Banking and Finance Update- March 2011

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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.

Plan Would Wind Down Fannie Mae, Freddie Mac

The Obama administration has presented Congress with a plan to wind down Fannie Mae and Freddie Mac and shrink the government's involvement in housing finance on a "responsible timeline" that does not impair economic recovery. The plan, released Feb. 11, 2011, would make the private sector the primary source of mortgage credit. Treasury Secretary Tim Geithner said the plan calls for "fundamental reform" of the government sponsored enterprises, including strengthening consumer protection while preserving access to affordable housing for those who need it. "We are going to start the process of reform now, but we are going to do it responsibly and carefully so that we support the recovery and the process of repair of the housing market." This story appears in Report Letter No. 2406, Feb. 17, 2011 (IntelliConnect, IRN, ip access user).

Proposal Would Set Rules for Nonbank Financial Companies

The Financial Stability Oversight Council has issued a notice of proposed rulemaking that describes the criteria established under the Dodd-Frank Act for the designation of nonbank financial companies for supervision by the Federal Reserve Board. The Dodd-Frank Act provides the FSOC the authority to require that a nonbank financial company be supervised by the Fed and be subject to heightened prudential standards if the FSOC determines that material financial distress at the firm could pose a threat to the financial stability of the United States. The FSOC's notice is at ¶97-482 (IntelliConnect, IRN, ip access user).

FDIC Proposes Rule on Incentive Compensation

The Federal Deposit Insurance Corp. has decided to propose a rule intended to prohibit incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions, said to be compensation that is deemed to be excessive or that may lead to material losses. The specific requirements of the proposal would vary based on the size of the affected institution. While the FDIC's proposal would apply only to some state banks and branches of foreign banks, the other federal financial institution regulatory agencies are likely to propose the same rules, making them applicable to banks, thrifts, credit unions, registered broker-dealers, investment advisors, Fannie Mae and Freddie Mac. The rule, required by the Dodd-Frank Act, is intended to address the perceived problem of compensation structures that do not properly align incentives and risk. This misalignment has been identified as one of the causes of the financial crisis that began in 2008. The notice is reported at ¶97-516 (IntelliConnect, IRN, ip access user).

Fed Guides on Dodd-Frank Interstate Branching Authority

The Federal Reserve Board has issued guidance on some of the requirements for state member banks that intend to take advantage of the broadened interstate branching authority granted by the Dodd-Frank Act. According to the Fed, a state member bank now can begin operating in any state by establishing a de novo branch at any location where a bank chartered by the host state could establish a branch. SR 11-3 is at ¶45-752 (IntelliConnect, IRN, ip access user).

Daily Updating Feature Added to Financial Reform QuickCharts

Reflecting the increased pace of changes and requirements arising from the Dodd-Frank Act, the Federal Banking and Federal Securities QuickCharts – Financial Reform now offer daily updating. The menu of time period choices in the highlighting feature has also been expanded. The user can now select within the last 1, 7, 14, 30, 60, 90 or 120 days to highlight any new material in yellow.

Federal Banking QuickCharts – Financial Reform provides a topical-based resource to monitor ongoing requirements and ramifications of the financial reform legislation. The Related Materials column of the QuickChart tracks ongoing regulatory action arising from the Dodd-Frank Act, including rulemaking actions and agency guidance. The QuickChart also includes added, amended or repealed law, effective dates and case law. With the QuickCharts, the user is able to fully and quickly understand and keep abreast of all the regulatory changes resulting from the Act.

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 the Financial Crisis Inquiry Commission issued on Jan. 27, 2010. 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 the February monthly update (IntelliConnect, IRN, ip access user).

Fed's Hoenig Says Systemic Risk "Even Worse" Post-Crisis

The soundness of the largest financial institutions, and the systemic risks they continue to pose, is "even worse" than before the financial crisis, Federal Reserve Bank of Kansas City President Thomas Hoenig said. "As well-intentioned as the Dodd-Frank Act may be, it will not improve outcomes," Hoenig said in a Feb. 23, 2011, speech to a Women in Housing and Finance symposium in Washington D.C. He noted that the incentives for risk taking have not changed post-crisis, while the regulatory factors that helped create the crisis remain in place. This story appears in the February 28 daily update (IntelliConnect, IRN, ip access user).

Agencies Issue Plan to Transfer OTS Powers

The Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and Office of Thrift Supervision jointly issued a plan outlining how the powers of the OTS will be moved to the other regulatory agencies as required by the Dodd-Frank Act. The plan also covers the transfer of personnel and assets, the continuation of existing regulations and orders and the pursuit of ongoing lawsuits. Under the Dodd-Frank Act, the OTS will be abolished 90 days after the designated transfer date of July 21, 2011.This story appears in the February 23 daily update (IntelliConnect, IRN, ip access user).

Executive Compensation Likely Little Changed Despite Government Role

Recent data suggest that the government's intervention in executive compensation through the Troubled Asset Relief Program ultimately may have little effect on executive pay practices, according to the latest Congressional Oversight Panel report. The report notes that while Special Master for Executive Compensation Ken Feinberg has achieved "significant changes" at the institutions under his review, including an average drop in overall compensation of 55 percent, he has "fallen short in his broader goal of permanently changing Wall Street's pay practices." This story appears in the February 14 daily update (IntelliConnect, IRN, ip access user).

Bernanke Says Banks Beginning to Ease Lending Standards

There are signs that banks are beginning to ease their lending standards and are looking more actively to find good borrowers, Federal Reserve Board Chairman Ben Bernanke told Congress on Feb. 9, 2011. During questioning at a hearing of the House Budget Committee Bernanke told members that banks have increased their capital and are "feeling much more stable, they're much more liquid." As the economy strengthens, Bernanke said, particularly the outlook for commercial real estate, which is used by many small businesses as collateral, then more small businesses will qualify for credit. This story appears in the February 10 daily update (IntelliConnect, IRN, ip access user).

Commercial Real Estate Worst-Case Scenario Considered Unlikely for Largest Banks

While the banking sector is likely to face significant ongoing problems related to the commercial real estate (CRE) sector, worst-case scenarios are becoming "increasingly unlikely," a Federal Reserve official told the Congressional Oversight Panel on Feb. 4, 2011. Patrick Parkinson, Director of Banking Supervision and Regulation at the Federal Reserve Board, noted that 2010 delinquency rates on construction and development loans began to improve slightly. However, he added that even if CRE delinquency metrics continue to improve, a large overhang of distressed loans will result in loss rates remaining high for some time. Approximately one third of all CRE loans are scheduled to mature over the next two years, according to Parkinson. This story appears in the February 8 daily update (IntelliConnect, IRN, ip access user).

Card Issuer Did Not Violate “Change-in-Terms” Notification Provision

In a unanimous decision, the U.S. Supreme Court held that Regulation Z—the implementing regulation of the federal Truth in Lending Act—as in effect prior to July 1, 2010, did not require a credit card issuer to notify a cardholder of an interest-rate increase instituted pursuant to a provision of the cardholder agreement giving the issuer discretion to increase the interest rate, up to a stated maximum, in the event of the cardholder’s delinquency or default. The cardholder argued that the card issuer violated Regulation Z because the issuer did not notify him of an interest-rate increase until after it had already taken effect. The card issuer contended that the rate increase did not change any terms in the credit card agreement; rather the rate increase merely implemented that which had been initially disclosed—the prospect of an increased interest rate upon the cardholder’s delinquency or default. The Court acknowledged that both parties’ interpretations were plausible because the pertinent Regulation Z provisions and the Federal Reserve Board’s accompanying Official Staff Commentary were unclear about whether the interest-rate increase constituted a "change in terms" requiring notification. Consequently, in giving much weight and deference to the Federal Reserve Board’s interpretation of the Regulation Z provisions, advanced in the Board’s amicus brief, the Court ruled that Regulation Z did not require the card issuer to provide the cardholder with a change-in-terms notification. The Supreme Court’s decision has limited effect, since it applies to notice obligations under a prior version of Regulation Z. Chase Bank USA, N.A. v. McCoy (SCt) ¶52,342 (IntelliConnect, IRN, ip access user).

Regulation Z Changes Held for Action by CFPB

The Federal Reserve Board has decided not to finalize three pending proposed rules that would have amended Regulation Z (Truth in Lending). Although the Fed has not withdrawn the proposals, it has decided to defer any decision on them so that the Consumer Financial Protection Bureau (CFPB) can take action when it takes over rulemaking authority in July. The three proposals would have addressed disclosure requirements pertaining to: closed-end mortgages; home equity lines of credit; rescission rights and duties; reverse mortgages, including advertising and sales practices; loan modifications; and loan servicers. The Fed decided that compliance difficulties would be avoided and the public interest would be better served by allowing the CFPB to act. This story appears Issue No. 1110, Feb. 8, 2011 (IntelliConnect, IRN, ip access user).

Evidence Did Not Support Finding of “Willful” FCRA Violation

In connection with a consumer’s claim brought under the federal Fair Credit Reporting Act (FCRA) against a credit reporting agency for inaccurate credit reporting, the U.S. Court of Appeals for the Tenth Circuit held that the consumer was not entitled to liquidated and punitive damages for any FCRA violation because the evidence failed to show that the credit reporting agency intentionally or recklessly failed to investigate the consumer’s dispute. When the consumer sent a letter to the credit reporting agency requesting the removal of derogatory information from his credit file, in keeping with its internal procedures, the agency responded that it could not take any action on the consumer’s request until he provided further identifying information for verification and as a safeguard. While the consumer represented that he "probably did" respond to the credit reporting agency’s request, the agency contended it had no record of a response. Based on the evidence in the record, the Tenth Circuit determined that the credit reporting agency’s policies and procedures were reasonable; at most an issue concerning negligent noncompliance with the FCRA was present, but the agency’s actions did not rise to a level of recklessness that would support a finding of willful noncompliance with the FCRA. Birmingham v. Experian Information Solutions, Inc. (10thCir) ¶52,343 (IntelliConnect, IRN, ip access user).

Mortgage Company Complies With FCRA “Furnisher” Investigation Duties

The U.S. Court of Appeals for the Eighth Circuit recently ruled that a mortgage company, as a furnisher of adverse credit information about a consumer to credit reporting agencies, did not violate the federal Fair Credit Reporting Act (FCRA) in the performance of its investigation duties required under the Act. The Eighth Circuit emphasized that the company’s investigation duties under FCRA were triggered only by a notice from a credit reporting agency, not from the consumer. According to the court, the mortgage company met its investigative duties under the FCRA. After the credit reporting agencies notified the mortgage company that the consumer’s account with the company was listed in the credit report as past-due for two months and that the consumer disputed the delinquent status, the mortgage company properly investigated the challenged account, correctly determined that the reported account status was accurate, and verified that information to the credit reporting agencies. Also, in connection with a summarized credit report, the Eighth Circuit determined that the summary was compiled by an unidentified source, and that the consumer failed to raise a genuine factual issue concerning the mortgage company’s alleged failure to investigate and correct an immaterial discrepancy as to which two months the account was past due. Anderson v. EMC Mortgage Corporation (8thCir) ¶52,344 (IntelliConnect, IRN, ip access user).

Collector’s Communication to Debtor’s Attorney Did Not Violate FDCPA

The U.S. Court of Appeals for the Seventh Circuit has ruled that a debt collector, who communicated a request to a debtor’s attorney that the debtor pay a debt after having been instructed to cease communication with the debtor and direct all communications to the attorney, did not violate the federal Fair Debt Collection Practices Act (FDCPA). In rejecting the debtor’s theory of an FDCPA violation, the Seventh Circuit was concerned about the effect the debtor’s theory of recovery would have on the interpretation of the entire Act. In the court’s view, to say that any communication by the collector with the debtor’s attorney was banned—or that "consumer" and "attorney" were equivalent—would be an unreasonable construction of the FDCPA. Further, such an interpretation would strongly discourage attorneys from negotiating any settlement before an FDCPA lawsuit was filed. This story about the Seventh Circuit’s decision in Tinsley v. Integrity Financial Partners, Inc. appears Issue No. 1111, Feb. 22, 2011 (IntelliConnect, IRN, ip access user).

District of Columbia: An amendment to the Check Cashers Act of 1998 modifies the maximum fees that may be charged for cashing checks. The legislation increases the fee for cashing a personal check or money order but lowers the fee for cashing a payment instrument that is issued by the federal government or a state or local government. The measure also allows a check casher to charge a customer an additional one-time membership fee not to exceed $5. The law is at ¶7017 (IntelliConnect, IRN, ip access user).

New York: Legislation that recently became effective this year makes significant changes to the state’s personal property law governing rental-purchase transactions by increasing consumer protections and strengthening industry regulation. The measure requires rent-to-own merchants to provide consumers with enhanced disclosures and establishes well-defined price controls. The law begins at New York ¶6321 (IntelliConnect, IRN, ip access user).

Article 9 Revisions Reflected

The Uniform Laws Commission (ULC), formerly known as the National Conference of Commissioners on Uniform State Laws, and the American Law Institute have released to the states the amendments to Article 9 of the UCC and the Official Comments that were adopted in 2010. The amendments make changes to definitions, filing rules and the requirements for the disposition of collateral. In addition, a new Part 8 has been added to facilitate transition to the amended Article. The amendments should take effect July 1, 2013. Ten states—Connecticut, Indiana, Kentucky, Massachusetts, Minnesota, Nebraska, Nevada, North Dakota, Oklahoma and Washington—have already introduced legislation to enact the 2010 amendments. The amendments begin at UCC Article 9—Secured Transactions, ¶R701 (IntelliConnect, IRN, ip access user).

Security Interest Avoided as Preferential Transfer

A bankruptcy trustee could avoid a creditor's security interest, because the creditor perfected its interest in the debtor’s location only one month prior to the debtor's filing for bankruptcy protection. The debtor was a Nevada corporation doing business in Nebraska. To perfect its security interest, the creditor filed a financing statement in Nebraska in December 2007 and in Nevada in February 2009. The debtor filed a petition for bankruptcy protection in March 2009. The Bankruptcy Code provides that a trustee may avoid any transfer of an interest in the debtor’s property that is made on or within 90 days of the filing of a petition for bankruptcy. In the case of a corporate debtor, a security interest must be perfected by filing a financing statement in the state where the corporation was organized. Thus, only the Nevada filing was effective. In re Qualia Clinical Service, Inc.; Lange v. Inova Capital Funding, LLC (BAP 8thCir) ¶56,248 (IntelliConnect, IRN, ip access user).

Vendor Lien Subordinate to Security Interest

A bank's security interest in a debtor's equipment was superior to another creditor's vendor lien in the same collateral, because Louisiana's vendor lien law did not expressly provide otherwise. The bank held a perfected security interest in all of the debtor’s equipment. The second creditor had sold a refrigeration unit to the debtor. After the debtor filed a petition for bankruptcy protection, the creditors filed claims for competing liens in the debtor's refrigeration unit. Article 9 of the Louisiana UCC provides that a security interest has priority over a conflicting lien, other than an agricultural lien, in the same collateral except to the extent that the law creating the conflicting lien expressly provides that the lien has priority over a security interest. Although the creditor held a valid vendor's lien, the law failed to provide that the lien would have priority over a security interest. In re South Louisiana Ethanol, LLC; South Louisiana Ethanol, LLC v. Whitney National Bank (Bankr EDLa) ¶56,249 (IntelliConnect, IRN, ip access user).

Illinois: The Illinois Secretary of State has adopted two amendments to its Electronic Registration and Titling Program. The first amendment relates to the secure transmission of information between program vendors and the Secretary of State, outlining the limitations of any entity's access to the confidential information. The second amendment authorizes service providers to charge vendors up to $10 for each transaction, with a maximum charge to customers not to exceed $25, in addition to other fees provided by law or rule. The regulations are at Illinois ¶1375 (IntelliConnect, IRN, ip access user) and ¶1381 (IntelliConnect, IRN, ip access user).

New York: The recently enacted personal property exemption from attachment for motor vehicles valued at $4,000 or less has been amended to specify that the exemption does not apply if the state of New York or any of its agencies or any municipal corporation is the judgment creditor. The law appears at New York ¶1099 (IntelliConnect, IRN, ip access user).

Zip Code Constituted Personal Information for California Law

Requesting a customer’s zip code during a credit card transaction violated California’s Song-Beverly Credit Card Act, which prohibits businesses from requesting that cardholders provide "personal identification information" during credit card transactions and then recording that information. The California Supreme Court has held that a zip code was personal identification information in the context of the law. A story on Pineda v. Williams-Sonoma Stores, Inc. (CalSCt) is in the Feb. 28, 2011, Privacy Extra (IntelliConnect, IRN, ip access user).

Expiration Date Truncation Satisfied FACT Act Requirements

A retailer that printed the month, but not the year, of a customer’s credit card expiration date on a receipt did not violate the credit card number truncation requirements of the Fair and Accurate Credit Transaction (FACT) Act. The FACT Act provides that "no person that accepts credit cards or debit cards for the transaction of business shall print more than the last five digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of sale or transaction." The court determined that "the expiration date cannot be a single month, because a month printed on a receipt in isolation does not provide the cardholder or any other person or business with an ascertainable period in time when the card’s functionality ‘ceases to exist.’" A story on of Long v. Tommy Hilfiger U.S.A., Inc. (WDPa) is in the Feb. 28, 2011, Privacy Extra (IntelliConnect, IRN, ip access user).

Employer Had No Statutory or Common Law Duty to Safeguard Information

A school district that inadvertently disclosed the personal information of 1,750 former employees in an insurance enrollment list sent to the former employees was not liable for the disclosure because it had no statutory or common law duty to safeguard the information, an Illinois appellate court held. Although the Health Insurance Portability and Accountability Act (HIPAA) prohibits the disclosure of an individual’s identifiable health information, health records held by a covered entity in its role as an employer are excluded from HIPAA protection. The school district was acting in its role as an employer. Moreover, although the state Personal Information Protection Act requires that any data collector notify an owner of personal information if there is a breach of data security, the court determined that the Act did not create a separate duty to safeguard the information. Finally, the court declined to create a common law duty to safeguard the information: "While we do not minimize the importance of protecting this information, we do not believe that the creation of a new legal duty beyond legislative requirements already in place is part of our role on appellate review." Cooney v. Chicago Public Schools (IllAppCt) at ¶100-519 (IntelliConnect, IRN, ip access user).

Wrap Fee Payment Not Deemed IRA Contribution

The payment of wrap fees by IRA and Roth IRA accountholders to the funds’ nonbank custodian for investment planning, advice and related financial services did not constitute deemed contributions to the accountholders’ respective IRAs and/or Roth IRAs. The fees were paid directly from funds that were not part of the accountholders’ respective IRAs and/or Roth IRAs. IRS Letter Ruling 201104061 is at ¶6248 (IntelliConnect, IRN, ip access user).