BulletProofBlog the blog on crisis communications

In this regular feature, Bulletproof interviews top plaintiffs' attorneys for their perspective on the crises likely to affect businesses in the near future. Today we talk to Michael Vaughan, a partner at Kansas City' s Walters Bender Strohbehn & Vaughan, PC, a nationally recognized trial firm that has distinguished itself on both the plaintiffs and defendants side in complex business litigation.

Mr. Vaughan' s firm represents plaintiffs in Thomas v. U.S. Rand NAND in which Missouri consumers, alleging they were charged excessive closing fees, sued 33 banks for violating Missouri law that allows lenders to exceed usury rates applicable to most loans, provided the lender conform to limits on closing costs and fees. The case, originally filed in 2004, was dismissed by a trial court on the basis of complete preemption, but the 8th Circuit Court of Appeals reversed earlier this month because it held that the preemptive effect of the federal law was conditional and not complete.

What are the longer-range implications of this case for the financial services industry, in Missouri and beyond?  

Mike Vaughan: Let' s start with Missouri as the bellwether. This case levels the playing field on lending in our state because it requires foreign state chartered banks to comply with the same laws that govern Missouri banks. The foreign state chartered banks cannot undertake lending and securitization strategies that are dependent on closing fees.

Beyond Missouri, the 8th Circuit decision affirms that, unless the lender' s home state rate exceeds that of the borrower' s home state rate, the borrower' s state laws govern the transaction. That is decisive for lenders nationally since there are many states where similar state legislation will control.
  
"Preemption" as used in Thomas involved the interpretation of preemption language in DIDA [the Depository Institutions Deregulation and Monetary Control Act]. But to avoid confusion, I' d point out that this discussion is not really that relevant to the ongoing debate over federal preemption of state product liability laws.

What does Thomas mean for Wall Street interests in the home mortgage business? 

Mike Vaughan: Securitizing institutions cannot hope to override local law; they must conduct due diligence on the loans they package; and, perhaps most importantly in terms of overall business impact, both originating lenders and the securitizing institutions must - whenever they do business in states where their home rates do not exceed the borrower' s home rates - make money the old-fashioned way. They must make money long-term, based on sound loans and not on how much in fees can be wrung out of each borrower.

That said, Thomas bodes well for business in Missouri and in other states where the same conditions apply. As I' ve said in the press, Missouri banks should welcome the decision because it means that non-Missouri banks can no longer lure away customers with reduced interest rates, only to charge higher hidden fees. At the same time, foreign state chartered banks have no reason to avoid states like Missouri. They simply need to compete more transparently. Given the economic and legal pressures they' re facing, I see no reason why they won' t choose to do so.

What other important issues and trends are of interest to you in the near future?  

Mike Vaughan: There remain predatory trends that will be harmful to our society and possibly fuel future litigation - for example, when lenders apply severe penalties during early default, virtually guaranteeing that borrowers will not work out of their distress. It' s bad for the lender as well, since the loans will eventually need to be written off.
 
I am also concerned that Congress, while trying to more closely regulate home mortgage lending, may be duped into believing that federal regulation is necessarily better than the laws that already exist in the borrowers' home states. Those local laws often permit high rates of interest (often, as in Missouri, dating back as necessary adjustments to the inflation of the late 1970s) but they also provide consumer protections blessed by local officials and their constituents.

The danger we face is that there will now be a push to significantly amend DIDA and undo our more than 200 years of an effective dual banking system.

Larry Smith is Senior Vice President of Levick Strategic Communications and a contributing author to Bulletproof Blog.