InfoBytes, December 23, 2005
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Federal Issues
Banking Agencies Issue Proposed Guidance on Nontraditional Mortgage Products. On December 20th, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and Office of Thrift Supervision (the “Agencies”) issued for comment proposed guidance on “interest-only” and payment-option ARMloans. The proposed guidance recommends that lenders should, among other things: * Assess a borrower’s ability to repay the loan, including any balances added through negative amortization, at the fully indexed rate that would apply after the introductory period (and upon maturity); * Recognize that certain nontraditional mortgage loans are untested in aneconomically stressed environment and warrant strong risk management standards as well as appropriate capital and loan loss reserves; * Ensure that borrowers have sufficient information to clearly understand loan terms and associated risks prior to making a product or payment choice (this requires appropriate attention to the timing, content, and clarity of information presented to consumers—promotionalmaterials and descriptions should enable consumers to “prudently consider the costs, terms, features, and risks of these mortgages in their product selection decisions,” including information aboutpayment shock, negative amortization, prepayment penalties, and cost of reduced documentation loans); and * Design and implement control systems to address compliance and fair disclosure concerns as well as safety and soundness considerations. The proposed guidance also addresses collateral dependent loans, risk layering, reduced documentation, simultaneous second-lien loans, the use of introductory interest rates, lending to subprime borrowers, non owner-occupied investor loans, and corresponding portfolio and risk management practices. Comments are due sixty days after publication in the Federal Register. The following is a link to the AgenciesÂ’ full press release and the proposed guidance: http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20051220/default.htm.
FDIC Issues Guidance on Filing Notices of Proposed Class-Action Settlements. On December 21, 2005, the Federal Deposit Insurance Corporation ("FDIC") issued guidance on new requirements for filing notices of proposed class action settlements under 28 U.S.C.§1715. If some or all of the matters alleged in the class actionare subject to regulation or supervision, the appropriate primary federal regulator or state bank supervisor as applicable must be notified in addition to the FDIC. The FDIC notice must be filed within 10 days of the proposed class action settlement being filed in court. More information may be obtained at: http://www.fdic.gov/news/news/financial/2005/fil12605.html.
Significant Penalties Imposed on ABN AMRO for Anti-Money Laundering Compliance Violations. On December 19, a joint announcement of the imposition of penalties against ABN AMRO Bank for violations of US federal, US state and Dutch anti-money laundering compliance requirements was made by the Federal Reserve, FinCEN, OFAC, New York and Illinois state bank regulators, and the Dutch bank regulator. The alleged violations included: processing wire transfers and letters of credit for Bank Melli Iran and the Arab Bank for Investment and Trade, both of which are subject to OFAC prohibitions on transactions; and providing US dollar clearing services through correspondent accounts for Russian financial institutions, without adequately monitoring those services for anti-money laundering issues. Penalties amounted to $80 million. In addition, ABN AMRO has committed to remedial steps that include: an enhanced global regulatory compliance program highlighting effective risk analysis, policies and procedures for reporting information about suspicious activities, encouragement of internal reporting by employees, training and testing of employee compliance, and assessment and audit of the overall program; enhanced oversight by the ABN AMRO Board, including direct reporting to the Board by a new Chief Compliance Officer; and an ongoing review of the operations of two of its overseas offices for possible OFAC violations. Among other points of significance, these penalties suggest the global reach of US anti-money laundering compliance requirements. For the text of the announcement, see http://www.federalreserve.gov/BoardDocs/Press/enforcement/2005/20051219/default.htm.
U.S. Senate Confirms William E. Kovacic and J. Thomas Rosch as Newest FTC Commissioners. On Saturday December 17, 2005, the United States Senate confirmed William E. Kovacic and J. Thomas Rosch as the newest commissioners of the Federal Trade Commission ("FTC"). Mr. Kovacic will fill a seat vacated in June by Commissioner Orson Swindle, and Mr. Rosch will replace the seat of Thomas B. Leary, who recentlyannounced his resignation on December 22, 2005. Mr. Kovacic currently serves as the E.K. Gubin Professor of Government Contracts Law at George Washington University Law School in Washington, DC. Mr. Kovacic previously served as General Counsel at the FTC from 2001 to 2004, and worked earlier at the FTCwith the Bureau of Competition’s Planning Office, and later asan attorney advisor to former Commissioner George W. Douglas. Mr. Rosch is currently a partner at Latham and Watkins in San Francisco, working in the firm’s antitrust, health care, and life sciences divisions. Among other career highlights, Mr. Rosch previously served as the chair of the Americanand California Bar Associations’ Antitrust Sections, as Director of the FTC’s Bureau of Consumer Protection,and was a member of the Special Committee to Study the Role of the FTC. It is anticipated that both newly appointed commissioners will be sworn in at the FTC in January. For the full text of the press release please seehttp://www.ftc.gov/opa/2005/12/commconfirm.htm. For more information on Commissioner Thomas B. Leary’s resignation, please see http://www.ftc.gov/opa/2005/12/leary.htm.
Allowable Charge for Credit Report Will Rise to $10. The Federal Trade Commission has approved an increase in the ceiling on allowable charges for consumer reports requested by consumers from $9.50 to $10.00, effective January 1, 2006. This ceiling does not apply to situations where the consumer is entitled to free disclosures, including the consumer’s request for a free annual consumer report under Section 211(a) of FACTA. For details, see http://www.ftc.gov/os/2005/12/051213fcrachanges.pdf.
State Issues
Illinois Delays Effective Date of Predatory Lending Database Pilot Program. The Banking Division of the Illinois Department of Financial and Professional Regulation has informed industry members that the predatory lending database pilot program created by H.B. 4050 will not go into effect on January 1, 2006, allowing mortgage lending in Cook County (Chicago) to continue after that date. The program requires mortgage brokers and originators to, among other things, pay for a potential borrower’s credit counseling if the state determines the consumer should undergo such counseling, and requires lenders, credit counselors, and title insurance companies or other closing agents to submit detailed information to the state’s database for monitoring. In the affected “pilot program areas” within Cook County, compliance with these requirements is required before a mortgage loan may be closed or recorded. The nominal effective date of the statute is January 1, 2006. Because the state has yet to designate the pilot program areas, create the database, or issue final rules, lenders and title insurance companies had been concerned that it would have been impossible to close loans in Cook County as of January 1. The Department is now about to issue an emergency regulation that delays the effective date of the program until at least 30 days after the Department announces an “inception” date. This will allow mortgage lending to continue normally in Cook County in 2006. The Department also issued a second notice of the substantive provisions of the regulation, which will now be reviewed for a 45-day period by the state’s Joint Committee on Administrative Rules.
Courts
Two More Courts: FACTA Repealed FCRA Private Right of Action. Two more district court opinions have held that the Fair and Accurate Credit Transactions Act of 2003(FACTA) repealed the private right of action for violations ofSection 615 of the Fair Credit Reporting Act, which includes most of FCRA’s notice and disclosure provisions, including the prescreening and adverse action requirements.The issue in these cases is whether language in the FACTA risk-based pricing notice provision, which added a new subsection (h) of Section 615,repealed the private right of action for all of Section 615. Phillips v. New Century Financial Corp., No. SA-CV-05-0692 (C.D. Cal. Nov. 9, 2005), is apparently the first decision on the issue from outside of the Northern District of Illinois. In Phillips, the U.S. District Court for the Central District of California dismissed the plaintiff’s claims under Section 615; the lender had not sought dismissal of the Phillips claim.The Phillips court also held that the repeal was retroactive; i.e., it requires dismissal of Section 615 cases that arose before December 1, 2004, the effective date of FACTA. The Phillips order is available on the Buckley Kolar LLP web site at http://www.buckleykolar.com/documents/phillipsvnewcenturyfinancial--fcraprivaterightofactionrepealedcdcal.PDF. Hernandez v. CitiFinancial Services, Inc., No. 05-C-2263, 2005 WL 3430858 (N.D. Ill. Dec. 9, 2005) is another in a series of credit bureau prescreening cases filed by plaintiff’s attorney Daniel Edelman in the U.S. District Court for the Northern District of Illinois.This is the sixth Northern District of Illinois opinion to hold that FACTA repealed the private right of action for all of Section 615. As in Phillips, the court dismissed the claim for violations of Section 615; the lender did not seek dismissal of the allegations that the lender had failed to comply with FCRA’s “firm offer” requirements for credit bureau prescreenings.
Federal Law Preempts State Regulation of National BankÂ’s Mortgage Subsidiary According to Sixth Circuit. On December 19, 2005, the Sixth Circuit Court of Appeals held that the National Bank Act and regulations promulgated by the Office of the Comptroller of the Currency (OCC) preempt the application of MichiganÂ’s mortgage lending laws to operating subsidiaries of nationally chartered banks. Specifically, the court determined that the OCC did not exceed its statutory authority or act arbitrarily by issuing a regulation providing that state laws apply to national bank operating subsidiaries to the same extent that they apply to the parent national bank, thus precluding state regulators from exercising visitorial powers over such operating subsidiaries. The courtÂ’s holding is in agreement with the Second and Ninth CircuitsÂ’ treatment of this issue. See Wachovia Bank, N.A. v. Watters, No. 04-2257, 2005 WL 3453909 (6th Cir. Dec. 19, 2005). Please contact Buckley Kolar for a copy of the decision.
California Supreme Court to Review Credit Card Currency Conversion Fee Case. This week, the California Supreme Court granted review of a Court of Appeal decision overturning a substantial judgment against Visa and MasterCard for failure to disclose currency conversion fees. The trial court decision resulted in an $800 million award against the credit card companies based entirely on California’s Unfair Competition Law (UCL). During the appeal, relevant UCL sections were amended by Proposition 64 to provide that injunctive or restitutionary relief could be pursued only by prosecutors or private persons who had suffered injury in fact. Prior to the Proposition, an uninjured private party could bring an action under the UCL. The Court of Appeals held that the adoption of Proposition 64 worked a statutory repeal, and as such, all causes of action based on the statute not reaching final judgment were abated. Schwartz v. Visa Int’l, 132 Cal. App. 4th 1452 (Cal. Ct. App. Sept. 28, 2005) petition granted, 2005 Cal. LEXIS 13683 (Cal. Dec. 14, 2005). Destruction of Electronic Records Likely to be Discoverable Leads Pennsylvania Court to Issue Spoliation Inference Against Alleged Copyright Infringer. On December 2, 2005, the U.S. District Court for the Eastern District of Pennsylvania issued an opinion highlighting the importance of proper records management techniques and the obligation to retain electronic records when faced with pending litigation. In Paramount Pictures Corp. v. Davis, 2:05-cv-00316-TON, Paramount Pictures Corp. (“Paramount”) alleged that the defendant had posted and distributed a pirated copy of one of Paramount’s feature films. After receiving notice of a pending lawsuit, the defendant wiped his computer’s hard drive clean, allegedly in preparation for selling the computer to another person. Noting that the defendant had a duty to maintain the integrity of his computer’s hard drive because it may have contained discoverable evidence, the court issued a spoliation inference against him. This inference allows the court to conclude that any information that had been on the defendant’s computer’s hard drive would have been detrimental to the defendant. To view the court’s memorandum, please go to http://www.paed.uscourts.gov/documents/opinions/05d1458
Miscellany
Buckley Kolar and InfoBytes would like to wish you and yours a wonderful and relaxing holiday season. InfoBytes will be taking a brief break next week, but will resume again upon the start of the new year. Happy holidays!