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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

November 17, 2006

Web Seminar – Defending Fair Lending Allegations

Friday, December 8th at 12 PM EST (9:00 AM PST)

Buckley Kolar has learned that numerous HUD complaints may be filed in the next several weeks against mortgage lenders based on alleged redlining for certain categories of housing stock. A free 45-minute web-based seminar hosted by Buckley Kolar will address these possible allegations, as well as possible defenses. In addition, other fair lending enforcement actions being planned by the federal banking agencies will be discussed. The webinar will be moderated by Ann Schnare, the Managing Director and Chief Economist of Corporate Risk Advisors LLC, a financial services consulting firm. The speakers for this webinar will be Joseph Lynyak, a partner at Buckley Kolar, and Dr. Timothy Savage, a Principal at ERS Group, an economic consulting firm specializing in fair lending analysis. To register for the seminar, please go to http://showvisuals.mshow.com/findshow.aspx?usertype=0&cobrand=128&shownumber=314445.

FEDERAL ISSUES

CSBS and AARMR Issue Guidance on Nontraditional Mortgage Product Risks. On November 15, the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) issued joint “Guidance on Nontraditional Mortgage Product Risks” (the “CSBS Guidance”) based on the federal banking interagency guidance on nontraditional mortgage product risks published in the Federal Register in early October (the “Interagency Guidance”) (as covered in the September 29th edition of InfoBytes). The CSBS Guidance is very similar to the Interagency Guidance—variations generally reflect the removal of material that is specific to the federal banking supervisors such as capital rules and allowance for loan and lease losses—but aims to cover state-licensed mortgage entities not subject to the federal interagency guidance “as a means of promoting consistent regulation in the mortgage market.”

The guidance focuses on non-traditional, alternative or exotic mortgage loans, including “interest-only” mortgages and “payment-option” ARMs, and provides that given the “potential for heightened risk levels” for these types of loans, “management” should carefully consider and appropriately mitigate exposures by: (i) ensuring that loan terms and underwriting standards are consistent with prudent lending practices, including consideration of a borrower’s repayment capacity; and (ii) ensuring that consumers have sufficient information to clearly understand loan terms and associated risks prior to making a product choice. Expanding on these aims, the guidance provides that a lender’s qualifying standards for non-traditional mortgage products “should recognize the potential impact of payment shock, especially for borrowers with high loan-to-value (LTV) ratios, high debt-to-income (DTI) ratios and low credit scores.” Lender underwriting standards should, among other things, “include an evaluation of their ability to repay the debt by final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule.”

The following are identified by the guidance as deserving of “increased scrutiny” due to higher than normal risk, to both the lender and to the borrower: (i) collateral-dependent loans; (ii) risk layering; (iii) reduced documentation; (iv) simultaneous second-lien loans; (v) introductory (teaser) interest rates; (vi) lending to subprime borrowers; and (vii) non-owner-occupied investor loans. The CSBS Guidance focuses on both industry and consumer risk in connection with these products, providing, among other things:

· That lenders should “ensure that risk management practices keep pace with the growth of nontraditional mortgage products and changes in the market” by developing written policies that specify acceptable product attributes, production, sales and securitization practices, and risk management expectations, as well as designing enhanced performance measures and management reporting that provide early warning for increasing risk.

· A series of “recommended practices” relating to consumer communication for addressing the risks raised by nontraditional mortgage products; including the marketing and disclosure of such loans, and servicing practices (e.g., monthly statements for payment-option ARMs). In this regard, the guidance stresses that lenders should avoid practices that obscure significant risks to the consumer, and should develop and use strong control systems to monitor whether actual practices are consistent with their policies and procedures.

While the CSBS Guidance does not itself have the force of law, CSBS urges individual state regulators to adopt the guidance to give it effect (though it is not entirely clear the legal basis by which individual state regulators can unilaterally adopt such guidance in connection with non-banks as they are not generally charged with ensuring the “safety and soundness” of non-bank mortgage lenders). To date, Georgia, Idaho, Iowa, Massachusetts, Montana, New Hampshire, and Wyoming have each adopted or proposed to adopt the CSBS Guidance in its entirety (see http://www.csbs.org/Content/NavigationMenu/RegulatoryAffairs/FederalAgencyGuidanceDatabase/ State_Implementation.htm). The following summarizes these developments:

· Georgia – On November 14, the Georgia Department of Banking and Finance adopted the CSBS Guidance in its entirety. According to the Department’s press release, the guidance now applies to Georgia-licensed mortgage brokers and lenders and “should be used as a best practices document when utilizing nontraditional mortgage products.” See http://www.ganet.org/dbf/pdfdoc/Non-TraditionalMP_CSBS-AARMR.pdf.

· Idaho – On November 15, the Idaho Department of Finance adopted the CSBS Guidance in its entirety. According to the Department’s press release, the guidance now applies to “state-licensed mortgage brokers and lenders.” See http://finance.idaho.gov/PR/2006/GuidanceNontraditionalMortgageProducts11_06.pdf.

· Iowa – On November 14, the Iowa Division of Banking adopted the CSBS Guidance in its entirety. According to the Division’s press release, the “guidelines are being distributed to all residential mortgage providers licensed by the Iowa Division of Banking.” See http://www.idob.state.ia.us/PnP/Iowa%20Press%20Release.pdf; http://www.idob.state.ia.us/PnP/CSBS-AARMR%20Guidance-IA.pdf.

· Massachusetts – On November 14, the Massachusetts Division of Banks issued an Industry Letter stating the intention of the Division to issue Regulatory Bulletin 5.1-103, which is identical to the CSBS Guidance, and would be applicable to “licensed mortgage lenders and mortgage brokers.” The Division is accepting comments on the Bulletin from interested parties through December 4, 2006. See http://www.mass.gov/?pageID=ocaterminal&L=6&L0=Home&L1=Business&L2=Banking+Industry+ Services&L3=Banking+Legal+Resources&L4=Laws+%26+Regulations&L5=Proposed +Regulations&sid=Eoca&b=terminalcontent&f=dob_5_1-103&csid=Eoca.

· Montana – On November 13, the Montana Division of Banking and Financial Institutions adopted the CSBS Guidance in its entirety. According to the Division’s press release, the guidance now applies to “state-licensed entities.” See http://banking.mt.gov/pdf/Mortgage_Product_Press_Release.pdf.

· New Hampshire – On November 13, the New Hampshire Banking Department adopted the CSBS Guidance in its entirety by “Order of the Bank Commissioner.” The Order provides that the guidance “shall apply to all mortgage bankers and brokers doing business in the State of New Hampshire.” The Department has reportedly said in an email to licensees that it will "be examining all mortgage bankers and brokers to ensure compliance with this newly adopted guidance." See http://www.nh.gov/banking/.

· Wyoming – On November 15, the Wyoming Division of Banking adopted the CSBS Guidance in its entirety as “regulatory guidelines.” According to the memorandum issued by the Wyoming State Banking Commissioner, “[i]t is expected that these best practices will be adopted by all entities offering mortgage products to Wyoming consumers.” Please contact to request a copy of the Wyoming press release, cover memorandum, and adopted guidance.

The process by which the above states are issuing the guidance raises concerns about compliance with requirements of applicable administrative procedures laws and fundamental concepts of procedural due process. To date, only Massachusetts has provided a limited window for public comment—the other states have simply issued orders or press releases announcing the adoption of the guidance without prior notice or opportunity for public comment. There remain some fundamental legal questions that should be addressed both as to the process by which the guidance is being issued by the various states and the underlying authority of the states to impose safety and soundness-like limitations on non-bank licensed lenders.

To view the CSBS Guidance and corresponding materials in their entirety, please see http://www.csbs.org/Content/NavigationMenu/RegulatoryAffairs/FederalAgencyGuidanceDatabase/ CSBS_AARMR_Guidance_.htm.

Please contact John Kromer (202-349-8040), Joe Kolar (202-349-8020), or Clint Rockwell (202-349-8058) with any questions.

FDIC Inspector General Issues Report Critical of Consumer Protection Supervision. On November 14, the Office of the Inspector General of the Federal Deposit Insurance Corporation (FDIC) released an audit of the FDIC consumer protection enforcement policies. The audit found 83% of the financial institutions examined in 2005 by the FDIC had “significant violations” of at least one of the eight consumer protection laws (EFTA, ECOA, FHA, Flood Insurance, HMDA, GLB Act, RESPA, TiLA, and TiSA) considered. Of the 43% committing “repeated, significant violations,” 80%, or 36% of the total, were given a rating of “1” or “2.” The Office of the Inspector General concluded that the FDIC had “not adequately ensured that the financial institutions in our sample had taken appropriate corrective actions for repeat… violations” and recommended the FDIC “strengthen its monitoring and follow-up processes by revising guidance on follow-up, consid[er] supervisory action when an institution’s corrective action is not timely or when significant violations recur, and revis[e] its performance goal.” To read the full report, go to http://www.fdicoig.gov/reports06%5C06-024.pdf.

U.S. Attorney Charges Executive, Employee with Using Employee and Client Data to Falsify Loan, Credit Card Applications. The Department of Justice and the FBI announced the arrests of Terrence D. Chalk, the principal of a computer systems company, and employee Damon T. Chalk, alleging that the men conspired to influence financial institutions by making false statements on applications for loans, lines of credit and credit cards. According to the eight-count indictment, the men submitted applications that (i) misrepresented that certain Chalk employees and clients were guarantors for the loans and were owners and officers of various Chalk entities, and (ii) included personal identification information of Chalk employees or clients without their knowledge or permission. Both men allegedly made the same false statements during meetings with representatives of the financial institutions. For the U.S. Attorney's press release, see http://www.usdoj.gov/usao/nys/pressreleases/October06/chalketalarrestpr.pdf.

HUD Renews Requests for Comments on RESPA Complaint Website. On November 7, the Department of Housing and Urban Development (HUD) published a request for comment in the Federal Register regarding a proposed Real Estate Settlement Procedures Act (RESPA) Web Site Complaint Questionnaire. A similar notice of proposed information collection was published last year (see the November 11th, 2005 Issue of InfoBytes). The proposed website would provide a common forum for consumers, settlement service providers, and the general public to submit complaints of RESPA violations directly to HUD to facilitate investigations into alleged RESPA violations. Comments on HUD’s proposal are due January 8, 2006. To view the notification as published in the Federal Register, go to http://www.hudclips.org/sub_nonhud/cgi/comment.cgi.

OFHEO: Conforming Loan Limit Will Not Decrease in 2007. Faced with a likely year-to-year decrease in the average home price, the Office of Federal Housing Enterprise Oversight (OFHEO) announced that it will not decrease the conforming loan limit–the maximum amount of mortgage loans eligible for purchase by Fannie Mae or Freddie Mac in 2007. OFHEO noted that the Federal Housing Finance Board’s average house price declined by 3.1% between September 2005 and September 2006 and is likely to show a decline between October 2005 and October 2006. Assuming that prices have declined when the October-to-October change is announced on November 28, 2006, OFHEO will not reduce the conforming loan limit from its 2006 level of $417,000 for a single-family home but will maintain that level for 2007. If prices continue to decline in 2007, then the limit for 2008 will be reduced by at least the 2005-2006 percentage decline in prices. OFHEO also clarified that mortgages previously purchased, guaranteed, or subject to purchase in the event of default will not be affected by any future reduction in the limit. The OFHEO announcement is available at http://www.ofheo.gov/media/pdf/PRConfLoan2007.pdf.

COURTS

FTC to Join Supreme Court Amicus Brief in Consolidated FCRA Cases. The Federal Trade Commission (FTC) has voted to join in an amicus brief filed by the United States government in two consolidated Fair Credit Reporting Act (FCRA) cases before the Supreme Court: SAFECO Insurance Company of America v. Burr, No. 06-84, and GEICO General Insurance Company v. Edo, No. 06-100. Both cases involve the interpretation of an insurance company’s obligation under FCRA to provide an applicant with an adverse action notice, as well as the meaning of “willful noncompliance.” FCRA provides for statutory penalties of $100-$1000 for “willful” violations but only actual damages for negligent violations. The Ninth Circuit Court of Appeals had held in a related case (Reynolds v. Hartford Fin. Svcs. Group, 2006 WL 171920 (9th Cir. Jan. 25, 2006)) that the obligation to provide an adverse action notice arises whenever an insurance company offers a consumer a higher rate than it would otherwise have offered if the information in the consumer’s credit report had been more favorable. The Ninth Circuit also held that a company can be found to have “willfully” violated FCRA if its interpretation is found to have been “implausible” or based on “creative lawyering.” The government’s amicus brief in SAFECO and GEICO supports the Ninth Circuit on the issue of when “adverse action” occurs in the insurance context, but disagrees with the appellate court on willfulness, arguing that “willful noncompliance” exists only when the violator either knew, or showed reckless disregard as to, whether its conduct violated the FCRA. For more information, see http://www.ftc.gov/opa/2006/11/fyi0672.htm. A copy of the government’s amicus brief can be found at http://www.ftc.gov/os/2006/11/061114safeco-geicoamicus.pdf. Please contact for copies of the many other amicus briefs filed on behalf of the insurance company defendants by trade associations and individual companies. Buckley Kolar LLP partners Jeremiah S. Buckley, Joseph M. Kolar, and Matthew P. Previn joined attorneys from Goodwin Proctor LLP in submitting a brief on behalf of amici curiae the Mortgage Insurance Companies of America and the Consumer Mortgage Coalition. For a discussion of the Ninth Circuit’s Reynolds decision see InfoBytes, January 27, 2006, available at http://www.buckleykolar.com/publications/InfoBytes012706.html).

FTC Reaches Consent Agreement with E-Mail Marketing Firm that Failed to Properly Process Unsubscribe Requests. On November 6, the Federal Trade Commission (FTC) announced a settlement with Yesmail Inc., an e-mail marketing firm that performs marketing services for other companies. The FTC alleged that Yesmail violated the CAN-SPAM Act by improperly treating some e-mail recipients’ “opt-out” requests as “spam,” preventing it from processing the opt-out requests. Accordingly, certain consumers who had attempted to opt-out continued to receive commercial e-mails from Yemail. Under the terms of the consent agreement, Yesmail is to pay a civil penalty of $50,717, and take certain actions to prevent future CAN-SPAM violations. To access the stipulated final order, Complaint and accompanying news release, please go to http://www.ftc.gov/os/caselist/0623002/0623002.htm.

Michigan Federal Court Grants Summary Judgment to Lender in ECOA Counteroffer Case. Recently, a Federal Court in Michigan granted summary judgment to a defendant mortgage company, ruling that the disclosure of a higher interest rate on a loan on the date of closing constituted a counteroffer within the permissible timeframe for action by a lender under the Equal Credit Opportunity Act (ECOA). In the case, plaintiff borrowers initially applied for a loan in an amount of $234,000 at a rate of 6.5%, but when the house appraised for a higher value, the defendant mortgage lender notified the plaintiffs that they would be able to borrow a larger amount. While the plaintiffs believed they would still borrow at 6.5%, they became aware on the date of closing that the rate for this loan was 7.5%. The plaintiffs, counting back to the date of the original loan application, claimed that failure to disclose the higher rate violated ECOA because the lender was required under ECOA to take an action within 30 days of a loan application. The defendants claimed, and the Court agreed, that the notification of the higher amount constituted a new offer, and the disclosure of the higher rate at closing was a counteroffer within the required timeframe under ECOA. The Court granted the defendant's motion for summary judgment and dismissed the case with prejudice. Miller v. Shore Financial Services, Inc., No. 03-40210, 2006 WL 2828584 (E.D. Mich., 2006). Please contact for a copy of the decision.

Missouri Federal Court Invalidates Arbitration Clause. In a putative class action styled, Doerhoff v. General Growth Properties, Inc., Case No. 06-04099 (W.D. Mo. Nov. 6, 2006), plaintiff sued the distributor of a gift card issued by American Express, alleging that the card’s monthly $2 service fee is misleading and illegal. The distributor moved to compel arbitration, but the Court held that the arbitration provision was unconscionable under Missouri law. As an initial matter, because the arbitration provision was non-negotiable and required the claimant to cover the costs associated with the arbitration, the Court held it to be procedurally unconscionable. Moreover, the arbitration provision was found to be substantively unconscionable because it foreclosed class adjudication of a claim that would be economically infeasible to bring individually. Further, the Court held no claimant could be expected to sue individually over a $2 fee, especially where she also must shoulder the costs of arbitration. Please contact for a copy of the decision.

Accessing Metadata Does Not Violate Ethics Rules, Says ABA Ethics Committee. On August 5, the Standing Committee on Ethics and Professional Responsibility of the American Bar Association held that nothing in the Model Rules of Professional Conduct (the “Model Rules”) expressly prohibits attorneys from mining, reviewing and using metadata contained in electronic documents received from adverse parties. ABA Comm. on Ethics and Prof’l Responsibility, Formal Op. 06-442 (2006). Metadata is information embedded in e-mail and other electronic documents that may reveal when the document was created and revised and who accessed it. It also includes information left behind in electronic documents, such as substantive revisions and comments. According to the Committee – and contrary to a Florida Ethics Opinion – Model Rule 4.4(b) (requiring lawyers who receive inadvertently sent documents from another party to notify the sender) does not bar the accessing of metadata. The Committee also disagreed with a New York Ethics Opinion, which had held that Rules 8.4(c) (disallowing dishonest conduct) and (d) (forbidding conduct prejudicial to the administration of justice) prohibit lawyers from accessing metadata found in opponents’ electronic documents. Rule 8.4, as interpreted by the Committee, contains no provisions barring such use of metadata. Placing the burden on the transmitter of electronic documents, the Committee provided several useful precautions to avoid sending metadata to opponents, including: (i) deleting comments; (ii) using a “scrubbing” program; (iii) sending hard copies or faxes, when possible; and (iv) negotiating confidentiality agreements or protective orders that allow metadata to be pulled back or excluded from evidence. Please contact for a copy of the decision.

STATE ISSUES

Fannie Mae Announces Rhode Island and Tennessee "High-Cost Home Loan" Purchasing Policies. On November 8, Fannie Mae issued Announcement 06-20 amending the Selling Guide to state that, beginning on December 31, 2006, Fannie Mae will no longer purchase any mortgage loans that meet the definition of "high-cost home loans" under the Rhode Island Home Loan Protection Act, R.I. Gen. Laws §§ 34-25.2-1 through 34-25.2-15. Moreover, Fannie Mae will no longer purchase any mortgage loans that meet the definition of "high-cost home loans" under the Tennessee Home Loan Protection Act, Tenn. Code Ann. § 45-20-101 et seq. The announcement further notes that pursuant to a seller’s Mortgage Selling and Servicing Contract, each seller represents and warrants that each mortgage loan the seller delivers to Fannie Mae conforms to applicable requirements under Fannie Mae’s Selling Guide, which now includes the above prohibitions. A copy of the announcement may be obtained at http://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2006/06-20.pdf.

MISCELLANY

First Complete eClosing Occurs in Pennsylvania. On November 14, the National Notary Association announced that Pennsylvania’s first 100% paperless real estate closing had occurred on November 13. The electronic closing (eClosing) was entirely paperless—the closing papers were created, executed, notarized and recorded using electronic records and signatures. The eClosing also included Pennsylvania’s first level 3 electronic recording (eRecording), which the Property Records Industry Association (PRIA) defines as the creation of recordable documents in XHTML, execution with electronic signatures, and electronic presentation to the recorder’s office. For more information, please go to http://www.nationalnotary.org/news/index.cfm?Text=newsNotary&newsID=1071. For more information on electronic closing standards and emortgage implementation standards, go to www.mismo.org and www.spers.org.

ABA and BITS Publish Paper on Data Security Breaches at Financial Institutions. The American Bankers Association and BITS, the non-lobbying technology division of the Financial Services Roundtable, released a paper this month to help financial institutions respond to data security breaches. The paper, titled "Key Considerations for Responding to Unauthorized Access to Sensitive Customer Information," reviews evolving legal and regulatory requirements including differences in state and federal laws governing data breach notifications. To read the paper, go to http://www.bitsinfo.org/downloads/Publications%20Page/BITSABADBNov06.pdf.

OTS Director Reich Speaks on Credit Market Trends. In a November 9th speech to the New York Bankers Association, John Reich, Director of the Office of Thrift Supervision (OTS), outlined several distressing trends among lenders. Reich pointed out that smaller institutions, with assets less than $100 million, seem to be suffering most due to declining mortgage originations. The federal banking agencies, Reich said, “continue to grapple with policy responses to credit risks, particularly for nontraditional mortgage lending products and commercial real estate (CRE) lending” (see above regarding nontraditional mortgage policy, and the January 13th Issue of InfoBytes regarding CRE proposals). To read the speech in full, see http://www.ots.treas.gov/docs/8/87126.pdf.

OFHEO’s 2006 Performance and Accountability Report Released. On November 15, the Office of Federal Housing Enterprise Oversight (OFHEO) released its annual, independently audited, Performance and Accountability Report for Fiscal Year 2006. To read the report, go to http://www.ofheo.gov/media/pdf/ofheopar111506.pdf.

President of St. Louis Federal Reserve Addresses Privatization of the GSEs. On November 16, William Poole, President of the Federal Reserve Bank of St. Louis, gave prepared remarks in a panel discussion calling for the end of government involvement in the Government Sponsored Enterprises (GSEs) – Fannie Mae and Freddie Mac. Poole suggested that, barring privatization, the best course of action would be to (i) limit the GSEs’ portfolios “in both scope and scale to assets with a clear public purpose,” (ii) make the capital requirements “substantially higher,” and (iii) significantly increase regulators’ power to impose “stringent restrictions” on GSEs seen to be undercapitalized. To read Poole’s remarks, given at the Cato Institutes’ Annual Monetary Conference, go to http://stlouisfed.org/news/speeches/2006/11_16_06.html.

Fannie Mae Releases Revised Forms. Fannie Mae introduced a revised Master Custodial Agreement (Form 2300) for custody of single-family MBS pool mortgage documents along with a new Annual Statement of Eligibility for Document Custodians (Form 2001). Lenders and custodians who currently have a signed custodial agreement in place must sign the new agreement by May 1, 2007. In addition, beginning March 2007, Fannie Mae document custodians must self-certify they continue to meet eligibility and operational requirements by submitting an Annual Statement of Eligibility for Document Custodians. These changes apply to all document custodians, and they reflect Fannie Mae’s attempt to further align document custody and certification requirements with industry standards. For further information see http://www.efanniemae.com/sf/guides/ssg/2006annlenltr.jsp.

FIRM NEWS

Jeff Naimon will be speaking on a panel entitled "Compliance, Due Diligence & Quality Assurance" at the SourceMedia Secondary Market Conference in New York City on December 6. For more information about this conference and to register, please visit http://www.sourcemediaconferences.com/conferences/SMC06/index.html.

Margo Tank and Joe Lynyak spoke at the MBA’s Legal Issues in Mortgage Technology Conference being held November 15–17 at the Arizona Biltmore Hotel in Phoenix, Arizona. Ms. Tank’s panel topics included the basic legal requirements for electronic mortgage origination and lending. Mr. Lynyak spoke on issues in fair lending.

Mr. Lynyak also spoke today on HMDA and discrimination at ACI's predatory lending conference in Las Vegas, Nevada.

© 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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