InfoBytes, October 7, 2005
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Federal Issues
U.S. Trustee Program Adjusts Guidelines for Hurricane Victims. In response to criticism that the bankruptcy reform law, which goes into effect on October 17, 2005, does not allow sufficient flexibility for Gulf Coast hurricane victims, the U.S. Trustee Program, a division of the Justice Department, announced enforcement guidelines on October 5, 2005. For example, the Trustee Program will consider income loss, expense increases, and other adverse effects of a natural disaster, as “special circumstances” that rebut the presumption of abuse under the new “means test.” Program attorneys will not file motions to compel against debtors who are unable to produce required documents but are otherwise eligible for relief. The Trustee Program has also taken various steps to assist small businesses, including granting time extensions for filing reorganization plans. The new requirement that bankruptcy filers receive credit counseling has been waived in Louisiana and the Southern District of Mississippi; at the same time, the Trustee Program announced that it has approved 41 credit counseling services that serve all federal judicial districts for which the Program is responsible. See http://www.usdoj.gov/ust/press/pr20051005.pdf (disaster relief); http://www.usdoj.gov/ust/press/pr20051004.pdf (credit counseling); http://www.usdoj.gov/ust/bapcpa/ccde/cc_approved.htm (list of approved credit counseling agencies).
Agencies Waive Appraisal Requirements for Financial Institutions Affected By Hurricanes. On October 6, 2005, the federal banking agencies and the National Credit Union Administration issued an order waiving for three years the requirement to have an appraisal conducted by licensed or certified appraiser for banks, thrifts, and federal credit unions affected by Hurricanes Katrina and Rita. As summarized by the FRB, “[i]n order to qualify for the waiver, a financial institution must document the following: (1) the transaction involves real property located in the designated disaster areas; (2) the property involved was directly affected by the major disaster or the transaction would facilitate recovery from the disaster(s); (3) there is a binding commitment to fund the transaction that is made within three years after the date the major disaster was declared; and (4) the value of the real property supports the institution’s decision to enter into the transaction.” For more information, see http://www.federalreserve.gov/boarddocs/press/bcreg/2005/200510062/default.htm
FTC Releases Denial of Petition to Delay Effect Date of Model Prescreen Opt-Out Forms. The Federal Trade Commission released a letter denying a petition by the American Financial Services Association to delay the effective date of its regulations, issued under the Fair and Accurate Credit Transactions Act of 2003, that prescribe the format and content of required FCRA disclosures in credit bureau prescreenings. (See 70 Fed. Reg. 5022 (Jan. 31, 2005); InfoBytes for January 28, 2005, available at http://www.buckleykolar.com/publications/InfoBytes012805.html.) Although the regulations went into effect on August 1, 2005, the letter was dated September 29 and released on October 7. Agencies Announce Phase-In of Basel II Risk-Based Capital Rules. On September 30, 2005, the federal banking regulators announced a schedule for implementing the new, international “Basel II” risk-based capital standards, which will give larger banking organizations the option of determining their minimum risk-based capital levels based on internal risk models. For those organizations, Basel I would replace the current Basel I-based standard, which sets specific levels of capital based on the type of asset. Under the schedule, eligible banks will be allowed to begin a “parallel run” of their internal model in January 2008, but the Basel I standards will continue to apply for that year. In 2009-2011, the agencies will set a floor of 95%, 90%, and 85% of Basel I capital level for each year, which will be the minimum risk-based capital required regardless of the results of the internal model. Beginning in 2012, regulators will make a case-by-case determination of whether to allow an organization to disregard Basel I entirely. The agencies also announced that the minimum “leverage ratio” (balance sheet capital) will continue to apply to organizations that choose to switch to Basel II. http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20050930/default.htm (joint agency release).
Agencies Seek Comment on Modifying Basel I Risk-Based Capital Rules. Basel II has been controversial because it is projected to allow dramatically lower capital levels for some asset classes, particularly mortgages, which would disadvantage smaller banks that will not be eligible for Basel II. In response to those concerns, the banking agencies this week issued an Advance Notice of Proposed Rulemaking seeking comment on how they should revise the Basel I Rules. They seek comment on, among other things, possible revisions to the treatment of mortgages. The revisions would create tiered capital levels for mortgages based on loan-to-value ratio and possibly other factors, such as debt-to-income ratio and creditworthiness. See http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20051006/Basel1Amemo.pdf (FRB version); http://www.fdic.gov/news/news/press/2005/pr10105a.html (FDIC version); http://www.occ.treas.gov/ftp/release/2005-101a.pdf (statement of Comptroller of the Currency John C. Dugan endorsing Basel I reform).
U.S. Issues Guidelines for Processing Contaminated Treasury Checks. On October 4, 2005, the Department of Treasury issued an operational bulletin to clarify and further define the September 19, 2005, Federal Reserve guidelines for the processing of checks contaminated by exposure to the post-Hurricane Katrina environment. To minimize the handling of these checks, the bulletin suggests the following methods (i) “Check 21 method,” which creates a substitute check or electronic image pursuant to federal regulations; (ii) “ACH method,” which allows destroyed checks to be created and collected by the Automated Clearinghouse system under the Destroyed Check Entry (XCK) format; or (iii) “photocopy method,” which uses a photocopy prepared pursuant to Federal Reserve guidelines. The Treasury’s operational bulletin indicates its preference for financial institutions either to forward “Check 21” images or to use the ACH entry XCK. The operational guidelines also contain an attachment illustrating the proper format for contaminated checks when using the ACH method. For the full text of the Bulletin, see http://www.frbservices.org/Retail/pdf/ContaminatedCheckProcedures10405.pdf.
State Issues
Texas Relaxes Mortgage Licensing Requirements For Licensees Affected By Katrina. The Texas Department of Savings and Mortgage Lending (SML) has temporarily relaxed its mortgage licensing requirements for mortgage loan providers who have been displaced by Hurricane Katrina, in an effort to help mitigate the housing crisis in the affected areas. Mortgage brokers and loan officers duly licensed in Louisiana, Mississippi or Alabama who are in good standing with their respective state regulators are eligible to apply to receive a six month “No Action Letter” allowing them to conduct mortgage activities in the affected home state from a Texas facility. The temporary exemption from licensing does not allow for the solicitation of consumers or loans in Texas, and is subject to revocation upon receipt of any “bona fide and sustained” consumer complaint. In addition, SML may issue three month provisional licenses upon receipt of a completed application for out-of-state licensees who wish to remain in Texas permanently and begin mortgage lending to Texas customers. This policy is in effect until March 31, 2006, or as extended by the Commissioner. To review SML’s complete policy go to: http://www.sml.state.tx.us/Hurricane%20Katrina%20-%20No%20Action.htm.
Courts
District Court Overturns California Affiliate-Sharing Rules. On October 4, 2005, the U.S. District Court for the Eastern District of California held that language in the Fair Credit Reporting Act (FCRA) preempts all of the affiliate information-sharing provisions of California’s S.B. 1, the California Financial Information Privacy Act (codified at Cal. Fin. Code ǧ 4050-60). The case involves a FCRA provision that preempts any “requirement or prohibition . . . imposed under the laws of any State . . . with respect to the exchange of information among persons affiliated by common ownership or common corporate control.” The case had been remanded by the U.S. Court of Appeals for the Ninth Circuit, which held that the FCRA provision might not preempt the California law in situations in which sharing among affiliates involves information that is not “consumer report information” within the meaning of FCRA. (See InfoBytes Special Alert, June 22, 2005, available at http://www.buckleykolar.com/publications/InfoBytesSpecialAlert062205.html.) In its decision on remand, the district court noted that the definition of a “consumer report” in FCRA has two prongs: “the scope of information that is governed under FCRA,” and “the purpose for which that information is to be collected, used or expected to be used” — “establishing eligibility for credit or insurance, employment, or [other authorized purposes].” The defendants, representing the state, conceded that the “information” prong would apply to “virtually all information regarding a consumer,” but argued that much consumer information is collected for other purposes and the California law should still apply to the sharing of such information. The district court rejected this argument, agreeing with the plaintiffs that it would be impossible to determine in advance whether information would be used for an “FCRA authorized purpose,” and, therefore, applying S.B. 1 would place financial institutions in an “untenable situation.” For that reason, the court invalidated the S.B. 1 affiliate-sharing provision in its entirety. It also declined to “sever” the unconstitutional portions of the S.B. 1 provision from the constitutional provisions. American Bankers Association v. Lockyer, No. Civ. S-04-0778, 2005 U.S. Dist. LEXIS 22437 (E.D. Cal. Oct. 4, 2005), also available at http://207.41.18.73/caed/DOCUMENTS/Opinions/England/04-778.pdf.
Ninth Circuit Issues Revised Opinion on Insurance Adverse Action. On October 3, 2005, the U.S. Court of Appeals for the Ninth Circuit issued a slightly revised opinion in the Reynolds FCRA insurance adverse action case, but the result was the same: the court continues to hold unanimously 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, and to hold 2-1 that the defendants’ conduct was “willful,” resulting in statutory damages of $100-$1000 per violation. Both the two-judge majority and the dissenting judge revised their opinions on willfulness to address the fact that the district court had held that the conduct was not even illegal. The defendants’ petition for an en banc rehearing is still pending. See Reynolds v. Hartford Financial Services Group, Inc., 2005 WL 2416126 (9th Cir. Oct. 3, 2005), modifying and vacating 2005 WL 1840054 (9th Cir. Aug. 4, 2005). For a discussion of the original Ninth Circuit opinion, see InfoBytes, Aug. 12, 2005, available at http://www.buckleykolar.com/publications/InfoBytes081205.html.
Federal District Courts Address FCRA Preemption of Claims Involving Furnishing of Credit Information. Four federal district courts have recently ruled on questions involving whether the FCRA preempts state law claims related to the furnishing of consumer credit information to consumer reporting agencies. FCRA contains two preemption provisions related to furnishers of information: Section 610 (e), which preempts state law claims “in the nature of defamation, invasion of privacy, or negligence,” unless “false information [is] furnished with malice or willful intent to injure” a consumer; and Section 625(b)(1)(F), which provides that “no requirement or prohibition may be imposed under the laws of any State” in connection with the responsibilities of persons who furnish consumer credit information. According to federal district courts in Pennsylvania and South Carolina, FCRA does not preempt state tort claims alleging “malice or willful intent to injure,” and Section 625(b)(1)(F) only preempts state statutes and does not preempt common-law causes of action. See Barnhill v. Bank of America, N.A., 378 F. Supp. 2d 696 (D.S.C. July 28, 2005); DiPrinzio v. MBNA, No. 04-872, 2005 WL 2039175 (E.D. Pa. Aug. 24, 2005). On a related issue, federal district courts in West Virginia and Illinois held that the FCRA provisions do not “completely preempt” state law, and, therefore, a case filed in state court alleging that a lender reported inaccurate information to a credit bureau may not be removed to federal court. See Sloan v. Green Tree Servicing, No. 2:05-CV-00558, 2005 WL 2428161 (S.D. W.Va. Sept. 30, 2005); King v. Retailers Nat’l Bank, No. 05 C 4208, 2005 WL 2334365 (N.D. Ill Sept. 19, 2005).
Firm News
Buckley Kolar is pleased to welcome three new associates to its growing financial services practice: Zachary R. Calo, Jon David D. Langlois, and Peter L. Olszewski. For more information and a link to the press release, see http://www.buckleykolar.com/news/.
On October 14, 2005, Bob Serino will be speaking at the West Virginia Association of Community BankersÂ’ Ceo/Bank Directors Conference on the subject of banking regulators and the Bank Secrecy Act/AntiMoney Laundering. For more information, please contact Bob Serino at .
On November 3-4, 2005, Jerry Buckley, Margo Tank and Frank Supik will be speaking at the SPeRS/MISMO Workshop in Washington, DC. CampusMBA is hosting the workshop. For more information, see “Classroom-Based Courses” at http://www.campusmba.org.
On November 30-December 2, 2005, Margo Tank will be speaking at MBA’s Legal Issues in Mortgage Technology Conference, November 30 – December 2, in San Diego, California. For more information, see http://events.mortgagebankers.org/legaltech2005/default.html.