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InfoBytes
CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS
Topics – Covered This Week (Click to View)
FEDERAL ISSUES
House Passes “Seasoned Customer” Transaction Reporting Exemption. On January 23, the U.S. House of Representatives passed H.R. 323 (reported in the January 12th issue of InfoBytes), which would, if it becomes law, exempt financial institutions from currency transactions reporting (CTR) for certain “qualified customers.” Under the bill, a qualified customer would include any person or entity that (i) is incorporated under Federal or State law or registered as and eligible to do business in the United States, (ii) has maintained a deposit account at the depository institution for at least 12 months, and (iii) has engaged, through such account, in multiple currency transactions subject to CTR requirements. The bill also gives the Secretary of the Treasury power to establish regulations determining when the qualified customer exemption may be suspended or revoked and under what circumstances the qualification may be preserved through a bank acquisition or merger. H.R. 323 has been referred to the Senate Committee on Banking, Housing, and Urban Affairs. For text of the bill, see http://thomas.loc.gov/cgi-bin/query/z?c110:h.r.323.eh:.
FDIC Releases Predatory Lending Supervisory Policy. On January 22, the FDIC released its "Supervisory Policy on Predatory Lending" (FIL 6-2007), guidance describing potential characteristics of predatory lending and the FDIC's array of tools to combat predatory lending. The Policy states that predatory lending involves (i) making unaffordable loans based on the assets of the borrower as opposed to the borrower's ability to repay the loan, (ii) inducing a borrower to repeatedly refinance a loan so as to charge high points and fees for each refinance (called "flipping"), or (iii) engaging in outright fraud or deception to conceal the true nature of the loan obligation or ancillary products. The Policy also reaffirms that the FDIC combats predatory lending through supervisory actions (ranging from commitments to formal enforcement actions), through the examination process, including regular CRA examinations and individual consumer complaints, and through consumer financial education efforts. The full text of the Policy can be found at http://www.fdic.gov/news/news/financial/2007/fil07006.html.
IRS Rules Variable Contract Holder Not Owner of Interest in RIC That Funds Contract. The IRS has ruled that a holder of a variable annuity or life insurance contract is not, for federal income tax purposes, treated as the beneficial owner of an interest in a regulated investment company (RIC) that funds the contract solely because interests in the RIC are also available to certain other investors. In previous rulings, the IRS concluded that variable contract holders are the beneficial owners of interests in the investments funding the contracts when those investments are also available to the "general public." However, Revenue Ruling 2007-7, in effect, excludes classes of beneficial ownership from the definition of "general public" for purposes of investor control analysis, which is relevant in determining exactly who pays the taxes on income generated by variable contracts. The ruling is available at http://www.irs.gov/pub/irs-drop/rr-07-07.pdf and will be published in Internal Revenue Bulletin 2007-7.
New SRO Focus to Include Point-of-Sale Advisory Activities. Efforts to block the merger of the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) recently failed after nearly two-thirds of member firms voted to approve the concept. The NYSE and NASD are moving forward with their plan to create a new self regulatory organization (SRO), merging some of the existing roles and potentially creating new roles for the SRO. The intended goals relating to existing functions include (i) consolidating regulation and the currently misaligned exam cycles, (ii) increasing enforcement efficiency, and (iii) eliminating the inconsistencies in standards promulgated by both agencies, such as the suitability standard. A new role suggested for the SRO is regulating point-of-sale advisory services. Expanded SRO jurisdiction on the advisory side would reach beyond supervision of advisers to institutions or advisers to funds, and allow regulation to trickle-down to the level of the retail investor. The current debate on whether broker-dealers giving investment advice to customers should be exempt under the Investment Advisers Act of 1940 may be resolved by a federal appeals court soon. Contemporaneously, there has been discussion on whether the new SRO should implement a new definition for hedge fund advisers by updating the 1996 statute setting forth an assets-under-management test to delineate which advisers are state regulated and which fall under the jurisdiction of the SEC. The merger is to be completed in the second quarter of this year. For more information, see http://www.nasd.com/PressRoom/NewsReleases/2007NewsReleases/NASDW_018334.
COURTS
California Supreme Court Declines to Depublish McKell. The California Supreme Court announced on January 17 that it would not depublish an appeals court ruling that found that the state’s Unfair Competition Law is not preempted by HOLA. McKell v. Washington Mutual Inc., No. S148143 (Jan. 17, 2007). Washington Mutual had asked for the opinion to be depublished to prevent it from being cited as precedent. The opinion by the California Court of Appeals made two significant rulings (McKell v. Washington Mutual, Inc., No. B17637, 2006 WL 2664130 (Cal. Ct. App. Sept. 19, 2006), discussed in the September 22nd issue of InfoBytes). As previously reported, the court held that certain fees marked-up to exceed their actual pass-through cost violated the Real Estate Settlement Procedures Act (RESPA), finding persuasive the Second Circuit’s position in Kruse v. Wells Fargo Home Mortgage that deference should be given to HUD’s policy statement on mark-ups where the statute did not compel a clear conclusion on the issue. The court also held that California’s Unfair Competition Law (UCL) which prohibits “unlawful, unfair, or fraudulent conduct is not preempted by the Home Owner’s Loan Act (HOLA)” as it applies to a federal savings bank. The court noted that “the state cannot dictate to the Bank how it can or cannot operate, but it can insist that, however the Bank chooses to operate, it do so free from fraud and other deceptive business practices.” The court found that the lender’s alleged practices of not disclosing the mark-ups were potentially deceptive and only incidental to banking activities, thus subject to the state law. A copy of the original Court of Appeals decision is available at http://www.courtinfo.ca.gov/opinions/documents/B176377.PDF.
Property Appraiser is Not Liable to Mortgage Holder for Economic Losses Where Inflated Appraisal Reports Were Altered by an Intervening Investor. A mortgage investor bought a set of ten residential mortgage loans from another mortgage company, which acquired the loans from mortgage brokers. The mortgaged properties were appraised by appraisers hired by the mortgage brokers. After all the borrowers defaulted, the last investor demanded its seller repurchase the loans, but the seller refused and declared bankruptcy. The investor then sued the appraisers for negligent appraisals under the Ohio law on information negligently supplied for the guidance of others. An Ohio Appeals Court declined to broaden Ohio’s general rule on economic loss, which is that “typically a plaintiff must have a contractual relationship with the defendant to recover damages for economic loss, also called pecuniary loss.” Ohio courts have expanded the economic loss rule to cover damages for negligently prepared accounting statements, but the court considered accounting to be less subjective than appraising. Another factor that appears to have influenced the decision is the alteration of the appraisal reports by the intervening mortgage holder, because the appraisers had disclaimed liability for their reports in case of alteration. The dissent in the case would have permitted the mortgage holder’s claim to go forward, because “[ap]praisals are the linchpin of mortgage fraud,” which is a “rampant pandemic with destructive effects.” See Trustcorp Mortgage Co. v. Zajac, 2006 WL 3690299 (Ohio App. 1 Dist., 12/15/06) at http://www.sconet.state.oh.us/rod/newpdf/1/2006/2006-ohio-6621.pdf.
Unsolicited Commercial E-Mail Return Address Need Not be Functional to Comply with Washington Anti-Spam Legislation. A Washington appellate court recently determined that Washington’s anti-spam law was not violated by a company that sent unsolicited commercial e-mails that did not allow the recipient to reply to the e-mail. Benson v. Oregon Processing Serv., Inc., No. 34195-6-II (Wash. App. Jan. 9, 2007). In Benson, the plaintiff received over 250 unsolicited commercial e-mails from the defendant. Although the e-mails’ “reply” address did not function, all of the e-mails contained the defendant’s physical mail address, and most contained a hyperlink and/or telephone number that could be used to unsubscribe from the defendant’s e-mailing list. In addition, the unsolicited commercial e-mails did not misrepresent the e-mails’ origin. The court held that the Washington anti-spam statute did not require that an unsolicited commercial e-mail’s “reply” address be functional, and that the methods of unsubscribing were sufficient to comply with the law’s requirements. Accordingly, the defendant’s actions did not violate Washington law. The decision can be accessed at http://www.courts.wa.gov/opinions/pdf/34195-6.07.doc.pdf.
First American Title Enters Into $10 Million Settlement with California Regulator. On December 27, First American Title Insurance Co. agreed to pay $10 million to settle allegations by the California Department of Insurance that First American engaged in certain illegal rebating activities. Specifically, the Department alleged that First American, among other things, paid the business support expenses of, and made cash payments and provided miscellaneous gifts and merchandise to, real estate professionals for the referral of title insurance business. According to the Department’s notice of noncompliance, the illegal rebates paid by First American totaled $371,490. For a copy of the settlement agreement, see http://www20.insurance.ca.gov/ePubAcc/Graphics/92509.pdf. The Department’s notice of noncompliance can be found at http://www20.insurance.ca.gov/pdf/PLD/91129.pdf.
DOJ Settles Marital Status Lending Discrimination Allegations. The Department of Justice (DOJ) announced that it has settled allegations of lending discrimination on the basis of marital status against Compass Bank. U.S. v. Compass Bank, Civil Action No. 07-H-0102-S (N.D. Ala.). According to the Complaint filed by the DOJ, which was filed along with a Consent Order and Settlement Agreement, Compass Bank’s auto lending group violated the Equal Credit Opportunity Act (ECOA) by charging higher interest rates to unmarried co-applicants than it did to married co-applicants. Specifically, the Complaint alleges that Compass Bank distributed rate sheets to auto dealers that instructed the dealers to charge higher interest rates to “non-spousal” co-applicants than to “spousal” co-applicants. In some cases, Compass Bank allegedly issued rate sheets instructing dealers to prevent unmarried co-applicants from applying altogether. Under the terms of the settlement, Compass Bank will pay up to $1.75 million to unmarried co-applicants who were charged higher interest rates, and will provide “enhanced equal credit opportunity training” to officers and employees who set rates for auto loans. The DOJ investigation and Complaint stemmed from a periodic Federal Reserve Board examination. The settlement is subject to court approval. To view the DOJ press release, the complaint, and the proposed settlement, see http://www.usdoj.gov/crt/housing/documents/compass_pr.pdf.
Passive Website is Insufficient to Support Personal Jurisdiction Over Defendant. A California appellate court recently determined that a Florida defendant’s contacts with California, which resulted from a transaction with a California resident, did not provide sufficient basis for the California courts to exercise personal jurisdiction over the defendant. Shisler v. Sanfer Sports Cars, Inc., H029791 (Cal. Ct. App. Dec. 20, 2006). In Shisler, the California-based plaintiff learned of a sports car that the defendant was selling in Florida by reviewing the defendant’s website. The plaintiff contacted the defendant by phone, completed the sales contract via the mail, and title to the car passed to the plaintiff before the car was shipped from Florida to California. Nevertheless, the plaintiff contended that the website’s provision of a credit application (which he did not use) and the California resident’s ability to access the website should allow the California court to exercise jurisdiction over the defendant. The court disagreed, noting that the defendant’s Internet activities did not amount to purposefully availing itself of California law, and that plaintiff’s argument would essentially allow for personal jurisdiction to “almost always be found in any forum in the country, contrary to long-settled principles of personal jurisdiction.” For a copy of this decision, please contact .
STATE ISSUES
Governor Suspends Illinois Predatory Lending Pilot Program. On January 19, Governor Milorad Blagojevich directed state regulators to halt the controversial Illinois Predatory Lending Database Pilot Program (most recently reported in the November 3rd issue of InfoBytes). The pilot program, often referred to by its authorizing legislation – H.B. 4050, had come under intense legal and political challenges both from the lending industry and from community groups claiming that the program’s increased compliance burden would drive financing out of the select group of zip codes to which it applied, or the Pilot Program Area. At Governor Blagojevich’s direction, the Illinois Department of Financial and Professional Regulation redesignated the Pilot Program Area to be “no zip codes or areas whatsoever.” To read Governor’s press release, see http://www.idfpr.com/newsrls/011907GOVIDFPR4050SUSP.asp.
South Carolina and New York Propose "Do-Not-Email" Lists. On January 17, legislation was introduced in South Carolina and New York that would provide a way for state residents to prevent commercial e-mail messages from being sent to their personal e-mail accounts. Under the South Carolina bill (H. 3280), e-mail service providers would create a database of "no e-mail" residential subscribers no later than six months after the effective date of the bill and commercial e-mail solicitors would be required to access the database, for a fee, to avoid sending e-mails to individuals on the list. Under the bill, solicitors would also be required to label such e-mails as advertisements with the letters "ADV" and include an "ADLT" label when the messages contain sexually explicit content. The bill contains criminal penalties that include a fine of $200 and imprisonment for no more than 30 days for a first offense, which would constitute a misdemeanor. Second offenses carry a fine of up to $1000 and up to a year in prison, according to the bill, and third offenses carry a fine of up to $5000 and five years in prison. The New York bill (A.2520) similarly creates a "do-not-mail / do not e-mail" registry (covering both paper and electronic ads) that would be administered by the state's Consumer Protection Board. As in South Carolina, direct marketers would be charged a fee to access the database to avoid sending commercial e-mails to residents on the list (the bill would contain an exclusion for existing customers). In New York, violators would be subject to civil penalties not to exceed $2,000 per violation. To view the full text of the bills, please visit the New York. Assembly website at http://assembly.state.ny.us/leg/?by=n&qs=A2520, & the South Carolina Legislature website at http://www.scstatehouse.net/cgi-bin/web_bh10.exe.
MISCELLANY
President of St. Louis Fed again Calls for GSE Reform. On January 17, President William Poole of the Federal Reserve Bank of St. Louis gave a speech urging Congress to impose further restrictions on Fannie Mae and Freddie Mac (the government sponsored enterprises or GSEs). Poole suggested that the GSEs’ persistent “thin capital position” in the face of enormous liabilities, which he estimated at $4.47 trillion in stated debts as well as off-balance sheet mortgage security guarantees, was due to the “implicit guarantee” that the Federal Government would not allow the GSEs to default. Poole concluded his remarks by proposing that Congress (i) limit the GSEs portfolio growth, (ii) increase their capital retention requirements, and (iii) establish “satisfactory bankruptcy legislation” to prepare and make transparent the government response in the worst case scenario. A previous speech by Poole was reported on in the November 17th issue of InfoBytes. For text of his January 17th speech, see http://www.stlouisfed.org/news/speeches/2007/01_17_07.html.
FRB Enforcement Actions for AML / BSA and Flood Insurance Non-Compliance. On January 22, the Federal Reserve Board (FRB) and the New York State Banking Department reached an enforcement agreement with Sumitomo Mitsui Banking Corporation for failure to adequately comply with federal and state anti-money laundering (AML) laws including the Bank Secrecy Act (BSA). The agreement outlines several steps Sumitomo Mitsui must take to strengthen its internal controls and revise its suspicious activity reporting mechanisms. The agreement can be read at http://www.federalreserve.gov/boarddocs/press/enforcement/2007/20070124/attachment.pdf.
On January 23, the FRB announced an enforcement action against Pacific Mercantile Bank for violations of the National Flood Insurance Act. The order issued by the FRB assesses a civil money penalty of $6,850 against the Bank. To see text of the order, go to http://www.federalreserve.gov/boarddocs/press/enforcement/2007/200701242/attachment.pdf.
FIRM NEWS
Jeffrey Naimon was quoted in an article in the January 24th American Banker entitled “Bankers See Flaws in Suspended Illinois Anti-Predatory Test.” Mr. Naimon was quoted as saying “Thank goodness that the Illinois state government now understands that the unintended consequences of a well-meaning but poorly designed bill vastly outweigh any possible benefit of the bill they enacted… Hopefully, the industry can work with the state government and the [state] Banking Department to find ways to address the legitimate concerns that appropriate lending is occurring in a positive way that doesn't cause the kind of credit constrictions that occurred under the Illinois predatory database law.”
Christopher Witeck will be speaking at American Conference Institute’s Issuer and Investor Forum on Mortgage Backed Securities, being held April 12 & 13 in New York. Mr. Witeck will be conducting a workshop entitled “Advanced Strategies for Negotiating Loan Purchase Agreements.” For more information, see http://americanconference.com/mbs.htm.
California Supreme Court Declines to Depublish McKell. The California Supreme Court announced on January 17 that it would not depublish an appeals court ruling that found that the state’s Unfair Competition Law is not preempted by HOLA. McKell v. Washington Mutual Inc., No. S148143 (Jan. 17, 2007). Washington Mutual had asked for the opinion to be depublished to prevent it from being cited as precedent. The opinion by the California Court of Appeals made two significant rulings (McKell v. Washington Mutual, Inc., No. B17637, 2006 WL 2664130 (Cal. Ct. App. Sept. 19, 2006), discussed in the September 22nd issue of InfoBytes). As previously reported, the court held that certain fees marked-up to exceed their actual pass-through cost violated the Real Estate Settlement Procedures Act (RESPA), finding persuasive the Second Circuit’s position in Kruse v. Wells Fargo Home Mortgage that deference should be given to HUD’s policy statement on mark-ups where the statute did not compel a clear conclusion on the issue. The court also held that California’s Unfair Competition Law (UCL) which prohibits “unlawful, unfair, or fraudulent conduct is not preempted by the Home Owner’s Loan Act (HOLA)” as it applies to a federal savings bank. The court noted that “the state cannot dictate to the Bank how it can or cannot operate, but it can insist that, however the Bank chooses to operate, it do so free from fraud and other deceptive business practices.” The court found that the lender’s alleged practices of not disclosing the mark-ups were potentially deceptive and only incidental to banking activities, thus subject to the state law. A copy of the original Court of Appeals decision is available at http://www.courtinfo.ca.gov/opinions/documents/B176377.PDF.
Governor Suspends Illinois Predatory Lending Pilot Program. On January 19, Governor Milorad Blagojevich directed state regulators to halt the controversial Illinois Predatory Lending Database Pilot Program (most recently reported in the November 3rd issue of InfoBytes). The pilot program, often referred to by its authorizing legislation – H.B. 4050, had come under intense legal and political challenges both from the lending industry and from community groups claiming that the program’s increased compliance burden would drive financing out of the select group of zip codes to which it applied, or the Pilot Program Area. At Governor Blagojevich’s direction, the Illinois Department of Financial and Professional Regulation redesignated the Pilot Program Area to be “no zip codes or areas whatsoever.” To read Governor’s press release, see http://www.idfpr.com/newsrls/011907GOVIDFPR4050SUSP.asp.
Property Appraiser is Not Liable to Mortgage Holder for Economic Losses Where Inflated Appraisal Reports Were Altered by an Intervening Investor. A mortgage investor bought a set of ten residential mortgage loans from another mortgage company, which acquired the loans from mortgage brokers. The mortgaged properties were appraised by appraisers hired by the mortgage brokers. After all the borrowers defaulted, the last investor demanded its seller repurchase the loans, but the seller refused and declared bankruptcy. The investor then sued the appraisers for negligent appraisals under the Ohio law on information negligently supplied for the guidance of others. An Ohio Appeals Court declined to broaden Ohio’s general rule on economic loss, which is that “typically a plaintiff must have a contractual relationship with the defendant to recover damages for economic loss, also called pecuniary loss.” Ohio courts have expanded the economic loss rule to cover damages for negligently prepared accounting statements, but the court considered accounting to be less subjective than appraising. Another factor that appears to have influenced the decision is the alteration of the appraisal reports by the intervening mortgage holder, because the appraisers had disclaimed liability for their reports in case of alteration. The dissent in the case would have permitted the mortgage holder’s claim to go forward, because “[ap]praisals are the linchpin of mortgage fraud,” which is a “rampant pandemic with destructive effects.” See Trustcorp Mortgage Co. v. Zajac, 2006 WL 3690299 (Ohio App. 1 Dist., 12/15/06) at http://www.sconet.state.oh.us/rod/newpdf/1/2006/2006-ohio-6621.pdf.
First American Title Enters Into $10 Million Settlement with California Regulator. On December 27, First American Title Insurance Co. agreed to pay $10 million to settle allegations by the California Department of Insurance that First American engaged in certain illegal rebating activities. Specifically, the Department alleged that First American, among other things, paid the business support expenses of, and made cash payments and provided miscellaneous gifts and merchandise to, real estate professionals for the referral of title insurance business. According to the Department’s notice of noncompliance, the illegal rebates paid by First American totaled $371,490. For a copy of the settlement agreement, see http://www20.insurance.ca.gov/ePubAcc/Graphics/92509.pdf. The Department’s notice of noncompliance can be found at http://www20.insurance.ca.gov/pdf/PLD/91129.pdf.
President of St. Louis Fed again Calls for GSE Reform. On January 17, President William Poole of the Federal Reserve Bank of St. Louis gave a speech urging Congress to impose further restrictions on Fannie Mae and Freddie Mac (the government sponsored enterprises or GSEs). Poole suggested that the GSEs’ persistent “thin capital position” in the face of enormous liabilities, which he estimated at $4.47 trillion in stated debts as well as off-balance sheet mortgage security guarantees, was due to the “implicit guarantee” that the Federal Government would not allow the GSEs to default. Poole concluded his remarks by proposing that Congress (i) limit the GSEs portfolio growth, (ii) increase their capital retention requirements, and (iii) establish “satisfactory bankruptcy legislation” to prepare and make transparent the government response in the worst case scenario. A previous speech by Poole was reported on in the November 17th issue of InfoBytes. For text of his January 17th speech, see http://www.stlouisfed.org/news/speeches/2007/01_17_07.html.
FRB Enforcement Actions for AML / BSA and Flood Insurance Non-Compliance. On January 22, the Federal Reserve Board (FRB) and the New York State Banking Department reached an enforcement agreement with Sumitomo Mitsui Banking Corporation for failure to adequately comply with federal and state anti-money laundering (AML) laws including the Bank Secrecy Act (BSA). The agreement outlines several steps Sumitomo Mitsui must take to strengthen its internal controls and revise its suspicious activity reporting mechanisms. The agreement can be read at http://www.federalreserve.gov/boarddocs/press/enforcement/2007/20070124/attachment.pdf.
On January 23, the FRB announced an enforcement action against Pacific Mercantile Bank for violations of the National Flood Insurance Act. The order issued by the FRB assesses a civil money penalty of $6,850 against the Bank. To see text of the order, go to http://www.federalreserve.gov/boarddocs/press/enforcement/2007/200701242/attachment.pdf.
FDIC Releases Predatory Lending Supervisory Policy. On January 22, the FDIC released its "Supervisory Policy on Predatory Lending" (FIL 6-2007), guidance describing potential characteristics of predatory lending and the FDIC's array of tools to combat predatory lending. The Policy states that predatory lending involves (i) making unaffordable loans based on the assets of the borrower as opposed to the borrower's ability to repay the loan, (ii) inducing a borrower to repeatedly refinance a loan so as to charge high points and fees for each refinance (called "flipping"), or (iii) engaging in outright fraud or deception to conceal the true nature of the loan obligation or ancillary products. The Policy also reaffirms that the FDIC combats predatory lending through supervisory actions (ranging from commitments to formal enforcement actions), through the examination process, including regular CRA examinations and individual consumer complaints, and through consumer financial education efforts. The full text of the Policy can be found at http://www.fdic.gov/news/news/financial/2007/fil07006.html.
House Passes “Seasoned Customer” Transaction Reporting Exemption. On January 23, the U.S. House of Representatives passed H.R. 323 (reported in the January 12th issue of InfoBytes), which would, if it becomes law, exempt financial institutions from currency transactions reporting (CTR) for certain “qualified customers.” Under the bill, a qualified customer would include any person or entity that (i) is incorporated under Federal or State law or registered as and eligible to do business in the United States, (ii) has maintained a deposit account at the depository institution for at least 12 months, and (iii) has engaged, through such account, in multiple currency transactions subject to CTR requirements. The bill also gives the Secretary of the Treasury power to establish regulations determining when the qualified customer exemption may be suspended or revoked and under what circumstances the qualification may be preserved through a bank acquisition or merger. H.R. 323 has been referred to the Senate Committee on Banking, Housing, and Urban Affairs. For text of the bill, see http://thomas.loc.gov/cgi-bin/query/z?c110:h.r.323.eh:.
California Supreme Court Declines to Depublish McKell. The California Supreme Court announced on January 17 that it would not depublish an appeals court ruling that found that the state’s Unfair Competition Law is not preempted by HOLA. McKell v. Washington Mutual Inc., No. S148143 (Jan. 17, 2007). Washington Mutual had asked for the opinion to be depublished to prevent it from being cited as precedent. The opinion by the California Court of Appeals made two significant rulings (McKell v. Washington Mutual, Inc., No. B17637, 2006 WL 2664130 (Cal. Ct. App. Sept. 19, 2006), discussed in the September 22nd issue of InfoBytes). As previously reported, the court held that certain fees marked-up to exceed their actual pass-through cost violated the Real Estate Settlement Procedures Act (RESPA), finding persuasive the Second Circuit’s position in Kruse v. Wells Fargo Home Mortgage that deference should be given to HUD’s policy statement on mark-ups where the statute did not compel a clear conclusion on the issue. The court also held that California’s Unfair Competition Law (UCL) which prohibits “unlawful, unfair, or fraudulent conduct is not preempted by the Home Owner’s Loan Act (HOLA)” as it applies to a federal savings bank. The court noted that “the state cannot dictate to the Bank how it can or cannot operate, but it can insist that, however the Bank chooses to operate, it do so free from fraud and other deceptive business practices.” The court found that the lender’s alleged practices of not disclosing the mark-ups were potentially deceptive and only incidental to banking activities, thus subject to the state law. A copy of the original Court of Appeals decision is available at http://www.courtinfo.ca.gov/opinions/documents/B176377.PDF.
FDIC Releases Predatory Lending Supervisory Policy. On January 22, the FDIC released its "Supervisory Policy on Predatory Lending" (FIL 6-2007), guidance describing potential characteristics of predatory lending and the FDIC's array of tools to combat predatory lending. The Policy states that predatory lending involves (i) making unaffordable loans based on the assets of the borrower as opposed to the borrower's ability to repay the loan, (ii) inducing a borrower to repeatedly refinance a loan so as to charge high points and fees for each refinance (called "flipping"), or (iii) engaging in outright fraud or deception to conceal the true nature of the loan obligation or ancillary products. The Policy also reaffirms that the FDIC combats predatory lending through supervisory actions (ranging from commitments to formal enforcement actions), through the examination process, including regular CRA examinations and individual consumer complaints, and through consumer financial education efforts. The full text of the Policy can be found at http://www.fdic.gov/news/news/financial/2007/fil07006.html.
Governor Suspends Illinois Predatory Lending Pilot Program. On January 19, Governor Milorad Blagojevich directed state regulators to halt the controversial Illinois Predatory Lending Database Pilot Program (most recently reported in the November 3rd issue of InfoBytes). The pilot program, often referred to by its authorizing legislation – H.B. 4050, had come under intense legal and political challenges both from the lending industry and from community groups claiming that the program’s increased compliance burden would drive financing out of the select group of zip codes to which it applied, or the Pilot Program Area. At Governor Blagojevich’s direction, the Illinois Department of Financial and Professional Regulation redesignated the Pilot Program Area to be “no zip codes or areas whatsoever.” To read Governor’s press release, see http://www.idfpr.com/newsrls/011907GOVIDFPR4050SUSP.asp.
DOJ Settles Marital Status Lending Discrimination Allegations. The Department of Justice (DOJ) announced that it has settled allegations of lending discrimination on the basis of marital status against Compass Bank. U.S. v. Compass Bank, Civil Action No. 07-H-0102-S (N.D. Ala.). According to the Complaint filed by the DOJ, which was filed along with a Consent Order and Settlement Agreement, Compass Bank’s auto lending group violated the Equal Credit Opportunity Act (ECOA) by charging higher interest rates to unmarried co-applicants than it did to married co-applicants. Specifically, the Complaint alleges that Compass Bank distributed rate sheets to auto dealers that instructed the dealers to charge higher interest rates to “non-spousal” co-applicants than to “spousal” co-applicants. In some cases, Compass Bank allegedly issued rate sheets instructing dealers to prevent unmarried co-applicants from applying altogether. Under the terms of the settlement, Compass Bank will pay up to $1.75 million to unmarried co-applicants who were charged higher interest rates, and will provide “enhanced equal credit opportunity training” to officers and employees who set rates for auto loans. The DOJ investigation and Complaint stemmed from a periodic Federal Reserve Board examination. The settlement is subject to court approval. To view the DOJ press release, the complaint, and the proposed settlement, see http://www.usdoj.gov/crt/housing/documents/compass_pr.pdf.
FRB Enforcement Actions for AML / BSA and Flood Insurance Non-Compliance. On January 22, the Federal Reserve Board (FRB) and the New York State Banking Department reached an enforcement agreement with Sumitomo Mitsui Banking Corporation for failure to adequately comply with federal and state anti-money laundering (AML) laws including the Bank Secrecy Act (BSA). The agreement outlines several steps Sumitomo Mitsui must take to strengthen its internal controls and revise its suspicious activity reporting mechanisms. The agreement can be read at http://www.federalreserve.gov/boarddocs/press/enforcement/2007/20070124/attachment.pdf.
On January 23, the FRB announced an enforcement action against Pacific Mercantile Bank for violations of the National Flood Insurance Act. The order issued by the FRB assesses a civil money penalty of $6,850 against the Bank. To see text of the order, go to http://www.federalreserve.gov/boarddocs/press/enforcement/2007/200701242/attachment.pdf.
DOJ Settles Marital Status Lending Discrimination Allegations. The Department of Justice (DOJ) announced that it has settled allegations of lending discrimination on the basis of marital status against Compass Bank. U.S. v. Compass Bank, Civil Action No. 07-H-0102-S (N.D. Ala.). According to the Complaint filed by the DOJ, which was filed along with a Consent Order and Settlement Agreement, Compass Bank’s auto lending group violated the Equal Credit Opportunity Act (ECOA) by charging higher interest rates to unmarried co-applicants than it did to married co-applicants. Specifically, the Complaint alleges that Compass Bank distributed rate sheets to auto dealers that instructed the dealers to charge higher interest rates to “non-spousal” co-applicants than to “spousal” co-applicants. In some cases, Compass Bank allegedly issued rate sheets instructing dealers to prevent unmarried co-applicants from applying altogether. Under the terms of the settlement, Compass Bank will pay up to $1.75 million to unmarried co-applicants who were charged higher interest rates, and will provide “enhanced equal credit opportunity training” to officers and employees who set rates for auto loans. The DOJ investigation and Complaint stemmed from a periodic Federal Reserve Board examination. The settlement is subject to court approval. To view the DOJ press release, the complaint, and the proposed settlement, see http://www.usdoj.gov/crt/housing/documents/compass_pr.pdf.
California Supreme Court Declines to Depublish McKell. The California Supreme Court announced on January 17 that it would not depublish an appeals court ruling that found that the state’s Unfair Competition Law is not preempted by HOLA. McKell v. Washington Mutual Inc., No. S148143 (Jan. 17, 2007). Washington Mutual had asked for the opinion to be depublished to prevent it from being cited as precedent. The opinion by the California Court of Appeals made two significant rulings (McKell v. Washington Mutual, Inc., No. B17637, 2006 WL 2664130 (Cal. Ct. App. Sept. 19, 2006), discussed in the September 22nd issue of InfoBytes). As previously reported, the court held that certain fees marked-up to exceed their actual pass-through cost violated the Real Estate Settlement Procedures Act (RESPA), finding persuasive the Second Circuit’s position in Kruse v. Wells Fargo Home Mortgage that deference should be given to HUD’s policy statement on mark-ups where the statute did not compel a clear conclusion on the issue. The court also held that California’s Unfair Competition Law (UCL) which prohibits “unlawful, unfair, or fraudulent conduct is not preempted by the Home Owner’s Loan Act (HOLA)” as it applies to a federal savings bank. The court noted that “the state cannot dictate to the Bank how it can or cannot operate, but it can insist that, however the Bank chooses to operate, it do so free from fraud and other deceptive business practices.” The court found that the lender’s alleged practices of not disclosing the mark-ups were potentially deceptive and only incidental to banking activities, thus subject to the state law. A copy of the original Court of Appeals decision is available at http://www.courtinfo.ca.gov/opinions/documents/B176377.PDF.
Passive Website is Insufficient to Support Personal Jurisdiction Over Defendant. A California appellate court recently determined that a Florida defendant’s contacts with California, which resulted from a transaction with a California resident, did not provide sufficient basis for the California courts to exercise personal jurisdiction over the defendant. Shisler v. Sanfer Sports Cars, Inc., H029791 (Cal. Ct. App. Dec. 20, 2006). In Shisler, the California-based plaintiff learned of a sports car that the defendant was selling in Florida by reviewing the defendant’s website. The plaintiff contacted the defendant by phone, completed the sales contract via the mail, and title to the car passed to the plaintiff before the car was shipped from Florida to California. Nevertheless, the plaintiff contended that the website’s provision of a credit application (which he did not use) and the California resident’s ability to access the website should allow the California court to exercise jurisdiction over the defendant. The court disagreed, noting that the defendant’s Internet activities did not amount to purposefully availing itself of California law, and that plaintiff’s argument would essentially allow for personal jurisdiction to “almost always be found in any forum in the country, contrary to long-settled principles of personal jurisdiction.” For a copy of this decision, please contact .
Property Appraiser is Not Liable to Mortgage Holder for Economic Losses Where Inflated Appraisal Reports Were Altered by an Intervening Investor. A mortgage investor bought a set of ten residential mortgage loans from another mortgage company, which acquired the loans from mortgage brokers. The mortgaged properties were appraised by appraisers hired by the mortgage brokers. After all the borrowers defaulted, the last investor demanded its seller repurchase the loans, but the seller refused and declared bankruptcy. The investor then sued the appraisers for negligent appraisals under the Ohio law on information negligently supplied for the guidance of others. An Ohio Appeals Court declined to broaden Ohio’s general rule on economic loss, which is that “typically a plaintiff must have a contractual relationship with the defendant to recover damages for economic loss, also called pecuniary loss.” Ohio courts have expanded the economic loss rule to cover damages for negligently prepared accounting statements, but the court considered accounting to be less subjective than appraising. Another factor that appears to have influenced the decision is the alteration of the appraisal reports by the intervening mortgage holder, because the appraisers had disclaimed liability for their reports in case of alteration. The dissent in the case would have permitted the mortgage holder’s claim to go forward, because “[ap]praisals are the linchpin of mortgage fraud,” which is a “rampant pandemic with destructive effects.” See Trustcorp Mortgage Co. v. Zajac, 2006 WL 3690299 (Ohio App. 1 Dist., 12/15/06) at http://www.sconet.state.oh.us/rod/newpdf/1/2006/2006-ohio-6621.pdf.
Unsolicited Commercial E-Mail Return Address Need Not be Functional to Comply with Washington Anti-Spam Legislation. A Washington appellate court recently determined that Washington’s anti-spam law was not violated by a company that sent unsolicited commercial e-mails that did not allow the recipient to reply to the e-mail. Benson v. Oregon Processing Serv., Inc., No. 34195-6-II (Wash. App. Jan. 9, 2007). In Benson, the plaintiff received over 250 unsolicited commercial e-mails from the defendant. Although the e-mails’ “reply” address did not function, all of the e-mails contained the defendant’s physical mail address, and most contained a hyperlink and/or telephone number that could be used to unsubscribe from the defendant’s e-mailing list. In addition, the unsolicited commercial e-mails did not misrepresent the e-mails’ origin. The court held that the Washington anti-spam statute did not require that an unsolicited commercial e-mail’s “reply” address be functional, and that the methods of unsubscribing were sufficient to comply with the law’s requirements. Accordingly, the defendant’s actions did not violate Washington law. The decision can be accessed at http://www.courts.wa.gov/opinions/pdf/34195-6.07.doc.pdf.
First American Title Enters Into $10 Million Settlement with California Regulator. On December 27, First American Title Insurance Co. agreed to pay $10 million to settle allegations by the California Department of Insurance that First American engaged in certain illegal rebating activities. Specifically, the Department alleged that First American, among other things, paid the business support expenses of, and made cash payments and provided miscellaneous gifts and merchandise to, real estate professionals for the referral of title insurance business. According to the Department’s notice of noncompliance, the illegal rebates paid by First American totaled $371,490. For a copy of the settlement agreement, see http://www20.insurance.ca.gov/ePubAcc/Graphics/92509.pdf. The Department’s notice of noncompliance can be found at http://www20.insurance.ca.gov/pdf/PLD/91129.pdf.
DOJ Settles Marital Status Lending Discrimination Allegations. The Department of Justice (DOJ) announced that it has settled allegations of lending discrimination on the basis of marital status against Compass Bank. U.S. v. Compass Bank, Civil Action No. 07-H-0102-S (N.D. Ala.). According to the Complaint filed by the DOJ, which was filed along with a Consent Order and Settlement Agreement, Compass Bank’s auto lending group violated the Equal Credit Opportunity Act (ECOA) by charging higher interest rates to unmarried co-applicants than it did to married co-applicants. Specifically, the Complaint alleges that Compass Bank distributed rate sheets to auto dealers that instructed the dealers to charge higher interest rates to “non-spousal” co-applicants than to “spousal” co-applicants. In some cases, Compass Bank allegedly issued rate sheets instructing dealers to prevent unmarried co-applicants from applying altogether. Under the terms of the settlement, Compass Bank will pay up to $1.75 million to unmarried co-applicants who were charged higher interest rates, and will provide “enhanced equal credit opportunity training” to officers and employees who set rates for auto loans. The DOJ investigation and Complaint stemmed from a periodic Federal Reserve Board examination. The settlement is subject to court approval. To view the DOJ press release, the complaint, and the proposed settlement, see http://www.usdoj.gov/crt/housing/documents/compass_pr.pdf.
IRS Rules Variable Contract Holder Not Owner of Interest in RIC That Funds Contract. The IRS has ruled that a holder of a variable annuity or life insurance contract is not, for federal income tax purposes, treated as the beneficial owner of an interest in a regulated investment company (RIC) that funds the contract solely because interests in the RIC are also available to certain other investors. In previous rulings, the IRS concluded that variable contract holders are the beneficial owners of interests in the investments funding the contracts when those investments are also available to the "general public." However, Revenue Ruling 2007-7, in effect, excludes classes of beneficial ownership from the definition of "general public" for purposes of investor control analysis, which is relevant in determining exactly who pays the taxes on income generated by variable contracts. The ruling is available at http://www.irs.gov/pub/irs-drop/rr-07-07.pdf and will be published in Internal Revenue Bulletin 2007-7.
New SRO Focus to Include Point-of-Sale Advisory Activities. Efforts to block the merger of the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) recently failed after nearly two-thirds of member firms voted to approve the concept. The NYSE and NASD are moving forward with their plan to create a new self regulatory organization (SRO), merging some of the existing roles and potentially creating new roles for the SRO. The intended goals relating to existing functions include (i) consolidating regulation and the currently misaligned exam cycles, (ii) increasing enforcement efficiency, and (iii) eliminating the inconsistencies in standards promulgated by both agencies, such as the suitability standard. A new role suggested for the SRO is regulating point-of-sale advisory services. Expanded SRO jurisdiction on the advisory side would reach beyond supervision of advisers to institutions or advisers to funds, and allow regulation to trickle-down to the level of the retail investor. The current debate on whether broker-dealers giving investment advice to customers should be exempt under the Investment Advisers Act of 1940 may be resolved by a federal appeals court soon. Contemporaneously, there has been discussion on whether the new SRO should implement a new definition for hedge fund advisers by updating the 1996 statute setting forth an assets-under-management test to delineate which advisers are state regulated and which fall under the jurisdiction of the SEC. The merger is to be completed in the second quarter of this year. For more information, see http://www.nasd.com/PressRoom/NewsReleases/2007NewsReleases/NASDW_018334.
Unsolicited Commercial E-Mail Return Address Need Not be Functional to Comply with Washington Anti-Spam Legislation. A Washington appellate court recently determined that Washington’s anti-spam law was not violated by a company that sent unsolicited commercial e-mails that did not allow the recipient to reply to the e-mail. Benson v. Oregon Processing Serv., Inc., No. 34195-6-II (Wash. App. Jan. 9, 2007). In Benson, the plaintiff received over 250 unsolicited commercial e-mails from the defendant. Although the e-mails’ “reply” address did not function, all of the e-mails contained the defendant’s physical mail address, and most contained a hyperlink and/or telephone number that could be used to unsubscribe from the defendant’s e-mailing list. In addition, the unsolicited commercial e-mails did not misrepresent the e-mails’ origin. The court held that the Washington anti-spam statute did not require that an unsolicited commercial e-mail’s “reply” address be functional, and that the methods of unsubscribing were sufficient to comply with the law’s requirements. Accordingly, the defendant’s actions did not violate Washington law. The decision can be accessed at http://www.courts.wa.gov/opinions/pdf/34195-6.07.doc.pdf.
Passive Website is Insufficient to Support Personal Jurisdiction Over Defendant. A California appellate court recently determined that a Florida defendant’s contacts with California, which resulted from a transaction with a California resident, did not provide sufficient basis for the California courts to exercise personal jurisdiction over the defendant. Shisler v. Sanfer Sports Cars, Inc., H029791 (Cal. Ct. App. Dec. 20, 2006). In Shisler, the California-based plaintiff learned of a sports car that the defendant was selling in Florida by reviewing the defendant’s website. The plaintiff contacted the defendant by phone, completed the sales contract via the mail, and title to the car passed to the plaintiff before the car was shipped from Florida to California. Nevertheless, the plaintiff contended that the website’s provision of a credit application (which he did not use) and the California resident’s ability to access the website should allow the California court to exercise jurisdiction over the defendant. The court disagreed, noting that the defendant’s Internet activities did not amount to purposefully availing itself of California law, and that plaintiff’s argument would essentially allow for personal jurisdiction to “almost always be found in any forum in the country, contrary to long-settled principles of personal jurisdiction.” For a copy of this decision, please contact .
South Carolina and New York Propose "Do-Not-Email" Lists. On January 17, legislation was introduced in South Carolina and New York that would provide a way for state residents to prevent commercial e-mail messages from being sent to their personal e-mail accounts. Under the South Carolina bill (H. 3280), e-mail service providers would create a database of "no e-mail" residential subscribers no later than six months after the effective date of the bill and commercial e-mail solicitors would be required to access the database, for a fee, to avoid sending e-mails to individuals on the list. Under the bill, solicitors would also be required to label such e-mails as advertisements with the letters "ADV" and include an "ADLT" label when the messages contain sexually explicit content. The bill contains criminal penalties that include a fine of $200 and imprisonment for no more than 30 days for a first offense, which would constitute a misdemeanor. Second offenses carry a fine of up to $1000 and up to a year in prison, according to the bill, and third offenses carry a fine of up to $5000 and five years in prison. The New York bill (A. 2520) similarly creates a "do-not-mail / do not e-mail" registry (covering both paper and electronic ads) that would be administered by the state's Consumer Protection Board. As in South Carolina, direct marketers would be charged a fee to access the database to avoid sending commercial e-mails to residents on the list (the bill would contain an exclusion for existing customers). In New York, violators would be subject to civil penalties not to exceed $2,000 per violation. To view the full text of the bills, please visit the New York Assembly website at http://assembly.state.ny.us/leg/?by=n&qs=A2520, & the South Carolina Legislature website at http://www.scstatehouse.net/cgi-bin/web_bh10.exe.
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