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InfoBytes

CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

February 10, 2006

FEDERAL ISSUES

Interagency Guidance Issued for Institutions Affected by Hurricane Katrina. On February 3, 2006, the FDIC, the Federal Reserve, the OCC, the OTS, and the NCUA, as well as state supervisory agencies in Alabama, Louisiana, and Mississippi, issued an interagency guidance outlining procedures to assess the financial condition of institutions affected by Hurricane Katrina in the disaster area, and outside the disaster area (i.e., those that have loans or investments with individuals or institutions in the actual disaster area). The guidance appears to maintain the flexibility examiners have in issuing supervisory response, and provides specific considerations for examiners to take into account when evaluating an affected institution. For the complete text of the supervisory guidance, see http://www.federalreserve.gov/boarddocs/srletters/2006/sr0603a1.pdf.

FinCEN Issues Warning About Potential For Fraudulent Transactions Involving Hurricane Relief Funds. The Financial Crimes Enforcement Network (FinCEN) has issued a warning to all financial institutions about the possibility for fraud associated with the distribution of funds relating to relief from Hurricanes Katrina, Rita and Wilma. In a brief release, FinCEN identifies a number of possible fraud schemes and red flags of which financial institutions should be aware. FinCEN also provides guidance as to how suspicious activity reports concerning such fraud schemes should be prepared, and what information they should include. For more information, see http://www.fincen.gov/hurricanebenefitfraud.pdf.

Federal Financial Regulatory Agencies Issue Advisory Regarding Engagement Letters that Limit External Auditor Liability. On February 3, 2006, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) (the Agencies) issued an interagency advisory on the “unsafe and unsound use of limitation of liability provisions in external audit engagement letters.” The Agencies warn financial insitutions that they should not enter into liability limitation agreements with respect to audits of financial statements, audits of internal control over financial reporting, and auditor engagements that include attestations on management’s assesment of internal control over financial reporting. According to the Advisory, financial institutions that include such unsafe and unsound limitation of liability provisions may be subject to “appropriate supervisory action” by the Agencies. To view the interagency advisory, see http://www.federalreserve.gov/boarddocs/press/bcreg/2006/20060203/attachment.pdf.

HUD Charges Philadelphia Landlords with Fair Housing Act Violations. On February 6, 2006, the U.S. Department of Housing and Urban Development (HUD) announced that it had charged Philadelphia landlords with violations of the Fair Housing Act for allegedly interfering with a prospective black tenant’s desire to rent an apartment in a predominantly white neighborhood. According to HUD, the property owners steered the prospective tenant away from the rental unit because the neighbors would object to her renting the property, and the owners also quoted a higher rental price to her than was eventually charged to white tenants. Unless one of the parties elects to have the case decided in a U.S. District Court, a hearing on the charges will be held by a HUD Administrative Law Judge on April 25, 2006. For more information, see http://www.hud.gov/news/release.cfm?content=pr06-015.cfm

HUD Unveils Proposed $33.6 Billion Budget for 2007. The Bush Administration has proposed a $33.6 billion budget for HUD for fiscal year 2007. According to HUD, the funding would be used to sustain programs that promote economic opportunity and ownership, such as The American Dream Downpayment Initiative, which provides assistance to first-time homebuyers. In addition, the proposed budget includes $1.5 billion for HUD’s Continuum of Care homeless assistance grants, and a $502 million increase in funding for the Housing Choice Voucher Program, which provides rental assistance for low-income families. According to HUD’s 2007 budget summary, HUD is also proposing to amend the National Housing Act in order “to give [the Federal Housing Administration] the tools to offer alternatives to high cost loans by supporting privately originated mortgages to non-prime borrowers.” For more information, see http://www.hud.gov/news/release.cfm?content=pr06-013.cfm.

Treasury, IRS Request Comments on Reporting Requirements of Interest on Residential Mortgage Loans. In the February 1, 2006 volume of the Federal Register, the Department of Treasury (Treasury) and the Internal Revenue Service (IRS) requested comment on an existing final regulation (Regulation) concerning Reporting Requirements for Recipients of Points Paid on Residential Mortgages (§§ 1.6050H-1, and 1.6050H-2). The Regulation is part of the IRS’ continuing attempts under the Paperwork Reduction Act of 1995, to minimize the burden of information collection on the Residential Mortgage industry. Among other requirements, the Regulations will instruct taxpayers to use Form 1098 to state the amount of points and the amount of interest received during the taxable year on a single mortgage. In addition, the taxpayer must provide a written statement setting forth the information being reported to the IRS on Form 1098 to the payer of these points. All written comments are due on or before April 3, 2006. For the full text of this Request for Comment in the Federal Register, see http://frwebgate6.access.gpo.gov/cgi-bin/waisgate.cgi?WAISdocID=582012473094+7+0+0&WAISaction=retrieve

STATE ISSUES

AFSA Sues Montgomery County. The American Financial Services Association and several lenders have reportedly challenged Montgomery County, Maryland's Ordinance 36-04, and asked the Circuit Court for Montgomery County to declare the Ordinance null and void and permanently enjoin its enforcement. The complaint argues that the bill is preempted by Maryland law which only allows the state to enact a law purporting to regulate extensions of credit by a financial institution, and further argues that the exception in that Maryland law for civil rights-type ordinances does not apply because the Ordinance is a predatory lending ordinance in the guise of an anti-discrimination bill. We reported on the Montgomery County ordinance, which is scheduled to go into effect the first week of March, in the December 2, 2005 edition of InfoBytes, available at http://www.buckleykolar.com/publications/InfoBytes120205.html.

COURTS

Two Indiana Districts Weigh in: Private Right of Action for FCRA Notice Violations Eliminated. In two decisions, judges for the U.S. District Courts for the Northern and Southern Districts of Indiana dismissed the consumers’ claims that automobile dealers violated the Fair Credit Reporting Act’s (FCRA) disclosure requirements for prescreened credit solicitations, holding that the Fair and Accurate Credit Transactions Act of 2003 (FACTA) repealed the private right of action for violations of Section 615 of FCRA. Both courts cited the many opinions from the Northern District of Illinois to the same effect; courts in the Northern and Central Districts of California have also reached the same result. Meanwhile, another court in the Northern District of Illinois held that FACTA repealed the private right of action for violations of the FCRA notice provision. See Stavroff v. Gurley Leep Dodge, Inc., — F. Supp. 2d —, 2006 WL 196381 (N.D. Ind. Jan. 20, 2006); Harris v. Fletcher Chrysler Prods., Inc., No. 1:05-CV-1140-LJM-VSS, 2006 WL 279030 (S.D. Ind. Feb. 2, 2006); Killingsworth v. Household Bank (SB), N.A., No. 05 C 5729, 2006 WL 250704 (N.D. Ill. Jan. 31, 2006).

Texas Court Determines that Internet and Telephone Customers May Be in Separate Classes. In a recent case, a Texas court determined that customers contracting with a company through Internet and telephonic channels may not be in the same class for class action litigation purposes. In Hotels.com, L.P. v. Canales, 04-05-00315-CV (Tex. 229th Jud. Dist. Ct. Feb. 1, 2006), the court reviewed whether the trial court properly approved a class composed of both telephonic and Internet customers. The court noted that Hotels.com’s Internet customers may have agreed to arbitration during their online contracting experience, while telephonic customers clearly had not. If the Internet customers created a valid online contract, then Hotels.com may be able to require Internet customers to adjudicate their disputes through arbitration, while telephonic customers would be able to proceed with their lawsuit. Determining that “the trial court failed to perform the necessary ‘rigorous analysis’ … on the issue of typicality,” the court remanded the matter to the trial court for further proceedings.

Company E-mail Address Does Not Invest the Writer with Apparent Authority to Bind Company in Contract. In CSX Transportation, Inc. v. Recovery Express, Inc., 1:04-cv-12293-WGY (D. Mass. Feb. 1, 2006) (CSX), the United States District Court for the District of Massachusetts examined whether a company provided a person with apparent authority to enter into a contract on the company’s behalf by merely providing him with a company email address. In this case, a person used an e-mail address issued by Recovery Express, Inc. (Recovery) to acquire scrap materials from CSX. This individual, however, was not a Recovery employee. The court held that it was unreasonable, as a matter of law, to rely solely on an e-mail domain name to believe that an individual had apparent authority to enter into a contract on the company’s behalf. “Granting an e-mail domain name, by itself, does not cloak the recipient with carte blanche authority to act on behalf [of] the grantee. Were this so, every subordinate employee with a company e-mail address – down to the night watchman – could bind a company to the same contracts as the president. This is not the law.” CSX at 11. A copy of the District Court’s opinion can be found at http://pacer.mad.uscourts.gov/dc/cgi-bin/recentops.pl?filename=young/pdf/csxfinalopinion.pdf.

MISCELLANY

Program Created to Evaluate Data Processing Companies. BITS, a financial services industry group, has created the Financial Institution Shared Assessments Program (FISAP) to establish a standard process for financial institutions to rate information technology service providers, including providers in the area of data security. The program allows organizations to gather detailed information on a service provider's controls (people, process, and procedures) and test those controls. BITS created FISAP on behalf of Citigroup Inc., Wells Fargo & Company, JPMorgan Chase & Co., U.S. Bancorp, the Bank of New York and Bank of America with the intent of benefiting the entire financial services industry by helping to establish an industry standard for due care.

ERRATA

Last week we reported on the Comptroller of the Currency John C. Dugan's recent speech on privacy notices and information security breaches. Contrary to the tenor of the report, Comptroller Dugan's speech indicated that (i) with respect to the simplification of notices, the banking agencies are conducting consumer testing of privacy notices that will inform the agencies' next steps in advancing the use of simplified notices, and (ii) with respect to the standards for information security requirements, the current Gramm-Leach-Bliley standards applicable to banks have worked well, but that if Congress decides to adopt a "one size fits all" standard, such standard should be crafted in a way that makes sense for banks, that functional regulators should write the rules for institutions within their jurisdiction and have exclusive authority to enforce these rules, and that in any event, a strong uniform federal standard, not numerous and inconsistent state requirements, would provide sound protections for consumers, without imposing unnecessary burdens and confusion.

FIRM NEWS

On March 15, 2006, Bob Serino will be speaking at the Money Laundering Alert 11th Annual International Money Laundering Conference in Hollywood, FL, the largest conference of its kind in the United States. For the benefit of InfoBytes subscribers who want to attend, Buckley Kolar has $200 Savings Vouchers available towards a discounted registration fee. If you are interested in attending and would like a Savings Voucher, please contact Sue Kilgore at (202) 349-8054. For a copy of the program brochure, which includes detailed registration information, see http://www.nxtbook.com/nxtbooks/alertglobalmedia/2006brochure/.

On February 6, 2006, Bob Serino was quoted in an American Banker article entitled “In Focus: FinCEN's Future: Industry Hopes It Doesn't Waver.” In the article, Mr. Serino makes a statement regarding the responsibilities of FinCEN and whether the agency has sufficient personnel to accomplish its mission. For more information, contact Bob Serino at . For a copy of the article, see www.americanbanker.com.

On February 11, 2006, Kirk Jensen will be a speaker at the 5th Annual Consumer Law and Consumer Credit Symposium at the UNC Chapel Hill School of Law on the topic of "Consumer Arbitration: For Better or For Worse." For more information, see http://www.law.unc.edu/SearchDetails.aspx?ID=494.

On March 10, 2006, from 12:00-1:30pm EST, Buckley Kolar LLP and the Electronic Financial Services Council will be hosting a teleseminar on Freddie Mac's recently released eMortgage Handbook. Ann Epstein, Offerings Director, and Michael Gordon of Freddie Mac will be presenting. If you would like to attend, please RSVP via email to Nick Ennis at Buckley Kolar (). A call-in number and materials will be provided in advance.

On March 9-10, 2006, Andrea Lee Negroni will be speaking at the Texas Bar Association's meeting at the Adolphus Hotel in Dallas, Texas, on the subject of "Advanced Real Estate Drafting: Residential Disclosures."

On March 16, 2006, Joe Kolar will be speaking on “Joint Ventures and Affiliated Business Arrangements Under RESPA” at the Old Republic National Title Insurance Company’s 2006 Annual Seminar in Columbus, OH.

On March 20-21, 2006, Joe Kolar will be speaking at the PLI’s 11th Annual Institute on Consumer Financial Services Litigation in New York City.

© Buckley Kolar, LLP 2006. INFOBYTES is not intended as legal advice to any person or firm. It is provided as a client service and information contained herein is drawn from various public sources, including other publications.

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