There were many things from the recent settlement of Fair Lending and Fair Housing Claims against BancorpSouth that didn’t surprised me (see United States of American and Consumer Financial Protection Bureau v. BancorpSouth Bank, Case No. 1:16cv118-GHD-DAS, U.S. District Court for the Northern District of Mississippi, Aberdeen Division). I was not surprised that BancorpSouth settled a Fair Lending investigation since it had been fairly well known that the bank was undergoing an investigation that had put on hold its regulatory applications for two planned bank acquisitions. I also was not surprised that a Mississippi bank was the subject of such an investigation since Federal regulators have long utilized Mississippi’s tortuous and inescapable past as a reason to plow its fertile ground and harvest a rich political yield in the form Fair Lending investigations. This regulatory tendency has existed at least a decade, going back to when the FDIC started sending Mississippi banks nasty letters about their HMDA data. There were three big points worth noting, though, some of which were concepts I already knew but had reinforced by the settlement. Others, however, were eye-opening revelations. Below is a description of each.
- HMDA Data Matters
I have never represented BancorpSouth on this or any other matter so I don’t have any knowledge of how this investigation began or what exactly triggered it. However, by reading through the lines in the complaint, there are too many references to “regression analysis,” “statistically significant” rate differentials, and the Memphis MSA to not think that it may have begun as a review of the bank’s HMDA data from Memphis. That is just a guess, but based on prior experience, it seems to be a good one. The way these things typically play out, the Feds, after sticking their statistics geeks in the corner with a bank’s HMDA data, find that there are statically significant differentials as to interest rates charged or denial rates for minority borrowers relative to non-minority borrowers.
Their questions start out benign at first, asking whether these differentials can be explained by business non-discriminatory reasons. What they are looking for is for you to provide them a rate sheet, loan policy, or some other objective measure that shows why the mortgage borrowers were charged a certain rate on a certain loan or why a minority borrower was denied credit. If they select a sample of loans and find that the rates charged followed closely a standard rate sheet used to price mortgage loans, or if denials of minority applications were the result of the applicant clearly not meeting objective credit standards stipulated in their loan policies, and those factors were carefully documented in the file as the reason for the decision made by the loan officer, the regulators will conclude (hopefully) that the “statistically significant” differences were caused by other non-discriminatory factors and move on to their next prey, I mean bank. However, if they take a sample to test, and in the process cannot find any objective reason for why minority borrowers would be treated differently, the bank that is the object of the investigation had better hold on; it is going to be a bumpy ride! This leads me to my second point . . .
- Underwriting Discretion is the Fair Lending Death Nail
I am the son of a community banker. Like all of us, I remember asking my dad one time when I was small why he decided to pick his career. His dad became a banker later in life, and both of my dad’s older brothers are bankers, so his choice was not a novel one. Family influence, though, was not the reason he gave. Instead, my dad believed that, as a community banker, he had the opportunity to help people meet the needs of their businesses and families. Of course, one of the greatest tools a community banker has in his or her toolbox to pursue this divine calling is good common sense to exercise reasonable discretion when warranted. Not only does it assist the community banker in pulling that customer out of a tough financial place in life, it also allows the community banker to compete with larger, less flexible institutions that have a tremendous advantage when it comes to economies of scale, especially in today’s compliance environment.
That tool now, though, has become the regulator’s number one enemy. When it comes to Fair Lending, discretion is a four letter word, especially as to HMDA reportable loans. If your bank’s LAR reveals that rates paid by minority borrowers or women are slightly higher on average than the control group, and they discover that your loan officers have the discretion to assign to borrowers whatever rates they, in their professional opinion, deem appropriate, your bank is presumed to be guilty of discriminating against minority borrowers until you somehow prove yourself innocent. This all but forces banks to standardize their pricing and credit decisions, turning consumer credit into a commodity and erasing any competitive advantage community banks may have on such loans over their larger brethren that see the borrower as another number. Unfortunately, what regulators don’t realize is that the one who really suffers is the borrower, black or white, who just needs a break to get over that next financial hurdle. After all, you don’t receive any compassion from a loan policy or a rate sheet.
- The CFPB is Taking No Prisoners
I’m sure no one was shocked that the CFPB would aggressively pursue fair lending enforcement, especially among those banks that are larger than $10 billion in assets and within the wheelhouse of their examination authority. There is a reason why that threshold was a big deal during the Dodd-Frank negotiations. I was flabbergasted, though, by the lengths they went to in order to satisfy their appetite for a trophy kill. Secret recordings of lower level management meetings and spies sent into branches in markets totally unrelated to where the original problems were found are just two examples of that. This was not a regulatory investigation; it was a James Bond novel. Apparently, the CFPB has inherited the playbook of the KGB.
Not only that, but in a settlement that was supposedly negotiated, they felt compelled to include in the complaint unnecessary and embarrassing quotes from their secret recordings just to rub salt in the wound. I can only hope that waterboarding was not used to convince the bank to accept the complaint’s content.
Make no mistake, the CFPB is on a war path, and it is scalps, not justice, that it is after. As an agency that is still trying to prove its worth and fend off political and judicial challenges to its constitutionality and unfettered administrative authority, the CFPB is more worried about justifying its existence than protecting its charge, the American consumer. What will happen to American consumers, though, much less our financial system, when the CFPB scares half of our community banks into ending consumer lending all together and assaults the reputation of the other half until their safety and soundness is compromised? They will be forced into the arms of industries much less regulated and unconcerned about their wellbeing, I’m sure. This case may be the best illustration yet of what happens when you separate the consumer regulator from the prudential one.
This spring, I returned to the wondrous fields of little league baseball and was fortunate enough to relive some of my happiest memories as a child through the eyes of my oldest son, whom I had the pleasure to coach. If you know me at all, you know that I love baseball, but I can’t think of any time in my life when I enjoyed it more than between the ages of 10 through 14. Those were the times when it was all consuming, but still just a game. When my every thought could be dedicated to it, but my stress levels were rarely raised by it. Baseball was still fun when I was older, but some of the wonder is taken out of it when your coach’s livelihood depends on it and your mistakes can mean much more than losing your rights to a dairy queen milkshake after the game.
This being said, I hate what we as a society are doing to little league baseball. We have removed it from the joyous goat ranches of recreational, Babe Ruth leagues and transferred it almost completely to the exclusive realm of “tournament baseball,” where 7 year olds have to worry about losing their spot on their team when they go 0 for 4, 9 year old pitchers have to worry about holding a runner on base and throwing 150 pitches a weekend, games are played until well after midnight, 40 year old coaches with three days growth of facial hair and a belly that betrays the fact that they are 20 years past their athletic prime berate a right fielder for missing a cut-off man, and the real goal of the organizations running it is to make as much money as possible off of parental conceit and paranoia of falling behind. The shame of it is, in today’s world of “specialization,” coaches and parents have guided little league baseball down a path where many kids who experience it either hate it by the time they get to high school or have had two Tommy John’s surgeries before the age of 18. For many years I avoided it out of principle, with the eventual realization that it is slowly becoming the only game in town. Therefore, in order to allow my son the chance to continue to experience the game that has given so much to me, I decided to coach his tournament baseball team with the hopes that I could control the experience enough to protect him from its ills.
The result, to no surprise, has been a losing baseball team. When your benefits are player development and enjoyment for a greater baseball future tomorrow, your cost is going to be long innings today at the hands of better teams who have carefully culled their talent pool and have played 100 games since this time last year. With my apologies to Thomas Paine, there is nothing that tries a man’s soul like willing 9 ten year olds to get 3 outs. However, because tournament baseball has become so cutthroat, it is also a pretty good microcosm of what it is like to manage a bank today in an ever increasingly hostile environment. Below I will discuss the top five things I learned about guiding an organization through challenging times that hopefully can speak to community bankers as well.
1. No One is Going to Feel Sorry for You
When top seeds in the bracket are decided by how bad you beat your competition, and 10 year old catchers are behind the plate, expect every baserunner to take second base, even when you are getting beat 20 – 5. When your team hasn’t won a game yet this season, but the better teams need an easier path to the finals, expect to always play the top seeds in your pool so that they can be certain to get a higher seed in the bracket. When your winless team gets the third out in the bottom of an inning up 8 – 5 with 30 seconds left, expect to have to start the next inning to finish the game (which you lose 10 – 9). This is just how it is. No freebees are given, and everything has to be earned. No one feels sorry for you when you are struggling in tournament baseball. There may be the occasional “good luck” from the opposing team during the coin flip, or possibly even a stray comment about how they appreciate the fact your team keeps fighting, but in the end, you literally only eat what you can kill. Feeling sorry for yourself is worthless.
Such is also the case in community banking these days. Growing regulation and a hostile regulatory and political environment is choking the life out of our banks on Main Street, and despite the occasional “focus group” or “community banking conferences” where regulators feign empathy for those problems, no one really cares. Politician’s will wax eloquently about how community banks are the life blood of their communities and the only hope for small businesses, but when the vote comes up to really do something about it through legislation, they cave to other special interests every time. As net interest margins continue to shrink, members of the Federal Reserve may act concerned about the affect their interest rate policies are having on community banks, but in the end they will act in a way that is politically expedient to help keep stock values afloat at the cost of an uncertain economic future. This is just the way the world is, and it is forcing community banks to shift from their traditional business model, which typically prioritized community growth and development over profits, to a meaner, leaner model focused on economies of scale and efficiency that causes banks to out-grow their communities in an effort to just survive. Unfortunately, community banks can’t afford to hold on to principles and continue to lose capital like I can choose to hold on to baseball ideals and lose games. Their existence is dependent upon “winning” games today. However, as I fear the current baseball environment is drying up the joy and future of that great game, I also fear that the current banking environment is drying up the future of our community banks, and even worse, our rural communities. Don’t expect sympathy for that dilemma, though, because in the end, no one seems to care.
2. You Have to Eliminate Unforced Errors
When the other team is much better than you, you do yourself absolutely no favors when you have to get 5 outs every inning and they only have to get 3. If there is a fly ball to center, or a grounder to second base, you have to make that play to have a chance, because your competition certainly will. I can’t even count how many times this season the difference in our runs scored and the runs scored by the other team consists almost exclusively of runs that we allowed after what should have been our third out. The other problem is that unforced errors seem to snowball. One error leads to pitcher frustration and a walk or another error, which only compounds the problem. We are still trying to implement this strategy, but I think we have learned that our ability to compete will be directly tied to our ability to just “pitch and catch” and make routine plays.
In community banking, the best analogy to unforced errors is poor loan quality. When margins are tight and overhead is growing, a failure to monitor the credit quality in your portfolio can hurt more than an overthrow to first base. One or two years of relaxed credit standards or a rogue loan officer can lead to loan losses that might be more manageable in better times but can quickly eat into precious capital in the current environment. Therefore, it is important that, during these difficult days, community banks keep their eye on the ball and avoid extending beyond their comfort zone with loan quality. Like a first baseman that stretches before he knows which direction the throw is going, compromising credit standards in an attempt to increase earnings during these difficult times will leave you unable to maneuver when the next recession hits.
3. People May Not Remember What You Do, But They Are Sure To Remember How You Make Them Feel
As someone who coached through our local league this year, I was required to attend a pre-season coach’s clinic that I was convinced would be useless. Why I needed to waste three hours of my time listening to a coach give me information I already knew to pass down to 10 year olds who wouldn’t listen half of the time was beyond me. Needless to say, I did not approach it with the best attitude.
To my surprise, though, the instructor did provide some helpful tips, and it was what he said at the end of the session that stuck with me the most. He began by asking each of us to raise our hands if we remembered what the record of our 10 year old baseball team was. Somewhat surprisingly, not one of us responded by raising our hands. He then asked us to raise our hands if we remembered who our 10 year old baseball coach was. At that point, everyone in the room raised their hands. He closed his point by stating that, no matter how bad each one of us wants to make the little league coaches Hall of Fame, no such institution exists, and no amount of wins will get us there; however, every player we coach will remember us, and wouldn’t we much rather them remember us as the one that engendered in them a love for this great game that they never lost than as a mean SOB that they avoid when they see us in the grocery store 20 years from now. The choice was completely up to us.
Like my players, your customers and employees are not likely to remember that super-low interest rate you gave them on the last loan or whether their raise five years ago was 2% or 2.5%; however, how you treat them is certain to make an impression, and they will always remember whether you made them feel like a valuable part of your bank or as another reason your day has not gone the way you wanted it to. How we treat people matters, not only in little league and banking, but also in life, and those of us who forget that are doomed to dirty looks in the grocery store, no matter how well we perform.
4. Invest in People With Character and Their Growth Will Surprise You
One of our many challenges on the team this year has been that we have several kids who have just not played a whole lot of baseball; however, to their credit, they have all worked hard and become better players. One of my players sticks out, though, because I never thought he had a chance. He was one of our later additions to the team, and when I put him on the roster I wasn’t even sure what he looked like. I knew we needed another player, though, and his mom said he wanted to play, so he was our man. George, as we will call him, came to the first practice in January incredibly rough, looking as if he had never played a game of catch in his life. My initial hope for George was that he would eventually become either bored or discouraged so that I would never have to deal with the dilemma of sitting him on the bench every game for fear that he would embarrass himself and the team.
What I underestimated, though, was George’s determination and growing love for this great game. George quickly fell in love with baseball, and this spring he claimed any free moment or dollar his dad had by begging him for trips to the batting cage or for weeklong baseball camps held in the area. I also underestimated George’s intelligence and attention span, which soaked up every helpful tip he was given and maximized every opportunity he had to grow as a baseball player. George still may not be my most talented player, and he has a long way to go before I consider him one of my best, but he is no longer my worst, and he has made some serious contributions to the team. Just this past weekend, he caught a fly ball in right field to mercifully end a long inning, becoming a savior I never would have suspected in January. While there have been many challenges and heartaches this season, George has certainly been one of the bright spots, and his experience epitomizes why I wanted to do this in the first place: to generate a love for this great game in the hearts of kids who had been excluded from it and watch them grow into players I never thought they could be.
Banks, like 10 year old baseball tournament teams, and all other organizations for that matter, tend to focus much more acquiring talented personnel with impressive resumes to do the job immediately than on developing some of their current employees who may have much less talent or experience today but with encouragement and inspiration have the character and work ethic to become a critical contributor in the future. Their path to success may not be as certain and their learning curve will definitely be steeper, but if they are motivated and willing to work hard, their upside is possibly greater and the initial overhead that must be invested to get them is sure to be much less painful. When they do develop into the banker you never thought they could be, you can take pride in knowing that you were the one who helped them get there.
5. Hope Changes Everything
While it is incredibly easy to focus only on the challenges when you are losing baseball games or dealing with bank examiners, the ability to maintain hope and project it to others around you is not only important, it is critical to survival. My son is a pretty good athlete that chose (possibly with his father’s prompting) to play for his dad instead of on some other more competitive teams with different goals; however, he has had a pretty tough year with all of the losing. Much like his father, he hates to lose more than he likes to win, and despite the fact that he and I both acknowledged at the outset that we might not win a game this year, he has gone through some valleys when his faith in our decision and his abilities has been hanging by a thread. Self-confidence can be a challenge for any pre-pubescent 10 year old, but it is especially challenging when you lose 15 baseball games in a row.
The low-point came late one night after he and I were driving back home following a game he pitched pretty well in but lost nonetheless by 10 runs. He was distraught at the fact that he continued to lose ball games, one of which he was on the mound when the winning run crossed the plate. He claimed that he wanted to quit altogether, one of his father’s greatest fears. The next morning at 9 AM, we had to be back on the baseball field, and as fate would have it, my son was on the mound in the bottom of the last inning with the score tied 5-5. He came in to pitch when we were down 5-3, and our team rallied to score two runs in the top of the inning to tie it. Two errors later, we lost the game 6-5, and there was not a dry eye in the dugout, including mine. After 10 minutes of silence on the ride home, to my surprise, my son was the first to speak when he said “Daddy, I think we are going to win a game.” At the time I was certain his spirit was crushed and all hope was lost, he found hope in the fact that we had come so close to our first win. I wish I could give you the story book ending and tell you that we won our next game, but unfortunately we are still waiting on that. The moral of the story, though, is since that morning, other than the occasional 10 year old tantrum, my son’s attitude has completely changed thanks to hope, and it has made him and our baseball team better.
We have to remember this lesson in banking. It is so easy for us to get caught up in the latest CFPB threat, or the next regulation, or the terrible yields earned on assets, or the current political environment, but the leaders of our banks have to find some way to give hope to their shareholders, employees, and customers. Community banking, after all, is a calling, and the blessings it provides our society are much greater than the sum of the profits generated by its institutions. We must find hope in the differences made in communities each day by caring bankers and cling to the faith that the hard work will one day be rewarded, if not in this life, than certainly in the next.
In my last blog post, which I am ashamed to say was all the way back in May of last year, I concluded by noting that, between 2010 and 2014, a bank’s ability to control costs appeared to be more closely correlated to its earnings performance than its ability to grow interest income. I also stated that my next article would examine whether or not that correlation should hold in a rising interest rate environment. However, since it appears that interest rates will never again rise meaningfully (notwithstanding the Federal Reserve’s feeble attempt to start the process last month, one they may very well need to reverse soon the way 2016 is starting out), I decided to scrap that whole series altogether. Instead, I decided to start the new year with a different idea that will highlight five important ideas or facts about different subjects that I feel are important to community bankers (or maybe just important to me, who knows).
First of all, I must admit that I stole this idea from the Wall Street Journal who, from time to time, runs articles on “Five Things” ranging from interesting notes on that most revered pursuit of intellectual superiority known as the presidential race to reasons why J.J. Abrams had to kill off Han Solo (a development that I am still quite upset about). Luckily, my legal help is cheap, so if the Journal has a problem with me using their format, maybe it will all work out OK.
For my first article in the series, I plan to focus on five things I learned as a community banker that are still useful to me today. As a matter of fact, since they are so countercultural for many in my current profession of law, they may benefit me more now than they did when I was banking. Follow along and see how many of these traits community banking has conditioned into your character as well.
1. Always Call People Back As Soon As Possible
I know this one sounds simple, but you would be shocked to know (or maybe you wouldn’t) how many attorneys act like their voicemail doesn’t exist. Trying to get them to return a message is like trying to get your ten year old to give you change back after a trip to the concession stand; it just doesn’t happen. I’m not sure if they are scared of their phone, or if they are actually that busy, but either way, it is enough to drive you mad. Not that it is excusable, but I can somewhat see why they now refuse to return my calls since I am not their client but instead an attorney that is often representing an opposing viewpoint (even so, the undue delay does nothing but hinder their client’s interest). However, I am sad to say that I had the same experience when I was a community banker AND A CLIENT. Either most clients are much more patient than me, or those attorneys are so good it doesn’t matter. Regardless, community banking taught me that you must always return your phone calls. Not only does it prevent the bank down the street from fielding a subsequent call from that same person, but common sense tells you that it benefits you and your community reputation in the long run to respect the time and effort people put into trying to contact you. Since common sense is often in short supply in the legal world, maybe that is why bankers are just better at this.
2. No Job is Below Your Pay Grade
I must admit, one community banker comes to my mind as the embodiment of this lesson, and it is my father. Since I was a kid, I have watched him pick up paper in the parking lot of the bank while carrying the title of Chairman of the Board and Chief Executive Officer, a practice that he also exhibited several times while me, as his employee, failed to notice and walked right by the tootsie roll wrapper that he bent down to pick up. In the world of legal runners and billable hours, this just doesn’t happen unless it can be done for $235 per hour and itemized on some poor soul’s bill. However, I learned from my father that doing the small jobs that need to be done doesn’t just make you look more down to earth; it also places the needs of your organization above those of your own in order to make sure that it accomplishes its utmost potential. After all, as the organization rises, so do the prospects and aspirations of its members. Unless the organization prospers, though, the realized potential of the members making up that organization is limited by the weight of that underperforming organization. There are too many small jobs for the runners and administrative staff to do alone; some of them require non-billable hours now for a more profitable practice later.
3. Sometimes You Have to Wear More than One (Or Twenty) Hats
Don’t get me wrong, attorneys are great multi-taskers and are forced every day to juggle more than one file at a time. However, for some time now the phenomenon of professional specialization has taken a foothold within many law firms so that most attorneys limit themselves to one or two practice areas and rarely venture across the borders of those specialties for fear of having to touch base with their professional liability carrier. Community bankers, though, have never had that luxury. As a matter of fact, as regulation increases and the pool of qualified talent decreases, the thought of specialization is nothing more than a pipe dream for all community bankers, or at least those that want to survive the current super-competitive environment to fight another day. Truth be known, technology and competition is quickly changing the legal profession as well, and an obstinate adherence to strict specialization may not be possible for most attorneys much longer, either. Luckily, I had six years of community banking that taught me to wear more than just one hat.
4. People Don’t Really Care What You Know Until They Know You Care
It scares me sometimes to think about how many people I work with every day (both within my law firm and within other firms whose attorneys I work with on different issues) that have more impressive IQs and resumes than I do. As a profession that peddles knowledge, attorneys often place the highest premiums on intellectual talents while discounting bedside manner. However, while I was a community banker that tried to convince my attorneys that I just didn’t need that twenty-page memo regardless of how well it was researched, I realized that clients really can’t trust your knowledge until they can trust that you will use it in their best interest. The duty of loyalty to a client doesn’t just mean you put their needs above those of a third party; it also means that you must put their needs above those of your own, no matter how much you need billable hours or words of affirmation extolling your vast legal research skills. Unless your knowledge benefits your client, it is better to just keep it to yourself, especially when your hourly rate contains three digits.
5. Never Tell A Customer “That’s Not My Job”
While I was at the bank, there was a sweet old lady that would call me at least once a month to help her balance her check book. At first, this aggravated me. After all, my ego told me that I have a CPA and a law degree; surely such a menial task can be performed more efficiently by a customer service representative, or possibly even a teller. However, I later noticed that there were other customers that would walk into my dad’s office asking the same thing, and he never hesitated to help them out. I’m not talking about customers who were going to bring the bank a two million dollar loan from time to time. No, I’m talking about the 85 year old man that was trying to make sure his social security check would stretch until the end of the month. Eventually, it dawned on me that God gives us a calling for reasons other than to generate income in the most efficient manner; he also places us within a profession to help make the world a better place. Those who realize this don’t just earn a living, they also live out a calling that makes their work more rewarding. At the same time, that two million dollar loan customer is watching more often than not and takes notice of their character. Such character demands loyalty, and loyalty is always good for business.
So, there’s my list of the five most valuable things I learned as a community banker. I know for sure that it is not comprehensive, and there very well may be other more important lessons you have learned that I failed to mention. If so, please e-mail them to me at firstname.lastname@example.org. I would love to learn from your experiences as well.
* This Newsletter is a publication of the Commercial Department of the law firm of Brunini, Grantham, Grower & Hewes located in Jackson, Mississippi. This Newsletter is not designed or intended to provide legal or professional advice, as any such advice requires the consideration of the facts of the specific situation.
IRS Circular 230 Notice
To ensure compliance with requirements imposed by the IRS, we inform you that, unless specifically indicated otherwise, any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any tax-related matter addressed herein.