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InfoBytes

CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

September 30, 2005

FEDERAL ISSUES

GAO Report, New Legislation Call For Greater ILC Oversight. On September 22, 2005 Rep. Jim Leach (R-IA) announced the findings of a General Accountability Office (“GAO”) report on Industrial Loan Corporations (“ILCs”) and introduced legislation calling for increased regulatory oversight of ILCs. The GAO report found that ILCs have experienced significant growth and evolution over the past two decades and pose more of a risk of loss to the bank insurance fund than other insured depository institutions operating in holding companies, because the FDIC has less supervisory authority over ILC holding companies than the consolidated supervisors of bank and thrift holding companies. Also, an exemption in current federal bank law allows ILC parents to mix banking and commerce more than the parents of other depository institutions. As a response to the report’s findings, Representative Leach’s proposed Financial Safety and Equity Act would require ILC holding companies to become financial holding companies regulated by the Federal Reserve Board under the Bank Holding Company Act. The proposed Act includes a delayed period of effectiveness for certain companies holding that held ILCs on January 1, 2005. To view the GAO ILC report, see http://www.gao.gov/new.items/d05621.pdf.

HUD Announces Lender Insurance Initiative, Streamlines Appraisal Process. On September 26, 2005 HUD announced FHA’s new Lender Insurance Program designed to enable high-performing FHA-approved Direct Endorsement mortgagees with acceptable default and claim rates to endorse FHA mortgage loans without a pre-endorsement review conducted by FHA. Instead, an approved mortgagee will perform its own pre-endorsement review and deliver mortgage loan level data to FHA via the FHA Connection. Through the FHA Connection, the mortgagee will be able to endorse the mortgage loan automatically. Also on September 26th, HUD announced that FHA is eliminating its “Valuation Conditions” and “Homebuyer Summary” appraisal-related forms and updating its appraisal protocol to conform with appraisal forms promulgated by Fannie Mae in order to “reduce burdensome and duplicative paperwork.” To access HUD’s announcements, see http://www.hud.gov/news/release.cfm?content=pr05-131.cfm; http://www.hud.gov/news/release.cfm?content=pr05-132.cfm.

House Subcommittee on Housing and Community Opportunity Addresses Mortgage Licensing and Regulation. On September 29, 2005, the Subcommittee convened to address “the benefits, controversies, and problems surrounding” state licensing and regulation of mortgage bankers and brokers. The hearing featured testimony from representatives of the Mortgage Bankers Association, the National Association of Mortgage Brokers, the American Bankers Association, and the Conference of State Bank Supervisors, among others. The speakers discussed a wide range of issues relating to the current state regulatory environment, including the need for uniform licensing standards and education requirements, and the role of federal legislation (see H.R. 1295—“The Responsible Lending Act of 2005”) in addressing those needs. For more information, see http://financialservices.house.gov/hearings.asp?formmode=detail&hearing=419

Federal Banking Agencies Exempt Transfer Agents Affected by Katrina. On September 28, 2005 the Federal Reserve Board, the FDIC and the OCC announced the issuance of orders granting emergency relief to bank transfer agents affected by Hurricane Katrina. The orders conditionally exempt banks, bank holding companies and bank subsidiaries acting as transfer agents from compliance with Section 17A of the Securities Exchange Act of 1934. The relief applies retroactively for the period beginning August 29, 2005 through October 17, 2005. The orders complement an order issued by the Securities and Exchange Commission on September 15, which similarly exempts transfer agents under the SEC's jurisdiction from the requirements on Section 17A. For a copy of the FDIC's relevant press release, including a copy of its order, see http://www.fdic.gov/news/news/press/2005/pr9605.html.

Mortgage Company Settles FTC Data Security Charges. Superior Mortgage Corp, a lender with 40 branch offices in 10 states and multiple websites, has agreed to settle Federal Trade Commission charges that the company violated federal law by failing to provide reasonable security for sensitive customer data and falsely claiming that it encrypted data submitted online. The settlement bars the company from misrepresenting the extent to which it maintains and protects the privacy, confidentiality or security of any personal information collected from or about consumers and requires the company to establish data security procedures to be reviewed by independent third-party auditors for 10 years. The FTC complaint alleged that the company violated its Safeguards Rule, adopted under the Gramm-Leach Bliley Act, by failing to do the following: assess risks to customer information until more than a year after the rule took effect, implement appropriate password policies, encrypt or otherwise protect sensitive customer information before sending it by email, and ensure that its service providers were providing appropriate security for customer information and addressing known security risks in a timely manner. The agreement is subject to public comment, after which the FTC will decide whether to make it final. For the FTC's press release, see http://www.ftc.gov/opa/2005/09/superior.htm.

Greenspan Voices Concern to American Bankers Association. On September 26, 2005, Federal Reserve Chairman Alan Greenspan issued a warning indicating that interest-only mortgages, more “exotic” adjustable rate mortgages, home equity lines of credit, and other risky mortgages may be inducing families to take on too much risk. Citing recent data compiled by the Federal Reserve research staff, Greenspan connects these new riskier mortgages to a decline in personal savings, as well an increase in consumer consumption over the last decade. In his speech to the American Bankers Association Annual Convention, Greenspan noted that as interest rates increase and home value decreases, the use of risky financial vehicles may result in losses for homeowners and lending institutions. However, Greenspan further stated that most homeowners have enough home equity to cushion a drop in home prices. For the complete text of the speech, see http://www.federalreserve.gov/boarddocs/speeches/2005/200509262/default.htm

STATE ISSUES

Consumer Credit Counseling Service Providers to be Licensed by South Carolina Department of Consumer Affairs. The Consumer Credit Counseling Act became law in South Carolina on June 2. Under this law, consumer credit counseling organizations and credit counselors engaged in debt management and credit repair services must be licensed by the Department of Consumer Affairs. Under S.B. 607, Act 111 of 2005, credit counselors must apply for a license beginning September 1, 2005. Licensees are subject to bonding and must undergo criminal background checks. Credit counselors must complete at least 12 hours of continuing education every 2 years. Written agreements disclosing the terms of debt management plans must be used. Credit counselors may not make false or misleading statements, permit consumers to waive their rights, charge consumers to cancel plans, accept referral fees, make loans to consumers or issue credit cards to them, or compensate employees based on the number of consumers enrolled in debt management programs. Violation of the law is a misdemeanor, punishable by $500 fine or 6 months’ imprisonment or both (but if the violation is willful, the monetary penalty is $550 per violation); injured consumers also have a right of private action against credit counseling companies. The Department's summary of the new law is at:http://www.scconsumer.gov/licensing/credit_counseling/summary.htm; frequently asked questions are answered at: http://www.scconsumer.gov/faqs/credit_counseling.htm; and a copy of the law is at: http://www.scstatehouse.net/sess116_2005-2006/bills/607.htm.

COURTS

“Worse Than Best” Mortgage Insurance Premium Triggers Adverse Action Notice. The U.S. District Court for the Western District of Kentucky held that a mortgage insurer that offered mortgage insurance at a rate that was higher than the best rate available had taken adverse action against the consumer, under the “insurance prong” of the Fair Credit Reporting Act’s definition of that term. The court rejected the mortgage insurance company’s argument that the “credit prong” of the FCRA definition should apply because the mortgage insurance was an integral part of the transaction. (If the credit prong had applied, then adverse action would not have occurred under the “accepted counteroffer” exception to that definition.) It also rejected the company’s argument that adverse action did not occur because the offered rate was lower than the rate for MI that the lender had quoted to the borrower, relying heavily on the recent Reynolds decision by the U.S. Court of Appeals for the Ninth Circuit (see InfoBytes, Aug. 12, 2005, available at http://www.buckleykolar.com/publications/InfoBytes081205.html). Broessel v. Triad Guaranty Insurance Corp., 2005 WL 2260498 (W.D. Ky. Sept. 15, 2005).

Hearing Held on Credit Card Interchange Fee Litigation. On September 29, 2005, a federal judicial panel heard arguments on preliminary issues arising from more than 40 lawsuits filed nationwide alleging collusive practices by credit card issuers and major banks in setting interchange fees. Interchange fees are paid by a merchant every time a consumer uses a credit or debit card to pay for a purchase. The hearing centered around preliminary issues, including potential consolidation of the related cases, the venue for the cases, which judges will be assigned, and which plaintiffs would lead the potential class.

MISCELLANY

Fed's Consumer Advisory Council to Meet. The Consumer Advisory Council of the Federal Reserve Board will hold its next meeting on Thursday, October 27, 2005 at 9 a.m.. The Council plans on discussing the following topics: the Home Mortgage Disclosure Act, the Economic Growth and Regulatory Paperwork Reduction Act, nontraditional mortgage loans, and Hurricane Katrina. The meeting is open to the public, but registration by October 25 at https://www.federalreserve.gov/secure/forms/cacregistration.cfm is required. See http://www.federalreserve.gov/boarddocs/press/other/2005/20050929/default.htm for the relevant press release.

ACORN Study. On September 29, 2005 ACORN released a study of the recently released HMDA data which identifies racial disparities within many metropolitan areas. The study can be reviewed at http://www.acorn.org/

FIRM NEWS

An article written by Jacob Thiessen and Kirk Jensen titled “New Requirement for Fannie and Freddie may mean suspicious activity reporting for mortgage lenders” was published in the October 5, 2005 edition of Consumer Financial Services Law Report. For a copy of the article, see http://www.buckleykolar.com/publications/

On October 7, 2005, Andrea Lee Negroni will make a presentation at the Compliance Technologies “Mortgage Lending Industry Diversity Conference” at the Crystal Gateway Marriott Hotel, on the subject of language barriers and accent discrimination and their role in the marketing of mortgage products to Asian-Americans and Hispanics. To register for the October 6-7 conference, go to http://mortgageindustrydiversity.com/registration.htm#confreg.

On November 3-4, 2005, Jerry Buckley, Margo Tank and Frank Supik will be speaking at the SPeRS/MISMO Workshop in Washington, DC. CampusMBA is hosting the workshop. For more information, see “Classroom-Based Courses” at http://www.campusmba.org.

On November 30-December 2, 2005, Margo Tank will be speaking at MBA’s Legal Issues in Mortgage Technology Conference, November 30 – December 2, in San Diego, California. For more information, see http://events.mortgagebankers.org/legaltech2005/default.html.

© Buckley Kolar, LLP 2005. 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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