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January 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 deposit insurance.
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 Promises More Action to Support Recovery
The Federal Open Market Committee has announced a plan to buy an additional $600 billion of longer-term Treasury securities by the end of 2011's second quarter in an effort to encourage economic recovery. The FOMC also said after its Dec. 14, 2010, meeting that the target for the federal funds rate will remain at its historic low of 0 to 0.25 percent and predicted that the low level will continue "for an extended period." According to the FOMC, the economic recovery is continuing but is not strong enough to reduce unemployment. Household spending and business investment remain weak, employers still are reluctant to hire and the housing market still is depressed. Progress toward the two objectives of maximum employment and price stability has been "disappointingly slow," the Committee said. This story appears in Issue No. 2398, Dec. 17, 2010 (IntelliConnect, IRN, ip access user).
Fed Proposes Sharp Cuts in Debit Card Transaction Fees
The Federal Reserve Board has proposed standards for determining debit card interchange fees that, if adopted, would result in fees falling to less than 70 percent of their 2009 average. The newly-revised fees are scheduled to take effect in July 2011. The Fed's proposal offers two alternatives. The first would base the permissible fee on each issuer's costs, with a safe harbor initially set at seven cents per transaction and a cap initially set at 12 cents per transaction. The second would be a stand-alone cap initially set at 12 cents per transaction. According to the Fed, either alternative would result in a more than 70-percent reduction from the 2009 average fee. The Fed proposal also would prohibit all issuers and networks from restricting the number of networks over which debit card transactions may be processed. The notice is at ¶97-400 (IntelliConnect, IRN, ip access user).
Final Supervisory Guidance on Overdraft Protection Issued
The Federal Deposit Insurance Corp. has issued final supervisory guidance on overdraft protection programs and related consumer protection issues. The guidance emphasizes that banks should be alert to consumers' overuse of overdraft protection programs in a way that is harmful, as opposed to using the coverage as protection against occasional errors or funds shortages. It also addresses the need for banks to make clear disclosures and comply with the recently created opt-in requirements for automated teller machine and point-of-sale debit card transactions. FIL-81-2010 is at ¶49-481 (IntelliConnect, IRN, ip access user).
Agencies Adopt Joint Appraisal and Evaluation Guidelines
The federal bank and thrift regulatory agencies have issued new Interagency Appraisal and Evaluation Guidelines that are intended to provide financial institutions with clear guidance on requirements for real estate appraisal programs. The guidelines cover appraiser independence and performance and appraisal methodologies. The Federal Deposit Insurance Corp. noted that while a borrower's ability to repay a loan is the primary consideration in a lending decision, collateral valuation is an integral part of loan underwriting. Related documents are at ¶63-969 (IntelliConnect, IRN, ip access user).
Product Enhancements
New Divisions on Consumer Financial Protection and Financial Stability
Reflecting legislative reforms enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act, two new divisions have been added to the Federal Banking Law Reporter Researcher: “Consumer Financial Protection Bureau” and “Financial Stability.” Both appear as new guide card divisions in Volume 4 of the print product. In electronic format, Consumer Financial Protection Bureau explanations begin at ¶33-001 (IntelliConnect, IRN, ip access user) as a menu level selection above “National Banks.” Financial Stability explanations begin at ¶41-501 (IntelliConnect, IRN, ip access user) as a menu level selection above “Accounting—Reporting—Audits.” The explanations link to the full text of underlying laws. Future agency issuances that provide interpretive guidance will be added in these divisions to augment the explanations.
The Dodd-Frank Act established the Bureau of Consumer Financial Protection as an independent bureau within the Federal Reserve Board to regulate consumer financial products and services. The new division includes discussion of Bureau structure, authority and enforcement activities, as well as companion state enforcement and regulatory authority.
Title I of the Dodd-Frank Act, called the “Financial Stability Act of 2010,” was designed to monitor and prevent system risk to the financial system. The new division discusses the new Financial Stability Oversight Council, an independent agency charged with monitoring and responding to systemic risks posed by large, complex companies, products and activities. Explanations also cover additional authority given to the Fed to help it carry out its obligation to supervise nonbank financial companies. The new Office of Financial Research, an executive agency to collect and standardize data on financial firms and their activities, is also discussed.
Financial Reform QuickCharts Now Available
Financial Reform QuickCharts are now available as an add-on to either the CCH Federal Banking Law Reporter or CCH Federal Securities Law Reporter. The QuickCharts are tools that allow users to quickly create custom easy-to-view charts that focus on particular topics of interest from the Dodd-Frank Act and to monitor new rulemaking, regulations, guidance, cases and other information arising from the Act.
Organized by topic, the charts offer a summary of each Dodd-Frank Act provision, with links to the full analysis, the text of the Act provisions, the text of existing laws as amended and related regulatory materials as they become available. Users can build custom charts in seconds, targeting all or selected topics. Users can also export the charts into Microsoft Word or Excel format for circulation while retaining live links to source material. Recent changes are highlighted in yellow.
For further information, call 1-800-344-3734.
Financial Regulation and Reform Update
The Winding Down of TARP
The Troubled Asset Relief Program (TARP) expired on Oct. 3, 2010, two years after the Emergency Economic Stabilization Act of 2008 (EESA) was signed into law by President George W. Bush. Sec. 115 of EESA granted authority to the government to utilize up to $700 billion in funds under TARP. TARP originally was set to expire in October 2009 but was extended one year by Treasury Secretary Timothy Geithner. In its quarterly report to Congress, issued on Oct. 26, 2010, the Office of the Special Investigator for the Troubled Asset Relief Program (SIGTARP) said that the belief that TARP has ended or is near its end is a "mistaken one." SIGTARP noted that as of Oct. 3, 2010, $178.4 billion TARP funds remained outstanding and, although no new TARP investments could be made, funds already obligated to existing programs could still be expended. In fact, SIGTARP wrote that with more than $80 billion available for spending, "it is likely that more TARP funds will be expended after October 3, 2010 than in the year since last October," when TARP was to have ended. An installment from an upcoming white paper, A Retrospective of the Troubled Asset Relief Program, is in the December 2010 monthly update (IntelliConnect, IRN, ip access user).
Legislation Mandates Accountability and Performance at Federal Agencies
Congress has passed landmark, bipartisan legislation requiring federal agencies to set clear goals that can be measured and reported to Congress and the American people in a more transparent way. The Government Performance and Results Modernization Act (HR 2142) calls on federal agencies to identify overlapping federal programs and requires more focused efforts to identify potential taxpayer savings. This legislation is the first significant update of the Government Performance and Results Act (GPRA) of 1993 in nearly two decades. The bill now goes to the President's desk for his signature, which is expected. This story appears in the Dec 28, 2010, Current Developments (IntelliConnect, IRN, ip access user).
Ernst & Young Sued for Massive Accounting Fraud
Global accounting firm Ernst & Young LLP helped Lehman Brothers Holding, Inc. conceal its true liquidity position from the public by approving the temporary removal of tens of billions of dollars of fixed income securities from Lehman's balance sheet, New York Attorney General Andrew Cuomo alleges. Lehman filed for bankruptcy in September 2008. According to the 32-page lawsuit, filed with the New York Supreme Court, Lehman "aggressively" conducted "Repo 105" transactions, which involved the temporary transfer of highly liquid, fixed income securities to European banks in order to reduce Lehman's financial statement leverage. Lehman allegedly conducted the Repo 105 transactions for over seven years prior to its bankruptcy filing. This story appears in the Dec. 22, 2010, Current Developments (IntelliConnect, IRN, ip access user).
SEC and CFTC Receive Funding Increase in House Resolution
A continuing resolution passed by the House to fund the government in FY 2011 provides a boost in SEC and CFTC funding so that the agencies can carry out the mandates of the Dodd-Frank Act. The Senate has yet to act on the continuing resolution. The House Appropriations Committee says that the SEC and CFTC will be provided with the resources necessary to combat the financial fraud and excessive risk-taking that provoked the 2008 financial crisis. The CR also adjusts funding to allow the Internal Revenue Service to go after offshore tax evasion. This story appears in the Dec. 13, 2010, Current Developments (IntelliConnect, IRN, ip access user).
Bachus Picked to Lead House Financial Services Committee
The House Republican Conference has chosen Rep. Spencer Bachus, R-Ala., as the new chairman of the House Financial Services Committee. Bachus will succeed Rep. Barney Frank, D-Mass. Bachus said the committee will "act on the priorities the American people delivered us last November." These include ending "too big to fail," and the administration's "unlimited bailout" of Fannie Mae and Freddie Mac. In addition, "we are committed to going title by title through the 2,300 page Dodd-Frank Act to correct, replace or repeal the job killing provisions that unnecessarily punish small businesses and community banks that did nothing to cause the financial crisis," Bachus said.. This story appears in the Dec. 10, 2010, Current Developments (IntelliConnect, IRN, ip access user).
Consumer Credit Guide
“Red Flag Program Clarification Act of 2010” Enacted
On Dec. 18, 2010, President Obama signed the Red Flag Program Clarification Act of 2010, which amends the federal Fair Credit Reporting Act. The legislation exempts attorneys and businesses from some of the requirements of the Fair and Accurate Credit Transactions Act (FACT Act) relating to identity theft detection programs. As initially written, the pertinent FACT Act provisions would have required law firms, medical offices, and other businesses that did not require full payment at the time services were rendered to establish programs to detect "red flags" of identity theft. The new law clarifies that the duties associated with the "red flag" program apply only to "creditors" who regularly and in the ordinary course of business obtain or use consumer reports in connection with a credit transaction, furnish information to consumer reporting agencies in connection with a credit transaction, or advance funds to, or on behalf of, a person based on the person’s obligation to repay the funds. A story on the legislation appears in Letter No. 1107, Dec. 14, 2010 (IntelliConnect, IRN, ip access user).
Internet Transaction Subject to FDCPA, Florida Collection Law
The U.S. Court of Appeals for the Eleventh Circuit recently ruled that a company seeking to recover funds on behalf of an e-commerce business was subject to the federal Fair Debt Collection Practices Act (FDCPA) and the Florida Consumer Collection Practices Act (Florida Act) because the company was attempting to collect a "debt." The e-commerce business operated as a financial intermediary between a buyer and a seller in an Internet transaction for a laptop computer. While the intermediary later "reversed" the transaction when it considered the buyer's payment to be fraudulent, the seller had already transferred the funds to his own personal bank account. When the seller refused to restore the funds to the account with the financial intermediary, the intermediary enlisted the services of the company, the company contacted the seller by phone several times in an attempt to recover the funds. The Eleventh Circuit ruled that the seller's payment obligation to the financial intermediary constituted a "debt" under both the FDCPA and the Florida Act. Since the court determined that three essential elements of a “debt” were present—a consumer in a transaction that was primarily for personal, family, or household purposes—the company was subject to liability under the FDCPA and the Florida Act. Oppenheim v. I.C. System, Inc. (11thCir), ¶52,337 (IntelliConnect, IRN, ip access user).
Lender's Exclusion of Yield Spread Premium Did Not Violate TILA
A "yield spread premium," paid by a lender to a mortgage broker, did not constitute "points and fees" under the Home Ownership and Equity Protection Act (HOEPA), an amendment to the federal Truth in Lending Act (TILA). After the closing of a mortgage loan transaction, the lender paid the mortgage broker a "yield spread premium" in the amount of $1,264. The "yield spread premium" was not factored into the principal amount loaned to the borrower and did not reduce the amount of loan proceeds available to the borrower at closing. The borrower contended that the yield spread premium should have been included in the points and fees calculation, and that its inclusion would have resulted in the points and fees exceeding 8% of the total loan amount—subjecting the mortgage loan to the heightened disclosure requirements of HOEPA. In rejecting the borrower's argument, the Supreme Court of Louisiana found that the $1,264 "yield spread premium" was not a type of closing fee financed by the borrower. In the court's view, while the yield spread premium arguably was to be paid by the borrower over the course of the mortgage loan, the yield spread premium was not "payable by the consumer at or before closing" under the language of TILA and Regulation Z. Consequently, the lender's exclusion of the yield spread premium from the calculation of points and fees did not violate TILA and Regulation Z. The Bank of New York v. Parnell (LaSCt), ¶52,336 (IntelliConnect, IRN, ip access user).
State Law Update
California: Amendments to the California Vehicle Code revise credit score disclosure requirements for motor vehicle dealers that finance the sale of a motor vehicle. The legislation requires dealers to provide a credit score disclosure that, among other things, informs the consumer of each credit score obtained and used, including a bar graph that shows the distribution of credit scores among other consumers who are scored under the same model. The law is at California ¶6476 (IntelliConnect, IRN, ip access user).
Wisconsin: Legislation regulating payday lenders and banning auto title loans in Wisconsin became effective Jan. 1, 2011. Among other restrictions and requirements, the legislation limits loans to $1,500 or 35 percent of a borrower’s monthly income, whichever is less, and mandates that a borrower can only renew a loan once. Although the measure does not cap interest rates for payday loans, lenders will be prohibited from charging any interest after a loan’s maturity date. The law begins at Wisconsin ¶5061 (IntelliConnect, IRN, ip access user).
Smart Charts Highlights
Some of the latest changes reflected in Consumer Credit Smart Charts include:
Secured Transactions Guide
Interest in Accessions Superior to Interest in Whole
A rental company's leasehold interest in custom wheels it installed on a financed vehicle was superior to a dealership's security interest in the whole vehicle, because the lease was entered into before it installed the wheels and tires. Pursuant to Tennessee law, goods are "accessions" when they are installed in or affixed to other goods. Except in certain circumstances, the interest of a lessor under a lease contract entered into before the goods became accessions is superior to all interests in the whole. Rent-N-Roll v. Highway 64 Car and Truck Sales (TennCtApp), ¶56,245 (IntelliConnect, IRN, ip access user).
Post-Petition Payments Were Avoidable as Proceeds
A bankruptcy trustee was entitled to payments made by a debtor to a financing company after the debtor had filed for bankruptcy protection as proceeds of an avoidable security interest. Two months after financing the purchase of a new vehicle, the debtor filed for Chapter 7 bankruptcy protection. The debtor continued to make post-petition payments to the financing company to reduce the amount of debt secured by the lien. The trustee and the financing company had agreed that the security interest was an avoidable preferential transfer. Post-petition payments may be recovered as proceeds of an avoided lien, if the payments were intended by the debtor to reduce the amount of debt secured by the lien. Because the post-petition payments were on account of the lien, the trustee was entitled to recover the payments as proceeds of the lien. The financing company was, however, entitled to an unsecured claim for the amount it was owed on the date of the petition. In re Wyatt; White v. Wachovia Dealer Services, Inc. (Bankr DDC), ¶56,246 (IntelliConnect, IRN, ip access user).
State Law Update
Connecticut: The Connecticut Department of Motor Vehicles has released new regulations relating to liens on motor vehicles abandoned at self-service storage facilities. The new regulations require registration of the self-service storage facilities before they can dispose of abandoned vehicles. The regulations also set forth new notice requirements, including a notice to the vehicle owners and a notice of intent to transfer title, and requirements for the sale or disposition of the vehicle. The regulations begin at Connecticut ¶1331 (IntelliConnect, IRN, ip access user).
Smart Charts Highlights
Latest changes on the Internet Research Network
The Secured Transactions UCC Filing Fees Smart Chart has been updated to reflect revised fees for Arizona, Arkansas, Colorado, Florida, Indiana, Kentucky, Massachusetts, Minnesota, Mississippi, Nevada, North Dakota, Oregon, Pennsylvania, Rhode Island, South Dakota, Texas, Vermont, Washington and Wyoming.
The Secured Transactions UCC Administrators Smart Chart has been revised to reflect updated information for Hawaii, Kentucky, Louisiana, Maine, Mississippi, New York, Oklahoma and Utah.
Financial Privacy Guide
Increased Risk of Identity Theft Established Standing
An action against Starbucks for negligence and breach of implied contract stemming from the theft of a laptop containing employees' personal information was cleared to proceed by the U.S. Court of Appeals for the Ninth Circuit. The court determined that the employees' injuries were adequate to establish Article III standing. Three former employees brought an action under Washington law against Starbucks for negligence and breach of implied contract. They alleged that they were at an increased risk for identity theft or suffered anxiety. Starbucks argued that the employees lacked standing to bring the suit because they failed to allege a cognizable injury under Washington law. The court determined that "generalized anxiety and stress" was sufficient to confer standing. Also, the court concluded the employees had alleged a credible threat of real and immediate harm stemming from the theft of the laptop, sufficient to confer standing. A story on Krottner v. Starbucks Corp. (9thCir) appeared in Privacy Extra, Dec. 30, 2010 (IntelliConnect, IRN, ip access user).
Truth in Caller ID Act Signed by President
President Obama, on Dec. 22, 2010, signed the Truth in Caller ID Act 2009 (S. 30). The measure, sponsored by Sen. Bill Nelson, D-Fla., amends the Communications Act of 1934 to make it unlawful for any person in the United States, in connection with any telecommunications service or Internet protocol (IP)-enabled voice service, to cause any caller identification (ID) service to transmit misleading or inaccurate caller ID information with the intent to defraud, cause harm, or wrongfully obtain anything of value. The measure is intended to put an end to so-called "spoofing," which occurs when a telephone caller alters the number or other information that appears on a recipient's Caller ID to conceal their identity with the intent to defraud, cause harm or wrongfully obtain something of value. The law calls for the Federal Communications Commission to prescribe implementing regulations no later than six months after enactment. A story appeared in Privacy Extra, Dec. 30, 2010 (IntelliConnect, IRN, ip access user).
Commerce Department Releases Privacy Bill of Rights
The Department of Commerce has issued a report recommending a "Privacy Bill of Rights," that would promote consumer privacy online while ensuring the Internet "remains a platform that spurs innovation, job creation, and economic growth." The Department is requesting public comment on the plan to further the policy discussion and ensure the framework benefits all stakeholders in the Internet economy. "America needs a robust privacy framework that preserves consumer trust in the evolving Internet economy while ensuring the Web remains a platform for innovation, jobs, and economic growth. Self-regulation without stronger enforcement is not enough. Consumers must trust the Internet in order for businesses to succeed online," said Commerce Secretary Gary Locke. A story appeared in Privacy Extra, Dec. 30, 2010 (IntelliConnect, IRN, ip access user).
Individual Retirement Plans Guide
Guidance for In-Plan Roth IRA Rollovers Issued
The IRS has issued guidance regarding in-plan Roth IRA rollovers. The Small Business Jobs Act of 2010 (P.L. 111-240) has amended the Code to allow in-plan Roth IRA rollovers for eligible rollover distributions made after Sept. 27, 2010, from a non-Roth IRA account into a designated Roth IRA account in the same plan. The guidance confirms something that came as a surprise to those who initially assumed the new law would allow unrestricted in-service transfers from non-Roth to Roth accounts for any vested amount in a participant’s account. IRS Notice 2010-84 is at ¶6235 (IntelliConnect, IRN, ip access user).
This month’s Hot Topic is deposit insurance. Title III of the Dodd-Frank Act—Supervision of Depository Institutions addressed deposit insurance reform and federal banking regulators have taken action to implement the statutory changes.
Regulatory activity is fully covered in the Federal Banking Law Reporter, such as:
Underlying laws and regulations are easily found in the Federal Banking Law Reporter. For example:
