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June 2011
From the editors of CCH’s Banking and Finance publications, this update describes significant developments covered in our products in recent reports, as well as product enhancements
Past issues of the Banking and Finance Update can be viewed on the Banking and Finance Web page at: http://business.cch.com/updates/bankingFinance.
If you have questions or comments concerning the information provided below, please contact the Banking and Finance Update editor.
Financial Reform Resources
Federal Banking Law Reporter
Reduced Loan Loss Provisions Boost Bank Profits
Reduced provisions for loan losses were the driving force behind a 66.5 percent improvement in the banking sector's first quarter profit, which rose to $29 billion from $17.4 billion a year earlier, the Federal Deposit Insurance Corp. has reported. While acknowledging that the industry shows continued signs of improvement, FDIC Chairman Sheila Bair noted that "there is a limit to how far reductions in loan-loss provisions can boost industry earnings.” This story appears in Issue No. 2420, May 26, 2011 (IntelliConnect, IRN, ip access user).
CFPB Takes First Step to Joint TILA/RESPA Disclosure Form
The Consumer Financial Protection Bureau has created two alternative prototype forms that are designed to combine the consumer disclosures required by the Truth in Lending Act and the Real Estate Settlement Procedures Act. The creation of a combined form is required by the Dodd-Frank Act. The CFPB will use the prototypes in a testing process that will last several months in preparation for the agency's formal proposal of a single form. The Treasury release is at ¶97-875 (IntelliConnect, IRN, ip access user).
Foreign Exchanges to Be Exempt from Trading Rules
The Treasury Department has decided to exempt foreign exchange swaps and forwards from the mandatory central clearing and exchange trading requirements of the Dodd-Frank Act. According to Treasury, the market already has procedures in place that mitigate risk and promote transparency, and central clearing requirements could jeopardize these procedures. In a Fact Sheet, the Treasury Secretary noted that the proposed determination is narrowly tailored and FX swaps and forwards will remain subject to Dodd-Frank's rigorous new trade reporting requirements and business conduct standards. The Treasury Secretary also stressed that the proposed determination does not extend to other FX derivatives, such as FX options, currency swaps and non-deliverable forwards. The Treasury release and notice are at ¶97-835 (IntelliConnect, IRN, ip access user).
Deutsche Bank Sued for U.S. Mortgage Fraud
The government has filed a civil mortgage fraud lawsuit against Deutsche Bank AG and its Manhattan-based subsidiary MortgageIT claiming that the defendants lied in order to be included in a government program to select mortgages for Federal Housing Administration insurance. The suit alleges that Deutsche Bank and MortgageIT made "substantial profits" through the resale of the mortgages. The suit was filed May 3, 2011, by the U.S. Attorney for the Southern District of New York seeking penalties and damages for past and future claims. According to the complaint, the defendants "recklessly" selected mortgages that violated program rules and blatantly disregarded whether borrowers could make mortgage payments. This story appears in Issue No. 2417, May 6, 2011 (IntelliConnect, IRN, ip access user).
Financial Regulation and Reform Update
Treasury to Create Federal Advisory Committee on Insurance
The Treasury Department has announced that it will create a new Federal Advisory Committee on Insurance as one in a series of steps that Treasury is taking to establish the new Federal Insurance Office created under the Dodd-Frank Act. The committee's role will be to provide advice to the FIO and Treasury, including to the FIO director in the director's role as a member of the Financial Stability Oversight Council. Treasury said that half of the committee's membership has been reserved for state and tribal insurance regulators. The remaining members "will represent a diverse range of perspectives from, for example, the property and casualty insurance industry, the life insurance industry, the reinsurance industry, the agent and broker community, public advocates, and academia." This story appears in the May 2011 Monthly Update (IntelliConnect, IRN, ip access user).
House Hearings Reveal Concern with Regulatory Arbitrage
Since the United States is expected to be the first nation to fully implement a comprehensive regulatory regime for the OTC derivatives markets, Congress is becoming increasingly concerned about the global coordination of derivatives regulations to ensure that the United States remains competitive in international markets and to achieve the objectives of reform to reduce systemic risk and enhance market stability and transparency. Testifying before the House Commodities and Risk Management subcommittee, CFTC Commissioner Jill Sommers noted that other jurisdictions are not as far along in their reform process, which may harm the global competitiveness of U.S. businesses, and that there are some important substantive differences between derivatives reform in the United States and other jurisdictions. This story appears in the May 27, 2011, Current Developments (IntelliConnect, IRN, ip access user).
Warren Dodges Recess Appointment Question
Treasury Special Advisor Elizabeth Warren dodged the question of whether she would accept a recess appointment to head the Consumer Financial Protection Bureau, telling a Congressional hearing only that it is "up to the President...to make a nomination." At a House Oversight and Government Reform subcommittee hearing May 24, 2011, Warren said it would not be appropriate to speculate on any possible nomination, adding that she has "tried to help the president in any way I can on the nomination process." This story appears in the May 26, 2011, Current Developments (IntelliConnect, IRN, ip access user).
Business Credit Cards Pose Risk to Millions, Study Shows
Business credit cards put millions of individuals and small business owners at risk from unfair or deceptive practices which remain widespread, and are not covered by the Credit CARD Act of 2009, a new report shows. A report from the Pew Health Group's Safe Credit Cards Project shows that between January 2006 and December 2010, U.S. households received over 2.6 billion offers for business credit cards. This story appears in the May 23, 2011, Current Developments (IntelliConnect, IRN, ip access user).
CFPB Seeks Input on Simplified Mortgage Loan Disclosure Form
The Consumer Financial Protection Bureau is seeking input and conducting extensive testing as it seeks to replace the current system of mortgage loan disclosures with a single, easy-to-understand form that will allow consumers to know the real costs of a mortgage. "This is about empowering consumers," Treasury Special Advisor Elizabeth Warren told reporters on May 18, 2011. The CFPB intends to conduct five rounds of evaluation and revision in six cities through September 2011 as it seeks to choose a single draft disclosure form. In addition, it will solicit online feedback from consumers, while reaching out to industry and consumer groups for additional input. This story appears in the May 20, 2011, Current Developments (IntelliConnect, IRN, ip access user).
Dodd-Frank Derivatives Regulations Must Be Harmonized
Senators Charles Schumer, D-N.Y., and Kirsten Gillibrand, D-N.Y., have warned that proposed margin regulations on derivatives between non-U.S. subsidiaries of U.S. entities and non-U.S. counterparties are not harmonized internationally as the Dodd-Frank Act intended and could presage a "race to the bottom" harmful to the competitiveness of U.S. financial institutions. In a letter to CFTC Chair Gary Gensler and banking regulators, the Senators asked the Commission to reconsider the extraterritorial application of these requirements in a way that is consistent with Congressional intent regarding the territorial scope of the new Dodd-Frank regulatory framework for derivatives. Ideally, said the Senators, international derivatives regulations should perfectly mirror U.S. regulations adopted under Title VII of Dodd-Frank in order to minimize the opportunity for regulatory arbitrage by non-U.S. customers of U.S. entities. This story appears in the May 19, 2011, Current Developments (IntelliConnect, IRN, ip access user).
Consumer Credit Guide
Lessor’s Servicing Agent Not a “Debt Collector” Under FDCPA
The U.S. Court of Appeals for the Seventh Circuit recently ruled that an apartment property manager—the owner/lessor's servicing agent—was not a "debt collector" subject to the federal Fair Debt Collection Practices Act. In the Seventh Circuit's view, the property manager was exempt from the FDCPA because the manager acquired the authority to collect a tenant's rent payments before any possible default. Since the property manager clearly became the lessor's servicing agent before the tenant arguably owed any back rent, the property manager could not be deemed a "debt collector" subject to the requirements of the FDCPA. Since the property manager was not a "debt collector," the Seventh Circuit ruled that the tenant's FDCPA claims were properly dismissed. Carter v. AMC, LLC (7thCir), ¶52,364 (IntelliConnect, IRN, ip access user).
Merchant’s Email Confirmation Not Subject to Credit Card Receipt Rule
The U.S. Court of Appeals for the Ninth Circuit recently ruled that, under the credit card receipt rule of the federal Fair and Accurate Credit Transactions Act (FACT Act), a receipt that is transmitted to a consumer via email and then digitally displayed on the consumer's screen is not an "electronically printed" receipt. After a consumer used his credit card to purchase travel arrangements through a merchant's website, the merchant sent the consumer an e-mail confirming the transaction and providing a receipt which included the expiration date of the consumer's credit card. The court noted that Congress apparently intended the credit card receipt rule to apply only to consumer transactions where receipts are physically printed by an electronic point-of-sale device, such as a cash register. The Ninth Circuit agreed with the Seventh Circuit that, to apply the FCRA provision to receipts emailed to a consumer would "broaden the statute's reach beyond the words that Congress actually used." As a result, the Ninth Circuit affirmed the judgment dismissing the consumer's lawsuit. This story appears in Report Letter No. 1118, May 31, 2011 (IntelliConnect, IRN, ip access user).
Creditor Establishes “Significant Impairment” Under Kansas UCCC Default Provision
The Supreme Court of Kansas recently examined the default provision of the Kansas Uniform Consumer Credit Code to determine whether a creditor was prevented from proceeding with a post-bankruptcy repossession of a consumer's vehicle upon which the creditor held a lien. First, as a threshold matter, the Kansas Supreme Court ruled that, without more, the consumer's voluntary filing of a bankruptcy petition did not establish as a matter of law that the prospect of payment, performance, or realization of collateral for the creditor was "significantly impaired" under the Kansas UCCC. Rather, the creditor was required to present additional evidence to demonstrate “significant impairment.” Ultimately, the Supreme Court of Kansas held that the creditor met its burden of proof to establish that its prospect of payment, performance or realization of collateral was "significantly impaired" under the default provision of the Kansas UCCC. As a result, the creditor was permitted to proceed with a post-bankruptcy repossession of the consumer's vehicle. Hall v. Ford Motor Credit Company, Inc. (KanSCt) ¶52,363 (IntelliConnect, IRN, ip access user).
State Law Update
Arizona: Changes to the judgment interest rate will require that interest on any judgment based on a written agreement evidencing a loan, indebtedness or obligation that does not exceed the maximum interest rate is to be at the rate of interest provided in the agreement. In addition, the rate must be specified in the judgment. Unless specifically provided for by statute or a different rate is contracted for in writing, interest on any judgment must be the lesser of: 10 percent per year; or a rate per year that is equal to 1 percent plus the prime rate as published by the Federal Reserve Board in Statistical Release H.15. The legislation also establishes restrictions on prejudgment interest. The law appears at Arizona ¶6401 (IntelliConnect, IRN, ip access user)
Colorado: Amendments to the Uniform Consumer Credit Code authorize the Attorney General—the UCCC Administrator—to assess a civil penalty of up to $1,000 for each violation of the UCCC. The legislation also: authorizes a similar $1,000 civil penalty for violations of the Refund Anticipation Loans Act and the Colorado Rental Purchase Agreement Act; and establishes enhanced remedies and penalties for violations of the Colorado Fair Debt Collection Practices Act and the Colorado Credit Services Organization Act. The law appears beginning at Colorado ¶5434 (IntelliConnect, IRN, ip access user)
Montana: Governor Brian Schweitzer vetoed legislation that would have revised the interest rate for civil judgments. Analysis appears in Report Letter No. 1116, May 3, 2011 (IntelliConnect, IRN, ip access user)
North Dakota: Recently enacted legislation increases from $30 to $35 the collection fee that may be recovered from the issuer of a check or other instrument, including an electronic funds transfer, that is dishonored for insufficient funds. A separate measure establishes stricter oversight over collection agencies, including eliminating the exemption for out-of-state collectors. Analysis appears in Report Letter No. 1116, May 3, 2011. Additional legislation strengthens and clarifies the money broker law, including prohibiting a net branch or a net branching arrangement. The law is reflected beginning at North Dakota ¶7001A (IntelliConnect, IRN, ip access user)
Tennessee: Stricter regulation of payday loans establishes licensing requirements for Internet lenders as well as restricting certain practices and limiting previously authorized fees. Analysis appears in Report Letter No. 1118, May 31, 2011 (IntelliConnect, IRN, ip access user)
Washington: Amendments to the Consumer Loan Act restrict the exemption for non-consumer loans as well as adding prohibited practices for lenders. Additional requirements and restrictions governing the business practices of debt collectors mandate the inclusion of specified account and payment information in the first notice sent to a debtor. Analysis appears in Report Letter No. 1117, May 18, 2011 (IntelliConnect, IRN, ip access user) and Report Letter No. 1116, May 3, 2011, respectively (IntelliConnect, IRN, ip access user).
Wisconsin: The Department of Financial Institutions has adopted payday lending rules establishing: standards and requirements for lenders; notice and other protections for borrowers; and database requirements for the secure entry, retention and transmission of borrower information. The rules also: identify transactions not deemed payday loans; list prohibited practices; establish disclosure requirements; set forth fees and interest, and address defaults; set forth the calculations to be used to determine a borrower’s income; and provide form and repayment plan requirements. The rules appear beginning at Wisconsin ¶6591 (IntelliConnect, IRN, ip access user)
Smart Charts Highlights
Some of the latest changes reflected in Consumer Credit Smart Charts include:
Product Enhancements
New Division on Consumer Financial Protection Bureau
A new “Consumer Financial Protection Bureau” division is now in place in the Consumer Credit Guide, with full explanation of the Consumer Financial Protection Act and the duties and responsibilities of the Bureau, beginning at ¶3801 (IntelliConnect, IRN, ip access user). The full text of the law, enacted as part of the Dodd-Frank Act, begins at ¶3865 (IntelliConnect, IRN, ip access user).
The CFPB will, over the next few years, replace the federal prudential regulators as the agency with the authority to adopt regulations implementing the federal consumer financial protection laws. The Bureau also will assume supervisory authority over the largest insured banks, thrifts and credit unions, as well as over many state-chartered or licensed providers of consumer financial products and services.
Secured Transactions Guide
Creditor Retained Interest Regardless of Agent's Mistake
An amended financing statement filed by a title company that mistakenly released a creditor's entire security interest was not a valid termination, because the title company exceeded its authority. After the creditor discovered the error, it filed two additional amendments, stating it had not authorized the complete termination of its security interest. During the debtor's bankruptcy proceedings, a committee of unsecured creditors argued the creditor's entire interest had been terminated by the title company. The California UCC, however, provides that a person may file an amendment only if the secured party of record authorized the filing. The filing of a form that would completely terminate the creditor's interest in the remainder of the debtor's property was not within the scope of the title company's limited authority, and the creditor was not bound by the amended financing statement. Official Committee of Unsecured Creditors v. City National Bank, N.A. (NDCal) ¶56,258 (IntelliConnect, IRN, ip access user).
Lender's Sale Was Commercially Reasonable
A debtor and other guarantors were liable for the deficiency balance that remained after the post-default sale of the debtor's equipment, because the lender's sale was commercially reasonable. The lender provided financing to the debtor in exchange for a security interest in the debtor's assets and third-party guarantees. After default, the creditor sold the secured equipment at a public sale and sought a deficiency judgment against the debtor and guarantors for the remaining balance. The debtor on a secured note bears the burden of proving that a foreclosure sale was unreasonable, and it was uncontested that the sale was commercially reasonable. The sale was conducted early in the day, at an easily accessible location and the equipment was available for inspection several days prior. In addition, an equipment financing expert stated that the price the lender received was the reasonable market value of the equipment on the date of sale. People's United Equipment Finance Corp. v. Halls (SDTex), ¶56,259 (IntelliConnect, IRN, ip access user).
State Law Update
Alabama: A "mini-truck" is now exempt from Alabama's certificate of title laws. A mini-truck is defined as "a four-wheeled reduced dimension truck that is not less than 48 inches wide, with an unladen weight, including fuels and fluids, of not less than 1,500 pounds, equipped with a fully enclosed metal cab, an installed speed governor to prevent the truck from attaining a speed of more than 25 miles per hour, headlamps, stop lamps, front and rear turn signal lamps, tail lamps, reflex reflectors, a parking brake, rearview mirrors, windshield, seat belts, and a nonconforming vehicle identification number." The law appears at Alabama ¶901 (IntelliConnect, IRN, ip access user) and Alabama ¶1182 (IntelliConnect, IRN, ip access user).
Arizona: The secretary of state in Arizona will no longer be required to provide same day service for the expedited processing of requests, applications, filings and searches. Expedited processing, however, will still be a priority and effected in a "fast and efficient" manner. The law appears at Arizona ¶1011 (IntelliConnect, IRN, ip access user)
Colorado: Except in extenuating circumstances, a lienholder will now be required to provide to a vehicle owner the certificate of title evidencing the release of a satisfied lien within fifteen calendar days of payment. "Extenuating circumstances" is defined as a situation in which access to the title is so impaired that good faith compliance with the requirement is impossible. It does not include delays caused by intentional or negligent acts by the lienholder. A person aggrieved by a violation may bring a civil action against the lienholder to attain the lienholder's compliance and any damages that arise as a result of the violation. The law appears at Colorado ¶1068 (IntelliConnect, IRN, ip access user)
Oklahoma: Oklahoma law now provides for a livestock owner’s lien to secure the obligations of a first purchaser. Every livestock owner will be granted a lien in all livestock sold by the owner for any unpaid portion of the sales price that attaches immediately and continues uninterrupted after the sale of the livestock. The validity of the lien is not dependent on possession of the livestock. The owner's lien takes priority over any other lien, but a subsequent purchaser or sales agent takes the livestock free of the owner's lien if the purchaser pays the full amount of consideration pursuant to a good faith agreement. The law appears at Oklahoma ¶460 (IntelliConnect, IRN, ip access user)
South Carolina: South Carolina has amended its law relating to liens for repair and storage to exclude from the lien the contents of the towed, stored or repaired motor vehicle, trailer, mobile home, watercraft or other object subject to towing, storage or repair. The law appears at South Carolina ¶1108 (IntelliConnect, IRN, ip access user)
Financial Privacy Guide
Illinois Identity Theft Law Violated Due Process Rights
The Illinois Identity Theft Law could not be enforced against an individual who was convicted under the statute because the law was unconstitutional on its face, the Illinois Supreme Court has held. The individual was accused of knowingly using the personal identification information of another person—specifically, her name, date of birth and address—to gain access to a record of actions taken, activities or transactions of the person. The purpose of the law was to protect the economy and people of Illinois from the ill effects of identity theft. The statute violated the due process clauses of both the Illinois and United States Constitutions because it potentially subjected innocent conduct to criminal penalty without requiring a culpable mental state beyond mere knowledge, the court held. The law potentially would punish as a felony a wide array of wholly innocent conduct, the court said. For example, entering someone's name in a search through Google or Facebook could uncover numerous records of actions taken, communications made or received, or other activities or transactions of that person. Illinois v. Madrigal (IllSCt) is at ¶100-536 (IntelliConnect, IRN, ip access user).
Racetrack Was Careless, Not Reckless or Willful
A racetrack that printed 2,277 receipts containing its customers' full credit and debit card numbers during a six-week period did not willfully violate the credit and debit card truncation requirements of the Fair and Accurate Credit Transaction Act (FACT Act), a federal district court has held. The credit and debit sale equipment at the racetrack had malfunctioned and, after a faulty repair, printed sale receipts with all 16 credit card numbers. The problem was corrected the day it was discovered. Two attorneys who received receipts during the malfunction brought a class action against the racetrack alleging willful violation of the FACT Act and seeking statutory damages. The court found no evidence that the racetrack knew that the equipment would malfunction or that the malfunction or faulty repair was due to the racetrack's recklessness. Although the racetrack's failure to review receipts for six weeks could have amounted to carelessness, it did not rise to the level of recklessness. Without a willful violation, the court concluded, the attorneys could not maintain their action. Keller v. Macon County Greyhound Park, Inc. (MDAla) is at ¶100-535 (IntelliConnect, IRN, ip access user).
Consumers Must Contact CRA to Dispute Information
Consumers who allegedly received numerous collection calls from a mortgage company claiming the consumers' debt was past due, despite the fact that the consumers were not obligated to the company, could not maintain an action against the company for violations of the Fair Credit Reporting Act (FCRA) or the Florida Consumer Collection Practices Act (FCCPA). The FCRA requires that the consumer reporting agency (CRA) conduct a reasonable investigation to determine whether the disputed information is inaccurate. However, the consumers failed to allege that they filed a dispute with a consumer reporting agency. Also, the FCRA preempted the consumers' FCCPA claims that related to the company's failure to disclose the dispute. A story on Osborne v. Vericrest Financial, Inc. (MDFla) appeared in Privacy Extra, May 31, 2011 (IntelliConnect, IRN, ip access user).
Individual Retirement Plans Guide
Taxpayers Allowed Extension to Recharacterize Roth IRA
A married couple was granted an extension to recharacterize a Roth IRA to a traditional IRA. One of the taxpayers had converted a traditional IRA to a Roth IRA, and both taxpayers had made regular contributions to their respective Roth IRAs. They then filed a joint tax return using a CPA. Later, the CPA filed an amended tax return for the couple to correct an unrelated error. The tax professional then realized that for the tax year both taxpayers exceeded the adjusted gross income limits, part of their regular contributions to their respective Roth IRAs were not allowed, and the conversion from the traditional IRA to a Roth IRA was improper. At the time of this discovery by the return preparer, the taxpayers had missed the deadline for recharacterizing the contributions. IRS Letter Ruling 201117037 is reported at ¶6259 (IntelliConnect, IRN, ip access user).
Rollover Waiver Denied Where Taxpayer Assumed Risk
A taxpayer who claimed bank error was denied a waiver of the 60-day rollover requirement. The taxpayer took a distribution and used it as a short-term loan to buy his elderly mother a new home. His mother entered into a reverse mortgage and the proceeds were returned to the IRA after the 60-day time period had expired. The IRS disagreed that the bank that offered the mortgage was at fault, ruling that the taxpayer did not intend that the bank transact any financial matter relating to an IRA. Rather, the amount was withdrawn from the IRA and presented to the bank for the purpose of contributing, on a temporary basis, toward the purchase price of a home. In essence, the IRS stated, the taxpayer made a short-term loan, and while he had the intent at the time of withdrawal to redeposit the amount into his IRA prior to the expiration of the 60-day rollover period, he assumed the risk that the funds might not be returned to him timely. IRS Letter Ruling 201118025 is reported at ¶6269 (IntelliConnect, IRN, ip access user).
