civil Money Penalty for Wells Fargo

The Federal Reserve announced that Wells Fargo has consented to an $85 Million civil money penalty (CMP). 

The CMP alleges that employees of Wells Fargo Financial, Inc., of Des Moines, Iowa, steered potential prime borrowers into more costly subprime loans and separately falsified income information in mortgage applications. In addition to the CMP, Wells Fargo is required to compensate affected borrowers.

This is the largest CMP the Federal Reserve has assessed in a consumer-protection enforcement action and the first formal enforcement action taken by a federal bank regulatory agency to address steering of borrowers into high-cost, subprime loans.http://www.federalreserve.gov/newsevents/press/enforcement/20110720a.htm

Link to FRB Press Release: 

(ag) Juy 26, 2011, in Consumer Protection

Rating Agencies, Greek Bailout, and the Potential U.S. Default

In a Wall Street Journal editorial, Holman Jenkins asks "Who elected the rating agencies?"  He says that a key concern of the European Central Bank in structuring the Greek bailout was the reaction of the rating agencies. 

Further, he claims that, in the U.S., the rating agencies have "turned an artificial crisis into a real one." 

"America's spending debate does not remotely make it any more of a default threat than it was a week or month or year ago. America's IOUs are still completely acceptable to the markets.  Even in the long term, the threat is not to bondholders. The threat is to Americans under 50 who think they can rely on Social Security and Medicare. The threat is to countries that hope the U.S. will fight their wars for them. . . .But the debt to bondholders will be the last to be dishonored."

Link:  http://online.wsj.com/article/SB10001424053111903591104576469923832521268.html

(ag) July 26, 2011, in Rating Agencies, Economy

Take Me Out to the Ball Game, Buy Me Some Peanuts and a Bank Bailout

The New York Times Deal Book has a story about the federal agency softball teams that play on the National Mall.  FDIC's team is called "Too Big to Fail" -- although its win-loss record indicates otherwise.  The SEC fields a team called "Naked Shorts."  The Veterans Administration team is "VA is for Lovers."  I have to confess to playing second base for FDIC's softball team many years ago as a "baby lawyer," but I don't recall a catchy team name -- just camaraderie after work.

Link to story:  http://dealbook.nytimes.com/2011/07/25/on-this-field-regulators-find-no-one-is-too-big-to-fail/

Intriguing Question: Is Pres. Obama Wall Street's Friend or Foe?

Here's an article that points out that opinions differ dramatically:  "Is Obama Wall Street's Best Friend or Mortal Foe?" by Ron Klain:  http://www.bloomberg.com/news/2011-07-26/is-obama-wall-street-s-best-friend-or-its-mortal-foe-ron-klain.html

(ag) July 25, 2011, in Economy

 

CFPB: What Do Republicans Want?

On July 18, 2011, the House passed legislation that would curtail the Consumer Financial Protection Bureau (CFPB).

Republicans are expected to refuse to confirm a Director for the Consumer Financial Protection Bureau (CFPB) without certain key changes:

• Place the CFPB under the appropriations process;
• Replace the Director with a commission;
• Reduce the veto vote required to a simple majority for the Financial Stability Oversight Council (FSOC) to overturn a CFPB rule and give prudential regulators more ability to block CFPB actions.

The bill has little chance in the Senate.  However, the President's nomination of Richard Cordray to head the agency may have an equally slim chance.

The financial industry strongly opposes the CFPB. 

But others remain hopeful that the new bureau will make a difference.  As one CNN Money reader says,

"If you can experience the 2008 financial meltdown and respond by saying, 'we really don't need more protection from the financial sector,' then you are truly, truly lost."

Link to CNN Money article:  http://money.cnn.com/2011/07/25/pf/consumer_bureau_opinion/ 

Link to article "House Bill Revamps Consumer Agency":  http://www.politico.com/news/stories/0711/59624.html 

Link to Sen. McConnell Press Release, July 18, 2011:  http://mcconnell.senate.gov/public/index.cfm?p=PressReleases&ContentRecord_id=cb2bf8bf-51ce-4920-ac9d-3e9962d99d92&ContentType_id=c19bc7a5-2bb9-4a73-b2ab-3c1b5191a72b&Group_id=0fd6ddca-6a05-4b26-8710-a0b7b59a8f1f

Link to May 2, 2011, letter:  http://talkingpointsmemo.com/documents/2011/05/senate-republicans-threaten-to-block-all-consumer-protection-bureau-heads.php?page=1

(ag) July 25, 2011, in Consumer Protection, CFPB 

Happy Birthday, Dodd-Frank!

 
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law one year ago today.  Many significant provisions become effective today.  Many more aspects of the law remain to be implemented through regulation.

(ag) July 21, 2011, in Dodd-Frank

My Interview about Fannie Mae/Freddie Mac and Transfer Tax Liability

Following is a link to a National Public Radio (NPR) interview I participated in concerning the liability of Fannie Mae and Freddie Mac for real estate transfer taxes.  The answer turns on whether these GSEs are government agencies exempt from the tax or private corporations liable for the tax. The story aired yesterday on Marketplace. 

Link to article about Andy Meisner, County Treasurer for Oakland County, Michigan, who has sued the two GSEs:  http://www.dailytribune.com/articles/2011/06/21/news/doc4e013a81bef9c362126456.txt

Link to NPR Interview:  http://marketplace.publicradio.org/display/web/2011/07/20/pm-county-treasurer-fannie-mae-and-freddie-mac-owe-back-taxes

(ag) July 21, 2011, in Fannie Mae/Freddie Mac

OCC Issues Final Rule on Preemption under Dodd-Frank Today

Today, July 20, 2011, the OCC issued its Final Rule on the scope of federal preemption under the Dodd-Frank Act.  The Dodd-Frank provisions and this OCC regulation become effective July 21, 2011.

The Federal Register version of the final regulation identifies comments -- both pro and con -- which have been received by the OCC in response to the proposed regulation issued May 25, 2011.

Key points: 

• The preemption shield has been eliminated for operating subsidiaries of national banks as well as op subs of federal savings associations.
• Federal thrifts can no longer avail themselves of "field preemption."  Their preemption standard is the same as that for national banks.
• The OCC removed language from its 2004 regulations which differed from that articulated in the Dodd-Frank Act and in the Barnett Bank of Marion County , N.A. v. Nelson case (rejected language called for preemption of state laws that "obstruct, impair, or condition a national bank's powers) and substituted the language from Dodd-Frank and Barnett:  calling for federal preemption of any state law that "prevents or significantly interferes with the exercise by the national bank of its powers."
• The OCC still contends that, although it is changing the language of its regulation, it did not need to repeal the 2004 regulations that were essentially "gutted" by Dodd Frank.  The OCC opines that all the prior preemption determinations remain in effect because the Dodd-Frank standard is not limited to the "prevents or significantly interferes" standard, but rather encompasses all the reasoning of the Barnett case and the OCC's interpretation of that case, which OCC says remains unchanged.  This is sure to provoke controversy.
• The OCC also contends that the existing categories of state laws that are preempted remain valid because they represent the OCC's review of the impact of each law.  The OCC says that the Dodd-Frank requirement for "case-by-case" preemption determinations will only affect future preemption determinations.
• The final regulation revises the OCC's 2004 visitorial powers rule to conform to the U.S. Supreme Court opinion in Cuomo v. Clearing House Association, L.L.C.  The new OCC regulations follow the Dodd-Frank provisions that make it clear that a state attorney general may bring an action against a national bank in a court of appropriate jurisdiction to enforce applicable laws.

Link to OCC's News Release (NR 2011-95 - July 20, 2011) and Final Regulation:  http://www.occ.gov/news-issuances/news-releases/2011/nr-occ-2011-95.html

(ag) July 20, 2011, in Federal Preemption

The Ostrich Defense Is Alive -- But Does It Work?

 
The "ostrich defense," "idiot defense," or "Sergeant Schultz (I know nothing, I see nothing, I hear nothing) defense" is being asserted again -- this time by Rupert Murdoch in his testimony before the U.K. Parliament's Culture, Media, and Sport Committee yesterday. 

Although he is CEO, he has denied any knowledge that News of the World (now defunct) employees were intercepting voicemails and paying police for stories.

According to Bloomberg reporters, Murdoch testified that:  “The News of the World is less than 1 percent of our company.” He said he may have “lost sight” of the paper because it was “so small in the general frame of the company.”

Corporate Governance experts suggest that when the CEO disclaims knowledge of and accountability for corporate wrongdoing, he should be removed as CEO.  Since Murdoch holds almost 40% voting control of News Corp, it is not likely that he would be removed involuntarily, but he could be pressured to resign voluntarily.

The Bloomberg article quotes Harvard Business School professor Jay Lorsch as saying, “If he didn’t know what was going on, he’s doing a lousy job as CEO and the board should replace him.  The board should be asking, ‘Where were you?’ The buck stops with him.”

Someone should remind Murdoch's lawyers that this "no-nothing" defense did not work so well for CEOs of Adelphia, WorldCom, and Enron.

 Link to article:  "Murdoch's Refusal to Take Responsibility May Undermine Credibility as CEO" by Carol Hymowitz and Andy Fixmer:  http://www.bloomberg.com/news/2011-07-20/murdoch-s-refusal-to-take-responsibility-may-undermine-credibility-as-ceo.html

(ag) July 20, 2011, in Corporate Governance

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

 

 

This Board of Directors "Qualifies for an 'F' in Every Category"

Corporate Governance profs take note of another illustration of how not to run a board of directors.  This New York Times article discusses Rupert Murdoch's rubberstamp board for News Corporation.

"'This is a board that qualifies for an ‘F’ in every category,' Nell Minow, a member of the board of GovernanceMetrics International and founder of the Corporate Library, a governance firm, said without any hesitation. 'It is the ultimate crony board.'”

Link to article: "Murdoch's Board Stays Silent as Scandal Widens" by Andrew Ross Sorkin :  http://dealbook.nytimes.com/2011/07/18/murdochs-board-stays-silent-as-scandal-widens/?scp=2&sq=murdoch%20board%20of%20directors&st=cse

(ag) July 19, in Corporate Governance

Richard Cordray - President's Choice for CFPB Director

 
The President has announced his intention to nominate Richard Cordray as Director of the Consumer Financial Protection Bureau (CFPB).  Mr. Cordray is currently the head of the CFPB's Enforcement Division and former Attorney General of Ohio.

Although President Obama has dodged some opposition by passing over Elizabeth Warren, he will not have an easy time obtaining Senate confirmation of Mr. Cordray, who joins a list of appointees awaiting confirmation, including the heads of the FDIC and the OCC.

Link to White House Press Release:  http://www.whitehouse.gov/the-press-office/2011/07/17/president-obama-announces-richard-cordray-director-consumer-financial-pr

Link to New York Times article:  http://www.nytimes.com/2011/07/18/business/former-ohio-attorney-general-picked-to-lead-consumer-agency.html?pagewanted=all

(ag) July 18, 2011, in Consumer Protection, CFPB

Janus Capital - New 10b-5 Case

 
Here's the abstract of a talk I'm giving next week at the Southeastern Association of Law Schools (SEALS):

"Janus Capital:  Driving a Big Truck through 10b-5" 

On June 13, 2011, the U.S. Supreme Court issued a 5-to-4 opinion in Janus Capital Group, Inc. v. First Derivative Traders which eliminates liability for mutual fund advisers who prepare prospectuses for affiliated entities.  Justice Thomas, joined by Justices Scalia, Alito, Kennedy, and Chief Justice Roberts, opined that for SEC Rule 10b-5 purposes, the "maker" of a statement, which may be untrue or misleading, can only be the person or entity with "ultimate authority over the statement, including its content and whether and how to communicate it."  Justice Breyer, joined by Justices Ginsburg, Sotomayor, and Kagan, authored a cogent dissent.  

How does Janus Capital square with Stoneridge Investment Partners, LLC v. Scientific -Atlanta, Inc.  and Central Bank of Denver, N.A. v. First Interstate Bank of Denver?  What are the future implications?

(ag) July 18, 2011, in Securities Law

First Woman CEO of a Top 20 U.S. Bank

KeyCorp's CEO Beth Mooney

Link to WSJ List of Top 50 U.S. Banks:  http://blogs.wsj.com/deals/2011/03/24/ranking-the-50-biggest-u-s-banks-from-bofa-to-commerce-bancshares/

Link to article:  http://diversityinc.com/article/8453/1st-Woman-CEO-of-a-Major-Bank-KeyCorps-Beth-Mooney/ 

(ag) July 14, 2011, in Banking

OCC Provides Guidance for Prepaid Access Programs

The OCC has issued Guidance explaining the risks posed by prepaid access programs -- that is, devices that facilitate consumers’ access to money electronically, including general purpose reloadable cards, payroll cards, government benefit cards, retail gift cards, mobile phones, and Internet sites. The consumer is able to add and store funds on the device, and use it to spend or withdraw the funds from a variety of sources.

The advantage for banks is lower credit or nonpayment risk.  These programs can be marketed to traditionally underserved customers.  Customers may use them instead of a bank account and transactions provide anonymous access to funds.  But these devices do run an increased risk of fraud, especially related to identity theft, and money laundering.  Third party providers add another source of risk that must be managed.

Link to Guidance: http://www.occ.gov/news-issuances/bulletins/2011/bulletin-2011-27.html

(ag) July 14, 2011, in Consumer Protection 

 

What If the Federal Reserve Can't Pull Any More Tricks From Its Sleeves?

A very provocative Wall Street Journal suggests that "The Federal Reserv's Toolbox Is Emptying."  The target federal funds rate is at rock-bottom and the Fed has just complete another round of buying Treasury securities to infuse liquidity into the economy.

And here's the pessimistic conclusion:  "Yet the results of these extraordinary efforts have been mixed. Deflation fears might have receded but were replaced by a spike in food and gasoline prices that has also undermined domestic growth. Meanwhile, the unemployment rate has actually risen of late, to 9.2% in June from 8.8% in March."

There's always the possibility that Congress will address our economy's problems.  Yeah, sure!

Link to article:  http://online.wsj.com/article/SB10001424052702304584404576442380750246052.html

(ag) July 13, 2011, in Economy

Sure Enough, the CFPB Will Immediately Go Into 100 Biggest Banks

Today's Wall Street Journal reports that the Consumer Financial Protection Bureau (CFPB) has stated that "it is preparing to dispatch examiners to more than 100 banks that together control 80% of the U.S. banking industry's assets. The agency's goal is to make sure banks aren't engaging in discriminatory lending practices and that their products and services don't put consumers at risk."

Link to article "Consumer Agency Set to Launch" by Maya Jackson Randall:  http://online.wsj.com/article/SB10001424052702303678704576442074175509028.html?mod=googlenews_wsj

(ag) July 13, 2011, in Consumer Protection, CFPB

 

Be Careful What You Ask For: CFPB without a Leader Has Only the Power to Regulate Bank Activities

Banks have spent millions of lobbying dollars opposing all aspects of the Consumer Financial Protection Bureau (CFPB) created by the Dodd-Frank Act. The new bureau's powers will be limited if there is no Senate-approved permanent Director by July 21, 2011, -- limited to focusing on banks rather than non-bank financial service-providers.

That's not what Congress intended. Congress sought to establish the CFPB as a consumer protection agency focusing on all financial product and service providers. For its powers to reach non-banks to become effective, the CFPB must have a Senate-confirmed Director. Senate Republicans have vowed to block any nomination, regardless of party. Cutting off your nose to spite your face? Or partisan politics as usual.

Link to article: "Banks to Pay Price for Director-Less CFPB" by Kate Davidson: http://www.americanbanker.com/issues/176_132/-1039896-1.html?ET=americanbanker:e7379:2278207a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=AB_Daily_Briefing_071111

Link to article: "Chicago: Top Lobbying Banks Got Biggest Bailouts: Study": http://www.thebestgovernmentmoneycanbuy.com/news/?p=771

Link to IMF Working Paper: "A Fistful of Dollars: Lobbying and the Financial Crisis": http://www.imf.org/external/pubs/ft/wp/2009/wp09287.pdf

Link to "The Billion Dollar Bank Heist": http://www.newsweek.com/2011/07/10/the-billion-dollar-bank-heist.html

(ag) July 12, 2011, in CFPB, Consumer Protection, Dodd-Frank, Congress

Washington Post Article Says the Bailout Did Pay Off

Here's part of what Allan Sloan and Doris Burke have to say in their article "It was a low-down, no good godawful bailout. But it paid:"

"The bailout, by the numbers, clearly did work. Not only did it forestall a worldwide financial meltdown, but a Fortune analysis shows that U.S. taxpayers are also coming out ahead on it — by at least $40 billion, and possibly by as much as $100 billion eventually. This is our count for the entire bailout, not just the 3 percent represented by the massively unpopular Troubled Assets Relief Program. Yes, that’s right — TARP is only 3 percent of the bailout, even though it gets 97 percent of the attention."

Link to article in full:  http://www.washingtonpost.com/business/it-was-a-low-down--no-good-godawful-bailout-but-it-paid/2011/07/05/gIQAbmIZ3H_story.html

(ag) July 11, 2011, in Economy

 

Legislating Regulatory Forbearance?

Didn't the S&L Crisis teach us that lowering capital standards in time of crisis to allow banks to "earn their way out of a hole" is a bad idea?

Apparently not:  Congress is considering legislation to dictate to bank regulators that they should be more lenient with capital standards. 

Congressman Bill Posey (R-FL) proposes that banks be allowed to treat non-accrual loans as accrual for capital purposes if they are current, amortizing, not paid from an interest reserve account and have not been more than 30-days delinquent within six months. 

Bankers say that regulators have been too aggressive in classifying loans as non-accrual. 

Regulators say this bill would cause understatement of problem loans and overstatement of capital.

Link to article "Fed Up with Talk, Bankers Push to Constrain Regulators" by Kevin Wack:  http://www.americanbanker.com/issues/176_131/bankers-push-constrain-regulators-1039869-1.html?zkPrintable=1&nopagination=1

(ag) July 11, 2011, in Capital, Congress

P.S.  There was a great comment asking for more clarification on this article about why certain loans are classified non-accrual even if payments have been received.  

The full article accessible by link above lists a few examples: 1.  Where payments are being made by someone other than the borrower -- maybe parents while the borrower is out of work.  Clearly this is a troubled loan that should be classified.  The parents have no legal obligation to pay.  2.  Modified loans, which are classified nonaccrual for six months.  Classifying such a loan is reasonable.  The borrower could not pay the loan as originally agreed.  This gives six months to see if he can pay under modified terms.  So, although payments are being received, these are risky loans which should be classified.  In neither instance is the borrower paying as agreed.  Classifying risky loans like this and requiring more capital is the right way to attempt to accurately reflect risk of loss and to require additional capital to compensate for increased risk.  

Hope this explanation helps!  --ag