InfoBytes, August 12, 2005
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Federal Issues
OCC Releases 2005 Survey of Credit Underwriting Standards. On July 28, 2005, the Office of the Comptroller of the Currency (“OCC”) released its eleventh annual Survey of Credit Underwriting Practices. The OCC observed significant easing in commercial real estate and middle market loan standards, as well as continued easing in lending activities centered in larger banks (i.e., structured finance and asset based loans). In the 2004 Survey for the first time in four years the examiners noted that more banks eased credit underwriting standards than tightened them (13% eased, 12% tightened, and 75% did not change), in 2005, the trend towards easing standards continued (34% eased, 12% tightened, and 54% did not change). With respect to retail credit, for the first time in the survey’s eleven year history, examiners reported net easing of the retail credit underwriting standards, and that such easing seemed concentrated in real estate secured products (i.e., home equity and first mortgage loans). The Deputy Comptroller for Credit Risk continues to call on Banks to diligently research and implement risk management practices, noting that while performance has not been affected, the exceptions to underwriting standards such as higher credit limits, lower credit scores, and less documentation and verification, among others, are creating risks within retail portfolios which must be approached with trepidation. See http://www.occ.treas.gov/toolkit/newsrelease.aspx?Doc=B8T391NN.xml for the OCC’s press release, and http://www.occ.treas.gov/cusurvey/scup2005.pdf for the text of the Survey.
Rules Proposed by Banking Agencies to Restrict Examiner Employment. The federal banking regulatory agencies issued proposed rules to restrict the post-employment of certain senior examiners for one year after leaving a federal banking agency or Federal Reserve Bank. The proposal would not allow an examiner to knowingly accept compensation as an employee, officer, director, or consultant from an institution, holding company, or certain related entities for which the examiner served as the senior examiner for two or more months during the examiner’s final year of employment. Under the proposal, the appropriate federal banking agency will be required to seek an order of removal and an industry-wide employment prohibition for up to five years and/or a civil money penalty of up to $250,000 against violators. More information on the proposed rules may be obtained at: http://www.fdic.gov/news/news/press/2005/pr7405.html.
State Issues
New Mexico Solicits Information on Subprime Lending. On August 9, 2005, the Attorney General of New Mexico, Patricia Madrid, announced that she had sent letters to more than 150 unspecified subprime lenders, requesting information about those lenders’ policies on a number of topics: borrower repayment ability, tests of borrower benefits from loans; prepayment penalties; limitations on loan origination points and fees; use of balloon payments; call provisions; home improvement contract referrals; use of independent closing agents and appraisers; and monitoring and compliance with consumer protection policies. The stated intent of the information-gathering was to help determine whether the subprime lending industry was following the consumer protection standards urged on the industry by the National Association of Attorneys General Subprime Lending Working Group, which in turn parallel the standards agreed to by Household Finance in its December, 2002 settlement. The press release is available at http://www.ago.state.nm.us/pio/pressrel/2005/08-09-05_sub_prime_lending_practices.pdf.
Courts
Ninth Circuit: Offer of Insurance Premium Rate above the Best Available is FCRA Adverse Action. This case involved the “Insurance Prong” of FCRA’s definition of adverse action, under which adverse action includes an “increase” in the premium rate. The plaintiffs claimed the defendant insurance companies took adverse action when they set initial premiums higher than the best available rate, based on information in the consumers’ credit reports. The U.S. District Court for the District of Oregon agreed with the insurers that an “increase” does not apply to the initial rate because the phrase implies a change from a previous rate, and dismissed the cases. On August 4, 2005, the U.S. Court of Appeals for the Ninth Circuit reversed the dismissals, holding that adverse action in insurance transactions occurs whenever the consumer’s premium rate is higher than it would have been absent the credit report information. The court also held that (1) a “no-hit” still represents a consumer report, triggering an adverse action notice, as does an offer at a better premium rate than the rate offered to consumers with average scores if some consumers were offered a still better rate; (2) the notice must explain the role played by the various affiliates and that the customer’s premium rate was increased based on the credit report information; (3) any company within a family of companies that was involved in the decision to take adverse action can be sued for failing to provide a notice, not just the policy-issuing company; and (4) because the defendants’ arguments were “objectively unmeritorious” and “nonsensical” (and notwithstanding the lower court’s dismissal of the case at their request), they acted with reckless disregard of their obligations and, therefore, are liable as a matter of law under the FCRA willful-violation provision, which subjects them to statutory damages of $100-$1000 per violation. The decision of the court was unanimous except on the willfulness issue, on which one judge on the three-judge panel dissented. It should be noted that the decision applies only to the “insurance prong” of the FCRA definition, not to the “credit prong,” which does not require a notice if the consumer accepts a “counteroffer” of credit at a higher rate than requested. Reynolds v. Hartford Financial Services Group, Inc., — F.3d —, 2005 WL 1840054 (9th Cir. Aug. 4, 2005), available at http://caselaw.findlaw.com/data2/circs/9th/0335695P.pdf.
Third Circuit Holds Markups Violate RESPA. In Santiago v. GMAC Mortgage Group, Inc., et al., decided on August 4, 2005, the U.S. Court of Appeals for the Third Circuit ruled that the Real Estate Settlement Procedures Act, 12 U.S.C. § 2607(b) (“RESPA”), allows for a cause of action for markups of third party charges. In this case, the borrower argued that (1) markups by the lender of third party fees for tax services and flood certification, and (2) overcharges by the lender for its funding services, violated Section 8(b) of RESPA. The District Court had dismissed the borrower’s claims on the basis that Section 8(b) was intended to prohibit kickbacks and referral fees but does not provide a cause of action for markups and overcharges. The Third Circuit agreed with the District Court’s findings regarding overcharges but ruled that markups do provide cause of action under Section 8(b). Regarding overcharges, the Third Circuit held that they are not prohibited by Section 8(b) where the service provider charges for its own services because the statute only prohibits the acceptance of “any portion, split or percentage of any charge” by two or more service providers. The court further concluded that there is no “reasonableness” standard for fees in Section 8(b), and thus there is no cause of action for overcharges. However, the court found that markups would be prohibited by Section 8(b) if the service provider who retains the portion of the fee in excess of the amount it pays to the third party service provider does not perform services ancillary to those performed by the third party. Such a practice would involve an illegal splitting or sharing of fees. The court noted that ancillary services must be more than “nominal services” and that the markup should be reasonable in light of such additional services. The case was remanded to the District Court to determine whether the markup received by the lender was reasonable in light of any additional services provided, or whether the extra services were already included in some other settlement service charge paid by the borrower. For a copy of the case, see http://caselaw.lp.findlaw.com/data2/circs/3rd/034273p.pdf.
Firm News
John Kromer, Lee Negroni and Clint Rockwell will present an “Update on Federal and State Laws” at the American Association of Residential Mortgage Regulator’s annual conference in Portland, Oregon, August 21 to 24. For more information, see http://www.aarmr.org.
On August 12, 2005, Bob Serino was quoted in an American Banker article titled “Regulation, Compliance and Influence” on the subject of regulators increasing enforcement of the Bank Secrecy Act. For more information, see http://www.americanbanker.com or contact Bob Serino at (202) 349-8053.
On August 8, 2005, Sara Emley was quoted in an IM Insight News Weekly article titled “Using an Affiliated Broker: What ERISA Has to Say About It,” For more information, see http://www.iminsightnews.com/.
On August 2, 2005, Bob Serino was quoted in an article titled “Suspicious Activity Reports From Banks Soar” published in The Tennessean. For a copy of the article, see http://www.tennessean.com.
Miscellany
Dugan takes office as Comptroller of the Currency. On August 4, 2005, John C. Dugan officially took office as the Comptroller of the OCC after being confirmed by the Senate on July 29, 2005. He graduated from Harvard Law in 1981 and has worked in a wide variety of positions in both government and the private sector, including Minority General Counsel to the Senate Committee on Banking, Housing, and Urban Affairs, Assistant Secretary of the Treasury for Domestic Finance, and Partner with the law firm of Covington & Burling. For the OCCÂ’s press release, see http://www.occ.treas.gov/toolkit/newsrelease.aspx?Doc=JOF3NVJG.xml.
Federal Banking Agencies and FinCEN Announce Webcast of the Bank Secrecy Act/Anti-Money Laundering Examination Manual Outreach Event. A live webcast of the BSA/AML Examination Manual outreach event in New York will be broadcast live at 9 a.m. EDT on August 22, 2005 and will be available for on-demand viewing for three months following the presentation. The webcast is open to all interested parties upon registration at http://www.ffiec.gov. The event is part of a series of briefings for the banking industry and field examiners on the BSA/AML Examination Manual. To view the joint press release in its entirety, please see: http://www.fdic.gov/news/news/press/2005/pr7705.html.