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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

October 27 , 2006

FEDERAL ISSUES

Internal Revenue Service Releases Final Regulations on Electronic Delivery of Disclosures. On October 20, the Internal Revenue Service (IRS) released final regulations governing the use of electronic signatures and electronic records to deliver and sign disclosures and elections affecting several types of retirement plans, IRS, pension plans and benefit plans. The regulations require that the plan member complete the ESIGN consumer consent process before the plan can send electronic notices to plan participants. (For more details on the ESIGN consumer consent process, see SPeRS.) However, the IRS determined that the ESIGN consumer consent process need not be followed before providing some disclosures to consumers, instead reaffirming prior guidance that was promulgated in 2000. Under the alternative process (i) the notice must be provided in a medium that the recipient has the effective ability to access, (ii) the recipient must be advised – at the time that the notice is provided – that he or she may request a paper copy of the notice on paper for no charge, and (iii) the notice must in fact be provided without charge upon the recipient’s request. The regulations were effective on October 20, 2006 and apply to notices provided, and elections made, on or after January 1, 2007. To view the Federal Register release, go to http://a257.g.akamaitech.net/7/257/2422/01jan20061800/edocket.access.gpo.gov/2006/E6-17528.htm.

Ginnie Mae Will Guarantee Securities Backed by Reverse Mortgages. The Government National Mortgage Association (Ginnie Mae) announced on October 17, that it will begin securitizing Home Equity Conversion Mortgage (HECM) reverse mortgages—loans designed to allow older homeowners to convert the equity in their homes to monthly streams of income or lines of credit—by creating a Home Equity Conversion Mortgage Mortgage-Backed Security (HECM MBS). The HECM MBS will allow approved issuers to securitize and sell their Federal Housing Administration (FHA)-insured HECMs in the form of a Ginnie Mae MBS. The Ginnie Mae HECM MBS promises to provide the mortgage-backed securities marketplace with a full faith and credit vehicle for the securitization of HECMs. This will increase liquidity in the reverse mortgage industry by providing capital market funding sources to primary market HECM lenders, broadening distribution channels for HECM loans and expanding the investor base for the HECM product. The HECM market has been expanding in recent years (it has been reported that FHA-insured HECMs have grown by 70 percent from just under 44,000 loans in fiscal year 2005 to more than 74,000 in fiscal year 2006). The increased competition among lenders brought about by the HECM MBS should result in further expanding reverse mortgage product offerings and reduced costs to borrowers. Despite the success of the HECM program, the number of outstanding FHA-insured HECMs is limited by a statutory cap, which was recently raised to 275,000. Ginnie Mae’s HECM MSB product should be introduced in the marketplace sometime during the current fiscal year. To view Ginnie Mae’s press release in its entirety, please see http://www.ginniemae.gov/news2006/10-17presshud.asp?Section=Media.

NCUA Amends SAR Reporting Regulations. On October 27, the National Credit Union Administration published a final rule revising its regulations for filing Suspicious Activity Reports (SARs). Specifically, the final rule amends NCUA regulations to include a requirement for prompt notification of the credit union's board of directors of SAR filings, an action the NCUA noted would formalize common practice and provide consistency with the SAR reporting regulations of other banking agencies. The final rule states that the term "prompt" means that a board of directors should receive notice of the credit union's SAR activity at least monthly. The rule is effective November 27, 2006. For more information, please see http://www.ncua.gov/RegulationsOpinionsLaws/RecentFinalRegs/final_regs.html.

OFHEO Issues Record Retention Regulations. On October 25, the Office of Federal Housing Enterprise Oversight (OFHEO) issued final regulations to govern Fannie Mae’s and Freddie Mac’s record retention programs. The final regulations, which were effective upon publication in today’s Federal Register, require both Government Sponsored Entities to establish a comprehensive records management program that covers both paper documents and electronic records. The records management program must address record retention and retrieval, training for employees, agents and independent contractors, and procedures for compliance with record “holds.” For more information, please go to http://a257.g.akamaitech.net/7/257/2422/01jan20061800/edocket.access.gpo.gov/2006/pdf/E6-18034.pdf.

NASD Imposes Largest Market Timing Fine Ever Against Hedge Fund Manager. The NASD has levied a $2.25 million fine for deceptive market timing practices against Paul Saunders, manager of James River Capital Corporation (JRCC) of Richmond, Virginia,. JRCC is the general partner and trading manager of the Jazzman Fund. Saunders evaded attempts by insurance companies to block Jazzman’s market timing trades through a number of deceptive practices. Most notably, Saunders created 19 separate limited partnerships to market time mutual fund sub-accounts of variable annuities, but failed to disclose to insurance companies offering variable annuities that those partnerships were under common ownership and control. The NASD’s investigation of the brokers that assisted Saunders in the excessive market timing activity is continuing. For more information see, http://www.nasd.com/PressRoom/NewsReleases/2006NewsReleases/NASDW_017689.

COURTS

Court Finds False Caller I.D. May Violate FDCPA. A federal court recently denied a defendant’s motion to dismiss a class action plaintiff’s claim that transmitting a false name via a caller identification device violates the Fair Debt Collection Practices Act (FDCPA). Knoll v. IntelliRisk Mgmt. Corp., No. 06-1211, 2006 WL 2974190 (D. Minn. Oct. 16, 2006). The defendant, a debt collection agency, contacted the plaintiff to collect a debt. The plaintiff told the debt collectors that the liability was beyond the statute of limitations, and that they should not contact him further. The defendants continued to telephone the plaintiff, and the telephone number showed up as “Jennifer Smith” on the plaintiff’s called identification device. The plaintiff alleged that the defendant’s practice of transmitting a false name in order to lure customers into answering the phone or returning the calls violated the FDCPA. The defendants argued that they were essentially using an alias, which is permissible under the FDCPA as a way to protect the identity of the debt collector. The court noted that FDCPA mandates “meaningful” disclosure of the caller’s identity. The court, in denying the defendant’s motion to dismiss, affirmed that the use of an alias is permitted only when the debtor knows that he is dealing with a debt collector, which was not the case here. For a copy of the decision please contact .

Texas Court Rejects Equitable Subrogation for Constitutionally Forfeited Home Equity Lien. In an October 11, 2006 opinion, the Texas Fourth Court of Appeals sitting en banc reversed the May 3, 2006 decision of a panel of the court in the case of LaSalle Bank N.A. v. White. The Court rejected the Panel's finding that the lien securing a home equity loan that failed to comply with Texas' constitutional requirements regarding the cash-out refinancing of a debt secured by a homestead could nonetheless be valid under the theory of "equitable subrogation." The Panel had found that under the contract theory the lender could step into the shoes of third parties who were paid the balance of an existing purchase money loan and certain taxes with the proceeds of the lender's loan, thus obtaining the benefit of the third parties' liens. The Court explained that the home equity loan was not simply a contract and existed only by means of constitutional amendment allowing the making of such loans subject to specific requirements and restrictions; the contract theory could not be applied to circumvent the constitutionally-mandated penalty of forfeiture. For the opinion in the case, see http://www.4thcoa.courts.state.tx.us/opinions/HTMLOpinion.asp?OpinionID=19610.

Class action waiver portion of arbitration clause held to be unconscionable. In Kinkel v. Cingular Wireless LLC, No. 100925 (Ill. October 5, 2006), the plaintiff, on behalf of a class, challenged a $150 early termination fee. Defendant moved to compel arbitration. The arbitration agreement itself was silent as to the costs associated with arbitration and as to which party would bear those costs. On appeal from the trial court’s denial of defendant’s motion, the Illinois Supreme Court first reminded that the unconscionability of a class action waiver must be determined on a case-by-case basis in light of the totality of the circumstances. The Court went on to hold that requiring the plaintiff to arbitrate all claims without revealing the potential costs of the arbitration to her (potentially $125), combined with the fact that that cost neared the amount of the challenged fee itself, effectively foreclosed plaintiff’s only reasonable, cost-effective means of obtaining a complete remedy, thereby rendering the class action waiver unconscionable and thus unenforceable. Importantly, the Court did not hold that the arbitration clause itself was unconscionable, instead severing the class action waiver from the clause. This action suggests that, upon remand to the trial court, the case may be referred to arbitration on a class-wide basis. Although not dispositive, the Court also expressed concern about the fact that the class action waiver required strict confidentiality surrounding the existence and results of the arbitration. For a copy of the Kinkel opinion, see http://www.state.il.us/court/Opinions/SupremeCourt/2006/October/Opinions/Html/100925.htm.

South Carolina Supreme Court Requires Attorney Supervision of Loan Disbursement. On October 23, in the case of Doe Law Firm v. Henry B. Richardson, the South Carolina Supreme Court held that the disbursement of residential loan proceeds constitutes the practice of law, and therefore is a phase in the loan closing process that requires attorney supervision. The Court considered a situation where Doe Law Firm, a South Carolina law firm retained by the lender to serve as its closing attorney for various residential real estate transactions, represents both lender and borrower in connection with a residential mortgage loan transaction. The proceedings focused on the final phase of the closing process—namely, the disbursement of residential mortgage loan proceeds. The Court concluded that “the disbursement of funds in the context of a residential real estate loan closing cannot and should not be separated from the process as a whole…[holding] that the disbursement of the funds must be supervised by an attorney.” The Court did not specify the form that such supervision must take, nor require that the funds pass through the supervising attorney’s trust account. The Court did conclude, however, that “the attorney’s obligation to both his clients if he represents the buyer and the lender, and to his individual client if he represents only one party, includes overseeing this step [i.e., the disbursement of funds] of the closing process.” This ruling will not take effect until January 22, 2007. Doe Law Firm v. Henry B. Richardson, Jr., Disciplinary Counsel and Henry Daragan McMaster, Attorney General, Opinion No. 26214 (S.C. Oct. 23, 2006). For a copy of this opinion see http://www.judicial.state.sc.us/opinions/displayOpinion.cfm?caseNo=26214.

STATE ISSUES

Black and Latino Residents Claim Illinois Anti-Predatory Lending Law Will Destroy Property Values. The Chicago Defender published an article on October 25 entitled “Coalition of Blacks, Hispanics join to fight HB 4050: Experts say legal redlining is destroying house values for minorities.” House Bill 4050 established a pilot anti-predatory lending program in ten Illinois zip codes that imposed significant new regulatory hurdles for subprime lending (for more information see the June 10th, July 21st, and July 28th issues of InfoBytes). The article, which prominently featured an African-American mortgage banker strongly critical of the program, was published in advance of a town hall meeting to discuss efforts to rescind the law. The following day, the Defender published a rebuttal article “Black legislatures who pushed HB 4050 say critics are wrong.”

MISCELLANY

FFIEC Revises “Getting It Right” HMDA Compliance Guide. The Federal Financial Institutions Examination Council issued the 2006 edition of A Guide to HMDA Reporting: Getting It Right!, a compliance guide for reporting lenders. The minor changes from the previous edition include a reminder that each entity (e.g., a bank and its operating subsidiary) must submit a separate Loan Application Register. See http://www.ffiec.gov/hmda/pdf/2006guide.pdf (Guide); http://www.ffiec.gov/hmda/guide.htm (summary of changes).

OCC Issues Bulletin on New Public Welfare Investment Caps. On October 23, the Office of the Comptroller of the Currency (OCC) issued a bulletin discussing the impact of the recent Financial Services Regulatory Relief Act on public welfare investment limits. (For more information on the Act, see the October 6th and October 20th issues of InfoBytes.) The bulletin directs executives of National Banks to note the ten percent increase in the public welfare limit, with OCC authorization, as well as the revised authority of National Banks to “make investments, directly or indirectly, each of which promotes the public welfare by benefiting primarily low- and moderate-income communities or families (such as by providing housing, services, or jobs).” To read the bulletin, see http://www.occ.treas.gov/ftp/bulletin/2006-44.html.

Apply the Law of the Consumer's Domicile Swiss Data Protection Commissioner Says. On October 27, the Swiss Federal Data Protection and Information Commissioner (FDPIC) posted "implementation aids and realisation proposals" on data protection and e-commerce that include guidelines and policy proposals aimed at reinforcing consumer confidence in electronic commerce. Among its findings and proposals, the FDPIC notes that privacy concerns must be resolved in order to increase consumer confidence and that such resolution should be accomplished by making the law of the consumer's domicile applicable to online transactions. This is difference from current U.S. business practice which allows vendors to choose the law. The FDPIC urges that the OECD be involved in implementing such a policy, and also recommends that "state regulations and codes of conduct as well as technological solutions" be synthesized at the international level. For a copy of the guidelines and proposals, please contact .

HUD Charges Property Owner for Refusing to Give a Disabled Man Accessible Parking. The Department of Housing and Urban Development (HUD) charged an apartment building owner with violating the Fair Housing Act by failing to provide a disabled resident with a handicapped parking space. The resident was given an assigned parking space near the entrance, and the building offered valet parking services, but HUD deemed these steps to be insufficient. The owner, if found to have engaged in housing discrimination, could be required to pay up to $11,000 civil penalty, in addition to damages, and attorney’s fees as well as provide injunctive or other equitable relief. To view the HUD press release see http://www.hud.gov/news/release.cfm?content=pr06-141.cfm.

OTS Publishes New Financial Reporting Manual. On October 25, the Office of Thrift Supervision (OTS) has published an updated Thrift Financial Reporting (TFR) Instruction Manual for March 2006. The manual can be downloaded at http://www.ots.treas.gov/docs/4/4210041.pdf.

OTS Regular Request of Comments on HMDA Collection. The OTS has made a request for public comment on its existing HMDA information collection documents and practices, as required by the Paperwork Reduction Act. Comments are due by November 20, 2006. To read the request as published in the Federal Register, see http://www.ots.treas.gov/docs/7/73325.pdf.

Report Finds Low Counterfeiting of Dollars Abroad. On October 25, the Treasury Department, the Federal Reserve Board, and the Secret Service issued a report examining counterfeiting of U.S. currency abroad. While 60% of all paper U.S. dollar denominated notes are held abroad, “the incidence of counterfeit passing activity abroad is generally quite small, approximately one counterfeit in 10,000 notes, about the same ratio as that found inside the United States.” The report can be found at http://www.federalreserve.gov/boarddocs/press/other/2006/20061025/default.htm.

FIRM NEWS

On Wednesday, October 25, Joseph Lynyak and Jeffrey Naimon presented a web-based seminar entitled "Why and How to Organize a Federal Savings Bank." A copy of the presentation slides used during their discussion, as well as a more detailed memorandum on the subject, is available on our website at http://www.buckleykolar.com/publications/ under the heading "Webinars."

Margo Tank is speaking today at the Electronic Records Forum of the Securities Industry Association in New York. Ms. Tank’s panel is 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 lead 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.

Robert Serino spoke at the Risk Management Association’s Annual Conference, held October 21st to 24th in Chicago. Mr. Serino speech was entitled “Best Practices in BSA and AML Compliance.”

© 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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