by Bob Mann, Division Claims Manager

You can be sure that one of the hottest topics in the banking industry in the upcoming year will be predatory lending. Consumer advocates, state, local and federal officials and regulators have all decried abusive lending practices that they say prey on the poor, uneducated, minority, female, and elderly There is proposed legislation at all levels of government designed to curb predatory practices. Law enforcement officials, both state and local, are looking very seriously at enforcement actions designed to prevent such lending abuse. And, as always, the regulators remain vigilant.

You may think that your institution will not be affected by this controversy because it does not engage in any predatory practices. If you do think that, you may be very wrong. There is a disturbing trend now among opponents of predatory lending to target institutions who only innocently and indirectly aid predatory lenders by purchasing predatory loans or mortgage backed securities based upon predatory loans. As a consequence, your institution may have exposure simply because it indirectly invested in such abusive loans.

BACKGROUND:
One of the problems is that no one can agree on a comprehensive definition of predatory lending. Like pornography, it defies easy definition. And like pornography, everybody believes they know it when they see it. The upcoming legislative season will no doubt see consumer advocates and industry groups arguing over the proper constraints to put on this amorphous category of lending activities. Moreover, because officials at all levels of government are looking to address real or perceived predatory practices, there is a real threat that enforcement will be “Balkanized,” forcing lenders away from those areas where enforcement is stringent to those areas where there is as yet no regulation.

At present, there are three federal statutes that provide some protection against predatory lending practices:

The Truth in Lending Act (TILA) (15 U.S.C. 1601, et seq)

The Home Ownership and Equity Protection Act (HOEPA) (15 U.S.C. 1601 et seq., 12 C.F.R. 226.32)

The Real Estate Settlement Procedures Act (RESPA) (12 U.S.C. 2601 et seq.)

In addition, there are a myriad of state statutory and common law remedies upon which private litigants have relied to provide some redress against the predatory lenders directly. As legislation against predatory lending increases, so too will the availability of legal remedies to combat predatory lending.

RECENT TRENDS:
Those seeking to stop lending abuse have significantly broadened their net. In a recent speech, Donna Tanoue, Chairman of the Federal Reserve, declared that “to effectively combat predatory lending, we must sever the money chain that replenishes the capital of predatory lenders and allows them to stay in business.” Specifically, she cited those institutions, which aided predatory lenders through loan purchases, and participation in syndications and securitizations backed by predatory loans.

In keeping with the new regulatory focus on the “money chain,” lawsuits no doubt have been, increasingly will be brought by aggrieved borrowers not against those institutions that originated the loans, but against those who purchased allegedly predatory loans from the originators.

There is some statutory support for these types of lawsuits. Under HOEPA, purchasers or assignees can be liable for all claims and defenses with respect to the mortgage that the borrower could assert against the creditor. Moreover, where the ties between the predatory lender and the financial institution were particularly close, litigants have had some success in bringing in the financial institution under the RICO statute.

Given the current regulatory and political climate, it is not unthinkable that a court might find a common law or equitable duty for purchasers of predatory loans to compensate aggrieved borrowers. Certainly, there are common law theories of conspiracy, aiding and abetting and unjust enrichment which if properly pled might at least get a litigant to a jury. While it is not clear how successful plaintiffs will be in making indirect participants responsible for predatory loans, we can count on more suits being filed. At very least, these suits will be expensive to defend. At worst, plaintiffs could prevail and receive big judgments.

Chairman Tanoue specifically cited the risk to financial institutions purchasing participatory shares in predatory mortgages in her October 13, 2000 speech. She stated:

The last several years have seen an increase in both class action lawsuits and state and federal enforcement activity against finance companies based upon fraud and other deceptive acts and practices in connection with real estate related loans. Many of these legal actions seek refunds for borrowers or to permit borrowers to cancel their loans and return the borrowed principal minus the interest and fees they have paid. To the extent that such suits involve loans that were pooled and sold to private investors, any legal requirement to refund or rescind loans could compromise such securities and hurt investors, including many banks that have invested in such mortgage-backed securities.

The bottom line here is that your institution may face exposure for predatory loans that it did not originate and that exposure could be significant. Therefore, when purchasing loans or mortgage pools it is critical to examine the underlying transactions to ensure that they might not be deemed predatory. This is not always easy because, as discussed above, there is no single definition for “predatory” lending. As a consequence, financial institutions should look to the certain indicia of predatory lending to determine whether loans fit into that category.

First, we must start with the premise that all subprime loans are not by definition predatory. Proper subprime lending affords credit to segments of society that would not be otherwise served. The question becomes what characteristics make a loan predatory? The regulators and other industry experts have answered that question in part. There is fairly general agreement that some of the characteristics of predatory lending include the following:

• The loan is made based upon the value of the collateral without regard for the borrowers’ ability to repay.
• Excessive points and fees are being charged.
• There are balloon payments envisioned in the loan documents.
• There are prepayment penalties.
• The accompanying insurance is to be financed.
• There are up-front payments.
• The loan has been refinanced repeatedly in order to charge points and fees with each refinancing.

Unfortunately, there is no litmus test that outlines, which of these categories must be met before a loan, will be considered predatory. Clearly a loan can contain one of these characteristics and still not be viewed as a predatory loan. Suffice it to say, though, that the more of these characteristics a loan embodies, the greater the chance is that it will be deemed predatory.

In addition, the FDIC has proposed a four-prong test that financial institutions should apply when considering investing in mortgage-backed securities.

1. The investor should assess the reputation of the originating lender.
2. The investor should review the originator’s mortgage loan statistics for characteristics that may raise “predatory flags.”
3. The investor should understand the credit enhancements protecting purchasers used to market the securities being sold.
4. The investor should examine the originator’s previous securitizations.

The message the FDIC is sending is clear: Before you invest in mortgage backed securities you must perform “due diligence.” Your only concern cannot be the promised return on your investment. You must know who the originator of the loans is and have a comfort level that the lender is not engaging in predatory practices. If you do not, your institution may expose itself to a lot more liability than it bargained for.

The lesson here is that your lending practices may be pristine, but you may still run into trouble by investing in or otherwise subsidizing predatory loans and lenders. Clearly, the regulators will be coming after you. State law enforcement officials and private litigants may not be too far behind.

by Mark Gamin, Sr. Claims Attorney

It is inevitable that your bank will be sued some time, somewhere, by someone. A defaulting borrower will allege that the bank promised to extend the loan and then reneged, causing his business to fail. A disgruntled employee will allege harassment of one kind or another. A customer whose faithless employee forged checks will allege that the Bank aided the thefts, or made the scheme possible.

It really doesn’t matter whether the claim is meritorious, or if your bank or your people did anything wrong. Whatever their theory, plaintiffs and their lawyers will feel that it’s worth taking their shot in a lawsuit. As a famous non-lawyer once observed, banks are where the money is. And that’s why the selection of trial counsel is so important.

On the morning that you receive the summons and complaint, then, one of the first things you will do is send a copy to your lawyer. Most banks will have regular outside counsel to advise on general corporate or regulatory matters, or for other general purposes. If you also have regular litigation counsel with whom you are satisfied, then you should send the complaint on to him or her. (Remember, though, that a general commercial litigator may not be the best choice for some lawsuits, such as employment-related claims.)

But what if you don’t have a litigation lawyer – one who will try a case – and you need one? How do you find a lawyer in whom you can have confidence?

The first steps are simple: Ask your lawyer, or your colleague, for a reference from another bank. Ask your board members. And don’t forget your D&O/E&O liability insurer. The claims attorneys at Progressive are each dealing with a hundred lawyers, all around the country, at any one time, and have a good idea about who is good – and who is to be avoided.

After getting referrals, interview two or three of the most promising candidates. Ask about their experience, their rates, their familiarity with the jurisdiction. Even after all this, the most important consideration in your decision may well be what it is in any job interview – how comfortable you are, on a personal level, with the candidate.

In any event, there are some things that you should look for, both before and after you retain a litigation attorney. At a minimum, your lawyer should be able to make a plan and stick to it; should speak to you with candor and in plain English about the prospects for the lawsuit; should charge a reasonable rate that makes you feel that you’re getting value; and should always act with the bank’s interests foremost in mind.

A Litigation Plan. Within a couple of weeks after being retained, a lawyer should have a plan for extricating the bank from the lawsuit as quickly and cheaply as possible. This will involve a myriad of possibilities, depending on the nature of the case. Perhaps the bank should file a counterclaim, or bring in third parties. Perhaps the bank should consider a quick settlement (which will often – but not always – involve the payment of money). Perhaps the Bank will need to retain experts. Perhaps there is an alternative dispute resolution scheme (e.g., mediation, arbitration, or another) that is likely to be more cost-effective than trial.

Whatever the permutations and factors involved in the making of a strategy, the important thing is that the lawyer have one, explain it to you in detail, and ask for your input on it. Too many lawyers act reflexively in the early stages of a lawsuit, and simply file an answer and proceed with expensive discovery and depositions, trusting that the lawsuit will resolve itself eventually (as all do). That kind of strategy is no strategy at all, and will cost your bank dearly.

Speaking of cost, one main benefit of forming a litigation plan is that it will enable the lawyer to tell you how much the legal fees will be for the case. A lawyer who makes excuses about his inability to give you a solid estimate of legal fees on which you and your board can rely is thinking about his interests more than yours.

And, eight or fourteen months from now, when trial is still a year away and the legal fees bills have already exceeded the original estimate, your lawyer must tell you why that came to be. In that circumstance, the lawyer owes you one of two things: (a) a good explanation or (b) a refund.

Speaking English. A lawyer should be able to explain any legal problem, any legal concept, and any legal ruling in plain language. If you don’t understand the explanation, it’s not because you’re not sophisticated in the law, or because the case is too complicated – it’s because you’re lawyer isn’t doing a good enough job at translating the matter for you. Ask questions. When your lawyer asks if you understand, don’t say “yes” unless you do. When your lawyer asks you if you have any more questions, don’t say “no” – ask them. What you might think is a dumb question is often the most important one.

Along with avoiding jargon, a lawyer should follow the same rules for responsiveness that you do for your customers: each call should be returned that same day if possible, but in no event more than 24 hours after the message is received. If a lawyer is too busy to return your calls quickly, he’s probably too busy to be handling your case. He should give you copies of every significant pleading, motion, discovery response, and order as soon as they are issued or filed.

Fees. “Never buy from a rich salesman. Always hire a rich lawyer.” Whatever the wisdom in that old joke, a lawyer should charge, and you should expect, a reasonable fee.

That, of course, begs the question. Experienced lawyers in New York City, Los Angeles, Philadelphia, and other big cities can cost $350 per hour and up (and a few of them are worth it); while lawyers in rural areas can charge $65 per hour (and some of them are no bargain). The amount of a fee, by itself, says virtually nothing about the quality of the lawyer – and it says absolutely nothing about whether that is the right lawyer for your bank or your case. But remember that just because your case is pending in a big city doesn’t mean you have to pay what is deemed the “going rate.” There are a range of rates – including those for excellent banking litigators – available in every jurisdiction.

At Progressive, we provide each bank’s litigation counsel with billing guidelines that spell out what kinds of billing practices are acceptable, and what kinds of practices appear to be used to inflate bills without providing value. Unfortunately, those latter kinds of practices are all too common, but you don’t have to tolerate them.

You Call The Shots. Some banks face two, three, or more lawsuits at any one time. If your bank is one of those, you need not use the same lawyer for every case. An employment discrimination case will require skills and a body of knowledge different from a lender liability case. Some lawyers can litigate both kinds of cases, and litigate them well – but not all lawyers can.

The bottom line is that if you take care in the selection of counsel, then it’s a buyers’ market, even for good lawyers. And when you’re facing a lawsuit, a good lawyer can be – should be – your bank’s best friend.

by Judith Yokaitis-Skutnik, Litigation Manager

A number of banks have been sued in individual and class action lawsuits stemming from alleged overcharges on trust accounts. The claims relate to trusts established years ago under trust agreements in which a bank agreed to charge a fixed fee based upon the value of the assets held in trust. Allegedly, in later years, the bank charged fees in excess of those provided in the trust agreement. Plaintiffs in these cases generally seek a refund of the alleged overcharges, along with interest and punitive damages.

At least one group of plaintiffs will be receiving a substantial payout as the result of such a suit. Last year, Bank of America Corp., without admitting any wrongdoing, agreed to pay approximately $35 million to settle a class action lawsuit seeking punitive damages in connection with trusts managed by a bank it acquired 1992. The large settlement was reached despite the fact that Bank of America had previously refunded $24 million in charges and $18 million in interest to trust customers.

Other banks face similar lawsuits. The cases point out the need for trust departments to be certain they are managing trusts in accordance with their agreements.

by Judith Yokaitis-Skutnik, Litigation Manager

In early March of this year, a U.S. Senate subcommittee conducted hearings on the use of correspondent bank accounts by criminals to facilitate laundering of money derived from drug sales, tax evasion, and other illegal activities. The hearings followed a report on money laundering released by the subcommittee the previous month and discussing the results of a year-long investigation on the subject. The report and hearings reflect growing concern within governmental agencies that correspondent banking relationships between U.S. and foreign banks have led to U.S. banks’ becoming unwitting facilitators for the financing of major criminal activities.

Types of foreign banks identified as high risk for money laundering activities include shell banks with no physical presence in any country, offshore banks which are licensed to conduct business only with persons located outside the licensing jurisdiction, and banks licensed by jurisdictions with inadequate regulation of money-laundering activities and strong bank secrecy laws. It’s been estimated that $500 billion is laundered through the United States each year.

Although no one is disputing the importance of correspondent banking to legitimate international business transactions, a variety of measures to address abuse of correspondent banking by money launderers are under consideration within various government agencies. While it’s still uncertain whether changes or additions to statutes or regulations will result, regulators are increasing their interest in how banks handle their correspondent relationships.

The OCC has made it clear that a bank must exercise caution and due diligence with each correspondent account. In September of 2000, it issued a handbook for its examiners on the Bank Secrecy Act and money laundering. The handbook advises its examiners to consider a number of factors in evaluating correspondent accounts. These factors include purpose of the account, whether the correspondent bank is located in a bank secrecy or money laundering “haven,” the correspondent’s level of efforts regarding money laundering prevention and detection, and condition of bank regulation and supervision in the correspondent’s country. The handbook also notes that “the level of perceived risk in each account relationship…should dictate the nature of risk management.” Thus, although there is no “bright light test” for evaluating any correspondent account, there is increasing emphasis on a bank’s need to scrutinize all such accounts carefully.

Our team of experts are hitting the road to bring you the latest information on some of the hottest topics in the industry. Be sure to mark your calendar and we’ll see you along the way!

March 28th,
Westborough, MA
Massachusetts Bankers Association
Mike Weikle, “Internet Contract, Risk Assessment and Insurance Issues”

April 18th;
ABA Webcast Briefing
Gina Juhnke and Mike Weikle, “Minimizing Internet Risk”

May 13-14th, Chicago, IL
Financial Managers Society 2001 National Conference
Mike Weikle, “Managing Internet Banking Liability”

May 10th, Callaway Gardens
Georgia Bankers Association Human Resources Conference
Laura Simmons, “How to Minimize Employment-Related Problems”

May 10th, Charlottesville, VA
Virginia Bankers Association, Technology Symposium
Mike Weikle, “Managing Internet Banking Liability”

May 16th, Charlottesville
Virginia Bankers Association, Operations/Technology Seminar
Ann Intili, “Combating Check fraud”

May 22nd, Oklahoma City, OK
Oklahoma Society of CPAs, 2001 Banker/CPA Conference
Mike Weikle, Fraud Panel

Stop By and See Us!

April 3-4 Indiana Mega Conference
April 17 Bank World
April 25-28 Louisiana Annual Conference
April 29-May 2 Massachusetts Annual Convention

May 5-8 Pennsylvania Annual Convention
May 6-8 New York Annual Convention (updated)
May 10-11 Delaware Annual Meeting & Dinner
May 13-15 Financial Managers Society
May 16-20 Mississippi Annual Convention
May 27-30 Georgia Bankers Association Annual Convention

June 2-5 Western Independent Bankers CFO Conference
June 3-6 South Carolina Association Annual Convention
June 17-20 Alabama Annual Convention
June 19-22 Illinois/Michigan Bankers Association Annual Convention
June 21-24 Maine, Vermont, and New Hampshire Annual Meeting & Conference
June 28-30 Washington Annual Convention

Employer Alert for Banks With 50+ Employees

OFCCP ISSUES NEW REGULATIONS GOVERNING THE CONTENTS OF AFFIRMATIVE ACTION PLANS
Any company with 50 or more employees and which either (1) serves as a depository of Government funds in any amount or (2) is a financial institution which is an issuing and paying agent for U.S. savings bonds and savings notes in any amount is considered a “federal contractor” and must develop a written affirmative action compliance program for each of its establishments. On November 13, 2000, the Office of Federal Contract Compliance Programs (OFCCP) issued new regulations governing affirmative action plans for federal contractors, which went into effect on December 13, 2000. Federal contractors are not required to revise affirmative action plans which were in effect prior to December 13, 2000. For example, if a contractor’s affirmative action plan has a July 1, 2000 start date, the plan will not need to be modified to comply with the new regulations until July 1, 2001. In addition to changes to the basic plan preparation process, the revised regulations require employers to perform, maintain and submit compensation analyses and to submit bi-annually an Equal Opportunity (EO) Survey.

The Equal Opportunity (EO) Survey is a burdensome new reporting requirement which will be sent to half of all contractor establishments each year (50,000 EO Surveys have already been sent to employers throughout the country). The EO Survey resembles a “supercharged” EEO-1 report and, in addition to requiring that the employer certify that it had a current affirmative action practice in place, it requires submission of extensive employee data, including applicant flow, new hires, promotions, terminations, workforce incumbency, compensation, and tenure data, each broken down by race, ethnicity and gender. Since the EO Survey is based only on full-time employees, to complete the EO Survey, employers must use workforce, personnel activity and compensation data different from that which is used to prepare EEO-1 reports or affirmative action plans, both of which include part-time and full-time employees. The revised regulations also modify basic affirmative action plan preparation requirements.

The OFCCP will use the EO Survey information to identify “problem” employers and to schedule compliance reviews. The OFCCP previously announced that it will use an analytical model to “rank contractors based on the number and nature of adverse indicators present in the survey data.” Employers will be scheduled for audit starting with those with “the highest ranking on the indicator scale.”

The revised regulations significantly increase the compliance and reporting burdens on financial institutions. With respect to the EO Survey, employers should be conducting “trial runs” of their ability to produce the data and perform basic analyses to identify problem areas. Accuracy is imperative because once EO Survey information is in the OFCCP’s hands, it will be compared with subsequent information submissions. Inconsistencies will raise questions about the employer’s record-keeping practices and data integrity. Indeed, employers are faced with the daunting task of generating accurate data in a novel new format in a relatively short time. With respect to the other significant changes brought about by the new regulations, employers should scrutinize their existing record-keeping and compliance procedures to ensure they are ready for an OFCCP audit. If you have questions regarding the EO Survey, preparing affirmative action plans which comply with the new regulations or reviewing your current compliance posture, please call the EPL Helpline at (888) 840-1498. If you currently have EPL coverage through the ABA-sponsored insurance program, attorneys from Jackson Lewis (one of the nation’s largest workplace law firms) will be available to assist you as a free service to our insureds. If you are not currently an EPL customer, please do not hesitate to Jackson Lewis attorneys Matt Halpern or Joy Chin, at (516) 364-0404 or halpernm@jacksonlewis.com or chinj@jacksonlewis.com.

employment practices helpline in action!

For the last several months, Progressive has offered its EPLI customer’s access to an Employment Practices Helpline to obtain free advice on employment-related matters. Progressive partnered with Jackson Lewis, a national law firm representing management exclusively in labor, employment and benefits law and related litigation, in order to provide this service to our customers.

Utilizing the Helpline is simple. Customers call (888) 840-1498 and speak with an attorney at Jackson Lewis. The attorney reviews the details of the situation with the customer and provides practical advice specific to the situation. This consultation is provided free of charge to our customers and remains confidential – particulars of the conversation are not shared with Progressive or anyone else.

Progressive’s customers have already utilized the Helpline in a variety of situations. For example:

• Unemployment Insurance Defense. Inquiry from a manager requesting assistance in preparing a response to a former employee’s request for unemployment insurance benefits. The former employee had been discharged for attendance and policy violations.
• FMLA. Inquiry from a manager requesting advice about re-assigning a managerial employee who has taken leave, on a recurring basis, under the Family and Medical Leave Act (FMLA).
• Leave of Absence. Inquiry from a manager requesting advice about the possibility of terminating an employee who has been absent on extended sick leave, but who has not reported the extent of her illness and who has not contacted her supervisor (in violation of company policy), since her initial sick report.
• Disclosure of Records. Caller requested advice about responding to an employee’s creditors who were asking for detailed background information concerning the employee which was beyond the usual scope of such requests.
• Medical Leave. Caller requested to be provided with sample sick and absence policies, which were beyond the scope of the hotline.
• FMLA. Inquiry from a manager requesting advice about the types of inquiries he was permitted to make under the Family and Medical Leave Act (FMLA) and the California Medical Confidentiality Act (CFRA).
• ADA Accommodation. Inquiry from a manager requesting advice about the employer’s responsibility to accommodate a disabled employee who, because of a disability, is becoming unable to perform job assignments.
• Wage/Promotion Discrimination. Caller requested advice about an employee’s claims of age discrimination based on failure to receive a bonus and promotion.
• Records Disclosure. Employer requested advice regarding their obligation to provide an employee’s personnel file to a former workers’ compensation carrier.

In each of these situations, the customer was provided with valuable advice on resolving the problem. Such advice allows our customers to make the most informed decisions possible and will hopefully avoid at least some employment-related litigation. If you have questions regarding Progressive’s Employment Practices Helpline, please call Laura Simmons, Employment Claims Supervisor, at (800) 274-5222 or call the Helpline directly at (888) 840-1498.