September 30, 2022

Major Banks Aid in Payday Loans Banned by States

Major banks have quickly become behind-the-scenes allies of Internet-based payday lenders that offer short-term loans with interest rates sometimes exceeding 500 percent.

With 15 states banning payday loans, a growing number of the lenders have set up online operations in more hospitable states or far-flung locales like Belize, Malta and the West Indies to more easily evade statewide caps on interest rates.

While the banks, which include giants like JPMorgan Chase, Bank of America and Wells Fargo, do not make the loans, they are a critical link for the lenders, enabling the lenders to withdraw payments automatically from borrowers’ bank accounts, even in states where the loans are banned entirely. In some cases, the banks allow lenders to tap checking accounts even after the customers have begged them to stop the withdrawals.

“Without the assistance of the banks in processing and sending electronic funds, these lenders simply couldn’t operate,” said Josh Zinner, co-director of the Neighborhood Economic Development Advocacy Project, which works with community groups in New York.

The banking industry says it is simply serving customers who have authorized the lenders to withdraw money from their accounts. “The industry is not in a position to monitor customer accounts to see where their payments are going,” said Virginia O’Neill, senior counsel with the American Bankers Association.

But state and federal officials are taking aim at the banks’ role at a time when authorities are increasing their efforts to clamp down on payday lending and its practice of providing quick money to borrowers who need cash.

The Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau are examining banks’ roles in the online loans, according to several people with direct knowledge of the matter. Benjamin M. Lawsky, who heads New York State’s Department of Financial Services, is investigating how banks enable the online lenders to skirt New York law and make loans to residents of the state, where interest rates are capped at 25 percent.

For the banks, it can be a lucrative partnership. At first blush, processing automatic withdrawals hardly seems like a source of profit. But many customers are already on shaky financial footing. The withdrawals often set off a cascade of fees from problems like overdrafts. Roughly 27 percent of payday loan borrowers say that the loans caused them to overdraw their accounts, according to a report released this month by the Pew Charitable Trusts. That fee income is coveted, given that financial regulations limiting fees on debit and credit cards have cost banks billions of dollars.

Some state and federal authorities say the banks’ role in enabling the lenders has frustrated government efforts to shield people from predatory loans — an issue that gained urgency after reckless mortgage lending helped precipitate the 2008 financial crisis.

Lawmakers, led by Senator Jeff Merkley, Democrat of Oregon, introduced a bill in July aimed at reining in the lenders, in part, by forcing them to abide by the laws of the state where the borrower lives, rather than where the lender is. The legislation, pending in Congress, would also allow borrowers to cancel automatic withdrawals more easily. “Technology has taken a lot of these scams online, and it’s time to crack down,” Mr. Merkley said in a statement when the bill was introduced.

While the loans are simple to obtain — some online lenders promise approval in minutes with no credit check — they are tough to get rid of. Customers who want to repay their loan in full typically must contact the online lender at least three days before the next withdrawal. Otherwise, the lender automatically renews the loans at least monthly and withdraws only the interest owed. Under federal law, customers are allowed to stop authorized withdrawals from their account. Still, some borrowers say their banks do not heed requests to stop the loans.

Ivy Brodsky, 37, thought she had figured out a way to stop six payday lenders from taking money from her account when she visited her Chase branch in Brighton Beach in Brooklyn in March to close it. But Chase kept the account open and between April and May, the six Internet lenders tried to withdraw money from Ms. Brodsky’s account 55 times, according to bank records reviewed by The New York Times. Chase charged her $1,523 in fees — a combination of 44 insufficient fund fees, extended overdraft fees and service fees.

For Subrina Baptiste, 33, an educational assistant in Brooklyn, the overdraft fees levied by Chase cannibalized her child support income. She said she applied for a $400 loan from and a $700 loan from in 2011. The loans, with annual interest rates of 730 percent and 584 percent respectively, skirt New York law.

Ms. Baptiste said she asked Chase to revoke the automatic withdrawals in October 2011, but was told that she had to ask the lenders instead. In one month, her bank records show, the lenders tried to take money from her account at least six times. Chase charged her $812 in fees and deducted over $600 from her child-support payments to cover them.

“I don’t understand why my own bank just wouldn’t listen to me,” Ms. Baptiste said, adding that Chase ultimately closed her account last January, three months after she asked.

A spokeswoman for Bank of America said the bank always honored requests to stop automatic withdrawals. Wells Fargo declined to comment. Kristin Lemkau, a spokeswoman for Chase, said: “We are working with the customers to resolve these cases.” Online lenders say they work to abide by state laws.

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Looking Ahead: Economic Reports for the Week of Jan. 14

ECONOMIC REPORTS Data scheduled to be released includes retail sales for December, the Producer Price Index for December, and business inventories for November (Tuesday); the Consumer Price Index for December, industrial production for December and the Federal Reserve beige book (Wednesday); weekly jobless claims, housing starts for December and the Philadelphia Fed index for January (Thursday); and the Thomson Reuters/University of Michigan consumer sentiment index for January (Friday).

CORPORATE EARNINGS Companies scheduled to release quarterly reports include Lennar (Tuesday); Bank of New York Mellon, Goldman Sachs, JPMorgan Chase, Charles Schwab, US Bancorp and eBay (Wednesday); Bank of America, BlackRock, Citigroup, UnitedHealth, American Express and Intel (Thursday); and General Electric, Morgan Stanley, Schlumberger and State Street (Friday).

IN THE UNITED STATES On Monday, the North American International Auto Show in Detroit will open for media previews before opening to the public on Saturday and running through Jan. 27; and Ben S. Bernanke, the Federal Reserve chairman, will speak at the University of Michigan in Ann Arbor about monetary policy.

On Tuesday, the Federal Deposit Insurance Corporation will meet to consider a multiagency rule that would bolster standards for higher-risk mortgages.

On Thursday, Christine Lagarde, managing director of the International Monetary Fund, holds a news conference in Washington, and the Consumer Financial Protection Bureau conducts a hearing in Atlanta about its plans for oversight of the mortgage servicing industry.

OVERSEAS On Tuesday, Abu Dhabi plays host to the World Future Energy Summit conference on renewable energy technologies and companies, which runs through Thursday.

On Friday, China reports fourth-quarter gross domestic product.

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Today’s Economist: Simon Johnson: Dropping the Ball on Financial Regulation


Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

With regard to financial reform, the outcome of the November election seems straightforward. At the presidential level, the too-big-to-fail banks bet heavily on Mitt Romney and lost; President Obama received relatively few contributions from the financial sector, in contrast to 2008. In Senate races, Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio demonstrated that it was possible to win not just without Wall Street money but against Wall Street money.

Today’s Economist

Perspectives from expert contributors.

More broadly, this political shift coincides with and matches a significant change of views within the regulatory community. To pick these up, you need to listen carefully, but the signs are unmistakable.

The Federal Deposit Insurance Corporation is firmly in the hands of sensible people. The Federal Reserve governor Daniel Tarullo is making all the right noises, including about the need for a cap on the nondeposit liabilities of our largest banks. Even Bill Dudley, the president of the New York Fed and a former Goldman Sachs executive, now acknowledges that too-big-to-fail is still with us. If the New York Fed is getting past denial, we are making progress.

At the Treasury Department, however, the tone and the content of messages on financial reform sound increasingly discordant. Recent signals suggest that appeasing powerful players within the financial sector is still high on the agenda for Treasury Secretary Timothy Geithner.

See, for example, the recent decision to exempt foreign-exchange swaps and forwards from the rules that will apply to most other over-the-counter derivative transactions. Read the response by Dennis Kelleher of Better Markets; he is exactly on target, as usual. I join him in recommending the reporting by Silla Brush of Bloomberg News on the issue.

The highest-profile issue remains the process to appoint a new chairman at the Securities and Exchange Commission. As anticipated in my post two weeks ago, Mary Schapiro announced on Monday that she would step down as chairwoman. Elisse Walter, already an S.E.C. commissioner, was immediately named as interim chairwoman – a step that many reformers saw as reasonable. This means that the president has some time to get a new chairman lined up; there is no need for a rushed decision.

The Treasury Department appears to have backed away from its earlier support for Mary Miller, and she is now reported to have withdrawn. She would have been a weak and inappropriate candidate, as I explained in my post last week.

The Treasury’s new candidate is Sallie Krawcheck, a former executive in the financial services industry. The campaign to appoint Ms. Krawcheck is already in full swing, and she is currently visiting people on Capitol Hill. Ms. Krawcheck is known to be good on the need to reform money markets – a key issue for the S.E.C. going forward. She has also been critical of management in some of our largest banks, at least in what she says on Twitter.

This week she supported Charles Schwab’s reform proposal for money market funds. It’s surprising that a potential nominee for such a prominent policy position is allowed to tweet. But perhaps it is also helpful, as we know very little about what she would do as S.E.C. chairwoman.

Ms. Krawcheck, who held senior positions at Bank of America and Citigroup, is on the advisory board of Gold Bullion International – a company that makes it easy for investors to own gold and other precious metals. Perhaps her experience and current position mean she has a healthy skepticism about the debt and equity currently on offer from very large banks.

But does she really understand how our financial system became so dangerous and what it would take to better protect investors? Ms. Krawcheck would be placed in charge of our principal markets regulator and made responsible for setting its agenda and answering to Congress. Yet she has never been a regulator or prosecutor; she has never sought to craft rules or dealt with Congress. What about her purely industry-based background suggests that she would be capable of marshaling the S.E.C.’s formidable staff to follow through on her tweets?

More broadly, what is Ms. Krawcheck’s view on the reform agenda put forward in early October by Mr. Tarullo? Aside from her tweets and short comments, I have not seen any clear statement on policy priorities from her. Nor does her track record suggest which way she would go.

And whom would she hire as head of enforcement? The S.E.C. needs to get its game back. This organization is a distinguished safeguard of public interest that has fallen on hard times – mostly through deregulation, underfunding, industry capture and a revolving door. Continuing the turnaround begun under Ms. Schapiro will require expert skills and a strong vision. No one can be above the law – including the country’s most powerful and best connected executives.

There is a huge political risk in this appointment. In terms of high-profile positions dealing with financial regulatory issues, the head of the S.E.C. ranks behind only the Fed chairman and the Treasury secretary.

Does President Obama want to make the same mistake at the S.E.C. that President George W. Bush made at the Federal Emergency Management Agency before Hurricane Katrina? Do his advisers want to wake up every morning worrying if an S.E.C. scandal or breakdown in competence or inappropriate wording will become what the second Obama term is remembered for?

Anyone genuinely seeking to protect the president should want the strongest possible candidate – on his or her merits – for this position.

Ms. Schapiro helped stabilize the situation, but a great deal of work remains. Ms. Krawcheck’s nomination would mostly be a way to make prominent people in the financial sector happy. Perhaps she would surprise them – and us – with real reform. But why play such games?

Some distinguished Americans are available to take the job of leading the S.E.C. I’ve written before about Neil Barofsky, Dennis Kelleher and Gary Gensler, the chairman of the Commodity Futures Trading Commission. I also heartily recommend Harvey J. Goldschmid, a former S.E.C. commissioner with an outstanding résumé on many fronts. (Disclosure: Mr. Goldschmid and I both serve in unpaid positions on the systemic risk council, founded by Sheila Bair.)

Ms. Bair would also be outstanding at the S.E.C. – although the country would be well served if she were to become our next Treasury secretary.

For a president serious about financial reform – including responsible policy and effective enforcement – the choice is simple. Nominate Ms. Bair as Treasury secretary and Mr. Barofsky, Mr. Goldschmid, Mr. Gensler or Mr. Kelleher as head of the S.E.C.

We need to restore confidence in all dimensions of our public markets. Financial markets are far too important to be left to the financiers.

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You’re the Boss Blog: The Biggest Banks Tell Us a Little More About Their Small-Business Lending

Searching for Capital

A broker assesses the small-business lending market.

Last week, I wrote a post about a joint announcement from the Small Business Administration and 13 of the largest banks in the country that they had increased their small-business lending by more than $11 billion over the past year. As I noted, this number stands in stark contrast to the number these banks self-report to the Federal Deposit Insurance Corporation, which shows that their lending has fallen by more than $2 billion.

Getting capital into the hands of small-business owners and entrepreneurs at affordable prices is a critical issue for our economic recovery. And that’s why it is important, when the largest banks in our country and the S.B.A. administrator make an announcement, that we understand what it means. I am happy to report that the Financial Services Roundtable, an organization that represents those 13 big banks, provided a statement in response to my post. We’ve decided to share the full statement, because we feel it provides some important clarification (while also raising some additional questions). Here it is, followed by a few of my thoughts:

After reading Ami Kassar’s Tuesday column (“The Big Banks Say They Are Meeting Their Lending Commitment”), we want to make sure you have information on F.D.I.C. call report data, what it shows and how it differs from the lending commitment reported by Karen Mills, U.S. S.B.A. Administrator, so this data is reported accurately.

In the conclusion of his article, Mr. Kassar wrote: “According to Ms. Mills, the banks are up by $11 billion; according to the F.D.I.C. call reports, the banks have fallen behind by more than $2 billion. We are still hoping the banks will explain what exactly they have committed to do.”

There is a straight-forward explanation behind the seeming contradiction Mr. Kassar cites. The lending commitment measures the increase in credit the 13 participating banks have made available. So, for example, if a bank provides a small business with a line of credit totaling $50,000, that bank is making $50,000 of credit available to the customer. If in the following year, the bank raises the customer’s line of credit to $75,000, that would be an increase of $25,000 which would be reported as part of measuring success against the lending commitment referred to by Ms. Mills.

The F.D.I.C. call report numbers measure the amount of credit small-business owners are actually using. If the customer in the example above has an outstanding balance of $20,000 against their $50,000 line of credit, the F.D.I.C. calculation would reflect only $20,000. If that same customer decides in the second year to pay their balance down to $15,000, this would result in a $5,000 decrease in the F.D.I.C. reported borrowing – even though the amount of credit made available to that customer by the bank has increased $25,000. Paying down the balance is the customer’s decision.

The banks participating in the lending commitment are working to make more credit available to small businesses and have made great progress in increasing new lending, as Ms. Mills reports. How much actual borrowing businesses do against their available credit is a decision made by business owners based on a number of factors, including how confident they are about the economic environment and the prospects of their business.

Just as consumers recently have been paying down their credit card balances, F.D.I.C. data shows us that small businesses are paying down their bank debt too (and not just cards and lines of credit). This is not something banks control nor should they try to influence what small-business owners do with their credit. It would be like saying to a consumer: we’ve increased your credit card limit so you need to increase your outstanding balance owed. Banks only determine the amount of credit they make available to small businesses, which has been increasing as reported in the lending commitment numbers. It’s business owners who decide how much they actually borrow at any given time.

The F.D.I.C. call report data gives us some insight into the use of credit by small businesses. Yet it does not show new lending commitments and should be not be used as a measure of a bank’s new lending to small businesses.

The Financial Services Roundtable is correct in that the F.D.I.C. numbers reflect actual monies borrowed by small businesses. These numbers tell the precise amount of loans to small businesses with a balance of $1 million or less.

Judging by the banks’ statement, I believe it remains very difficult to determine whether these banks have really done anything to make credit more available to the small businesses that need it. First of all, the banks’ numbers still include loans to companies with revenue of as much as $20 million. With a few strokes on an excel spreadsheet, they could tell us the corresponding numbers for companies with revenue of $1 million or less.

Second, this statement confirms that the loan dollars noted in their commitment include credit card debt. That means a significant portion of the $11 billion they are bragging about comes from the millions of small businesses who use credit cards for convenience or to earn cash-back and frequent flier points — not as capital to build their businesses. The statement also makes clear that when it comes to lines of credit, small businesses have only borrowed a fraction of the money that the banks are taking credit for lending.

Given these issues, as I have previously discussed, I still believe that the F.D.I.C. call numbers are a better barometer of small-business lending. The Obama administration has talked a lot about transparency. Wouldn’t it be appropriate for the S.B.A. administrator to demand clarity from the banks and share it with the small-business community? As a starting point, they could at least pull the credit card loans out of their numbers.

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

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You’re the Boss Blog: Is Bank of America Trying to Shed Small-Business Customers?

The Agenda

How small-business issues are shaping politics and policy.

Bank of America has once more found itself on the defensive over small-business lending, in the wake of a Los Angeles Times report that said the bank is demanding some borrowers to “pay off their credit-line balances all at once instead of making monthly payments.” According to the report, customers who can’t pay in full “are being offered new repayment plans for as long as five years, but with far higher interest rates than their original credit lines had.”

The claim that Bank of America is casting off its small-business customers — “systematically,” as The Times put it — probably would not surprise many observers. Back in the fall of 2008, the bank’s then-chairman and chief executive, Kenneth Lewis, called its small-business loan portfolio a “damn disaster.” Since then, that portfolio, as reported to the Federal Deposit Insurance Corporation, has shrunk by nearly a third, though the decline has occurred principally in small commercial real estate loans. (Small commercial and industrial loans have actually increased slightly, according to F.D.I.C. data.)

More recently, The Agenda has reported that from 2006 to 2010, Bank of America’s Small Business Administration general business lending fell by 89 percent. Rohit Arora, chief executive of Biz2Credit, which helps small businesses find new loans, said many of his prospective clients are current Bank of America customers. “We are finding pretty consistently that bank of America is almost at the top of the list of banks whose existing customers are shopping around for other avenues right now,” he said.

But Bank of America argues that the concern in this most recent instance is overblown.

It is true that Bank of America notified thousands of borrowers with revolving credit lines that their loans would come due in full. But Jefferson George, a spokesman for the bank, said that the intention was not to force immediate repayment or higher interest rates. Nor did the notices take aim at poorly performing businesses, or businesses in industries or parts of the country where the bank felt overexposed. Instead, he said, it was to rewrite the agreements for a small portion of its line-of-credit loans, giving the bank more control over the terms. 

In a revolving line of credit, a company can borrow up to a set credit limit, and as it pays off existing debt, the amount of credit available for borrowing increases. (A credit card is a common kind of revolving credit.) Typically, revolving credit lines last for a year, whereupon they are automatically renewed. But loan officers at Bank of America, and at some of the banks it acquired, opened some credit lines without maturities or formal renewal processes. It was these loans, said Mr. George, that the bank was trying to rein in. “We had a small percentage of clients who had a product that wasn’t in line with our current credit products,” he said. “And all we did was added a maturity date and a renewal process.

“I don’t want to minimize this,” Mr. George continued. “It is a change for customers, and that’s why we gave them a year’s notice.”

In one version of the letter Bank of America sent to clients, dated November 2010 and provided by Mr. George, the bank did indeed set an expiration date for the line of credit, in January 2012, and added terms to the loan agreement that required the borrower to “repay in full any principal, interest or other charges outstanding” by the new expiration date. However, it also said that the credit line could be extended with a separate written renewal notice from the bank — albeit potentially with new terms.

Mr. George would not say on the record how many small-business borrowers became subject to maturity dates and renewals. But he said that the group amounted to “a very small percentage of our roughly 1.5 million small-business credit customers.” Of these, he said, “the majority of customers — more than 90 percent — qualified for renewal at the same rate. The others had the option to pay in full or restructure their agreement with different terms.” Mr. George added that he was unaware of any instance where a customer was not offered an extension one way or the other.

In all, Mr. George said, “98 percent of customers in this small, specific group” have renewed their loans on basically the same terms (but with a maturity date and renewal) or on new terms, which probably included a higher interest rate, a reduced credit line, or both. In some cases, lines of credit became term loans. The number of borrowers with whom Bank of America has not reached any agreement, Mr. George said, amounted to one-tenth of 1 percent of those small-business credit customers. One-tenth of one percent of 1.5 million would be 1,500 customers — not exactly a sweeping retrenchment from the small-business credit market.

Bob Coleman, who publishes a newsletter for the S.B.A. lending industry, said Bank of America is acting prudently by changing the terms of its lines of credit. The borrowers who’ve been left behind, at least as described in The Los Angeles Times article, appear to have been abusing the system. “A line of credit is you borrow the money from the bank, you pay your vendors, and a few months later, you pay back the bank, and you do it again next year,” said Mr. Coleman. But some borrowers, he said, turn what is meant to be a seasonal tool into an evergreen, and effectively never pay down the principal on their lines of credit.

That’s always been a problem for banks, Mr. Coleman said, but it is becoming more untenable today. “The regulators will not allow you to have an evergreen loan,” said Mr. Coleman. “If you have a $100,000 line of credit, and all you’re doing is making interest payments, regulators are going to say that’s not a line of credit, that’s a loan.”

Still, The Los Angeles Times also reported that Bank of America took the opportunity while restructuring these credit lines to add a fee. (So-called commitment fees are typical in revolving lines of credit.) Mr. George acknowledged that the renewal terms call for an annual fee of 1 percent of the commitment, up to $500. But, he added, “in many cases, the fees are reduced, or even waived, based on our relationship with the client.”

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Ex-Bank Executives Settle F.D.I.C. Suit

Former executives at Washington Mutual have reached a $64 million agreement to settle a civil lawsuit with the government, according to officials with the Federal Deposit Insurance Corporation, which pursued the case after the savings and loan collapsed in 2008.

The deal is one of the larger amounts recovered in a financial crisis case, though only about $400,000 in total will be paid by the executives, according to a person briefed on the settlement but not authorized to discuss it. The F.D.I.C. initially sought $900 million in the case, which it filed in March.

Much of the settlement will come from insurance policies the company took out for the executives, who are also releasing Washington Mutual’s estate from some financial claims they have against it. The money in the settlement will be distributed among Washington Mutual’s creditors. It will not benefit the F.D.I.C. fund because the fund did not lose money when Washington Mutual foundered and was sold in part to JPMorgan Chase Company, according to F.D.I.C. officials.

The settlement, which was reported in The Wall Street Journal on Tuesday, is expected to be formally announced within the next week, the officials said.

The executives in the suit are Kerry Killinger, the company’s former chief executive; Stephen Rotella, its former president; and David C. Schneider, its former home loans president.

The F.D.I.C. accused the executives of pushing Washington Mutual, which was based in Seattle, to the brink by making risky bets to reap short-term profits for themselves. In an unusual move, the F.D.I.C. also accused the wives of Mr. Killinger and Mr. Rotella of helping them shield some of the compensation from the company from legal claims. The wives will also be released from the suit as part of the settlement.

The executives will neither admit nor deny wrongdoing in the settlement, according to another person briefed on it but not authorized to discuss it. The government has faced recent criticism over its willingness to settle cases without extracting admissions of guilt. In November, a federal judge in New York denounced that practice when he refused to approve a settlement between Citigroup and the Securities and Exchange Commission.

The Justice Department has already closed its criminal investigation into officials at Washington Mutual, saying last summer that its investigators had “concluded that the evidence does not meet the exacting standards for criminal charges in connection with the bank’s failure.”

After Washington Mutual collapsed, Mr. Schneider stayed on as a mortgage servicing executive at JPMorgan. Mr. Killinger, who ran Washington Mutual for nearly two decades, is retired. Mr. Rotella, who joined the company in 2005 to try to turn it around, is now a consultant.

In March, Mr. Rotella wrote in an e-mail to friends, which was circulated in the media, that he felt the suit was unfair and that he and other managers had been working to put Washington Mutual on a better footing by decreasing exposures to risky mortgages.

Lawyers for the executives declined to comment on Tuesday. A spokesman for JPMorgan, which is not involved in the settlement, declined to comment.

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Business Briefing | Company News: F.D.I.C. Closes Four Banks Burdened by Home Loans

Regulators on Friday closed two banks in Georgia and one each in Florida and Colorado, raising to 84 the number of American banks that have failed this year. The Federal Deposit Insurance Corporation seized the four banks. The largest by far was Community Banks of Colorado, based in Greenwood, Colo., with $1.38 billion in assets and $1.33 billion in deposits. Also shuttered were Community Capital Bank, in Jonesboro, Ga.; Decatur First Bank, in Decatur, Ga.; and Old Harbor Bank, in Clearwater, Fla. By this time last year, regulators had shuttered 139 banks.

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DealBook: Volcker Rule Divides Regulators

Regulators have faced a barrage of complaints from lawmakers and financial industry lobbyists in their 14-month-long quest to constrain risky trading on Wall Street, an effort known as the Volcker Rule. Now, as regulators begin a push to produce a final draft of the rule, they face hurdles from an unexpected group: themselves.

Though several federal agencies agreed last week to propose the initial version of the Volcker Rule, they are divided over some of its crucial details. The Federal Deposit Insurance Corporation, for example, has pushed for tough language that would require bank executives to vouch for their compliance with the Volcker Rule — a measure that the Office of the Comptroller of the Currency has been fiercely resisting, say people close to the regulators.

In recent weeks, some regulators even quarreled over which agency would vote first on the rule, according to one of the people close to the regulators. And while four regulators ultimately did vote, a fifth agency, the Commodity Futures Trading Commission, was conspicuous by its silence.

The commission, according to another person with direct knowledge of the issue, raised concerns that an earlier draft overlooked the costs and benefits of the Volcker Rule, an important standard whose absence could expose regulators to a legal challenge.

Both the rule’s critics and supporters fear that an escalating turf war could sidetrack regulators as they shape a final version of the overhaul by July 2012. While Wall Street opposes the proposal, it worries that the regulatory fracture will generate additional uncertainty over how to comply.

“You do see a split,” said Thomas Quaadman, a lobbyist for the Chamber of Commerce, which opposes the Volcker Rule. “They might be trying to get to the same place, but it’s difficult to get there.”

Henry Klehm, a lawyer at Jones Day and a former Securities and Exchange Commission official, noted that regulators would try to reconcile their differences, though “this means delay.”

The Volcker Rule bickering reflects broader tensions among financial regulators, who have amassed broad and sometimes overlapping powers in the aftermath of the financial crisis. The Dodd-Frank Act of 2010, the sprawling overhaul that spawned the Volcker Rule among 300 other regulations, transformed the regulatory landscape and is at the heart of the squabbling.

For one, regulators are divided on Dodd-Frank’s requirement that banks keep risk on their books when selling mortgage securities. Proposed rules for the derivatives industry, too, vary between agencies.

The Volcker Rule presents a particularly thorny task. Named for Paul A. Volcker, a former Federal Reserve chairman who campaigned for the rule, it aims to curb outsize risk-taking on Wall Street.

The rule would limit most proprietary trading, where a bank places bets for itself rather than for clients, a major money maker for the industry. Wall Street has warned that the rule will eat into profits just as banks are trying to regain their footing.

Anticipating complaints, regulators have already fashioned multiple exemptions to the ban, allowing banks to place trades when hedging against risk. Banks can also buy securities from one client with an eye toward later selling them to another, though the line is often fuzzy between that business and proprietary betting.

The proposal reflects the rule’s complexity, spanning nearly 300 pages and taking aim at some of the most arcane financial minutia. Davis Polk, a law firm that advises some of the nation’s biggest banks, has churned out multiple summaries of the proposal for clients and even started a Web site,

The regulatory discord, analysts say, only compounds the confusion. While the Volcker Rule itself “would be a worthy study for Talmudic scholars, complicate this with five agencies having to write the rules and you have geometric expansion of complexity,” the accounting firm PricewaterhouseCoopers said in a recent report.

Still, regulators are open to tweaking the rule. The proposal posed nearly 400 questions, replete with multiple follow-up queries, for the industry and the public to ponder.

The question section ballooned in recent weeks as it became a favored destination for controversial provisions. When regulators failed to reach a compromise, a rule was relegated to a question for the public.

In recent weeks, the deepest divide centered on provisions that spelled out how regulators would enforce the Volcker Rule. One idea would require bank executives to promise compliance.

In August, a confidential draft proposal included the “C.E.O. attestation” clause in brackets, meaning it was “included for discussion purposes only, pending resolution at the principal level.”

The Office of the Comptroller of the Currency objected, according to the people close to the regulators, who spoke on the condition of anonymity because the discussions were private. The agency, which oversees national banks, flagged the executive compliance rule as a deal-breaker.

Over the last month, regulators scrambled to draft a compromise. The agencies formed Volcker Rule working groups, which held weekly phone calls and regularly gathered in a conference room at the F.D.I.C.’s Washington headquarters, the people said. Treasury Department lawyers occasionally mediated the dispute.

But in recent days only one compromise emerged: turn the C.E.O. rule into a question. Ultimately, regulators asked whether the rule would “be a preferable approach.”

The Office of the Comptroller of the Currency, with support from the Federal Reserve, also opposed an F.D.I.C. proposal that would force banks to turn over a battery of trading data to independent warehouses where regulators could keep an eye on the trades. Again, the provision was demoted to a question.

Regulators are playing down their differences.

Elise Walter, a Democratic commissioner at the Securities and Exchange Commission, said at a public meeting last week that the Volcker Rule had “been a very effective exercise in cooperation.”

At the same meeting, however, the agency’s lone Republican commissioner, Troy Paredes, voted to approve the rule but warned that he had “significant reservations.”

At the Federal Reserve, which quietly voted by e-mail recently, one board member, Sarah Bloom Raskin, opposed the proposal, according to a person with knowledge of the vote. It is unclear why she voted against the rule.

The Fed and the F.D.I.C. declined to comment.

“Developing any interagency rule is a complex process, particularly when regulators with different missions are involved, and this is quite a complex rule,” Bryan Hubbard, a spokesman for the comptroller’s office, said in a statement. He added that “banking and market supervisors were able to reach consensus.”

But the consensus did not include the Commodity Futures Trading Commission. The agency, according to the person with direct knowledge of the issue, objected to an August version of the proposal because it failed to include a full cost-benefit analysis of the Volcker Rule.

The agency is concerned that Wall Street will mount lawsuits against its policies, especially in light of a court decision over the summer that struck down a separate S.E.C. rule.

The latest draft of the Volcker Rule does outline the economic effects of the proposal.

The C.F.T.C., the smallest of the regulators, also says it feels it cannot currently spare the time and staff needed to review the Volcker Rule while it juggles dozens of other Dodd-Frank policies. It is unclear whether the agency will adopt a similar version of the rule.

Wall Street groups have already seized on what they see as a split among the agencies. One group, the Chamber of Commerce, sent a letter last week outlining its concerns with the Volcker Rule to Treasury Secretary Timothy F. Geithner.

“The Chamber is concerned that the lack of coordination,” the letter said, “injects additional uncertainty into an already fragile economy, and threatens to further endanger the economic recovery.”

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DealBook: Volcker Rule Banking Revamp Moves Step Closer to Law

Martin J. Gruenberg, acting chairman of the Federal Deposit Insurance Corporation, on Tuesday, with Mary L. Schapiro, chairwoman of the Securities and Exchange Commission.Chip Somodevilla/Getty ImagesMartin J. Gruenberg, acting chairman of the Federal Deposit Insurance Corporation, on Tuesday, with Mary L. Schapiro, chairwoman of the Securities and Exchange Commission.

Wall Street is bracing for major changes from a new rule that would overhaul how the banking industry conducts its trading.

The Federal Deposit Insurance Corporation unanimously approved on Tuesday an initial version of the regulation, known as the Volcker Rule. Two other regulators followed suit, and the Securities and Exchange Commission is scheduled to vote on Wednesday.

The rule, intended to limit trading when the bank’s money is at risk, a sweet spot for banks, is seen as a centerpiece of the sprawling financial overhaul of the Dodd-Frank Act of 2010. In anticipation, the nation’s biggest banks, like Goldman Sachs and Bank of America, have already shut down their stand-alone proprietary trading desks.

But the proposal on Tuesday included several unfriendly surprises for the banks, including provisions that scrutinize how they generate revenue, award compensation and track their compliance with the Volcker Rule. Such measures, analysts say, could significantly change the way Wall Street does business.

“You’d have to go back to the New Deal for a rule that would have as profound an impact on the financial markets as the Volcker Rule,” said Donald N. Lamson, a former Treasury Department official who helped write the Volcker Rule into Dodd-Frank. “If you add it all together, it’s going to increase costs, decrease revenue and profits and potentially scare off your most productive employees,” said Mr. Lamson, now a lawyer at Shearman Sterling.

With regulators blessing the first draft of the rule — named after Paul A. Volcker, a former Federal Reserve chairman and former adviser to President Obama — the fight over its esoteric details kicks into high gear. The deadline for public comments on the proposal is now Jan. 13; the final version takes effect next July.

“I expect the agencies will move in a careful and deliberative manner in the development of this important rule,” Martin J. Gruenberg, acting chairman of the F.D.I.C., said on Tuesday.

More than a year after Dodd-Frank became law, much is still unknown about the Volcker Rule. The proposal introduced on Tuesday in some ways raises more questions than it answers. In the 298-page document, regulators posed nearly 400 questions for the industry and the public to consider, leaving room for significant changes.

”Unfortunately, the resulting uncertainty will have an enduring and negative impact on the banking industry and the customers we serve,” Frank Keating, president and chief executive of the American Bankers Association, said in a statement.

For now, the rule’s supporters and critics alike are frowning on the proposal that emerged on Tuesday. Consumer groups want to make it tougher. Wall Street has been lobbying furiously to tame the Volcker Rule, holding roughly 40 meetings with various regulators, warning that the changes will eat into profits at a difficult time for banks.

“The banking industry fears the oversized nature and complexity of this proposed rule will make it unworkable and will further inhibit U.S. banks’ ability to serve customers and compete internationally,” Mr. Keating said.

Some aspects of the proposal, financial industry lawyers and lobbyists say, challenge the very nature of Wall Street. For one, the rule would prevent banks from awarding bonuses intended to “encourage or reward proprietary risk-taking.”

The proposal also requires banks to generate revenue primarily from fees and commissions rather than from the fluctuating value of securities they hold. In essence, the move would upend the banking industry’s lucrative, yet risky trading system, forcing powerhouse investment banks to resemble sleepier brokerage firms.

Answers to a fundamental question surrounding the Volcker Rule — namely, how will it be enforced — provided little comfort to Wall Street on Tuesday. The proposal spells out an expansive internal control regimen that banks must adopt, creating layers of expensive and time-consuming compliance. Under the rule, banks must turn over a battery of information to regulators, including a number of metrics to gauge whether a bank is helping clients or trading for its own benefit. The proposal itself, citing survey data, estimates that banks will have to spend more than six million hours putting the rule into effect.

“The onus is absolutely on the banks,” said Kim Olson, a principal with Deloitte Touche who is both a former regulator and banker.

While the proposal stopped short of forcing bank chiefs to certify the legitimacy of their compliance program, regulators asked the public to comment on the possibility of “C.E.O. attestation.”

Regulators also raised the possibility that banks might turn over their data to independent warehouses, where regulators could keep an eye on the trading.

As Wall Street grumbles over the scope of the Volcker Rule, some Democratic lawmakers and consumer advocates are pushing for even tougher restrictions.

“Unfortunately, this initial proposal does not deliver on the promise of the Volcker Rule or the requirements of the statute,” said Marcus Stanley, policy director of American for Financial Reform, an advocacy group.

During the lengthy rules-making process that led to Tuesday’s draft proposal, a number of controversial exemptions emerged.

While the regulation prevents big banks from placing bets on many stocks, corporate bonds and derivatives, it exempts trading in government bonds and foreign currencies.

The proposal also provided a path for getting around the ban, for instance, when banks hedge against risk that comes from carrying out a customer’s trade. Market-making and underwriting are excused, too, though the line is often fuzzy between these pure client activities and proprietary bets.

Proprietary trading, analysts say, often slips into client-focused activity. Banks, as part of routine market-making, can buy securities from one customer with the intent of selling them to another client. The Volcker Rule proponents want to close certain loopholes in the rule, particularly the broad exemption for hedging. The proposal unveiled on Tuesday would allow banks to hedge against theoretical or “anticipatory” risk, rather than just clear-and-present problems.

“The vagueness of the proposal, and the hundreds of questions it includes, also demonstrate that we are still in the middle of this process,” Mr. Stanley said.

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You’re the Boss Blog: A Banker Explains Why Some Small Businesses Have Trouble Getting Credit

The Agenda

How small-business issues are shaping politics and policy.

After a recent post about the bad news embedded in the Federal Deposit Insurance Corporation’s second-quarter good news — business lending broadly was up for the first time in three years, but small-business lending continued to fall — The Agenda heard from a representative of Sterling National Bank, a small institution based in New York City that lends exclusively to small and medium-sized businesses. Contrary to what I had reported, loans were way up at Sterling, the representative said. Did I want to find out why?

I did. But what I learned was not as clear-cut as my correspondent had suggested.

Sterling, as the president, John Millman, tells it, was established in 1929 — “a very difficult year” — by a handful of businessmen who felt that the city’s small and mid-size companies “were under-served by larger banks in the marketplace.” (Among the founders was an owner of Arnold, Constable Company, the famed New York department store of the time.) The bank, Mr. Millman said, makes no consumer loans but offers businesses — today’s clients are mostly professional services — an unusual range of products for a community bank, including asset-based lending, factoring, trade financing, and until recently leasing.

While the banking industry increased total business lending by less than 3 percent in the second quarter, Sterling bolstered its own by nearly 10 percent. “Most banks have not been seeing growth in the loan portfolio, and they are saying that they’re not seeing loan demand,” Mr. Millman said. Sterling claimed to see a different picture. For one thing, the bank’s existing clients were starting to bite off a little bit more of their available credit line, he said. “But the very big area for growth for us are new relationships. Many traditional lenders to what we call small and mid-size companies have either lost interest for various reasons in the marketplace or they have merged up into much larger institutions and they can’t focus on that particular sector.

“We have been able to pick up many really significant client relationships the last several quarters, and they come to us largely from banking relationships that they’re unhappy with.”

Sterling has received some press coverage about the growth in its small-business lending. And that’s fair enough. But the key phrase here may be Mr. Millman’s qualification, what we call small and mid-size companies. For Sterling, those are companies with revenues that start at $4 or $5 million and reach as high as $100 million and who borrow as much as $20 million. In the category of what the F.D.I.C. calls small-business loans — financing of $1 million or less — Sterling’s portfolio actually dropped 3 percent, a steeper decline than in the banking industry as a whole.

In fact, since 2003, when the F.D.I.C. began collecting small-business loan figures, the small-business share of total commercial and industrial lending at Sterling has fallen, from 26 percent to 19 percent. At the nation’s biggest bank, by assets, JPMorgan Chase Bank, the small-business loan portfolio constitutes a slightly larger share of total business lending than at Sterling.

Mr. Millman acknowledged that Sterling now makes fewer small-business loans (or perhaps business loans that are small), “but that had never been a significant part of our lending,” he said. “Our core strategy is to work with larger, more established companies that borrow up to $20 million. While we did some very small business lending, we have determined that it makes much more economic sense to us and to our shareholders to focus our resources into larger relationships.

“You can even do the arithmetic,” he continued. “The resources required to make a $10 million loan are not a lot different than the resources required to underwrite, administer, and make a $1 million loan. If you’re trying to grow your loan portfolio by 10 percent, and you have over a billion-dollar loan portfolio, you’re going to make a lot of $400,000 loans and you’re not going to get there. But if you’re making $20 and $25 million loans, you’re more likely to get the loan growth. And that’s the strategy we have employed.”

We have heard others say that big banks have difficulty with small loans — though it’s rare to hear a banker acknowledge it. But Sterling is hardly a big bank — with about $2.5 billion in assets, it ranks 283rd. It is almost an axiom of banking that big banks are interested in transactions and use computer credit models to underwrite their small loans, while small banks are interested in borrower relationships and underwrite their loans manually. Mr. Millman, though, seemed to say that only the smallest banks would be able to treat the smallest businesses like people, rather than numbers. “It’s pretty hard for a bank that’s bigger than ours, I would think, to make lots of $500,000 loans and to say it’s a relationship business,” he said. “I don’t see how you can have a relationship with that many units.”

I asked Mr. Millman why he had wanted to talk to me, given that Sterling’s experience wasn’t exactly a counter-example to the broader trend I reported on. “We’re a $2.5 billion bank in the biggest banking market in the world, and folks at The New York Times don’t normally focus on community banks in a market that’s this big,” he said. “And to us it’s important to speak to as many people as we can to let them know about what we’ve been doing the last 80 years and who we are.”

Where would he recommend people who want $1 million loan go to get one, I asked. Sterling National Bank, he answered: “The experience will be much better at an institution like ours at that dollar level than at any other institution I can think about.”

But when asked where borrowers seeking smaller loans — $500,000, say — might go, Mr. Millman had no similar advice. “I honestly don’t know the answer to that,” he said.

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