Anatomy of a Plan Designed to Fail

On January 14, 2011, the Atlanta Journal-Constitution reported:

A small coastal Georgia bank failed Friday, marking the first such failure of 2011 in the state and the 52nd since mid-2008.

Georgia’s Department of Banking and Finance closed Oglethorpe Bank of Brunswick. Oglethorpe Bank and its deposits will be acquired by Bank of the Ozarks, which is based in Little Rock, Ark.

The rate at which Georgia banks are failing has slowed, but this state of a mere ten million people, continues to lead the nation in the number of failed banks. Perhaps not co-incidentally, Georgia is also the home of Prommis Solutions, LLC, founded in Roswell, Georgia in 2006, as the national leader in foreclosure processing services.

Perhaps there was something amiss with how Oglethorpe Bank sought to “secure” the money it lent. In addition to the loan agreement and the note, borrowers were required to waive their rights ahead of time, almost as if somebody expected them to default:

Waiver of Rights

By execution of this Instrument Borrower expressly,

(1) Acknowledges the Lender’s Right to Accelerate the debt and the power of attorney given hereby to Lender to sell the premises by nonjudicial foreclosure upon default by borrower without any judicial hearing and without any notice other than such notice as is specifically required to be given under the provisions of said Deed to Secure Debt;

(2)Waives all rights which Borrower may have under the Fifth and Fourteenth Amendments to the Constitution of the United States, the various several states, the Constitution of the State of Georgia, or by reason of any other applicable law, to NOTICE AND TO JUDICIAL HEARING prior to the exercise by the lender of the right or remedy herein provided to Lender, except such notice as is specifically required to be provided in said Deed to Secure Debt;

(3)Acknowledges that Borrower has read this deed and its provisions have been fully explained to Borrower and Borrower has been afforded the opportunity to consult with counsel of Borrower’s choice prior to executing this deed;

(4)Acknowledges that all Waives of the aforesaid rights of Borrower Have Been Made Knowingly, Intentionally and Willingly by Borrower as part of a bargain for loan transaction;

(5)Agrees that Borrower’s right to notice shall be limited to those rights to notice provided by this deed and no other; and

(6)Agrees the provisions hereof are incorporated and made part of the Deed to Secure Debt.


For those of you who haven’t read the Constitution lately:

Fifth Amendment

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

Fourteenth Amendment

Section 1. All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

Section 2. Representatives shall be apportioned among the several States according to their respective numbers, counting the whole number of persons in each State, excluding Indians not taxed. But when the right to vote at any election for the choice of electors for President and Vice President of the United States, Representatives in Congress, the Executive and Judicial officers of a State, or the members of the Legislature thereof, is denied to any of the male inhabitants of such State, being twenty-one years of age, and citizens of the United States, or in any way abridged, except for participation in rebellion, or other crime, the basis of representation therein shall be reduced in the proportion which the number of such male citizens shall bear to the whole number of male citizens twenty-one years of age in such State.

Section 3. No person shall be a Senator or Representative in Congress, or elector of President and Vice President, or hold any office, civil or military, under the United States, or under any State, who, having previously taken an oath, as a member of Congress, or as an officer of the United States, or as a member of any State legislature, or as an executive or judicial officer of any State, to support the Constitution of the United States, shall have engaged in insurrection or rebellion against the same, or given aid or comfort to the enemies thereof. But Congress may, by a vote of two-thirds of each House, remove such disability.

Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

Section 5. The Congress shall have power to enforce, by appropriate legislation, the provisions of this article.

Now, since the Constitution and its Amendments are clearly addressed to agents of government and, whatever the intent, offer no guarantee as regards the rights of individuals, what relevance the reference to these two amendments is supposed to have to a bank, a private corporation, is somewhat of a puzzlement — unless the intent is to insure that if and when a borrower defaults or pays late, in the event the bank elects to “accelerate the debt,” no time (or money) will be wasted in taking the matter to court and letting a judge take a look.

What Ogelethorpe Bank seems to have set up here is a pre-planned resolution to a failure under the now common logic that when an individual consents to being stripped of rights, it’s not abuse. It obviously did not work to secure Oglethorpe from failure. But this strategy, which was not in evidence when I took out an adjustable rate loan in 1995, may well account for why the financial crisis has been so difficult to resolve. After all, the borrowers, at least in Georgia, had agreed ahead of time not to squawk if the loan went bad.

Which raises the question what kind of person would agree ahead of time to give up the right to seek justice in a court of law? Certainly, I never would have agreed to such a waiver, nor, to be honest, reading it now, I’m not sure I understand “its meaning.” Since the banks aren’t bound by the Constitution, why the insistence that unrecognized rights be surrendered? It raises the suspicion that perhaps the individuals signing for the loans weren’t making a commitment to necessary housing, but were participating in a deal whereby housing, grossly inflated in price, was funneled into the market for willing investors in unrealistic loans.

Did the lenders know the loans were unrealistic? Very likely, the lawyers assured them they were protected. There was a time when both lawyers and real estate brokers adhered to ethical standards which both sides in a transaction could count on. That individuals transaction business with Oglethorpe Bank had been “afforded an opportunity to consult with counsel,” reminiscent of people being read their Miranda rights, suggests that banks lawyers should perhaps not be trusted, not even when they represent that the documents are all “boiler plate” — the new industry standard, don’t you know.

Perhaps the waiving of, albeit non-existent, rights may just be designed to provide assurance that the unreliable justice system need not be involved since the bank has gone the extra mile to address rights. Oglethorpe, btw, was not the only “offender.” Theirs just happens to be the form I copied from the public records. Were borrowers provided with copies of the documents? Presumably, some of those who are now suing have documentary evidence of how they were bamboozled.

The press has made reference to “straw buyers” — people who entered into purchase agreements for houses they did not plan to occupy. However, it’s my sense that these reports focused on investors looking to either rent or resell at a profit. That a plan to default and trigger a fire sale was on the agenda has not been, as far as I know, much explored. Some people have picked up real bargains at Sheriff’s Auctions.