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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

June 23, 2006

FEDERAL ISSUES

SEC Adopts New Rules and Enhanced Disclosure Requirements in Connection with “Fund of Funds” Arrangements. On June 20, the Securities and Exchange Commission (SEC) adopted three new rules under the Investment Company Act of 1940 that increase the ability of investment companies (funds) to invest in shares of other funds. Subject to certain exceptions, Section 12(d)(1) of the Act prohibits "fund of funds" arrangements. New rules 12d1-1, 12d1-2 and 12d1-3 under the Act expand the ability of a fund to invest in shares of other funds in a manner consistent with the public interest and the protection of investors. The SEC also adopted amendments to the forms used by funds to register under the Act and to offer their shares under the Securities Act of 1933. The amendments to Forms N-1A, N-2, N-3, N-4 and N-6 are intended to improve the transparency of the expenses of funds of funds by requiring that the expenses of acquired funds be aggregated and shown as an additional expense on the prospectus fee table of such funds. The effective date for the new rules is July 31, 2006. The compliance date for the new disclosure requirements is January 2, 2007. The SEC release adopting the new rules and rule amendment is available at http://www.sec.gov/rules/final/2006/33-8713.pdf.

FTC and DOJ Permit Electronic Filing of Premerger Notification. On June 20, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) announced the implementation of an electronic filing system that allows merging parties to submit the premerger notification filings required under the Hart-Scott-Rodino (HSR) Act via the Internet. Parties to a proposed merger now have the option of completing and submitting the required form and all documentary attachments electronically. Hard copies of the filings, however, may still be submitted. According to the FTC and the DOJ, a number of security measures have been adopted to ensure the confidentiality of electronically submitted documents. For more information, see http://www.ftc.gov/opa/2006/06/premerger.htm.

HUD Proposes to Add the One-Year LIBOR as an Acceptable Index. On June 19, the Department of Housing and Urban Development (HUD) issued a proposed rule to add the one-year London Interbank Offered Rate (LIBOR) as an acceptable index for the interest rate of HUD-insured Adjustable Rate Mortgage (ARM) products. Under current regulations, only the weekly average yield of U.S. Treasury securities, adjusted to a constant maturity of one year (commonly referred to as the Constant Maturity Treasury, or CMT, index), may be used as the index of HUD-insured ARM loans. In the preamble to the proposed rule, HUD states that the addition of the LIBOR index for FHA-insured loans is necessary due to the popularity of LIBOR-based ARM loans and that permitting LIBOR-based loans will allow lenders to offer lower margins to borrowers because these loans enjoy a more robust secondary market. Comments on the proposed rule are due by August 18, 2006. To view the proposed rule in its entirety, please see http://a257.g.akamaitech.net/7/257/2422/01jan20061800/edocket.access.gpo.gov/2006/06-5494.htm.

Secretary of HUD Issues Statement Supporting “Expanding American Homeownership Act.” On June 19, U.S. HUD Secretary Alphonso Jackson issued a statement pledging his full support for the “Expanding American Homeownership Act” introduced to the U.S. Senate by Senator Jim Talent of Missouri. Secretary Jackson emphasized that the Act, if passed, would bring several improvements to FHA lending, including (i) eliminating the current statutory three percent minimum down payment, to be replaced by less demanding down payment requirements nearer those found among private lenders, (ii) creating a new, risk-based insurance premium structure for FHA that would match the premium amount with the credit profile of the borrower, and (iii) increasing and simplifying FHA’s loan limits. The House version of the Act (H.R. 5121) was introduced on April 6, 2006 and was unanimously approved by the House Financial Services Committee on May 24, 2006. For the complete text of the statement, please see http://www.hud.gov/news/release.cfm?content=pr06-069.cfm.

HUD Announces Review of Fannie and Freddie Investments. On June 13, HUD Secretary Alphonso Jackson announced a plan to review Fannie Mae's and Freddie Mac's debt and equity investments. Speaking before a congressional caucus, Secretary Jackson asserted that he will be drawing on HUD's power under the Federal Housing Enterprises Financial Safety and Soundness Act to increase the transparency of the Government Sponsored Enterprises (GSEs). With this review process, HUD hopes to ensure that the activities of the GSEs comport with their individually mandated government charters and public purposes. For more information on this announcement, please see http://www.hud.gov/news/release.cfm?content=pr06-065.cfm.

Mark W. Olson Named Chairman of Public Company Accounting Oversight Board. SEC Chairman Christopher Cox announced on June 19, that Federal Reserve Board Governor Mark W. Olson has been appointed Chairman of the five-member Public Accounting Oversight Board. Olson will succeed Acting Chairman Bill Gradison, who will remain a member of the Board. Olson, whose term as Chairman will expire in 2010, has previously served as President of the American Bankers Association and as a partner with Ernst & Young. The Public Accounting Oversight Board is a private-sector, non-profit corporation, created by the Sarbanes-Oxley Act of 2002, “to oversee the auditors of public corporations in order to protect the interests of investors and further the public interest in preparation of informative, fair and independent audit reports.” For further information see http://www.sec.gov/news/press/2006/2006-97.htm.

BANKS

Federal Reserve Requests Comments on Intraday Liquidity Consultation Paper. On June 15, the Federal Reserve Board requested public comment on a consultation paper that it hopes will assist the Board in obtaining broader information on intraday liquidity management issues. This paper is also intended to lay the groundwork for discussions about the long-term evolution of its Payment System Risk (PSR) Policy. It also requests views on potential changes in market practices and PSR Policy that could reduce operational risks associated with Fedwire transfers and associated transactions, while maintaining or improving the efficiency of the payment system. Comment is requested by December 15, 2006. The press release may be read at http://www.federalreserve.gov/boarddocs/press/other/2006/200606152/default.htm.

Agencies Announce Revisions to Uniform Standards of Professional Appraisal Practice. On June 22, the federal banking agencies and the National Credit Union Administration notified institutions under their jurisdiction that the Appraisal Standards Board issued the 2006 version of the Uniform Standards of Professional Appraisal Practice (USPAP). Generally, institutions must ensure that appraisals that support federally-related transactions (i.e., any real estate-related financial transaction that an agency or any regulated institution engages in or contracts for and that requires the services of an appraiser), adhere to USPAP and other minimum standard appraisal guidelines. Among the changes are the inclusion of a new “Scope of Work Rule” that clarifies the type and extent of research and analysis necessary for the appraisal. For a copy of the notices, see http://www.fdic.gov/news/news/financial/2006/fil06053a.html.

COURTS

Federal Appeals Court Overturns SEC Hedge Fund Regulation. On June 23, the U.S. Court of Appeals for the District of Columbia Circuit vacated an SEC regulation that required managers of hedge funds to register with the SEC as investment advisors under the Investment Advisers Act of 1940. The court remanded the matter to the SEC for further consideration, holding that the adoption of the registration requirement for hedge fund managers was an arbitrary exercise of the SEC's authority. The court found unreasonable and unsupported by the language and legislative history of the Advisers Act and the SEC's own prior interpretations, the SEC's determination in the rule to count each investor in a hedge fund vehicle (as opposed to the vehicle itself) as a "client" for purposes of determining whether the manager advised 15 or more clients and thus could not qualify for the statutory exception from registration set forth in Section 203 of the Advisers Act. Since the SEC's rule required hedge fund managers to be registered by February 1, 2006, it is unclear from the court's opinion whether managers who registered by that date would now have to file an application with the SEC to withdraw their registration (a Form ADV-W) in order to cease being subject to the Advisers Act provisions, or whether the decision operates to automatically rescind their status as registered advisors. Goldstein, et al. v. Securities and Exchange Commission, No. 04-1434 (DC Cir. 2006). To view this decision see http://www.cadc.uscourts.gov/bin/opinions/allopinions.asp.

Seventh Circuit Rejects Fleet Class Settlement. The U.S. Seventh Circuit Court of Appeals yesterday rejected, for the second time, a nationwide class action settlement reached by Fleet Mortgage in Mirfasihi v. Fleet Mortgage Corp., No. 05-3669 (7th Cir. June 19, 2006). The suit alleged that Fleet sold customer information to third-party telemarketers in violated of TILA, FCRA, and various state consumer protection laws. The circuit court had previously rejected a class action settlement in January 2004. See, Mirfasihi v. Fleet Mortgage Corp., 356 F.3d 781 (7th Cir. 2004). In this latest opinion, the 7th Circuit criticized several aspects of the settlement, but its primary concern was that the settlement awarded monetary relief to only one of the two classes whose claims were being settled, giving nothing to the class of customers who never purchased anything from the telemarketers and suffered no actual damages. The Court suggests that the district court should consider the potential state law remedies this class of members, with no actual damages, would have in all 50 states, not just a select handful. This opinion continues a pattern of scrutiny by the 7th Circuit regarding class action settlements. For a copy of this decision please e-mail .

District Court Upholds OTS Interpretation on Preemption of State Licensing Laws for Thrift Agents. On October 25, 2004, the Office of Thrift Supervision (OTS) issued an opinion holding that the exclusive agents of federal thrifts enjoyed preemption from state laws to the same extent as did the federal associations themselves. See the November 12, 2004 issue of InfoBytes. On June 21, the US District Court for Connecticut ruled that the OTS's interpretation of the preemptive effect of its own regulations was to be accorded controlling weight and was not clearly erroneous. As a result, the court dismissed the case against State Farm Bank and a State Farm insurance agent filed by the Connecticut Banking Commissioner, which had asserted, among other things, that a State Farm agent needed a mortgage lender's license to originate loans on behalf of the bank. State Farm Bank, F.S.B. and Lopreiato v. Burke, 3:05-cv-00808-JBA (June 21, 2006). For a copy of this decision please e-mail .

Supreme Court Will Hear OCC Preemption Case. On June 19, the United States Supreme Court granted certiorari to hear a case challenging the Office of the Comptroller of Currency’s (OCC) preemption authority over state regulation of operating subsidiaries of national banks. In this case, the Commissioner of the Office of Financial and Insurance Services in Michigan sought to apply state mortgage lending laws to an operating subsidiary of a national bank. The 6th Circuit held that the OCC acted within its authority in preempting the state laws. For more information on the 6th Circuit decision in Wachovia Bank, N.A. v. Watters, 431 F.3d 556 (6th Cir. Mich. 2005), please see the December 23, 2005 issue of InfoBytes.

Court Implies Duty for Attorneys to Check Spam Filters. An Arkansas court recently held that an attorney’s attempt to appeal a judgment was untimely, even though the attorney never actually received notice that the order which he sought to appeal had been entered. Moody v. Farm Bureau Mut. Ins. Co. of Ark., Inc., CA 05-910 (Ark. Ct. App. Mar. 8, 2006). The court had entered an order and sent notice of the order’s entry to the litigants’ attorneys via e-mail. One of the attorneys claimed that he did not receive the e-mail because it had been caught by his internet service provider’s spam filter, but had made periodic attempts to learn whether an order had been entered by checking his postal mail and by asking his secretary to check with the court to determine if an order had been entered. This attorney learned of the order from the other litigant’s counsel after the time for appeal had elapsed and the court entered judgment against his client. The Court noted that its “law imposes a duty on lawyers and litigants to exercise reasonable diligence to keep up with the status of their case.” Nevertheless, the Court determined that the attorney’s efforts fell short of the required reasonable diligence, effectively requiring attorneys to check their spam filters regularly, if they receive important communications or notices through that media. For a copy of the court’s unpublished decision, please go to http://courts.state.ar.us/unpublished/2006a/20060308/ca05-910.html.

Kansas Supreme Court Rules Junior Mortgagee Not Entitled to Surplus Proceeds. In Fidelity Bank v. King, No. 92,410 (Kan. June 16, 2006), the Kansas Supreme Court held that “a junior mortgage holder waives its claim to excess sheriff’s sale proceeds if it fails to appear and assert its position in a senior mortgage holder’s action.” In this case, U.S. Bank, the junior mortgage holder, chose to bid on the property in the foreclosure sale rather than participate in the foreclosure proceeding undertaken by the senior mortgage holder, Fidelity Bank. After the sale, U.S Bank filed a motion requesting that the sheriff distribute the excess sale’s proceeds to U.S. Bank. In the meantime, the debtors had sold their equity of redemption to a third party, River City Enterprises (RCE), which claimed the right to receive the excess proceeds. In awarding the proceeds to RCE, the Court agreed with RCE’s argument that “U.S. Bank had lost any interest it had in the property, including any right to recover surplus proceeds, when it failed to adjudicate its lien in Fidelity’s foreclosure.” U.S. Bank was therefore left with an unsecured claim against the debtors for the unpaid balance of the note. For a copy of this decision please e-mail .

STATE ISSUES

Colorado Passes Foreclosure Bill. House Bill 1387, overhauling Colorado's foreclosure procedures, was recently signed by the Governor. Under the law, borrowers no longer have the right to redemption. However, they are granted a longer cure period prior to the date of sale. The earliest allowable date of sale from the time notice of the public trustee foreclosure is recorded has been extended in many cases to well over one hundred days. The permissible fees that a trustee may charge have also been revised. A copy of the enactment may be obtained at http://www.leg.state.co.us.

Florida Amends Licensing Requirements under the Mortgage Brokerage and Lending Act. On June 13, Florida’s governor signed House Bill 7153, which amends several provisions of the Florida Mortgage Brokerage and Lending Act. The amended law changes the license application process by adding more specific background checking procedures, including additional fingerprinting requirements, and by creating an application procedure for changes of control of a licensee. Other changes effected by the amended law include (1) adding a requirement that licensees notify the Office of Financial Regulation of any changes to information in the license application within 30 days of the change, (2) adding state and federal chartered banks to the list of entities exempt from the Act, and (3) providing that a principal representative will be deemed to have satisfied the 24 hours of classroom instruction requirement if the representative has continuously served in the capacity as personal representative for a licensed entity for at least one year and has not had a lapse in designation as such of more than two years before the license application is submitted. Alternatively, this last requirement is also satisfied if the principal representative currently holds an active license as a mortgage broker in Florida. The changes take effect on October 1, 2006. For the text of the bill, see http://www.myfloridahouse.gov/Sections/Bills/billsdetail.aspx?BillId=33950&BillText= 7153&HouseChamber=H&SessionId=42&.

© 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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