(202) 349-8000
1250 24 th St NW · Suite 700 · Washington D.C. 20037
www.buckleykolar.com

InfoBytes

CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

September 15, 2006

FEDERAL ISSUES

OCC Issues Warning of Increased Fraud and Identity Theft in Internet Banking this Fall. On September 8, the Office of the Comptroller of the Currency (OCC) issued an alert regarding an anticipated increase this fall in false communications from criminals seeking to obtain customer information for the purposes of fraud and identity theft. The alert, which was issued to all national banks and federal and state bank regulators, warns that these false communications may attempt to exploit the December 31, 2006 deadline for banks to comply with last year's guidance entitled Authentication in an Internet Banking Environment (see the October 14th, 2005 edition of InfoBytes). The alert discusses potential fraudulent schemes as well as steps banks should consider to combat them. For a copy of the alert, please see http://www.occ.gov/ftp/alert/2006-50.html.

U.S. Department of Labor Issues Opinion Letter on Employment Status of Mortgage Loan Officers. In response to a request for an opinion from the Mortgage Bankers Association (MBA), the U.S. Department of Labor (DOL) has stated that mortgage loan officers are exempt administrative employees under the Fair Labor Standards Act, 29 U.S.C. § 231(a)(1). Specifically, the MBA asked whether mortgage loan officers meet the administrative duties test set forth in 29 C.F.R. § 541.203(b), and whether loan officers meet this standard even though they may use underwriting software programs. The DOL’s opinion determined that mortgage loan officers satisfy traditional requirements for the administrative exemption, including exercise of discretion and independent judgment on matters of significance, and performance of non-manual work related to management of the business. The opinion also provided that use of software tools in evaluating mortgage products for customers does not disqualify an employee from the administrative employee exception, so long as the loan officer is still responsible for assessing the information and making recommendations to the customer. And exempted employee is not subject to relevant provisions of the Fair Labor Standards Act, including payment of overtime. For a copy of the opinion letter, please contact .

OCC Releases Revised Comptroller's Handbook for Depository Services. The OCC has released a revised version of the Depository Services compliance handbook, which is dated September 2006. The handbook provides information on regulations regarding several consumer protection issues, such as the Electronic Fund Transfers Act (EFTA), the Expedited Funds Availability Act and the Truth in Savings Act. The handbook guidance reflects revisions made to Regulation CC, which implements the Check Clearing for the 21st Century Act (Check 21), and Regulation E, which implements the EFTA. To view the handbook visit http://www.occ.treas.gov/handbook/depserv.pdf.

House Hears Testimony on Basel II and CRE Risk Requirements from Regulators. On September 14, the Subcommittee on Financial Institutions and Consumer Credit of the U.S. House of Representatives heard testimony from key financial regulators regarding the implementation of the Basel II capital reserve standards and the proposed risk assessment rules for Commercial Real Estate (CRE) holdings. (Please see the September 8th issue of InfoBytes for more discussion of Basel II. See the January 13th, 2006 issue of InfoBytes for more discussion of the CRE assessment rule.) The heads of the Federal Deposit Insurance Corporation, the OCC, and the Office of Thrift Supervision and prominent members of the Federal Reserve Board and Securities and Exchange Commission, among others, defended their shared vision regarding the proposed implementation of Basel II. Several also reiterated their continued concern about the increasing exposure of small banks to the real estate market. To read all the statements made at this hearing, see http://financialservices.house.gov/hearings.asp?formmode=detail&hearing=507.

Senate Hears Testimony Regarding the Thompson Memorandum. On September 12, the Senate Judiciary Committee held hearings on the U.S. Justice Department’s “Thompson Memorandum” and its effect on the right to counsel during a corporate investigation. As reported in the June 30 edition of InfoBytes, the Thompson Memorandum includes a set of guidelines used by the Justice Department in determining whether to charge a company with a criminal violation. Among the factors considered in the guidelines is the level of cooperation shown by the company being investigated as evidenced by such actions as waiving the attorney-client and work products privileges, agreeing to hand over internal company investigations, and limiting the advance of attorneys fees and other costs to employees whose conduct is at issue in the investigation. Committee Chairman Arlen Specter (R-PA) and Ranking Minority Member Patrick Leahy (D-VT) both voiced strong concerns over the coercive effect of the cooperation factor, particularly with respect to its effect on the constitutionally protected right to counsel, as did the American Bar Association and other private sector witnesses. Earlier this month, a bi-partisan group of former Justice Department officials, including former Solicitor General Kenneth Starr and former Attorney General Griffin Bell, also expressed concern about the Thompson Memorandum in a letter to Attorney General Alberto Gonzales. To find out more about the hearing, and listen to a webcast of testimony, go to http://judiciary.senate.gov/hearing.cfm?id=2054.

GAO Report Reveals Weaknesses in FDIC Information Security System. In an August 2006 report, the Government Accountability Office (GAO) noted that, although improved through recent measures, the information security system of the Federal Deposit Insurance Corporation (FDIC) remains vulnerable on many fronts. The GAO report commended the implementation by FDIC of automated procedures that limit access to sensitive data. However, ongoing security weaknesses pertaining to confidential account and password accessibility, access rights, network services and physical security persist. The report notes that the main cause of these security failures is the incomplete implementation of the FDIC’s stated information security program. The full report can be found at http://www.gao.gov/new.items/d06620.pdf.

House Financial Services Committee Seeks Action on GSE Legislation. In a September 14 letter, 64 members of the House Financial Services Committee, including Chairman Michael G. Oxley (R-OH) and Ranking Minority Member Barney Frank (D-MA), wrote to Senate Banking Committee Chairman Richard Shelby (R-AL) and Ranking Minority Member Paul Sarbanes (D-MD) seeking action in the remaining weeks of the 109th Congress on legislation overhauling the regulation of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. The Senate and House have passed competing versions of such legislation that will die unless reconciled and sent to the President for signature before Congress adjourns at the end of the year. A copy of the letter can be found at http://financialservices.house.gov/news.asp?FormMode=release&id=861&NewsType=1.

COURTS

Absence of the Word "Monthly" on Payment Schedule Violates TILA. In Washington v. Ameriquest Mortg. Co., No. 05 C 1007 (N.D. Ill. July 11, 2006), a federal district court for the Northern District of Illinois held that the absence of the word “monthly” from a mortgage payment schedule violated the requirements of the Truth in Lending Act (TILA), resulting in summary judgment against the mortgage lender and a ruling in favor of the plaintiffs’ right to rescind the mortgage. In so holding, the court viewed as irrelevant under the “hypertechnical” rules of TILA that the lender’s disclosure document listed the total number of payments along with starting and ending dates, the mortgage note itself contained an express statement that the mortgage payments were to be made on a monthly basis, and that one of the borrower/plaintiffs testified in a deposition that she understood that the payments would be due monthly. For a copy of the opinion, please contact .

Company That Lost Confidential Information Was Not a "Consumer Reporting Agency." The U.S. District Court for the Northern District of California rejected an attempt by plaintiffs to characterize a security breach as a violation of the Fair Credit Reporting Act (FCRA). According to the plaintiffs, a briefcase stolen from a bank contained personal and financial information of account holders at the bank, including “names, addresses, telephone numbers, account numbers, types of accounts, account opening dates, account balances, social security numbers and, occasionally, interest rates.” The plaintiffs argued that the information in the briefcase represented “consumer reports” and that the bank was a “consumer reporting agency” that violated FCRA by disclosing those reports to unauthorized third parties. The court rejected this argument, noting that the bank “was not acting as a ‘consumer reporting agency’ with respect to the information contained in the stolen briefcase” because it was not providing “consumer credit information ... on consumers for the purpose of furnishing consumer reports to third parties” (emphasis in original). The court also held that the information in the briefcase qualified for the “transactions or experiences” exception to the definition of a “consumer report.” See Garcia v. UnionBanCal Corp., No. C 06-03762, 2006 WL 2619330 (N.D. Cal. Sep. 12, 2006). For a copy of the opinion, please contact .

STATE ISSUES

Regulations Adopted in Indiana Permitting New Servicing Fees. On September 6, regulations approved by the Board of the Indiana Department of Financial Institutions permitting "skip-a-payment" and "on-demand/expedited payment" fees under certain conditions were posted to the Indiana Register. These fees are available to all creditors under the Indiana Uniform Consumer Credit Code, Ind. Code Ann.§24-4.5-2-202(1)(c) and §24-4.5-3-202(1)(e). For loans having an APR of 18% or less, with other particular features,a skip-a-payment fee is allowed but is limited per occurrence to $25 and may not be assessed more than twice in a 12-month period.The expedited payment fee may be charged on a broader range of loans but the fee is limited to $10 per occurrence. Late fees may not be charged on any payment when either of these fees have been charged. More specific information on the regulations and conditions under which these fees are permissible may be found at http://www.in.gov/legislative/iac/20060906-IR-750060345ONA.xml.html.

Ohio Attorney General Issues Rules on Predatory Mortgage Lending Practices. On September 8, Ohio Attorney General Jim Petro issued proposed rules implementing SB 185, a bill passed earlier this year to amend Ohio’s predatory lending laws (as reported in the June 30 edition of InfoBytes). Among other things, the proposed rules contain (i) factors to be considered in determining whether a lender’s method of assessing a consumer’s ability to repay a residential mortgage loan is “reasonable”; (ii) factors that may not be solely or predominantly used to determine ability to repay; (iii) guidelines for determining whether a consumer received a “reasonable, tangible net benefit” by refinancing an existing mortgage loan; (iv) prohibitions on sharing loan value or desired appraisal value with appraisers; (v) “unconscionable” arbitration provisions; (vi) disclosures regarding a consumer’s right to refuse to close a loan transaction that contains different terms and conditions than those the consumer was promised; and (vii) information that must be provided to consumers about unfair, deceptive, and unconscionable lending practices. The Attorney General is seeking public comment on the proposed rules until September 27, 2006. For more information, see http://www.ag.state.oh.us/press/06/09/pr060908.asp. A copy of the proposed rules can be found at http://www.ag.state.oh.us/press/06/09/060908.pdf.

The Massachusetts Division of Banks Announces Measures to Halt Predatory Lending Practices by Mortgage Lenders and Brokers. On September 8, the Division of Banks of Massachusetts’s Office of Consumer Affairs and Business Regulation announced a program to combat predatory lending practices among mortgage lenders and brokers and decrease the incidence of loan foreclosures. The program combines regulatory and enforcement actions and educational outreach initiatives. The regulatory and enforcement measures announced as part of the strategy include (i) the issuance of cease and desist orders to mortgage brokers in violation of regulations; (ii) the establishment of a hotline for consumers who are victims of deceptive mortgage practices; and (iii) the issuance of “emergency amendments” to existing regulations governing the mortgage industry that effectively increase the number of practices prohibited by law. In addition, the Division will host a mortgage summit this fall that will provide a forum for government, industry and consumer representatives to discuss additional strategies for reducing the incidence of foreclosure and abusive lending practices. The press release is available at http://www.mass.gov/dob, under the archived press releases.

Montana Amends Continuing Education and Recordkeeping Regulations Pertaining to the Mortgage Broker and Loan Originator Licensing Act. The Division of Banking and Financial Institutions of the Department of Administration of the State of Montana has adopted amendments to its Administrative Rules that pertain to licensing, continuing education provider requirements, and recordkeeping requirements for mortgage brokers. On July 18, 2006 a public hearing was held regarding a new recordkeeping rule as well as amendments to § 2.59.1705 of the Administrative Rules. The amendments pertain to fees for providers of continuing education to the mortgage industry, and the new rule (§2.59.1710) stipulates what records must be maintained by mortgage brokers. The notice of the public hearing and the notice of amendment and adoption of the rules can be found at http://banking.mt.gov/#9. The Mortgage Broker and Loan Originator Licensing Act can be found at http://data.opi.mt.gov/bills/mca_toc/32_9_1.htm.

Georgia Department of Banking and Finance Promulgates New Mortgage Rules. On September 11, the Georgia Department of Banking and Finance issued final regulations amending its Mortgage Rules. Areas of the rules amended include (i) fees; (ii) disclosures, advertising, branches, background checks; (iii) books and records; (iv) fines; and (v) licensing, education, exemptions, and processors. For a copy of the new rules, please see http://www.ganet.org/dbf/pdfdoc/DBFFinalRules8-21-06.pdf.

MISCELLANY

OFHEO Reports Dramatic Deceleration in House Price Index. On September 5, the Office of Federal Housing Enterprise Oversight (OFHEO) announced what it called the most dramatic deceleration of its house price index in three decades. Possible causes of this nationwide trend identified by OFHEO include high interest rates and large inventories of homes resulting from a construction boom during the past few years in response to high rates of home appreciation. OFHEO’s House Price Index is produced quarterly from data on house price changes in refinancings or repeat sales of single-family properties. The press release can be viewed at http://www.ofheo.gov/media/pdf/2q06hpi.pdf.

HUD Doubles "Lock-in" Period for HECM Loans. On August 31, the Department of Housing and Urban Development (HUD) published Mortgagee Letter 2006-22 extending the expected interest rate “lock-in” provision for Home Equity Conversion Mortgages (HECM’s) from 60 to 120 days. The Mortgagee Letter can be read in full at www.hudclips.org.

FRB Study Finds That GSE Purchases Have Little Effect on Mortgage Rate Spreads. Contradicting some previous studies on the issue, researchers at the Federal Reserve Board (FRB) have concluded that portfolio purchases by government GSEs Fannie Mae and Freddie Mac have “no significant effects” on mortgage interest rate spreads in both the primary and secondary mortgage markets. Released on September 8, the study was based on an analysis of monthly market data from 1993 to 2005. An abstract of the study, including a link to the full study, is available at http://www.federalreserve.gov/pubs/feds/2006/200630/200630abs.html.

CFA Publishes Study Based on Recent HMDA Data Release. On September 5, the Consumer Federation of America (CFA), a consumer advocacy group, produced a report entitled “Subprime Locations: Patterns of Geographic Disparity in Subprime Lending.” Using recently released data (see the September 8th edition of InfoBytes) gathered under the mandate of the Home Mortgage Disclosure Act (HMDA), the authors of the study found “significant variation exists in the pricing of higher-priced subprime refinance mortgage loans between states, regions and localities” as well as “the prevalence of racial pricing disparities.” The report in full can be found at http://www.consumerfed.org/pdfs/SubprimeLocationsStudy090506.pdf.

FIRM NEWS

Introduction to Mortgage Lending, co-authored by Jeremiah Buckley and Andrea Lee Negroni, 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.

Robert Serino will be speaking at the National Institute on Banking Law II on September 21-22 in Chicago. To learn more or register, go to http://www.abanet.org/cle/programs/n06bla1.html.

© 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.