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August 2012
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 here.
If you have questions or comments concerning the information provided below, please contact the Banking and Finance Update editor.
Financial Reform Resources
Consumer Financial Protection Bureau Reporter
CFPB Announces First Enforcement Action, Targets Capital One Credit Card Marketing
The Consumer Financial Protection Bureau on July 18, 2012, announced its first public enforcement action with an order requiring Capital One Bank (U.S.A.), N.A., to refund approximately $140 million to two million customers and pay an additional $25 million penalty. The bureau’s action stemmed from a CFPB examination that identified deceptive marketing tactics used by Capital One’s vendors to pressure or mislead consumers into paying for "add-on products," such as payment protection and credit monitoring, when they activated their credit cards. The CFPB enforcement action states that consumers were misled about the benefits of the products, believing in some cases that the product would improve their credit scores and help them increase the credit limit on their Capital One credit card. This story is in Report 48, July 23, 2012.
CFPB to Propose Mortgage Disclosure Rules
The Consumer Financial Protection Bureau has completed its proposal for rules that will combine the mortgage disclosure requirements of Reg. Z—Truth in Lending (12 CFR 1026) and Reg. X—Real Estate Settlement Procedures (12 CFR 1024). The proposal will establish new disclosure requirements and new forms and will provide "extensive guidance" on compliance in the form of staff commentary. There are two comment deadlines: comments on proposed changes to the applicability of Reg. Z and the determination of finance charges are due by Sept. 7, 2012, while comments on the balance of the proposal are due by Nov. 6, 2012. The bureau also will make a separate proposal addressing high-cost mortgage loans. The proposals begin at ¶200-101.
CFPB Rule Protects Privileged Information
The Consumer Financial Protection Bureau has adopted a rule intended to protect from disclosure confidential information provided to it by financial institutions for supervisory purposes. Under the rule, neither an institution’s delivery of privileged information to the CFPB nor the bureau’s subsequent transfer of the information to another regulator waives any privilege the institution could claim. The rule amends the bureau’s rules relating to the confidential treatment of information (12 CFR part 1070, subpart D) by adding a new section providing that the submission by any person of any information to the bureau in the course of the CFPB’s supervisory or regulatory processes will not waive or otherwise affect any privilege such person may claim with respect to such information under federal or state law as to any other person or entity. The final rule is at ¶300-052.
CFPB to Begin Supervising Credit Reporting Agencies
The Consumer Financial Protection Bureau has adopted a rule to bring the credit reporting industry under its supervision. According to the bureau, the rule will apply to the three largest nationwide credit reporting agencies—Experian, TransUnion and Equifax—as well as approximately 27 other companies. The CFPB estimated that these firms account for about 94 percent of the credit reporting industry’s $4 billion in total annual receipts.
The newly adopted rule comprises two subparts. Subpart A provides general definitions and establishes the process for determining whether a company is a larger participant in its market and thus should be subject to CFPB supervision. Subpart B applies those general principles to the consumer reporting industry. As other industries are considered, Subpart B will be expanded to cover those as well. The rule is at ¶300-054.
Credit Card Marketing Compliance Bulletin Issued
The Consumer Financial Protection Bureau has issued a bulletin outlining its expectations for how credit card issuers will sell "add-on" products, such as debt protection, identity theft protection or credit score tracking, to consumers. According to the bureau, it has found that some credit card companies have used deceptive marketing practices or enrolled consumers in programs without their consent or knowledge. The bulletin spells out a number of steps the CFPB expects credit card companies to take if they sell add-on products. The guidance also described the aspects of an appropriate compliance management program. This story is in Report 48, July 23, 2012.
Federal Banking Law Reporter
Systemically Important Financial Market Utilities Named
The Financial Stability Oversight Council has designated eight financial market utilities as systemically important due to their role in clearing and settling transactions between financial institutions. The move, which marks the first systemically important designation made by FSOC, will result in heightened risk management standards at these firms. The designated financial market utilities are:
According to the council, the action represents "another key step towards creating a safer, more resilient financial system." Related documents begin at ¶151-632.
FDIC Cautions Against Deposit Insurance Fees
The Federal Deposit Insurance Corp. has warned banks and thrifts to be careful in imposing fees with designations such as "FDIC Insurance Charge" or "FDIC Insurance Premium" on customers. While institutions are not prohibited from passing the cost of deposit insurance on to customers, explicitly designating a fee as being for deposit insurance is discouraged, the FDIC said. FIL-33-2012 is at ¶55-262.
Fed Guides on Abandoning Foreclosures
The Federal Reserve Board has issued examination procedures that specifically address situations in which a financial institution has begun, and then abandoned, the process of foreclosing on residential mortgages. The procedures call on examiners to determine whether the institution has made prudent decisions and communicated properly with both the consumers and the governmental authorities. They apply to state member banks, bank holding companies and savings and loan holding companies. SR 12-11/CA 12-10 is at ¶63-820Q.
Guidance on Cloud Computing Risks Issued
Cloud computing is a "form of outsourcing with the same basic risk characteristics and risk management requirements as traditional forms of outsourcing," according to a new statement by the Federal Financial Institutions Examination Council. The FFIEC noted that there is no widely accepted definition of cloud computing, but generally defined it as "a migration from owned resources to shared resources in which client users receive information technology services, on demand, from third-party service providers via the Internet ‘cloud.’" An institution contemplating such an arrangement should consider the factors outlined in the FFIEC’s Information Technology Examination Handbook, the agency said. The FFIEC statement is at ¶60-710.
Fed Guides on Managing OREO
The Federal Reserve Board has issued an extensive set of questions and answers covering how financial institutions are expected to handle financial reporting, loss recognition and management of other real estate owned (OREO) assets. The Fed did not describe the Q&As as replacing previous guidance; rather, it said the Q&As are intended to "reiterate this longstanding guidance and to highlight key concepts." SR 12-10/CA 12-9 is at ¶62-080C.
Consumer Credit Guide
Mortgage Loan Servicer Liability Under TILA Addressed
The U.S. Court of Appeals for the Ninth Circuit recently ruled that, in connection with a mortgage loan servicer’s duty to provide notice to a mortgage borrower under the federal Truth in Lending Act (TILA), the duty applies only to a mortgage loan servicer that is also the actual owner of the mortgage loan as an assignee, not a mortgage loan servicer that is a nominal assignee for administrative convenience. After experiencing difficulties with meeting his mortgage loan payments and attempting to renegotiate or otherwise resolve the problem, a borrower sent a letter to his original mortgage lender asking for the name and address of the true owner of the obligation or holder of his promissory note. Although the lender was both the creditor and servicer for the mortgage loan, the lender failed to respond in any capacity to the borrower’s request for information. While the Ninth Circuit acknowledged the lender’s impoliteness for having failed to respond to the borrower, the court ultimately determined that the lender was not legally required by TILA (§1641(f)(2)) to respond; liability for failing to respond to the borrower’s letter would attach only to “those servicers who are also assignees of the loan.” Gale v. First Franklin Loan Services (9thCir), ¶52,435.
Collector’s Letter Did Not Contradict or Overshadow FDCPA Validation Notice
In finding that a "least-sophisticated" or "unsophisticated" consumer would not be confused by a debt collector’s collection letter, the U.S. Court of Appeals for the Fifth Circuit held that the collection letter did not violate the federal Fair Debt Collection Practices Act (FDCPA) because the letter neither overshadowed nor was inconsistent with the required FDCPA notice contained in the same letter. In attempting to collect a $716 debt allegedly owed by a consumer to an apartment complex, a debt collector mailed a letter, containing the validation notice required by the FDCPA, to the consumer. The Fifth Circuit determined that the collection letter was not inconsistent with the validation notice because it did not demand payment within the 30-day period for disputing the debt and urged timely action by the consumer concerning any dispute about the validity of the debt, not timely payment of it. The court further determined that the collection letter did not overshadow the validation notice because the letter’s bad-credit warnings permissibly promoted final resolution of the matter, and the placement, typeface, size, and font of the FDCPA notice were acceptable. McMurray v. ProCollect, Incorporated (5thCir), ¶52,436.
Premature Mortgage Foreclosure Susceptible to FDCPA Violation
The U.S. Court of Appeals for the Sixth Circuit decided that a consumer, who contended a law firm made a material misrepresentation to her in violation of the federal Fair Debt Collection Practices Act (FDCPA), stated a valid claim. The Sixth Circuit determined that, since the law firm represented during foreclosure proceedings that its client, a bank, was the holder of the consumer’s mortgage before the bank properly established documented ownership, the law firm’s statement constituted a material representation that would tend to mislead or confuse the least sophisticated consumer. Moreover, the use of the incorrect name for the mortgage holder in the law firm’s foreclosure pleadings made it more difficult for the consumer to contact the proper lender to gain information about the loan and to resolve the matter. Consequently, the Sixth Circuit permitted the consumer’s claim—that the law firm made a "false, deceptive or misleading" representation in violation of the FDCPA—to proceed. Wallace v. Washington Mutual Bank, F.A. (6thCir), ¶52,433.
National Bank Act Preempts California Credit Card Disclosure Law
The Supreme Court of California ruled that the National Bank Act (NBA) preempted a California law requiring that certain disclosures accompany preprinted "convenience checks" that a credit card issuer provides to its cardholders for use as credit. As part of its business activities for credit card accounts, a credit card issuer provided a cardholder with preprinted convenience checks. When the cardholder used several of the convenience checks and incurred greater finance charges than he would have incurred had he used his credit card, the cardholder filed a class action against the credit card issuer—a national bank. The cardholder alleged that the credit card issuer failed to comply with the disclosure requirements of California law concerning the computation of finance charges associated with use of the convenience checks. In ruling that the California law was preempted by the NBA and its pertinent federal regulations, the California Supreme Court determined that preventing the card issuer from furnishing convenience checks to cardholders unless the card issuer provided the required California disclosures significantly impaired the card issuer’s lending authority as a national bank. The card issuer, as a national bank, was not required to show that the California law significantly impaired the exercise of its lending powers because requiring such a factual showing could result in state law being applied to some banks but being preempted as to other banks, the Court concluded. Parks v. MBNA America Bank, N.A. (CalSCt), ¶52,432.
State Law Update
Delaware: Stricter oversight over short-term consumer loans, commonly known as payday loans, limits the number of loans a borrower may obtain during a 12-month period. However, the maximum amount of a payday loan will be increased from $500 to $1,000. Analysis appears in Report No. 1146, July 10, 2012.
Minnesota: Stricter oversight over debt collectors establishes a personnel screening process that a debt collection agency must follow in hiring and retaining individual collectors. In addition to other requirements, the new process must include specified criminal history record searches. The law is reflected beginning at Minnesota ¶6301.
New Jersey: Beginning Dec. 1, 2012, fees and charges for stored value cards will be prohibited with certain exceptions. A card issuer may charge an activation fee and a replacement card fee. Beginning Sept. 1, 2012, if the redemption of a stored value card results in a balance of less than $5 after redemption, the merchant or other entity redeeming the card must refund the balance in cash if requested by the card owner. The law begins at New Jersey ¶6185.
Rhode Island: Recently enacted legislation excludes a gift card or certificate donated for fundraising purposes from the state’s expiration date restrictions if the gift card or certificate clearly states it was donated for charitable purposes and is subject to a clearly defined expiration date not less than one year from the date of issuance. The law is at Rhode Island ¶6200A.
Texas: The Finance Commission of Texas, Office of Consumer Credit Commissioner has amended its rules governing property tax lenders relating to authorized activities, licensing and application procedures, disclosures, costs and fees, and tax lien transfers. The rules appear beginning at Texas ¶8664.
Smart Charts Highlights
Some of the latest changes reflected in Consumer Credit Smart Charts include:
Secured Transactions Guide
Sale of Collateral Was Not a Conversion
The purchaser of encumbered equipment could not be held liable for conversion of the collateral and proceeds, because the transaction did not interfere with the rights of the secured party, the U.S. Court of Appeals for the Eighth Circuit has held. A creditor held a security interest in the debtor’s equipment that the debtor later sold in a sale and leaseback transaction. The debtor retained possession of the equipment and the purchaser held the purchase price as security to ensure that the debtor satisfied the lease payments. The purchaser later sold the equipment and assigned the debtor’s lease payments, secured by the heldback funds, to a third-party bank. After the debtor defaulted, the creditor repossessed the equipment in the debtor’s possession and brought suit against the purchaser and the bank for the heldback proceeds of the sale, claiming they converted the equipment and the collateral proceeds.Nebraska law provides that when property is subject to a security interest, an exercise of dominion or control over the property that is inconsistent with the secured party’s rights constitutes a conversion of the property. In accordance with Article 9 of the Nebraska UCC, a security interest in collateral continues notwithstanding the sale, lease or other disposition, unless the secured party authorized the disposition free of the security interest. The court determined that there was no conversion. The sale and leaseback of the equipment did not interfere with the bank’s right to repossess the equipment in the debtor’s possession. In addition, the bank, in possession of deposit account containing the proceeds of the sale, had a superior interest in the funds. A secured party having control over a deposit account has priority over a conflicting security interest. Thus, the bank was not entitled to the proceeds. Platte Valley Bank v. Tetra Financial Group, LLC (8thCir), ¶56,288.
State Law Update
Delaware: Delaware has added new certificate of title provisions to allow for the non-testamentary transfer of a certificate of title to a vehicle on the death of the vehicle’s owner. A vehicle is titled in transfer-on-death form by designating on the title the name of the sole owner, or the names of all owners if owned jointly, followed in substance by the words "transfer on death to [name of beneficiary or beneficiaries]." The abbreviation "TOD" may also be used. The law appears at Delaware, ¶1095, ¶1097, ¶1099, and ¶1124.
Nebraska: Nevada has adopted new regulations concerning Article 9 of the UCC to make technical changes and account for the adoption of the Article 9 amendments promulgated by the ULC and ALI in 2010. The amended regulations adopted, effective May 30, 2012, the requirements for the use of an addendum form to add additional debtors or secured parties, the use of certain characters when entering the name of the debtor or secured party in the information management system, and substituted the term "statement of claim" wherever the term "correction statement" appeared. A "statement of claim" is a UCC document that indicates that a financing statement is inaccurate or wrongfully filed. The use of the term "statement of claim" is effective through June 30, 2013. Thereafter, the term "statement of claim" will be replaced by "information statement," which will have the same meaning as a "statement of claim." The regulations begin at Nebraska, ¶1301.
Rhode Island: The amount of the homestead exemption protected from levy and attachment has increased from $300,000 to $500,000. In addition, the exemption will now extend to persons occupying the premises as a life tenant, lessee or beneficiary of a trust that owns the property. The law appears at Rhode Island, ¶1136.
Texas: The Texas Secretary of State has repealed and re-issued new UCC regulations. The new regulations provide detailed rules for the means to deliver UCC records, delivery of search requests, acceptance and refusal of documents, the UCC information management system, filing and data entry procedures and filing other notices of liens. The regulations begin at Texas, ¶1351.
Financial Privacy Law Guide
FCRA May Allow Private Action Against Information Furnisher
The Fair Credit Reporting Act (FCRA) does not preclude a private right of action against a furnisher of information under 15 USC 1681s-2(b), a federal district court has held. An individual alleged that a financial institution violated the FCRA by "willfully and negligently" reporting inaccurate information after it was notified by the individual of the erroneous or fraudulent information. The financial institution responded that the FCRA provision does not allow a private right of action and the individual failed to allege any facts to establish her claim. The court stated that the FCRA appears to impose civil liability on "any person" violating a duty imposed by the FCRA owed to "any consumer." While the specific provision found at 15 USC 1681s-2(a) can only be enforced by government officials, nothing in the statute precludes a private suit against a furnisher for a violation of 15 USC 1681s-2(b). A private right of action may exist under Sec. 1681s-2(b) if the individual pleads correctly and sufficiently, the court concluded. Haley v. Citibank N.A. (SDTex) at ¶100-590.
Class Action Appropriate for EFTA Notice Action
A federal district court has determined that a class action is the appropriate method to adjudicate claims brought under the Electronic Fund Transfer Act against a credit union that allegedly failed to post notices of a transaction fee at its ATM locations, because the legal and factual issues were common to all members of the proposed class. The individual alleged that she used the credit union’s ATM at one of three ATM locations operated by the credit union and was charged a fee of $1.75, despite the fact that there was no notice of the fee posted at the location. She brought suit against the credit union for violating the EFTA and sought to certify a class of similarly situated persons, consisting of all consumers who initiated an electronic fund transfer at one of the three locations and was assessed a fee. A story on Campbell v. Hope Community Credit Union (WDTenn) is in Privacy Extra, July 31, 2012.
Legislation Would Alter ATM Disclosure Requirements
The House Financial Services Committee has approved H.R. 4367, which would amend the Electronic Fund Transfer Act to limit the fee disclosure requirement for automatic teller machines to the screen of that machine. The current law, which requires a sticker or sign about transaction fees to be attached to the ATM in addition to an on-screen notice, has spawned lawsuits by enterprising plaintiffs and vandals who remove the sticker or sign so they can then sue the ATM operator for being in violation of the law. This story is in Report No. 133, July 23, 2012.
Individual Retirement Plans Guide
Couple Penalized for Excess Roth IRA Contribution
Married taxpayers who created corporations owned by their Roth IRAs were liable for excise taxes for making excess contributions to their Roth IRAs, according to the Tax Court. The taxpayers became involved in the business of home construction and sales and to avoid personal financial risk created an S corporation into which they transferred their interests in the business. They subsequently opened two Roth IRAs, and formed two C corporations to provide services to the S corporation, with the husband’s Roth IRA owning one of the C corporations and the wife’s Roth IRA owning the other. The C corporations paid small amounts to the individuals as salary, but paid larger amounts as dividends to the two IRAs. One C corporation created a medical plan that reimbursed its employees (the wife and the husband) and their dependents for medical expenses. The Tax Court determined that the agreements between the S corporation and the C corporations were mechanisms to transfer value to the Roth IRAs. Thus, the taxpayers were liable for excise taxes. Tax Court Memorandum 2012-168 is reported at ¶10,344.
