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February 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
This month’s Hot Topic discusses credit reporting.
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
Inquiry Commission Says Financial Crisis Was Avoidable
There were enough warning signs before the financial crisis struck that it could have been prevented, according to the final report of the Financial Crisis Inquiry Commission. Commission Chairman Phil Angelides said that "The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done. If we accept this notion, it will happen again."
"The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble," the report asserted. This story appears in Issue No. 2403, Jan. 28, 2011 (IntelliConnect, IRN, ip access user).
Underwriting Standards for Small Business Loans Issued
The federal bank and thrift regulatory agencies have published underwriting standards for loans under the Small Business Lending Fund Program. Under the program, the Treasury Department will buy up to $30 billion in preferred stock and other financial instruments from eligible financial institutions to increase the availability of credit for small businesses. Financial institutions with assets of $10 billion or less are eligible to participate. The Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and Office of Thrift Supervision issued the standards jointly. The interagency guidance is reproduced at ¶63-780F (IntelliConnect, IRN, ip access user).
Fed Clarifies Home Mortgage Disclosure Requirements
The Federal Reserve Board has published an interim rule amending Reg. Z—Truth in Lending (12 CFR 226) to clarify certain aspects of a Sept. 24, 2010, interim rule, in response to public comments. The September interim rule implements provisions of the Mortgage Disclosure Improvement Act (MDIA) that amended the Truth in Lending Act to require mortgage lenders to disclose examples of how a loan's interest rate or monthly payments can change. Those statutory amendments are effective Jan. 30, 2011. The MDIA seeks to alert borrowers to the risks of payment increases before they take out mortgage loans with variable rates or payments. Under the September interim rule, lenders' cost disclosures must include a payment summary in the form of a table stating the initial rate and corresponding periodic payment and, for adjustable rate loans, the maximum rate and payment that can occur during the first five years. Lenders also must provide a "worst case" example showing the maximum rate and payment possible over the life of the loan. The Fed's notice is reported at ¶97-438 (IntelliConnect, IRN, ip access user).
Oversight Council Moves on Dodd-Frank Regulation
The Financial Stability Oversight Council has approved a study of the "Volcker Rule" that was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Volcker Rule generally prohibits banking entities from engaging in proprietary trading and from investing in or sponsoring hedge funds and private equity funds. This includes prohibiting these companies from engaging in trading activities in which they act as a principal in order to profit from near-term price movements. The hedge fund and private equity fund provisions generally prohibit a banking entity from investing in, or having certain relationships with, any fund that is structured under exclusions commonly used by hedge funds and private equity funds under the Investment Company Act of 1940. The rule does not apply to activities that represent core banking functions, such as certain types of market making, asset management, underwriting and transactions in government securities. Also, nonbank financial companies supervised by the Federal Reserve Board are to be subject to additional capital charges or other restrictions rather than an absolute prohibition on the described activities. The FSOC studies and the proposed rule begin at ¶97-470 (IntelliConnect, IRN, ip access user).
Product Enhancements
E-Mail Delivery of Advance Release Documents Now Available
Advance Release Documents for Federal Banking are now available for delivery in a separate e-mail containing the entire contents of a day’s update. This service is offered with the IntelliConnect option allowing users to sign up for E-Newsletters/Report Letters. This is an alternative to the abbreviated format provided in the standard Tracker News e-mail. The Advance Release Documents provide federal banking highlights of significant current events and regulatory activity. Posted stories discuss important developments with links to full text of source documents.
Bank Digest Enhancements
The printable version of Bank Digest has been enhanced with new navigation tools. One feature is hyperlinking which allows subscribers to instantly navigate to a particular agency listed in the “Inside This Issue.” Also, there are navigation tools in the right hand margin that allow a subscriber to scroll page-by-page through the PDF version.
Financial Regulation and Reform Update
Legislation Affects Dodd-Frank Act, Requires Federal Agency Transparency
The President on Dec. 29, 2010, signed legislation amending Sec. 343 of the Dodd-Frank Act to assure continued full Federal Deposit Insurance Corp. protection for lawyer trust accounts. The current Term Asset Guarantee program under which the FDIC guarantees the total amount of client funds maintained in lawyer trust accounts expired on Dec. 31, 2010. The Dodd-Frank Act creates an equivalent program, running for two years beginning Jan. 1, 2011, but makes several changes, including a more narrow definition of a covered account. In what appears to have been a drafting error, lawyer trust accounts were not covered under the new program established by the Dodd-Frank Act. The legislation, H.R. 6398, corrects that inadvertent omission so that the accounts are fully insured. This story appears in the January monthly update (IntelliConnect, IRN, ip access user).
Dodd-Frank Repeal Bill Introduced in House
Legislation that seeks a full repeal of the Dodd-Frank Wall Street Reform and Consumer Protection Act has been introduced in the House of Representatives by Rep. Michelle Bachmann, R-Minn., who claims the financial reform bill "grossly expanded the federal government beyond its jurisdictional boundaries." This story appears in the January 7 daily update (IntelliConnect, IRN, ip access user).
SEC and CFTC Propose Joint Form for Hedge Fund Advisers
Advisers to hedge funds and other private funds would be required to report information for use by the Financial Stability Oversight Council in monitoring risk to the financial system under rules jointly proposed by the Securities and Exchange Commission and Commodity Futures Trading Commission. The proposed rules would implement Sections 404 and 406 of the Dodd-Frank Act by creating a new Form PF to be filed periodically by SEC-registered investment advisers who manage one or more private funds. Information reported on Form PF would remain confidential, although the SEC may use Form PF information in an enforcement action. This story appears in the January 28 daily update (IntelliConnect, IRN, ip access user).
President Obama Signs Executive Order Outlining Regulatory Strategy
President Obama on Jan. 18, 2011, signed an Executive Order that details the administration’s regulatory strategy intended to "support continued economic growth and job creation, while protecting the safety, health and rights of all Americans." As part of the implementation of this strategy, the President also issued a memorandum to the heads of executive agencies and departments calling for greater transparency and accountability in regulatory compliance and a memorandum emphasizing the need to reduce burdens on small businesses whenever possible. This story appears in the January 19 daily update (IntelliConnect, IRN, ip access user).
Agencies Seek Comment on Market Risk and Basel II Advanced Approaches
The Office of the Comptroller of the Currency, Federal Reserve Board and Federal Deposit Insurance Corp. are requesting comment on a proposal to revise their market risk capital rules to modify their scope to better capture positions for which the market risk capital rules are appropriate. This story appears in the January 12 daily update (IntelliConnect, IRN, ip access user).
Consumer Credit Guide
Fed Proposes Expanded Coverage of Reg. M, Reg. Z
The Federal Reserve Board has proposed rules to expand consumer protection regulations to leases and credit transactions of higher dollar amounts. The proposed rules would amend Regulation M (Consumer Leasing) and Regulation Z (Truth in Lending) to implement a provision of the Dodd-Frank Act. Currently, a consumer lease is exempt from the Consumer Leasing Act if the consumer's total obligation exceeds $25,000. Generally, under the Fed's proposed amendment to Regulation M, the $25,000 threshold amount would be increased to $50,000 for consumer leases on July 21, 2011. While private education loans and loans secured by real property are subject to the federal Truth in Lending Act (TILA) regardless of the amount of the loan, consumer loans of more than $25,000 are generally exempt from TILA. Under the Fed's proposed amendment to Regulation Z, the $25,000 threshold amount would be increased to $50,000 for consumer loans on July 21, 2011. In calendar year 2012, the $50,000 threshold amounts for both Regulation M and Regulation Z would be subject to a Consumer Price Index adjustment. The notices begin at ¶30,178 (IntelliConnect, IRN, ip access user).
Communications to Debtor's Attorney Subject to FDCPA
The U.S. Court of Appeals for the Third Circuit recently ruled that communications from a debt collecting law firm to a debtor's attorney subjected the law firm to liability under the federal Fair Debt Collection Practices Act (FDCPA). In rejecting the law firm’s argument that it was not subject to the dictates of the FDCPA, the Third Circuit determined that the applicable FDCPA provision (§1692f(1)) prohibits unfair or unconscionable means of collecting or attempting to collect a debt, regardless of the person to whom the communication is directed. Moreover, in noting the expansive definition of a "communication" under the FDCPA, the court emphasized that the law firm’s letters were indirect communications to the debtor; to rule otherwise would mean that an improper communication could escape FDCPA liability simply because it was directed to the debtor's attorney. In addition, the Third Circuit also ruled that the application of the New Jersey common law "litigation privilege" to the same communications from the law firm to the debtor's attorney did not absolve the law firm from liability as a debt collector under the FDCPA. While the Third Circuit acknowledged that the law firm’s letters "undoubtedly" qualified as relevant communications under the New Jersey litigation privilege, the court determined that the FDCPA does not contain an exemption from liability for such state common law privileges. Allen v. LaSalle Bank, N.A. (3dCir), ¶52,341 (IntelliConnect, IRN, ip access user).
Collector's Procedures Insufficient to Satisfy FDCPA's "Bona Fide Error" Defense
In connection with the "bona fide error" defense under the federal Fair Debt Collection Practices Act (FDCPA), the U.S. Court of Appeals for the Eleventh Circuit determined that a debt collector failed to show that its procedures were reasonably adapted to avoid errors that presumptively violated the FDCPA. In seeking to collect a debtor's outstanding debt, the collector attempted to collect compound interest and a "7% Interest" fee that had been improperly charged by the creditor. While the debtor did not contest the fact that the collector’s presumed FDCPA violation was unintentional and resulted from a bona fide error, the debtor disputed the collector’s claim that it maintained "procedures reasonably adapted to avoid...error." Although the Eleventh Circuit acknowledged that the collector maintained procedures to avoid error, the court determined that the collector's procedures were not reasonably adapted to avoid the specific type of error at issue. Owen v. I.C. System, Inc. (11thCir), ¶52,339 (IntelliConnect, IRN, ip access user).
State Law Update
Montana: A statewide ballot initiative previously approved by Montana voters caps the annual interest rate on payday loans, title loans, consumer loans and retail installment sales contracts at 36 percent. The initiative also prohibits businesses from structuring other transactions to avoid the rate limit. The cap applies to loans and finance contracts made on or after Jan. 1, 2011. The law as enacted by the voter initiative begins at Montana ¶6003 (IntelliConnect, IRN, ip access user).
New Hampshire: Legislation amending the state’s retail selling law increases from $25 to $150 the threshold sales price of goods or services to qualify as a home solicitation sale. Additional changes clarify that a seller engaged in a home solicitation sale must provide written notice of the buyer’s rights under the contract and allow a buyer to obtain a refund from the seller if the buyer properly cancels a transaction, notwithstanding the fact that the seller has performed services under the contract within that period. The law begins at New Hampshire ¶6081 (IntelliConnect, IRN, ip access user).
South Carolina: Increased consumer protections impose new advertising requirements for motor vehicle dealers in connection with the sale or lease of a motor vehicle. The new requirements, which were added as part of amendments to the South Carolina Consumer Protection Code, require clear and conspicuous statements, representations and disclosures. Advertising agencies are deemed agents of the motor vehicle dealer under the new requirements. The law is at South Carolina ¶5098 (IntelliConnect, IRN, ip access user).
Secured Transactions Guide
Application for Certificate of Title Created Interest
In accordance with Article 9 of the Ohio UCC, an application for a certificate of title to a vehicle and the certificate of title itself created a valid security interest in the debtor's vehicle. As a result, the debtor's bankruptcy trustee could not avoid a creditor's lien. Although the debtor did not execute any formal loan documents, the debtor signed an application for a certificate of title, and the vehicle’s certificate of title identified the creditor as lienholder. Taken together, the application for the certificate of title and the certificate of title to the vehicle constituted a security agreement. In re Giaimo; Drown v. Perfect (BAP 6thCir) ¶56,247 (IntelliConnect, IRN, ip access user).
State Update
Florida: Final rules have been issued that provide for an electronic filing system for motor vehicle certificates of title in the state. The rules establish participant requirements, certification of service providers, electronic filing system requirements, agent participation requirements, requirements relation to disclosures to customers, enforcement provisions and tax collection requirements. The regulations begin at Florida ¶1301 (IntelliConnect, IRN, ip access user).
Massachusetts: A design professional, defined as an architect, landscape architect, professional engineer, licensed site professional or licensed land surveyor, is now entitled to a lien on the real property, land, building, structure or improvement owned by the person or entity with whom the architect or engineer has entered into a contract. The law adds separate lien notice requirements and amends existing mechanics’ lien provisions to include design professionals. The summaries begin at Mechanics’ Liens, Massachusetts ¶8510 (IntelliConnect, IRN, ip access user).
New York: The exemptions for various types of personal property that are otherwise subject to money judgments have been increased, a separate exemption for a motor vehicle has been included, current terminology has been adopted and the time period for several of the exemptions has been extended. Beginning on April 1, 2012, and every three years thereafter, the dollar amounts of the exemptions will be subject to adjustment. The law begins at New York ¶1099 (IntelliConnect, IRN, ip access user).
Ohio: UCC Article 9 rules have been amended to conform with the national uniform rules provided by the International Association of Commercial Administrators (IACA). This marks the first major change in the Ohio rules since they were adopted following enactment of Revised Article 9 in 2001. The regulations begin at Ohio ¶1301 (IntelliConnect, IRN, ip access user).
Financial Privacy Guide
Applications Faxed to Recipients Were Not Ads
Faxes sent to a California company by a financial services company and two nonprofit organizations that promoted an annual business leadership award were not advertisements. Therefore, the transmissions did not violate the Telephone Consumer Protection Act (TCPA), the U.S. District Court for the Northern District of California has held. The company received at least four unsolicited faxes promoting an annual Asian Business Leadership Award sponsored by the financial services company and two nonprofit organizations and containing an application for the award. The three leading Asian businesses would receive a $5,000 award and be recognized at a conference. Two pages of the four-page fax contained a logo for the financial institution no larger than a quarter. The court determined that the faxes did not advertise the commercial availability or quality of any property, goods or services. In addition, although the faxes mentioned a conference as a location for the award, they were distinguishable from promotions for "free" seminars that were really pretexts for advertising in that they were not advertisements for the conference itself. Lastly, the senders' logos and business slogans did not convert the faxes into ads; the logos and slogans were only used to identify the award's sponsors. N.B. Industries v. Wells Fargo & Co. (NDCal) at ¶100-517 (IntelliConnect, IRN, ip access user).
Supreme Court Passes on FACT Act Challenge
The U.S. Supreme Court has denied certiorari to a recipient of an online receipt who challenged a ruling that the Fair and Accurate Credit Transactions Act (FACT Act) did not apply to online purchases. The consumer had purchased contact lenses from the online retailer, receiving a computer-generated receipt that included the consumer’s credit card expiration date. The FACT Act provides that no person that accepts a credit or debit card for transaction of business may print the expiration date of the credit or debit card on any receipt provided at the time of the transaction. The Seventh Circuit determined that the term “print” is not commonly understood to apply to a display on a computer screen, and that the FACT Act was directed at printed, paper receipts. Moreover, the court concluded, the confirmation was not provided at the “point of sale or transaction” but was e-mailed to an account that can be accessed anywhere in the world. The petition for writ of certiorari (Docket No. 10-640) was denied on Jan. 18, 2011. This story is in the Jan. 31, 2011, Privacy Extra (IntelliConnect, IRN, ip access user).
Rite Aid Settles FACT Act Class Action
The U.S. District Court for the Eastern District of Pennsylvania has approved a settlement of a class action brought against Rite Aid Corporation (Rite Aid) for alleged violations of the credit card truncation requirements of the Fair and Accurate Credit Transactions Act (FACT Act). In accordance with the settlement agreement, Rite Aid will provide a $20 gift card for each credit or debit card receipt provided to a class member between June 3, 2008, and June 18, 2009, that contained the expiration date of the person’s credit or debit card. Rite Aid also agreed to pay all administrative expenses and $65,000 in attorneys fees to the class members’ counsel. A story on Reibstein v. Rite Aid Corp. (EDPa) is in the Jan. 31, 2011, Privacy Extra (IntelliConnect, IRN, ip access user).
Individual Retirement Plans Guide
Misled Taxpayer Granted Rollover Waiver
A taxpayer was granted a waiver of the 60-day rollover requirement. He demonstrated that his failure to timely roll over the proceeds was due to misleading information that he received from an employee of the financial institution. The employee advised him that he had 90 days to roll over the proceeds of his IRA. When the taxpayer tried to roll over the proceeds within the 90-day period, according to his understanding, he was advised that the 60-day rollover period had expired. IRS Letter Ruling 201050045 is at ¶6239 (IntelliConnect, IRN, ip access user).
This month’s Hot Topic of the Month is credit reporting. Many states have enacted laws regulating the activities of consumer reporting agencies. The activities of consumer reporting agencies are also governed by the federal Fair Credit Reporting Act (FCRA), which preempts state law to the extent of any inconsistency. The Consumer Credit Guide provides coverage of both federal and state laws, while the Federal Banking Law Reporter focuses on regulatory requirements of federal banking agencies.
In general, the laws set out the permissible uses of consumer reports and disclosures that consumer reporting agencies must make to consumers who have been the subject of such reports. The laws also place obligations on users of consumer reports who deny credit or insurance for personal, family or household purposes, or who deny employment or increase the charge for credit or insurance either wholly or partly because of information obtained from a consumer report.
Because state explanations are arranged under a Uniform Topical Outline and paragraph plan that aids in referring from state to state, a list of explanations on state credit reporting can be found by linking to Consumer Credit Guide ¶4635 (IntelliConnect, IRN, ip access user) or by using the “Find by Citation” functionality to find the explanation for a particular state, such as:
Legislative changes are summarized in Report Letter stories:
Court decisions also provide important interpretations of credit reporting laws. For example:
Federal law and regulations of the Federal Trade Commission and Federal Reserve Board are found in the Consumer Credit Guide in the “Federal Fair Credit Reporting” division. Fair credit reporting regulations of all of the federal banking agencies are found in the Federal Banking Law Reporter with the Consumer Compliance Regulations. Agency issuances are also included in the Federal Banking Law Reporter, such as:
