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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

FEDERAL ISSUES

Federal Reserve Board to Review Open-End Credit Rule. The Federal Reserve Board is publishing for public comment an advance notice of proposed rulemaking (ANPR) to commence a review of the open-end (revolving) credit rules of the Board's Regulation Z, which implements the Truth in Lending Act. The Board periodically reviews each of its regulations to update them, if necessary. The ANPR seeks comment on a variety of specific issues relating to three broad categories: the format of open-end credit disclosures, the content of the disclosures, and the substantive protections provided under the regulation. The ANPR solicits comments on the scope of the review, and also requests commenters to identify other issues that the Board should consider addressing in the review. See: http://www.federalreserve.gov/BoardDocs/Press/bcreg/2004/20041203/default.htm.

Bush Signs Bill Increasing Veterans Administration (VA) Loans By 40%. On December 10, 2004, President Bush signed the Veterans' Benefits Improvements Act of 2004 (S.2486), raising the VA-guaranteed loan limit by 40% from $240,000 to $333,700 (the current Fannie Mae/Freddie Mac loan limit). The Bill will help veterans living in high cost areas who were previously unable to take advantage of their VA guaranty benefit due to home price appreciation, among other things. Keith Pedigo, the director of VA’s loan guarantee service, said the bill is “probably the most significant piece of legislation for the VA program in the last 35 years.” For a copy of the bill, email .

FTC Reports to Congress on Further Restrictions on Unsolicited Written Offers of Credit and Insurance. The FTC recently submitted a report to Congress pursuant to Section 213(e) of the Fair and Accurate Credit Transactions Act of 2003 (FACTA). The report focuses on the ability of consumers to avoid ("opt out" of) receiving written offers of credit or insurance in connection with transactions not initiated by the consumer and the potential effect on consumers of any further restrictions on providing such offers. The report concludes that prescreening does not have a significant bearing on problems like consumers' receipt of unwanted junk mail, fraudulent activity, compromises of consumers' privacy, or consumers' tendencies to take on more debt than they can reasonably handle; moreover, any substantive restrictions would likely significantly reduce the beneficial effects of prescreened solicitations on competition and consumer access to credit and insurance. The report found that many consumers have opted out and that more consumers would opt out if awareness of the right was more widespread, leading to the conclusion that further legislative or regulatory changes to the opt-out system should at least be put on hold until the effects of FACTA's enhancements to the opt-out-notice provisions and the FTC's campaign to raise awareness of opt-out rights can be evaluated. For a copy of the report, see http://www.federalreserve.gov/boarddocs/rptcongress/

OCC Publishes Paper on Effects of Preemption of Georgia Fair Lending Act. The OCC has published a paper on the results of a study on the effect of OCC preemption of certain provisions of the “Georgia Fair Lending Act” (GFLA) that would otherwise regulate the real estate lending activities of national banks. The study showed that the OCC’s preemption of GFLA, which was enacted in 2002, has not resulted in a significant competitive advantage for large, national bank holding companies, as critics of the preemption decision argued would happen. Instead, the study found that smaller, multistate bank holding companies benefit from preemption more than the large national banks or large state bank holding companies operating in a single state, likely because preemption helps those smaller, multistate bank holding companies that cannot realize economies of scale or deal with the proportionally greater compliance burden that they face. The paper can be found at: http://www.occ.treas.gov/ftp/workpaper/wp2004-4.pdf.

FinCEN Issues Guidance for Money Services Businesses. On December 8, the Financial Crimes Enforcement Network (FinCEN) issued guidance for money services businesses ("MSB"s), including money transmitters and issuers, sellers and redeemers of stored value, on compliance with their anti-money laundering program requirements when dealing with foreign agents and foreign counterparties. The issuance identifies three general requirements, each with a number of subparts:
• Due Diligence. An MSB should have procedures for conducting reasonable, risk-based due diligence on foreign agents and counterparties. This diligence should at a minimum allow for identification of owners and evaluation of operations of the foreign agents and counterparties.
• Monitoring. An MSB should have procedures for risk-based monitoring and review of transactions through an agent or counterparty, and for identifying material changes in agent/counterparty risk profile, such as change in ownership. An MSB should also be able to monitor agent/counterparty implementation of anti-money laundering programs.
• Corrective Action. An MSB should have procedures for taking corrective action against foreign agents or counterparties that pose unreasonable money laundering risks, including termination of the relationship with any agent/counterparty that poses an unacceptable risk.
FinCEN expects full compliance with this guidance within six months. See http://www.fincen.gov/comamknewsrel.pdf.

FTC Reports to Congress on Credit Report Accuracy and Completeness. The FTC recently submitted a report to Congress pursuant to Sections 318 and 319 of the Fair and Accurate Credit Transactions Act of 2003 (FACTA), requiring the FTC to analyze specific issues related to consumer reporting and to conduct an ongoing, 11-year study of the accuracy and completeness of consumer report information. Regarding a proposal to require the nationwide consumer reporting agencies (CRAs) to match more points of consumers' personal identifying information, the report concludes that doing so would decrease the likelihood that data will be assigned to the wrong file but may increase the number of "fragmented" files, making consumer reports less complete. Regarding a proposal to require that consumers denied credit based on credit report information receive a copy of the same credit report, the report concludes that, while the proposal could benefit consumers in cases where the creditor received the wrong report or multiple reports, the "same report" would in many cases be less useful than the currently available full disclosure and poses potential identity theft risks. Regarding a proposal that consumers be notified when negative information has been added to their credit reports, the report concludes that the costs would be significant, there would be risks of fraud and identity theft, that an opt-in system might achieve the same goals with fewer costs, and that the market has already begun to provide credit monitoring services offering similar benefits. Additionally, the report concludes that several types of transactions could be useful in evaluating creditworthiness, including rent and utility payments, and notes that there are barriers to reporting these payments, some of which might be addressed at the state level. The FTC concludes that legislative and administrative recommendations are not yet appropriate and that it would be premature to adopt Section 318's proposals, in part because many of FACTA's new requirements should enhance the accuracy and completeness of credit reports and the market appears to be responding to some of Section 318's concerns. For the FTC's press release regarding the report, see http://www.ftc.gov/opa/2004/12/factarpt.htm; for the report itself, see: http://www.ftc.gov/reports/facta/041209factarpt.pdf.

Federal Reserve Revises Bank Holding Company Rating System. On December 1, 2004, the FRB revised its bank holding company (BHC) ratings system to increase emphasis on risk management. Each bank holding company will receive a rating based on three main components: risk management, financial condition, and potential impact of the parent company and nondepository subsidiaries on the subsidiary depository institutions. However, noncomplex bank holding companies with assets below $1 billion will undergo a simpler rating system, based on risk management and financial condition. The new ratings will be applied to BHC’s in sections beginning on January 1, 2005, and may, at the discretion of local Reserve Banks, be used for inspections that began in 2004 and will be completed in 2005. The final rule can be accessed at: http://www.federalreserve.gov/boarddocs/press/bcreg/2004/20041201/attachment.pdf.

NASD Issues Notice on Liquefied Home Equity. The National Association of Securities Dealers (NASD) issued a notice addressing concerns that arise when members recommend or facilitate investments of liquefied home equity. The notice lists factors for members to consider when recommending a liquefied home equity strategy such as how much equity the investor has in the home, the level of equity being liquefied, how the investor will meet the increased mortgage obligations, whether the mortgage is at a fixed or variable rate, the investor’s overall debt burden, and the sustainability of the value of the home. Stating that liquefied home equity investments may not be appropriate for some homeowners, the notice outlines specific risks involved for investor-homeowners, including the potential decrease in value of the investments, the potential increase in debt service payments due to rising interest rates on the new mortgages or loans, the damage to their asset diversification benefit provided by their home, and, most importantly, the possibility that they may not be able to meet the new mortgage obligations. The notice urges members to consider the extent to which customers are informed of the risks of the strategy, to provide adequate disclosure of risks, to ensure sales materials and oral presentations of strategies addresses risks, and to consider when such recommendations should be prohibited. The NASD alert can be found at: http://www.nasd.com/stellent/groups/rules_regs/documents/notice_to_members/nasdw_012714.pdf.

COURTS

Ohio Appellate Court Upholds Cleveland Predatory Lending Ordinance. In American Financial Services Assoc. v. City of Cleveland, Ohio's Court of Appeals, the Eighth Appellate District overturned a lower court's determination that Cleveland's anti-predatory lending law violates Ohio's Constitution. Under the Home Rule Amendment to Ohio's Constitution, a local ordinance is preempted by state law (the state's anti-predatory lending law) if the ordinance is an exercise of the municipality's police power, the state statute is a general law and a conflict exists between the state and local law. The appellate court found that the state law is not a general law and that was not in conflict with the local ordinance, nothing that its decision conflicts with the decision of another Ohio appellate court holding that state law preempted Dayton’s predatory lending ordinance (see Dayton v. Ohio, 15 7 Ohio App. 3d 736). The American Financial Services Association plans to appeal the ruling to the Ohio Supreme Court. The opinion can be accessed at http://www.sconet.state.oh.us/rod/newpdf/8/2004/2004-ohio-6416.pdf. AFSA's statement regarding the opinion can be found at: http://www.afsaonline.org/news/docs/ClevelandDecisionStatementDec2004.doc.

FTC Obtains Temporary Restraining Order Against What It Called a “Debt Collector Gone Wild.” On December 8, 2004, the FTC announced that the U.S. District Court for the Northern District of Illinois had issued a TRO that freezes the assets of and appoints a receiver for Capital Acquisitions & Management (“CAMCO”), its affiliate RM Financial Services, and the principals of the companies. In March 2004, the defendants entered into a consent decree that provided for $300,000 in civil penalties and injunctive relief. The complaint and supporting memorandum in the current action allege that the companies, which specialize in collecting time-barred debts, have continued to engage in a variety of violations of the Fair Debt Collection Practices Act (FDCPA), including collecting debts when the companies had no documentation to support the claim that the consumer was the debtor, claiming that the companies are government agents, threatening criminal action, and threatening to sue to collect debts that have been discharged in bankruptcy or are time-barred when the companies have no intention of collecting the debts. The FTC does not allege, however, that collecting time-barred debts by itself violates the FDCPA. In addition to a permanent injunction against violations, the FTC is seeking to bar the defendants from engaging in the debt-collection business, redress (refunds) for affected consumers, cancellation of contracts, and disgorgement (apparently to the government). United States v. Capital Acquisitions and Management Corp., No. 04C50 147 (N.D. Ill., filed Dec. 2, 2004). See http://www.ftc.gov/opa/2004/12/camco.htm (press release with links to pleadings and TRO).

MISCELLANY

FDIC Releases Winter 2004 Outlook for the U.S. Consumer Sector in 2005. Earlier this month, the FDIC released its Outlook for the U.S. Consumer Sector in 2005. The report forecasts the following: (i) based on the dwindling effect of lower taxes and cash-out home refinancings, consumer spending in 2005 will be more dependent on job growth and incomes than in recent years; (ii) although home price appreciation continues to be strong in most housing markets, there are signs of speculative market activity in sections of Florida, Nevada and California; (iii) concerns about increasing access to home equity will continue to rise; (iv) due to increasing competitiveness in the auto finance market, underwriting standards could be loosened to the detriment of the marketplace; and (v) the Hispanic market share is increasing and will be key to future growth in the consumer sector. The report provides detailed descriptions of each of these topics. To view the report in its entirety, please click on: http://www.fdic.gov/bank/analytical/regional/ro20044q/na/t4q2004.pdf.

OCC Issues Gift Card Tips for Consumers. On December 7, the OCC issued a Consumer Advisory regarding gift card features. Noting that these cards are often purchased as gifts during the holiday season, the Consumer Advisory recommends that consumers obtain information regarding the fees, expiration dates, accepting locations, how to handle lost cards and other issues. The Consumer Advisory can be viewed at http://www.occ.treas.gov/ftp/RELEASE/2004-108a.pdf.

Electronic Payments Surpass Check Payments in 2003. On December 6, 2004, the Federal Reserve announced the release of surveys that show that the number of electronic payments in the United States was greater than the number of check transactions in 2003. Although checks still have a higher average dollar amount, they created an average annual growth rate of -4.3% for the period 2000-2003. In contrast, electronic payments grew at an annual rate of 13.2% during the same period. Debit cards are the fastest growing electronic payment method, followed by ACH and credit card payments. The press release, which includes a link to the Federal Reserve’s Payments Study, can be viewed at: http://www.federalreserve.gov/boarddocs/press/other/2004/20041206/.

Massachusetts Bankers Association To Hold Seminar on Massachusetts Predatory Lending Regulations. The Massachusetts Bankers Association will hold a seminar on the new Massachusetts Predatory Home Loan Act Regulations on January 6, 2005. The seminar will be held at the Sheraton in Framingham, Massachusetts. Information can be found online athttp://www.massbankers.org.

FIRM NEWS

On December 8, 2004, Jeremiah S. Buckley testified before the National Committee on Vital and Health Statistics (NCVHS) in Washington, DC. The NCVHS is an advisory committee charged with providing the Secretary of the Department of Health and Human Services with recommendations for standards on the implementation of electronic records and signatures in dispensing prescription drugs. For a copy of the testimony and presentation, see:http://www.buckleykolar.com/news/.

On December 6, 2004, Joseph M. Kolar testified on behalf of the Consumer Mortgage Coalition before the Tennessee Department of Financial Institutions at a hearing on aspects of the Department’s proposal to register mortgage loan originators and processors.

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© Buckley Kolar, LLP 2004. 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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