Banking Law Prof Blog

Overdraft Fees on Debit Cards

Consumers are irate about huge overdraft fees on small purchases.  Banks claim they need the revenue.  Center for Responsible Lending says these fees hit hardest those who can least afford them.  The New York Times has a story today.

LInk:  http://www.nytimes.com/2009/09/09/your-money/credit-and-debit-cards/09debit.html?_r=1&pagewanted=print

(ag) Sept. 9, 2009, in Consumer Protection

Banking Law Hot Topics

My banking law class will be writing papers on the following Hot Topics in Banking Law for 2009:

1.  Federal Preemption – What are the limits to federal preemption?  Analyze the U.S. Supreme Court opinions in Watters v. Wachovia, Cuomo v. Clearing House Association and the Fifth Circuit opinion in Wells Fargo v. James.  Should “exclusive agents” of national banks be allowed to use preemption as a shield against state law?

2.  Community Reinvestment Act – What is it and what was its purpose?  Should the CRA be abolished?  Should it be expanded to cover other entities?  Why do uninformed people blame CRA for lending losses?

3.  Fannie Mae and Freddie Mac – What are these entities?  What was their original purpose?  How did they get into trouble?  What was the government response?  Should they be abolished? 

4.  The Federal Reserve and the Financial Crisis – What has the Federal Reserve done since January 1, 2007, to address the worst financial crisis since the 1930s and to try to prevent another Great Depression?  Has it worked?

5.  Credit Cards and Consumer Protection – What have the federal banking agencies done to curb credit card abuses?  Did they go far enough?  Did they go too far?  Are there other limitations that you recommend?  

6.  Credit Reporting Agencies – What are they?  What relationship do banks have with credit reporting agencies?  What are the key consumer protections involving credit reporting agencies and banks?  Are they effective?  Too costly?  Any other recommendations?

7.  State Regulators and Predatory Lending – What is predatory lending?  Why do states have an interest in preventing it?  How have states tried to prevent it?  Should it be addressed exclusively at the federal level?

(ag) Sept. 9, 2009, in Banking

Federal Reserve and the Discount Rate

Today, the Federal Reserve Board posted the minutes of its discount rate meetings from July 6, 2009 through Agu. 10, 2009.

Link:  http://www.federalreserve.gov/newsevents/press/monetary/20090908b.htm

What is the discount rate? 

"The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility--the discount window."

Link to FRB website for more information about the discount rate:  http://www.federalreserve.gov/monetarypolicy/discountrate.htm

(ag) Sept. 8, 2009, in Economy, FRB

Post Traumatic Slack Syndrome and the Economic Outlook (with thanks to Finn Kydland, Dolly Parton, and John Kenneth Galbraith)

President of the Dallas Federal Reserve Bank, Richard Fisher, is one of the clearest, most informative and entertaining speechmakers on economic issues I've encountered. The caption to this posting is the title of his recent remarks at the Laboratory for Aggregate Economics and Finance. 

He explains that our expected gradual economic recovery is made more difficult by the excess capacity that overhangs the market.  He says that after our spending boom crashed: 

"There are too many ships at sea; too many rail cars; too many airplanes and trucks; too many homes; too many hotels and apartments and office buildings; too many retail stores and malls and convenience stores; too much oil, natural gas and corn; and, according to Wall Street Journal reports this week, even too much champagne and bottled water.  And yes, thank you Lord, we have finally come to realize there are too many lawyers."

He further explains the purpose and anticipated workings of the government infusions of cash into the economy through the stimulus:

"If you go back to the rudimentary formula taught in high school economics to account for the makeup of GDP—consumption plus investment plus government expenditures plus net exports—the “G,” or government, variable is receiving enormous emphasis, while “C” is flaccid, “I” is hesitant and net “X” is tentative. At the present rate, federal, state and local authorities are expected to spend, net of intragovernmental transfers, $5.4 trillion in 2009—just under 40 percent of expected GDP.

The problem is that government stabilization measures come with a real long-term price tag: higher tax rates, greater national indebtedness and the prospect of higher interest rates driven by the government’s issuance of debt. These long-term costs of a larger government limit the American people’s willingness to rely on the public sector to drive overall economic growth. A fiscal gag reflex ensues, and the public-sector option looks less and less attractive as anything other than a temporary source of growth.

The major challenge facing U.S. fiscal authorities is meeting the need for near-term economic stimulus while pursuing a practicable plan to stabilize the government’s debt-finance obligations. The Secretary of the Treasury is doing his level best to reassure investors—both overseas and here at home—that the programs put in place by the Obama administration will work their magic and then be gradually withdrawn as the economy gets back into stride."

Fisher's quote from Galbraith is the following disclaimer:   “[T]he only function of economic forecasting is to make astrology look respectable.”

You'll have to read the whole speech to find out why he cites Dolly Parton as an economic expert!

Link:  http://dallasfed.org/news/speeches/fisher/2009/fs090903.cfm

(ag) Sept. 7, 2009, in Economy
 

G-20: Requiring More Capital and Restricting Bank Bonuses

G-20 Finance ministers met in London this week and and discussed a plan for reining in bonuses for bank executives.  The group of the world's most developed nations agreed that the stimulus needs to remain in place for now to avoid the continued threat of sliding into worldwide economic depression.  They also agreed that banks should be required to hold more capital.  Leaders of the G-20 nations will meet in the U.S. September 24 and 25.

Link to story:  http://www.bloombergnews.com/apps/news?pid=20601170&sid=afx1vwj_G6Qo

(ag) Sept. 6, 2009, in Economy

Eighth Circuit Recognizes Limits on Federal Preemption

The U.S. Court of Appeals for the Eighth Circuit recently ruled that national bank assignees or purchasers of mortgages are not completely shielded from state law violation claims by a blanket claim of federal preemption.  The case is Thomas v. U.S. Bank. 

Plaintiff/Appellants are Missiouri homeowners who received "high loan-to-value" second mortgages (reflecting total debt of 125% of the value of their homes) from FirstPlus Bank, a federally insured state-chartered bank which has since failed.  Their mortgages were purchased or assumed by other banks, including some national banks.

Plaintiffs claim that the loans violated state law, specifically the Missouri Second Mortgage Loans Act (MSMLA) which limits the type and amount of closing costs and fees that can be imposed on residential second mortgages secured by MissourI real estate.

The national banks removed the case to federal court and successfully moved for dismissal of the case, contending that state law claims were completely preempted by the Depository Institutions Deregulation and Monetary Control Act (DIDA). 

On appeal, the Eighth Circuit reversed and remanded to state court for trial.  The Eighth Circuit opinion distinguished preemption under the National Bank Act (NBA) and the limited scope of preemption provided by the plain language of DIDA.  NBA would have applied if national banks had originated the loans.  DIDA applies to loans originated by statte-chartered banks.

State law claims in this case are not preempted because state law usury limits are higher than the ceiling provided under federal law -- even though these claims are for non-refundable broker's fees that exceeded MSMLA limits and for closing costs and fees that exceeded the fees actually charged by third-party providers where the originator FirstPlus retained the difference.

The state law remedy -- forfeiture of interest and twice the interest paid -- is not preempted here -- if the state law claims can be established at trial.

Link:  http://www.aba.com/aba/documents/GeneralCounsel/BankingDocket/ThomasvUSBankNational.pdf

(ag) Sept. 5, 2009, in Federal Preemption, Lending Issues, Consumer Protection, Predatory Lending, Dual Banking

Second Quarter 2009 Not Pretty for FDIC Insured Institutions Nationwide

Although Texas banks may be doing "less bad" than the rest of the country as I've discussed in a previous post, the FDIC's Quarterly Profile based on aggregate second quarter figures for all insured institutions paints a grim picture for the banking industry as a whole following many years of profitability. Following are some key points (can't use the word "highlights" here) from the report:

• The banking industry posted its second quarterly loss in the past 18 years.
• Higher loss provisions still weigh heavily on industry earnings.
• Loss provision expenses have been growing in significance for two years.
• Margins improved slightly in the Second Quarter of 2009.
• Troubled loans increased at a slower rate in the Second Quarter.
• Noncurrent ["delinquent" or "90 days or more past due"] loan growth is outpacing growth in reserves.
• The noncurrent loan rate has risen to a record 4.35% of all loans and leases.
• On a more positive note, loans that were 30-89 days past due declined substantially.
• Overall capital levels have improved.
• The number of "problem" institutions is at a 15-year high.

Link:  http://www2.fdic.gov/qbp/2009jun/qbpall.html

(ag) Sept. 3, 2009, in Economy, Federal Banking Agencies/FDIC

Bringing Securitized Assets Back Onto Bank Balance Sheets

The comment period is open for a Joint Federal Banking Agency proposed regulatory capital rule.  Beginning in 2010, new accounting rules from the Federal Accounting Standards Board (FASB) will require major changes in the way banks account for currently off-balance sheet items, including securitized assets. 

How shoud the bank capital requirements be adjusted or phased-in to reflect these new items on the balance sheet and the true risk involved?

Link:  http://www.occ.treas.gov/ftp/release/2009-101.htm 

(ag) Sept. 3, 2009, in Capital

Increasing Deposit Insurance Premiums and Report on the Condition of Texas Banks

The Federal Reserve Bank of Dallas has published an excellent explanation of the FDIC's assessments on banks to restore losses to the insurance fund incurred by reason of bank failures during this Recession.  In addition to an informative discussion of how the deposit insurance fund gets its money, the article, Restoring Banking's Safety Net: Deposit Insurance’s Steeper Cost By Kory Killgo, highlights the fact that Texas banks, on the whole, are doing well compared to the rest of the country, despite the Recession. 

Could it be that Texas bankers learned some painful lessons during the Banking Crisis of the 1980s that are helping them perform well now?  Banking regulators in Texas also learned to be more vigilant and more conservative.  Once burned, twice shy pays off!

"Eleventh District banks [Texas, northern Louisiana, and southern New Mexico] have higher relative levels of deposits, so we would expect their assessments to be higher than banks elsewhere—but that isn’t the case. The reason involves the condition of the banks.

"The FDIC places insured institutions in one of four risk categories. In the Eleventh District, a greater percentage of banks falls into the lowest risk category—a function of district banks’ generally higher safety and soundness ratings and levels of capital. Ninety-three percent of Eleventh District banks are in the FDIC’s lowest risk category, compared with 86 percent of banks elsewhere. Because of these factors, they tend to have lower assessments.

. . . .

"The condition of Eleventh District banks offsets their relatively higher concentration of deposits, reducing assessments and freeing up capital."

(ag) Sept. 2, 2009, in Economy

Mexico's Ano Horrible - Report on Financial Crisis

The Dallas Federal Reserve Bank has issued an intriguing report on the impact of the Global Financial Crisis on the Mexican economy and the prospects for recovery.

Link:  http://dallasfed.org/research/swe/2009/swe0903b.cfm

(ag) Sept. 2, 2009, in Economy

California Fires Cause Temporary Bank Closings

Emergency preparedness and disaster recovery plans are required for every bank.  Due to wildfires, some banks are having to exercise those plans, much like banks affected by Hurricane Katrina.  On August 31, the Office of the Comptroller of the Currency authorized national bank offices affected by the California fires to close at their discretion and to make every effort to reopen as quickly as possible.

Note to compliance officers:  Update your disaster recovery plan!

LInk to Proclamation:  http://www.occ.treas.gov/ftp/release/2009-102.htm

(ag) Sept. 2, 2009, in Federal Banking Agencies/OCC

B of A - Getting Out of Harm's Way?

The Wall Street Journal has an article today about Bank of America seeking to repay part of the Bailout money it received.  Of course, the reason for repaying the money is to escape the intensive government scrutiny and restrictions that came with it.

LInk:  http://online.wsj.com/article/SB125176546582274505.html

(ag) Sept. 1, 2009, in Economy

George Soros and the Financial Crisis

  It's not bedtime reading, but well worth considering:  THE CRASH OF 2008 AND WHAT IT MEANS by George Soros.  If you aren't already an adherent, you should ponder Soros' theories of "reflexivity" and "radical fallibility." 

Reflexivity, fully described in his earlier book, THE ALCHEMY OF FINANCE, is discussed again in his current work.  Reflexivity distinguishes two aspects of human interaction with financial markets (and reality in general):  the cognitive function and the participating or manipulative function. 

He says, "I came to realize that market participants cannot base their decisions on knowledge alone, and their biased perceptions have ways of influencing not only market prices but also the fundamentals that those prices are supposed to reflect.  ...Participants' thinking plays a dual function.  On the one hand, they seek to understand their situation. . .the cognitive function.  On the other hand, they try to change the situation. . . .the participating or manipulative function."  [p. viii]

 "Reflexivity can be interpreted as a circularity, or two-way feedback loop, between the participants' views and the actual state of affairs.  People base their decisions not on the actual situation that confronts them but on their perception or interpretation of that situation.  Their decisions make an impact on the situation (the manipulative function), and changes in the situation are liable to change their perceptions (the cognitive function).  The two functions operate concurrently, not sequentially." [p. 10]

Radical fallibility, as applied to financial markets, says that "instead of being always right, financial markets are always wrong.  Markets have the ability, however, both to correct themselves and occasionally to make their mistakes come true by a reflexive process of self-validation. . . . .To be specific, financial markets cannot predict economic downturns accurately, but they can cause them."  [p. 77]

His perspective on market fundamentalists and financial regulation are equally intriguing:

"Market fundamentalists blame market failures on the fallibility of the regulators, and they are half right:  Both markets and regulators are fallible.  Where market fundamentalists are totally wrong is in claiming that regulations ought to be abolished on account of their fallibility.  That happens to be the inverse of the communist claim that markets ought to be abolished on account of their fallibility. . . .The fact that regulators are fallible does not prove that markets are perfect.  It merely justifies reexamining and improving the regulatory environment." [p. 78]

(ag) Aug. 31, 2009, in Economy

Consumer Information about Credit Cards and Mortgages

FDIC's Consumer News highlights information for the public about recent changes to credit card rules, prohibitions against abusive lending practices, and revised consumer disclosures.

Link:  http://www.fdic.gov/news/news/press/2009/pr09158.html

(ag) Aug. 31, 2009, in Consumer Protection

Edge Act Jurisdiction

Here's a forthcoming article to watch for:

"The 'Technicalities' of Edge Act Jurisdiction: Advocating for the Federal Courts' Adoption of and Adherence to a Uniform and Narrow Interpretation of 12 U.S.C. § 632," by Elizabeth Sheyn --  to be published in the University of Toledo Law Review. 

Abstract:  This article proposes a new (uniform and narrow) standard for interpreting the Edge Act of 1919, which provides a basis for original federal district court jurisdiction over civil suits arising out of “transactions involving international or foreign banking” or “out of other international or foreign financial operations."  Under the Edge Act, any defendant in a suit mentioned above may remove the suit from state court to federal district court.  This standard will remedy the federal courts’ recent adoption of a broad construction of the Edge Act, which has resulted in the consideration of cases that would ordinarily have no business being before a federal court, such as suits involving purely state law claims without any diversity of citizenship.

The abstract is available on SSRN: http://ssrn.com/abstract=1461823.

(ag) August 30, 2009, in International Banking

Washington Post & Too Big To Fail

On Friday, the Washington Post ran a feature on the "too big to fail issue," complete with data to demonstrate that the big have gotten bigger as a result of the bailouts.  Will this issue be addressed in the regulatory reform legislation working its way through Congress?  It's sure to meet well-organized, well-funded opposition to any "breakups" a la Ma Bell and the Baby Bells.  Antitrust is a dead language. And "free market" only means "let me do what I want until I get in trouble, just bail me out if I stumble." 

Link:  http://www.washingtonpost.com/wp-dyn/content/discussion/2009/08/28/DI2009082801337.html

(ag) August 29, 2009, in Economy, Financial Regulatory Reform

SEC, Bank of America, and Executive Compensation

The SEC is now saying that Bank of America acted in good faith but essentially made a careless error by not disclosing to investors its plans to pay bonuses to Merrill Lynch executives. (You won't be surprised to learn that B of A has said all along that it did nothing wrong.)

So why is the SEC backtracking?  Well, Federal District Judge Jed Rakoff is balking at approving SEC's quick $33 million settlement with Bank of America.  He thinks that if the problem is as bad as SEC initially claimed that they shouldn't be so quick to settle for so little.  He thinks SEC's enforcement should be more agressive.  SEC's puzzling response is that the bad behavior wasn't THAT bad?????

LInk to WSJ story:    http://www.washingtonpost.com/wp-dyn/content/article/2009/08/27/AR2009082703818_pf.html

Congress should be watching this watchdog.  It didn't bark when it should have and now it appears toothless.

(ag) August 28, 2009, in Executive Compensation

Texas Association of Bank Counsel - 33rd Annual Convention

The Texas Association of Bank Counsel (TABC) will hold its 33rd Annual Convention in Ft. Worth, TX, on Oct. 8 and 9, 2009.  Great topics and a great networking opportunity!

Link:  http://texasbankers.informz.net/texasbankers/data/images/2009_tabc_conf_bro.pdf

Guaranty Bank - Second Largest Bank Failure for 2009

Last Friday, the Office of Thrift Supervision (OTS) closed Guaranty Bank, Austin, TX, and appointed FDIC Receiver.  This is the 10th largest failure in U.S. history.  Cost to the deposit insurance fund is estimated at $3 Billion.  BBVA Compass, headquarted in Birmingham, AL, bought all the closed thrift's deposits and $12 Billion of its assets. 

Link:  http://www.fdic.gov/bank/individual/failed/guaranty-tx.html

(ag) August 27, 2009, in FDIC

Identity Theft: It Can Happen to Anyone

Today's story is that Federal Chairman Ben Bernanke has been a victim of identity theft.  His wife's purse was stolen and identity thieves began using the family checkbook.

Link:  http://news.yahoo.com/s/afp/20090826/pl_afp/uscrimefinancebankbernankenewsweek_20090826232518

Remind banking law students that the Federal Trade Commission (FTC) website has great information about how to prevent and respond to identity theft.  The motto is "Deter, Detect, Defend."

Link:  http://www.ftc.gov/bcp/edu/microsites/idtheft/

(ag) August 27, 2009, in Identity Theft