Banking Law Prof Blog

Not a Pretty Picture for Banks

FDIC's Quarterly Banking Profile for the Fourth Quarter 2007 is a bit grim.

• Quarterly net income for FDIC-insured institutions declined to a 16-year low.
• Record high loan loss provisions, record losses in trading activities, and good will impairment expenses were significant negative factors.
• One in four large institutions lost money in the fourth quarter.
• Net interest margins continue to decline.
• Full-year earnings fell to a 5-year low.
• Net charge-offs rose to a 5-year high.
• Three FDIC-insured institutions failed in 2007.

There is some good news:

• Asset growth remains strong.
• Domestic deposits posted record growth.
• Trust income rose.

Link:  http://www2.fdic.gov/qbp/2007dec/qbp.pdf

(ag) Mar. 5, 2008, in FDIC.

Chairman Bernanke Reports to Congress

Today, Federal Reserve Board Chairman Ben Bernanke presented the Semiannual Monetary Report to Congress before the House Financial Services Committee.  Most of the report discussed the deteriorating economy, noting that the Fed's balancing act now tips toward encouraging economic growth rather than  dampening inflation.  The Fed is striving to implement monetary policy "properly calibrated to foster our mandated objectives of maximum employment and price stability in an environment of downside risks to growth, stressed financial conditions, and inflation pressures."

Sluggish economic activity in the near term is almost a dead certainty.  There is substantial risk that " the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further."  Consumer price inflation has increased, so although Bernanke did not say it, we could be headed for a bad combination of stagnant economy + inflation = stagflation.

Bernanke noted that "monetary policy works with a lag," so it will be some time before we can determine whether the FOMC's aggressive reductions in the target federal funds rate of 225 basis points since last summer are accomplishing the desired results.

Other reportable items include:  1.  The Fed's proposed HOEPA regulations on which comments are still being received and evaluated.  After much berating by Congress, the Fed finally did get around to formulating proposed HOEPA changes.  2.  The Fed is engaged in informal encouragement to lenders to work with borrowers facing foreclosure.   It is difficult to make this sound impressive.  3.  Final Truth in Lending Act Rules should be forthcoming.  New credit card disclosures will be part of those rules.  4.  Separately, the Fed plans to use Federal Trade Commission Act authority to issue rules regarding unfair and deceptive practices by credit card issuers.

Link to testimony:  http://www.federalreserve.gov/newsevents/testimony/bernanke20080227a.htm

Link to other viewpoints about the testimony:  http://www.forbes.com/markets/feeds/afx/2008/02/27/afx4705136.html

(ag) Feb. 27, 2008, in Economy/Interest Rates

FOMC Minutes Available

Federal Open Market Committee (FOMC) minutes for two conference calls and a two-day meeting in January 2008, give us some insight into the Fed's think behind the two extraodinary rate cuts totaling 125 basis points within one week. Pressure from the financial markets overwhelmed all other considerations.  The rate adjustments appear to have been both too much and not enough.  Too much in that inflation is a very real risk and not enough in that the markets have not improved as hoped.

Link to FOMC Minutes:  http://www.federalreserve.gov/newsevents/press/monetary/20080220a.htm

See also today's Wall Street Journal front-page article, "Fears of Stagflation Return as Price Increases Gain Pace."

(ag) Feb. 21, 2008, in Economy/Interest Rates

OCC says, "Don't Confuse Me With the Facts!"

The Feb. 14, 2008, Press Release by Comptroller John Dugan is a stunning example of disregard for reality. 

1.  He says that national banks were not involved in predatory lending.  Okay, maybe so.

2.  He says that the worst abuses came from state-licensed lenders.  Still, maybe so.

3.  He claims that these state-licensed lenders are exclusively the responsibility of state regulators and anyone [Eliot Spitzer, in particular] claiming "that the OCC and national bank preemption have prevented the states from taking action against predatory or abusive lenders" is "just plain wrong."

How could the Comptroller forget about the Supreme Court case of Watters v. Wachovia?  The OCC fought tooth and toenail to prevent the Michigan banking commissioner from enforcing a state law that required state-chartered mortgage companies to register with the state to be monitored for consumer protection purposes?  OCC claims to have exclusive visitorial authority over operating subsidiaries of national banks [a state-licensed mortgage lender in this very case] and the Supreme Court upheld their position. 

Comptroller Dugan's Feb. 14, 2008, press release conveniently omits any mention of OPERATING SUBSIDIARIES.  He forgets to mention that, under Watters v. Wachovia, state regulators CAN'T EXAMINE ANY STATE-CHARTERED MORTGAGE LENDERS IF THEY ARE OPERATING SUBSIDIARIES OF NATIONAL BANKS. State regulators can't even require them to register for tracking purposes. The OCC wanted these state-chartered mortgage lenders under their exclusive regulatory authority as national bank operating subsidiaries so badly that they went all the way to the Supreme Court to achieve that result.  Even though it was clear that the OCC did not have the resources to examine these operating subsidiaries or to enforce sanctions for predatory lending practices, the OCC insisted on blocking the state from exercising any authority over them. 

This statement from Comptroller Dugan's press release is so completely contrary to the Supreme Court decision and the OCC's vigorous arguments in Watters that it seems Comptroller Dugan and his staff that allowed him to publish it have suffered total amnesia. He says, "Nothing the OCC has done has prevented the states from regulating and preventing abuses among the lenders that they license – lenders that are the source of most of today’s problems.  The states have ample authority – as well as clear responsibility – to set standards for these lenders and enforce them."

This is such a bald-faced misstatement that it should be grounds for going back to the Supreme Court for reversal of the Watters case.

Read this Press Release for yourself:  http://www.occ.gov/ftp/release/2008-16.htm

(ag)February 20, 2008, in OCC - I need a new category for "Regulatory Disinformation".

Year End Financial Data for Banks

FDIC's Letter to Stakeholders highlights the following bank stats from year-end 2007:

     *  FDIC-insured commercial banks and savings institutions reported net income of $28.7 billion in the third quarter of 2007, a decline of $9.4 billion (24.7 percent) from the third quarter of 2006. The year-over-year decline is primarily attributable to increases in provisions for loan losses and a decline in non-interest income.

    * Estimated insured deposits increased by $9.7 billion in the third quarter of 2007.

Link:  http://www.fdic.gov/about/financial/letters/07Q4_stake.html

(ag) Feb. 19, 2008, in FDIC

Getting Back To That Community Bank Lending Perspective

FDIC kicks off its two-year pilot project to identify best practices in affordable small-dollar loan programs. Thirty banks, headquartered in 17 states and ranging in assets size from $20 Million to $10 Billion will participate.

Key characteristics of a small loan program under this program include:

• Loans under $1,000
• Installment payments
• Interest rate less than 36%
• Low or no origination fees
• No prepayment penalties
• May include an automatic savings component
• Streamlined applications
• Financial education

Here's a link to the list of participating banks: http://www.fdic.gov/news/news/press/2008/pr08010.html

(ag) Feb. 19, 2008, in FDIC/Lending Issues

BSA Update

What's hot in the Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) arena?

1.  When the USA PATRIOT Act Correspondent Account Rules don't apply:  FinCEN's Jan. 30, 2008 Guidance says that financial institutions don't have to worry about those rules if they process negotiable instruments drawn on foreign banks.  No matter how many checks drawn on a single foreign bank you (as a bank) may process for customers, that foreign bank is not your correspondent.  That is not a "formal relationship."

Good to know!  Here's the link:  http://www.fincen.gov/fin-2008-g001.html

2.  New Guidance about how to fill out a Currency Transaction Report (CTR) when there's a sole proprietor involved:  Previously, CTR instructions said to file two Section A's (Persons on whose behalf the  transaction is conducted) as if Multiple Persons are involved in the transaction.  This is still permissible, but the new instructions recognize that the individual is the sole proprietorship, calling for the completion of only one Section A which indicates the individual's name and places the sole proprietorship name in the DBA box.  Use the individual's address.

LInk to new CTR instructions:  http://www.fincen.gov/fin-2008-r001.html

3.  NOT A MONEY SERVICES BUSINESS (MSB): If a business cashes its own employees' payroll checks or cashes checks for customers and applies a portion of the check proceeds to obligations owed to the business it is not a "check casher" and is not required to register as an MSB with FinCEN.

Link to Letter Ruling:  http://www.fincen.gov/FIN-2007-R002.pdf

4.  We really mean it!  FinCEN assessed a $12 Million fine against Sigue Corporation and Sigue, LLC, money service businesses (MSBs) in San Fernando, California.  This civil money penalty was assessed pursuant to a consent order.  At the same time, the Justice Department hit Sigue with $15 Million forfeiture under a deferred prosecution agreement for failing to maintain an effective Anti-Money Laundering (AML) program.  FinCEN's $12 M is included in payment of $15M under the Justice Department forfeiture.

Link: http://www.fincen.gov/20080128.pdf

5.  The Federal Reserve Board and the Indiana Dept. of Financial Institutions announced Monday that they had entered into a Written Agreement with Salin Bank & Trust, Indianapolis, Indiana.  The Written Agreement requires Salin Bank & Trust to bring its BSA/AML Program up to standard.

Link:  http://www.federalreserve.gov/newsevents/press/enforcement/20080201a.htm

(ag) Feb. 5, 2008, in BSA/AML

5. 

The FOMC Cuts Again

On the heels of last week's interest rate interest rate reduction of .75%, which was a very substantial cut and one taken in an unscheduled FOMC meeting, the Federal Open Market Committee (FOMC) lowered the target federal funds rate another .5% to 3%.  Dallas Federal President Richard Fisher was the lone dissenter.

I can't resist:  The first cut may have been the deepest, but this one is not inconsequential.

Link to FOMC Statement:  http://www.federalreserve.gov/newsevents/press/monetary/20080130a.htm

(ag) Jan. 30, 2008, in 2008.

Wal-Mart in Mexico

Thanks to Bank Lawyer's Blog for this report on Wal-Mart's "micro-lending" operations in Mexico.  Can you say "blatant usury"?

http://www.banklawyersblog.com/3_bank_lawyers/2008/01/wal-mart-embrac.html

(ag) Monday, Jan. 28, 2008, in Usury

The First Bank Failure of 2008

On Friday, Jan. 25, 2008, the OCC closed Douglass National Bank, Kansas City, MO, a $53 Million bank.
http://www.occ.gov/ftp/release/2008-7.htm

FDIC is Receiver of this failed financial institution.  All deposit accounts have been transferred to Liberty Bank and Trust Company, New Orleans, LA.  Cost to the Deposit Insurance Fund is estimated to be approximately $5.6 Million.

(ag) Monday, Jan. 28, 2008, in OCC.

Shot in the Arm or Shot in the Head? The President's Stimulus Proposal and the Fed's Dramatic Interest Rate Cut

This morning, for the first time in memory, the Federal Reserve's Federal Open Market Committee (FOMC) reduced the target federal funds rate 75 basis points in an action taken outside its regularly scheduled meeting.  After this dramatic cut, the fed funds rate is at 3 1/2%.   The FOMC also cut the discount rate 75 basis points to 4%.  FOMC member and President of the St. Louis Federal Reserve Bank Bill Poole voted against this rate cut because he would have waited to consider this action at the regular FOMC meeting next week.

The Federal Reserve is clearly more concerned with economic stimulus than with the possibility of inflation -- although there are inflationary indicators as well.  Lowering interest rates exacerbates inflationary conditions.

Link to Federal Reserve statement:  http://www.federalreserve.gov/newsevents/press/monetary/20080122b.htm

As foreign stock indexes showed sharp declines last week and yesterday in response to fears the the U.S. subprime meltdown will lead to a U.S. recession with global impact, the Federal Reserve obviously intended to demonstrate that it will act decisively and in a substantial way to rescue the U.S. economy.  But will this action achieve its intended result?  This abrupt action could signal that the situation is worse than previously perceived and it could signal that the Fed is reacting in a panic rather than in a measured way.

On  Friday, President  Bush weighed in on the state of the U.S. economy with a call for immediate economic stimulus through a sizeable tax cut package that would take effect quickly.  Foreign markets were not soothed by this plan.

The question of the day is whether these extraordinary measures by the Federal Reserve and the President will save the U.S. from recession -- or simply indicate panic and trigger inflation.

Link to White House statement:  http://www.whitehouse.gov/news/releases/2008/01/20080118-1.html

(ag) Jan. 22, 2008, in Economy/Interest Rates

Comparing U.S. Interest Rate Adjustment Policies with those in the U.K. and the E.U.

Here is a fascinating article comparing the Federal Reserve Board's Federal Open Market Committee (FOMC) response to the now-global crisis stemming from the U.S. mortgage meltdown with the response of the Bank of England (BOE) and the European Central Bank (ECB).  The ECB may be considering raising interest rates to combat the potential for inflation.

Link:  http://archive.constantcontact.com/fs018/1101875042839/archive/1101934910245.html

(ag) Jan. 14, 2008, in Economy/Interest Rates

The R Word?

If it declines, it headlines!  (My economy-related version of "If it bleeds, it leads.")

Goldman Sachs suggested on Wednesday that the U.S. could be headed down Recession Road:

Link:  http://www.kansascity.com/business/story/437955.html

Now, AP is singing that same tune.  The stock market finished down today & fears about the continuing fallout from the subprime mortgage meltdown are blamed.

LInk:  http://biz.yahoo.com/ap/080111/wall_street.html

(ag) Jan. 11, 2009, in Economy

Mayor of Baltimore Sues Wells Fargo

Here's a novel approach:  The Mayor and City Council of Baltimore filed suit in the U.S. District Court for the District of Maryland, Baltimore Division, against Wells Fargo Bank, N.A. and Wells Fargo Financial Leasing, Inc., claiming that "reverse redlining" that targeted Baltimore's underserved and vulnerable, primarily African-American, neighorhoods has resulted in a foreclosure crisis and substantial and irreparable damage to the neighborhoods and to the City of Baltimore.  The suit is brought under the Fair Housing Act

Link to Complaint for Declaratory and Injunctive Relief and Damages:  http://www.aba.com/aba/documents/GeneralCounsel/BankingDocket/Baltimore.pdf

(ag) Jan. 9, 2008, in Predatory Lending

Sheila Bair Makes the Case for Loan Modification

FDIC Chairman Sheila is no free-market advocate when it comes to consumer issues, so it comes as no surprise that she makes the case for loan modification for borrowers who are at risk of default as a result of rate resets and other problems related to the current mortgage industry crisis.

Here's a link to her article, which appears in the FDIC's Quarterly Banking Profile for the third quarter 2007, posted to the FDIC website on Jan. 9, 2008:

Link:  http://www.fdic.gov/bank/analytical/quarterly/index.html

(ag) Jan. 10, 2008