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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

March 17, 2006

FEDERAL ISSUES

FTC Files Amicus Brief in Case of Whitfield v. Radian Guaranty. On March 17, 2006, the Federal Trade Commission (FTC) approved the filing of an amicus brief in the pending case Whitfield et al v. Radian Guaranty, Inc., No. 05-5017 (3d Cir.). The brief concerns the borrower's appeal of a district court ruling that a mortgage insurance company was not required to provide a consumer with a Fair Credit Reporting Act (FCRA) adverse action notice when, as a result of the information in a consumer’s credit report, the mortgage insurer charged the consumer a higher mortgage insurance premium than the best rate offered by the mortgage insurer. The lower court’s holding was based on the fact that it was not the consumer but the lender that obtained the policy from the mortgage insurer and the lender was also the policy’s beneficiary. In its brief, the FTC urges reversal of the district court’s decision, arguing that even though the consumer was not the beneficiary of the policy, the insurance still related to the consumer. The FTC argues that the mortgage insurer's action falls under the "insurance prong" of FCRA's definition of adverse action and urges the court to apply the very broad interpretation of insurance adverse action adopted by the Ninth Circuit in the Reynolds case, in which an offer of any premium rate greater than the lowest available triggers the FCRA adverse action notice requirement. To read the brief in its entirety, see http://www.ftc.gov/os/2006/03/BriefAmicusCuriaeoftheFTCinWhitfieldv.Radian.pdf

FTC Issues Final Order Against DSW Inc. Related to 2005 Security Breach. On March 14, 2006, the Federal Trade Commission (FTC) unanimously approved a final consent order against DSW Inc. The FTC’s complaint alleged that DSW failed to provide reasonable and appropriate security for personal information collected at its stores, which resulted in a security breach in April 2005 that compromised approximately 1.4 million credit and debit cards along with over 96,000 checking accounts and driver’s license numbers. According to the FTC, DSW’s practices were unfair and deceptive acts or practices as specified under Section 5 of the FTC Act. The order requires DSW to create a comprehensive information security program and to obtain an assessment of its security practices from a qualified, objective, third-party professional every two years. The FTC approved the order in final after receiving public comment on it. Although the Commission, as is typical, did not modify its order in response to comments, it did respond to a comment by Bank of America that noted that the order applies to a broader range of information than the information subject to the Gramm-Leach-Bliley Act (GLB) privacy provisions, including information that is on the public record. In its response, the FTC explained that the GLB definitions do not control an action under Section 5 of the FTC Act. It justified coverage of public-record information in the order as “fencing-in relief . . . designed to prevent future unlawful conduct,” because certain publicly-available records contain information that could be used in identity theft. The complaint, order, public comments, and FTC responses are available at http://www.ftc.gov/os/caselist/0523096/0523096.htm

Board Requires Edge and Agreement Corporations, U.S. Branches of Foreign Banks to Have AML Programs. On March 15, 2006, the Board of Governors of the Federal Reserve System (Board) announced a final rule under which Edge corporations, agreement corporations, and U.S. branches, agencies and offices of foreign banks (all as defined under Regulation K) will have to develop programs "reasonably designed to assure and monitor compliance" with the requirements of the Bank Secrecy Act, including customer identification, currency transaction reporting, and suspicious activity reporting. As with other types of financial institutions subject to these requirements, the institutions covered by this new rule are formally required to (i) establish a system of internal controls to assure ongoing compliance; (ii) arrange for independent testing of compliance; (iii) designate an individual or individuals responsible for coordinating and monitoring day-to-day compliance; and (iv) arrange training for appropriate personnel. In addition, as with other types of financial institutions, the newly covered institutions are implicitly expected to engage in a searching risk analysis, adapting their systems of internal controls to the risks thereby uncovered. The primary divergence between the compliance requirements of newly covered institutions and those already covered is that foreign bank branches' compliance programs can be approved by delegates acting under the express authority of those banks' boards of directors, not by the boards themselves. While not specifically part of the new regulation, the Board takes this opportunity to remind institutions already covered by Bank Secrecy Act regulations that a bank's anti-money laundering policies, procedures and processes are expected to be enterprise-wide, applying to the bank's activities throughout the world, not simply in the United States. For more information, see http://www.federalreserve.gov/BoardDocs/Press/bcreg/2006/200603152/attachment.pdf.

OCC Clarifies Community Development Investment Authority For Investments in Minority Owned Banks and Thrifts. On March 17, 2006, the Office of the Comptroller of the Currency (OCC) announced a new interpretive "Question and Answer" to explain the criteria under which a national bank may invest in a minority-owned bank or thrift under the Part 24 community development investment authority. Making such investments can earn banks and thrifts positive consideration towards their Community Reinvestment Act (CRA) ratings. This Question and Answer clarifies that, consistent with CRA criteria, an OCC-regulated bank may make a Part 24 investment in any minority-owned bank or thrift that serves the local community in which it is chartered. To view information about the Part 24 authority or this policy change, see http://www.occ.gov/cdd/commonpart24.htm#MWOB.

Financial Regulation Agencies Issue Advisory on Bird Flu Pandemic Preparedness. On March 15, 2006, the federal bank and thrift regulatory agencies (the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and Office of Thrift Supervision) issued an interagency advisory to financial institutions and their technology service providers on the possible impact a pandemic influenza outbreak might have on the delivery of critical financial services. The advisory outlines the roles and responsibilities of financial institutions under the National Strategy for Pandemic Influenza, issued by the White House in November 2005. To view the advisory, see http://www.federalreserve.gov/boarddocs/press/bcreg/2006/20060315/attachment.pdf.

FDIC Increases Insurance Coverage to $250,000 on Certain Retirement Accounts. On March 14, 2006, the Federal Deposit Insurance Corporation (FDIC) announced that it had approved final rules that will increase the deposit insurance coverage from $100,000 to $250,000 on a variety of retirement accounts, its first increase in federal deposit insurance coverage in more than 25 years. The increased coverage will apply primarily to traditional and Roth IRAs at one insured institution, but also include self-directed Keogh accounts, “457 Plan” accounts for state government employees, and employer-sponsored “defined contribution plan” accounts that are self-directed (primarily 401(k) accounts). The final rules also establish a method by which the FDIC will consider increases in the insurance limits on all deposit accounts every five years, beginning in 2011. The rule increasing the coverage to $250,000 becomes effective on April 1, 2006. To view the official press release and a list of FDIC resources regarding the effect of the new law on deposit insurance coverage, see http://www.fdic.gov/news/news/press/2006/pr06029.html.

STATE ISSUES

Washington State Passes Strict Amendments to Broker Practices Act. On March 9, 2006, the Governor of Washington signed House Bill 2340, which regulates mortgage brokers and loan originators and amends the Mortgage Broker Practices Act. The bill strengthens the Mortgage Broker Practices Act by: (i) establishing liability for supervisory authority, (ii) giving the Washington State Department of Financial Institutions (DFI) expanded oversight authority to conduct audits, and (iii) requiring broker compliance with additional federal statutes (including ECOA, Gramm-Leach-Bliley, privacy rules, HMDA, FTC advertising rules, FTC Telephone Sales Rule, the Telemarketing and Consumer Fraud Abuse Act, and “any other applicable mortgage broker or loan originator activity covered by the acts”), among other things. In addition, all loan originators will be required to pass a test, to complete continuing education requirements, and to hold a license in order to continue conducting business in Washington after January 1, 2007. For a copy of the legislation, see http://www.dfi.wa.gov/cs/mortgage_rulemaking.htm.

Bill Introduced to Repeal Montgomery County Anti-Discrimination Ordinance. On March 14, 2006, the Montgomery County, Maryland Council introduced a bill (4-06) to repeal the County’s anti-discrimination ordinance (36-04), whose implementation was recently enjoined by the Montgomery County Circuit Court (see InfoBytes Special Alert for March 7, 2006). According to a recently issued statement from Councilmember Mike Knapp, a sponsor of the bill, “many lenders have already decided that [the ordinance] presents them with unquantifiable risks, and therefore is so potentially onerous, that they have chosen not to provide loans to persons residing in Montgomery County.” As reported in previous issues of InfoBytes, the ordinance, among other things, allows plaintiffs to recover up to $500,000 in damages for “humiliation and embarrassment.” A public hearing on the bill to repeal the ordinance is scheduled for April 25, 2006. For a copy of the legislative file, see http://www.montgomerycountymd.gov/content/council/agpackets/060314/20060314_05-1.pdf.

Wisconsin Amends Law to Permit Prepayment Penalties on Variable Rate Loans. On March 10, 2006, Wisconsin’s Governor signed 2005 WI AB 456 (the Act) into law, amending Wis. Stat. § 138.056, which covers variable rate loans, to permit lenders to charge prepayment penalties in connection with variable rate loans under certain circumstances. Specifically, a lender may not include a prepayment penalty in connection with a variable rate loan using an approved index unless all of the following are satisfied: (i) the lender also makes variable rate loans without prepayment penalties and provides the borrower with a written statement notifying the borrower of this; (ii) at the time of the offer of the variable rate loan the borrower acknowledges, in writing, receipt of the statement (as specified in Wis. Stat. § 138.056); (iii) the penalty is limited to a prepayment that is made within 3 years of the date of the loan; (iv) the prepayment is not made in connection with the sale of a dwelling or mobile home securing the loan. The foregoing applies only to variable rate loans made, refinanced, renewed, extended, or modified on or after March 25, 2006. To view the Act in its entirety, see http://folio.legis.state.wi.us/cgi-bin/om_isapi.dll?clientID=28808329&infobase=billhist.nfo&softpage=Browse_Frame_Pg.

Georgia Clarifies Which Lead Generation Activities Require Licensing. In its February, 2006 Mortgage Activities Newsletter, the Georgia Department of Banking and Finance clarified which activities require a license under the Georgia Residential Mortgage Act ("GRMA") to sell mortgage leads or collect information from potential borrowers. For instance, Individuals or companies must be licensed if they, at their own initiative and without a written contract to solicit from a GRMA licensee, contact Georgia consumers and generate a list of potential residential mortgage contacts for sale to such licensees. On the other hand, there are limited situations in which a GRMA license may not be required to engage in these types of activities. For more information, see http://www.state.ga.us/dbf/mortpdf/imortfeb.pdf.

District of Columbia Amends Code Pertaining to Mortgage Validity. Effective April 3, 2006, lenders operating in the District of Columbia will be required to obtain, when applicable, the signature of a person’s “registered domestic partner” in order to assure the validity of a mortgage or deed of trust. Previously, Chapter 3 of Title 14 of the District of Columbia Code required the signature of a “husband and wife” in order to make a mortgage or deed of trust binding or valid; however, this language has been amended such that the signature of a “spouse or domestic partner” is required. For the full text of the statute, see http://www.dccouncil.washington.dc.us/images/00001/20060113145021.pdf.

COURTS

ATM Notice that it May Charge a Fee to Non-Bank Customers Does Not Violate the EFTA. In Morrissey v. Webster Bank, the U.S. District Court of Massachusetts granted a bank's motion for summary judgment and dismissed a consumer’s claim alleging that the bank was required to disclose on the ATM that it will impose a fee for withdrawals or cash advances, if it imposes a fee on any customer engaging in those transactions. The bank’s notice on the ATM stated that a service fee may apply to cash withdrawals or advances made using non-Webster Bank cards. After making a cash withdrawal at the ATM and specifically agreeing on-screen during the transaction to a fee, the plaintiff, a non-bank customer, sued alleging that under the Electronic Funds Transfer Act, the bank was required to state on the machine that it will charge a fee if any instances existed in which a fee would be charged. The Judge dismissed the claim and stated that because instances exist where the bank would not impose the fee, the bank’s notice on the machine that it may impose a fee was sufficient. Furthermore, the bank need only disclose on the screen that it will impose the fee when a fee will definitely be imposed. Morrissey v. Webster Bank, No. 05-10984, 2006 U.S. Dist. LEXIS 6543 (D.C. Mass. Feb 22, 2006).

MISCELLANY

SEC, UK FSA Sign Regulatory Cooperation Arrangement. On March 14, 2006, the Securities and Exchange Commission (SEC) and the United Kingdom Financial Services Authority (UK FSA) signed a comprehensive arrangement to increase cooperation in market oversight and supervision. This arrangement will facilitate the exchange of confidential supervisory information currently collected by both regulators. Among other things, the arrangement provides for exchange of information about regulated entities and investment banking groups that operate both in the United States and the United Kingdom. To view the SEC press release discussing the arrangement, see http://www.sec.gov/news/press/2006-36.htm.

Sites Chosen for FDIC’s Public Hearings on Proposed Wal-Mart Bank. On March 14, 2006, the Federal Deposit Insurance Corporation (FDIC) announced that the public hearings on Wal-Mart Bank’s application for federal deposit insurance will be held in April, 2006 in the Washington, DC, and Kansas City, Missouri, areas. Wal-Mart Bank is a proposed industrial loan company based in Salt Lake City, Utah. The FDIC has made the non-confidential portions of Wal-Mart Bank’s application, which includes supporting data, supplementary information and comments received on the application, accessible to the public at http://www.fdic.gov/regulations/laws/walmart/index.html. For a copy of the FDIC’s press release, see http://www.fdic.gov/news/news/press/2006/pr06028.html.

FIRM NEWS

On March 20, 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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