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InfoBytes

CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

August 18, 2006

FEDERAL ISSUES

OCC Issues New Guidance on Gift Cards. On August 14, the Office of the Comptroller of the Currency (OCC) issued a new bulletin regarding bank-issued gift card disclosure and marketing issues. The bulletin addresses the types of disclosures that the OCC would expect to see with respect to “bank product” gift cards, including basic information that is most essential to a gift card recipient’s decisions about when and how to use the card. Additionally, the bulletin advises national bank gift card issuers to implement measures to avoid engaging in misleading marketing or promotional practices – such as advertising a gift card as having “no expiration date” if monthly charges can consume the card balance. For more information, see http://www.occ.treas.gov/toolkit/newsrelease.aspx?Doc=M182NCDR.xml. A copy of the OCC’s guidance can be found at http://www.occ.treas.gov/ftp/bulletin/2006-34.doc.

FDIC Requests Public Comment on ILC Freeze. On August 17, the Federal Deposit Insurance Corporation (FDIC) announced it would publish a request for comment regarding its moratorium on applications for insurance and notifications of change of control by Industrial Loan Companies (ILCs). The FDIC’s recent decision to cease processing applications by ILCs (reported in the July 28th issue of InfoBytes) was for the stated purpose of examining the “risks of ILCs to the deposit insurance fund, and whether their commercial relationships pose any safety and soundness risks.” The request for comment includes the following specific questions to commentators: (i) Should the FDIC apply its supervisory or regulatory authority differently based upon whether an ILC owner is a financial entity or a commercial entity? (ii) Should the FDIC routinely place different restrictions or requirements on ILCs based on whether they are owned by commercial companies or companies not subject to some form of consolidated federal supervision? (iii) Should the FDIC routinely place certain restrictions or requirements on all or certain categories of ILCs that would not necessarily be imposed on other institutions (for example, on the institution’s growth, ability to establish branches and other offices, ability to implement changes in the business plan, or capital maintenance obligations)? And (iv) given that congress has expressly excepted owners of ILCs from consolidated bank holding company regulation under the Bank Holding Company Act, what are the limits on the FDIC’s authority to impose such regulation absent further congressional action? Comments will be accepted for 45 days after the request is published in the Federal Register (not yet published). To view a draft of the publication, and view instructions on how to comment, see http://www.fdic.gov/regulations/laws/federal/2006/06noticeILCcomments.html.

Federal Reserve Board Seeks Comment on Proposed Revisions to "Bankers' Bank" Exemption from Reserve Requirements. Currently, qualified “bankers’ banks” are exempt from reserve requirements generally applicable to depository institutions under the Federal Reserve Act and its implementing Regulation D. Generally, exempt bankers’ banks do not conduct business with the general public, and are organized primarily to serve their owners which are mostly other depository institutions. On August 14, the Federal Reserve Board (FRB) announced a proposed revision to a 1980 interpretation of Regulation D (the “Interpretation”) that would continue to exempt qualified bankers’ banks from reserve requirements but would permit such banks to serve certain additional customers on a case-by-case basis that the bank may be prohibited from serving under the existing rules. Under the proposed revision, such new customers would still be subject to the percentage limitations specified in the Interpretation relating to ownership and doing business (i.e., not more than 25 percent of bankers’ bank capital may be owned by non-depository institution customers and bankers’ bank business with non-depository institution customers may not exceed 10 percent of total assets/liabilities). Comments are requested no later than thirty days after publication in the Federal Register (not yet published). A copy of the release may be found at http://www.federalreserve.gov/boarddocs/press/bcreg/2006/20060814/default.htm.

Banking Agencies Provide Additional Guidance on Multifactor Authentication. On August 15, the FRB, FDIC, National Credit Union Administration, the OCC, and Office of Thrift Supervision (collectively the “Banking Agencies”) issued Frequently Asked Questions on FFIEC Guidance on Authentication in an Internet Banking Environment (FAQs). The FAQs provide information to interpret the Banking Agencies’ 2005 authentication guidance, which provides guidance on performing a risk assessment and requires the use of multifactor authentication for high-risk transactions. The FAQs reiterate the Banking Agencies’ expectation that covered financial institutions comply with the 2005 authentication guidance by the end of 2006. A press release and access to the FAQs is located at http://www.ffiec.gov/press/pr081506.htm.

Investment Advisers to Hedge Funds Get Clarification from SEC on Registration Rules. On August 10, the Securities and Exchange Commission (SEC) issued a no-action letter outlining its view of the now vacated rule requiring hedge fund registration in the aftermath of the decision in Goldstein v. SEC (reported in the June 23rd issue of InfoBytes). In its letter, the SEC Division of Investment Management (IM) stated, among other things, that (i) IM would not pursue enforcement action against an adviser that had been required to register prior to Goldstein and now withdraws based on exemption; and (ii) IM soon will post guidance on the SEC website regarding completion of online registration and reporting forms regarding the vacated rule (these will not be altered immediately due to technical constraints). Other matters addressed in the no-action letter include offshore investment advisers to offshore funds, the custody rule, records supporting performance information, and performance-based compensation arrangements. The no-action letter can be read in full at http://sec.gov/divisions/investment/noaction/aba081006.pdf.

HUD Announces Review of Fannie Mae and Freddie Mac Investments. The Department of Housing and Urban Development (HUD) has announced it is undertaking a comprehensive review of Fannie Mae’s and Freddie Mac’s investment activities based on concern with the lack of transparency on their financial statements. HUD intends to investigate whether various investment activities undertaken by the two government sponsored enterprises (GSEs) are consistent with their charter authorities and with public purposes. HUD will also examine the extent to which the GSEs’ investments are subject to the internal investment guidelines approved by each GSE's Board of Directors. HUD anticipates that its review and evaluation of GSE investment activities will be completed by Fall 2007. To view the press release, please see http://www.hud.gov/news/release.cfm?content=pr06-094.cfm.

COURTS

Maryland Court of Appeals Allows Negligence Claim By a Non-Customer Against a Bank. The Court of Appeals of Maryland let stand a lower court decision holding that an action for negligence may be brought by a non-customer against a depositary bank, where no UCC provisions have been violated, and where an "intimate nexus" establishes a duty between the depositary bank and the non-customer. In the instant case, the non-customer was a title company that had provided an individual homeowner two checks pursuant to a refinancing – (i) a cash out check made payable to the individual, and (ii) a second check intended to pay off a second loan made payable to the depositary bank. Rather than paying off the second lien, the individual deposited the second check in his own account with the apparent permission of the depositary bank (the payee on the check). As a result, the loan was not paid off and the non-bank customer title company could not perfect the lien. The Court of Appeals, after resolving that there were no violations of the UCC because all indorsements were authorized and proper, stated that under Maryland law, the equivalent of a contractual relationship may establish the necessary privity to give rise to a tort action in negligence where only economic loss results. The Court found an "intimate nexus" existed between the two parties sufficient to create privity between them and to give rise to a tort action in negligence. The Court cited as support for its conclusion the facts that: (i) the bank was aware that the check was not made payable to the individual and yet permitted him to deposit the check in his own account, (ii) that the bank knew the non-customer was a title company and was on notice that the check was for payments to remove the liens held by the bank on the individual's property, and (iii) that the bank had also received a "payoff request" from the new lender. Consequently, the Court of Appeals upheld the lower court decision to let the negligence claim stand. Chicago Title Insurance Co. et al., v. Allfirst Bank, et al., No. 80 (Md. Aug. 4, 2006), available at http://www.courts.state.md.us/opinions/coa/2006/80a05.pdf.

MISCELLANY

Federal Reserve Adjusts HOEPA Points and Fees Trigger. The Home Ownership and Equity Protection Act of 1994 (HOEPA) restricts credit terms such as balloon payments and requires additional disclosures when, in relevant part, total points and fees payable by the consumer exceed the fee-based trigger (initially set at $400 and adjusted annually) or 8 percent of the total loan amount, whichever is larger. Based on changes in the Consumer Price Index (CPI), the Federal Reserve has increased the dollar amount trigger from $528 in 2006 to $547, effective January 1, 2007. The FRB’s August 9 press release announcing the adjustment is available at http://www.federalreserve.gov/boarddocs/press/bcreg/2006/20060809/default.htm.

OCC Adopts Final Rule for Fee Assessments. On July 25, the OCC published a final rule for the payment of fees. Under the revised collection assessment process: (i) the OCC, rather than each national bank, computes the semi-annual fee; and (ii) the fee amount assessment and payment dates have also been altered. The effective date of the rule is August 24, 2006. The OCC will notify each national bank of the amount of its semiannual assessment and automatically deduct that amount from each bank’s designated account on the payment due date. The final rule as published in the Federal Register can be viewed at http://www.occ.gov/fr/fedregister/71fr42017.pdf.

FIRM NEWS

Jeremiah Buckley, Joe Kolar and Andrea Lee Negroni will be speaking at the Mortgage Bankers Association's Regulatory Compliance Conference at the J.W. Marriott Hotel in Washington DC from September 6-9. The conference brochure can be found at http://events.mortgagebankers.org/regcomp2006/agenda/.

Buckley Kolar welcomes Jonathan Cannon to the firm as a first year associate. Mr. Cannon is a 2006 graduate of the University of Virginia School of Law where he was the Articles Editor of the Virginia Journal of Social Policy and the Law. He also received a master’s degree in English from Middlebury College in 2001 and graduated magna cum laude with a B.A. in English from Colby College in 1996, where he was elected to Phi Beta Kappa.

© 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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