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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

October 21, 2005

FEDERAL ISSUES

Banking Agencies Jointly Publish Advance Notice of Proposed Rule Making for Modifications to Capital Guidelines and Maintenance. On October 20, 2005, the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (FRB), Federal Deposit Insurance Corporation (FDIC), and Office of Thrift Supervision (OTS) (the “Agencies”) published an advance notice of rulemaking. The Agencies are considering various revisions to the existing Basel I risk-based capital framework that would enhance its risk sensitivity. Specifically, the advance notice of proposed rule making discusses, among other things, various modifications that would: (i) increase the number of risk-weight categories, (ii) permit greater use of external ratings as an indicator of credit risk for externally-rated exposures, (iii) expand the types of guarantees and collateral that may be recognized, and (iv) modify the risk weights associated with residential mortgages. These changes would apply to banks, bank holding companies, and savings associations. The Agencies are soliciting comment on these proposals (comments must be received by January 18, 2006.). To view the proposed rule in its entirety, see http://www.occ.treas.gov/fr/fedregister/70fr61068.pdfhttp://frwebgate4.access.gpo.gov/cgi-bin/waisgate.cgi?WAISdocID=90805315794+4+0+0&WAISaction=retrieve.

SEC Proposes Interpretive Guidance on “Soft Dollars.” On October 19, 2005, the Securities and Exchange Commission published for comment an interpretive release on “client commission” practices under the “brokerage and research services” safe harbor of § 28(e) of the Exchange Act. To prevent confusion, the SEC has chosen to use the term “client commission” in lieu of “soft dollars” in the release. The safe harbor provides that money managers, under certain circumstances, do not breach their fiduciary obligations if client commissions are used to pay a broker-dealer more than the lowest available commission rate for a bundle of products and services in excess of the pure execution of the trade. The latest interpretation replaces Sections II and III of the 1986 Release and specifically provides guidance with respect to: (i) the appropriate framework for analyzing whether a particular services falls within the “brokerage and research services safe harbor; (ii) the eligibility criteria for “research”; (iii) the eligibility criteria for “brokerage”; and (iv) the appropriate treatment of “mixed-use” items. The guidance also addresses the money manager’s statutory requirement to make a good faith determination that the commissions paid are reasonable in relation to the value of the brokerage and research services provided and third-party research and commission-sharing arrangements. The comment period is open until November 25. A copy of the release may be obtained at http://www.sec.gov/rules/interp/34-52635.pdf.

FTC and DOJ Urge Michigan Legislators to Reject Minimum Service Requirements for Real Estate Brokers. On October 18, 2005, the Department of Justice and the Federal Trade Commission issued a letter urging the Michigan legislature to reject H.B. 4849, which would enact minimum level service standards for Michigan-licensed real estate brokers. H.B. 4849 would amend Michigan’s Occupational Code to require any real estate broker with an exclusive agreement with a client to provide certain minimum services, including assisting a client in developing and negotiating offers. The federal agencies claim such requirements “will make it more difficult for real estate professionals to provide Michigan consumers with customized real estate brokerage services, and will likely decrease competition among real estate professionals.” H.B. 4849 was passed by the Michigan House of Representatives earlier this month, and the bill is tentatively scheduled for Michigan Senate committee hearings on October 25, 2005. For a copy of the FTC/DOJ joint letter, see http://www.ftc.gov/os/2005/10/051020commmihousebill4849.pdf; H.B. 4849 can be found at http://www.legislature.mi.gov/mileg.asp?page=getObject&objName=2005-HB-4849.

HUD Announces No-Down Payment Mortgages for Hurricane Victims. On October 12, 2005, the Department of Housing and Urban Development announced (HUD News Release 05-143) a mortgage financing program that requires no down payment for people whose homes were damaged or destroyed by Hurricanes Katrina and Rita. Under the Section 203(h) program, the Federal Housing Administration will insure mortgages for those whose residences were in areas declared a disaster by the President and were destroyed or damaged. Qualifying borrowers may use the loans anywhere in the country. For HUD's news release, see http://www.occ.treas.gov/ftp/EAs/ea2005-141.pdf.

OCC Enters Consent Order Involving Bank Secrecy Act. On October 18, the OCC published a consent order which provides useful guidance for banks seeking to perform risk assessments of their products, services, customers and lines of business. If a bank is perceived to lack an adequate “whole bank” assessment, bank examiners could come up with their own assessment and examine the bank based on the risks assessed by them, rather than risks identified by the bank itself. The danger of being evaluated on standards developed by the examiners themselves may be apparent. For a copy of the consent order, see http://www.occ.treas.gov/ftp/EAs/ea2005-141.pdf

Broad Data Security Bill Stalled in Senate Judiciary Committee. On October 20, 2005, Congressional efforts to pass a broad data security bill, which is strongly opposed by many sectors of the business community, were stalled when the Senate Judiciary Committee chair, Arlen Specter, agreed to postpone consideration. The bill would create rules for securing information and notifying consumers about breaches, subject financial firms to two sets of rules for notifying individuals of breaches, and increase civil and criminal penalties for violations. Specter plans to resume consideration of the bill next week. The Committee unanimously approved a narrower, industry-backed data security bill introduced by Senator Sessions (S. 1326) which prohibits states from setting conflicting rules and allows financial firms to continue operating under security rules established by the Gramm-Leach-Bliley Act. To view the Specter/Leahy Bill, go to: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_bills&docid=f:s1789is.txt.pdf. To view the Sessions bill, see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_bills&docid=f:s1326is.txt.pdf.

STATE ISSUES

California Department of Real Estate Cancels Broker’s License Based on Misrepresentation of Yield Spread Premiums. The fall 2005 issue of the “Mortgage Loan Bulletin” of the California Department of Real Estate discusses a licensed broker’s responsibility to disclose compensation to its clients. Based on the failure of one licensed broker to fully disclose all compensation, the DRE terminated the license of the company and its designated officer. The same issue of the Mortgage Loan Bulletin includes an article indicating that a licensed real estate broker may conduct real estate activities for more than one licensee. See the Bulletin at http://www.dre.ca.gov/pdf_docs/mlb_fall05.pdf

Mississippi Foreclosure Relief. A 1980 Mississippi law provides relief from “inequitable mortgage foreclosures” in the event of a certain disasters declared by the President and Governor of Mississippi. On October 4, 2005, Governor Barbour issued a proclamation stating that Hurricane Katrina is a disaster to which the inequitable foreclosure statute would apply and that all counties in Mississippi are covered. All Mississippi foreclosures in the state will be regulated by these special statutory provisions, which are contained in Sections 89-1-301 through 89-1-329 of the Mississippi Code (Miss Code Ann. §§ 89-1-301 –329).

New Address for Nevada Financial Institutions Division. Beginning September 13, 2005, the Las Vegas office of the Nevada Financial Institutions Division has moved to 2785 E. Desert Inn Rd., Suite 180, Las Vegas, Nevada 89121. The phone is (702) 486-4120 and the fax is (702) 486-4563.

New York Mayor Bloomberg Announces Innovative Initiative To Combat Predatory Lending. On October 18, Mayor of New York Michael Bloomberg announced a $1.35 million initiative to combat predatory lending in the city. It will consist of financial education, legal assistance and credit assistance and will initially be offered to the neighborhoods of Southeast Queens, Bedford-Stuyvesant and Bushwick, which are believed to have a high incidence of predatory lending. The elderly, first time buyers, fixed income homeowners and minority and immigrant homeowners are the most victimized by predatory lending, according to the joint announcement by the Mayor and New York Department of Housing Preservation and Development (HPD) Commissioner Shaun Donovan. The target neighborhoods have foreclosure rates two to four times higher than other neighborhoods in New York City, running approximately 10% of the total loans on residential 1-4 family homes. The New York Banking Department announced its support for the program. For the full press release, see http://www.banking.state.ny.us/pr051018.htm

Registration Date Draws Near for Washington Tax Refund Anticipation Loan Facilitators. The Washington Department of Financial Institutions is reminding companies that offer tax refund anticipation loans that they must file a registration form not later than December 31. The law requiring registration, called the Tax Refund Anticipation Loan Act ((S.B. 5692), became effective July 24, 2005. A "facilitator" is a person who receives or accepts an application for a refund anticipation loan, delivers a check for refund anticipation loan proceeds, or in any other manner acts to allow the making of a refund anticipation loan. However, banks, thrifts, savings associations, industrial banks, and credit unions are not considered facilitators. To register, facilitators must complete the registration form and file it with a $35 fee and a copy of the IRS letter authorizing them as electronic filing providers. Registrants must make certain disclosures to consumers who obtain refund anticipation loans, and borrowers have a cooling off period to cancel such loans. The registration forms are on the Department’s website and the announcement of the pending registration deadline is at http://www.dfi.wa.gov/cs/ralletter.pdf

COURTS

Court Rejects FCRA “Firm Offer” Prescreening Case. In Perry v. First National Bank, No. 05 C 1470, 2005 U.S. Dist. LEXIS 23100 (N.D. Ill. Sept. 13, 2005), the U.S. District Court for the Northern District of Illinois dismissed a claim that a credit card issuer did not comply with the Fair Credit Reporting Act’s “firm offer” requirement for credit bureau prescreenings. The consumer alleged that the offer was a sham, and not a firm offer, because the fees to open the account and the annual fees would create an initial balance of $175 and the card had a minimum credit limit of only $250, leaving only $75 in credit available. The court rejected this allegation and granted summary judgment to the card issuer, finding that the credit line, although small, had value and the offer was not a sham. The court also dismissed the consumer’s claim under Section 615 of FCRA that the required prescreening disclosures in the solicitation were not clear and conspicuous, agreeing with the courts in Murray v. Household Bank and Murray v. Cross Country Bank, that the private right of action for violations of Section 615 was repealed by the Fair and Accurate Credit Transactions Act of 2003 (see InfoBytes, September 23 http://www.buckleykolar.com/publications/InfoBytes092305.html and August 26, 2005 http://www.buckleykolar.com/publications/InfoBytes082605.html).

Court Refuses to Dismiss FCRA “Firm Offer” Prescreening Case; Denies Arbitration Based on Auto Sales Contract. In another prescreening case, the US District Court for the District of Maryland declined to dismiss the consumer’s allegation that an offer of a minimum loan of $300 to purchase an automobile was a sham and did not meet the FCRA “firm offer” requirement, noting that $300 was far less than the lowest cost of an available vehicle and that the offer letter “lack[ed] critical information about the credit product [such as] an interest rate or range of interest rates, . . . the repayment period, [or] the method by which interest will be compounded.” The court also declined to dismiss the consumer’s claim that the disclosures under Section 615 were not “clear and conspicuous,” holding that “one could reasonably conclude that the disclosures made ... are designed to ensure minimal attention by the reader.” The court did not address whether Section 615 still provides for a private right of action. Before ruling on the FCRA issues, the court declined to enforce the arbitration clause contained in the sales contract for the automobile, holding that the allegation that the dealer’s prescreening program violated FCRA did not bear a “significant relationship” to the sales contract. Hyde v. RDA, Inc., 2005 U.S. Dist. LEXIS 22614 (D. Md. Oct. 5, 2005).

District Court Holds that Regulation Z Does Not Require Sending Periodic Statements to Deceased Card Holders. The estate of a deceased credit card holder sued Citibank (Citi), alleging violations of the federal Truth in Lending Act (TILA) and various state law claims. At death, the cardholder had a balance of under $900. Two years later, the estate paid roughly $975 to Citi, which it argued resulted in a credit balance. The estate claimed that when Citi made a book entry deleting any existing credit balance on the customer’s cards, it illegally converted the property of the deceased. Citi defended on the basis that because once two years’ interest was calculated to the account balance owed at the time of death, the payment made by the estate was insufficient to pay off the full balance and therefore no credit balance existed. The estate argued that the assessment of interest violated TILA because Citi ceased sending periodic statements after the death of the cardholder. The Court rejected this argument, interpreting the definitions of “consumer” and “cardholder” in Regulation Z did not include a deceased person, his estate, or his personal representative, obviating the duty to send periodic statements. Therefore, the assessment of interest was proper, the plaintiff could not show credit balance existed, and the motion for summary judgment was granted. Hess v. Citibank, N.A., 2005 U.S. Dist. LEXIS 22214 (W.D. Mo. 2005).

North Dakota Supreme Court Upholds Right to Electronically Collect Bounced Check Fees. In CybrCollect, Inc. v. North Dakota Department of Financial Institutions, 2005 ND 145; 703 N.W.3d 285 (2004), the Supreme Court of North Dakota affirmed a district court judgment reversing a Department of Financial Institutions (DFI) order directing CyberCollect to cease electronic collection of fees for checks returned for insufficient funds (NSF) without obtaining debtor’s signed authorization. CyberCollect contracts with North Dakota merchants to electronically collect checks returned for insufficient funds. When CybrCollect receives an NSF check from a contracting merchant’s bank, it scans the check into a computer system. When sufficient funds become available in debtor’s account, CybrCollect transmits information to the bank and collects funds for the face value of the check and the NSF fee. DFI raised several objections to this practice, all of which the court rejected. First, the court held that the plain language of relevant state law cannot be read to prohibit the holder of an NSF check from electronically debiting collection fees without written authorization of the check writer. The court similarly rejected DFI’s argument that this practice violated the Electronic Funds Transfer Act, 15 U.S.C. § § 1693 et seq., and Federal Reserve Board Regulation E, 12 C.F.R. Part 205. Finally, the court held that DFI could not allege that CybrCollect’s practice violated the Fair Debt Collection Practices Act because this claim was untimely raised.

FIRM NEWS

On November 3-4, 2005, Jerry Buckley, Margo Tank and Frank Supik will speak 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, 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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