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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

FEDERAL ISSUES

FDIC Issues Study on Identity Theft. On December 14, 2004, the FDIC issued a study on account-hijacking, one of the fastest growing types of identity theft in the United States. Account-hijacking is the unauthorized access to and misuse of existing account information, which is usually accomplished through various phishing and hacking schemes. According to the study, an estimated 2 million U.S. internet users experienced this form of identity theft during a twelve-month period ending April, 2004. The study advises financial institutions and regulators to consider certain steps to help reduce online fraud, including upgrading existing password-based customer authentication systems from one-factor to two-factor authentication, using scanning software to identify and defend against phishing, strengthening educational programs, and placing a continuing emphasis on information sharing among the financial services industry, technology providers, and the government. The FDIC is soliciting comments on the study through February 11, 2005. For a copy of the study, see http://www.fdic.gov/consumers/consumer/idtheftstudy/identity_theft.pdf.

HUD Issues Interim Rule on Credit Watch Initiative. The interim rule implements many of the changes to the Credit Watch initiative proposed in HUD's April 1, 2003 proposed rule. Among other things, this rule further clarifies the applicability of the Credit Watch Termination Initiative to underwriting mortgagees, and requests comments on the regulatory provisions regarding underwriting mortgagees. The effective date of the rule is January 18, 2005, but HUD will take additional comments until February 15, 2005. See: http://frwebgate6.access.gpo.gov/cgi-bin/waisgate.cgi?WAISdocID=321884432398+0+0+0&WAISaction=retrieve.

Federal Financial Institutions Examination Council Issues Additional Guidance on the New HMDA Reporting Rules. The guidance addresses technical issues that have arisen since the new rules were issued. The FFIEC notes, for example, that race must always be reported along with Hispanic or non-Hispanic ethnicity if the lender is face-to-face with the applicant. If the applicant self-identifies as Hispanic but declines to choose a race, the lender must choose a race to enter into the race field and may not use the code for “not applicable.” The FFIEC also announced that reported pricing data will be based only on loans on which the application was received on or after January 1, 2004, because loans with an application received before that date will not have rate information reported on them unless the rate locked on or after that date. A data field will be added to publicly-released loan application register (“LAR”) data indicating the date that the application was received. Lenders will apparently still be responsible for including rate-spread data, where the rate-spread exceeds the cutoff, on entries for loans in which the application was received before January 1, 2004, but the rate was not set until after that date, even though that information will not be included in FFIEC reports or on the LAR. Memorandum from Tamara Wiseman, Executive Secretary, FFIEC (Nov. 29, 2004), available at http://www.ffiec.gov/hmda/pdf/FFIECguidance2004.pdf.

OFAC Hits Do Not Automatically Require SAR Filing. The Financial Crimes Enforcement Network (FinCEN) announced that it had revised its interpretation of the rules on filing suspicious activity reports (SARs). In a November, 2003 issuance, FinCEN had interpreted the rules as requiring a covered financial institution to file a SAR whenever the name of a customer or employee matched a name on the Office of Foreign Assets Control (OFAC) list of Specially Designated Nationals and Blocked Persons. This interpretation led to redundant reporting to both FinCEN and OFAC and caused significant inconvenience to financial institutions. In response to these criticisms, FinCEN will henceforth regard the filing of a blocking report with OFAC as satisfying the SAR requirement in connection with the name match. If the financial institution has additional information not included in the blocking report, however, or if there was other suspicious activity associated with the name match, the financial institution should still file a SAR.

HUD Will No Longer Collect HMDA Data. All HMDA-reporting institutions will now submit their data to the Federal Reserve Board, beginning with the 2004 report, which is due by March 1, 2005. Memorandum from Patricia Dykes, Manager, CRA/HMDA Operations Unit, FRB (Nov. 23, 2004), is available at http://www.ffiec.gov/hmda/pdf/HUDtransfer.pdf.

Federal Trade Commission Issues Final Regulations on the “Primary Purpose” of a Commercial Email. On December 16, 2004, the FTC issued its final regulations under the CAN-SPAM Act that define the “primary purpose” of a commercial email. Establishing an email’s primary purpose determines whether certain CAN-SPAM restrictions apply to the email. The rules provide different tests for determining an email’s primary purpose, which depend upon whether the email contains only commercial content, a mixture of commercial and “transactional and relationship” context, a mixture of commercial and non-commercial and non-transactional or relationship content, or solely transactional or relationship content. The new rules can be accessed at http://www.ftc.gov/os/2005/01/050112canspamfrn.pdf.

FTC, DOJ: Massachusetts UPL Proposal Will likely Increase Legal Costs for Consumers. In a joint letter, the FTC and DOJ encouraged the Massachusetts Bar Association to reject or substantially reduce the breadth of a proposed model definition of the "practice of law." According to the agencies, the proposal would unnecessarily decrease competition between lawyers and nonlawyers. For example, the proposal could be interpreted to prohibit real estate agents from informing clients on smoke detector or lead laws, or prohibit nonlegal professionals such as tax preparers, accountants and financial planners from advising clients on issues involving related laws. The letter can be obtained at: http://www.usdoj.gov/atr/public/press_releases/2004/206849.htm.

Fed Releases HMDA formats. The Federal Reserve Board announced changes to the tables used to publicly release data collected by lenders under the Home Mortgage Disclosure Act (HMDA), which is implemented by the Board's Regulation C. These revisions to the public disclosure tables do not affect the data collection and reporting requirements applicable to lenders subject to Regulation C; the revised disclosure tables merely show the format that will be used by the federal financial regulatory agencies for public disclosure of the data collected and reported by lenders. The formats for some of the existing disclosure tables have been revised, one set of existing tables has been deleted, and new tables have been added. The changes reflect revisions to Regulation C, adopted by the Board in 2002, that require lenders to collect new data beginning January 1, 2004. The 2002 revisions to Regulation C require lenders to collect and report data including loan pricing information (the rate spread between the annual percentage rate on the loan and the yield on Treasury securities of comparable maturity); whether the loan is subject to the Home Ownership and Equity Protection Act; whether manufactured housing is involved; whether the loan is secured by a first or subordinate lien on the property; and certain information about requests for preapproval. In addition, the race and ethnicity categories were changed to conform to standards established by the Office of Management and Budget. http://www.federalreserve.gov/boarddocs/press/bcreg/2004/20041210/.

STATE ISSUES

Repeated Denial of Application for Virginia Mortgage Lender License Reversed. On December 15, the Virginia State Corporation Commission overturned the denial by the state banking commissioner of a mortgage company license, following a 3-day hearing. In the case of Calusa Investments, LLC, the SCC ordered the Bureau of Financial Institutions to write regulations governing the use of the term "preapproved" in connection with marketing materials used by licensed mortgage companies, and also requested new regulations to improve the definitions of the term "subsidiaries and affiliates" as used in the mortgage banking regulations. The SCC determined that Calusa should not be denied a license based on its alleged use of misleading offers that credit had been "preapproved" because it is not the only company to use such offers and the term "preapproved" has not been defined by rule of the Bureau. The ambiguity in the term "subsidiaries and affiliates" left open to question whether the applicant for a license had acted as a principal in unlicensed transactions by a separate company, and was therefore not a permissible ground for denial of the application. For a copy of the decision, email .

Freddie Mac Will Not Purchase Indiana High Cost Home Loans. Freddie Mac announced in an industry letter that it will no longer accept for delivery, mortgages with note dates on or after January 1, 2005, secured by mortgage premises in Indiana that meet the definition of a high cost home loan under Indiana's Home Loan Practices Act. Ind. Code § 24-9-1-1 et seq. Moreover, sellers must represent and warrant that such Indiana high cost home loans will not be sold to Freddie Mac. The industry letter can be accessed at http://www.freddiemac.com/sell/selbultn/121504indltr.html.

COURTS

Seventh Circuit Says “Firm Offer of Credit” in FCRA More Than Just Minimal Amount Guaranteed.LIn November, the 7th Circuit reversed a ruling in which the District Court for Northern District of Illinois dismissed a claim alleging that the defendant violated the Fair Credit Reporting Act (“FCRA”) by using a promotion for credit as a sham to access her credit information. The U.S. District Court dismissed her claim, ruling that the offer qualified as a “firm offer of credit,” creating a permissible purpose under the FCRA to obtain the plaintiff’s credit information. On appeal, the 7th Circuit said that in adopting the FCRA, Congress balanced the right to preserve the consumer’s privacy against the benefit of a firm offer of credit through a screening process. The 7th Circuit rejected the defendants’ argument that so long as any amount of credit is guaranteed, the offer qualifies as a “firm offer of credit,” noting that would permit anyone to gain access to virtually all consumer information by offering a meaningless, nominal amount of guaranteed credit. The court stated that whether the offer of credit will be honored is only one factor to consider. Courts should examine the entire offer, including the rate of interest, the method of computing interest, and the repayment period, to determine whether the offer has value for the customer, or if it is just pretext to gain access to credit information. If the latter, the offer cannot be considered a “firm offer of credit.” The 7th Circuit also reversed the District Court’s dismissal of the claim that the disclosures in the material violated FCRA because they were not “clear and conspicuous,” stating that the document clearly failed any test of conspicuousness. The court, noting a dearth of case law explaining the meaning of “clear and conspicuous” in the FCRA context, relied on guidance from cases interpreting the UCC and TILA, and found that the communication was severely lacking. Cole v. U.S. Capital, Inc., 389 F.3d 719 (7th Cir. Nov. 19, 2004).

Compliance With RESPA Bars Consumer Fraud and Fiduciary Breach Claim. In a case alleging that the payment of a yield spread premium violated RESPA, the Illinois Consumer Fraud Act and constituted a breach of a fiduciary duty, an Illinois state court held that, because the plaintiffs failed to state a claim under RESPA's anti-kickback provision in light of HUD's mortgage broker policy statements, the other allegations also fail. First, the Court found that actions specifically authorized by RESPA come under the Consumer Fraud Act provision which states that "[n]othing in this Act shall apply to * * * [a]ctions or transactions specifically authorized by laws administered by any regulatory body or officer acting under statutory authority of this State or the United States." "In other words, if the YSP payment ... was not violative of RESPA's anti-kickback provision, plaintiffs have no recourse under the Consumer Fraud Act; the reach of the Consumer Fraud Act simply does not extend beyond that of RESPA." Similarly, with respect to the fiduciary breach claim, the Court stated, "Assuming, arguendo, that [the broker] owed a fiduciary duty to plaintiffs (which [broker] conceded in its brief), because plaintiffs failed to state a claim under RESPA's anti-kickback provision, their allegation that [the broker] breached their fiduciary duty fails." Johnson v. Matrix Financial Services Corp. 2004 WL 2827587 Ill.App. 1 Dist.(Dec 09, 2004)

Foreclosure Terminates TILA Rescission Right. Plaintiffs argued post-foreclosure that they should have the right to rescind the loan under Regulation Z because the creditor did not give them two copies of the notice of the rescission right at closing. Under Regulation Z, where the creditor does not deliver the required notice or material disclosures, "the right to rescind shall expire 3 years after consummation [of the transaction], upon transfer of all the consumer's interest in the property, [or] upon sale of the property, whichever occurs first." Consistent with Regulation Z Commentary, the court ruled that a sale or transfer of the property need not be voluntary to terminate the right to rescind. For example, a foreclosure sale would terminate an unexpired right to rescind. In this case, the borrower had a post-foreclosure right of redemption but did not attempt to redeem the property during that period. Instead, the borrower attempted to rescind the loan. Worthy v. World Wide Financial Services, Inc. 2004 WL 2901587 E.D.Mich., 2004. Dec 13, 2004

Lender Prevails in Document Preparation Fee Case. In the case of Inge v. Rock Financial Corp., Case No. 03-1816, the United States Court of Appeals for the Sixth Circuit considered, in relevant part, whether a lender’s $120 document preparation fee charged in connection with a mortgage loan was “reasonable” under TILA and its implementing Regulation Z. The Plaintiff claimed that the $120 fee was excessive; Plaintiff did not claim that such fee was for something other than document preparation. In its decision, the Court considered whether the fee was reasonable given the prevailing practices in the relevant market, meaning reasonable given the prevailing practices of the industry in the locality, not whether the lender used the cheapest third-party service available to it anywhere. The Court decided by summary judgment that the $120 document preparation fee charged by the lender was “reasonable” under TILA and Regulation Z because there was no competent evidence in the record challenging the reasonableness of Defendant’s $120 document preparation fee vis-à-vis other lenders in the Western Michigan area. To see the decision in its entirety, please see http://pacer.ca6.uscourts.gov/opinions.pdf/04a0394p-06.pdf.

Maryland Court Strikes Down State Anti-Spam Statute. A Montgomery County, Maryland court recently held that the Maryland Anti-Spam law was unconstitutional because it attempted to regulate commerce that may not occur within Maryland’s borders. The plaintiff, a Maryland-incorporated entity that is run by an individual who lives in Washington, DC, brought suit against an alleged New York spammer. The court, however, noted that the law could be interpreted to prohibit the transmission of commercial emails between entities that are not physically located in Maryland. An appeal is planned. State legislators have expressed an interest in amending the Maryland law to solve any constitutional issues. An article regarding this case can be read at http://www.washingtonpost.com/ac2/wp-dyn/Search?keywords=maryland%20spam.

MISCELLANY

Undocumented Immigrants Could Provide $44 Billion in New Mortgages. A study commissioned by the National Association of Hispanic Real Estate Professionals has found that 1.5 million undocumented Latinos are potential home buyers, and about 172,626 undocumented Latinos that rent could potentially afford a home worth $94,500 or more. According to the study, if all the current undocumented renters purchased affordable homes, it could create $44 billion in new mortgages. The study also discussed barriers to homeownership for undocumented Latinos, such as establishing a credit history and providing identification. The news release can be accessed at http://www.nahrep.org/News/PRnahrepStudy.htm.

American Express and Citigroup Join for Co-Branded Cards. American Express has entered into a partnership with Citigroup to begin issuing joint credit cards. Citigroup will design, issue, and manage the cards and American Express will process the transactions. In October, the Supreme Court declined to hear an appeal from Visa and MasterCard to a federal court ruling that struck down their rules forbidding their members from working with other brands. A month later, American Express filed suit seeking damages for the alleged anticompetitive practices stemming from the rules struck down in federal court. That lawsuit named Visa and MasterCard, as well as eight major banks, but not Citigroup.

FTC and DOJ Urge Massachusetts Bar to Reject a Narrow Definition of the Practice of Law. The agencies argued that, for example, barring non-attorneys from conducting real-estate closings would harm consumers. See http://www.ftc.gov/os/2004/12/041216massuplltr.pdf.

Maximum Charge for a Credit Report Disclosure Increases to $9.50. The FTC announced that the maximum fee for a credit bureau’s disclosure of a consumer’s credit file will increase from $9.00 to $9.50 in 2005. The charge applies when the consumer is not entitled to a free report under the new annual free disclosure requirement, after adverse action has occurred, or in other situations. See http://www.ftc.gov/os/2004/12/041217fcrafrn.pdf.

FIRM NEWS

Andrea Lee Negroni published two articles in the mortgage press this month, including "Translating Disclosures for the Hispanic Market" which appeared in Mortgage Originator magazine (and is online at http://www.buckleykolar.com/publications/) and "Above and Beyond the Law," an article dealing with permissible fees for faxing mortgage loan payoff statements to borrowers. The latter article appears in the December issue of Servicing Management magazine. Ms. Negroni, the author of 3 multi-state reference books on mortgage lending law and more than 50 published articles, was also selected for inclusion in the West/Thomson Publishing Company's "Expert Directory" this month.

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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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