Cordray Is Now In The Field With His Examiners

Cordray is now in full gear. He is going around the country holding town halls and is on the internet asking the public to send their complaints to him. This is designed to elicit areas of focus and perceived “unfair” practices in all areas of lending and servicing. The public, of course, is happy to tell stories of how they are being charged too much for overdrafts, credit cards, and the like. One thing a politician needs to do is respond to a lot of complaints to make it look like he is doing something for the constituents. That means Cordray will need to act against some lenders this year so Obama can say look what he is doing the protect the “hard working Americans” who are being abused by the big bad banks.

While this is happening he is sending his teams of examiners into all the larger lenders to find “abusive and unfair” practices. By starting at the biggest, he is hoping to see what the big lenders who can afford armies of lawyers and compliance people are doing, and then he will go to the smaller lenders and claim they are not doing it right. For the big banks and non bank lenders, this is not a major problem since they are most likely already in compliance to a great degree. For the small players, even if they are trying, they will not be in full compliance on something since the cost to do so is prohibitive. These teams just appear and they not only go through all of the policies and manuals, they actually listen in on calls to consumers to find someone saying something that is perceived by the examiner to be misleading or unfair. This is a major departure from past examinations where the review was of policies and procedures, and not intrusive on calls.

Thus far the big lenders and pay check people are not too upset as nothing has happened yet, and they are used to compliance examinations and have all the people on staff to deal with it. I suggest it is early. The Cordray army is just in the learning mode now. Many of the examiners are old hands from other agencies, but many are young and looking to make a name. They will gather the complaints, go back, and over time, determine areas of attack, and then new edicts and fines, and other actions will happen as we get closer to the election. Everything is regional, so a regional head can levy a fine because he decides something is abusive in his sole opinion. There is no appeal procedure. It is purely discretionary.

While Cordray makes the point that he is not going to try to set pricing, he can and is likely to do so through policy actions. It is not hard to set a policy related to overdraft fees which he has already done. It had been a practice to charge on the biggest then on down to the smallest overdraft balance. Now lenders have to charge first in first charged. This changes pricing in a back door way and reduces profits to the bank. More concerning, it is another way the administration is attacking bank profits.

Cordray is just getting going. As the election gets closer, you are likely to see some headline grabbing actions on overdraft fees and things like credit card charges. The banks have already stopped with teaser rates on credit cards and have ended 4% rates and are now back up to 12% so they are not accused of misleading people to use credit cards. The teaser rate applied if you paid your card bill on time, but was raised if you are late. This was a profit opportunity for the banks. Bottom line- the consumer pays a lot more and the banks earn less.

You have seen the Durbin amendment that cut debit card fees, now it is forced reduction of principal on mortgages. They are already forcing reductions in the overdraft fees. There is already talk of student loans are way too burdensome so the president told colleges they charge too much. Coming next is the government forcing lenders to cut the principal on student loans. Then there will be people complaining they are over burdened with credit card debt and the government will tell lenders they are being abusive on trying to collect these late debts and the fines will start, and then they will move to force banks to cut credit card balances just as they have home mortgage balances. It is an easy logical step from mortgages to overdraft to student loans to credit cards. The bottom line from the administration is – banks are overpaid bad guys and the poor “hard working American worker” is being abused by the big bad banks so let’s fine the lenders and force principal reductions. Somewhere around September is a good time for this to happen. Just before the election.

We are witnessing a major change in American culture from be responsible, work hard, pay your bills, to go ahead and run up debts and the administration will ride in and rescue you from the big bad, over paid bankers, who will be fined for trying to make you pay, and we will get you a principal reduction. With 50% of people paying no taxes, and $200,000 now being defined as “rich”, is it any wonder that we have an entitled populace now.

For real estate investors and lenders, you need to be well aware of this trend, and especially in residential. The consensus of the experts who are involved with Cordray issues is, if Obama gets reelected, you will see many new attacks on lenders and landlords. That is not a political view. That is the view of someone who is very left wing and a diehard Obama fan who I spoke with this past week, and who has deep experience on capital hill. If you are dealing with residential loans or assets, credit cards or anything where there is credit extended to consumers, you better have very competent counsel helping you with compliance.

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Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.