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October 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

Mortgage-Related Complaints Top CFPB Grievances List
Mortgage-related complaints top the list of consumer grievances received by the Consumer Financial Protection Bureau, and their volume is expected to continue rising, CFPB Chairman Richard Cordray told Congress. Appearing Sept. 13, 2012, before the Senate Banking Committee, Cordray said the number of complaints was not unexpected, but "it’s hard work for us to keep up with it." Cordray also told the committee that the CFPB has "slowed down a little bit" with regard to the Qualified Mortgage rule, which it is due to finalize by January 2013. "We absolutely don’t want to make a judgment that’s going to further constrict credit in the mortgage market," Cordray asserted, noting that the CFPB has put the rule out for further comment and is getting more data through collaborations with the Federal Housing Finance Agency and others. This story appears in Report 57, Sept. 24, 2012.

Credit Reporting Agency Examination Procedures Released
The Consumer Financial Protection Bureau has issued the procedures it will use when examining consumer reporting agencies beginning Sept. 30, 2012. The CFPB has the authority to examine consumer reporting agencies that are found to be larger participants in the market—those with more than $7 million in annual receipts from the business. According to the CFPB, this will include approximately 30 companies that together account for about 94 percent of the industry’s revenue. The notice is at ¶1521.

CFPB, FDIC Penalize Discover Bank for Deceptive Telemarketing Practices
The Consumer Financial Protection Bureau and Federal Deposit Insurance Corp. have ordered Discover Bank to pay a $14 million civil penalty and refund approximately $200 million to customers in connection with the firm’s use of deceptive telemarketing and sales tactics to promote various credit card "add-on" products. A joint investigation highlighted a number of such products, including payment protection, credit score tracking, identity theft protection and wallet protection, which Discover offered to more than 3.5 million consumers. The products were marketed between December 2007 and August 2011. Half of the penalty will go to the CFPB’s Civil Penalty Fund, which is to be used to pay for consumer redress, consumer education and financial literacy programs. The CFPB’s notice, the order and a fact sheet are at ¶200-131.

PHH Corporation Ordered to Comply with Civil Investigative Demand

Consumer Financial Protection Bureau Director Richard Cordray has responded to a petition by PHH Corporation, a mortgage lending company, ordering it to comply with a CFPB Civil Investigative Demand within 21 days. According to a CFPB blog post, when a Civil Investigative Demand is challenged, these "are generally public records." This is the first determination of a petition to modify or set aside a CID issued by the bureau. In the Decision and Order, PHH is directed to produce all documents, items and information within its possession, custody or control that are responsive to the CID within 21 calendar days of the order, which was issued Sept. 20, 2012. A post to the CFPB’s blog, PHH Corporation’s petition and the decision and order by the bureau can be found at ¶200-132.

CFPB to Resolve Stay-at-Home Spouse Credit Problem
The Consumer Financial Protection Bureau will put forward a proposal "in the very near future" to address the problem of stay-at-home spouses and other individuals who have been denied access to credit as a result of regulations issued by the Federal Reserve Board, according to CFPB Director Richard Cordray. In April 2011, the Fed approved a rule clarifying implementation of the Credit Card Act. One provision adopted by the Fed stated that card issuers could apply an independent ability-to-pay requirement to consumers age 21 and older. The rule, which was subsequently inherited by the CFPB, could affect a stay-at-home spouse’s ability to obtain a credit card because of the consumer’s lack of independent income, even if their total household income meets requirements. This appears in Report 58, Oct. 1, 2012.

Federal Banking Law Reporter

FDIC Advises on Risk Management for Loan Participations
The Federal Deposit Insurance Corp. has told state nonmember institutions that they should underwrite and administer loan participations with the same diligence as if the participations were directly originated by the purchasing institution. Some institutions have successfully participated in shared credit facilities, which are arranged by bank and nonbank entities, by implementing effective due diligence and prudent credit risk management practices, the agency said. However, purchasing banks’ over-reliance on lead institutions has, in some instances, caused significant credit losses and contributed to bank failures, particularly for loans to out-of-territory borrowers and obligors involved in industries unfamiliar to the purchasing bank. According to the FDIC, financial institutions purchase loan participations to achieve growth and earnings goals, diversify credit risk and deploy excess liquidity. FIL-38-2012 is reproduced at ¶62-294.

Settlement Offer Could Not End Court Jurisdiction
An offer by debt collectors to settle consumers’ Fair Debt Collection Practices Act suits by paying the full amount of the possible statutory damages, plus attorney’s fees and costs, did not moot the consumers’ suits and thus did not deprive the federal courts of subject matter jurisdiction, the U.S. Court of Appeals for the Eleventh Circuit has decided. The settlement offers would not have provided the consumers with all of the relief that was available to them, the court said in reversing the dismissal of the three consolidated suits. In each of the three cases, the debt collectors offered to settle the consumers’ FDCPA claims by paying $1,001 in damages—$1 more than the maximum possible statutory damages—plus attorney fees and costs that would be agreed on or determined by the court. None of the consumers accepted the offers. In each case, the debt collectors then convinced the trial court that the settlement offers would give the consumers everything they could recover under the law, meaning there no longer existed a case or controversy that would give the court jurisdiction. Zinni v. ER Solutions, Inc. (11thCir) is at ¶101-351.

Mortgage Lending in 2011 at 16-Year Low
The number of home loans reported in 2011 fell to nearly 7.1 million from about 7.9 million the year before, marking the lowest level seen under the Home Mortgage Disclosure Act since 1995, according to data collected by bank regulators. The decline in lending affected all income and racial or ethnic groups, according to an article posted by the Federal Reserve Board. The article presents a number of key findings from a review of the data that mortgage lending institutions reported for 2011 under HMDA, documents home-lending activity and places the 2011 activity in historical context. It also examines changes in mortgage market concentration in recent years and in the credit scores of recent homebuyers. In addition, the article reviews patterns of lending across different racial or ethnic and income groups and across areas that differ in terms of housing market distress. Finally, it discusses how census updates may affect evaluations of the performance of banking institutions under the Community Reinvestment Act. This story is in Report 2486, Sept. 21, 2012.

Regulators Take Steps to Enhance Capital Standards

The Federal Reserve Board, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. have amended their market risk capital rules in a way they anticipate will "significantly increase the risk-based capital allocated to market risk." They also have proposed amendments to their regulatory capital and risk-based capital rules. According to the OCC, the amendments will better capture the risks that are inherent in trading positions by enhancing sensitivity to risk. Default and migration risks arising from less liquid products were specifically mentioned. The market risk capital amendments apply to all institutions with trading assets and liabilities that total either at least 10 percent of the institution’s total assets or $1 billion. The agencies noted that, in the interests of safety and soundness, the rule may be applied to institutions that do not meet either of those thresholds. The notices are at ¶151-390.

GAO Examines the Impact of the Dodd-Frank Act
The Government Accountability Office has issued a report examining the significant changes community banks and credit unions have undergone in the past decade and how the Dodd-Frank Act will affect them. The GAO found that the full impact of the Dodd-Frank Act on these institutions is uncertain. Industry officials told the GAO that it is difficult to know for sure which Dodd-Frank provisions will affect community banks and credit unions because the outcome largely depends on how agencies implement certain provisions through their rules, many of which have not been finalized. The GAO analyzed a number of the Dodd-Frank Act provisions that regulators, industry officials and others expect to affect community banks and credit unions. Several of the act's provisions—including its deposit insurance reforms, exemption from Section 404(b) of the Sarbanes-Oxley Act, and the Consumer Financial Protection Bureau's supervision of certain nonbanks—could reduce costs and help level the playing field for community banks and credit unions. Other provisions, such as the Act's mortgage reforms, may impose additional requirements and costs on all banks and credit unions, but their impact will depend on how the provisions are implemented. GAO-12-881 is at ¶151-744.

FDIC Imposes New Violation Classification System
The Federal Deposit Insurance Corp. has established a new system for classifying violations found during compliance examinations. Beginning with examinations after Oct. 1, 2012, each violation will be classified into one of three levels based primarily on its effect on consumers. The replacement for the current two-level system is intended to help banks focus on more significant issues, the agency said. This story is in Report 2487, Sept. 27, 2012

Holding Company Not Required to Add to Thrift Capital
A cease-and-desist order issued by the Office of Thrift Supervision requiring a thrift holding company’s board of directors to ensure that the thrift achieved and maintained specified capital levels did not require the company to make contributions to the thrift’s capital, according to the U.S. Court of Appeals for the Sixth Circuit. The order was ambiguous, the court said, and the trial court’s decision that no capital contributions were required was supported by "the bulk of the extrinsic evidence." As described by the court, the problems began when the quality of the thrift’s assets began to deteriorate due to the collapse of the real estate market in 2008. The OTS significantly reduced the thrift’s rating due to a concern over a high level of problem assets such as loans to real estate developers and home mortgage loans, including a substantial number of low-documentation loans, loans in particularly troubled markets and less-than-prime loans. The thrift promised the OTS that it would raise new capital, but the business plan failed; moreover, the quality of the loan portfolio continued to fall. As a result, both the thrift and the holding company agreed to cease-and-desist orders, under which the thrift was required to maintain a higher capital level and the holding company’s board was required to "ensure" that the thrift complied. A story on FDIC v. AmTrust Financial Corp. (6thCir) is in Report 2487, Sept. 27, 2012.

Consumer Credit Guide

Presumption of Proper TILA Rescission Notice Not Overcome
In connection with a Truth in Lending Act claim by two borrowers that they had not received the required number of notices of their right to rescind their mortgage loan transaction with a lender, the borrowers did not provide sufficient evidence to overcome the presumption of proper notice created by their written acknowledgment of receipt of the rescission rights notices. As a result, the borrowers did not adequately show that they were entitled to an extended three-year period under TILA in which to exercise their right to rescind the mortgage loan transaction with the lender. In the court’s view, the borrowers could not rely on "conjecture" to rebut the presumption of delivery. Lee v. Countrywide Home Loans, Inc. (6thCir), ¶52,441.

Letter’s Misstatement About Availability of Bankruptcy Remedy Violated FDCPA
A debt collector’s statement in a collection letter to a consumer that the consumer’s student loan debt was ineligible for discharge in bankruptcy was false, deceptive or misleading in violation of the federal Fair Debt Collection Practices Act, according to the U.S. Court of Appeals for the Second Circuit. As a result, the federal appellate court reversed a pretrial judgment in favor of the debt collector. The Second Circuit noted that, while it was difficult to obtain a bankruptcy discharge of a student loan debt, it was not impossible. The Second Circuit determined that the collector’s statement not only was literally false, it was misleading under the FDCPA as well. Among other things, the collector’s statement could have convinced the consumer not to seek legal advice about the possibility of a discharge; convincing a consumer not to seek legal advice was precisely the type of practice the FDCPA was intended to prevent, the court asserted. Easterling v. Collecto, Inc. (2dCir), ¶52,445.

State Law Update

Illinois: Beginning next year, debt buyers will be subject to all provisions and requirements of the state’s Collection Agency Act with specified exceptions. Separate legislation amends the Consumer Installment Loan Act and Payday Loan Reform Act to make loans by an unlicensed lender void. Analysis is in Report 1150, Sept. 4, 2012.

Maryland: Stricter requirements governing rental-purchase transactions expand the circumstances under which a lessor must give a receipt when a payment is made by a consumer. A lessor also will be required to give a consumer receipt if a payment is made in any other form, if requested by the consumer. A lessor also must provide a consumer with a written statement of account within three days after the consumer's request. A lessor must maintain a copy of the rental-purchase agreement for three years after final payment. The laws are at Maryland ¶6567 and ¶6570A.

Ohio: Changes to the state’s statute of limitations generally shorten the limitations period for actions upon an agreement, contract, or promise in writing from 15 years to eight years after the cause of action accrued. The law is summarized in the Statute of Limitations Chart at ¶600.

Texas: The Finance Commission of Texas, Office of Consumer Credit Commissioner has adopted a rule concerning multiple-advance loans made by regulated lenders. The OCCC additionally amended a rule concerning the filing of new applications for credit access businesses. The rules are at Texas ¶8469 and ¶8522.

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

  • The Legislative Developments Smart Charts are updated regularly as legislation is enacted, allowing users to keep up to date without waiting for a scheduled Report. Links to legislative summaries and to full text of laws amended, repealed or added are provided. Recent updates include:
  • California: Finance Lenders Law—Exempt Entities.

Consumer Credit Topics Smart Charts. The Interest-Usury Topics Smart Chart reflects the current monthly and quarterly state interest rate modifications beginning Oct. 1, 2012.

Secured Transactions Guide

Creditor, Bank Did Not Have Secured Bankruptcy Claims
A bank that failed to deliver the certificate of title and security agreement to the appropriate state agency within 30 days after the execution of the documents did not have a perfected security interest in the vehicle. In addition, a creditor that signed the release of its security interest in the motor vehicle and mailed the certificate of title to the debtor, prior to confirming it received payment for the underlying obligation, no longer had a perfected security interest in the vehicle. As a result, neither the bank nor the creditor’s interests were superior to that of the bankruptcy trustee. If a creditor submits copies of the security agreement and certificate of title within 30 days after the date the documents were executed to the appropriate state agency, the lien relates back to the date of the execution of the documents. Because the bank failed to perfect its lien within 30 days, the lien could not relate back to the date of the loan and its interest was not perfected at the time of the debtor’s bankruptcy filing. In addition, the debtor’s failure to satisfy the loan indebtedness prior to the creditor’s release had no effect on the validity of the release. Both steps to a valid lien release having been accomplished, the creditor’s security interest in the vehicle was also unperfected on the day the debtor filed his bankruptcy petition. In re Mouton; Mouton v. Toyota Motor Credit Corp. (BankrEDArk), ¶56,294.

Creditor Held Production-Inputs Lien, Not Feeder’s Lien
In accordance with Minnesota law, a creditor that did not directly feed livestock but merely provided another with feed and information related to providing the feed to livestock was entitled to a production-inputs lien, rather than a feeder’s lien. Thus, the creditor’s lien was inferior to a bank’s prior perfected security interest. The creditor, a feed supplier, provided feed and feeding instructions to the debtor. A perfected feeder’s lien always takes priority over a previously perfected security interest, whereas a production-inputs lien only does so if the supplier satisfies strict notice requirements. "The production-inputs lien provision applies to one who provides feed and labor to be used by another in raising livestock, whereas the feeder’s lien provision applies to one who provides feed and labor directly to the livestock," the court noted. The creditor contributed feed and instructions for feeding the hogs but did not directly feed the debtor’s hogs. Thus, the creditor’s interest was subordinate to prior perfected interests. First National Bank v. Profit Pork, LLC (MinnCtApp), ¶56,293.

State Update

Illinois: Illinois has adopted the Article 9 revisions that were released by the Uniform Laws Commission and the American Law Institute in 2010. A story appeared in Report 1126 on Aug. 28, 2012.

Illinois has also amended its certificate of title law to clarify that only low-speed vehicles that were manufactured after Jan. 1, 2010, are required to apply for a certificate of title. The law appears at Illinois ¶1094.

Finally, according to a new amendment, a debtor in Illinois may now claim all proceeds payable upon the death of an insured to a revocable or irrevocable trust that names the wife or husband of the insured or names the child, parent or other person dependent upon the insured as the primary beneficiary of the trust as personal property exempt from execution and judgment. The law appears at Illinois ¶1178.

Financial Privacy Law Guide

Laptop Thefts Resulted in Injury for purposes of Identity Theft Standing
An insurance company that failed to encrypt sensitive medical information on company laptops that were stolen could be liable under Florida law to individuals who suffered monetary loss from the theft of their identities as a result of the company’s failure. The stolen information was used by third parties to open bank accounts, activate credit cards, make unauthorized purchases and open and overdraw on an investment account. The individuals alleged that they became victims of identity theft and suffered monetary damages as a result of the theft of the unencrypted laptops. They were not required to specifically allege "unreimbursed losses." It was enough that the complaint alleged financial injury. Moreover, they established a nexus between the data theft and the identity theft. However, they failed to establish negligence per se and breach of the implied covenant of good faith and fair dealing. A story on Curry v. AvMed, Inc. (11thCir) appeared in Privacy Extra, Sept. 27, 2012.

Monetary Damages Not Required for TCPA Suit Alleging Unwanted Calls to Cell Phones

Individuals who allegedly received unwanted calls to their cell phones could maintain an action under the Telephone Consumer Protection Act against the call originators, despite the fact that they had not alleged that they were charged for the calls. A debt collector and credit card company placed numerous calls to the individuals’ cell phones using automatic dialing equipment and leaving at least one prerecorded message for the purpose of collecting a debt owed by a relative of the individuals. The individuals had not given their cell phone numbers to the debt collector or credit card company. The court stated that an individual need not allege that the individual was charged for a call in order to state a claim under the TCPA. The individuals’ allegations that they were forced to tend to unwanted calls and that the calls used airtime from their cell phone plans established a violation of property and private interests that are protected by the TCPA. Martin v. Leading Edge Recovery Solutions, LLC (NDIll) is at ¶100-599.

Purported Debt Relief Operation Halted
A federal district court has halted a purported debt relief operation that allegedly contacted consumers through prerecorded telemarketing calls, falsely claimed it would reduce their unsecured debt by 50 percent or more, made unauthorized charges to their bank accounts, and called phone numbers listed on the National Do Not Call Registry. The action, taken at the Federal Trade Commission’s request, is part of the FTC’s efforts to stop scams that target consumers in financial distress and its continuing crackdown on illegal "robocalls." The court ordered a stop to the defendants’ allegedly deceptive practices and froze their assets pending a trial. This story appeared in Privacy Extra, Sept. 27, 2012.

Individual Retirement Plans Guide
Waiver of 60-Day Rollover Requirement Denied
The IRS denied a waiver of the 60-day rollover requirement for a taxpayer whose failure to timely roll over funds from one IRA to another IRA was due to his lack of knowledge of the 60-day rollover requirement and his adjustment to life in a new state after terminating employment with a company. The IRS determined that the taxpayer had no intent to roll over the distribution and he did not show that his inability to rollover the amount within the 60-day rollover period was affected by factors beyond the control of the taxpayer. IRS Letter Ruling 201234034 is at ¶6381.