Hoenig Proposes Regulatory Relief to 90+ Percent Banks

By Charles H. Green

During the aftermath of the financial crisis, the regulatory community largely stood together and at times endured a withering degree of criticism that they had not done their job, given the extent of the systematic breakdown following the housing crash. When there were differences, they always seemed to be when FDIC Chair Sheila Bair offered a harder line of bank criticism than the others, expressing many of the failures of the system and some of its institutions.

Another such difference bubbled to the surface in the supervisory community recently

photo courtesy of

photo courtesy of

after the Federal Reserve reported that capital at the eight largest American banks averaged 12.9 percent of assets at the end of 2014, according to their measurement, well above required regulatory minimums.

But in contrast, in a recent speech by FDIC Vice Chair Thomas Hoenig, he calculated that capital at those same banks averaged only 4.97 percent at the end of 2014. This discrepancy is due to differing views at the FDIC of the risks posed by the banks’ vast holdings of derivative contracts used for hedging and speculation, which is more closely aligned with international accounting standards.

The Fed assumes that gains and losses on derivatives generally net out, in keeping with American accounting rules and the central bank’s accords, and as a result, most derivatives do not appear as assets on banks’ balance sheets, an omission that bolsters the ratio of capital to assets. The FDIC takes exception to this generous view.

Since passage of the landmark Dodd-Frank Act in 2010, fully named, the Wall Street Reform and Consumer Protection Act, delaying, confusing and rolling back the new law has been a constant pursuit of many of the nation’s largest banking institutions. As fast as the resulting new regulations were announced or implemented, an onslaught of proposals were aired for regulatory reform by the financial industry, intended to dilute or delay any and all effects on the pre-crisis leeway the major banking houses had to the banking system that previously crashed.

Maybe the day for reform has finally arrived, as Hoenig announced a bold new proposal to scale back the regulations on a majority–more than 90 percent, in fact–of the nation’s banks, who would be largely exempted from many of the onerous reporting requirements, tangled compliance mandates and restrictive capital tabulations of Dodd-Frank.

The catch, of course, is that while the suggested relief of regulatory burdens will affect the vast majority of institutions that pose no danger of systematic risk, due to their business activities, the relative scale of risky operations or capitalization.

Hoenig has proposed some smart ways to give regulatory relief to the banks that deserve it: low-risk, traditional banks that did not cause the financial crisis. Those institutions that did contribute to the 2008 mess get no relief under the plan.

Proposed conditions

Hoenig’s proposal is based on the size, complexity and business activities of any institution to determine whether it’s eligible for the possible relief. He and his deputy Karl Reitz examined bank failure rates and looked at the institutional characteristics of banks that were able to withstand downturns.

From this exercise, Hoenig devised a criteria list for banks he felt would be safe to exempt from some regulations without posing risks to the financial system and ultimately, the taxpayers. The winners would be banks that:

  • Hold no trading assets or liabilities;
  • Have no derivative positions other than plain-vanilla interest-rate swaps and foreign exchange derivatives;
  • Hold a notional value of all derivatives exposures totals less than $3 billion;
  • Have a capital level of at least ten percent.

As for the latter, such a simple, straightforward capital ratio cannot be gamed as more complex, risk-weighted ratios can. Obviously, many smaller community banks already have capital ratios at or above this minimum level, and for most that don’t, it would be difficult to get there

The prize

What kinds of regulations could banks avoid if they met these qualifications? Hoenig offered his ideas that 1) they might be given longer periods between examinations by their regulators, such as every 18 months instead of every 12;  2) exempting a bank from having to complete some sections of the quarterly call report; 3) banks could avoid having to adhere to capital standards and calculations required under the rules of the Basel Committee on Banking Supervision, the international standard-setter.

“From our point of view, a bank that meets the 10 percent threshold of equity to assets and that doesn’t have trading or off-balance-sheet items, that’s a well-capitalized bank,” Mr. Hoenig said.

In addition, Hoenig suggested that qualifying banks could also escape having to conduct stress tests under the Dodd-Frank Act. “If you meet the 10 percent capital requirement and you’re traditional, we would do the stress test ourselves,” Mr. Hoenig said.

Banks meeting the criteria Hoenig propose would not be exempt from the Volcker Rule, which was intended to separate banks’ risk-taking trading desks from their federally insured units. That’s because these banks aren’t engaging in these kinds of practices. “The reality is that the vast majority of community banks have virtually no compliance burden associated with implementing the Volcker Rule,” Mr. Hoenig said.

Congressional support is required to make some of these changes. Politicians are well aware of the rules, since the clamor for regulatory relief from the large, politically connected financial institutions has been a constant ever since Dodd-Frank was enacted. After working to water down the rules as they were being written, today they are simply pushing for repeal.

How Hoenig’s proposal will be received remains to be seen, but the choices are quite clear as the regulatory community agrees with relief if they are permitted to differentiate between institutions that truly deserve a lighter burden and those that do not.

“For the vast majority of commercial banks that stick to traditional banking activities and conduct their activities in a safe and sound manner with sufficient capital reserves, the regulatory burden should be eased,” Mr. Hoenig said. “For the small handful of firms that have elected to expand their activities beyond commercial banking, supported with the subsidies that arise from the bank’s access to the safety net, the additional regulatory burden is theirs to bear.”

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Fed Beige Book–Banking Sector Continues to Improve

By Charles H. Green

The Federal Reserves’s  latest ‘Summary of Commentary on Current Economic Conditions,’–better known as the beige book–is out as of April 15, and provides some reassuring news overall about the banking sector. This book is a summary of comments received by all the Fed banks from business and other contacts outside the Federal Reserve System and and compiled by the Federal Reserve Bank of Cleveland. They remind you that it is not a commentary on the views of Federal Reserve officials.

The good news is that banking conditions remain positive across reporting Districts. On Federal Reserve System Beige Bookbalance, the overall demand for credit increased all districts in at least one lending sector. Credit demand was especially strong for commercial real estate in Dallas and Atlanta while stable in other districts.

Commercial and industrial (C&I) loans grew in seven districts, but was especially strong in Chicago, Cleveland, New York, and Philadelphia. Bankers in Atlanta reported that C&I lending to the energy industry slowed as a result of oil-price declines.

The banks in the San Francisco district reporting the build up of sizeable pending loan pipelines and have increased interest rates somewhat to cool that demand more in line with supply.

Consumer lending grew in three districts (Chicago, New York, and Atlanta) while soft in others (Cleveland and San Francisco). Auto lending remained strong in Chicago, Atlanta, and San Francisco, but a banker in Cleveland attributed weakening auto lending to very aggressive captive-finance operations.

Residential mortgage demand–particularly for refinancings–grew in Richmond, Chicago and Dallas and was steady in New York, but HELOC volumes fell in Philadelphia and Cleveland. Philadelphia and Kansas City district bankers expressed confidence in the quality of their loan portfolios, and New York and Cleveland bankers noted that delinquencies were down.

Bankers in the Richmond district reported that loosening of credit standards were a cause for concern that credit quality was declining as a result.


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Growth in Nonbank Sector Needs Regulatory Response

by Ravinder Kapur

Speaking recently at a conference in Frankfurt Germany, the Federal Reserve’s Stanley Fischer said that regulators need to keep pace with the growth in the nonbank sector. While acknowledging that regulation is a cat and mouse game, he said that “since the global financial crisis, many reforms have been adopted for both banks and nonbank financial institutions. However, certain segments of the nonbank sector require further work.”

In 1980 the nonbank financial institutions accounted for 40% of the total credit market Stanley-Fischer-Federal-Reserveassets held by the domestic financial sector. By the late 1990s this figure had risen to approximately 66%. Since then, nonbanks have maintained their share at this level. Insurance companies, mutual funds and government-sponsored enterprises, primarily Fannie Mae and Freddie Mac form a large part of the nonbank credit market.

Fischer acknowledged three principal reforms that will impact the nonbank sector, including:

  1. The Financial Stability Oversight Council (FSOC), which was been created under the Dodd Frank Act. While the FSOC has been charged with the responsibility for identifying emerging risks and vulnerabilities to financial stability in the entire financial system, seven out of ten of its members are from supervisory or regulatory authorities relating to credit unions, broker-dealers, asset managers, and derivative market participants.
  1. The Securities and Exchange Commission (SEC) has adopted new rules for money market mutual funds. These are expected to reduce the likelihood of runs on prime money market funds.
  1. A rule finalized in October, 2014 requires the securitizers of some assets to retain at least 5 percent of the credit risk of the assets that collateralize the securities.

But Fischer pointed out that some segments of the nonbank sector are not covered and will require further reform from the regulatory community, including:

  1. Hedge funds and broker-dealers use secured short-term funds to finance assets that have long term maturities. This mismatch is not new and was always known as a risk that could result in their solvency. This risk became reality during the crisis when the Fed had to rescue money-market funds that funded short term liquidity of many leading banks.
  1. Mutual funds that track the return on illiquid assets like leveraged loans and credit default swaps offer daily liquidity to investors. This practice exposes them to liquidity risks.
  1. There is a dearth of data regarding hedge fund operations and the derivatives market that makes it difficult for supervisors and regulators to work effectively.

Nonbanks play a crucial role in the financial system, comprising two-thirds of the total credit market and responsible for significant economic benefits. However, they are also a risk to financial stability, as was clearly seen during the global financial crisis. The nonbank sector increases the complexity of the financial system by lengthening the intermediation chain, which has both banks and nonbanks in it. Further, many nonbanks are owned by bank holding companies.

The Federal Reserve has called upon regulators to respond to the challenge of these complexities.


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Myth of “Picking Winners & Losers:” Envy-Baiting Politics

By Charles H. Green

Editorial-Commercial lenders who use federal or state loan guarantee programs need to resist efforts by program opponents to miscast program effects and benefits.

Remember November 5, 2014? I do–it was a cool, peaceful autumn day in Atlanta, and delightfully quiet. The day after the midterm election was finally devoid of the mind-boggling attack of political television and radio advertising, screaming, screeching and threatening their way into your life at a seemingly unprecedented volume. The politicos seemed to give us a couple of months to recover, but January, 2015 was apparently the campaign reset date for 2016, a presidential election year.

And now the race is on to field a bevy of big-talking, ambitious and ambiguous politicians Twister Signwho are aiming for the big job. Invariably, the entire field will embrace “small business,” as a keystone of the American economy. And just as widely as that statement will be agreed with, a more careful dissection of their words will define the huge range of definition for what a “small business” is and how they would help.

Washington Post’s J.D. Harrision wrote about one of the early candidates, Rand Paul, offering him the premature title of “real champion of small business.” Tsk, tsk… it’s a little soon to be crowning anyone for anything, but everybody has their job to do. Based on the evidence laid out in Harision’s article, I personally think it would be worth allowing more time for other candidates to weigh in before anointing anyone.

What does this have to do with commercial lenders?

Harrison cited five points in Paul’s positions that he felt needed reflection by small business owners. You can read them all for yourself, but it’s basically a rehash of some well-known liturgy of the conservative right, with Paul’s more Libertarian slant. But one consistency repeated misdirection by the candidate:  “Government is inherently bad at picking winners and losers.”

Harrison cited a 2014 speech by Paul. “In the marketplace, most small businesses fail. If government is to send money to certain people to create businesses, they will more often than not pick the wrong people and no jobs will be created.”

And there you have what I see a decisive flaw in Paul’s and most of the Libertarian argument with the U.S. Small Business Administration, the Export-Import Bank and other federal and state government sponsored loan guarantees, research grants and even the Federal Reserve system: the government isn’t picking winners and losers.

Some misleading politicians, in this case Paul, practice what I call “envy-baiting” to attract others to their shortsighted efforts to reverse public policy that has proven itself time and time again. Good business policy pushed post-WWII America into a towering economy without a single, close competitor. If you are familiar with these credit enhancement programs, you will recognize Rand Paul’s sleight-of-hand: government doesn’t choose who gets a loan–the private lenders do.

If your bank uses credit insurance from the Ex-Im Bank, loan guarantees or subordinated credit with the SBA, or perhaps have an account at the Federal Reserve, imagine the risk–chaos–of losing these institutions. Upon the loss of credit insurance, provided by the borrower/lender paid fees, banks would back out of lending to tens of thousands of customers, from Mom & Pop businesses to financing exports of American-made products. Who wins? No one.

Successful public policy speaks for itself

Why? Because there are real risks in these sectors that wouldn’t be held by a privately-owned bank. Winners and losers? We all win in a healthy, vibrant economy that has effective tools to meet a range of capital financing needs, from high-flying industries that can tap into Wall Street for low priced financing, to a startup business supported by a federally-guaranteed loan.

Losers? Libertarians, like Paul, would have you believe that U.S taxpayers bear the direct cost of the loan losses of federally insured credit. That is a semantic lie that captivates their followers into believing that they are victims of impervious policy that takes from them and gives to someone else. The problem is that is a false premise.

Borrowers pay relatively high fees for loan guarantees and private lenders also contribute to the cost of credit insurance in addition to bearing direct credit loss exposure. Leading potential supporters, who largely have no familiarity with these programs or business in general, with the idea that they are being taken advantage of through the false “winners and losers” argument is disingenuous and dishonest.

Don’t misinterpret this article to be anti-Ron Paul or any other conservative or Libertarian candidate. But I do have a problem with his–and others like him–illogical dismissal of good public policy that works just fine. Several “think tanks,” such as the CATO Institute, American Enterprise Institute and Heritage Institute, unite to advocate against these programs, which represent a relatively small portion of the American economy, and an even smaller portion of the federal budget.

No one has bothered to explain their actual reasoning to me, so naturally I suspect their motive goes below the surface beneath what they really want. Since there are much larger targets that affect public spending more without the accompanying benefits to a majority of taxpayers, as they assert about small business financing, why not aim for bigger fish?

Why don’t they speak up and explain it to us without the fabricated politics of envy ever-present in their rantings?

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Prosper Marketplace Raises $165 Million & Future Prospects

By Ravinder Kapur

DealBook reported that Prosper Marketplace has raised $165 million in a new round of financing led by Credit Suisse NEXT Investors, which valued the online loan marketplace at $1.7 billion. This valuation is more than double what the company was appraised at this time in 2014. The investors included banks like JPMorgan Chase, SunTrust Banks, USAA and BBVA Ventures.

“They represent really strategic investors for us in the long term,” said Aaron Vermut, Prosper MarketplaceProsper’s chief executive. “In the past, our investor makeup was primarily venture capital and private equity, so branching out into strategic investors is new for us and very exciting.”

Credit Suisse is a strong believer Prosper’s business model and the future of marketplace lending. In fact, this belief in the company’s prospects led Credit Suisse to approach Prosper last year and offer to help find the investors for the next round of financing.

Last year Prosper Marketplace had revenues of $80 million on $1.6 billion in loan originations, a great improvement over 2013, when the company had revenues of $19 million on $360 million in loans. The phenomenal growth in the volume of business has attracted the attention of bankers like Credit Suisse and JPMorgan. Credit Suisse’s asset management arm, for example, allows some investors to buy parts of loans originated on Prosper’s market.

Prosper makes the sort of loans which were earlier made by traditional bankers. Under the current regulations, these loans (primarily to refinance credit card debt) are unprofitable for the big institutions. “We’ve changed the company so much, it’s unrecognizable,” said Mr. Vermut, who took over the company with a group of investors in 2013. “This is a real business.”

Earlier this year Prosper bought AmericanHealthCare Lending, which helps patients borrow money for elective medical procedures like cosmetic surgery. With the current infusion of money, Prosper Marketplace plans to grow its user base and increase its portfolio of loan services. Later this year it also plans to increase its brand awareness and improve its user experience.

For the current year the company expects a revenue of $180 million. In the first fiscal quarter the company has originated nearly $600 million of loans, up 300% from the same period last year. However, for the moment it will continue to grow its business rather than concentrate on turning a profit.

Prosper does not have any intention of going public in the near future, although it has completed a three-year audit by the accounting firm Deloitte.

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By the Hour–Wage Debate Gaining More Headlines

By Charles H. Green

It used to be that higher wages for hourly workers was only the perennial plank of liberal politicians and activists, and more recently one of the assorted demands issued by the short-lived and disjointed ‘Occupy Wall Street’ movement. But with the clamor of income inequality resonating with more middle class American voters and the Federal Reserve weighing into the debate, higher wages are suddenly on a trajectory that pits Fortune 500 companies against each other in a race to pay higher wages.

Worker wages have long been an issue of contention between employees and employers, Minimum Wageswith the first public foray into the topic coming in 1349 when King Edward III issued the ‘Ordinance of Labourers,’ which actually set a wage cap rather than a floor. The first attempt of setting a minimum wage for the United States was in 1933 as part of the New Deal era National Industrial Recovery Act, which established $.25 per hour as a minimum standard. This wage was thrown out by the Supreme Court, being declared unconstitutional in 1935.

But when reestablished in 1938 as part of the Fair Labor Standards Act, the minimum wage was upheld by the same court under the ‘Commerce Clause,’ justified to regulate employment conditions. Since then, the minimum wage has been a constant source of political and populist tension, pitting business against labor in an ongoing effort to balance corporate/shareholder profits against wages that provide workers with an acceptable standard of living.

Its not just wages-its income inequality

Since 2009, the federal minimum wage has been set at $7.25, but as of January 1, 2015, 29 states had higher wage standards, including 11 established through recent legislated or ballot initiatives. Without sufficient support in Congress, last year President Obama encouraged the states to move forward on their own accord, and several have done so in an effort to boost the overall wages in their local economies.

The Federal Reserve has entered this debate more loudly than before, with Chair Janet Yellen, telling a recent conference on community development research that “economic inequality has long been of interest within the Federal Reserve System,” she said, citing a 2007 speech by then-Chairman Ben Bernanke on the matter.

As reported by the Wall Street Journal, Yellen said the broader public cares, too. According to a survey, “the gap between rich and poor now ranks as a major concern in the minds of citizens around the world,” she said, adding “in advanced economies still feeling the effects of the Great Recession, people worry that children will grow up to be worse off financially than their parents were.”

The New York Times reported that nearly three-quarters of the people helped by programs geared to the poor are members of a family headed by a worker, as determined through a study by the Berkeley Center for Labor Research and Education at the University of California. As a result, taxpayers are providing not only support for the poor, but also, in effect, a huge subsidy for employers of low-wage workers, from giants like McDonald’s and Walmart to mom-and-pop businesses.

Who are they talking about? NYT’s story told about a home health care worker in Durham, N.C., a McDonald’s cashier in Chicago, a bank teller in New York, and even an adjunct professor in Maywood, Ill. They were all working yet had to rely on public assistance, like food stamps, Medicaid or other safety net programs to help cover basic expenses when their paychecks come up short.

In response to the growing clamor, some of the nation’s most recognizable retailers and franchise companies have either tired of the criticism or unable to hire new workers at their stores. Wal-Mart, McDonalds, Dominoes, Target, and others have announced the decision to voluntarily raise minimum wages for employees.

One small business is even getting into the act, by setting $70,000 as the minimum salary that the company will pay their employees. Gravity Payments president Dan Price will forgo his own $1 million salary in order to gradually provide higher wages to all employees over the next three years.

Price attributed his decision from listening to friends tell stories of how tough it was to make ends meet even on salaries that were still well-above the federal minimum of $7.25 an hour. “They were walking me through the math of making 40 grand a year,” he said, then describing a surprise rent increase or nagging credit card debt.

Minimum wages vs. executive compensation

He wanted to do something to address the issue of inequality, although his proposal “made me really nervous” because he wanted to do it without raising prices for his customers or cutting back on service.

The United States has one of the world’s largest pay gaps, with chief executives earning nearly 300 times what the average worker makes, according to some economists’ estimates. That is much higher than the 20-to-1 ratio recommended by Gilded Age magnates like J. Pierpont Morgan and the 20th century management visionary Peter Drucker.

New York Times columnist Gretchen Morgenson described how high–and opaque–that gap remains, despite recent laws designed to require public companies to publish their executive salaries as a ratio with the company’s median employee cost. In her research with leading compensation consultants, she found that some Fortune 100 CEOs are compensated more than 1,000 times their company’s median salary. In the case of Disney’s CEO Robert Iger, it was 2,238x.

As much as the eye-popping wage gap is, the lack of transparency to company owners continues to plague shareholders who are also left without a real voice in determining executive compensation. Whether this broad gap plays into the perennial efforts of corporate America to fight minimum wage hikes over the last generation is likely the subject of debate.

Many economists argue that the labor market is like the market for anything else, and that the law of supply and demand determines the level of wages. Further, they claim that the ‘invisible hand’ of the market punishes anyone who tries to defy this law. Therefore, using that logic, any attempt to push up wages will either fail or have bad consequences. Setting a minimum wage, it’s claimed, will reduce employment and create a labor surplus.

Macroeconomics vs. good help

But labor economists question this view. They point out that the labor force–is people. And because workers are people, wages are not, in fact, like the price of butter. How many workers are paid depends as much on the social forces and political power as it does on simple supply and demand.

Case in point, what happens when minimum wages are increased in one state while neighboring states do not? No one has proven that the wage-hiking state loses a large number of jobs, but rather the concensus from studying these natural experiments is that moderate increases in the minimum wage have little or no negative effect on employment.

As the post-crisis economy improves, workers are gaining clout thanks to an improving labor market, which is reflected in an increasing willingness to quit bad jobs. And although that pressure is far from prevalent at the moment, Walmart has raised wages anyway. Their justification for the move echoes what critics of its low-wage policy have been saying for years: Paying workers better will lead to reduced turnover, better morale and higher productivity.

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CFPB Files Complaint Against Phantom Debt Collectors

By Ravinder Kapur

The Consumer Financial Protection Bureau has initiated a lawsuit against the perpetrators of an alleged robo-call phantom debt collection operation run out of New York and Georgia. The modus operandi of the scheme involved making automated calls to unsuspecting victims and demanding payment of fictitious amounts.

Richard Cordray-CFPB

Richard Cordray, CFPB

The whole operation was masterminded by Mohan Bagga of Georgia and Marcus Brown of New York. These two, along with their wives, and another individual, Sumant Khan, duped consumers by making calls threatening arrest, wage garnishment and “financial restraining orders.” CFPB Director, Richard Cordray stated “Our lawsuit asserts that consumers were harassed, threatened, and deceived as part of a reprehensible scheme to collect debt that was not even owed.”

The fraudulent scheme hatched by Brown and Bagga involved several participants:

  • Consumers’ personal information was purchased from debt brokers and illegally operating lead generators.
  • A telemarketing company, Global Connect, then automatically broadcast millions of calls to these consumers. The recorded call contained a message about the debt that was owed. A call back number was provided to the hapless victims.
  • When the call back was made (to a number traced to Brown and Bagga), the caller was threatened with arrest. The collectors speaking on the call back number also said that check fraud had been committed as the debt remained unpaid.
  • Upon being threatened in this fashion by the collectors, many consumers furnished their credit or debit card details.
  • The collectors then submitted this information to the payment processors, who enabled the collectors to access the consumers’ bank accounts and withdraw money.

The CFPB’s lawsuit has alleged that Global Connect, the telemarketing company, broadcast millions of automated messages even though they knew that these messages contained unlawful content. The payment processors (Global Payments, Pathfinder, Frontline, and Electronic Merchant Systems) chose to ignore the collectors’ unlawful conduct.

The CFPB’s complaint was filed in the United States District Court for the Northern District of Georgia. The complaint is not a finding or ruling that the defendants have actually violated the law.

About the Consumer Financial Protection Bureau

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) established the CFPB. In January of 2012, President Obama appointed Rich Cordray to be the first Director of the CFPB.

The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit

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Business/Lending Interests Weigh in on SBA Franchise Rules

By Charles H. Green

The International Franchise Association (IFA) and several other business and lender associations weighed in on the SBA’s recent call for comments about its consideration of modifications to their finance program guidelines on lending to franchise companies.  As described in a recent AdviceOnLoan article, in late 2014, the U.S. Small Business Administration announced that it had launched a re-examination of the factors the agency considers relevant to the determination of ‘‘affiliation.’’

These standards evolved to screen small company loan requests that were affiliated with a franchisingfranchise or other similar relationships (such as licensee, gasoline dealer, and oil jobber). The screening is required to determine whether business owner getting SBA financial assistance, in fact, has an adequate degree of control over their own business fate, and not merely an extension of a larger enterprise.

The IFA and others expressed a strong interest in the SBA’s evaluation process of these franchise lending policies along with a vested interest in improving the SBA’s system for franchise lending. Their aim was to encourage the SBA to preserve or open untapped, potential capital to franchises, which would add jobs to the nation’s local communities and small business economy.

Franchise companies support 8.9 million direct jobs and $890 billion of economic output for the U.S. economy. Since 2009, franchise businesses have grown faster than the rest of the economy. Franchise borrowers often finds stability and lower risk in proven franchise business models, which makes them easier for banks to approve capital financing.

Several business and lender associations jointed the IFA in this communique, presumably strengthening the collective interests that support a continuation of unfettered capital access by franchised businesses. These included the Asian American Hotel Owners Association (AAHOA), U.S. Chamber of Commerce, Consumer Bankers Association (CBA), National Association of Development Companies (NADCO), National Association of Government Guaranteed Lenders (NAGGL), National Council of Chain Restaurants (NCCR), National Development Council (NDC), National Restaurant Association (NRA), National Small Business Association (NSBA), and Small Business Investor Alliance (SBIA).


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GE Capital Fires Staff, Sells Portfolio to WF/Blackstone

By Charles H. Green

General Electric (GE) announced Friday that they were selling off their storied GE Capital financing arm, but unspoken was the fact that the deal was already done. In fact, as the business world was learning of this decision, GE Capital employees were being fired en masse, as the company had reached terms to sell the bulk their real estate loan portfolio to Wells Fargo and Blackstone.

Terms of the sale were announced separately by those two companies jointly. Wells Fargo Wells Fargo-Blackstonebought the performing real estate loan portfolio of credits in the U.S., Canada and he U.K. valued at approximately $9 billion. In addition, they financed the purchase of  a $4.6 billion portfolio of performing  U.S. real estate loans that were purchased by BXMT, Blackstone’s commercial mortgage REIT.

Blackstone purchased a number of equity assets from GE Capital, including a $3.3 billion portfolio of office properties in Southern California, Seattle and Chicago, a €1.9 billion portfolio of office, logistics and retail assets in U.K., Spain and France.

Blackstone’s BREDS, a real estate debt fund, purchased a $4.2 billion portfolio of performing real estate loans in Mexico and Australia.

While no public announcements have been found, GE Capital apparently fired their entire staff in the Atlanta office last week after the pending sale became known. GE elected to sell off its portfolio without ongoing operational support, and the two buyers are well-versed in these kinds of assets.

For other lenders seeking more experienced real estate lenders, there is a new flood of fresh prospects on the market.

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Lender Liability Suit Looms Against M&T Over Whipple Fraud

By Charles H. Green

One of the strangest lending frauds in recent memory, which in 2014 revealed that M&T Bank Vice President Michael ‘Mick’ Whipple  was operating a ‘Robin Hood’ style lending portfolio, enters a new chapter as Buffalo NY business owner Jeffrey T. Drilling filed a $25 million legal claim against Whipple, the bank and two high-ranking M&T officials.  According to the Buffalo News, Drilling claims Whipple illegally used collateral secured by Drilling’s company to make loans to other businesses in the Buffalo area.

In asserting these claims, Drilling said that Whipple’s actions damaged his credit rating, M&T Bankcaused major customers to stop doing business with him and forced him to lay off almost every one of his employees. Buffalo News quoted Drilling as saying “Mick Whipple hijacked my credit and used my credit to help other businesses get loans. I believe there are other unsuspecting businesspeople out there who had the same thing happen to them.”

Drilling’s business, Client Server Direct, was a call center located in Amherst, NY that employed more than 70 people. The business was started in the 1990s, and reportedly grew to revenues in the $5 million range. But the business stumbled badly and Drilling blames the downfall on Whipple and those who supervised him at M&T Bank.

Robin Hood business lender?

According to earlier reports by Buffalo News, the bank fired Whipple in late 2013 amid the discovery of a $5 million pool of loans under investigation by the bank attorneys, who were quickly joined by the FBI. The allegations, which were never denied by Whipple, was that he arranged millions of dollars in bank loans to struggling Buffalo-area businesses that should not have qualified under M&T Bank credit standards.

Whipple was a rising star, widely admired in his community where he was an active volunteer in church, business and civic affairs. Whipple, through his attorney Rodney Personius, acknowledged acted improperly in granting some of these loans, but has maintained that the only victim was the bank.

Some people who knew Whipple and the investigation described him to the media as a “Robin Hood” figure, who risked his career to help struggling companies stay in business. “I can only tell you that, from everything I can determine, Mick did not receive any financial benefit for these loans,” attorney Personius said.

Others suggested that Whipple may have been trying to save himself from embarrassment in the banking community by helping companies to avoid defaulting on previous loans that he had arranged. “He did not go into this with the intention of committing crimes … but he got in over his head, and had to get money to help keep these companies afloat,” one unidentified source said.

What’s the lesson for other lenders?

M&T Bank officials recognized Whipple’s alleged wrongdoing as “a very serious matter,” but responded to Drilling’s suit by denying any effort to cover up for Whipple. They also deny that Whipple’s actions damaged Drilling’s business or his company’s credit rating, said C. Michael Zabel, manager of corporate communications for M&T.

“We worked diligently to communicate with customers who did business with” Whipple, Zabel said, “and to ensure that there were no impacts to those customers whatsoever, personally or financially.”

Whipple is a Buffalo native who worked at M&T for almost two decades, winning many achievement awards, and was promoted to a vice president in the bank’s business banking section in about 2010. According to his own biography, he oversaw a small-business loan portfolio of $150 million.

But something went terribly wrong somewhere along the way, brought to light with the discovery that he had arranged about $5 million of fraudulent loans to struggling local businesses that – under normal M&T bank procedures – should not have qualified for loans. It remains to be seen whether Drilling’s assertions that Whipple illegally conveyed his collateral assets to support other non-related loans.

This sort of case is not new, but usually shares one defining motivation with all the others: the financial benefits directly gained by rogue lenders when committing fraud with bank loans. Whipple apparently did not seek to enrich himself.

The case also raises tough questions about loan procedures and checks-and-balances at M&T, the nation’s 16th-largest commercial bank. How could anyone perpetrate such a large fraud in an organization so highly regarded in terms of operational performance?

The alleged improper loan activities conducted by Whipple were far out of step with the bank’s approved procedures, and yet went on for almost five years before it was discovered that something was wrong.

Now the bank is being sued for the financial downfall of one client, who is refusing to repay a $1.5 million loan balance,. While scrambling to defend itself, the bank work to remain competitive in business lending while fixing a broken system that could be gamed with multiple loans over a durable period. Should the bank be found liable in Drilling’s lawsuit, their problems will multiply.

While many of us have been in situations, where emotionally you really want to help a client through a difficult financial situation, but realistically they were outside the boundaries that we were obligated to remain within.

Some days it’s more difficult to say “No” than on others, but nonetheless it’s our job.

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