Banking and Finance Update- May 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.

Arbitration Clause Banning Class Actions Upheld

In a decision likely to have broad applicability, the U.S. Supreme Court has determined that a California Supreme Court decision denying enforcement of some consumer contract arbitration clauses because they banned class actions was preempted by the Federal Arbitration Act (FAA). Although the specific suit involved cell phone services, there is no reason to believe that the principle would not also apply to other consumer contracts, including those for credit card accounts or other financial services. Moreover, the decision likely will have equal force when applied to the laws of other states that have attempted to restrict the effects of arbitration agreements. This story appears in Issue No. 2416, April 29, 2011 (IntelliConnect, IRN, ip access user).

Fed Proposes Mortgage Lending Standards

The Federal Reserve Board has proposed amendments to Reg. Z–Truth in Lending (12 CFR 226) that would set out how residential mortgage lenders would be required to determine a consumer's ability to repay a mortgage. The proposal would define what are termed "qualified mortgages" and also set minimum underwriting standards for many mortgages. The proposed amendments, which are required by the Dodd-Frank Act, also would implement limits on prepayment penalties and attempt to prevent lenders from evading the rules. The Fed's notice is at ¶97-818 (IntelliConnect, IRN, ip access user).

Agencies Propose Rule on Risk Retention Requirements

The Federal Reserve Board and Federal Deposit Insurance Corp. have proposed a rule that would implement the Dodd-Frank Act requirement that securitizers of asset-backed securities retain at least 5 percent of the credit risk of the assets collateralizing the asset-backed securities. The proposal would prohibit securitizers from hedging or transferring the risk they are required to retain. Disclosure requirements also are included in the proposal. Earlier in the week, the financial services regulatory agencies announced that they intended to consider a proposal, and action by the other bank, thrift, securities and housing finance agencies still is expected. The joint proposal is at ¶97-763 (IntelliConnect, IRN, ip access user).

Fed Expands Reach of Consumer Protection Regulations

The Federal Reserve Board has adopted two rules that expand the coverage of consumer protection regulations to credit transactions and leases of higher dollar amounts. The final rules amend Reg. Z—Truth in Lending (12 CFR 226) and Reg. M—Consumer Leasing (12 CFR 213) to implement a provision of the Dodd-Frank Act requiring that, effective July 21, 2011, the protections of the Truth in Lending Act and the Consumer Leasing Act apply to consumer credit transactions and consumer leases up to $50,000. This amount will be adjusted annually to reflect any increase in the consumer price index. The Fed's notices are reported at ¶97-752 (IntelliConnect, IRN, ip access user) and ¶97-753 (IntelliConnect, IRN, ip access user).

Agencies Propose Derivatives Margin, Capital Requirements

The federal banking regulatory agencies, Farm Credit Administration and Federal Housing Finance Agency have jointly proposed rules that would impose margin and capital requirements for swap dealers, major swap participants, security-based swap dealers and major security-based swap participants (referred to as "swap entities"). Swaps often are known as derivatives, and the capital and margin rules are required by the Dodd-Frank Act. The proposed rule generally would require swap entities the agencies regulate to collect minimum amounts of initial margin and variation margin from counterparties to non-cleared swaps and non-cleared, security-based swaps. The joint agency notice is at ¶97-800 (IntelliConnect, IRN, ip access user).

Formation of Consumer Financial Protection Bureau Moves Forward

During consideration of financial regulatory reform legislation, perhaps no single topic caused more dispute than the creation of a consumer financial protection regulator. The major justification offered for the creation of a consumer financial protection agency of some type was that the existing federal regulators had not done an adequate job of regulating irresponsible mortgage lending practices that contributed substantially to the financial system meltdown. This story appears in the April 2011 monthly update (IntelliConnect, IRN, ip access user).

Bernanke Says Economy Recovering at "Moderate Pace"

Federal Reserve Board Chairman Ben Bernanke said the economic recovery is proceeding at a moderate pace, with labor market conditions improving gradually, while the housing market remains depressed. Bernanke, speaking at the Fed's first-ever news conference on April 27, 2011, said the economy will show moderate growth through 2011, with accelerated growth expected in 2012 and 2013. This story appears in the April 29, 2011, Current Developments (IntelliConnect, IRN, ip access user).

Treasury Urges Forward Momentum on Dodd-Frank

The Obama administration will continue to oppose efforts to slow down, weaken or repeal reforms to the financial system, said Treasury Deputy Secretary Neal Wolin, who stressed that "we must move forward with implementing this law." Speaking April 19, 2011, to the Pew Charitable Trusts, Wolin said critics of the Dodd-Frank Act have engaged in a broad set of attacks against the law and its implementation, including the pace of reform, lack of regulatory coordination and global regulatory imbalances. This story appears in the April 20, 2011, Current Developments (IntelliConnect, IRN, ip access user).

Regulators' Report Castigates Mortgage Servicers

An interagency review of the activities of 12 mortgage servicing companies, including the five largest, found widespread critical weaknesses in procedures, record-keeping and internal controls, but did not find evidence of the problems that could have caused the most harm to consumers. The reviews of approximately 2,800 mortgage foreclosure files found that the borrowers in all cases were "seriously delinquent" in their loan payments and that the mortgage servicers had the legal authority to foreclose on the loans. Enforcement actions also were taken against two third-party service providers. This story appears in the April 15, 2011, Current Developments (IntelliConnect, IRN, ip access user).

CFPB, State AG's Forge Cooperative Partnership

The Consumer Financial Protection Bureau and state attorneys general said they have taken the first step toward forging a partnership aimed at enhancing protection for consumers of financial products and services. The CFPB and NAAG outlined a Joint Statement of Principles that includes information-sharing, regular consultations, coordinated investigation and enforcement actions, and joint training programs. This story appears in the April 13, 2011, Current Developments (IntelliConnect, IRN, ip access user).

Residential Property Manager Not a “Debt Collector” Under the FDCPA

The U.S. Court of Appeals for the Ninth Circuit recently ruled that a residential property manager was not a "debt collector" subject to the federal Fair Debt Collection Practices Act (FDCPA). A tenant sued the property manager in federal court, alleging the manager violated various disclosure obligations under the FDCPA in attempting to collect the tenant’s rental payments. In rejecting the tenant's FDCPA claims, the Ninth Circuit noted that both an agreement signed by the tenant and the property manager’s collection letter to him sought payments due only prospectively but not any amount in default. Since the property manager obtained the right to collect the tenant's rent before the debt was contractually overdue and in default, the property manager was not subject to the FDCPA as a "debt collector." De Dios v. International Realty & Investments (9thCir), ¶52,358 (IntelliConnect, IRN, ip access user).

Debtor Failed to State FDCPA, FCRA Claims on Unenforceable Debt

The U.S. Court of Appeals for the Third Circuit recently addressed a consumer's claims, brought under the federal Fair Debt Collection Practices Act (FDCPA) and the federal Fair Credit Reporting Act (FCRA), against a debt collector for seeking to collect an unenforceable, time-barred debt and for accessing the consumer's credit report. In addressing the consumer’s FDCPA claim, the Third Circuit acknowledged that, under New Jersey law, the consumer held a complete legal defense against having to pay the debt because the applicable statute of limitations had expired. However, the Third Circuit ruled that the FDCPA permitted the debt collector to seek the consumer's voluntary repayment of the time-barred debt so long as the collector did not initiate or threaten legal action in connection with its collection efforts; the court found that the collector did not initiate or threaten legal action. In addition, the consumer claimed the debt collector violated the FCRA because the collector did not have a permissible purpose to obtain his credit report from a credit reporting agency. The Third Circuit held that, in accessing the consumer's credit report to facilitate its collection efforts, the debt collector did not violate the FCRA because the Act permitted the use of such consumer information under the circumstances. Consequently, the Third Circuit affirmed the dismissal of the consumer's FDCPA and FCRA claims. Huertas v. Galaxy Asset Management (3dCir), ¶52,359 (IntelliConnect, IRN, ip access user).

New Mexico: Small Loan Act licensees will be required to file an annual report with the Financial Institutions Division containing specified, aggregated information relating to loans made or offered during the preceding calendar year. The annual report is not, however, to include information relating to payday loans. The law is at New Mexico ¶7540 (IntelliConnect, IRN, ip access user)

North Dakota: Deferred presentment service providers—payday lenders—will be subject to stricter transactional and administrative requirements under recently enacted legislation. In addition to those items currently required to be included in a written agreement for a deferred presentment transaction, lenders will be required to provide other disclosures regarding, among other things, renewals, the term of the loan, and the borrower’s right to rescind the transaction. Analysis appears in Report Letter No. 1115, April 19, 2011 (IntelliConnect, IRN, ip access user)

Utah: The Motor Vehicle Rental Company Disclosure Act allows rental companies to include separately stated surcharges, fees or charges in a rental agreement, including motor vehicle license cost recovery fees, airport access fees, airport concession fees, convention center surcharges and applicable taxes. The law appears beginning at Utah ¶6452 (IntelliConnect, IRN, ip access user)

Virginia: Governor Bob McDonnell approved legislation expanding the lending authority of title lenders by allowing title loans to be made to nonresidents of Virginia. A lender making a loan to a nonresident owning a vehicle in another state must comply with the laws of that state when adding its security interest on the vehicle's certificate of title. The law appears beginning at Virginia ¶7501 (IntelliConnect, IRN, ip access user)

Washington: Amendments to the Collection Agency Act update provisions to reflect modern communications methods and technology, and make a number of changes related to the prohibited practices of collection agencies. Analysis appears in Report Letter No. 1115, April 19, 2011 (IntelliConnect, IRN, ip access user)

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:

Arizona: Credit Card Agreements; Interest on Judgments.
Colorado: Legal Remedies for Consumer Credit Laws.
Indiana: Financial Institutions and Consumer Credit; Credit Agreements.
North Dakota: Issuing a Check with Insufficient Funds.

Steel Fabricator Held Perfected Materialman's Lien

In accordance with Arkansas law, a steel fabricator that furnished steel for the manufacture of barges held a valid materialman's lien on the barges in a shipbuilder's possession for the entire amount past due on the shipbuilder's account. The U.S. Court of Appeals for the Eight Circuit determined that the district court committed no clear error when it determined the lien was timely perfected and for the entire amount owed. Falcon Steel, Inc. v. J. Russell Flowers, Inc. (8thCir), ¶56,256 (IntelliConnect, IRN, ip access user).

Oklahoma Attorney General Decides Priority Issue

In an official opinion, the Oklahoma Attorney General has determined that a personal property tax lien, which is seven years old or less and arises under Oklahoma law, does not have priority over a prior perfected security interest in personal property created pursuant to Article 9 of the Oklahoma UCC. It does, however, have priority over a subsequent interest. The Oklahoma State Banking Department had requested the official opinion. Opinion of the Attorney General of Oklahoma. (A.G. Opin. 2011-1), ¶56,257 (IntelliConnect, IRN, ip access user).

Arizona: The law relating to the indexing and filing of certificates of title has been amended to provide that if a document is filed in a registering office within 30 business days after the date of execution, constructive notice of the lien described on the certificate of title will date back to the execution of the document. The law previously provided for 30 calendar days. The law appears at Arizona, ¶1057 (IntelliConnect, IRN, ip access user).

Arkansas: The fee for a certificate of title and duplicate certificate of title has been increased from $1.00 to $2.00. The law appears at Arkansas, ¶1041 (IntelliConnect, IRN, ip access user) and ¶1053 (IntelliConnect, IRN, ip access user).

Montana: An owner of a motor vehicle, trailer, semitrailer, pole trailer, camper, motorboat, personal watercraft, sailboat or snowmobile may now transfer ownership to an insurance company using an electronic signature on a certificate of title or limited power of attorney. In addition, a secured party may similarly release a perfected security interest. The law appears at Montana, ¶1116B (IntelliConnect, IRN, ip access user).

Ohio: Ohio has enacted both Revised Article 1 and Revised Article 7 of the UCC. While Article 7 is outside the scope of coverage, conforming amendments to Article 1, Article 2A and Revised Article 9 were enacted. The law begins at Ohio, ¶R651 (IntelliConnect, IRN, ip access user).

Virginia: Debtors in Virginia will now be able to hold exempt a firearm, not to exceed $3,000 in value, from the creditor process. In addition, motor vehicles up to $6,000, formerly $2,000, in value will be similarly exempt. The law appears at Virginia, ¶1119 (IntelliConnect, IRN, ip access user).

Facebook's CAN-SPAM Act Suit Against Advertiser Proceeds

Allegedly false and misleading web pages created by a marketing company on Facebook’s social networking site that directed the site users to transmit the pages to their friends could be considered “electronic mail messages” as used by, and subject to the requirements of, the Controlling the Assault of Non-Solicited Pornography And Marketing (CAN-SPAM) Act. The social networking site alleged that the marketing company created fake web pages on the networking site intended to redirect site users to third-party commercial sites, requiring the user to register in order to qualify for free gifts that the users never actually received. The CAN-SPAM Act makes it “unlawful for any person to initiate the transmission, to a protected computer, of a commercial electronic mail message, or a transaction or relationship message, that contains, or is accompanied by, header information that is materially false or materially misleading.” An “electronic mail message” is a “message that is sent to a unique electronic mail address.” Although the pages were not transmitted to an “inbox,” Facebook users were used to facilitate the transmission of the pages to the “walls,” newsfeeds, home pages and external e-mail addresses of their site “friends.” In addition, the transmission required some routing activity on the part of the networking site. The court concluded the transmissions could be considered electronic mail messages as used by the CAN-SPAM Act and refused to dismiss the claim. Facebook, Inc. v. MaxBounty, Inc. (NDCal) is at ¶100-532 (IntelliConnect, IRN, ip access user).

Federal Courts May Hear TCPA Private Actions

In a consolidated appeal, the U.S. Court of Appeals for the Third Circuit has held that federal courts can exercise diversity jurisdiction over private actions for Telephone Consumer Protection Act violations. The TCPA provides that it is unlawful to use any facsimile machine, computer or other device to send an unsolicited advertisement to another facsimile machine. A person may bring a private action for damages or injunctive relief in a state court, if otherwise permitted by the laws or rules of that state court. The Act is silent as to whether a private action may be brought in federal court. The court determined that Congress did not intend state courts to have exclusive jurisdiction over TCPA private actions, stating, “We do not find the TCPA's language sufficiently clear or forceful enough to deprive federal courts of diversity jurisdiction over TCPA claims.” A story on Landsman & Funk PC v. Skinder-Strauss Assoc. (3dCir) appears in the April 29, 2011, Privacy Extra (IntelliConnect, IRN, ip access user).

SEC Fines Brokerage Executives for Privacy Violations

The Securities and Exchange Commission has settled charges against three former brokerage executives for violating customer privacy rules by improperly transferring customer records to another firm while their firm, GunnAllen Financial Inc., was winding down its business operations. The SEC also found that the firm's chief compliance officer failed to ensure that the firm's policies and procedures were reasonably designed to safeguard confidential customer information. This was the first time that the SEC has assessed financial penalties against individuals charged solely with violations of Regulation S-P, known as the Safeguard Rule, which requires financial firms to protect confidential customer information from unauthorized release to unaffiliated third parties. This story appears in Report Letter No. 118, April 13, 2011 (IntelliConnect, IRN, ip access user).

Extension to Recharacterize Roth IRA Granted

A taxpayer was granted additional time in which to recharacterize a Roth IRA back into a traditional IRA. The taxpayer had relied upon a CPA, and the conversion had failed due to the fact that her modified adjusted gross income (AGI) had exceeded the $100,000 limit for the tax year. The taxpayer worked and resided overseas, and her modified AGI included her foreign earned income that was usually deducted in computing AGI. IRS Letter Ruling 201114046 is reported at ¶6257 (IntelliConnect, IRN, ip access user).