InfoBytes, July 21, 2006
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Federal Issues
HUD Settles with Lender and Builders over Alleged RESPA Violations Involving Captive Title Reinsurance. On July 18, the Department of Housing and Urban Development (HUD) announced three settlements with a lender and two homebuilders totaling $1.6 million under the Real Estate Settlement Procedures Act (RESPA) involving captive title reinsurance business practices. HUD defines “captive title reinsurance” as a practice whereby a title insurance company transfers a portion of the risk and title premium to a company owned by the builder, lender, or real estate broker referring the title business. In HUD’s view, any captive title reinsurance arrangements in which payments are not bona fide and exceed the value of the reinsurance are a violation of RESPA. Assistant Secretary for Housing, Brian D. Montgomery, was also quoted in the announcement as stating that “[t]here is almost never any legitimate need or business purpose for title reinsurance on a single-family residence." Mr. Montgomery also stated that “HUD will continue to work with the states to investigate captive arrangements to make certain that they aren’t created for the purpose of obscuring referral fees." The settlements each make clear that they do not constitute any admission of wrongdoing. A copy of the announcement and a link to the settlement agreements may be found at http://www.hud.gov/news/release.cfm?content=pr06-086.cfm.
Senate Holds Hearings on National Insurance Bill. On July 11, the Senate Banking, Housing & Urban Affairs Committee held hearings on S. 2509, the National Insurance Act of 2006. Senators Sununu (R-NH) and Johnson (D-SD) are sponsoring the legislation. If enacted, the bill would create an Office of National Insurance within the Treasury Department. Some of the bill’s more significant features include the establishment of a national charter for insurance companies and creation of federal licensure for insurance producers. Similar to the federal banking regulatory structure, nationally-chartered insurers and federally-licensed producers would be subject to federal regulation but would not be subject to state regulation. To obtain a copy of the proposed legislation, go to http://thomas.loc.gov/cgi-bin/bdquery/z?d109:s.02509:.
State Issues
Missouri Amends Laws for Financial Institutions. On July 10, Missouri’s Governor signed into law a bill that alters several statutes relating to financial institutions. Notably, the law prohibits industrial loan companies and industrial banks from establishing or maintaining any deposit production office, loan production office, or one or more bank branches, for the purpose of conducting any banking business within this state, whether by de novo charter, branching, or merger with another institution. For purposes of this prohibition, the terms “industrial loan company” and “industrial bank” include any company chartered under the laws of any state that: (1) is insured or regulated by the Federal Deposit Insurance Corporation;(2) engages in one or more banking activities; and (3) is owned, directly or indirectly, by a commercial entity that is not a bank holding company or a financial holding company subject to regulation under the Federal Bank Holding Company Act of 1956. Other provisions alter the existing law regarding defaults on second mortgage loans by providing that a debtor may no longer cure after a third default and by including late charges and foreclosure expenses in the definition of “current obligation of the debtor,” which must be paid to cure a default. The law also raises the fees and bond requirements for financial institutions licensed in Missouri and gives the Director of Finance additional authority to conduct examinations of these licensees and their affiliates during license application and renewal proceedings. The law becomes effective on August 28, 2006. For details on the law, see http://www.senate.mo.gov/06info/BTS_Web/Bill.aspx?SessionType=R&BillID=37168.
Illinois Passes Law to Create Inception Date for Predatory Lending Database Pilot Program. Illinois passed a law that amends the provision of the Residential Real Property Disclosure Act that created a predatory lending database pilot program. Public Act 094-0280 (July 21, 2005) created a pilot program under which mortgage brokers, originators, credit counselors, title insurance companies, and closing agents are to submit information into an online database managed by the Department of Financial and Professional Regulation. Among other requirements of the program, within 10 days of taking a loan application, brokers and originators for any mortgage within the pilot program area must submit to the database certain required information, and await a determination by the Department on whether credit counseling is required for the borrower at the expense of the broker or originator. If the Department makes such a recommendation, the broker or originator may not take any legally binding action on the loan until after the borrower meets with the credit counselor and the credit counselor submits the required information into the database. The new law, Public Act 094-1029, requires that the Secretary of the Department create an “inception date” of not later than September 1, 2006 which must be declared in writing and posted on the website (no such date has been declared at this time). The new law also clarifies that the pilot program will apply only to mortgage applications made or taken on or after the inception date. Additionally, the new law creates limited immunity for credit counselors, shielding a counselor from civil damages liability to a broker or originator, so long as the counselor was acting in good faith. For the full text of P.A. 094-0280 can be found at http://www.ilga.gov/legislation/publicacts/fulltext.asp?Name=094-0280&GA=094. For P.A. 094-1029, the new law, please see http://www.ilga.gov/legislation/publicacts/fulltext.asp?Name=094-1029&GA=094.
Courts
California Supreme Court Refuses to Hear Appeal Regarding Rescission of Repaid Loans. On July 19, the Supreme Court of California denied Pacific Shore Funding’s Petition for Review and Request for Depublication of the Court of Appeal’s decision holding that a mortgage loan that has been paid off and released is still subject to rescission under the Truth in Lending Act. The decision, issued by the California Court of Appeal for the Second Appellate District, entitles borrowers who have already paid off their loan to a refund of the finance and other charges paid during the course of the loan. The Court of Appeal’s decision conflicts with existing Ninth Circuit decisions, including Mijo v. Avco Fin. Servs. of Hawaii, 937 F.2d 613, 1991 WL 126660 (9th Cir. 1991) and King v. State of California, 784 F.2d 910 (9th Cir. 1986). Buckley Kolar, on behalf of industry trade groups (Consumer Bankers Association, Consumer Mortgage Coalition, Housing Policy Council of the Financial Services Roundtable, Mortgage Bankers Association), had filed letters with the Supreme Court urging review or depublication of the Court of Appeal’s decision. Pacific Shore Funding v. Lozo, Case Number S-144018. The docket is available at http://appellatecases.courtinfo.ca.gov/search/case/dockets.cfm?dist=0&doc_id=426014&doc_no =S144018.
California Law Requiring Mutual Consent to Record Telephone Conversations Applies to Calls from Other States. The Supreme Court of California recently held that Cal. Penal Code sec. 632, which prohibits the recording of a telephone conversation unless both parties to the conversation consent to the recording, applied to calls between a Georgia-based securities broker and its California customers, notwithstanding the fact that Georgia law expressly permits recording calls even if only one party to the conversation consents. As a result, the Supreme Court upheld an injunction against the securities broker from recording telephone conversations with California customers without first disclosing that it would do so (presumably permitting the California customers to hang up if they refused to consent to allow their calls to be recorded). Because the securities broker reasonably relied on Georgia law in acting as it did, the Supreme Court declined to impose damages on the securities broker for its past violations of California law. In reaching its conclusion, the Supreme Court strongly affirmed the right of states such as California to enact and enforce more stringent privacy provisions than federal or other states’ privacy laws in order to protect residents of California against businesses that conduct business within the state. Kearney v. Salomon Smith Barney, Inc., S124739 (July 13, 2006). For the text of the opinion, see http://www.courtinfo.ca.gov/opinions/documents/S124739.PDF.
Florida Federal District Court: Offer That Does Not State “Material Terms” Is Still Valid FCRA “Firm Offer.” Breaking with some of its counterparts in the Seventh Circuit, the U.S. District Court for the Middle District of Florida (which is part of the Eleventh Circuit) held that an offer of a mortgage for $55,000 could meet the requirements for a “firm offer” under the Fair Credit Reporting Act’s (FCRA) credit bureau prescreening provisions even though it did not state material terms such as the “interest rate, method of computing interest and term of the loan.” The court stated that the omission of those terms “is not fatal given the facts of this case. While the terms were not disclosed on the face of the offer, the material terms were ascertainable with minimal effort.” The court also joined the overwhelming majority of courts that have held that the Fair and Accurate Credit Transactions Act of 2003 (FACTA) repealed the private right of action for notice violations under FCRA, including the lender’s alleged failure to make prescreening disclosures clearly and conspicuously, although it declined to dismiss the consumer’s claims in this case because the solicitation was sent before the FACTA provision went into effect on December 1, 2004. See Soroka v. Homeowners Loan Corp., No. 8:05-cv-02029-EAK-MAP (M.D. Fla. June 12, 2006). For a copy of the opinion, please contact .
Illinois Federal District Court Rules Individual Consumer’s Finances Irrelevant to “Firm Offer” Issue. Meanwhile, the U.S. District Court for the Northern District of Illinois (in the Seventh Circuit) rejected a lender’s motion to compel discovery of the plaintiff’s financial condition in a “firm offer” prescreening case. The lender had argued that the consumer could not pursue an individual or class action if he could not show that he would have qualified for the offer, but the court held that it could determine whether the lender complied with the “firm offer” by examining the “four corners” of the offer, implying that the offer must be contained in the mailer. See Hernandez v. CitiFinancial Services, No. 05 C 2263, 2006 WL 1749649 (N.D. Ill. June 21, 2006). For a copy of the opinion, please contact .
Indiana Federal District Court States “Plainly Lousy” Deal Is Still Valid “Firm Offer.” The U.S. District Court for the Northern District of Indiana, in the Seventh Circuit, held that an offer of a credit card with an initial credit line of $250, of which all but $75 would be absorbed by the initial and first month’s fees, was a valid “firm offer” even though it was “plainly a lousy deal for consumers of credit.” The court stated that in firm-offer cases, the court “need not determine whether the offer is a good one, only whether it is an offer with some value to a consumer as an extension of credit.” Therefore, the court granted judgment on the pleadings to the lender on the firm-offer issue. The court also held that FACTA eliminated the private right of action for failure to make prescreening disclosures clearly and conspicuously, dismissing that claim as well. Bonner v. CorTrust Bank, N.A., 2006 WL 1980183 (N.D. Ind. July 12, 2006). For a copy of the opinion, please contact .
Southern District of New York Upholds Forum Selection Clause Contained in Click-Through Agreement. On June 21, the U.S. District Court for the Southern District of New York upheld a forum selection clause contained in an online “click through” agreement. ESL Worldwide.com, a foreign company, brought suit against Interland, Inc. in New York. The defendant moved to dismiss for lack of proper venue, citing, among other reasons, the fact that the plaintiff had assented to venue in Georgia by accepting Interland’s Terms of Service (which identified Georgia as the proper venue for disputes) when it clicked on an “Accept” button. The “Accept” button was accompanied by a link to the Terms of Service and was preceded by text that clearly indicated that clicking the Accept button constituted assent to the Terms of Service. The court decided that the venue selection clause was valid and found that the plaintiff had agreed to the Terms of Service, in part because the defendants’ computer system contained records of the click through. ESL Worldwide.com, Inc. v. Interland, Inc., 06-CV-2503 (LBS) (S.D.N.Y. June 21, 2006). Please contact for a copy of the decision.
Firm News
Buckley Kolar attorney Lee Negroni will be part of a state law panel at the MBA’s Regulatory Compliance Conference in Washington DC from September 6-8, 2006 at the J.W. Marriott Hotel. She will be speaking on new developments in state rules, regulations, and informal guidance issued to residential mortgage bankers during 2005 and 2006.
Miscellany
Casey Sworn in as SEC Commissioner. On July 17, Kathleen Casey was sworn in as the 88th Commissioner of the SEC. Casey was appointed Commissioner by President Bush on May 18, 2006. Casey spent the last 13 years of her career working in various capacities on Capitol Hill, most recently spent three years as the Staff Director of the Senate Committee on Banking, Housing & Urban Affairs. For the full text of the SEC press release regarding Casey’s swearing in please see http://www.sec.gov/news/press/2006/2006-118.htm.
FTC Releases Transcript of Conference for the Mortgage Industry. The Federal Trade Commission (FTC) has released a transcript of the proceedings of the public workshop it hosted this Spring. Protecting Consumers in the New Mortgage Marketplace was held May 24, and discussed a range of topics in the mortgage lending industry. For the transcript, and details of conference, see http://www.ftc.gov/bcp/workshops/mortgage/index.html.
Banking
Agencies Propose Rules on Identity Theft “Red Flags.” On July 18, the federal financial regulatory agencies (Federal Reserve Board, FDIC, NCUA, OCC, and OTS) and the Federal Trade Commission announced a Notice of Proposed Rulemaking concerning identity theft “red flags.” The jointly proposed regulation would require all financial institutions and creditors to develop a program for detecting identity theft in the opening and closing of accounts. The proposed regulations would also require financial institutions and creditors to implement a mitigation strategy for “flagged” situations in which there exists a heightened risk of identify theft. Comments on the proposed rules are required within sixty days of their Tuesday publication in the Federal Register. For the joint press release on the proposed regulation, see http://www.ftc.gov/opa/2006/07/idtheftredflagjoint.htm. For the text of the proposed regulation, see http://www.fdic.gov/news/news/press/2006/pr06071a.pdf, http://www.fdic.gov/news/news/press/2006/pr06071b.pdf, and http://www.fdic.gov/news/news/press/2006/pr06071c.pdf
FATF Says Lower Threshold Needed to Identify Terrorist Financing. On July 11, the Financial Action Task Force (FATF) issued a report describing and analyzing anti-money laundering and counter-terrorist financing measures and providing recommendations on how to strengthen those measures. Of note is FATF’s assertion that the $5,000 threshold for Suspicious Activity Reports (SARs) is too high because some terrorist financial transactions use smaller amounts. Currently, financial institutions are required to report only suspicious activities that aggregate to $5,000 or more under anti-money laundering laws. FATF recommends reporting suspicious activity regardless of amount and greater application to businesses that are not defined as financial institutions. The report may be read at http://www.fatf-gafi.org/dataoecd/44/12/37101706.pdf.
Securities
SEC Issues New Guidance Regarding the Use of Client Commission Dollars. On July 18, the SEC issued guidance regarding the use of client commissions to pay for “brokerage and research services” as permitted under Section 28(e) of the Securities Exchange Act of 1934. Section 28(e) is a safe harbor which allows money managers who exercise investment discretion over client accounts to use client commission dollars (so-called “soft dollars”) to purchase brokerage and research services, under certain circumstances, without breaching their fiduciary duty to obtain “best execution” of client transactions. The interpretive release is effective upon publication in the Federal Register. However, market participants may continue to rely on prior SEC guidance for a period of six months following publication. The release is available at http://www.sec.gov/rules/interp/2006/34-54165.pdf.
SEC Files Separate Actions in Connection With Fraud Against Seniors. Last week the Securities and Exchange Commission filed two separate actions dealing with fraud and the victimization of elderly citizens. On July 14, 2006, the SEC filed an emergency enforcement action in the Western District of New York to stop an allegedly fraudulent real estate investment scheme that the SEC claims bilked senior citizens and retirees out of millions of dollars since 1996. In addition, on July 17, 2006, in the United States District Court for the Central District of California in Orange County, the SEC filed charges against Renaissance Asset Fund, Inc., alleging the company and its principals used investor funds (much of which belonged to elderly customers) to pay lavish expenses. For the full text of the press releases, and links to the litigation releases, please see http://www.sec.gov/news/press/2006/2006-117.htm and http://www.sec.gov/news/press/2006/2006-119.htm.