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February 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 on the Banking and Finance Web page at:

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 Launches Nonbank Supervision Program
In the wake of the appointment of Richard Cordray as Director of the Consumer Financial Protection Bureau, the bureau has said it will begin to phase in the supervision of nonbank financial services providers. The CFPB said it now has the authority to supervise mortgage companies, private education lenders and payday lenders. Also, the bureau soon will propose a rule defining "larger participants" in all other markets and begin to supervise these companies when a final rule is adopted.

The CFPB said it intends to examine nonbanks in the same way it examines banks, using a combination of required reports, document reviews and on-site examinations. Companies generally will be given advance notice of examinations. The CFPB said it will coordinate its examinations with those of other regulatory agencies at both the state and federal levels.

Under the Dodd-Frank Act, the CFPB also can supervise larger nonbank participants in areas outside of mortgage, payday and private education lenders. The CFPB said it soon will propose an initial rule identifying six possible markets for consideration—debt collection, consumer reporting, prepaid cards, debt relief services, consumer credit and related activities, and money transmitting, check cashing and related activities. The notice is at ¶200-035.

Mortgage Originator Examination Procedures

In a "key step" to implementation of its Nonbank Supervision Program, the CFPB has published its examination procedures for mortgage loan originators. The procedures will be used by examiners dealing with both banks and nonbank mortgage originators.

According to the CFPB, a large part of the mortgage origination market, including many of the largest subprime lenders, has been exempt from federal supervision. However, the bureau now has the authority to supervise these companies under changes made by the Dodd-Frank Act. The bureau issued examination procedures for mortgage servicers in September 2011.

The CFPB will be implementing its nonbank mortgage supervision program based on its assessment of risk to consumers, including consideration of factors such as the volume of business, types of products or services and the extent of state oversight. The CFPB also will be coordinating with federal and state regulators in order to maximize overall supervisory capability and minimize regulatory burden, the bureau said. The examination procedures are at ¶1509.

CFPB Guides on Payday Lending Examination Procedures
The Consumer Financial Protection Bureau on Jan. 19, 2012, released guidance on examination procedures related to the short-term, small-dollar credit market known as payday lending. The bureau noted that, prior to using the exam procedures, examiners should complete a risk assessment and examination scope memorandum.

The procedures are comprised of modules covering a payday loan’s lifecycle. Each module identifies relevant matters for review. Each examination will cover one or more of the modules, depending on the scope of the examination and in conjunction with the compliance management system and consumer complaint response review procedures. The guidance is at ¶1510.

CFPB Adopts International Money Transfer Rules
The Consumer Financial Protection Bureau has amended Reg. E—Electronic Fund Transfers (12 CFR 1005) to establish federal regulatory protections for consumers who are making international fund transfers. The rules, which are required by the Dodd-Frank Act, constitute the first time that federal laws have provided consumer protections for international remittance transfers, the CFPB said. They require specified disclosures, create cancellation rights and impose a duty to investigate claimed errors. The rules will apply to transfers of more than $15, but will not take effect until one year after they are published in the Federal Register. As they now stand, the rules will apply to banks, thrifts and credit unions as well as traditional remittance service providers. The CFPB will be publishing proposed changes that are intended to provide regulatory relief for financial institutions that do not provide remittance transfer services as part of their normal business operations. The rules appear in Report 23, Jan. 30, 2012.

Cordray Outlines to House Panel His Vision for a CFPB with Full Enforcement Authority
Consumer Financial Protection Bureau Director Richard Cordray’s vision is that the new CFPB will make consumer financial markets operate fairly in order to protect consumers, support honest businesses, and play a crucial role in helping to safeguard the overall economy. In testimony before a House oversight panel chaired by Rep. Patrick McHenry, R-N.C., he said that the bureau will benefit consumers by clarifying the prices and risks of consumer financial products and services.

When consumers know the true costs, benefits and risks of competing products, Cordray reasoned, they will be able to better make informed decisions. Greater knowledge also helps people avoid being ambushed by costly surprises buried in the fine print, he continued, so that they can have proper confidence that the terms of the deal stated today are the terms they will actually be living with down the road. The CFPB will benefit honest businesses by leveling the playing field and ensuring that financial institutions play by the same set of rules. Cordray’s testimony appears in Report 23, Jan. 30, 2012.

Federal Banking Law Reporter

Credit Repair Act Permits Pre-Dispute Arbitration Agreements
A company and a bank that marketed and issued credit cards as a way for consumers to improve their credit histories were not prevented by the Credit Repair Organizations Act from requiring consumers to arbitrate their claims, the U.S. Supreme Court has decided. In a decision joined in by six of the Justices, the Court reversed decisions by a federal district court and the U.S. Court of Appeals for the Ninth Circuit that the CROA did not permit the mandatory pre-dispute arbitration clause that was included in the contract the consumers signed (see Greenwood v. CompuCredit Corp., 2011-1 CCH Dec.¶101-216). Two Justices concurred in the result on narrower grounds, while Justice Ginsburg dissented. CompuCredit Corp. v. Greenwood (SCt) is at ¶101-301.

Fed Cautions on Asset Exchange Transactions
The Federal Reserve Board has issued guidance that is intended to help banks—particularly smaller community banks—avoid the risks that can arise from the inappropriate use of asset exchanges to dispose of nonperforming assets or Other Real Estate Owned. These arrangements can effectively be used to reduce nonperforming assets on an institution’s balance sheet, the Fed noted; however, they also could threaten an institution’s safety and soundness. The guidance includes an example of an asset exchange that illustrates the risks and that caused the involved bank "significant losses." SR 11-15 is at ¶62-080A.

FDIC Moves to Tighten Supervision of Larger Institutions

The Federal Deposit Insurance Corp. has approved one rule and proposed a second that are intended to enhance its ability to supervise the largest financial institutions under its authority. The final rule will require banks and thrifts with $50 billion or more in assets to submit resolution plans to the agency, while the proposed rule would require state nonmember banks and state thrifts insured by the agency that have more than $10 billion in total assets to conduct annual capital adequacy stress tests. The notices are at ¶151-106 and ¶151-107.

OCC Proposes Stress Test Requirements
The Office of the Comptroller of the Currency has proposed a rule that would require larger national banks and federal savings associations—those with more than $10 billion in consolidated assets—to perform annual stress tests. The rule also would impose related reporting and disclosure obligations. It would not apply to federal branches or agencies of foreign banks. The proposal would establish the parameters of the stress test, which it defines as "a process to assess the potential impact of hypothetical economic conditions ("scenario") on the capital of a covered institution over a set period (the "planning horizon"), taking into account the current condition of the covered institution including its material risks, exposures, strategies, and activities." For each test, the agency would provide at least three scenarios, which it says will reflect baseline, adverse and severely adverse conditions; however, additional scenarios may be included. The scenarios will be developed in cooperation with the Federal Reserve Board and the Federal Deposit Insurance Corp., which will be adopting comparable regulations for the institutions they supervise. This story is in Report No. 2453, Jan. 26, 2012.

Consumer Credit Guide

Lender Did Not Violate TILA’s Rescission Rights Notification by Using General Form
The U.S. Court of Appeals for the Fourth Circuit held that, in a refinanced mortgage loan situation, even though a lender used the general "Model Form H-8" as a notice of the borrower’s rescission rights, instead of "Model Form H-9" specifically designed for refinancing transactions, the lender still complied with the notification requirements of the federal Truth in Lending Act (TILA) and Regulation Z concerning the borrower’s rescission rights. The Fourth Circuit acknowledged that it was preferable for the lender to have used the more specific Model Form H-9. However, the court determined that since nothing in TILA or Regulation Z required the lender to advise the borrower of the specific effects of rescinding a mortgage refinancing, as distinct from rescinding an initial mortgage financing, the lender substantially complied with TILA and Regulation Z by using Model Form H-8. Watkins v. SunTrust Mortgage, Inc. (4thCir), ¶52,404.

Municipal Fines Are Not “Debts” Under FDCPA
The U.S. Court of Appeals for the Seventh Circuit recently held that several fines levied by a municipality against an individual did not constitute "debts" under the federal Fair Debt Collection Practices Act (FDCPA). The municipality’s fines against the individual pertained to a parcel of real estate allegedly owned by the individual. The Seventh Circuit determined that the amounts the individual allegedly owed fell outside the FDCPA’s definition of a "debt" because they constituted nonconsensual penalties attributable to violations of municipal law. As a result, the Seventh Circuit affirmed the dismissal of the individual’s FDCPA action against a law firm that attempted to collect the municipal fines. Gulley v. Markoff & Krasny (7thCir), ¶52,397.

Credit Reporting Act Preempts State Common-Law Claims
The U.S. Court of Appeals for the Second Circuit recently decided that a consumer’s state common-law claims—that a bank willfully and maliciously provided false information about the consumer’s finances to a consumer reporting agency and that the bank intentionally caused the consumer emotional distress—were preempted by the federal Fair Credit Reporting Act (FCRA). In affirming the dismissal of the consumer’s claims, the Second Circuit determined that the FCRA’s preemption provisions applied not just to claims based on state statutes but also to claims based on state common law. The court asserted that the two preemption provisions in the FCRA were not in conflict; rather, a 1996 amendment supplemented the original language of the Act by adopting a broader preemption that applied to more claims. Macpherson v. JPMorgan Chase Bank, N.A. (2dCir), ¶52,399.

State Law Update

California: Changes to the Automobile Sales Finance Act and the Vehicle Code attempt to increase participation in the electronic vehicle registration program of the Department of Motor Vehicles (DMV) by requiring all eligible vehicles sold or leased by a new motor vehicle dealer to be registered electronically. Increased document preparation fees will permit a dealer that has a contractual agreement with the DMV to be a private industry partner to charge a document processing charge of up to $80. The law is reflected beginning at California ¶6091.

Oregon: Trade practices legislation prohibits motor vehicle sale or lease advertisements from including specific claims regarding the value of a trade-in vehicle tendered in connection with a sale or lease transaction. Separate legislation regulates and imposes disclosure requirements relating to promotional or free trial offers and automatic renewal or continuous service contracts. The laws are reflected beginning at Oregon ¶6061.

Washington: The Department of Licensing has increased licensing fees for collection agencies to support the Department's operating costs for its collection agency program. An original application fee for a main office is now $850 and the renewal fee is $475. A branch office application fee is $550 and the renewal fee is $300. The Department’s rule is at Washington ¶9104.

Smart Charts Highlights
Some of the latest changes reflected in Consumer Credit Smart Charts include:

Secured Transactions Guide
Mistaken Release Terminated Creditor’s Security Interest
A bank that mistakenly consented to the release of all of its collateral, not just the debtor’s equipment, did not have a security interest in the debtor’s remaining assets. The debtor executed a security agreement with the bank that covered all of the debtor’s assets. The bank filed UCC financing statements to perfect its interest with the Nebraska Secretary of State. The debtor later arranged for credit, secured by its equipment, with a financing company. The financing sent the bank a consent form that would authorize the financing company to file amended UCC financing statements that would terminate the bank’s security interest in all of its collateral. The bank’s executive signed the form, believing that he had consented only to the release of the bank’s interest in the debtor’s equipment. Section 9-509 of the Nebraska UCC provides a person may file an amendment, other than an amendment that adds collateral or adds a debtor, to a financing statement only if the secured party authorizes the filing. The financing company’s letter stated unequivocally that it was seeking the bank’s termination of its security interest in all of the collateral, not just the equipment. The bank gave its unqualified consent when its executive signed the letter as requested. In re Negus-Sons, Inc.; Lange v. Mutual of Omaha Bank (BAP 8thCir), ¶56,274.

Feed Supplier’s Lien Had “Superpriority” Status
In accordance with Iowa law, a feed supplier’s lien in a debtor’s livestock was superior to a bank’s prior perfected Article 9 security interest. The debtor already had an outstanding loan with a bank, secured by a lien on the debtor’s livestock, when it purchased livestock feed on credit from a feed supplier. After the debtor filed for bankruptcy protection, the bank and feed supplier claimed competing liens in the livestock. The bank held a perfected security interest in the livestock in accordance with Article 9 of the Iowa UCC and the feed supplier held a perfected agricultural supply dealer lien in accordance with Iowa’s agricultural supply dealer lien law. The bank argued the feed supplier’s lien was subordinate to the bank’s prior interest, because the debtor failed to provide a certified request to the bank, as required by subsection (2) of the agricultural supply dealer lien law. Subsections (1) and (2) of the law state the general priority rules for all agricultural supply dealer liens, while subsection (3) specifically provides that a lien in livestock feed has priority over a prior lien in the livestock for the difference between the acquisition price of the livestock and the market value or the sale price of the livestock at the time the lien attaches, whichever is greater. Thus, liens for livestock feed have "superpriority" over prior liens that circumvent any notice provisions contained in subsection (2). Oyens Feed & Supply, Inc. v. Primebank (IowaSCt), ¶56,275.

State Update
Alabama: The Alabama Department of Revenue has revised its certificate of title regulations relating to salvage certificates of title and junk, parts only and scrap vehicles, adding new procedures for licensed automotive dismantlers and parts or secondary metal recyclers that acquire motor vehicles for dismantling or recycling. In addition, the department will no longer issue a certificate of title for: trailers, semi-trailers, travel trailers or utility trailers more than 20 years old; motor vehicles more than 35 model years old; or low-speed vehicles. Alabama’s certificate of title regulations begin at Alabama, ¶1401.

Financial Privacy Law Guide
Supreme Court: Federal Courts May Hear TCPA Claims
Federal courts have federal question jurisdiction to hear private actions for violations of the Telephone Consumer Protection Act (TCPA), the U.S. Supreme Court has held. Overturning a decision by the U.S. Court of Appeals for the Eleventh Circuit, the Court reasoned that the TCPA’s grant of jurisdiction to state courts did not operate to divest federal courts of federal question jurisdiction. A story on Mims v Arrow Financial Services, LLC (SCt) appeared in Privacy Extra, January 31, 2012.

Zip Codes are Personal Identification Information
The collection of a consumer’s zip code in conjunction with a credit card transaction may have violated the Massachusetts law, a Massachusetts district court has concluded. The zip code constituted “personal identification information.” However, because the consumer failed to allege a cognizable injury as a result of the retailer’s violation, she could not maintain a private action under the law. A story on Tyler v. Michaels Stores, Inc. (DMass) appeared in Privacy Extra, January 31, 2012.

EC Proposes Comprehensive Reform of Data Protection Rules
The European Commission has proposed a comprehensive reform of the European Union’s 1995 data protection rules to strengthen online privacy rights and boost Europe’s digital economy. An EC release noted that a single law would do away with the current fragmentation and costly administrative burdens. The proposal encompasses a single national data protection authority, a right to data portability and a “right to be forgotten.” A story on the proposal appeared in Privacy Extra, January 31, 2012.

Individual Retirement Plans Guide
IRS Provides Relief on IRA Broker Indemnification Agreements
The IRS has provided temporary relief to IRA owners who have signed certain indemnification agreements or granted certain security interests to brokers that are similar to those described in Department of Labor Advisory Opinions 2009-03A and 2011-09A. Until further guidance is published, the IRS will determine the tax consequences relating to an IRA without taking into account the consequences that might otherwise result from a prohibited transaction under Code Sec. 4975 resulting from entering into any indemnification or any cross-collateralization agreement, provided there has been no execution or other enforcement pursuant to the agreement against the assets of an IRA account of the individual granting the security interest or entering into the cross-collateralization agreement. IRS Announcement 2011-81 is reported at ¶6321.