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InfoBytes

CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

October 20, 2006

Web Seminar – Why and How to Organize a Federal Savings Bank

Wednesday, October 25th at 12:00 PM EDT (9:00 AM PDT)

Buckley Kolar is presenting a free 45-minute Web-based seminar that will address the advantages of organizing a federal savings bank and will include a detailed explanation of the application process. Presenting the seminar will be two Buckley Kolar partners expert in the area of organizing financial institutions — Joseph Lynyak and Jeffrey Naimon. In addition, a senior member of the OTS staff will participate as a guest speaker. Written materials summarizing the topics to be discussed will be available as part of the presentation. To register for the seminar, please go to http://showvisuals.mshow.com/findshow.aspx?usertype=1&cobrand=128&shownumber=310009.

FEDERAL ISSUES

Congress Passes Legislation to Place Restrictions on Extensions of Consumer Credit to Active Duty Service Members and Their Dependents. On October 16, the President signed into law H.R. 5122, the John Warner National Defense Authorization Act for Fiscal Year 2007. As noted in the October 6 issue of InfoBytes, Section 670 of the Warner Act, which will take effect on October 1, 2007 unless an earlier effective date is established by regulation, imposes a 36% annual percentage rate (APR) usury limit and other restrictions on consumer credit (except for residential mortgages and secured purchase-money loans for cars and other personal property) extended to members of the military, reserves, and National Guard on full-time active duty, as well as their dependents. This expanded InfoBytes entry notes some of the issues and questions raised by the Warner Act for credit card issuers and other consumer credit lenders pending the promulgation of implementing regulations by the Department of Defense.

First, the nature and scope of a lender’s duty to identify service personnel and their dependents eligible for the protections of the Warner Act are currently unclear. It appears, however, that the Warner Act may require lenders to establish new applicant identification procedures and to create new or revised applications and other materials for consumer loans and accounts subject to the Warner Act.

Second, the calculation of the 36% APR usury limit is currently unclear as well. On the one hand, the statute takes a broad approach the definition of APR by both incorporating the definition of the Truth in Lending Act (TILA) and its implementing Regulation Z and stating expressly that the term includes “all fees and charges, including charges and fees for single premium credit insurance and other ancillary products sold in connection with the credit transaction.” On the other hand, the statute may not be targeting transaction and other fees imposed during the course of a loan or the operation of an account that only nominally inflate a periodic APR above the usury limit.

Third, in addition to the usury limit, the Warner Act imposes a variety of other restrictions on transactions with covered service personnel and their dependents, including broadly worded prohibitions on (i) payday, paycheck allotment, and car title lending, (ii) the waiver of legal rights, (iii) mandatory arbitration, (iv) “onerous legal notice provisions in the case of a dispute,” (v) prepayment fees or prohibitions, and (vi) refinancing. Most lenders will be affected by one or more of these restrictions, which may require new processes and resources to monitor and ensure compliance throughout the life-cycle of a loan or account.

Other aspects of the Warner Act may raise issues for lenders as well, such as initial disclosure requirements that might go beyond the scope of those required by TILA, the potential for inconsistency in overlapping regulations given that the Department of Defense is the lead regulator instead of the usual financial regulatory agencies, and the precise reach of the Warner Act’s express preemption of federal and state law.

Enforceable through civil remedies and criminal penalties (as a federal misdemeanor punishable by up to one year in prison), the Warner Act has the makings of an important new feature in the financial regulatory landscape.

For the text of the Warner Act, see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_bills&docid=f:h5122enr.txt.pdf.

or contact Buckley Kolar.

Regulatory Relief Bill Changes Information Privilege. On Thursday October 12, the President signed into law the Financial Services Regulatory Relief Act of 2006, which aims to provide regulatory relief for insured depository institutions. Of particular interest to the banking industry is Section 607 (titled “Nonwaiver of Privileges”), which amends the Federal Deposit Insurance Act and the Federal Credit Union Act to provide that the submission of information to banking regulators (including federal banking agencies, state bank supervisors, or foreign banking authorities) in the course of supervisory or regulatory processes does not waive or otherwise affect any privileges that may be asserted with respect to that information to any other person or agency. This provision reverses court decisions that, in limited instances, have held that submission of privileged information to a bank regulator, even pursuant to the regulator’s examination authority, would result in a waiver of the privilege with respect to all third parties. To view the full Act, please go to http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_bills&docid=f:s2856enr.txt.pdf.

HUD Announces $2M in Settlements for Captive Title Reinsurance Arrangements. On October 12, the Department of Housing and Urban Development (HUD) announced three settlements (totaling $1.95 million) with three homebuilders engaged in captive title reinsurance arrangements that HUD alleges were violations of Section 8 of RESPA. These latest settlements marked the second round of federal-level settlements for captive title reinsurance arrangements, bringing the total amount of negotiated settlements with builders and lenders involved in captive title reinsurance to $3.55 million. To view the HUD press release, see http://www.hud.gov/news/release.cfm?content=pr06-137.cfm.

FTC Issues Consumer Publication on Selecting a Real Estate Professional. The Federal Trade Commission (FTC) has issued a new publication entitled Selling Your Home? Tips for Selecting a Real Estate Professional that is designed to assist those considering whether to sell their home through a real estate broker or agent. The publication addresses the differences between different types of brokers and agents, the advantages and disadvantages of selling a home without a broker, and what to ask when hiring a real estate broker. It also provides a list of consumer resources for obtaining additional information about mortgages and the home-selling process. To view the publication on the FTC website, please go to: http://www.ftc.gov/bc/realestate/pubs/zrea01.pdf.

Banking Agencies Release Consumer Handbook on Nontraditional Mortgages. The federal bank, thrift, and credit union regulatory agencies (the FRB, NCUA, FDIC, OTS) have released a consumer handbook entitled Interest-Only Mortgage Payments and Payment-Option ARMs – Are They for You? The purpose of this handbook is to help consumers make informed decisions about adjustable rate, interest-only, and payment-option mortgages. The handbook aims to inform consumers about these loan products in order to avoid “payment shock” or any other consequence a consumer might not sufficiently appreciate at the outset of a loan. The handbook contains a question-and-answer section regarding nontraditional mortgages, a glossary of loan terms, and a mortgage shopping worksheet. A press release describing the handbook is available at http://www.fdic.gov/news/news/press/2006/pr06093.html. A full copy of the booklet can be found at http://www.federalreserve.gov/pubs/mortgage_interestonly/default.htm.

OTS Publishes Guides for Savings Association Directors. On October 17, the Office of Thrift Supervision (OTS) released two separate guide books for savings association directors. The Director’s Guide to Management Reports provides comprehensive guidelines on the preparation of various reports, such as financial reports and internal audit management and review reports for savings associations. The Director’s Responsibilities Guide provides a general overview of a director’s fiduciary duties. For the full text of the OTS’ Guides, please see http://www.ots.treas.gov/docs/r.cfm?48091.pdf and http://www.ots.treas.gov/docs/r.cfm?48090.pdf.

Federal Data Security Breaches Not Uncommon, House Committee Reports. On October 13, the House Committee on Government Reform released a Staff Report on Agency Data Breaches that have occurred since January 1, 2003. The report indicates that all 19 federal departments had experienced at least one data security breach involving sensitive personal information and that some departments experienced hundreds of breaches in the study period. Notably, the greatest number of data security breaches involved the physical loss of computer hardware or paper documentation, though there were incidents of computer ‘hacking‘. The study’s findings highlight the importance of adequate internal controls and physical safeguards, as well as the fact that private sector contractors are often liable for breaches. For more information, go to http://reform.house.gov/GovReform/News/DocumentSingle.aspx?DocumentID=51539.

Comptroller of the Currency Urges Nontraditional Mortgage Guidance Be Made to Apply to All Originators. On October 17, John Dugan, the Comptroller of the Currency gave a speech suggesting that recent alternative mortgage guidance from federal banking agencies be made to apply to all mortgage loans (see the September 29th issue of InfoBytes). The guidance issued applies only to federally-regulated institutions which, according to Dugan, creates “an unlevel playing field that plainly distorts competition in the nontraditional mortgage business.“ To reduce the regulatory disparity, he called on states to enact parallel guidelines and for federally-regulated institutions to exercise “appropriate due diligence when they use a third party to make, purchase, or service a nontraditional mortgage on behalf of an institution.” Full text of the speech can be found at http://www.occ.treas.gov/ftp/release/2006-115a.pdf.

ICBA Calls for Extension of ILC Moratorium. On October 10, the Independent Community Bankers of America sent a comment letter to the Federal Deposit Insurance Corporation (FDIC) requesting that the freeze on Industrial Loan Company (ILC) applications for insurance be extended beyond the current January 31, 2007 termination date. Citing dangers to safety and soundness, the letter urged the moratorium be extended long enough to give Congress an opportunity to take action and proposed steps to implement consolidated regulation of ILCs and their parent entities. The letter, as posted by the FDIC, can be found at http://www.fdic.gov/regulations/laws/federal/2006/06c63ilc.pdf.

COURTS

U.S. District Court Holds Plaintiffs Cannot Sue Unless they Suffer Actual Injury from Data Breach. The U.S. District Court for the Southern District of Ohio recently ruled that a class-action plaintiff seeking damages related to exposure of personal data held by shoe retailer DSW did not have standing to sue DSW merely due to the data breach. Key v. DSW, Inc., No. 2:06-cv-459 (S.D. Ohio Sept. 27, 2006). Though the Plaintiff pointed to the increased risk of identity theft resulting from the loss of her personal information, the Court held that the possibility of future injury did not give her standing and that she could not sue unless she suffered some actual injury from the breach. This ruling is consistent with other cases, such as the decision in Guin v. Brazos Higher Educ. Serv. Corp., Inc., previously reported in the February 24, 2006 edition of InfoBytes. However, regulatory agencies (such as the FTC) continue to pursue enforcement actions against companies that have a security breach. Please contact for a copy of the decision.

Bankruptcy Court Awards Attorneys' Fees In RESPA Case. On September 19, 2006, the United States Bankruptcy Court for the District of Massachusetts held that Jacalyn S. Nosek, who had previously been awarded nominal damages in her bankruptcy case charging violations of the Real Estate Settlement Procedures Act (RESPA) and Chapter 93A of the Massachusetts General Laws by Ameriquest Mortgage Company, was also entitled to attorney’s fees and costs. In a previous decision in the bankruptcy case of Ms. Nosek, the Bankruptcy Court ruled that Ameriquest had violated the RESPA and Chapter 93A by failing to respond to Ms. Nosek's qualified written request for a payoff statement. However, the Court awarded only nominal damages in the total amount of $26 because Ms. Nosek failed to quantify her damages for that claim. In the same action, Ms. Nosek prevailed on her claim for breach of the covenant of good faith and fair dealing, and the Court awarded her $250,000. See, In re Nosek, 2006 WL 1867096 (Bankr. D. Mass. June 30, 2006). Ms. Nosek subsequently filed a motion to assess attorneys' fees and costs and was awarded $45,000 in attorneys' fees and $2,395.80 in costs. In granting the award to Ms. Nosek, the Court rejected Ameriquest's argument that Ms. Nosek was not successful in her RESPA claim (which is a requirement under RESPA to receiving an award of attorneys' fees and costs). The Court stated that Ms. Nosek succeeded in demonstrating that she had been harmed by Ameriquest's actions and that she did not have to have been awarded more than nominal damages in order to prevail in her claim. Nosek v. Ameriquest Mortgage Company, Adversary Proceeding No. 04-4517 (Bankr. D. Mass. September 19, 2006). Please contact Buckley Kolar at for a copy of the decision.

Six Indictments Returned in Orange County for Identity Theft in the Mortgage Industry. On October 4, a federal grand jury returned six indictments as part of “Operation Broken Trust,” an investigation by the Secret Service into identity theft in the California mortgage industry. Operation Broken Trust is one of several identity theft investigations conducted by the Orange County Identity Theft Task Force, a group formed by the U.S. Attorney’s Office for the Central District of California and consisting of agents and investigators from the United States Secret Service, the United States Postal Inspection Service, the Social Security Administration, the Federal Bureau of Investigation, the Federal Trade Commission, IRS Criminal Investigation Division and U.S. Immigration and Customs Enforcement. The investigation into the California mortgage industry focused on a ring that assumed victims' identities by accessing their credit reports and used those reports to obtain money, refinance homes, and purchase high-end merchandise and drugs. Those charged include three mortgage brokers accused of selling loan applicants’ credit profiles and account information and two people accused of selling loan dossiers and credit reports stolen from a mortgage brokerage firm. To view the press release, please see: http://www.usdoj.gov/usao/cac/pr2006/133.html.

Fifth Circuit Remands SAR Disclosure Request Case, Orders OCC to Apply Its Own Standards. The U.S. Court of Appeals for the Fifth Circuit vacated a district court decision that would have forced the Office of the Comptroller of the Currency (“OCC”) to disclose a confidential Suspicious Activity Report (SAR) filing to a third party. BizCapital Bus. & Ind. Dev. Corp. v. OCC , No. 06-30032 (5th Cir. October 11, 2006). As originally reported in the April 28, 2006 issue of Infobytes, BizCapital initially requested disclosure of the SAR because it included information about another entity with whom BizCapital was engaged in civil litigation. Following the OCC’s denial of the request, BizCapital sued the agency, claiming it improperly failed to weigh the factors outlined in its own regulations. The district court agreed with BizCapital and, rather than remand to the OCC for de novo consideration using the regulations’ balancing test, ordered that SAR be disclosed. The Fifth Circuit vacated the part of the district court’s opinion requiring disclosure, and remanded to the OCC to properly consider the disclosure request using the balancing test outlined in its regulations. For a copy of the Fifth Circuit decision, please see http://www.ca5.uscourts.gov/opinions/pub/06/06-30032-CV0.wpd.pdf.

STATE ISSUES

Washington Utility to Pay $795,000 to Settle Privacy Dispute. On October 5, the Washington Utilities and Transportation Commission (Commission) announced that Puget Sound Energy, Inc. (Puget) will pay $795,000 to settle allegations that it violated Commission rules governing disclosure of private consumer information. Under the settlement agreement, Puget admits to violating state regulations by transferring over 65,000 customer calls, along with electronically transferring the customers’ personal information, to a third party company that marketed a range of other services to Puget customers. The settlement requires Puget to pay a $700,000 penalty to the Commission along with $95,000 (the commission Puget received from the third party company) to a heating assistance fund. For more information, please go to http://www.wutc.wa.gov/webimage.nsf/0/6107696C5A69F5DC882571FE00664D8B.

Washington Regulator Reports “Astonishing” Non-Compliance by Title Companies. On October 16, the Washington State Insurance Commissioner issued a result of a ten-month investigation of a dozen title companies. The report found an enormous level of non-compliance with state law, and that “some of the major offenders view the law as little more than a nuisance standing between them and their ability to have business steered to them from their middlemen, go-betweens and associates in the real estate business.” Due to the “truly astonishing numbers of violations” the Office of the Commissioner stated that it chose to issue recommendations to “help the industry recognize that it has a problem” rather than set straight into costly enforcement actions. The recommendations include a new program of technical and consumer guidance. To read the report in full, see http://www.insurance.wa.gov/publications/news/Investigation_Title_Insurance.pdf.

MISCELLANY

OCC Study Finds Continued Easing of Underwriting Standards. On October 18, the Office of the Comptroller of the Currency (OCC) released a survey of credit underwriting practices from the first quarter of 2006. The report, which examined the practices of the 73 largest national banks, found that underwriting standards for commercial and retail lending had loosened. While easing was most dramatic in large syndicated loans, standards in commercial real estate lending “continue to loosen while concentrations continue to grow.” To read the report in full, go to http://www.occ.treas.gov/2006Underwriting/CreditUnderwriting2006.htm.

FRB Governor Speaks on Enterprise Risk Management. On October 17, Governor Susan Schmidt Bies of the Federal Reserve Board (FRB) spoke on the growing importance of enterprise risk management in the financial services industry. When discussing risk management, Bies mentioned four areas: (i) regulatory compliance risk, (ii) operational risk deriving from complex new transactions and banking methods, (iii) mortgage lending practices such as loosening underwriting practices and nontraditional mortgage products, (iv) information security and identity theft issues, and (v) growing commercial real estate concentrations. Bies suggested an “enterprise-wide approach” and an “enterprise-wide culture” were needed to tackle the risk management problem, and noted that solutions should vary from institution to institution based on size and complexity. To read her complete remarks, see http://www.federalreserve.gov/boarddocs/speeches/2006/20061017/default.htm.

Study Praises Value of Affiliated Business Arrangements. A study performed by CapAnalysis Group, LLC, an economic consulting firm, claims that affiliated business arrangements between real estate settlement service providers do not significantly affect consumer closing costs. Commissioned by the Real Estate Services Providers Council (RESPRO), the analysis examines 2200 HUD-1 forms from nine states in 2003 and 2005. Brian Levy, chairman of RESPRO, claims “this study blows the lid off any theory that affiliated businesses provide inadequate service or overcharge consumers.” The results can be read in full at http://www.respro.org/docs/CAP%20RESPRO%20Study%20(2).pdf.

FIRM NEWS

Margo Tank will be speaking at the Electronic Records Forum of the Securities Industry Association on October 27, 2006 in New York. Ms. Tank will speak on a panel entitled “Practicalities and Pitfalls of Electronic Records.”

Ms. Tank will be speaking at the MBA’s Legal Issues in Mortgage Technology Conference, November 15–17, 2006 at the Arizona Biltmore Hotel, Phoenix, AZ. Ms. Tank’s panel topics will include the basic legal requirements for electronic mortgage origination and lending.

Manley Williams will be leading a workshop on the Fundamentals of Marketing Law: Consumer Protection Laws for Financial Institutions, at the American Conference Institute, In New York, on October 24th, 2006.

Robert Serino will be speaking at the Risk Management Association’s Annual Conference, held October 21st to 24th in Chicago. Mr. Serino speech, scheduled for the 23rd, is entitled “Best Practices in BSA and AML Compliance.” For more information, go to www.rmahq.org/RMA/.

Joseph Lynyak spoke at the American Bankers Association Banking Leaders Forum and Annual Convention, which was held October 15 - 18, 2006 in Phoenix, Arizona. Mr. Lynyak’s panel was entitled "Operational and Regulatory Risk Management: Management Practices Which Increase Shareholder Value."

Introduction to Mortgage Lending, co-authored by Andrea Lee Negroni and Jeremiah Buckley, was recently published by the American Bankers Association. This publication provides an overview of mortgage lending, covering such topics as the origination and servicing of mortgage loans, the appraisal process, the secondary mortgage market, and real estate and mortgage law. More information, including pricing and purchasing instructions, can be found at http://www.aba.com/Products/PS98_056500.htm or by contacting Ms. Negroni at Buckley Kolar.

© 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.

We welcome reader comments and suggestions regarding issues or items of interest to be covered in future editions of InfoBytes. Email:

For back issues of INFOBYTES (or other Buckley Kolar LLP publications), visit http://www.buckleykolar.com/publications.