Banking Law

A few more interesting aspects of the Charter Bank deal that got the OTS on Defcon 1 PR alert last week showed up late last week in New Mexico Business Weekly.

The story shows that in many cases, the community banks that are being closed down are, in fact, "community" banks, relatively smaller institutions that are performing vital work for their local communities. In Charter Bank's case, it was acting as the primary originator and master servicer of loans for the New Mexico Mortgage Finance Authority, which provides financing assistance to low income home buyers in New Mexico. The buyer of Charter Bank's insured deposits and most of its assets (a good portion of which are covered by a loss sharing agreement with the OTS) isn't interested in fulfilling that public service role. The MFA needs to find a new master servicer and a new loan originator. According to its spokesman, its not exactly sure yet which institutions will take up the burden previously borne by Charter Bank.

The new Charter might be vastly different from the old one, said MFA Executive Director Jay Czar.

?From what I understand, they are going to be a depository bank and they are not going to do loan servicing,? Czar said. ?They are not going to do any of the work that [the old] Charter did with the MFA.

?There is going to be another group to take over their service component. No one [as of yet] is taking over their loan origination side, and so somebody else is going to end up having to do that work.

?The current Charter employees will continue doing it for a period of about three months and then there will be a transition.?

Czar said he could not yet release the name of the group that would be taking over the MFA?s loan servicing duties. He also said that the agency has not yet found an institution or group to take over the loan origination services. Charter employs about 90 people to service those contracts, Czar said.

The last sentence discloses another consequence of the loss of this community bank. What are those 90 employees going to do? It's not likely that they'll be working for the new, improved Charter Bank. How many more of their fellow employees will be cashiered? They'll all be more folks added to the unemployment rolls. Multiply that by hundreds of banks that have failed, then increase that number five fold or more, and you get a sense of the human pain and suffering involved in these dry statistics and what the callous make sport of with "Bank Fail Friday" and other humorless "games" on social media forums.

When I wrote my first post about Charter Bank, I didn't intend to get into Ed Morrissey's contention that something was "fishy" about the write downs, although I'm glad I did because it highlighted a problem with zealous regulators laying waste to community banks' capital due to aggressive CRE collateral value writedowns and Armageddon-like loan loss reserve assumptions at a time when politicians are yapping and yipping at banks to lend more to small businesses. What I intended to focus on that behind all the back-and-forth on public policy and, often, ideological, issues, is that the death of community banks affects real human beings. They're no less "real" than the residential loan borrowers over whom Sheila Bair sheds tears. I suppose most people don't give a damn about that fact. When bank haters express glee over big, bad fat cat bankers "getting theirs" when a bank fails, they don't seem to understand the fact that the collateral damage can be widespread, and very few of the community banks that have gone down in flames, and will continue to go down in flames as a result of economic woes they did not cause, are "fat cats." For the most part (with some exceptions, as is always the case) they're people who are standing in front of a steam roller and get flattened.

When I toiled as a partner for a large national law that represented banks and thrifts in the late 1980s and early 1990s, I grew tired of a particular attorney with a bank regulatory agency kicking my ass. So, I hired her as an associate. I put her to work representing thrifts, the owners and senior management of one of which which soon grew close to her and she to them on a personal level. She fought hard for them, and we did what we could to keep them alive, but when commercial real estate loans in Texas, including the land acquisition and development loans in which this thrift specialized, went down the tubes, so, eventually, did the savings institution. On the day that institution failed and was crammed into a Southwest Plan receivership, she bawled her eyes out. Not unkindly, I told her "Now you know how it feels on the other side of the table."

Many observers (our Care Bair among them) rightly feel for residential loan borrowers caught in the downside of the current economic cycle and want to help them. I think that compassion is well placed (if poorly executed), however hard that assertion might be for some readers to believe. On the other hand, what I wish some regulators (including Chair Bair) would also keep foremost in their minds as they rush to close down community banks by the hundreds, is that there are actual human beings involved, no less worthy of compassion.