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InfoBytes

CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

September 29 , 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

Agencies Issue Final Guidance on Nontraditional Mortgage Products. On September 29, the Board of Governors of the Federal Reserve System (FRB), Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS), Federal Deposit Insurance Corporation (FDIC), and National Credit Union Administration (NCUA) (together, the “Agencies”) issued final guidance on interest-only and payment-option ARM loans. The final guidance retains the basic structure of the proposal issued in December 2005, but responds to industry criticisms of various aspects of the proposal. For example, the final guidance removes language that implied that the Agencies sought to impose a broker/dealer-like “suitability standard” on underwriting of nontraditional mortgage products, such as references to “responsible payment choices” and consumers “prudently consider[ing] the costs, terms, features, and risks of” nontraditional mortgage products. It also eliminates a proposal to hold institutions responsible for the marketing practices of third party originators such as mortgage brokers and correspondents.

The guidance clarifies that it “applies to all residential mortgage loan products that allow borrowers to defer repayment of principal or interest”–in other words, it does not apply to traditional, fully-amortizing adjustable-rate mortgages. The final guidance does not cover home equity lines of credit (HELOC) or reverse mortgages, but the Agencies simultaneously issued an addendum to their existing HELOC guidance.

Key features of the final guidance include recommendations that institutions should:

Address the issue of “payment shock”–the possibility that “[p]ayments on nontraditional loans can increase significantly when the loans begin to amortize.” As in the proposal, institutions must consider the borrower’s ability to make fully-indexed, fully-amortizing payments when the loan begins to amortize, but the final guidance clarifies that this means evaluating repayment ability based on the assumption that the loan was fully-indexed and fully-amortizing from the beginning and does not require “worst-case” interest-rate assumptions. The final guidance also adds a statement that recognizes that underwriting criteria reflect many factors other than debt-to-income ratio.
Provide generic disclosures illustrating the maximum monthly payment a consumer could be required to pay, which should reflect features such as a negative-amortization cap where applicable. Although the Agencies rejected industry suggestions that consumer disclosures belong in Regulation Z rather than in safety-and-soundness guidance, the final guidance emphasizes that transaction-specific disclosures are not required. The Agencies published model disclosure forms and requested public comments.
Avoid making “collateral-dependent” loans–those where the loan terms and underwriting practices “may heighten the need” for the borrower to sell or refinance once amortization begins. A footnote indicates that this portion of the guidance does not prohibit lenders from making “low-documentation” loans, although elsewhere the guidance states that “stated income” loans “should be accepted only if there are mitigating factors that clearly minimize the need for direct verification of repayment capacity,” and notes that institutions can often easily verify income with W-2 forms, tax returns, or pay stubs.
Recognize the heightened risk that may be presented by “risk-layering” practices such as combining a nontraditional payment structure with a simultaneous second-lien (piggyback) loan. The guidance, however, does not treat piggyback loans as a form of risky nontraditional mortgage product.

The materials (with the subject indicated in the link) are available at: http://www.occ.treas.gov/ftp/release/2006-107a(Guidance).pdf, http://www.occ.treas.gov/ftp/release/2006-107b(Illustrations).pdf and http://www.occ.treas.gov/ftp/release/2006-107c(Addendum).pdf (the addendum to the HELOC guidance). Although the guidance issued by the Agencies only applies to federally chartered institutions, state regulators have previously stated their intention to issue similar guidance to state licensed lenders (see the June 16th issue of InfoBytes).

Banking Agencies Release and Testify on Basel Proposed Rule. On September 25 a Notice of Proposed Rulemaking to implement the Basel II accords was published in the Federal Register. The rules, jointly published by the FRB, the OCC, the OTS, and the FDIC, detail the risk assessment structures that will be required of banks, and put forth questions for public comment. The following day, the heads of these banking agencies testified before the U.S. Senate Committee on Banking, Housing, and Urban Affairs. Director John Reich of the OTS noted that “in addition to the models-based approach of Basel II, the Notice of Proposed Rulemaking includes questions aimed at eliciting comment on non-models-based approaches, commonly known as ‘standardized’ approaches.” The proposed rules can be read at http://www.occ.treas.gov/ftp/bulletin/2006-40.html. Text of Senate testimony can be found at http://banking.senate.gov/index.cfm?Fuseaction=Hearings.Detail&HearingID=241.

OTS to Align CRA Regulations with Regulations Issued by Other Federal Banking Agencies. On September 27, the OTS announced that it intends to issue a Notice of Proposed Rulemaking to make its Community Reinvestment Act (CRA) regulations consistent with CRA regulations promulgated by other federal banking regulators in August 2005. According to the OTS, consistent standards for CRA public evaluations for all insured institutions would improve comparability in evaluating the performance of such institutions in meeting the needs of their communities. The OTS Notice of Proposed Rulemaking is expected to be published in the Federal Register in the near future. For more information, see http://www.ots.treas.gov/docs/7/776045.html.

House Introduces Government Data Security Breach Bill. On September 25, Representative Tom Davis (R-VA) introduced H.R. 6163, which is intended to strengthen the federal government’s response to data security breaches. If enacted, bill would require the Office of Management and Budget to establish uniform procedures to respond to data breaches involving sensitive personal information. In addition, all federal agencies would be required to notify those individuals who are affected by a data security breach. The language of H.R. 6163 was added to the Veterans Administration bill that passed the House of Representatives on Tuesday, September 26. For more information, please go to http://tomdavis.house.gov/cgi-data/news/files/266.shtml.

U.S. District Court Orders Injunction Against Nationwide Debt Negotiation Operations. The Federal Trade Commission (FTC) recently announced that the United States District Court for the Central District of California had granted its request to issue a temporary restraining order against several companies and individuals alleged to have been engaged in debt negotiation services that violate Section 5 of the FTC Act. Among other things, the plaintiffs complained that the defendants misrepresented the fact that they would reduce all unsecured debt, when in fact they often did not contact creditors to negotiate a settlement for months after they advised the plaintiffs to stop payment, and in some cases never contacted creditors. A hearing on the preliminary injunction has been set for October 11, 2006. To view the FTC’s Complaint, the temporary restraining Order, and the FTC Press Release, please go to http://www.ftc.gov/opa/2006/09/nationwide.htm.

HUD Reaches $500,000 Settlement With Mortgage Company. SouthStar, an Atlanta-based mortgage firm, will pay $500,000 to the National Community Reinvestment Coalition (NCRC), pursuant to a settlement negotiated by the Department of Housing and Urban Development (HUD). In a complaint filed in March 2006, NCRC alleged that SouthStar employed discriminatory lending polices, including refusing to to make loans on any row house in Baltimore and any row house valued under $100,000, which typically are found in neighborhoods with high populations of African American and Hispanic residents. Following an investigation by HUD, SouthStar will (i) discontinue using property type to exclude borrowers; (ii) no longer use a minimum property value as an absolute bar to the making of any loan; and (iii) change its underwriting guidelines to ensure loans secured by row homes have the same underwriting criteria as loans secured by town homes and condominiums. The official press release can be found at http://www.hud.gov/news/release.cfm?content=pr06-120.cfm.

Belgian Privacy Commission Says Banking Consortium Broke European Law by Providing Financial Data to U.S. Law Enforcement. The Belgian government's Privacy Commission ruled this week that the Belgian-based Society for Worldwide Interbank Financial Telecommunication (SWIFT) had violated European privacy laws when it provided the U.S. government with confidential personal data held by it's 7,800 client financial institutions. SWIFT, a banking consortium that facilitates the transmission of financial data between institutions, had been providing this data in order to cooperate with anti-terrorism investigations overseen by the U.S. Treasury Department. To view a summary of the Commission's opinion in English, please go to: http://www.washingtonpost.com/wp-srv/world/documents/swift_english_summary.pdf. The full-text original opinion (in French) is also available at: http://www.washingtonpost.com/wp-srv/world/documents/SWIFTreport.pdf.

COURTS

Failure by Consumer to Use Specified Dispute Address Results in Summary Judgment for Creditor. A federal district court granted summary judgment in favor of a creditor under the Fair Credit Billing Act (FCBA) when the obligor sent his written dispute notice to the creditor but not to the creditor’s specified address for billing errors. Maranto v. CitiFinancial Retail Servs., No. 05-0359, 2006 WL 2620057 (W.D. La. Sept. 11, 2006). The plaintiff, a victim of identity theft, called CitiFinancial to dispute fraudulent charges that had been made in his name. He followed up with a written notice, but he admitted that he sent the notice to a post office box used by the creditor, but not to the address specified by the creditor for dispute notification. CitiFinancial refused to forgive the contested charge, claiming that its obligations under FCBA were not triggered, since it had not received notice “at the specified address,” as required by the FCBA. The court dismissed the plaintiff’s charges under FCBA with prejudice. For a copy of this decision, please contact .

Court Upholds Forum Selection Clause in Online Contract. On September 14, the United States District Court for the District of Utah, Central Division, upheld the forum selection clause in eBay, Inc.’s (eBay) online user agreement. Nasaruk v. eBay, Inc., 2:06CV242 DAK (D. Ut. Sept. 14, 2006). The Utah-based plaintiff alleged, among other things, that eBay and one of its users had violated her civil rights when another eBay user posted allegedly discriminatory feedback about her. eBay moved to dismiss the claim for improper venue, based upon a forum selection clause in its user agreement that requires disputes to be filed against eBay in Santa Clara County, California. The magistrate determined, and the District Court agreed, that the forum selection clause was valid and binding and that the plaintiff had accepted the eBay user agreement. Accordingly, it determined that the plaintiff could not pursue her case against eBay in a court outside Santa Clara County, California. For a copy of this decision, please contact .

STATE ISSUES

PayPal Settles with States Regarding Disclosure and Payment Practices. Recently, PayPal, Inc. agreed to settle a multi-state investigation into its business practices, particularly with regards to its disclosure of contractual terms and financial obligations to customers. Consumers complained, among other things, that PayPal froze money held in consumers’ accounts during disputes and charged credit cards directly without consumer permission. Under the terms of the settlement, PayPal will disclose important terms and conditions prior to a consumer becoming a PayPal member and at the time of each transaction initiation, it will provide consumers with a clear choice regarding what form of payment to use, and will provide access to information describing differences between its own dispute resolution programs and rights granted by federal law to consumers who use electronic payment systems. The settlement was between PayPal and 28 states. For more information, see http://www.nj.gov/oag/newsreleases06/pr20060928a.html.

MISCELLANY

Fannie and Freddie Announce Spanish Translations. On September 25, Fannie Mae and Freddie Mac announced the joint release of a Spanish translation of eighty-three (83) of their Uniform Instruments. In an effort to assist Spanish-speaking consumers and mortgage lenders serving such consumers, Fannie Mae and Freddie Mac have translated the common documents that a mortgage borrower would sign. The translations, which are provided for fifty-four (54) security instruments, twenty (20) promissory notes, and nine (9) related documents, will be available for free download starting October 2, 2006 at www.efanniemae.com and www.freddiemac.com/uniform. For a full text of the press release announcing the translations please see http://www.fanniemae.com/newsreleases/2006/3803.jhtml;jsessionid= VNPI2R0P2KOKJJ2FQSHSFGI?p=Media&s=News+Releases.

OTS Director Speaks on Mortgage Fraud and CRE Risk Proposal. In his September 22 remarks John M. Reich, Director of the OTS, warned of the growing threat of mortgage fraud in an increasingly difficult market. Speaking to the Illinois and Ohio Bankers’ Leagues, Reich encouraged “vigilance” against predatory lending and fraud. He discussed the increasing detachment of underwriting decision-makers from actual knowledge of properties and warned that relationships with third parties should be carefully monitored. The Director also mentioned the Commercial Real Estate (CRE) guidance proposed earlier this year (reported in the January 13, 2006 issue of InfoBytes). A transcript of his remarks can be found at http://www.ots.treas.gov/docs/8/87122.pdf.

Banking Agencies Release Study of Shared National Credit Data. On September 26, the FRB, OCC, FDIC, and OTS released a joint study showing a strong growth in large, syndicated loans in the second quarter. The survey, which covers loans or loan commitments of at least $20 million that are shared by three or more regulated financial institutions, also showed a slight increase in high risk loans. The study also notes that underwriting standards appear to be easing, and that “advanced credit risk management systems should exist to appropriately measure, monitor and control risks in large corporate portfolios.” The report can be read at http://www.federalreserve.gov/boarddocs/press/bcreg/2006/20060925/default.htm.

FRB Appoints New Head of Bank Regulation. On September 21, the FRB appointed Roger T. Cole as director of the Division of Banking Supervision and Regulation. He was first employed by the FRB in 1979, and most recently worked at the Federal Reserve Bank of Boston. Mr. Cole’s predecessor, Rich Spillenkothen, retired in June. The announcement can be found at http://www.federalreserve.gov/boarddocs/press/other/2006/20060921/default.htm.

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 speakon 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. The topic of her panel will be “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.

On Tuesday, October 3, 2006, Frank Supik will speak at the Fiserv Client Conference in Orlando, Florida regarding eMortgage developments and strategies. For more information, please go to www.fiservconference.com.

Buckley Kolar welcomes Anastasia Davis as a Specialist Attorney. She holds a L.L.M. from Georgetown University Law Center in Securities & Financial Regulation, a J.D. cum laude from Nova Southeastern University, and a B.A. cum laude in Political Science from the University of South Alabama. In addition to her law firm experience, Ms. Davis previously worked at the Securities and Exchange Commission’s Division of Enforcement in Miami and in Merrill Lynch’s Global Private Client Group in London.

© 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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