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InfoBytes

CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

October 6 , 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. 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 Provides Regulatory Relief to the Financial Services Industry. On September 30, Congress approved S. 2856, the Financial Services Regulatory Relief Act of 2006. This bill provides wide-ranging regulatory relief, including (i) requiring a joint rulemaking between the Board of Governors of the Federal Reserve System (FRB) and the Securities Exchange Commission (SEC) regarding the definition of the term “broker;” (ii) providing the FRB with more flexibility in establishing certain reserve requirements; (iii) allowing more banks to qualify for a more relaxed examination schedule; (iv) providing the Conference of State Bank Supervisors with a full voting membership on the Federal Financial Institutions Examination Council; (v) expanding credit unions’ ability to make certain loans and offer certain services; and (vi) modifying the Fair Debt Collection Practices Act to exempt certain private entities from the definition of a debt collector. For more information, please go to http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_bills&docid=f:s2856enr.txt.pdf.

FTC Proposes Limits on Use of Pre-Recorded Telemarketing Message. On October 3, the Federal Trade Commission (FTC) announced four decisions involving the Telemarketing Sales Rule (TSR). The FTC (i) denied a request to create a new TSR “safe harbor” to allow sellers and telemarketers to contact customers with whom they have a pre-existing business relationship via prerecorded messages; (ii) proposed an amendment to the TSR that would expressly prohibit the use of unsolicited prerecorded telemarketing calls without first obtaining the consumer’s prior written agreement; (iii) announced that it is terminating its policy of forbearance of enforcement actions against sellers and telemarketers who make prerecorded telemarketing calls to established customers; and (iv) proposed a change to the method of measuring the acceptable percentage of “abandoned” telemarketing calls. Comments on the proposals are due by November 6, 2006. For more information, go to http://www.ftc.gov/opa/2006/10/fyi0662.htm.

Credit Agency Regulation and NRSRO Designation Process Reformed Under SEC Administration. On September 29, President Bush signed into law the Credit Rating Agency Reform Act of 2006, which establishes that credit rating agencies meeting certain fixed criteria may elect to register with the SEC and be designated a Nationally Recognized Statistical Rating Agency (NRSRO). A credit rating agency seeking NRSRO status through registration would have to provide the SEC with data including performance measurement statistics, procedures and methodologies for rating companies, possible conflicts of interest, and a confidential list of the largest issuers that use the agency. Designated NRSROs will be subject to heightened disclosure requirements and oversight by the SEC through exams and enforcement actions. The statute is intended to promote competition and formalize regulatory methods, while simultaneously enhancing transparency. A copy of the bill can be obtained at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_bills&docid=f:s3850enr.txt.pdf.

Congress Enacts Usury Limits on Interest to Servicemembers. On September 29, Congress passed H.R. 5122, the John Warner National Defense Authorization Act for Fiscal Year 2007. Section 670 of the bill prohibits a creditor from charging a servicemember or dependent interest on consumer credit that is greater than 36%. The bill also provides other limits on the terms of consumer credit and requires the Secretary of Defense to promulgate enacting regulations, in consultation with the FTC, FRB, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation, Office of Thrift Supervision, National Credit Union Administration, and Treasury Department. H.R. 5122 can be obtained at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_bills&docid=f:h5122enr.txt.pdf.

Congress Passes Internet Gambling Bill. On September 30, the House of Representatives and the Senate passed new legislation restricting Internet gambling, as part of a bill (H.R. 4954) providing for the protection of America’s ports. Among other things, the new legislation would require the FRB to adopt regulations requiring participants in certain “designated payment systems”—including financial institutions and credit card issuers—to establish procedures to identify and block restricted Internet gambling transactions. It is expected that President Bush will sign the new bill into law. A copy of the bill can be found at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_bills&docid=f:h4954enr.txt.pdf.

Temporary Restraining Order Issued Against Online Check Processing Firm. A joint stipulation and temporary restraining order has been issued against Neovi, Inc. and several co-defendants who operate an Internet-based check creation and delivery service doing business as Qchex.com (Qchex). In a Complaint filed in the U.S. District Court for the Southern District of California, the FTC alleged that Qchex created and delivered checks for an account without verifying that the customer requesting the check had the lawful ability to access the bank account. Consequently, the FTC alleges that malefactors were able to use Qchex to draw checks on the bank accounts of others. In a proposed joint stipulation and temporary restraining order, Qchex agreed not to create or deliver a check for any person without first taking reasonable steps to verify that the requesting person has the power to do so in accordance with procedures outlined in the order. The FTC continues to seek a permanent injunction for these business practices and restitution. To read the official FTC press release and access certain case filings, please see http://www.ftc.gov/opa/2006/10/qchex.htm.

COURTS

Mailer in FCRA Firm Offer Need Not Contain Material Terms. The U.S. District Court for the Northern District of Illinois entered summary judgment in favor of a lender whose prescreened solicitation letter contained only limited information about the lender’s offer to refinance the consumer’s automobile loan. See Murray v. HSBC Auto Finance, Inc., No. 05-C-4040 (N.D. Ill. Sept. 27, 2006), notice of appeal filed, Oct. 3, 2006. The case is significant because many of the troublesome “firm offer” cases have been brought in the Northern District of Illinois or elsewhere within the Seventh Circuit. The mailer stated that consumers would receive at least a $5,000 loan if approved and might be able to reduce their interest rate by as much as 5.04%, and also described the savings available in a typical loan. The consumer argued that the mailer was not sufficiently specific and that it did not offer “value” as required by the Seventh Circuit’s Cole v. U.S. Capital decision, particularly because it stated that “[r]ates and terms [were] subject to change at any time.” Although the court applied the “value” requirement, it held that HSBC’s offer had value despite the lack of a specific description of the offer in the mailer. The court interpreted the requirement to consider the “four corners” of the offer, stated in the Seventh Circuit’s Murray v. GMAC decision, as meaning that all aspects of the offer, not just those described in the initial solicitation letter, must be considered in determining whether an offer has “value.” It held that in this case, considering all factors, including the fact that the illustrative savings were, in fact, typical, the offer had value. The court also specifically held that “nothing in the text or legislative history of” the Fair Credit Reporting Act (FCRA) requires that the specific terms of the loan be set out in the offer letter. Finally, it found that, even if the lender violated FCRA, it did not do so willfully, because the FCRA willfulness standard “requires a defendant to knowingly violate the law and be conscious that its act impinges the rights of others.” For a copy of the decision, please contact .

Seventh Circuit Allows Rescission for Paid-Off Loan Due to TILA Violations. The Seventh Circuit has held that a mortgagor may be entitled to rescission because she received two inconsistent mortgage rescission rights forms, even though the loan had been consummated two years prior and had since been paid in full. Handy v. Anchor Mortgage Corp., Nos. 04-3690, 04-4042, 2006 WL 2788500 (7th Cir. Sept. 29, 2006). The mortgagor obtained a new mortgage from Anchor Mortgage Corp. (Anchor). At closing, Anchor gave the mortgagor two different rescission forms: 1) Form H-8 (refinancing by a different creditor); and 2) Form H-9 (refinancing by the original creditor). Form H-8 suggested that the mortgagor could rescind the entire loan, while Form H-9 suggested that she could rescind only the difference between the new loan and the original loan. In this case, the difference between the two amounts was over $75,000. The court ruled that these inconsistent disclosures violated the Truth in Lending Act’s “clear and conspicuous” disclosure requirement, especially regarding the “effects of disclosure.” This violation extended the rescission period from three days to up to three years. The court remanded the case, stating that rescission may be available, even though the loan had been paid in full. The court reasoned that the mortgagor had “a right to be returned to the status quo that existed before the loan.” To view the opinion, please go to http://caselaw.lp.findlaw.com/data2/circs/7th/043690p.pdf.

California Supreme Court Grants Review in Case to Address Whether the Provisions of a California Disclosure Statute Are Preempted by HOLA. In a case that turns on the preemptive effect of the Home Owners’ Loan Act, 12 U.S.C. §1461 et seq. (HOLA), on state disclosure laws, the California Supreme Court agreed to review a peremptory writ of mandate issued by the Court of Appeal in WFS Financial, Inc. v. Superior Court, S145304 (Cal. Sept. 20, 2006). In the underlying case, a putative class action seeking refunds for every Californian sued in a collection case by WFS Financial (WFS), the nation’s largest independent auto financing company, WFS demurred, asserting that HOLA preempted the notice requirements imposed by California’s Automobile Sales Finance Act because WFS is a federally chartered savings institution. The Superior Court overruled WFS’ demurrer. WFS then sought a peremptory writ from the Court of Appeals to set aside the order, which the Court of Appeals granted. See WFS Financial, Inc. v. Superior Court, 140 Cal.App.4th 637 (Cal. Ct. App. 2006). For a copy of the Court of Appeals decision granting the writ, go to http://www.courtinfo.ca.gov/cgi-bin/opinions.cgi, and search for “WFS”. To see the California Supreme Court’s case summary page, click http://appellatecases.courtinfo.ca.gov/search/case/mainCaseScreen.cfm?dist=0&doc_id= 433283&doc_no=S145304.

Supreme Court Sets Date to Hear Wachovia v. Watters, Denies Certiorari in Separate Preemption Case. The U.S. Supreme Court will hear one case this term regarding preemption and the financial services industry. Oral arguments are scheduled for November 29, 2006 in Wachovia Bank, N.A. v. Watters, a case challenging the OCC’s preemption authority over state regulation of operating subsidiaries of national banks. Wachovia Bank, N.A. v. Watters, 431 F. 3d 556 6th Cir. Mich. 2005. For more details, see the June 23rd issue of InfoBytes. However, the Supreme Court declined to hear an appeal in another case involving federal preemption of state law. The Ninth Circuit Court ruled in Kroske v. US Bank Corp. that the National Bank Act did not preempt Washington state age discrimination laws. Kathy Kroske v. US Bank Corp, 9th Cir. No. 04-35187 (December 23, 2005). For more details, see the January 9th issue of InfoBytes. To view the schedule for Supreme Court arguments, see www.supremecourtus.gov.

STATE ISSUES

New York Enacts Privacy and Identity Theft Legislation. New York recently enacted three statutes regarding privacy and identity theft. S. 6723 is designed to eliminate the unauthorized acquisition of telephone records by “pretexting,” the practice of requesting telephone records by pretending to be the telephone customer or another person. The bill is effective immediately. The second piece of legislation, S. 6909C, limits a business’ ability to use and disclose an individual’s social security number (SSN) by prohibiting (i) intentional publication of SSNs; (ii) printing SSNs on ID or other cards; (iii) requiring individuals to transmit their unencrypted SSNs over insecure internet connections; (iv) requiring individuals to use SSNs to access websites without also requiring a password or PIN to access the site; and (v) printing SSNs on materials mailed to an individual, unless certain conditions are met. S. 6909C is effective January 1, 2008. Finally, A. 891F amends the New York criminal code definitions of unauthorized use of a computer, computer trespass and computer tampering to encompass “accessing” a computer or computer network. The new definitions clarify that spyware and other methods of controlling or instructing another person’s computer can constitute a misdemeanor and/or felony. A. 891F is effective November 1, 2006. All three statutes are available through http://public.leginfo.state.ny.us/menuf.cgi.

Oregon Proposes Increased Supervision for Loan Originators. The Oregon Department of Consumer and Business Services (DCBS) issued a proposal to increase the required supervision of loan originators by licensed mortgage companies. If adopted, the proposal would require (i) licensed mortgage lenders to establish and enforce policies for loan originator compliance with the Oregon Mortgage lender law and administrative rules; (ii) each loan officer to read the Oregon Mortgage lender law and rules; and (iii) licensees to frequently review each loan originator's files (for closed loans, denied loans, and loans in process) and the correspondence sent and received by them. The rule would also require the entry-level coursework and examination of loan originators to be completed before loan applications are taken from Oregon consumers (presently, a loan officer can take the courses and test up to six months after employment). The complete proposal can be found at http://www.cbs.state.or.us/external/dfcs/rulestat.html#proposed.

California Outlaws False Claims of Special Lending Experience and Expertise. On September 5, Governor Schwarzenegger signed A.B. 2890, a bill sponsored by the California Association of Mortgage brokers (CAMB). It allows the Commissioner of the Department of Corporations to ban a person from employment with a licensed California finance lender or residential mortgage lender if the person made false claims of special education, qualifications, or experience. The purpose of the law is to prevent individuals from falsely claiming they have designations indicating special competence in the lending field, such as the designations or logos of trade associations. CAMB believes this law will “weed out the bad actors." A discussion of the bill and a link to the bill’s status can be found at http://www.cambweb.org/main/page/navhome.

MISCELLANY

HUD Removes Photo ID Requirement, Clarifies Counseling Obligation for HECMs. The Department of Housing and Urban Development (HUD) announced in two mortgagee letters that it has eased burdens on applications for insurance of Home Equity Conversion Mortgages (HECMs). The first letter (ML 2006-23) removed the existing obligation for “photo identification evidence” to be provided with each case binder. They noted, however, that the burden still existed on the mortgagee to verify critical information about the borrower. The second letter (ML 2006-25) clarifies the requirement for counseling in relation to HECMs. To read these, or any other HUD mortgagee letters, visit www.hudclips.org.

FIRM NEWS

Joseph Lynyak will be speaking at the American Bankers Association Banking Leaders Forum and Annual Convention, which is being held October 15 - 18, 2006 in Phoenix, Arizona. Mr. Lynyak will speak on a panel entitled "Operational and Regulatory Risk Management: Management Practices Which Increase Shareholder Value."

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.”

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.

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

On Tuesday, October 3, 2006, Frank Supik spoke at the Fiserv Client Conference in Orlando, Florida regarding implementation strategies and considerations for electronic mortgage applications. For more information, please go to www.fiservconference.com.

© 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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