banking header


November 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 here.

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 Finalizes Debt Collector Regulation
The Consumer Financial Protection Bureau has adopted a rule under which it will supervise large consumer debt collectors beginning Jan. 2, 2013. The CFPB says that by expanding the supervision program to oversee the nonbanks that are larger participants in the consumer debt collection market, it now will have a window into every stage of the process, from the origination of credit to debt collection. The CFPB also released examination procedures to be used to ensure that companies engaging in debt collection are following the law. The CFPB’s release and a fact sheet are at ¶200-147. The draft Federal Register notice is at ¶300-103, and the examination procedures are at ¶1524.

CFPB Moves to Fix “Stay-at-Home Spouse” Credit Problem
The Consumer Financial Protection Bureau has proposed amendments to Reg. Z—Truth in Lending (12 CFR 1026) that are intended to enable persons who do not work outside the home to get credit cards by relying on income they share with their spouses or domestic partners. Under rules adopted by the Federal Reserve Board in 2010, an applicant’s ability to make payments generally must be assessed based only on the applicant’s income and assets, rather than on household income and assets. In making its proposal, the CFPB said it disagreed with the Fed’s interpretation of the Credit CARD Act as requiring such an analysis of all applicants’ ability to pay; that analysis was required only for applicants under the age of 21. The proposed rule is at ¶300-101.

CFPB Publishes Supervisory Highlights, Updates Supervision and Examination Manual
A new report published by the Consumer Financial Protection Bureau discusses problems uncovered by the bureau during its supervision process. The initial issue of the CFPB’s Supervisory Highlights features supervision work completed between July 21, 2011, and Sept. 30, 2012.

The CFPB also updated its Supervision and Examination Manual, used in the supervision of depository institutions and other consumer financial service providers, as well as an appeals policy for supervised institutions. The story appears in Report 63, Nov. 5, 2012.

Bureau Releases Small Entity Compliance Guide on International Fund Transfers
The Consumer Financial Protection Bureau has issued a small business compliance guide for its international electronic money transfers rule (the remittance rule), which will become effective on Feb. 7, 2013. The guide is intended to make it easier to understand the new requirements. Although the guide is not a substitute for the rule, it highlights issues that the CFPB believes that businesses, in particular small businesses and those that work with them, should consider while implementing the new requirements.

The CFPB also released a "Safe Harbor Countries List" of countries that qualify for an exception in the rule, permitting estimated disclosure of certain figures in lieu of disclosure of exact amounts where the laws of the recipient country do not permit determination of the exact amounts. The guide is at ¶41-511. The list is at ¶41-512.

American Express to Pay $85 Million Refund for Illegal Credit Card Practices
The Consumer Financial Protection Bureau has ordered three American Express Co. subsidiaries to pay an $85 million refund to approximately 250,000 customers harmed by illegal credit card practices. American Express also must pay $27.5 million in civil monetary penalties to several federal government agencies. The order and related documents are at ¶200-148.

CFPB Begins Taking Complaints on Credit Reporting
The Consumer Financial Protection Bureau has begun accepting consumer complaints about credit reporting, giving consumers individual-level complaint assistance for the first time at the federal level. "Credit reporting companies exert great influence over the lives of consumers. They help determine eligibility for loans, housing, and sometimes jobs," said CFPB Director Richard Cordray. "Consumers need an avenue of recourse when they feel they have been wronged." The notice is at ¶200-146.

Federal Banking Law Reporter

Agencies Implement Dodd-Frank Stress Test Requirements

The Dodd-Frank Act requires that certain institutions regulated by a primary federal financial regulatory agency with total consolidated assets of more than $10 billion must conduct annual stress tests to determine whether the companies have the capital necessary to absorb losses as a result of adverse economic conditions. Under the requirements, affected institutions must conduct an annual stress test, report results to their primary regulator and publicly disclose results of the tests. The Fed's notice is at ¶151-781. The FHFA's notice is at ¶151-785. The FDIC and OCC notices are at ¶151-791, ¶151-802 and ¶151-803.
Small Bank Guidance.—The Office of the Comptroller of the Currency has issued guidance intended to help banks and thrifts with $10 billion or less in total assets use stress tests to identify and measure loan portfolio weaknesses and bolster their planning processes. While these smaller institutions are not covered by the Dodd-Frank Act annual stress test requirement, the guidance makes clear the OCC expects them to carry out at least simple stress tests that are appropriate for their business strategy, size, products, sophistication and risk profile. "The OCC, however, does consider some form of stress testing or sensitivity analysis of loan portfolios on at least an annual basis to be a key part of sound risk management for community banks," the agency says. OCC 2012-33 is at ¶47-744.

Contract Enforcement Rule Finalized
The Dodd-Frank Act provides for the appointment of the Federal Deposit Insurance Corp. as receiver of an insolvent covered financial company that poses a systemic risk to the nation’s economic stability, and it outlines the process for the orderly resolution of such a company. Section 210(c)(16) of the act permits the FDIC as receiver to enforce contracts of subsidiaries or affiliates of the covered financial company despite contract clauses that purport to terminate, accelerate or provide for other remedies. As a condition to maintaining these subsidiary or affiliate contracts in full force and effect, the FDIC as receiver must either transfer any supporting obligations of the covered financial company that back the obligations of the subsidiary or affiliate under the contract to a bridge financial company or qualified third-party transferee by the statutory one-business-day deadline or provide adequate protection to contract counterparties. The agency has finalized a rule establishing the scope and effect of the authority granted under section 210(c)(16), clarifying the conditions and requirements applicable to the receiver, addressing requirements for notice to certain affected counterparties and defining key terms. The notice is at ¶151-801.

Proposal Would Amend Retail Foreign Exchange Rule
The Office of the Comptroller of the Currency is proposing to amend its retail foreign exchange rule for transactions with bank common trust funds, bank collective investment funds and insurance company separate accounts and is making technical corrections to the rule. The OCC preliminarily believes it is appropriate to modify the requirements of the retail forex rule for retail forex transactions between federal depository institutions and bank funds and is proposing to apply to these transactions only the rule’s antifraud and general provisions. The agency also believes that the same requirements should apply to retail forex transactions between federal depository institutions and insurance company separate accounts. The proposal would exclude retail forex transactions with bank funds and insurance company separate accounts from the profitability calculations required by 12 CFR 48.7(b), which requires federal depository institutions to calculate the percentage of retail forex accounts that are profitable and the percentage of retail forex accounts that are not profitable. The OCC's notice is at ¶151-812.

Wells Fargo Faces Mortgage Fraud Lawsuit
The U.S. government has filed a civil mortgage fraud lawsuit against Wells Fargo Bank, N.A., alleging a longstanding practice at the bank of reckless underwriting and fraudulent loan certification for Federal Housing Administration-insured loans that ultimately defaulted. Wells Fargo denies the allegations. The government is seeking damages and civil penalties for practices spanning a period of more than 10 years during which Wells Fargo participated in the FHA Direct Endorsement Lender Program. As a result of false certifications, according to the lawsuit, FHA paid hundreds of millions of dollars in insurance claims on thousands of mortgages that defaulted. "Yet another major bank has engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance," said Manhattan U.S. Attorney Preet Bharara, who filed the suit. This story is in Report No. 2489, Oct. 11, 2012

OCC Describes BSA Act Examination Considerations
The Office of the Comptroller of the Currency has issued a summary of changes in how it views Bank Secrecy Act and anti-money laundering program examination findings for purposes of its ratings and risk assessment systems. The OCC said that it was emphasizing its "longstanding policy that weaknesses in a bank’s BSA/AML program are serious safety and soundness concerns that require management’s prompt attention." The "refinements" have been incorporated into the Comptroller’s Handbook. OCC 2012-30 is at ¶35-652.

Supreme Court Starts Term by Rejecting Two Appeals
The Supreme Court denied petitions for certiorari in two banking-related cases—one civil and one criminal—on the first day of its October 2012 term. In the civil case, the Court decided it would not review whether a consumer who successfully sued under the Fair Debt Collection Practices Act could recover her costs of participating in a court-ordered mediation (Nicholas v. Reliance One Receivables Management, Inc., Dkt. 11-192). In the criminal case, the Court rejected a request that it decide whether a check cashing business and its owner were required to include in Currency Transaction Reports the corporate payee of checks that furthered an illegal scheme and whether the name of the company’s employee who cashed the checks was to be included in the CTRs (Caro v. U.S., Dkt. 11-1483). This story is in Report No. 2488, Oct. 5, 2012.

Demand for Foreign Account Records Not Unconstitutional
Demanding that an individual under suspicion of having used Swiss bank accounts to evade federal income taxes produce account records did not violate his Constitutional privilege against being required to incriminate himself, the U.S. Court of Appeals for the Fifth Circuit has decided. The court agreed with two other circuits that the Required Records Doctrine permits the government to require individuals to maintain such records and produce them on demand. In re: Grand Jury Subpoena (5thCir) at ¶101-358.

Consumer Credit Guide

Condo Assessment Considered “Debt” Under FDCPA, Michigan Law

In analyzing the definition of a "debt" under the federal Fair Debt Collection Practices Act (FDCPA) and the Michigan Collection Practices Act (Michigan Act), the U.S. Court of Appeals for the Sixth Circuit decided that the relevant time for determining whether a debt is for "personal, family, or household purposes" is at the time of the transaction creating the debt, not at the time when collection efforts begin. As a result, the Sixth Circuit ruled that past-due assessments owed by a condo owner to a condominium association qualified as a "debt" under both the FDCPA and the Michigan Act. Haddad v. Alexander, Zelmanski, Danner & Fioritto, PLLC (6thCir), ¶52,455.

Since Key Factual Issues Exist, Consumer’s FCRA Lawsuit Against Bank Continues

The U.S. Court of Appeals for the Sixth Circuit ruled that a consumer’s claims under the federal Fair Credit Reporting Act (FCRA) against a bank, in its capacity as a "furnisher" of information to consumer reporting agencies, could proceed to trial because genuine material factual issues existed concerning whether the bank failed to perform its duties under the FCRA. In particular, the federal appellate court decided that the bank’s investigation of a consumer’s dispute of information about an automobile loan may have violated the FCRA. Based on the evidence presented, the Sixth Circuit determined that a jury could find that the bank’s investigation was unreasonable and that the consumer was not responsible for the automobile loan in question. Boggio v. USAA Federal Savings Bank (6thCir), ¶52,453.

Mortgage Creditor Subject to Liability Under TILA for Servicer’s Noncompliance

The U.S. District Court for the Southern District of Florida ruled that, under principles of agency law and vicarious liability, a mortgage creditor was subject to liability under the federal Truth in Lending Act (TILA) for a claim by borrowers that a mortgage servicer’s response to their request for information did not comply with TILA. Under TILA, upon written request, a mortgage servicer must "provide the obligor … with the name, address, and telephone number of the obligation or the master servicer of the obligation." At the same time, TILA generally does not impose liability on mortgage servicers; rather, TILA imposes liability on "creditors" for noncompliance. In connection with the mortgage creditor’s contention that it complied with any TILA requirement because the servicer's response letter provided the borrowers with adequate information to allow them to conclude that the mortgage servicer was the "master servicer" on their loan, the court decided it could not resolve the issue at the pleading stage of the case. Rather, the mortgage creditor’s argument was an available defense that could be raised and addressed later during the litigation; consequently, the court refused to dismiss the borrowers’ TILA claim. Kissinger v. Wells Fargo Bank, N.A., (SDFla), ¶52,450.

State Law Update

California: Amendments to the Rees-Levering Motor Vehicle Sales and Finance Act (Rees-Levering) establish consumer protections for vehicles bought or leased from a "buy-here-pay-here" (BHPH) automobile dealer. The legislation defines a BHPH dealer to mean a seller who enters into conditional sale contracts or lease contracts, and assigns less than 90 percent of all unrescinded conditional sale contracts and lease contracts to unaffiliated third-party finance or leasing sources within 45 days of the consummation of those contracts. Additional Rees-Levering amendments enacted by separate legislation establish disclosure requirements relating to electric vehicle charging station charges. The laws are at California ¶6103C and ¶6099D.

Florida: The Financial Services Commission, Office of Financial Regulation has amended its rules by eliminating specific disclosure requirements for consumer finance companies and deferred presentment providers that were not authorized by state law. The rules are at Florida ¶8125 and ¶8282.

North Carolina: Legislation modernizing North Carolina’s banking laws took effect Oct. 1, 2012. The legislation rewrites the state’s prior banking law and consolidates provisions under a single chapter covering the regulation of banks and other financial services. Conforming amendments to the North Carolina Consumer Finance Act and other consumer credit laws within the scope of the GUIDE are reflected beginning at North Carolina ¶6403.

Washington: The Department of Financial Institutions (DFI) has amended its consumer loan rules to implement legislation enacted earlier this year (Chapter 17, Laws of 2012). Substantive changes include: (i) removing a licensing requirement for certain employees of residential loan servicers; and (ii) authorizing the DFI to enter into informal settlements. The rules appear beginning at Washington ¶8010.

Secured Transactions Guide

State Court Judgment Was Not a Dischargeable Debt

A mechanic who failed to follow the notice and sale procedures required by Texas law to enforce his worker’s lien on a motor vehicle could not discharge through bankruptcy proceedings a state court judgment that had been entered in favor of a competing lienholder because the mechanic’s failure caused willful injury to the lienholder. After failing to receive payment for repairs to the vehicle, the mechanic sent a notice less than 30 days after payment was due to the lienholder stating that the vehicle would be sold at its premises. The mechanic then sold the vehicle after advertising the sale on Craig’s List. The dealer won a judgment against the mechanic for $23,000 in state court, and the mechanic sought to discharge the judgment in bankruptcy proceedings. The Bankruptcy Code provides a debtor may not discharge a debt if there is willful injury to another party. To enforce a worker’s lien, Texas law requires that the worker give written notice to the owner and any lienholder 30 days after the payment is due. The mechanic failed to wait the required 30 days. In addition, when the mechanic chose to sell the vehicle on Craig’s List without notice to the dealer or owner, and without providing them an opportunity for competitive bidding on the vehicle, he displayed the intent necessary for the court to find there was a willful and malicious injury. In re Benites; S.P. Auto Sales, Inc. v. Benites (BankrNDTex) ¶56,296.

Enforceable Vehicle Lien Attached Upon Possession
In accordance with Pennsylvania law, a creditor who gave value in exchange for a security interest in a vehicle and later obtained possession of the vehicle held a valid lien against the vehicle, a Pennsylvania bankruptcy court has held. A relative of the debtor loaned the debtor the funds necessary to satisfy a prior obligation on her vehicle. After the debtor failed to repay the relative’s loan, the relative-turned-creditor won a state court judgment for the loan’s balance. The debtor surrendered the vehicle to the creditor prior to filing a petition for bankruptcy protection. The debtor later argued the creditor’s lien was invalid. In accordance with the Pennsylvania UCC, a security interest in a vehicle attaches and is enforceable if value is given, the debtor has rights in the collateral, and the debtor authenticated a security agreement that describes the collateral or the creditor has taken possession of the collateral. The bankruptcy court concluded the creditor had a valid lien against the vehicle. It was undisputed that value was given for the vehicle and the debtor had rights in the vehicle. Regardless of whether there was an authenticated security agreement, once the creditor obtained possession of the vehicle, the security interest attached. In re Dean; Dean v. Carr (BankrMDPa) ¶56,295.

State Update

California: California has extended the effective date of its law relating to mining liens. Any person who performs labor in any mining claims or furnishes materials to be used or consumed in a mine has a lien on the mine, and the works used for milling or reducing the ores from the mine, for the value of the labor performed or materials furnished. The former law provided that the section was inoperative on July 1, 2012, and as of Jan. 1, 2013, would be automatically repealed. The amended law provides that the section was operative July 1, 2012, and there is no date set for repeal. California ¶440.

Financial Privacy Law Guide

Right to Financial Privacy Act Did Not Apply to Dealers in Precious Metals
Dealers in precious metals did not qualify as financial institutions for purposes of the Right to Financial Privacy Act (RFPA), according to a federal district court in Illinois; therefore, they could not avoid responding to Commodity Futures Trading Commission subpoenas by claiming that they had to first give notice to their customers. The CFTC served several administrative subpoenas on three precious metals businesses, which provided the documents but redacted names and contact information of customers, retailers and intermediaries. The CFTC then sought unredacted versions of the documents. The RFPA provides that customers of a financial institution must be given notice and the opportunity to object before any disclosures are made. The businesses claimed that they were "consumer finance institutions," within the RFPA list of covered financial institutions, because they provided financing to customers who bought precious metals. However, the court rejected that claim by interpreting the term in light of earlier terms in the statutory list of covered institutions, which included entries such as bank and card issuer, more traditionally associated with the provision of financing. U.S. Commodity Futures Trading Commission v. Worth Bullion Group, Inc. (NDIll) at ¶100-603.

Theft of Tax Refund Established Injury for ID Theft

Allegations that an individual’s employer and a third-party program administrator failed to adequately secure the individual’s personally identifiable information, which resulted in the loss of the individual’s federal tax refund, were sufficient to establish an injury in fact, a Florida federal district court has held. After the individual was notified by his employer that an employee of the program administrator had inappropriately accessed his information, he discovered that a person unknown to him filed a federal tax return on his behalf and received the tax refund that was due to him. The individual brought suit, and the employer and program administrator responded that he lacked standing to maintain an action against them because he had not suffered an injury in fact that was fairly traceable to them. The court, however, determined that the alleged misuse of the individual’s personally identifiable information amounted to an injury in fact. The individual suffered a monetary loss when he failed to obtain the tax refund due to him as a result of the fraudulent filing using his misappropriated personal information. In addition, the court concluded that the individual’s injury was fairly traceable to the company’s and employer’s actions. A story on Burrows v. Purchasing Power, LLC (SDFla) appeared in Privacy Extra, Oct. 31, 2012.

Class Action Inappropriate for Unsolicited Fax Suit
A federal district court in Missouri has denied class certification for an action brought against a Connecticut company for allegedly sending unsolicited facsimile advertisements in violation of the Telephone Consumer Protection Act (TCPA). A Missouri law firm alleged that it had received three of 105,826 unsolicited facsimile advertisements a Connecticut company sent in March 2010. The firm brought suit against the sender for violations of the TCPA and sought to certify a class comprised of all persons that had received a fax promoting the sender’s products or services during March 2010. The court denied class certification because: numerous individual issues predominated over issues that were common to the class, including whether each individual facsimile was solicited or unsolicited and whether each facsimile recipient had an established business relationship with the sender; the individual had not established that class action would be the superior method of adjudication; and there was also no reason for the litigation to be concentrated in Missouri—the sender was a Connecticut company, and there was no indication that any other class members resided in Missouri. A story on Evans & Green, LLP v. That’s Great News, LLC (WDMo) appeared in Privacy Extra, Oct. 31, 2012.

State Law Update

California: California consumer credit reporting agencies (CRAs) will no longer be able to charge consumers 65 years of age or older a fee for placing an initial security freeze on a credit report under recently enacted legislation. Prior to the new law, a CRA could charge a fee of no more than $5 to place the initial freeze. However, a CRA will still be authorized to charge seniors a $5 fee for lifting, removing or replacing security freezes. This story appeared in Report No. 257, Oct. 17, 2012.

Individual Retirement Plans Guide

Additional IRA Distribution Due to Error by Financial Institution
An additional distribution from an IRA was not considered a modification to a series of substantially equal periodic payments made to an individual. The distribution was due to an error by a financial institution that made a duplicate distribution to the individual despite having been informed that the distributions were going to be made by another institution. Moreover, the additional distribution was not used for any other purpose. Therefore, the individual was granted 60 days in which to re-contribute the additional distribution to her IRA, and she was not subject to the 10% additional tax on early distributions.  IRS Letter Ruling 201235029 is at ¶6382.