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January 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: 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

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Consumer Financial Protection Bureau Reporter


Cordray Named CFPB Director by Recess Appointment
President Barack Obama has appointed former Ohio Attorney General Richard Cordray as Director of the Consumer Financial Protection Bureau, sidestepping protracted Republican efforts to block the nomination in the Senate. The GOP, however, has questioned the legality of the recess appointment and indicated that it could be legally challenged. In his first remarks as Director of the Consumer Financial Protection Bureau, Richard Cordray outlined a vision for the Bureau of transparency, effective enforcement and exercising the full powers of the Bureau over banks and non-bank financial entities. In remarks at The Brookings Institution, the Director announced that the Bureau will immediately launch a program for supervising non-bank financial entities, such as payday lenders, mortgage servicers, mortgage originators, private student lenders, and other firms that often compete with banks but have until now escaped meaningful federal oversight.


House Leaders Ask CFPB to Study Impact of Fed’s Ability to Pay Rules on Credit
In a bi-partisan letter to the Consumer Financial Protection Bureau, House Financial Services Committee Chairman Spencer Bachus, R-Ala., and senior committee members asked the CFPB to study and report back on the impact of the ability to pay rules implemented by the Federal Reserve Board before the CFPB took over implementation of the Credit CARD Act. The rules, amending Reg. Z—Truth in Lending (12 CFR 226), took effect Oct. 1, 2011, and require all consumers to demonstrate an independent ability to pay, rather than the dual standard for college-age consumers and all others called for in the legislation. The House leaders requested the CFPB to conduct an extensive review of the potential impact that these new rules are having on the ability of consumers to obtain credit and amend Reg. Z if it finds a negative impact. They urged the Bureau to begin this process before the end of the year. The letter also was signed by, among others, Committee Ranking Member Barney Frank, D-Mass., and Rep. Carolyn Maloney, D-N.Y., an author of the Credit CARD Act.

The Fed’s final rules create a uniform standard requiring all consumers to demonstrate an independent ability to repay. The members believe that these rules contradict the Congressional intent of the Credit CARD Act because the Act created two distinct standards, one for younger consumers and one for all others. They also are concerned that these rules will disadvantage stay-at-home spouses who may not have an independent source of income, but who may have ample household income to secure lines of credit. This story appeared in the Dec. 19, 2011, CFPB Reports.


CFPB Transfers Regulations
The Consumer Financial Protection Bureau is publishing for public comment the following interim final rules transferring consumer financial protection regulations from other federal agencies. The rules include technical and conforming changes made by the Dodd-Frank Act but do not impose any new substantive obligations.
Regulation F—Fair Debt Collection Practices Act (12 CFR 1006), 76 Federal Register 78121, Dec. 16, 2011. Comments are due Feb. 14, 2012.
Regulation I—Disclosure Requirements for Depository Institutions Lacking Federal Deposit Insurance (12 CFR 1009), 76 Federal Register 78126, Dec. 16, 2011. Comments are due Feb. 14, 2012.
Regulation N—Mortgage Acts and Practices-Advertising (12 CFR 1014) and Regulation O—Mortgage Assistance Relief Services (12 CFR 1015), 76 Federal Register 78130, Dec. 16, 2011. Comments are due Feb. 14, 2012.
Regulation X—Real Estate Settlement Procedures Act (12 CFR 1024), 76 Federal Register 78978, Dec. 20, 2011. Comments are due Feb. 21, 2012.
Regulation E—Electronic Fund Transfers (12 CFR 1005), 76 Federal Register 81020, Dec. 27, 2011. Comments are due Feb. 27, 2012.
The interim final rules became effective on Dec. 30, 2011. The CFPB's notices for Regs. F, I, N/O, X and E are at ¶300-021; ¶300-022; ¶300-023; ¶300-024; and ¶300-025.


Bureau Seeks Comments on Mortgage Servicing Model Forms and Disclosures
The Consumer Financial Protection Bureau is requesting comments on a proposed agency information collection, "Qualitative Testing of Mortgage Servicing Related Model Forms and Disclosures." Title XIV of the Dodd-Frank Act requires the CFPB to publish certain mortgage servicing rules by Jan. 21, 2013. These rules implement Sec. 1418 (Reset of Hybrid Adjustable Rate Mortgages), Sec. 1420 (Periodic Mortgage Loan Statements) and Sec. 1463 (Force-Placed Insurance Disclosures) of the Act. The CFPB has determined that model forms and disclosures are required for these rules.

The Bureau will collect data on the design, development and implementation of the forms. The CFPB plans to test at three sites in three rounds to allow for improvement to the forms between rounds.

Comments are due by Jan. 13, 2012. The CFPB’s notice appeared at 76 Federal Register 77766 on Dec. 14, 2011. The notice is at ¶200-033.

Bureau Addresses Credit Discrimination
The Consumer Financial Protection Bureau’s Office of Fair Lending & Equal Opportunity was created by Congress to ensure that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent and competitive, the CFPB recently posted on its blog. The Bureau also noted that Congress gave the CFPB authority over two key federal fair lending statutes: the Equal Credit Opportunity Act, which prohibits discrimination against applicants in any type of credit transaction, including mortgages, car loans, student loans and credit cards; and the Home Mortgage Disclosure Act, which requires lenders to report mortgage data to allow for better fair lending enforcement.

The Bureau is requesting that interested parties send suggestions and questions for the Office of Fair Lending & Equal Opportunity via its blog or email. The CFPB’s post on credit discrimination is at ¶200-034.

CFPB Creates Violation Tip Methods
The Consumer Financial Protection Bureau has outlined the ways that whistleblowers now can begin to report violations of the federal consumer financial protection laws. The Bureau has established an email address for whistleblowers to use, as well as a toll-free telephone number. In addition, it plans to create a portal on its website that will be available early in 2012. These methods are to be used by whistleblowers, not for submitting consumer complaints, the CFPB said.

Whistleblowers can request confidentiality when they pass information to the CFPB, and can remain anonymous "to the extent permitted by law," the Bureau said. Information about a company’s possible violations is welcome from current or former company employees, contractors, vendors and competitor companies. The CFPB added that the Dodd-Frank Act includes provisions that are intended to protect cooperating employees from retaliation by their employers. The Consumer Financial Protection Bureau has outlined the ways that whistleblowers now can begin to report violations of the federal consumer financial protection laws. The Bureau has established an email address for whistleblowers to use, as well as a toll-free telephone number. In addition, it plans to create a portal on its website that will be available early in 2012. These methods are to be used by whistleblowers, not for submitting consumer complaints, the CFPB said.

Whistleblowers can request confidentiality when they pass information to the CFPB, and can remain anonymous "to the extent permitted by law," the Bureau said. Information about a company’s possible violations is welcome from current or former company employees, contractors, vendors and competitor companies. The CFPB added that the Dodd-Frank Act includes provisions that are intended to protect cooperating employees from retaliation by their employers. The press release and CFPB Bulletin 2011-05 are at ¶1507.

Federal Banking Law Reporter


OCC Guides on Caring for Foreclosed Properties
Banks need to have in place policies and procedures to recognize and manage all of the risks and obligations that can arise from taking title to foreclosed residential properties, according to the Office of the Comptroller of the Currency. In a recent bulletin, the OCC noted that the continuing high level of foreclosures is resulting in banks owning an unprecedented number of properties and projected that this will continue, at least for the near term. What obligations a bank will assume depends on the bank's role in the foreclosure and the terms of the contract under which it is operating. The OCC added that understanding the requirements imposed by Fannie Mae, Freddie Mac and the Department of Housing and Urban Development is "particularly crucial." The bulletin also noted that in some cases financial considerations may lead a bank to choose to release a lien on a property rather than foreclose. The agency advocates that banks engage in a sound financial analysis before beginning a foreclosure due to the problems that can arise if a foreclosure is commenced and then halted after the homeowner has abandoned the property. If a bank decides not to proceed with a foreclosure, it should notify the homeowner that it is releasing the mortgage lien, that the owner can stay in the property, and that the owner remains obligated to fulfill all financial obligations. OCC 2011-49 is at ¶63-820M.


Fed Proposal Would Strengthen Largest Financial Companies
The Federal Reserve Board has proposed a rule intended to strengthen capital standards and supervision requirements for the largest bank holding companies–those with $50 million or more in total consolidated assets–and the nonbank financial companies the Financial Stability Oversight Council has determined should be supervised by the Fed due to their systemic significance and potential to adversely affect the financial system. The proposal, required by the Dodd-Frank Act, would not apply to foreign banking organizations, which will be dealt with in a separate proposal. The proposal also omits savings and loan holding companies because the Fed has yet to establish the necessary risk-based capital standards for them. This story is in Report No. 2449, Dec. 22, 2011.


Fed Committee Takes No Additional Stimulus Steps
The Federal Open Market Committee announced after its Dec. 13, 2011, meeting that it was leaving the federal funds rate target unchanged at a range of 0 to .25 percent and that it expected the target to remain "exceptionally low" until mid-2013. The FOMC said that it will continue its program to extend the average maturity of its holdings of securities. It also intends to maintain its policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This story is in Report No. 2448, Dec. 15, 2011.


OCC Sets Next Year’s Fees for Banks, Thrifts
The Office of the Comptroller of the Currency has announced its 2012 fee schedule, which will for the first time apply to federal savings associations. National banks, federal thrifts and federal branches and agencies must pay the semi-annual assessments on March 31 and September 20 of next year, based on information included in their quarterly reports that are due by Dec. 31, 2011, and June 30, 2012. The OCC noted that, as of the March 31, 2012, reporting dates, thrifts will change from using the Thrift Financial Report to the Call Report. OCC 2011-46 is at ¶43-165.


Consumer Credit Guide


CFPB Seeks Input on Streamlining Regulations

The Consumer Financial Protection Bureau (CFPB) is seeking public input on ways to streamline regulations under more than a dozen consumer financial laws that the CFPB inherited from seven different federal agencies under the Dodd-Frank Act. According to Raj Date, Special Advisor to the Secretary of the Treasury on the CFPB, "We’re asking the public to help us identify and prioritize concrete ways that we can streamline the regulations we inherited so that they work better for consumers and the firms that serve them." In particular, the CFPB is asking the public to identify provisions of the pertinent regulations that the CFPB should make the highest priority for updating, modifying, or eliminating because the provisions are outdated, unduly burdensome, or unnecessary. Public comments must be submitted to the CFPB by March 5, 2012; subsequently, commenters will have extra time, until April 3, 2012, to respond to other comments of record. Federal Agency Releases, ¶30,211.


CFPB Report Shows Credit Card Confusion; Card Agreement Simplification Sought
A new Consumer Financial Protection Bureau (CFPB) report shows that consumers still are struggling to understand the terms of credit cards and associated products like debt protection services. After collecting data for three months on consumer complaints about credit cards, the CFPB has determined that there is a lot of confusion about the terms of consumer accounts. In its report, the CFPB indicated it already has received more than 5,000 consumer credit card complaints. The CFPB found "a mismatch between consumer expectations and the way the product functions." As a step toward ending this consumer confusion, the CFPB has created a prototypical, standard credit card agreement that is intended to make the prices, risks and terms of a credit card account easier for consumers to understand. The prototype is intended to be a "thought-starter," not a model form, and the CFPB is asking for comments on the prototype. This story appears in Report Letter No. 1132, December 13, 2011.


Bank Subject to Assignee Liability Under New York and Federal “Holder Rules”

A New York state appellate court recently addressed the assignee liability of a bank for state claims brought by a consumer who purchased a car under a motor vehicle retail installment contract. The court determined that while the federal Truth in Lending Act (TILA) did not have a bearing on the assignee liability of the bank, the "Holder Rules" under both federal and New York law served to preserve the consumer’s state-law claims and defenses against the bank. Although the consumer did not actually allege any violations of TILA, the bank argued not only that the consumer’s "TILA-type" claims under New York law were preempted by TILA but also that the assignee-liability principles of TILA should result in the dismissal of the consumer’s state-law claims. In rejecting the bank’s arguments, the New York appellate court ruled that, as an assignee under the motor vehicle retail installment contract with the consumer, the bank, while not subject to liability under TILA, was subject to derivative liability under New York state law via the federal and New York "Holder Rules" preserving the consumer’s claims and defenses. The court stressed that no conflict with federal law was present because, among other things, TILA itself restricted assignee liability to only TILA claims. Ramirez v. National Cooperative Bank (NCB) (NYAppDiv), ¶52,394.


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

Secured Transactions Guide


Puerto Rico UCC Applied to Perfection of Interest
According to the Bankruptcy Appellate Panel for the First Circuit, a creditor that filed a financing statement in Puerto Rico to perfect its security interest in a debtor’s inventory held a perfected security interest in accordance with the Puerto Rico UCC, despite the fact that the security agreement contained a North Carolina choice of law provision. Although North Carolina law applied to the validity of the underlying agreement, Article 9 of the Puerto Rico UCC determined the perfection of the security interest. Seven years after the creditor filed a financing statement with the Puerto Rico Department of State, the debtor filed for bankruptcy in protection in 2010. The trustee argued the security interest had lapsed under North Carolina law, which provides that perfection by financing statement is limited to five years. The effective period under the Puerto Rico UCC is 10 years. The security agreement provided that North Carolina law applied to the validity of the agreement; however, as the lapse of a financing statement relates solely to the perfection of the security interest, the laws of the jurisdiction governing the perfection of the financing statement apply. Thus, the court concluded the creditor’s security interest had not lapsed and was still effective at the time the debtor filed for bankruptcy protection. In re Supplies & Services, Inc.; Supplies & Services, Inc. v. NACCO Industries, Inc. (BAP 1stCir), ¶56,272.


State Law Update


Wisconsin: Wisconsin has amended its interest-usury provisions to provide that the maximum rate of interest on a monetary judgment, previously 12 percent, will now be based on the prime rate as published by the Federal Reserve Board. For judgments entered on or before June 30, the annual rate is equal to 1 percent above the prime rate in effect on January 1 of the year in which the judgment is entered. For judgments entered on or after July 1, the annual rate is equal to 1 percent above the prime rate in effect on July 1 of the year in which the judgment is entered. The law appears at Charts, ¶40.


Financial Privacy Law Guide


CFPB Transfers Privacy Rule
Pursuant to the Dodd-Frank Act and the Gramm-Leach-Bliley Act, as amended, the Consumer Financial Protection Bureau has published for public comment an interim final rule establishing a new Regulation P—Privacy of Consumer Financial Information (12 CFR Part 1016), implementing those privacy provisions of the GLB Act for which the CFPB has rulemaking authority. The interim final rule, which is effective Dec. 31, 2011, does not impose any new substantive obligations on regulated entities. This story appeared in Privacy Extra, December 30, 2011.


CFPB Questions Need for Annual Privacy Notices
The Consumer Financial Protection Bureau is asking for public comments on how it can streamline the consumer protection regulations it inherited from the Federal Reserve Board and other financial services regulatory agencies. The CFPB noted that the agencies’ privacy regulations generally require that financial services providers give a privacy notice to a customer annually during a customer relationship. According to the CFPB, providers have questioned the value of providing consumers annual notices where the provider’s privacy practices have not changed since the last notice, at least where the provider does not share information with other firms (or shares in narrow cases). Therefore, the Bureau is asking whether there should be an exception from the requirement to provide an annual privacy notice in these or any other circumstances. This story appeared in Report No. 126, December 14, 2011.


Federal Courts Can Hear Private TCPA Claims
Federal courts have federal question jurisdiction over private actions for violations of the Telephone Consumer Protection Act (TCPA) actions, the U.S. Court of Appeals for the Sixth Circuit has reaffirmed. The decision will allow an action between two Michigan-based parties to proceed in federal court. An organization that provides eldercare services in Detroit had brought an action against a Michigan-based provider of mortgage services, alleging that it sent the eldercare organization unsolicited facsimile advertisements in violation of the TCPA. The district court dismissed the action for lack of subject matter jurisdiction, adopting the majority viewpoint of the circuit courts that the TCPA does not authorize a private action in federal court. The issue, however, had since been addressed by the Sixth Circuit, as held in Charvat v. NMP, LLC (see ¶100-548). This story on Bridging Communities Inc. v. Top Flite Financial Inc. (6thCir) appeared in Privacy Extra, December 30, 2011.


Individual Retirement Plans Guide


Distribution Did Not Qualify for Education Exception
A taxpayer who inherited funds from a nonspousal IRA, transferred the funds into an IRA and then withdrew the funds from the IRA on the same day was liable for federal income tax on the distribution of the funds. The taxpayer was a beneficiary of his cousin’s IRA. After his cousin passed away, the taxpayer received the funds from the inherited IRA into an IRA in his own name. Along with the distribution, the taxpayer received a beneficiary notice that included a substitute Form W-4P, Withholding Certificate for Pension or Annuity Payments. The substitute Form W-4P indicated that the beneficiary had to: elect not to have income tax withheld from the IRA distribution; elect to have income tax withheld of 10 percent of the amount distributed; or elect to have a specified amount withheld. The taxpayer signed and returned the substitute Form W-4P to the bank that maintained the IRA, but he did not elect any of the choices listed on the substitute Form W-4P. The taxpayer on the same day instructed the bank to distribute the funds from his IRA. The Tax Court noted that a taxpayer may avoid being taxed on an inherited IRA if the funds in the IRA are transferred from one account trustee to another account trustee without the IRA owner or beneficiary ever gaining control of the funds. However, the Tax Court ruled, by withdrawing the funds from his IRA, the taxpayer was subjected to the standard income tax rules for distributions from an IRA. Tax Court Memorandum 2011-267 is reported at ¶10,342.