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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

FEDERAL ISSUES

OTS Issues Interim Rule for Streamlined Process to Determine Status as a Savings and Loan Holding Company. The Office of Thrift Supervision (OTS) issued an interim final rule providing a streamlined process under its rules of practice and procedure for determining whether a company qualifies as a savings and loan holding company. Under the rule, a company that holds at least 1%, but not more than 10%, of the voting stock of a savings association or savings and loan holding company may be found to be exercising a controlling influence over the affairs of the association or company for certain purposes under the Home Owners’ Loan Act, and thus qualify as a savings and loan holding company. The OCC said the streamlined procedure enables U.S. companies with significant foreign operations to be categorized as savings and loan holding companies subject to OTS comprehensive, consolidated supervision, thus reducing burdens that arise from regulatory oversight by multiple financial regulatory authorities.
For a copy of the press release, see http://www.ots.treas.gov/docs/7/77508.html; for the interim rule, see http://www.ots.treas.gov/docs/7/73254.pdf

Federal Reserve Board Proposes to Amend Treatment of “Remotely Created Checks.” The Federal Reserve Board published a proposed rule that would amend Regulation CC to define “remotely created checks” and adopt new transfer and presentment warranties for the checks. The proposed rule would shift liability for unauthorized remotely created checks from the payee bank drawing on the check to the depository bank of the account holder. Among other things, the rule also attempts to create a uniform national system of treatment for remotely created checks. It defines a remotely created check as a check that “is drawn on a customer account at a bank, is created by the payee, and does not bear a signature in the format agreed to by the paying bank and the customer.” This definition includes checks drawn on either a consumer or a non-consumer account, such as a business or other accounts, and would include agents of a payee bank. It would not include a typical forged check. Comments on the rule are due by May 3, 2005. For more information on the rule, please see: http://www.federalreserve.gov/boarddocs/press/bcreg/2005/200503012/.

Federal Banking Agencies Issue Reminder on Confidentiality of Supervisory Ratings and Examination Reports. The federal banking and thrift agencies (Fed, FDIC, OCC, and OTS) issued an advisory reminding financial institutions that they are prohibited by law from disclosing their supervisory ratings and other nonpublic supervisory information, such as examination reports. In addition, the agencies asked the National Association of Insurance Commissioners to assist in notifying insurance companies of the prohibition and to discontinue requesting such information from financial institutions. See http://www.ots.treas.gov/docs/4/480176.pdf.

OTS Adopts Final Rule Permitting Large Savings Associations to Choose Their CRA Rating Weights. The OTS adopted a final rule permitting large savings and loan associations (associations with assets of more than $1 billion) to determine the rating weights to be assigned to the lending, investments, and services tests of the large institution Community Reinvestment Act (CRA) evaluation. As a result, large institutions may assign a weight of 50 to 100% to the lending test, 0 to 50% to the investments test, and 0 to 50% to the services test, provided the sum of the percentages assigned is 100%. For institutions that do not elect alternative weights, the OTS will continue to assign the 50/25/25 percent weight allocations of the existing rule. The OTS said the rule provides flexibility for large institutions to assess areas of greatest CRA need in their communities and to tailor their CRA activities accordingly. For a copy of the press release, see http://www.ots.treas.gov/docs/7/77507.html; for the final rule, see http://www.ots.treas.gov/docs/7/73253.pdf.

FDIC Revises Examination Guidance for Payday Lending Programs. In follow-up to its initial July 2003 payday lending guidance, the FDIC revised and clarified the appropriate limits on payday lending programs. Payday loans are small-dollar, unsecured, short-term, sub-prime credit products with high fees relative to their size and duration. The FDIC issued these revisions for the purpose of ensuring that FDIC-supervised institutions do not provide payday loans on a recurring basis to customers with long-term credit needs. The revised guidance states that institutions should not provide payday loans to customers who have had payday loans outstanding from any lender for a total of three months in the previous 12-month period, but should instead offer the customer an alternative longer-term credit product more appropriately suiting the customer’s needs. To view the FDIC’s revised guidelines in their entirety, see: http://www.fdic.gov/news/news/financial/2005/fil1405a.html.

Senate Judiciary Committee to Probe Data Collection Practices. In response to the developments in the ChoicePoint case, Senator Leahy asked the Senate Judiciary Committee to hold hearings on data collection, sales and use practices. Senator Leahy suggested that the Committee examine the business of information brokering, the government’s data mining operations and use of commercially available data, the opportunities and challenges created by new data technologies, and the impact of outsourcing on data security. For more information, see http://leahy.senate.gov/press/200502/022205.html.

ChoicePoint Data Breach Triggers Nationwide Legal and Legislative Response. The February 16, 2005 announcement that ChoicePoint, Inc., the nation’s largest data broker, had mistakenly sold personal information on at least 145,000 individuals to identity thieves has triggered a nationwide legal and legislative response. On the federal level, Sen. Dianne Feinstein (D-CA) is pushing a series of bills providing individuals with the right to control the sale of their personal information (S.116), the use of their social security numbers (S.29), and to receive notice from data brokers of any security breach affecting their personal information (S.115). Senate Judiciary Committee Chairman Arlen Specter (R-PA) also plans to hold hearings on the ChoicePoint incident and identity theft in general. On the state level, the California attorney general has opened an investigation of ChoicePoint, and the Georgia Insurance Commissioner has placed the company on probation and ordered it to perform a security audit. In addition, legislation has been introduced in Illinois and Georgia requiring a broad range of companies to provide consumer notification in the event of data security breaches. Finally, ChoicePoint is defending against a class action lawsuit in California based on the security breach. For information on ChoicePoint’s notification program for affected individuals (which was spurred by a preexisting California notification statute and pressure from attorneys generals in 38 states), see www.choicepoint.com.

STATE ISSUES

Illinois Bill Would Require Consumer Notice in Cases of Identity Theft. On February 22, 2005, in response to the recent Choicepoint, Inc. identity theft crisis, Illinois Governor Rod Blagojevich proposed legislation requiring organizations maintaining personal information about Illinois residents to notify consumers when personal data has been illegally accessed. Initially, Choicepoint decided to inform only the 35,000 California residents of the nearly 145,000 consumers, including 5,000 Illinois residents, whose personal information was stolen. Its decision was based on the fact that California consumers were covered by California’s S.B. 1386—a consumer notification requirement that requires state agencies and businesses that own or license computer data to disclose any security breach that involves personal data. Although Choicepoint has since agreed to notify all customers whose information was illegally accessed, its initial decision motivated Gov. Blagojevich to propose an Illinois consumer notice requirement that emulates California’s. Gov. Blagojevich believes his proposal will not only promote consumer notification, but in addition, will “motivate companies that maintain personal information to employ tougher security measures.”

Wisconsin Better Business Bureau Issues Warning on Mortgage Elimination Scam. On February 15, 2005, the Wisconsin Better Business Bureau issued a warning about a fraudulent mortgage elimination scheme. The BBB investigated the scheme, in which individuals attempt to eliminate a person’s mortgage for a fee by filing false documents with the person’s lender. D. Scott Heineman and Kurt F. Johnson were the individuals filing the false documents. They charged mortgagors a $3,000 fee for the so-called service. The scheme appears to have spread to Tennessee, Ohio, Florida, North Carolina and South Carolina. The BBB warned that there could be other individuals or businesses involved, including the Dorean Group, Capital Creation Resource and Redwood Trust in New York.

Wyoming Enacts Mortgage Lender & Broker Licensing Law. On February 25, Wyoming enacted the “Wyoming Residential Mortgage Practices Act” (S.B. 13, Enrolled Act No. 54) to require mortgage lenders and mortgage brokers to obtain licenses. The law covers residential mortgage loans, defined as first mortgage loans “made primarily for personal, family or household use and primarily secured by a security interest on residential real property.” The Act sets forth the powers of the state banking commissioner, including enforcement, examination, and investigative powers. It also sets forth application requirements, record keeping and confidentiality requirements, change in control requirements, license renewal procedures, and grounds for license suspension or revocation. Licensees must maintain a surety bond of $25,000. Licensed mortgage lenders and brokers will be subject to disclosure requirements. The Act prohibits compensation to any unlicensed person engaged in mortgage lending or brokering, exclusive dealing or exclusive agency agreements from borrowers, delay in closing residential mortgage loans for the purpose of increasing interest, costs, fees or charges to the borrower, acceptance of any undisclosed fees at closing, obtaining any agreement or instrument in which blanks are left to be filled in after execution, payments to a in-house or fee appraiser to influence the appraiser’s independent judgment, false promises or misrepresentations, and agreements to fix in advance a particular interest rate or other term without written confirmation. Violations of the Act are subject to civil and criminal penalties. Persons conducting mortgage lending or brokering activities as of July 1, 2005 must apply for a license by September 30, 2005. See the bill at http://legisweb.state.wy.us/2005/enroll/SF0013.pdf.

COURTS

FTC Settles Longstanding Predatory Lending and Servicing Case Against Capital City Mortgage. The FTC complaint, filed in January 1998, alleged a wide variety of unfair and deceptive lending and servicing practices, including misleading charges on monthly statements, foreclosing on borrowers who were not in default, and failing to release liens after payoff. The defendants will pay $750,000 in consumer redress over two years and will pay an additional $350,000 into a “performance fund” designed to secure compliance with the consent decree. Under the order, the defendants are enjoined from misrepresenting any of the material terms of a loan offer or the amount, nature, or terms of any fee. They will have to disclose all fees three days before loan closing unless the borrower waives this requirement because of a bona fide financial emergency; this requirement is in addition to the right of rescission. The defendants are also enjoined from, among other things, misrepresenting the amount of any fee or that it is allowed under the loan instruments or applicable law, misrepresenting the priority order of loan payments, stating the amount of a loan payment or fee unless it can substantiate that amount based on “competent or reliable evidence,” charging interest on funds not yet disbursed to the borrower without the borrower’s explicit consent, charging a late fee after a loan has been accelerated, and taking or attempting to take title to secured property from a borrower who is current. The order also requires the company to follow proper escrowing practices, including requiring sufficient escrow payments and making timely disbursement payments while at the same time not exceeding a maximum cushion of one-sixth of the balance. The order sets out detailed notice procedures that are required before the company may force-place insurance. The order also prohibits specific violations of Truth in Lending Act disclosure requirements. It prohibits the company from misrepresenting that an employee is an independent debt collector or collecting amounts not expressly authorized by the loan agreement or permitted by law, in violation of the Fair Debt Collection Practices Act. (The company’s in-house counsel previously signed a consent order agreeing not to violate the FDCPA.) The order requires the company to comply with Equal Credit Opportunity Act and Regulation B requirements to take written applications; collect racial, ethnic, and gender information; and provide written adverse action notices. It requires the company to institute a dispute-resolution procedure and to provide detailed annual summaries of the status of the account and to provide up to two payoff statements per year on request. The company must, “to the greatest extent practicable,” use the Uniform Instruments for its notes and security instruments. Copies of the order are available at http://www.ftc.gov/os/caselist/capitalcitymortgage/050224settlement02232005.pdf.

New York Enforces New State Limits on Gift Card Fees. Simon Property Group, operator of the nation's largest chain of shopping malls, has settled a lawsuit brought last month by New York Attorney General Eliot Spitzer alleging that its "Simon Giftcard" -- a Visa-branded prepaid debit card issued by Bank of America -- violated New York's recently-passed gift card law, GBL 396-i. In addition to the cost of the card itself, card-holders were being charged a monthly administrative fee beginning in the seventh month after purchase of the card -- a fee that is illegal under a recently passed New York law that prohibits administrative fees until the thirteenth month of a card's dormancy. In its settlement with the New York A.G., Simon agreed not to assess this administrative fee except in conformity with the New York law. Simon also agreed to disclose on the card itself the charges for replacement of lost or stolen cards and reissuance of expired cards -- another requirement of the New York law. Finally, Simon agreed to pay a $100,000 penalty and $25,000 costs.

Connecticut Court Holds Corporations Cannot Sue to Foreclose in Trade Name. In two cases decided on February 15, 2005, the Appellate Court of Connecticut held that a trial court did not have subject matter jurisdiction over a foreclosure action brought solely in the corporate plaintiff's trade name and directed the trial court to grant the defendant borrower's motion to dismiss. The court explained that America's Wholesale Lender (AHL), a trade name used by Countrywide Home Loans, is not an entity with legal capacity to sue, but merely a description of the corporation doing business under that name, and cannot confer jurisdiction on the court. The court refused to extend the reasoning used in other cases to allow a cure of the mislabeling or misnaming of a defendant, pointing to the public's heightened interest in knowing who is financially and personally liable for the actions of entities doing business under trade names. The court rejected AHL’s attempt to substitute the assignees of the subject notes and mortgages as plaintiffs, explaining in one of the cases that there was no legally recognized entity for which there could be a substitute, and that, because AHL did not have standing to bring an action, no action was ever commenced. For unofficial copies of the cases, see http://www.jud.state.ct.us/external/supapp/Cases/AROap/AP87/87AP151.pdf for America's Wholesale Lender v. Pagano, and http://www.jud.state.ct.us/external/supapp/Cases/AROap/AP87/87AP152.pdf for America's Wholesale Lender v. Silberstein.

Mortgage Company Settles FTC GLB Safeguards Rule Charges. On March 4, 2005, the FTC announced that Nationwide Mortgage Company had settled an FTC administrative complaint charging it with violating the FTC’s Safeguards Rule. The Rule, required by the Gramm-Leach-Bliley Act, requires financial institutions, including mortgage bankers and brokers, to implement policies and procedures to ensure the security of customer information. The FTC had alleged that the company “collected sensitive customer information, including Social Security numbers and bank account numbers, without implementing reasonable policies and procedures to ensure the security and confidentiality of that information,” by, for example, storing information on a computer network that was “accessible to all employees and connected to the Internet,” without monitoring the network for vulnerability to attack. The FTC had not alleged any actual security breaches, however. In addition to prohibiting future violations of the Safeguards Rule, the order requires the company to hire an independent professional to certify that its security program is consistent with the standards listed in the order, initially within 180 days and then every two years for ten years. Following its normal procedure for administrative consents, the FTC will publish the proposed order in the Federal Register for public comments, which will be due by April 4, 2004. Copies of the proposed consent decree and other documents are available at http://www.ftc.gov/os/adjpro/d9319/index.htm.

MISCELLANY

Bank of America to Implement VeriSign’s Authentication Platform. Bank of America (“BOA”) recently hired VeriSign, a provider of online security services, to support its implementation of enhanced authentication technology. The decision to work with VeriSign comes on the heels of a lawsuit filed against BOA by a Miami businessman who alleges that $90,000 was illegally transferred from his bank account after hackers used a computer virus to extract account information from his PC. BOA’s new security measures will utilize two-factor authentication. Such systems require users to provide two means of identification—usually a password and a token or “smartcard.” VeriSign plans to use “next-generation tokens” to help BOA “facilitate authenticated and secure communications and transactions.” For more information, see: http://www.verisign.com/verisign-inc/news-and-events/news-archive/us-news-2005/page_028523.html.

Information Security May Be the Next Area of Corporate Exposure. Speaking at a recent American Bar Association Information Security Committee meeting, a panel of experts noted that information security will be an increasingly significant litigation risk. The panel noted that a variety of state and federal laws, including California’s AB 1950 and SB 1386, Sarbanes-Oxley and HIPAA require companies to ensure the security of their internal records and customer information, and to disclose certain security breaches to consumers. In addition, agencies and the courts have demonstrated a willingness to impose sanctions on companies that fail to maintain secure systems, including requiring regular information security audits or even requiring that insecure systems be disconnected from the Internet. Failure to adequately protect a company’s IT systems and customer data could lead to enforcement action and/or civil liability.

FTC Memorandum of Understanding on Spam with Spanish Counterpart. The Federal Trade Commission (FTC) entered into a memorandum of understanding on spam law enforcement with the Agencia Española de Protección de Datos (AEPD). Under the memorandum, the two agencies agreed to facilitate effective enforcement actions against spam violations by sharing information, cooperating on prosecutions, assisting in the identification and location of information and persons of interest, and involving other agencies in their respective countries as necessary. Although the memorandum is not intended to be legally binding or to create new obligations or new powers in either agency, both the FTC and the AEPD regard the it as an important part of the multilateral international effort to coordinate anti-spam enforcement efforts begun last year in London. For details, see http://www.ftc.gov/opa/2005/02/spainspam.htm.

FTC Issues Its Annual Report to the FRB on Enforcement of the Consumer Credit Statutes. The report summarizes enforcement of the Truth in Lending Act, Consumer Leasing Act, Equal Credit Opportunity Act, and Electronic Fund Transfer Act. In contrast to some previous reports, the FTC does not recommend any legislative changes in those laws. The report is available at http://www.ftc.gov/os/2005/03/050301enforcemntrpt.pdf.

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© Buckley Kolar, LLP 2005. 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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