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October 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
Consumer Financial Protection Bureau Reporter
CFPB to Issue Rule on Reasonable Ability to Repay
Special Advisor to the Treasury Secretary for the Consumer Financial Protection Bureau Raj Date remarked on the breakdown of the mortgage market leading up to the financial crisis in 2008 in a speech before a group of banking professionals. Speaking at the American Banker’s Regulatory Symposium in Washington, D.C., on Sept. 20, 2011, Date observed that free markets need regulatory oversight for proper functioning. A properly functioning market consists of three basic principles: transparency, aligned incentives and fair competition, Date said, finding that, based on these principles, the mortgage market was “quite profoundly broken.”
Date indicated that the CFPB intends to issue a final rule early next year addressing a lenders’ duty to determine that consumers have a reasonable ability to repay mortgages. Emphasizing the need for a comprehensive approach to servicing that protects consumers, investors and the financial sector, he said that the Bureau also is working with other federal agencies to develop common-sense national servicing standards. This story appears in Report 7, Sept. 26, 2011 (IntelliConnect).
“Know Before You Know” Initiative Continues
The Consumer Financial Protection Bureau is continuing its “Know Before You Owe” initiative by offering consumers the opportunity to compare two different types of loan products using the same version of a simplified mortgage disclosure form. The Bureau is seeking consumer feedback to help it ensure that the disclosure actually helps consumers understand features of competing loan products, from the overall loan amount to estimates of taxes and insurance costs. “Comparing two versions of a form is useful, but in the real world, consumers should be able to use disclosures to compare different loan offers, not different forms,” the CFPB posted on its blog. This story appears in Report 6, Sept. 19, 2011 (IntelliConnect).
CFPB Seeks Information on Products and Services for Servicemembers
The Consumer Financial Protection Bureau has asked for input on consumer financial products and services that are tailored to servicemembers and their families. The information is intended to help the CFPB’s Office of Servicemember Affairs develop financial education and outreach initiatives for military families, which is one of the bureau’s tasks under the Dodd-Frank Act.
The CFPB specifically has asked for information on:
This story appears in Report 5, Sept. 12, 2011 (IntelliConnect).
CFPB Sets Policy on Comment Disclosures
The Consumer Financial Protection Bureau has established a policy on how it will treat ex parte communications that it receives during informal rulemaking proceedings. In general, communications from anyone outside the CFPB to bureau decision-making personnel that provide information or argument about the proceeding are covered by the policy, unless the communication occurs during a public meeting or in some other public manner. The goal of the policy is to promote public disclosure of covered communications. This story appears at 200-016 in Report 4, Sept. 5, 2011 (IntelliConnect).
Federal Banking Law Reporter
Credit Card Fees Rule Amendment Blocked
A federal district court has granted a preliminary injunction against the enforcement of an amendment to Reg. Z—Truth in Lending (12 CFR 226) that would have reduced the ability of credit card companies to impose fees on the types of cards usually offered to subprime borrowers. The injunction, which prevents the Consumer Financial Protection Bureau from enforcing the rule until a final decision is given in the case, was based in part on a determination that the Federal Reserve Board exceeded its authority when it adopted the amendment. A story on First Premier Bank v. U.S. Consumer Financial Protection Bureau (D S.D.) is in Issue No. 2437, Sept. 30, 2011 (IntelliConnect, IRN, ip access user).
Fed Offers Explanations of Swipe Fee Rule
The Federal Reserve Board has issued a set of frequently asked questions and answers that are intended to explain aspects of Reg. II—Debit Card Interchange Fees and Routing (12 CFR 235). The FAQs focus mainly on the exemption provided for reloadable prepaid cards and on the rule's efforts to prevent payment card issuers from evading or circumventing the limits on fees. The Fed also has published a Small Entity Compliance Guide that is intended to help smaller card issuers fulfill their responsibilities. The Fed's FAQs are at ¶49-993 (IntelliConnect, IRN, ip access user), and the Small Entity Compliance Guide is at ¶49-994 (IntelliConnect, IRN, ip access user).
Fed Offers Rule on Securities Holding Company Supervision
The Federal Reserve Board has proposed a rule that would establish the procedures a securities holding company would need to follow if it wished to be supervised by the Fed. According to the Fed, an SHC might elect Fed supervision to meet requirements by another country's regulator that the firm be subject to comprehensive, consolidated supervision in the United States in order to operate in the other country. An SHC is a nonbank company that owns at least one registered broker or dealer. If an SHC chooses to be supervised by the Fed it will be treated as a bank holding company and subject to the same supervisory regime and capital requirements. However, the restrictions on nonbanking activities that apply to BHCs would not apply to SHCs. The Fed notice is at ¶98-114 (IntelliConnect, IRN, ip access user).
FDIC Adopts "Living Wills" Regulations
The Federal Deposit Insurance Corp. has adopted an interim final rule that requires large, systemically-important banks and thrifts to provide resolution plans, referred to as "living wills," to the FDIC, Federal Reserve Board and Financial Stability Oversight Council. The rule would apply to FDIC-insured institutions with more than $50 billion in assets. The FDIC also approved a second rule—a joint rulemaking that still needs Fed approval—that requires bank holding companies with assets of $50 billion or more and companies designated as systemic by the FSOC to report periodically to the FDIC and the Fed on the company's plan for its rapid and orderly resolution in the event of material financial distress or failure. The rules and a supporting memorandum are at ¶98-135 (IntelliConnect, IRN, ip access user) and ¶98-136 (IntelliConnect, IRN, ip access user).
Fed Proposes Phase-in for Most SLHC Filing
The Federal Reserve Board is proposing a two-year phase-in period for most savings and loan holding companies (SLHCs) to file regulatory reports with the Fed and an exemption for some SLHCs from initially filing regulatory reports. Under the Dodd-Frank Act, supervisory and rulemaking authority for SLHCs and their nondepository subsidiaries transferred from the Office of Thrift Supervision to the Fed on July 21, 2011. The Fed is proposing to exempt a limited number of SLHCs from initial regulatory reporting using the Fed's existing regulatory reports and a two-year phase-in period for regulatory reporting for all other SLHCs. Exempt SLHCs would continue to submit Schedule HC, which is currently a part of the Thrift Financial Report, and the OTS H-(b)11 Annual/Current Report. The Fed notice is at ¶98-103 (IntelliConnect, IRN, ip access user).
Consumer Credit Guide
Cardholder's Claims Under Fair Credit Billing Act and Oregon Law Successful on Appeal
The U.S. Court of Appeals for the Ninth Circuit recently issued several rulings in favor of a credit-card holder and against a card issuer, in connection with the cardholder's claims brought under the federal Fair Credit Billing Act (FCBA) and the Oregon Unlawful Debt Collection Act. In reversing rulings by the U.S. District Court for the District of Oregon, the Ninth Circuit held: (1) the cardholder was not required to establish evidence of detrimental reliance on the conduct of the card issuer to support an award of actual damages resulting from violations of the FCBA; (2) the cardholder's recovery of statutory damages resulting from the card issuer's multiple violations of the FCBA was not limited to a single statutory-damages penalty; (3) the cardholder was entitled to recover reasonable attorney's fees incurred for all work undertaken in pursuit of his FCBA claims, including those fees attributable to the appeal; and (4) the cardholder stated a valid claim under the Oregon Unlawful Debt Collection Practices Act. Lyon v. Chase Bank USA, N.A. (9thCir), ¶52,382 (IntelliConnect, IRN, ip access user).
Collection Agency Could Not Charge Bad-Check Penalties for Checks Assigned from Payday Lender
The Supreme Court of Montana recently held that since a payday lender is prohibited from charging a bad-check penalty under the Montana Deferred Deposit Loan Act, a collection agency may not charge a bad-check penalty under Montana law for checks assigned to the collection agency from a payday lender. The Montana high court determined: (1) under principles of assignment law, the collection agency could not obtain greater rights in the assigned debt than that of the payday lender; (2) the Montana Deferred Deposit Loan Act not only restricted collection of charges and fees but also entitled the borrower to defenses and protections; and (3) the collection agency was not "exempt" from the Montana Deferred Deposit Loan Act with respect to the collection of bad-check penalties. Credit Service Co., Inc. v. Crasco (MontSCt), ¶52,383 (IntelliConnect, IRN, ip access user).
Amended Complaint Revived Lender's Arbitration Rights
The U.S. Court of Appeals for the Eleventh Circuit recently held that, since a consumer's amended complaint in a proposed class action significantly expanded the potential scope of the litigation, a lender's right to compel arbitration was revived even if it had been previously waived with respect to the consumer's claims in the original complaint. The Eleventh Circuit determined that in certain limited circumstances an initial waiver of arbitration may be nullified by the filing of an amended complaint. The court noted that the consumer's amended complaint unexpectedly changed the scope and nature of the consumer's claims by greatly expanding the size of the proposed class and by expanding the relevant time period for the class from approximately three months to approximately three years. Given the unforeseen alteration in the nature and shape of the consumer's case, the court ruled that "in plain fairness" the lender should be permitted to rescind its earlier waiver of arbitration and be allowed to compel arbitration on the consumer's claims. Krinsk v. SunTrust Banks, Inc. (11thCir), ¶52,386 (IntelliConnect, IRN, ip access user).
State Law Update
Connecticut: Changes to the state’s gift certificate laws prohibit a general-use prepaid card from including an expiration date for the underlying funds redeemable through its use, but allows an expiration date for the card itself if certain requirements are met. Although general-use prepaid cards are explicitly excluded from the definition of "gift certificate," identical restrictions on inactivity charges, fees or penalties, as well as the exemption from state escheat provisions, apply equally to general-use prepaid cards and gift certificates. The law begins at Connecticut ¶6203 (IntelliConnect, IRN, ip access user).
Maine: Consumer Credit Code amendments incorporate federal consumer protections, including credit card restrictions enacted by the federal Credit Card Accountability Responsibility and Disclosure Act of 2009 and Truth-in-Lending provisions based on authority granted by the federal Dodd-Frank Act. The law begins at Maine ¶5022 (IntelliConnect, IRN, ip access user)
Missouri: Amendments to the Consumer Loan Act specifically authorize the sale of deficiency waiver addendums and guaranteed asset protection products with respect to certain consumer loans, second mortgage loans and retail credit sales. The law is at Missouri ¶6022 (IntelliConnect, IRN, ip access user).
New York: Debt collection legislation establishes guidelines for information subpoenas by requiring a judgment creditor, or agent, that sends more than 50 subpoenas per month to maintain records for five years on the information subpoenas that are sent. The guidelines attempt to ensure compliance with the civil practice law, which requires that a judgment creditor or agent have a reasonable belief that the person receiving an information subpoena possesses information about a judgment debtor that will assist in collecting the debt. The law begins at New York ¶6312 (IntelliConnect, IRN, ip access user).
Virginia: The State Corporation Commission (SCC) recently increased the annual fee for payday lenders to $500 per office, plus 47¢ per payday loan made by a licensee. Previously the fee was $300 per office, plus 18¢ for each payday loan made by a licensee. The increase was deemed necessary to recover various costs incurred by the Bureau of Financial Institutions in examining, supervising and regulating licensees. The regulation is at Virginia ¶8390 (IntelliConnect, IRN, ip access user).
Smart Charts Highlights
Some of the latest changes reflected in Consumer Credit Smart Charts include:
Secured Transactions Guide
Security Interest Was an Avoidable Preferential Transfer
A bankruptcy trustee could avoid a creditor's security interest as a preferential transfer because the creditor failed to perfect its security interest where the debtor was located until one month prior to the debtor's filing for bankruptcy protection. The Bankruptcy Code provides that a trustee may avoid any transfer of a debtor’s interest in property made within 90 days of the debtor's filing of a petition if it is made to the benefit of a creditor for an antecedent debt owed by the debtor. The debtor was a Nevada corporation, and its principal place of business was in Nebraska. Article 9 provides that a security interest must be perfected by filing a financing statement where the debtor is located, and corporations are located where they are organized. To perfect its interest, the creditor had filed a UCC financing statement in Nebraska in December 2007 and in Nevada in February 2009. The debtor filed a petition for Chapter 11 bankruptcy protection in March 2009. Because the Nebraska filing was ineffective, the transfer of the debtor’s interest in the collateral was made within 90 days of filing its bankruptcy petition.In re Qualia Clinical Service, Inc.; Lange v. Inova Capital Funding, LLC (8thCir), ¶56,267 (IntelliConnect, IRN, ip access user).
Judgment Lien Was an Avoidable Preferential Transfer
A creditor's judgment lien perfected within 90 days of a debtor's filing of a petition for bankruptcy protection was an avoidable preferential transfer because the value of the transfer exceeded the threshold exception for transfers of property under $5,475. The creditor secured a judgment lien for $5,845.74 on the debtor's personal property on Feb. 22, 2010. On March 18, 2010, the debtor filed a petition for bankruptcy protection, and the creditor submitted a secured claim for the judgment. The Bankruptcy Code provides that a trustee may avoid any transfer of a debtor’s interest in property made within 90 days of debtor's filing of a petition if it is made to the benefit of a creditor for an antecedent debt owed by the debtor. A trustee, however, may not avoid a transfer in non-consumer cases if the aggregate value of the property affected by the transfer is less than $5,475. Unfortunately for the creditor, the provision did not create a safe harbor that insulates $5,475 of all transfers from avoidance. Because the judgment lien exceeded the $5,475 threshold, the entire lien was avoidable. In re Bay Area Glass, Inc.; Western States Glass Corp. of Northern California v. Barris (BAP 9thCir), ¶56,268 (IntelliConnect, IRN, ip access user).
Houseboat Was a “Vessel” Subject to Maritime Lien
A city that owned and operated a marina held a valid maritime lien on a disabled houseboat that was incapable of sailing under its own power because the boat was still a "vessel" as used by federal maritime law. A person providing necessaries to a vessel has a maritime lien on a vessel that may be enforced by a civil action against the vessel. A prerequisite to the attachment of a maritime lien is that a watercraft be a "vessel" under federal law. The primary inquiry in determining whether a craft is a vessel is whether the craft is practically capable of transportation or movement. Although the boat could only be towed and had no steering power of its own, it had the capacity for maritime transportation. The fact that the boat had been "designed as a residence that just happened to float" was immaterial—the status of a vessel does not depend in any way on the purpose for which the craft was intended. City of Riviera Beach v. That Certain Unnamed Gray, Two-Story Vessel Approx. Fifty-Seven Feet in Length (11thCir), ¶56,265 (IntelliConnect, IRN, ip access user).
State Update
Illinois: Illinois has revised its law relating to innkeepers' liens to provide new requirements for stable keepers. The amended law provides that stable keepers have a lien upon horses, carriages, harness, tack and equipment and any other personal property stored by the owner at the stable or boarding facility, in the amount of the charges and expenses due for their keeping plus all fees and expenses, including legal fees, incurred by the keeper to enforce the lien. The law also includes new requirements for notice and sale. The law appears at Illinois, ¶1201 (IntelliConnect, IRN, ip access user).
Illinois has also amended its self-service storage facility lien law to provide new notice requirements. In order to enforce a lien on the contents of a self-service storage facility unit, the owner may provide notice to the owner by first-class mail with a certificate of mailing, and the notice must now include the name of facility, address, telephone number, date, time, location and manner of the lien sale, along with the occupant's name and unit number. Owners are no longer required to include a description of the personal property subject to the lien. The law appears at Illinois, ¶430 (IntelliConnect, IRN, ip access user).
Financial Privacy Law Guide
California Adds Notification Requirements to Data Breach Law
Recently enacted legislation updating California's security breach notification law requires that notifications be written in plain language and include, at a minimum: the name and contact information of the reporting agency, person or business; a list of the types of personal information that were, or are reasonably believed to have been, the subject of a breach; the date or estimated date of the breach; the date of the notice; whether the notification was delayed because of an investigation by law enforcement; a general description of the breach incident; and the toll-free telephone numbers and addresses of the major credit reporting agencies if the breach exposed a Social Security number, driver's license or California Identification Card number. Also, the new law requires any agency, person or business that must provide a security breach notification pursuant to existing law to more than 500 California residents as a result of a single breach to submit a single sample copy of the notification electronically to the Attorney General. The law is at ¶34-521 (IntelliConnect, IRN, ip access user) and ¶34-523 (IntelliConnect, IRN, ip access user).
Users Lacked Standing for Apple Mobile App Claims
Users of mobile applications (apps) on Apple's devices could not maintain an action against Apple and mobile app developers for alleged violations of various federal and state privacy laws because the users failed to allege that they had suffered any injury to themselves. The devices' operating system allows apps, without consent of the users, to access, use and track information such as address book and cell phone entries, geolocations, photographs, SIM card serial numbers and unique device identifiers. App developers can then collect and track personal data without the user's permission or knowledge. Injuries alleged by the users included misuse and diminution in value of personal information and “lost opportunity costs.” However, the court determined that the users failed to allege any concrete harm caused by Apple or the developers—they did not identity which devices they used, which developers tracked what information and what harm resulted from the activity. A story on In re iPhone Application Litigation (NDCal) appears in Privacy Extra, Sept. 30, 2011. (IntelliConnect, IRN, ip access user).
Federal Courts May Hear Private TCPA Claims
A recipient of 31 prerecorded telemarketing calls could maintain an action in federal court against two telemarketers for alleged violations of the Telephone Consumer Protection Act (TCPA). According to the U.S. Court of Appeals for the Sixth Circuit, federal courts are not divested of federal-question jurisdiction over private TCPA actions. The TCPA provides that a person may bring a private action "in an appropriate court" of a state to recover actual or statutory damages. The court concluded that provision does not divest federal courts of federal-question jurisdiction, and federal courts may hear private TCPA claims. Also, diversity jurisdiction existed because the court could aggregate the claims brought under the TCPA and state law. The court concluded that a recipient can recover treble statutory damages of $1,500 for willful and knowing violations of the automated call provisions and $1,500 for willful and knowing violations of the do-not-call list requirements, even if both violations occur on the same call. Charvat v. NMP, LLC (6thCir) is at ¶100-548. (IntelliConnect, IRN, ip access user).
Civil Money Penalties Assessed Against Ocean Bank
The Federal Deposit Insurance Corp., Financial Crimes Enforcement Network and Florida Office of Financial Regulation have assessed concurrent civil money penalties of $10.9 million against Ocean Bank, Miami, Fla., for violations of federal and state Bank Secrecy Act and anti-money laundering laws and regulations. According to the agencies, the bank failed to implement an effective BSA/AML compliance program with internal controls reasonably designed to detect and report money laundering and other suspicious activity in a timely manner. The Order and Assessment are at ¶100-549. (IntelliConnect, IRN, ip access user).
Individual Retirement Plans Guide
IRS Updates List of Approved IRA Custodians
The IRS issued an updated list of approved entities to serve as nonbank trustees or custodians of accounts in qualified plans, 403(b) plans, 457 plans, traditional IRAs and Roth IRAs. The updated list will not affect the tax-exempt status of the plans and will supersede the existing list of approved entities. An entity that is not a bank (and in the case of Archer MSAs and health savings accounts, a bank or an insurance company) must receive approval from the IRS to serve as a nonbank trustee or custodian. A prospective nonbank trustee or custodian must file a written application with the Commissioner demonstrating that the statutory requirements will be met, and, on approval of the application, a written Notice of Approval will be issued to the applicant. IRS Announcement 2011-59 is at ¶6292 (IntelliConnect, IRN, ip access user).
