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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

November 11, 2005

FEDERAL ISSUES

OCC Orders Bank to Refund Up to $14 Million. On November 4, 2005, the Office of the Comptroller of the Currency (OCC) announced an agreement with Homeowners Loan Corp. (HLC), a subsidiary of The Laredo National Bank, Laredo, Texas, to ensure compliance with Section 5 of FTC, RESPA, various OCC guidelines, and other laws. Although the OCC does not make its charges public, it appears to have been concerned with the mortgage company’s preapproval practices and with whether it honored terms disclosed in the Good Faith Estimate (GFE). The agreement imposes requirements on the company that go significantly beyond what is specifically required under the laws and guidelines; for example, RESPA does not require reimbursement if actual costs do not match the GFE. Under the agreement, HLC must:

· Create a $14 million fund to reimburse consumers who (1) were “preapproved,” paid appraisal fees out of pocket, and then were denied credit, for the appraisal fee plus interest at 5% per annum; (2) paid higher loan origination costs or a higher interest rate than what was shown or reflected on the GFE, unless the difference is justified by factors such as a change in the product or change in the borrower’s financial condition; (3) refinanced a subsidized mortgage and did not receive a “tangible economic benefit,” to the extent of the difference between the HLC loan and the original loan; or (4) received a loan without adequate underwriting. The refund program must be monitored by an external consultant approved by the OCC and:

· Include extensive disclosures of conditions and limitations to credit offers in all advertising, including direct-mail solicitations and on the company’s web site. In direct-mail offers, the conditions must be shown on the envelope;

· Include a disclosure within 3 business days of receiving a loan application that explains to the borrower that he or she “has the option of choosing between an adjustable or fixed rate mortgage, if available, and the option of choosing between a loan with or without a prepayment penalty.” The disclosure must show the cost differences between types of loans, explain the annual percentage rate and how it differs from the interest rate, and explain the consumer’s right to an attorney;

· Implement a consumer compliance program, including extensive requirements to make the GFE consistent with actual loan costs. The reasons for any material differences between the GFE and actual costs must be documented in the loan file and the file must reflect any changes discussed with the consumer;

· Create a board compliance committee with a majority of independent directors and a comprehensive compliance audit program and staffing plan.

A copy of the OCC’s agreement is available at http://www.occ.treas.gov/ftp/eas/ea2005-142.pdf.

FDIC Publishes Interstate Banking, Federal Interest Rate Authority Notice of Proposed Rulemaking. On November 10, 2005, the FDIC published a notice of proposed rulemaking to clarify which state laws apply to branches of out-of-state, state-chartered banks, and to clarify the interest rates that state-chartered banks may charge. The FDIC proposed rules would: (1) implement section 24(j) of the FDI Act (12 U.S.C. § 1831a(j)) which describes, generally, which host state laws apply to branches of out-of-state, state-chartered banks; (2) implement section 27 of the FDI Act (12 U.S.C. § 1831d) which generally describes the interest rates that state banks may charge; (3) clarify that a host state law does not apply to an activity that involves a branch in the host state of an out-of-state, state-chartered bank to the same extent that a federal court or the Office of the Comptroller of the Currency (OCC) has determined in writing that the particular host state law does not apply to an activity involving a branch in the host state of an out-of-state national bank; (4) provide, parallel to the OCC’s rules, a federal definition of the term “interest” that would include as interest such charges as late fees, overlimit fees, annual fees, NSF fees, and cash-advance fees; (5) clarify that state banks have “most-favored-lender” status, i.e., state banks may charge interest at the maximum rate permitted to any state-chartered or state-licensed lender by the law of the state where the bank is located; (6) clarify where a state bank is “located” for purposes of interest rate exportation; and (7) clarify the effect of a state’s opt-out from the federal interest rate provisions. The notice seeks public comment on all aspects of the proposed rules through December 13, 2005. To view the notice in its entirety, see http://www.fdic.gov/news/news/financial/2005/fil10905.html.

Federal Reserve Governor Olson Comments On Fair Lending And New HMDA Data. On November 7, 2005, Federal Reserve Board Governor Mark Olson spoke about fair lending issues in the context of the newly released HMDA data at the Consumer Bankers Association’s Fair Lending Conference. The Governor stated that the public disclosure of pricing information should improve market efficiency and regulatory compliance, as well as help lenders focus on people and geographic areas that may be underserved by the current lending market. In addition, he outlined how the new data can be used to monitor lenders’ programs, and discussed what regulators can expect to find when examining mortgage lenders. For more information, see http://www.federalreserve.gov/BoardDocs/Speeches/2005/20051107/default.htm

STATE ISSUES

Third-Party Processor Settles Charges With Five States. On November 3, 2005, the Illinois Attorney General announced that the Attorneys General of five states reached a settlement with AmeriNet, Inc., a US company that served as a third-party processor of electronic debits and demand drafts for telemarketers who fraudulently obtained consumers' account information. According to the settlement and complaint, after the telemarketers contacted consumers and obtained the checking account numbers through various misrepresentations, AmeriNet allegedly accepted the account numbers from the telemarketer, processed the demand drafts through the banking system and sent the money to the telemarketer less Amerinet’s cut of the money. AmeriNet allegedly continued to process such transactions even though over 80% of the consumers sought to have their money re-credited to their account. Under the settlement, AmeriNet and its president must pay civil penalties to each of the five settling states along with full restitution to the aggrieved customers, as well as take remedial steps to improve monitoring and oversight. For more information, see, e.g., http://www.ag.state.il.us/pressroom/2005_11/20051103c.html.

COURTS

FACTA Repealed Private Right of Action for FCRA Disclosure Violations. In Pietras v. Curfin Oldsmobile, Inc., 2005 WL 2897386 (N.D. Ill. Nov. 1, 2005), the U.S. District Court for the Northern District of Illinois dismissed a claim that an automobile dealer failed to include the clear and conspicuous disclosures required by the Fair Credit Reporting Act (FCRA) in its prescreened solicitation for an auto loan. The court agreed with other decisions in the same district that that the private right of action for violations of Section 615 was repealed by the Fair and Accurate Credit Transactions Act of 2003 (FACTA) (see, e.g., InfoBytes, Sept. 16, 2005, available at http://www.buckleykolar.com/publications/InfoBytes091605.html). The court, however, declined to dismiss the plaintiff’s claim that the dealer did not comply with FCRA’s “firm offer” requirement for credit bureau prescreenings because the defendant had not sought dismissal of that claim.

Federal Court Declines to Dismiss FCRA Punitive Damages Claim for Lender’s Failure to Investigate. On March 21, 2005, a federal district court in Minnesota ruled against a lender in a lawsuit alleging that the lender violated FCRA by incorrectly reporting the plaintiff’s credit information to credit reporting agencies over a period of five years. The plaintiff, a credit card customer with the lender, negotiated a settlement with the lender in connection with his credit card account. According to the plaintiff, however, the lender repeatedly failed to properly investigate or update the account status with credit reporting agencies, which allegedly resulted in lost credit opportunities for the plaintiff. Although the court found that the plaintiff’s claims for actual damages lacked sufficient evidence, it denied the lender’s motion for summary judgment with respect to the punitive damages claim, finding that the allegations raised a genuine issue of material fact with respect to the lender’s willfulness in failing to comply with FCRA. See Schaffhausen v. Bank of America, N.A., No. Civ. 03-3492, 2005 U.S. Dist. WL 1430216 (D. Minn. March. 21, 2005).

MISCELLANY

HUD Proposes RESPA Enforcement Website; Would Allow Public to Submit Complaints to HUD Directly Online. On November 8, 2005, HUD filed a Notice of Proposed Information Collection in the Federal Register requesting comments on a proposed RESPA Website Complaint Questionnaire. The RESPA Website Complaint Questionnaire would establish a common website for consumers, settlement service providers, and the general public to submit complaints of RESPA violations directly to HUD. The information collected would be used to investigate the alleged RESPA violations. Comments on HUD’s proposal are due by January 9, 2006. For a copy of the notice, see http://hudclips.org/sub_nonhud/cgi/nph-brs.cgi?d=FR05&s1=FR-4975-N-36$%5bNO%5d&SECT5=FR05&SECT1=TXTHLB&l=50&u=../cgi/newsdoc_run.cgi&p=1&r=1&f=G

Scott M. Polakoff Named Deputy Director and Chief Operating Officer of the OTS. On November 8, 2005, the Office of Thrift Supervision (OTS) announced that Scott M. Polakoff has been named the agency’s next Deputy Director and Chief Operating Officer. Mr. Polakoff was previously the Regional Director, Division of Supervision and Consumer Protection, of the FDIC, and will join the OTS on November 27, 2005. For a copy of the press release, see http://www.ots.treas.gov/docs/7/77539.html.

FIRM NEWS

On November 4, 2005 an article written by Bob Serino was published in the American Banker entitled “Now Every Bank Must Do A BSA Risk Assessment.” In the article, Mr. Serino discusses the importance of financial institutions performing their own risk assessments prior to a Bank Secrecy Act or Anti-Money laundering examination, and suggests that readers refer to FIFEC’s "Bank Secrecy Act Anti-Money Laundering Examination Manual," issued June 30, 2005, which similarly places a great deal of importance on banks performing their own risk assessment, and details examination procedures for agencies to follow during BSA or AML examinations.

It is important to note that examiners will use information found in a bank’s risk assessment both to determine their scope of investigation, and to decide which documents and information the bank must produce. Of perhaps even greater importance is that the FIFEC manual directs examiners to develop a Risk Assessment for a bank if a bank does not one, or if the bank’s risk assessment is inadequate. Allowing examiners to develop a bank’s Risk Assessment, and then conduct an examination based upon it, is fraught with difficulties and could lead to unreasonable examination results. "Risk Assessments" has thus become the new "mantra" of the BSA/AML world, and banks must establish them before an examination is commenced. For more information, please contact Bob Serino at (202) 349-8053 or .

On November 30-December 2, 2005, Jerry Buckley and 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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