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April 2011
From the editors of CCH’s Banking and Finance publications, this update describes significant developments covered in our products in recent reports, as well as product enhancements
Past issues of the Banking and Finance Update can be viewed on the Banking and Finance Web page at: http://business.cch.com/updates/bankingFinance.
If you have questions or comments concerning the information provided below, please contact the Banking and Finance Update editor.
Financial Reform Resources
Federal Banking Law Reporter
Fed Acts on Mortgage Loan Escrow Account Rules
The Federal Reserve Board has adopted a final rule that increases the annual percentage rate threshold used to determine whether a mortgage lender is required to establish an escrow account for property taxes and insurance for first-lien, "jumbo" mortgage loans—loans that exceed the conforming loan-size limit for purchase by Freddie Mac. Under the amendments to Reg. Z—Truth in Lending (12 CFR 226), the escrow requirement will apply to a first-lien jumbo loan only if the loan's APR is 2.5 percentage points or more above the average prime offer rate. This is an increase from the current 1.5-percent threshold. The threshold for loans that are not jumbo loans is not affected by the change, according to the Fed.
The Fed also has proposed an amendment to Reg. Z that would expand the minimum period for mandatory escrow accounts for first-lien, higher-priced mortgage loans to five years from the current one year. An even longer period would be required under some circumstances, such as when the loan is delinquent or in default. The proposal would provide an exemption from the escrow requirement for some creditors that operate in "rural or underserved" counties. Additional disclosure requirements also would be imposed under the proposal. The Fed's notices begin at ¶97-555 (IntelliConnect, IRN, ip access user).
Fed Acts to Encourage Electronic Check Clearing
The Federal Reserve Board has proposed amendments to Reg. CC—Availability of Funds and Collection of Checks (12 CFR 229) that it intends to encourage banks to handle more checks electronically. The amendments would govern check returns, check clearing and extended hold periods. Changes to the Fed's model forms are included in the proposal. Clearing and returning checks electronically is more efficient, faster, cheaper and more accurate than paper-based methods, the Fed said. Nevertheless, some banks are continuing to demand paper returned checks or to present paper checks for same-day settlement, which means that some of the advantages of electronic processing cannot be fully realized. The proposed amendments are intended to encourage—but not require—banks to use electronic methods. This story appears in Issue No. 2409, March 7, 2011 (IntelliConnect, IRN, ip access user).
Debt Collection Errors Cost Lawyers $300,000 Judgment
A debt collecting law firm's violations of the Fair Debt Collection Practices Act while trying to collect a $3,000 credit card account justified a $311,000 judgment against the firm, the U.S. Court of Appeals for the Ninth Circuit has decided. The facts as described by the court showed that the debt collector was acting on behalf of a company that bought and then attempted to collect debts that had been charged off. The consumer had become unable to make payments on his account after both he and his wife had medical problems, and the last payment on the account was made in 1999. The collection effort was turned over to the law firm in 2006—after the statute of limitations expired. Under the contract between the firm and the company, the company disclaimed any responsibility for the accuracy of the information it gave to the firm and the firm was obligated to determine whether the debt could legally be collected, the court observed. The law firm recognized that there was a statute of limitations problem and asked the company for anything that would extend the limit, the court continued. The company responded by telling the firm that the consumer had made a payment on the account in 2004, which would have extended the deadline for filing suit. The firm then relied on that information in filing its collection suit; however, the information turned out to have been erroneous. The law firm later was told of the error and that the statute of limitations had expired, but continued to prosecute the suit for another four months, the court also noted. McCollough v. Johnson, Rodenburg & Lauinger, LLC. (9thCir) is at ¶101-243. (IntelliConnect, IRN, ip access user).
FSOC Proposal Would Define Significant Market Utilities
The Financial Stability Oversight Council has proposed a rule that would define which financial market utilities are systemically significant for purposes of the heightened prudential and supervisory provisions of the Dodd-Frank Act. Under Dodd-Frank, a financial market utility is an entity that manages or operates a multilateral system for the purposes of transferring, clearing or settling payments, securities or other financial transactions among financial institutions or between financial institutions and the entity. However, some entities, such as designated contract markets and national securities exchanges, are exempt from being considered to be financial market utilities. A utility would be systemically significant if its failure or disruption could create or increase the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the U.S. financial system, the FSOC said. The FSOC notice is at ¶97-736 (IntelliConnect, IRN, ip access user).
Product Enhancements
White Paper Details Troubled Asset Relief Program
Wolters Kluwer Law & Business has published A Retrospective of the Troubled Asset Relief Program, a new white paper by Banking Law Analyst Katalina M. Bianco, J.D. In the white paper, Bianco discusses the implementation of the Troubled Asset Relief Program (TARP) as a key aspect of the Emergency Economic Stabilization Act of 2008 (EESA) to the aftermath of TARP, including the latest reported TARP recovery figures from the Treasury.
Although authority for the Troubled Asset Relief Program expired on Oct. 3, 2010, the pros and cons of the legislative response to the financial crisis continue to be debated. The white paper explores the details, evolution and key developments of the program; outlines specific programs under the TARP umbrella; and describes the oversight measures and sunset of TARP, as well as responses and outcomes of the program.
Financial Regulation and Reform Update
Treasury Says Dodd-Frank Systemic Risk Tools Need Time To Work
The Treasury Department rebuffed accusations that the government will lack courage in the future to use the new tools provided by the Dodd-Frank Act allowing it to wind down systemically risky financial institutions. At the final hearing of the Congressional Oversight Panel on March 4, 2011, Treasury Acting Assistant Secretary for Financial Stability Timothy Massad was questioned on whether the government would, in a time of panic, be prepared to shutter faltering institutions rather than simply writing a check and instituting a bailout. "I would certainly hope so...but, obviously, it remains to promulgate the regulations necessary and to act," Massad said. He added that it will also require "regulation that is responsive to changes in the industry as we go forward. But...I think we should give these tools a chance to work before we judge." This story appears in the March monthly update (IntelliConnect, IRN, ip access user).
Barofsky Urges Regulators to Move Beyond "Empty Rhetoric"
Outgoing Special Inspector General for the Troubled Asset Relief Program Neil Barofsky called for regulators to move beyond "empty rhetoric" in order to convince the markets that they are serious about ending the problem of too-big-to-fail. "Instead of issuing empty statements...let's start with an articulated plan similar to the one advocated by [Federal Deposit Insurance Corp.] Chairman [Sheila] Bair saying...we're going to simplify and shrink these institutions...we're not going to bail them out," Barofsky told the House Oversight and Government Reform Committee on March 30, 2011. This story appears in the March 31 daily update (IntelliConnect, IRN, ip access user).
Fed Blocks Bank of America Dividend Increase
Bank of America said the Federal Reserve Board has indicated that it objects to the bank's proposed "modest increase" in its common dividend for the second half of 2011 and is allowing the bank to submit a revised comprehensive capital plan. In a filing with the Securities and Exchange Commission, Bank of America said it will continue to work with the Fed in order to permit the dividend increase. The bank noted that over the last 12 months it has made "meaningful progress" in building its capital and liquidity positions. This story appears in the March 24 daily update (IntelliConnect, IRN, ip access user).
SIGTARP Says Too-Big-to-Fail Perception Problem Persists
Financial markets believe "more than ever" that the government will step in and save too-big-to-fail financial institutions should there be another financial shock, outgoing Special Inspector General for the Troubled Asset Relief Program (SIGTARP) Neil Barofsky told Congress on March 17, 2011. During questioning at a Senate Banking Committee hearing Barofsky told ranking member Sen. Richard Shelby, R-Ala., that "it's nearly the identical toxic cocktail of implicit guarantees and market distortions that the too-big-to-fail banks have today as Fannie (Mae) and Freddie (Mac) did leading into the financial crisis." In his testimony, Barofsky stated that "the ultimate success of the Dodd-Frank Act depends to a certain degree on market perception. Thus far, the Act has clearly not solved the perception problem." He added that the largest financial institutions "continue to enjoy access to cheaper credit based on the existence of the implicit government guarantee against failure." This story appears in the March 21 daily update (IntelliConnect, IRN, ip access user).
Bair Says Bank Support for Reform Vital for Industry Success
The biggest risk to the future success of the banking industry would be its failure to support reforms needed to ensure long-term stability in financial markets and the economy, Federal Deposit Insurance Corp. Chairman Sheila Bair said on March 16, 2011. In a speech to an American Bankers Association symposium, Bair, whose term as FDIC chairman ends in June, said that in the years ahead "it is far more likely that banks will come to be viewed either as a group that supported the restoration of free enterprise and public responsibility in the American economy, or as a group that mainly looked out for its own short-term interests and resisted reforms that could have restored a sense of confidence and fairness in our financial markets." Bair noted that in the wake of the financial crisis banks appear to have "an even bigger image problem" than regulators in the eyes of the public. "As this historical era unfolds, public opinion as to the role played by the banking industry seems unlikely to be neutral," she said. This story appears in the March 17 daily update (IntelliConnect, IRN, ip access user).
Consumer Credit Guide
FRB Adopts Reg. M, Reg. Z Threshold Dollar Amount Increases
The Federal Reserve Board recently adopted two rules that would expand the coverage of consumer protection regulations to consumer credit transactions and leases of higher dollar amounts. The adopted rules amend Regulation M (Consumer Leasing) and Regulation Z (Truth in Lending) to implement a provision of the Dodd-Frank Act. Accordingly, effective July 21, 2011, under the Fed’s adopted rules for both Regulation M and Regulation Z, the current $25,000 threshold amount will be increased to $50,000 for consumer leases and consumer loans. In calendar year 2012, the new $50,000 threshold amount will be subject to further adjustment in conformity with the Consumer Price Index. This story appears in Report Letter No. 1114, April 5, 2011 (IntelliConnect, IRN, ip access user).
Fed Final Rule Clarifies Regulation Z Credit Card Provisions
The Federal Reserve Board recently approved a final rule amending Regulation Z (Truth in Lending) to clarify aspects of prior rules implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit Card Act). The final rule addresses practices that can result in extensions of credit to consumers who lack the ability to pay. The rule additionally clarifies that: promotional programs that waive interest charges for a specified period of time are subject to the same Credit Card Act protections as promotional programs that apply a reduced rate for a specified period; and application and similar fees that a consumer is required to pay before a credit card account is opened are covered by the same Credit Card Act limitations as fees charged during the first year after the account is opened. This story appears in Report Letter No. 1113, March 22, 2011 (IntelliConnect, IRN, ip access user).
FDCPA Venue Provision Construed in Accordance with State Law
In a case of first impression, the U.S. Court of Appeals for the Second Circuit held that a debtor stated a valid claim under the federal Fair Debt Collection Practices Act (FDCPA) against a debt collector because the collector did not bring its separate, underlying New York state court action in the proper "judicial district or similar legal entity" in which the debtor resided, even though the debtor resided elsewhere within the county containing the city court. In determining that the FDCPA term "judicial district" was to be construed in accordance with the structure of the state court system under New York law, the Second Circuit ruled that the "judicial district" pertained to the proper city boundaries and not the county boundaries. The Second Circuit noted that while its ruling might appear to be in tension with other federal appellate jurisdictions, its ruling on the "judicial district" issue was actually compatible with other federal decisions because of the notable differences of the respective state court systems. Hess v. Cohen & Slamowitz LLP (2dCir) is at ¶52,347 (IntelliConnect, IRN, ip access user).
FDCPA Protections Do Not Extend to State Court Judge
The U.S. Court of Appeals for the Seventh Circuit recently ruled that, since the protections of the federal Fair Debt Collection Practices Act (FDCPA) extend only to consumers and those who have a special relationship with the consumer, these protections do not extend to communications that would confuse or mislead a state court judge. In seeking to recover a consumer’s outstanding credit card debt, a debt collector attached to its state court complaint an exhibit that closely resembled a credit card statement, purportedly listing the consumer’s outstanding balance and replacing the name of the card issuer with the name of the collector. The consumer alleged that the attachment to the state court complaint violated the FDCPA because it was designed to mislead the state court judge into believing that the consumer had actually received the document and had not objected to its validity—thereby influencing the judge’s decision to grant a default judgment in favor of the collector. In rejecting the consumer’s theory of recovery, the Seventh Circuit emphasized that the protections of the FDCPA generally do not extend to third parties, including a state court judge. The Seventh Circuit acknowledged that the debt collector’s exhibit was not a proper way of practicing law. However, in addressing the narrow issue of the collector’s liability for false, deceptive, or misleading representations under the FDCPA, the court determined that the communication would need to have been one that improperly influenced a consumer’s decision, not a state court judge’s decision. O’Rourke v. Palisades Acquisition XVI, LLC (7thCir) is at ¶52,354 (IntelliConnect, IRN, ip access user).
State Law Update
Mississippi: Governor Haley Barbour recently signed legislation establishing a revised fee structure and maximum check cashing amount for deferred deposit or payday loan transactions governed by the Mississippi Check Cashers Act. The legislation increases from $400 to $500 the maximum amount of a deferred deposit or payday loan transaction, and revises the maximum fee for cashing a delayed deposit check from a percentage of the check amount to a stated dollar amount for each $100 advanced by the lender. The law is at Mississippi ¶7519 (IntelliConnect, IRN, ip access user).
Nebraska: Changes to the Installment Loan Act and Installment Sales Act clarify that the cost of debt cancellation contracts and debt suspension contracts can be financed in installment sales and loan transactions. In addition, installment loan and sales licensees, as well as financial institutions, may offer and issue debt cancellation and debt suspension contracts. The amendments also provide that the cost of electronic title and lien services can be charged and financed in installment sales contracts and installment loan contracts. The law begins at ¶6002 (IntelliConnect, IRN, ip access user).
Smart Charts Highlights
Some of the latest changes reflected in Consumer Credit Smart Charts include:
Secured Transactions Guide
Debtor Had Sufficient Rights Without Title to Grant Interest
A debtor who possessed and maintained cattle for almost eight years had sufficient rights in the cattle to grant an enforceable security interest to a bank, despite the fact that the debtor had no title to the cattle. A security interest is enforceable against the debtor and third parties with respect to the collateral if: value has been given; the debtor has rights in the collateral or the power to transfer rights in the collateral; and the debtor has authenticated a security agreement that provides a description of the collateral. Possession of collateral, accompanied by a contingent right of ownership, is sufficient for a security interest to attach. Although the seller of the cattle had not been paid in full and the agreement provided that the title to the cattle would not pass until the seller was paid in full, the debtor's possession and maintenance of the cattle for eight years established rights in the collateral sufficient for the bank to enforce its interest. Hubbard v. HomeBank of Arkansas (ArkCtApp) is at ¶56,255 (IntelliConnect, IRN, ip access user).
"Lease" Agreement Created Security Interest Not Lease
A "noncancelable" agreement that purported to be a lease but provided that the lessee, a golf course, could purchase the leased beverage cart at the end of the lease term in exchange for one dollar was, in fact, a disguised sale with a security interest. A transaction in the form of a lease creates a security interest if the lease is not subject to termination by the lessee, and the lessee has an option to become the owner of the goods for no additional consideration or nominal additional consideration at the end of the lease term. The golf course was required to make payments of $299 per month for 60 months for the cart, and at the end of the term it would have the option to purchase the cart for one dollar. The agreement also stated that it was "noncancelable." Thus, the court concluded, the lease agreement was a sale with a security interest. C & J Vantage Leasing Co. v. Wolfe (IowaSCt) is at ¶56,253 (IntelliConnect, IRN, ip access user).
Bank Not Entitled to Debtor's Post-Petition Receipts
Cash receipts collected by a miniature golf course after filing a petition for bankruptcy protection were not subject to a bank's security interest because the bank did not have a perfected security interest in the post-petition receipts. The bank had argued it was entitled to the post-petition cash receipts as proceeds of its security interest in the debtor's putters, golf balls and scorecards or as secured "money." However, the customers paid a fee to license the use of the golf course, not rent the debtor's equipment. Thus, the cash receipts were not proceeds of the bank's security interest in the debtor's equipment. In re The Wright Group, Inc. (BankrNDInd) is at ¶56,252 (IntelliConnect, IRN, ip access user).
State Update
Arkansas: The certificate of title law has been amended to provide for the transfer of title to a motor vehicle or motor boat upon the owner's death to a beneficiary. If the owner of a vehicle wishes to transfer the vehicle upon death by operation of law, the owner may request a certificate of title with beneficiary from the Arkansas Department of Finance and Administration. The law sets forth the application procedures and fees, as well as the procedure to change beneficiaries. The law is at Arkansas ¶1053 (IntelliConnect, IRN, ip access user), ¶1055 (IntelliConnect, IRN, ip access user) and ¶1057 (IntelliConnect, IRN, ip access user).
Nebraska: Where liens exist on a motor vehicle for which a title application has been filed, the law now requires that the application be handled in accordance with the electronic lien filing process recently established by the state. Under prior law, the Division of Motor Vehicles was required to deliver or mail the certificate of title to the holder of the first lien on the day of issuance. The law is at Nebraska ¶1059B (IntelliConnect, IRN, ip access user).
Virginia: Any landowner, his lessee or agent seeking to acquire title to a vessel abandoned for more than 60 days on his land or the water immediately adjacent to his land must publish a notice to appear for three consecutive issues in a newspaper of general circulation in the county or city where the vessel is located. The landowner, lessee or agent must also make a good faith effort to secure the owner's or lienholder's last known address and notify them that if the ownership is not claimed and the vessel not removed within 30 days, he will apply for title. Acquiring title under the statute divests any other person of any interest in the vessel. The law is at Virginia ¶1048A (IntelliConnect, IRN, ip access user).
Financial Privacy Law Guide
Personal Privacy Exemption Does Not Apply to Corporations
In an 8 to 0 decision, the U.S. Supreme Court held that corporations do not have “personal privacy” interests for the purposes of a provision of the Freedom of Information Act, overturning a decision by the U.S. Court of Appeals for the Third Circuit. As a result, AT&T could not block disclosure of certain documents under a FOIA exemption that prevents the disclosure of law enforcement records that "could reasonably be expected to constitute an unwarranted invasion of personal privacy." Federal Communications Commission v. AT&T Inc. (SCt) is at ¶100-529. (IntelliConnect, IRN, ip access user).
Opt-Out Requirements Apply Only to Unsolicited Faxes
An advertisement faxed to an attorney that did not contain an opt-out notice did not violate the Telephone Consumer Protection Act. The advertisement was not unsolicited, and only unsolicited fax advertisements must contain an opt-out notice, a federal district court held. Nack v. Walburg (EDMo) is at ¶100-527. (IntelliConnect, IRN, ip access user).
FTC, Administration Call for Consumer Privacy
"Do Not Track is no longer just a concept, it is becoming a reality," said Federal Trade Commission Chairman Jon Leibowitz at a March 16 hearing on The State of Online Consumer Privacy held by the Senate Committee on Commerce, Science and Transportation. "It's encouraging to see companies responding positively to our call for more consumer choice about their online privacy," Leibowitz continued. Also testifying at the hearing, Assistant Commerce Secretary Lawrence Strickling said the administration is calling for legislation to provide a stronger statutory framework to protect consumers' online privacy interests. This story appears in the March 31, 2011, Privacy Extra. (IntelliConnect, IRN, ip access user).
Identity Theft Tops FTC Consumer Complaints
For the eleventh year in a row, identity theft was the number one consumer complaint received by the Federal Trade Commission. According to a list released by the FTC of the top 10 consumer complaints, 19 percent of complaints the FTC received in 2010 were related to identity theft. Debt collection complaints came in second place at 11 percent. This story appears in Report Letter No. 117, March 16, 2011. (IntelliConnect, IRN, ip access user).
Individual Retirement Plans Guide
IRS Issues Guidance on Employer Securities
The IRS has released guidance regarding when securities of the employer are "readily tradable on an established securities market" or "readily tradable on an established market" for purposes of certain provisions of the Internal Revenue Code relating to employer securities held by certain qualified retirement plans. IRS Notice 2011-19 is at ¶6249 (IntelliConnect, IRN, ip access user).
