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InfoBytes

CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

FEDERAL ISSUES

Fannie Mae and Freddie Mac Directed to Follow Nontraditional Mortgage Guidance. Office of Federal Housing Enterprise Oversight (OFHEO) Director James B. Lockhart has ordered Fannie Mae and Freddie Mac, the two housing government-sponsored enterprises (GSEs), to take immediate action to implement the practices outlined in the "Interagency Guidance on Nontraditional Mortgage Product Risks" issued by the federal financial regulatory agencies (FRB, FDIC, NCUA, OCC, and OTS) (reported in the September 29th issue of InfoBytes). In separate letters to the GSEs, Director Lockhart directed the GSEs to (i) develop and implement written policies that specify acceptable product attributes, portfolio limits, sales and securitization practices, and risk management expectations, (ii) design and implement internal controls to ensure that mortgages purchased and guaranteed by the GSEs meet the underwriting and consumer protection standards of the guidance, (iii) design and implement enhanced performance and management reporting measures that provide early warning for increased risk, (iv) establish appropriate loan loss allowance levels that consider the credit quality of the portfolio and conditions that affect collectability, and (v) maintain capital commensurate with the risk characteristics of their nontraditional mortgage loan portfolios. Director Lockhart requested that the GSEs provide the examiner-in-charge with a complete report on the steps they have taken to implement these directives and the guidance by February 28, 2007. For further information see http://www.ofheo.gov/media/pdf/PRGuidance121306.pdf.

SEC To Propose Interpretive Guidance for Management to Improve Sarbanes-Oxley Implementation. On December 13, the Securities and Exchange Commission (SEC) voted to propose interpretive guidance for companies to use in evaluating their internal controls of financial reporting. The SEC also proposed amendments to Rules 13a-15 and 15d-15 to clarify that a company will satisfy its annual evaluation requirements of those rules (which implement Sarbanes-Oxley Section 404) by following the interpretive guidance. The SEC stated that its goal was to reduce uncertainty that currently exists in the implementation of Section 404, particularly regarding what constitutes a reasonable approach to management’s evaluation of its internal financial reporting controls. The guidance addresses four specific areas: (i) identification of risks to reliable financial reporting and the related controls that management has implemented to address those risks; (ii) evaluation of the operating effectiveness of controls; (iii) reporting the overall results of management's evaluation; and (iv) maintenance of documentation required in support of management’s assessment. To view the SEC press release, see http://www.sec.gov/news/press/2006/2006-206.htm.

FinCEN Issues Guidance on Customer Identification for Insurance Sold Through Bank. On December 12, the Financial Crimes Enforcement Network (FinCEN), working with the federal financial regulatory agencies, issued guidance on the applicability of the Customer Identification Program (CIP) (31 C.F.R. § 103.121) to persons purchasing insurance through a bank. FinCEN stated that if the insurance product is issued or underwritten by an insurance company that is not a subsidiary of, or otherwise affiliated with, a bank, then the product’s sale is not considered to be “establishing an account” with respect to the CIP. The guidance also points out that while such a sale does not fall under the CIP, a bank “should conduct an appropriate level of risk-based due diligence” regarding the purchase and “at a minimum” comply with other components of its own anti-money laundering program. To view this guidance, go to http://www.fincen.gov/final_bank_insurance_agent_faq_12122006.html.

SEC Votes to Publish Rules for Comment Regarding Bank Broker Provisions. On December 13, 2006, the SEC voted to seek public comment on proposed joint rules that would define certain statutory terms in the areas of third-party brokerage (networking), trust and fiduciary activities, safekeeping and custody, and sweep accounts. The SEC will also seek comment on a companion proposal that would provide banks acting as unregistered brokers with conditional exemptions to accommodate certain limited bank securities activities. If approved, the new exemptions would allow banks to, among other things, effect mutual fund transactions through the National Securities Clearing Corporation’s Mutual Fund Services or directly with a transfer agent and be exempt from the definition of a “broker” for certain noncustodial securities lending activities. The Board of Governors of the Federal Reserve System (FRB) is slated to address the joint proposals on December 18, 2006. For more information, go to http://www.sec.gov/news/press/2006/2006-205.htm.

Banking Agencies Issue Guidance on FAS 158 and Retirement Accounts. On December 14, the federal banking agencies (FRB, FDIC, OCC, and OTS) issued interim joint guidance specifying that new accounting standards on retirement accounts will not have an effect on banking organizations’ regulatory capital. The Financial Accounting Standards Board recently issued FAS 158 requiring full accounting recognition of an over- or under-funded defined-benefit post-retirement plan. In their guidance, the federal banking agencies state that until they “determine otherwise through a rulemaking” financial institutions “should exclude from regulatory capital any amounts recorded in Accumulated Other Comprehensive Income resulting from the adoption and application of FAS 158.” The agencies promise further instruction on this interim exclusion. To view the guidance, go to http://www.federalreserve.gov/boarddocs/press/bcreg/2006/20061214/default.htm.

OTS Rules that Securities Clearing, Paying Interest on Free Credit Balances is Permissible for Op Sub. The Office of Thrift Supervision (OTS) recently released a legal opinion concluding that securities clearing and related activities are permissible under the express and implied powers granted by the Home Owners' Loan Act (HOLA), and that an operating subsidiary of a federal savings association (FSA) may pay interest on its customers free credit balances even though FSAs are prohibited from paying interest on demand accounts.

The FSA planned to make a broker-dealer registered limited liability company (LLC) a wholly-owned operating subsidiary and requested the OTS to conclude that the securities clearing and related services that the LLC currently conducts constitute permissible activities for an FSA, and therefore would continue to be permissible for the operating subsidiary. The OTS concurred, ruling that many of the activities are akin to securities activities that are expressly permitted by HOLA. OTS stated that the remaining activities would be incidental to express powers granted to federal savings associations by HOLA. Because an operating subsidiary may engage in any activity that is permissible for its parent FSA, the OTS ruled that all of the securities clearing activities conducted by the LLC were permissible.

In addition, the OTS concluded that the practice of paying interest on the free credit balances would continue to be permissible for the LLC, even though HOLA prohibits an FSA from paying interest on a demand account. The OTS reasoned that (i) the HOLA prohibition does not reference subsidiaries, (ii) the free credit balances at issue are not "demand accounts" within the meaning of the HOLA prohibition, and (iii) the free credit balance is not an insured deposit subject to the prohibition. The OTS also gave weight to the fact that the LLC is functionally regulated by the SEC, and the SEC has a rule requiring the LLC to pay interest on the free credit balances. To read the entire opinion, see http://www.ots.treas.gov/docs/5/56222.pdf.

 Federal Agencies Issue Joint Statement on Allowance for Loan and Lease Losses. On December 13, the federal financial regulatory agencies issued an interagency policy statement on the Allowance for Loan and Lease Losses (ALLL). The guidance revises the original 1993 policy statement to incorporate subsequent changes in accounting standards and regulatory supervision. The agencies also issued supplemental frequently asked questions pertaining to ALLL. To view the press release go to http://www.federalreserve.gov/boarddocs/press/bcreg/2006/20061213/default.htm.

SEC Proposes Changes to Rules Regarding Short-Selling. The SEC has proposed rules to remove the “price test” restrictions on short-selling, while increasing constraints on short-selling in connection with public offerings.  In proposed changes to Rule 10a-1, the long standing “tick test,” which requires that a security’s value must be increasing in order to be sold short, would be removed. The proposal comes after analysis of a pilot program, on a select set of stocks, showed no discernable adverse effects from unrestricted short-selling. The proposed rules would also prohibit any self-regulatory organization from implementing its own price test for short-selling transactions. Comments are due by February 12, 2007. To see the proposed rules, go to http://www.sec.gov/rules/proposed/2006/34-54891.pdf. To view the SEC’s analysis of the pilot program, see http://www.sec.gov/about/economic/shopilot091506/draft_reg_sho_pilot_report.pdf.

The SEC has also proposed amendments to Rule 105 of Regulation M that would make it unlawful for a person to sell a security short during the five days before a public offering and then purchase that security in the offering. Currently, Rule 105 prohibits a person from covering a short sale with securities sold in a public offering if the person sold the securities short within five days prior to the offering. The SEC has stated that this type of short selling can depress market prices artificially and lead to lower than expected offering prices and reduced offering proceeds for an issuer. Under the proposal, a person could engage in a short sale of a security within five days in advance of a public offering, or buy shares in the offering, but not both. The deadline for submission of comments on the proposal is February 12, 2007. The full text of the proposal is available at http://www.sec.gov/rules/proposed/2006/34-54888.pdf.

Maximum Charge for a Credit File Disclosure Remains at $10. The Federal Trade Commission (FTC) announced that the maximum fee for a credit bureau’s disclosure of a consumer’s credit file will remain at $10 in 2007. The charge applies when the consumer is not entitled to a free report under the annual free disclosure requirement, after adverse action has occurred, or in certain other situations. The maximum fee may be adjusted annually, based on the Consumer Price Index. See http://www.ftc.gov/os/2006/12/FRNAnnualMaximumDisclosure.pdf.

Grant Thornton to Pay $300,000 Civil Penalty for Reckless Conduct in Performing Bank Audit. On December 8, the Office of the Comptroller of the Currency (OCC) announced that it has imposed a $300,000 civil penalty and a cease and desist order against Grant Thornton LLP for allegedly engaging in reckless conduct in connection with its audit of First National Bank of Keystone’s 1998 financial statements. According to the OCC, Grant Thornton participated in an unsafe or unsound practice by recklessly failing to comply with Generally Accepted Auditing Standards in planning and conducting the audit. Among other things, Grant Thornton allegedly failed to discern that the largest item on the bank’s income statement—$98 million in interest income—did not exist. For more information, see http://www.occ.treas.gov/ftp/release/2006-132.htm.

FDIC Solicits Comments on Large-Bank Deposit Insurance Determination Modernization Proposal. The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) is soliciting comments on proposed improvements to the process of determining the insurance status of depositors of larger institutions in the event of a failure. This advance notice of proposed rulemaking (ANPR) follows up a previous proposed rulemaking on this subject in December 2005. Because of the growth in larger, more geographically diverse and complex institutions that have millions of deposit accounts – far more than any other institution that the FDIC has resolved in the past – the FDIC is seeking to update and modernize the deposit claims process. For purposes of the ANPR, a large institution would have more than 250,000 deposit accounts and $2 billion in domestic deposits or at least $20 billion in total assets and $2 billion in domestic deposits, regardless of the number of deposit accounts. Currently, 159 institutions out of the more than 8,700 insured by the FDIC meet the criteria. These institutions would be split into two tiers. Tier 1 would include the most complex of the large institutions, while Tier 2 would include all other large institutions. These institutions would face several new requirements. The ANPR also requests comment on whether large institutions should be encouraged or required to know the insurance status for each new account opened and/or notify the customer of this status. Further comment is requested on whether a unique depositor identifier and insurance category should be required for new accounts. To view the ANPR in its entirety, please see http://www.fdic.gov/regulations/laws/federal/2006/06cAC98.pdf.

COURTS

Court Upholds Federal Preemption of State Due-on-Sale Restrictions in Louisiana “Bond for Deed” Case. In a case testing the federal preemption of state due-on-sale restrictions, the Supreme Court of Louisiana ruled that a Louisiana “bond for deed” constituted a transfer of an interest in the property sufficient to trigger the mortgage contract’s standard “due-on-sale” provision. The “bond for deed,” like a traditional contract for deed, gives the purchaser the immediate right of possession of the property. More importantly, the Court ruled that such transfer is subject to the provisions of the National Housing Act (added by the Garn-St Germain Depository Institutions Act of 1982) that authorize a lender to enter into and enforce a contractual due-on-sale clause “notwithstanding any provision of the constitutions or laws (including the judicial decisions) of any State.” 12 U.S.C. § 1701j-3(b). In this case, after learning that the borrower had entered into a bond for deed with another purchaser of the property, the bank accelerated the loan and attempted to foreclose. Claiming wrongful foreclosure, the borrower sought to enjoin the foreclosure and brought an action for damages. The lower court ruled against the bank, enjoined the foreclosure, and found the bank liable for $300,000 for humiliation, embarrassment, and mental anguish. The lower court also found that the bank had violated the Louisiana Unfair Trade Practices and Consumer Protection Law. The Supreme Court’s determination reversed these findings of liability. Buckley Kolar, with the assistance of McGlinchey Stafford as local counsel, filed an amicus curiae brief on behalf of several mortgage trade associations in this case, outlining the bases for federal preemption of state due-on-sale restrictions. Levine v. First National Bank of Commerce, No. 06-C-0394 and 06-C-0439 (Dec. 15, 2006). To view this decision, go to http://www.lasc.org/opinions/2006/06C0394.pdf.

Montgomery County Will Not Appeal Decision Voiding Mortgage Ordinance. On December 12, the Montgomery County Executive and County Council announced their intent not to appeal the recent court decision declaring discriminatory lending Ordinance 36-04 unconstitutional (reported in the December 1st issue of InfoBytes). In a November 30 ruling, the County’s Circuit Court found that the Ordinance had extraterritorial effects, which exceeded the authority of a County government. In their recent statement, the County Executive and the County Council announced their hope to “work with all stakeholders (including consumers, civil rights advocates, and representatives of mortgage lenders) to correct any apparent flaws in the current law.” To view the press release, go to http://www.montgomerycountymd.gov/Apps/Council/PressRelease/PR_details.asp?PrID=2947.

Northern District of Illinois Certifies Firm-Offer Case Where Plaintiff Not Qualified for Loan. In Claffey v. River Oaks Hyundai, Inc., – F.R.D. –, 2006 WL 3392221 (N.D. Ill. Nov. 20, 2006), the U.S. District Court for the Northern District of Illinois certified another of the many class actions alleging that the defendant, an automobile dealer, violated the Fair Credit Reporting Act’s (FCRA) firm-offer requirement. As in other cases, the court appeared to interpret FCRA as requiring that the initial solicitation set out the terms of the offer. The factual twist in this case was that the named plaintiff did not have an income of at least $1500, which was stated in the mailer as one of the requirements to qualify for the loan. The court held that the issue of the plaintiff’s income was insufficient to disqualify the plaintiff as a class representative, as were as allegations that she did not understand the nature of her claim and had lied on a previous bankruptcy petition. Please contact for a copy of this decision.

Firm Offer Case Now Available Electronically. The previously reported Poehl case, in which the U.S. District Court for the Eastern District of Missouri held that a creditor who sent a mailing that did not specify the interest rate or any other specific terms of the proposed loan still had made a “firm offer of credit” under FCRA, is now available electronically. Poehl v. Countrywide Home Loans, Inc., – F. Supp. 2d –, 2006 WL 3628982 (E.D. Mo. Nov. 1, 2006). See http://www.buckleykolar.com/publications/InfoBytes111006.html for a discussion of the case.

STATE ISSUES

Pennsylvania AG Announces Multi-State Settlement with Chase Bank and Trilegiant Corp. On December 11, 2006, Pennsylvania Attorney General Tom Corbett announced a multi-state $14.5 million settlement with Chase Bank USA, Chase Home Finance LLC, and Trilegiant Corp. It was alleged that the companies deceived customers into paying for various membership programs by offering “free” or “no obligation” trial offers that were automatically charged to the consumer if the program was not canceled within a certain period of time. Although the offering mailings were physically sent by Trilegiant Corp., Chase conceded to the use of its customer list, and the envelopes and letterheads featured Chase logos. As part of the settlement, the companies did not admit any wrongdoing, but agreed to take steps to prevent customer confusion in future solicitations. The $14.5 million settlement includes separate agreements with Trilegiant and Chase. Trilegiant must pay $8.325 million in restitution to customers, and Trilegiant and Chase together must pay $6.175 million to the cover all civil penalties, legal penalties, and fees. For a full test of the AG’s press release please see http://www.attorneygeneral.gov/press.aspx?id=1986.

Spitzer Files Suit Against UBS. New York Attorney General Eliot Spitzer has brought suit against UBS Financial Services, Inc. for defrauding customers by inappropriately moving them into its “InsightOne” brokerage program. The lawsuit alleges that UBS moved clients from regular brokerage accounts to InsightOne in order to collect higher fees. The InsightOne account charges fees based on assets rather than transactions, allegedly making it inappropriate for customers who rarely trade. According to the complaint, UBS steered customers to InsightOne with false promises of providing personalized financial planning advice. The suit seeks disgorgement, damages, restitution, and injunctive relief. For further details see http://www.oag.state.ny.us/press/2006/dec/dec12b_06.html.

New Jersey Senate Approves Privacy Law. On December 4, the New Jersey Senate approved S.547, the New Jersey Financial Information Privacy Act. This act proposes an “opt-in” requirement, which would mandate the affirmative consent of customers before financial institutions may share non-public personal information with non-affiliates. "Opt-in" measures such as S.547 and similar measures passed by other states are more restrictive than the "opt-out" required under the Gramm-Leach-Bliley Act. S.547 has been referred to the Assembly Financial Institutions and Insurance Committee, which is also considering the Assembly version of the bill, A.2518. The text of S.547 is available at http://www.njleg.state.nj.us/2006/Bills/S1000/547_R1.PDF.

MISCELLANY

Democrats Nominate New Members for House Financial Services Committee. On December 12, the Democratic Steering Committee announced its recommendations for new members to the House Committee on Financial Services. The list of seven freshmen consists of Rep.-elect Joe Donnelly (D – Ind.), Rep.-elect Keith Ellison (D – Minn.), Rep.-elect Ron Klein (D – Fl.), Rep.-elect Tim Mahoney (D – Fl.), Rep.-elect Ed Perlmutter (D – Col.), Rep.-elect Albio Sires (D – N.J.), and Rep.-elect Charlie Wilson (D – Ohio). To view the Democratic Leadership’s press release, see http://democraticleader.house.gov/press/releases.cfm?pressReleaseID=1962.

FTC Hosts Workshop on Net Neutrality. On February 13 and 14, 2007, the FTC will hold a workshop entitled “Broadband Connectivity Competition Policy” in Washington, DC. The conference will discuss issues related to “network neutrality” and if or how Internet traffic should be regulated. To learn more, see http://www.ftc.gov/opa/2006/12/broadbandworkshop2.htm.

FIRM NEWS

An article co-authored by Margo Tank entitled "It's the Message, not the Medium!  Rules for Electronic Records and Signatures in Recorded Land Title Instruments" was published in The Computer & Internet Lawyer (Dec. 2006, Vol. 23, No. 12).  An earlier version of the article was published in The Business Lawyer in August 2006.

Jeff Naimon was quoted in an article entitled “Pulling the Plug on Subprime Lending?” printed in the December 12th edition of the MBA Newslink, a publication of the Mortgage Bankers Association.  In the article he discussed efforts to regulate the subprime secondary market through “assignee liability.” 

 

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© 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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