Where Is OCC in Court Battle Over State Usury Limits? By William M. Isaac and Alex J. Pollock published by American Banker on April 27, 2016

Where Is OCC in Court Battle Over State Usury Limits? By William M. Isaac and Alex J. Pollock published by American Banker on April 27, 2016

A surprising decision of the Second Circuit Court of Appeals in the case of Midland Funding v. Madden threatens the functioning of the national markets in loans and loan-backed securities. The ruling, if it stands, would overturn the more than 150-year-old guiding principle of “valid when made.”

The effects of the decision could be wide-ranging, affecting loans beyond the type at issue in the case. It is in the banking industry’s interest for the Supreme Court, at the very least, to limit its applicability. And since the Madden case could deal a blow to preemption under the National Bank Act, it is time for the Office of the Comptroller of the Currency to voice an opinion.

Under the valid-when-made principle, if the interest rate on a loan is legal and valid when the loan is originated, it remains so for any party to which the loan is sold or assigned. In other words, the question of who subsequently owns the financial instrument does not change its legal standing. But the appeals court found that a debt buyer does not have the same legal authority as the originating bank to collect the stated interest.

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CFPB Should Tread Cautiously on Payday Loans by William M. Isaac published by American Banker on March 23, 2016

CFPB Should Tread Cautiously on Payday Loans by William M. Isaac published by American Banker on March 23, 2016

Readers of the American Banker know that I am very concerned that regulators at the Consumer Financial Protection Bureau might inadvertently strangle the small-dollar, payday loan market, destroying a lifeline of credit for millions of responsible, low- and middle-income Americans. CFPB Director Richard Cordray, whom I respect and believe wants sincerely to keep small-dollar credit available, would do well to have his staff talk with researchers at the Urban Institute.

The institute’s recent study, “Small-Dollar Credit: Protecting Consumers and Fostering Innovation” (December 2015), is the latest in an intelligent series of published roundtable discussions about what researchers and regulators know — and do not know — about small-dollar credit. The authors of the study (Signe-Mary McKernan, Caroline Ratcliffe, and Caleb Quakenbush) point out that most research on small-dollar loans focuses on consumers’ needs and behaviors, but is quite light, at best, on the needs and behaviors of lenders.

Yet, without a better understanding of providers’ business models, profitability, loss rates, volume and overhead costs, regulators cannot possibly create a product that ensures consumers get the credit they need and deserve. The first protection a consumer needs is the assurance that any new reforms will not inadvertently drive all regulated credit from the market. No lenders, no credit. Or worse, as the authors note, consumers will be forced to find other, far more harmful products.

The authors note that most research suggests the overwhelming majority of borrowers need credit because of a family emergency; a temporary, unexpected cash shortfall; or an occasional manageable gap between paychecks. Right now most of these consumers are getting credit when they need it. Regulators must be careful that they do not destroy this supply of credit while trying to help the much smaller percentage of borrowers who probably should not be getting credit at all.

To this end, the authors offer some suggestions.
Here is the link to the full article

Isaac: Chapter 9 offers Puerto Rico a path to solvency By William M. Isaac published by The Washington Post on February 25, 2016

Isaac: Chapter 9 offers Puerto Rico a path to solvency By William M. Isaac published by The Washington Post on February 25, 2016

This week, Puerto Rico faces another critical juncture in its debt crisis, as the House will devote simultaneous hearings to the island’s fiscal situation on Thursday. I will appear alongside a panel of other witnesses at the hearing before the House Financial Services’ Oversight and Investigations subcommittee, while Treasury Counselor Antonio Weiss will be the lone witness to testify before the House Natural Resources Committee.

Puerto Rico’s complex and increasingly severe debt crisis demands federal intervention and, ultimately, a significant debt restructuring. The urgency of this need is not lost on Washington, where there is rare bipartisan consensus in Congress and within the administration that lawmakers must act to offer the island debt relief and put in place policies to foster long-term economic growth.

As noted by Puerto Rico’s government and other observers, this is a task that presents significant challenges. The commonwealth has amassed a spiders’ web of debts from various issuers, each with their own legal guarantees and ranking, which amount to just under $70 billion in total obligations. For an island with an ever-shrinking population of only 3.5 million and an economy mired in a decade-long recession, this is an unsustainable debt load which inevitably must be subject to restructuring.

Here is the link to the full article

TESTIMONY of WILLIAM M. ISAAC SENIOR MANAGING DIRECTOR & GLOBAL HEAD OF FINANCIAL INSTITUTIONS, FTI CONSULTING FORMER CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION

TESTIMONY of WILLIAM M. ISAAC SENIOR MANAGING DIRECTOR & GLOBAL HEAD OF FINANCIAL INSTITUTIONS, FTI CONSULTING FORMER CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION

TESTIMONY of WILLIAM M. ISAAC SENIOR MANAGING DIRECTOR & GLOBAL HEAD OF FINANCIAL INSTITUTIONS,FTI CONSULTING FORMER CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION
before the SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON FINANCIAL SERVICES

Washington, DC
February 25, 2016

Thank you Chairman Duffy, Ranking Member Green, and Members of the Subcommittee for conducting this very important hearing on the future of the Commonwealth of Puerto Rico, and the potential legislative proposals under consideration to help the Commonwealth address the fiscal crisis impacting the future health and welfare of the Puerto Rico.

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Consumer lending, from perspectives of a former regulator and a consumer advocate By William M. Isaac and Reverend DeForest Soaries published by The Hill on February 11, 2016

Consumer lending, from perspectives of a former regulator and a consumer advocate By William M. Isaac and Reverend DeForest Soaries published by The Hill on February 11, 2016

Markets work best when they have strong competition and consumer participation. Our current financial system stands to improve on both fronts.

According to the Federal Deposit Insurance Corporation (FDIC), 92 million Americans are unbanked or underbanked, often without access to credit and the financial know-how to pursue other lending options. At the same time, regulators are throwing up roadblocks for new business models that bring these disenfranchised consumers back into the fold by offering them legal and responsible small-dollar credit access at competitive rates. Shutting these innovative models out of the marketplace both decreases competition and consumer participation – everybody loses.

The reality is, most unexpected credit needs aren’t for tens of thousands of dollars. They’re for a few hundred dollars, to cover unexpected urgent costs like a car breaking down or an emergency root canal. When people who do bank at a traditional institution need a small-dollar loan for situations like these, they’re often surprised to find that banks don’t offer this service.
In 2008 only 31 banks in the entire country offered loans smaller than $2,500, according to the FDIC. Since then, major players like Wells Fargo, U.S. Bank, and Regions have discontinued their small-loan products due to regulatory pressures.

As a result, the situation is becoming ever more dire for the unbanked and under-banked, a group which includes 54 percent of African Americans.

Here is the link to the full article

U.S. Government Must Make a Decision on Freddie, Fannie By William M. Isaac published by TheStreet on February 10, 2016

U.S. Government Must Make a Decision on Freddie, Fannie By William M. Isaac published by TheStreet on February 10, 2016

It’s time for the Federal government to make a decision about Fannie and Freddie — to let them die a gradual death or to help them resurrect.

The government’s disingenuous measures that have kept the lending institutions afloat have been unlawful and dangerous for taxpayers and for the organizations’ investors. Congress should insist that Fannie and Freddie be wound down through receivership or be allowed to recapitalize and resume operations.

The ongoing litigation brought by private shareholders against the government for its alleged looting of Fannie Mae and Freddie Mac has finally started receiving media attention. Respected financial journalists have highlighted the contradiction between the Federal Housing Finance Agency’s (FHFA) decision to give the U.S. Treasury all of Fannie’s and Freddie’s profits in perpetuity with Congress’s mandate under the Housing and Economic Recovery Act of 2008 (HERA) that the FHFA act as conservator to restore the companies to sound condition.

Here is the link to the full article

Dear Fed: Get Out of the Markets’ Way By William M. Isaac and Richard M. Kovacevich published by American Banker on February 2, 2016

Dear Fed: Get Out of the Markets’ Way By William M. Isaac and Richard M. Kovacevich published by American Banker on February 2, 2016

William M. Isaac

William M. Isaac, a former chairman of the FDIC, is senior managing director and global head of financial institutions at FTI Consulting. Richard M. Kovacevich is the retired chairman and CEO of Wells Fargo.

The Federal Reserve acknowledged slow worldwide economic growth and volatile financial markets at last month’s meeting of the Federal Open Market Committee. This is really not news but a continuation, albeit somewhat more pronounced, of what has been the case for over a year. Analysts’ assessments late last year about a strengthening economy are now looking incorrect, as the current trend raises deepening questions about whether the recovery will continue. The recovery has benefited mainly the wealthy while producing slow jobs growth and meager income for middle- and lower-income Americans.

There will always be considerable handwringing and second-guessing with each Fed move or lack thereof. That said the Fed should not delay putting in place a long-term plan that diminishes its outsized influence and allows the financial markets to work without undue interference from the central bank.

Much of the Fed’s problem is tied directly to its obsession with achieving an elusive goal of 2% inflation. That goal is unlikely to be achieved any time soon because the world’s economy is exceptionally sluggish with excess capacity nearly everywhere.

Ironically, low inflation has actually been a good thing for the U.S. economy.
Here is the link to the full article

Banks Have Huge Stake in Outcome of Puerto Rico Crisis by William M. Isaac published by American Banker on November 5, 2015

Banks Have Huge Stake in Outcome of Puerto Rico Crisis by William M. Isaac published by American Banker on November 5, 2015

Puerto Rico’s debt situation has the potential to significantly rattle financial markets and banks need to take notice.

At a recent Senate hearing, Antonio Weiss, a counselor to the Treasury secretary, unveiled a plan to allow Puerto Rico to restructure all of its debts. Puerto Rico’s financial challenges are well-documented, but the plan introduced by Weiss is unprecedented and dangerous, particularly for the banking industry. It would allow sweeping bankruptcy powers that aren’t currently available to any U.S. state by allowing Puerto Rico to restructure debt that must be repaid under the territory’s constitution.

Treasury’s plan, called “Super Chapter 9”, would require congressional approval, which is far from certain. That’s a good thing because allowing Puerto Rico to restructure its constitutional debt would undoubtedly lead to high-spending states like Illinois wanting the same authority. If that happened, debt markets would be chaotic. The entire notion that full faith and credit debt for territories, states and even the federal government are sacrosanct would be called into question. Banks, as major holders of government debt, would be affected severely.

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CFPB Payday Plan Will Hurt Those It Seeks to Help by William M. Isaac published by American Banker on Oct 15, 2015

CFPB Payday Plan Will Hurt Those It Seeks to Help by William M. Isaac published by American Banker on Oct 15, 2015

Reading the Consumer Financial Protection Bureau’s proposed rules for regulating payday loans, I couldn’t help but recall the late Yogi Berra’s line, “It’s like déjà vu all over again,” alongside the Hippocratic Oath (“First, do no harm”).

Two years ago, the Office of the Comptroller of the Currency issued rules governing non-collateralized, “advance deposit” loans – a bank product that bore considerable resemblance to nonbank payday loans. Within days of the OCC’s promulgating its rules, every significant bank that offered the product decided to pull it from the market.

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