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September 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 Issues Interim Final Rules
The Consumer Financial Protection Bureau has released a series of interim final rules establishing procedures for various parts of the agency's operations. The agency is seeking public comment on the rules.
Records and Information. The CFPB issued an interim final rule establishing procedures for the public to obtain information from the agency under the Freedom of Information Act, the Privacy Act of 1974 and in legal proceedings. This interim final rule also establishes the CFPB's rules regarding the confidential treatment of information obtained from persons in connection with the exercise of its authorities under federal consumer financial law.
Adjudication Proceedings. Procedures for the conduct of adjudication proceedings conducted pursuant to Sec. 1053 of the Dodd-Frank Act have been established. Sec. 1053 authorizes the CFPB to use administrative adjudications to ensure or enforce compliance with the provisions of the Act, rules prescribed by the CFPB under the Act, and any other federal law or regulation that the CFPB is authorized to enforce.
Investigations. An interim final rule relating to investigations has been issued to describe the agency's procedures for investigations pursuant to Sec. 1052 of the Dodd-Frank Act. Among other things, the rule sets forth the CFPB's authority to conduct investigations and the rights of persons from whom the agency seeks to compel information in investigations.
State Official Notifications. The Bureau also has established procedures that govern the process, described in Sec. 1042(b) of the Dodd-Frank Act, by which state officials notify the CFPB of actions or proceedings undertaken pursuant to the authority granted in Sec. 1042(a) to enforce the Act or regulations prescribed under the Act. The notices begin at ¶300-015 (IntelliConnect).
Interim Final Rule on Alternative Mortgage Transactions Issued
The Consumer Financial Protection Bureau is issuing an interim final rule establishing Reg. D—Alternative Mortgage Transaction Parity (12 CFR 1004) pursuant to the Alternative Mortgage Transaction Parity Act (AMTPA) and the Truth in Lending Act. According to the Bureau, the interim final rule is necessary to avoid a regulatory gap created by the amendments to the AMTPA in the Dodd-Frank Act. Without an interim final rule that takes immediate effect, state housing creditors would no longer be able to make variable rate mortgage loans and other alternative mortgage transactions pursuant to AMTPA in states that prohibit such transactions, thus denying consumers access to that form of credit. The CFPB notice is at ¶300-013 (IntelliConnect). The CFPB bulletin is at ¶5501 (IntelliConnect).
Guidance on Compliance with Land Sales Act Issued
The Consumer Financial Protection Bureau issued guidance on how to comply with filing and other requirements under the Interstate Land Sales Full Disclosure Act. The ILSFDA, which was administered by the Department of Housing and Urban Development until July 21, 2011, generally requires land developers—individuals who, directly or indirectly, offer to sell or lease, or advertise for sale or lease, any lots in a subdivision—to register subdivisions of 100 or more non-exempt lots by filing a Statement of Record. It also requires developers to provide purchasers with a Property Report disclosing relevant information. The CFPB bulletin is at ¶63-501 (IntelliConnect).
First Suit Naming CFPB Filed in Credit Card Case
First PREMIER Bank and PREIMER Bankcard, LLC (First Premier) have filed suit naming the Consumer Financial Protection Bureau and its director, among others, in a case involving First Premier’s credit card program as it relates to the Federal Reserve Board’s recent amendments to Reg. Z—Truth in Lending (12 CFR 226). The case was filed in the U.S. District Court for South Dakota under the Administrative Procedure Act (5 USC 701-706). Secretary of the Treasury Timothy Geithner is named in the suit as being responsible for implementing the Truth in Lending Act and Reg. Z until a director for the CFPB is appointed. First Premier is seeking a legal declaration that the portion of the Fed’s amendment of 12 CFR 226.52 regulating fees that are paid "prior to account opening" exceeds the Fed’s statutory authority under TILA and the Credit Card Accountability Responsibility and Disclosure Act of 2009, which extends only to fees paid "in the first year during which the account is opened." First Premier also is seeking a permanent injunction to enjoin the effectiveness of the challenged portion of the amendment and preliminary relief postponing the Oct. 1, 2011, effective date of the amendment. This story appears in Report 2, Aug. 15, 2011 (IntelliConnect).
CFPB to Coordinate Consumer Complaints
The Consumer Financial Protection Bureau has announced on its blog that it has entered into an agreement with the Federal Trade Commission allowing the CFPB to access consumer complaints within the FTC’s Consumer Sentinel system. The agreement fulfills a Dodd-Frank Act provision requiring the CFPB to share consumer complaint information with the FTC and other state and federal agencies. In addition, the CFPB intends to share complaint information that the agency receives from consumers with the Sentinel database, subject to privacy protections and access restrictions. The database is used by many governmental and non-governmental agencies, such as state Attorneys General and the National Consumers League, to share complaints and provide information to law enforcement agencies. This story appears in Report 3, Aug. 22, 2011 (IntelliConnect).
CFPB Updates “Owe Before You Know” Program Blogs
The Consumer Protection Financial Bureau has been running a series of posts on its blog, some of which target its efforts to develop consumer-friendly mortgage disclosure forms. In August, the CFPB asked for further consumer input in the development of these forms. The CFPB also included a post on the Office of Servicemember Affairs this month. The Office of Servicemember Affairs is a team of professionals with military experience that is discussing with the CFPB financial issues that impact military families and addressing outstanding issues concerning these families. According to the post, the CFPB’s Consumer Response Center is ready to take military-specific questions and to flag complaints that are coming in from military or veterans’ families. This story appears in Report 2, Aug. 15, 2011 (IntelliConnect).
Product Enhancements
CFPB Watch Provides Commentary on Evolving Changes
The CFPB Watch, authored by the Dewey & LeBoeuf Financial Services Group, provides commentary and analysis on developments relating to consumer financial protection issues involving the regulatory authority of the Consumer Financial Protection Bureau or related topics. The CFPB Watch is periodically included in the report letter.
Federal Banking Law Reporter
FOMC to Keep Interest Rates Low Through Mid-2013
The Federal Open Market Committee demonstrated significant concern about the economic outlook and pledged to hold the federal funds rate near zero "at least" through mid-2013, the first time the Fed's policy-setting committee put a time frame on their duration. Economic growth so far this year has been considerably slower than expected, the FOMC said. The committee cited a deterioration in overall labor market conditions, flat household spending and a depressed housing sector as factors behind the dreary outlook. "The FOMC now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting, and anticipates that the unemployment rate will decline only gradually" from the July level of 9.1 percent, the central bank's statement said. "Moreover, downside risks to the economic outlook have increased." This story is in Issue No. 2430, Aug. 12, 2011 (IntelliConnect, IRN, ip access user).
Fed Assumes Thrift Dividend Review Duties
The Federal Reserve Board has notified savings and loan holding companies that their thrift subsidiaries must provide at least 30 days notice before declaring a dividend. The Fed assumed the duty to review proposed dividends from the Office of Thrift Supervision on July 21, 2011, when the OTS closed. The notice is to be filed with the appropriate Federal Reserve Bank using the form that is attached to the Fed's notice (which still identifies the OTS as the relevant agency). The FRBank that receives the notice will have the authority to permit or deny a proposed dividend, the Fed notice said; however, it must consult with the Fed's staff before denying a notice or asking that a notice be withdrawn. SR 11-13 is at ¶47-678 (IntelliConnect, IRN, ip access user).
Agencies Guide on Federal Debt Risk Weighting
In light of the decision by Standard & Poor's to lower the long-term rating of the U.S. government and federal agencies from AAA to AA+, the Federal Reserve Board, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Federal Housing Finance Agency and National Credit Union Administration have issued guidance on the capital treatment of government securities. The agencies noted that the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies and government-sponsored entities will not change. The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies and government-sponsored entities under other federal banking agency regulations also will be unaffected. PR-133-2011 is at ¶47-181 (IntelliConnect, IRN, ip access user); Advisory Bulletin 2011-AB-02 is at ¶41-076B (IntelliConnect, IRN, ip access user).
S & L Holding Company Regulations Established
The Federal Reserve Board has adopted an interim final rule that implements the transfer of regulations from the Office of Thrift Supervision to the Fed. Under Title III of the Dodd-Frank Act, supervisory and rulemaking authority for SLHCs and their nondepository subsidiaries transferred from the OTS to the Fed on July 21, 2011. The Fed also issued an order delegating to staff and the Federal Reserve Banks the authority to take a number of actions with respect to SLHCs. In general, the intent is to treat SLHCs similarly to bank holding companies. The Fed's notice is at ¶98-092 (IntelliConnect, IRN, ip access user); the order is at ¶98-093 (IntelliConnect, IRN, ip access user).
Consumer Credit Guide
Borrower's Testimony Overcomes Presumption of Rescission Rights Notification
The U.S. Court of Appeals for the Third Circuit recently held that, under the federal Truth in Lending Act (TILA) and in keeping with the Federal Rules of Evidence, a borrower's testimony is sufficient to rebut the TILA presumption that the borrower's signed acknowledgment of a lender's notice of rescission rights indicates receipt of such notification. One of the trial court's jury instructions stated that "in a TILA case, something more than just the testimony of the borrower is needed to rebut the presumption that she received two copies of the Notice." The Third Circuit ruled that the jury instruction was faulty not only because the plain language of TILA did not support the instruction but also because there was nothing to indicate that Congress intended to replace the application of the Federal Rules of Evidence. As a result, since the Third Circuit determined that the trial court's faulty jury instruction was not "harmless error," the federal appellate court vacated the jury verdict and ordered a new trial on the borrower's TILA rescission claim. Cappuccio v. Prime Capital Funding LLC (3dCir) ¶52,377 (IntelliConnect, IRN, ip access user).
Claim of Hidden Finance Charges in Auto Pricing Not Actionable Without Credit Status
The U.S. Court of Appeals for the Second Circuit recently ruled that, although two consumers alleged that a car dealership and an affiliated finance company violated the federal Truth in Lending Act (TILA) by burying hidden finance charges in the pricing of used cars, the consumers' class-action complaint was properly dismissed because the complaint failed to allege purchase-price discrimination based on the consumers' credit status. On behalf of a purported class, the consumers claimed that those who had poor credit were steered toward the older used cars and paid prices that were substantially higher than those listed in a pricing guide. Under the consumers' theory, since a consumer paid more for an older car due to his or her poor credit, the higher prices constituted "hidden finance charges" in violation of TILA. In rejecting the consumers’ contention, the Second Circuit determined that, although the consumers' complaint pled facts indicating that the pricing of the used cars correlated with the age of the cars, the consumers did not adequately plead facts to infer that the consumers' "bad bargain" stemmed from an undisclosed finance charge. In particular, the court noted that the consumers failed to compare the consumer credit transaction in question with a similar cash transaction. Consequently, in emphasizing that "TILA is a disclosure statute, not a fair pricing law," the Second Circuit affirmed the lower court's judgment dismissing the complaint. Poulin v. Balise Auto Sales, Inc. (2dCir) ¶52,373 (IntelliConnect, IRN, ip access user).
Consumer's Failure to Comply with Notification Requirement Nullified FCRA Claim
The U.S. Court of Appeals for the Third Circuit recently decided that even though a consumer complained to a mortgage loan company about information the company furnished to a consumer reporting agency, the consumer's claim against the company, brought under the federal Fair Credit Reporting Act (FCRA), could not stand because the consumer failed to first notify the consumer reporting agency about disputed information in her credit report. The Third Circuit noted that Congress had drafted the FCRA in such a manner as to subject credit reporting agencies to immediate suit by consumers but did not subject "furnishers of information" to the same type of liability. In the Third Circuit's view, requiring furnishers of information to respond directly to consumers rather than to reporting agencies "would upset the balance enacted by the statute." The Third Circuit agreed with the lower court that the consumer, as a private litigant, was first required to provide notice of her dispute to the consumer reporting agency reporting the allegedly erroneous information. As a result, the Third Circuit ruled that the mortgage loan company did not face any liability under the FCRA. SimmsParris v. Countrywide Financial Corp. (3dCir), ¶52,374 (IntelliConnect, IRN, ip access user).
Private Right of Action Permitted Against Collector Under W.V. Consumer Law
In answering a certified question posed to it by the U.S. District Court for the Northern District of West Virginia, the Supreme Court of Appeals of West Virginia recently held that the West Virginia Consumer Credit and Protection Act (West Virginia Act) provides a consumer with a private cause of action against a professional debt collector who has engaged in debt collection practices that are prohibited by the Act. Under the pertinent provision of the West Virginia Act, "if a creditor has violated the provisions of this chapter applying to ... any prohibited debt collection practice, ... the consumer has a cause of action to recover actual damages and in addition a right in an action to recover from the person violating this chapter a penalty in an amount determined by the court not less than one hundred dollars nor more than one thousand dollars." The West Virginia high court determined that, since a professional debt collector qualifies as a "creditor" under the provision, the West Virginia Act provides a consumer with a private right of action against a professional debt collector. Barr v. NCB Management Services, Inc. (WVaSCtApp) ¶52,372 (IntelliConnect, IRN, ip access user).
State Law Update
Alaska: Changes to Alaska’s interest rate statute will allow for a rate of up to 10 percent that may be charged by express agreement on a contract or loan commitment involving an amount of $25,000 or less. An analysis is in Report Letter No. 1123, Aug. 10, 2011 (IntelliConnect, IRN, ip access user).
Illinois: Governor Pat Quinn signed legislation that effectively caps interest rates for active-duty Illinois servicemembers and their families on loans made under the Payday Loan Reform Act. An analysis is in Report Letter No. 1124, Aug. 23, 2011. (IntelliConnect, IRN, ip access user).
Montana: Rulemaking by the Department of Administration, Division of Banking and Financial Institutions, clarifies the legal effect of its approval of a deferred deposit loan agreement form. The newly adopted rule provides that the Department’s approval of a loan agreement form constitutes verification by the Department that the form contains those provisions specifically required by the Montana Deferred Deposit Loan Act and does not contain provisions specifically prohibited by the Act. The rule is at Montana ¶8964 (IntelliConnect, IRN, ip access user).
Rhode Island: Financial institutions legislation primarily amending the state’s Secure and Fair Enforcement Mortgage Licensing Act modifies the examination provisions of the Licensed Activities law. The changes mandate that an examined licensee receive a copy of the written examination report, together with a notice requiring the licensee to file a written response or rebuttal to the comments and recommendations contained in the report within 30 days. The law is at Rhode Island ¶6523 (IntelliConnect, IRN, ip access user).
Texas: Legislation relating to the regulatory authority of the Consumer Credit Commissioner expands the confidentiality provisions governing information obtained by the Commissioner to include information obtained during an examination or investigation. In addition, the confidentiality provisions apply not only to licensees but also to unlicensed persons subject to an examination or investigation. Amendments to the motor vehicle sales law mandate that specified information provided by a retail seller to the Commissioner relating to documentary fees is confidential and not subject to disclosure. The law begins at Texas ¶6391-1 (IntelliConnect, IRN, ip access user).
Smart Charts Highlights
Some of the latest changes reflected in Consumer Credit Smart Charts include:
Secured Transactions Guide
Statutory Compliance Required for Lien Priority
A feed supplier that held a perfected livestock production input lien could not obtain priority over a lender's preexisting security interest because the supplier did not comply with the statute's lien-notification requirements. The supplier had perfected its livestock production lien by filing a UCC financing statement and sending a lien-notification statement to the lender in an unmarked envelope. A perfected agricultural lien on collateral has priority over a conflicting security interest on the same collateral in accordance with the statute creating the agricultural lien. A holder of a livestock production input lien may obtain priority over a lender's preexisting security interest if the supplier notifies the lender by providing the lender with a lien notification statement in an envelope marked "IMPORTANT-LEGAL NOTICE." The court determined that because the envelope was not marked, the supplier did not satisfy the requirements of the law. The supplier's failure to mark the envelope was "not merely a defective attempt to comply with the requirement to place notice on the exterior of the envelope but a complete failure to attempt compliance with this requirement." Minnwest Bank, M.V. v. Arends (MinnCtApp) ¶56,264 (IntelliConnect, IRN, ip access user).
Description of Collateral Insufficient for Sale Proceeds
A security agreement that described the collateral as motor vehicle installment contracts purchased with loan proceeds did not secure every installment contract assigned to the creditor by the debtor, because the creditor could not trace its advances to the purchase of the contracts. In the course of their dealings, the creditor would advance funds to the debtor, and the funds were deposited in a mingled deposit account. The debtor would send the creditor an investor package containing installment contracts, titles to vehicles, purchase agreements and an allonge, which would assign the included installment contracts to the debtor. The court determined that the assignment did not expand the scope of the security agreement to include those contracts not purchased with loan proceeds, stating, "An assignment of an asset as payment, and the pledging or offer of security to be held until a loan is paid are not the same." Because the proceeds were not placed in a separate account and could not be traced, the creditor did not have a valid security interest in all of the assigned contracts. As a result, the creditor was not entitled to the proceeds of the sale of the contracts. In re Inofin, Inc. (Bankr DMass) ¶56,263 (IntelliConnect, IRN, ip access user).
State Law Update
California: California has amended its regulations for special handling fees to create a new separate section for copy fees. The new regulation also clarifies that there is no fee for an uncertified copy of a filed record at the time of filing the record through the California Secretary of State's electronic filing service. The regulations begin at California ¶1431 (IntelliConnect, IRN, ip access user).
Connecticut: The law relating to a release of lien on a motor vehicle after satisfaction of a security interest has been revised to provide that the Commissioner of the Connecticut Department of Motor Vehicle may require that lienholders electronically submit the release. Accordingly, vehicle owners will no longer be required to mail or deliver the release to the department. The law appears at Connecticut ¶1067 (IntelliConnect, IRN, ip access user).
A lienholder seeking to foreclose on a security interest in a vessel must now file with the Connecticut Secretary of State a notice of the vessel lien indicating the date and place of the sale at least 30 days, formerly 60 days, before the sale. If no substitution of bond is made within 30 days of the filing, the lienholder may sell the vessel at public auction, provided that at least seven days prior to the sale, the lienholder publishes the same information as provided in the notice three times in a newspaper of general circulation in the municipality the vessel is located. The law appears at Connecticut ¶1120A (IntelliConnect, IRN, ip access user).
Illinois: Illinois has amended its certificate of title provisions to add that a certificate of title to an "expanded-use antique vehicle" does not need to include an odometer certification. An "expanded-use antique vehicle" is defined as a vehicle that is more than 25 years of age or a bona fide replica thereof. The law appears at Illinois ¶1105A (IntelliConnect, IRN, ip access user).
Nevada: A debtor's tax identification number or Social Security number will no longer be required for an effective UCC financing statement filed in Nebraska. Accordingly, a filing office may not refuse to accept a financing statement that does not contain such information. The law is at Nevada ¶R812 and ¶R826 (IntelliConnect, IRN, ip access user).
Financial Privacy Law Guide
Hospital Cannot Maintain TCPA Action for Robocall Campaign
A hospital could not maintain an action for violations of the Telephone Consumer Protection Act against two unions that employed robocall campaigns to connect residents with the hospital's representatives, a federal district court concluded, because the prerecorded messages were received by local residents, rather than the hospital. Two unions hired a third-party resource to launch a robocall campaign against a hospital to protest its hiring and labor practices. The third party used prerecorded messages created by the unions that allowed recipients to connect directly to the hospital's executives by pressing "1." During the course of one campaign, the hospital's vice president received 536 calls from residents in a 24-hour period. As a result, the calls tied up multiple incoming phone lines. Although the TCPA prohibits prerecorded messages directed at emergency and health care facilities, the hospital itself never received any prerecorded messages—it fielded calls from citizens that were connected by the third party's service. Because the citizens had a choice of whether to connect to the hospital's representatives, there was an intervening act that prevented the hospital from receiving automated calls. Ashland Hospital Corp. v. International Brotherhood of Electrical Workers Local 575 (EDKy) at ¶100-544 (IntelliConnect, IRN, ip access user).
Bank Settles with Massachusetts Attorney General Over Data Breach
Belmont Savings Bank has entered into a settlement with Massachusetts Attorney General Martha Coakley following a data breach in which an unencrypted backup computer tape containing the names, Social Security numbers and account numbers of more than 13,000 Massachusetts residents was lost after a bank employee failed to follow the bank's policies and procedures. The employee left a backup computer tape on a desk rather than storing it in a vault for the night. Surveillance footage showed that the tape was thrown away by the evening cleaning crew. The tape was most likely incinerated by the bank’s waste disposal company, and the bank has no evidence that consumers' personal information had been acquired by an unauthorized person or used for an unauthorized purpose. The settlement provides for a civil penalty of $7,500 as well as injunctive relief to mitigate the risk of future data breaches at the bank. Under the terms of the settlement, Belmont Savings Bank must: ensure the proper transfer and inventory of backup computer tapes containing personal information; store backup computer tapes containing personal information in a secure location; and effectively train the members of its workforce on the policies and procedures with respect to maintaining the security of personal information. This story appears in Issue No. 229, Aug. 17, 2011 (IntelliConnect, IRN, ip access user).
Mobile App Developer Settles COPPA Charges
A developer of mobile applications, including children’s games for the iPhone and iPod touch, has agreed to pay $50,000 to settle Federal Trade Commission charges that it violated the Children’s Online Privacy Protection Act and the FTC’s COPPA Rule. In the first case involving “apps,” the FTC alleged that the developer illegally collected and disclosed personal information from tens of thousands of children under age 13 without their parents’ prior consent. The FTC’s COPPA Rule requires that website operators notify parents and obtain their consent before they collect, use or disclose children’s personal information. The Rule also requires that website operators post a privacy policy that is clear, understandable and complete. The FTC alleged that the developers failed to post a privacy policy and collected and maintained thousands of email addresses from users of the apps without verifiable parental consent in violation of the Rule. This story on United States v. W3 Innovations, LLC (NDCal) appears in Privacy Extra, August 31, 2011 (IntelliConnect, IRN, ip access user).
Individual Retirement Plans Guide
Rollover Waiver Denied for Funds Used for Personal Expenses
A taxpayer was denied a waiver of the 60-day rollover requirement. He withdrew funds from his IRA for use as a short-term interest-free loan to cover personal living expenses due to financial difficulties. The IRS declined the waiver asserting that the taxpayer had not presented any evidence indicating factors that prevented him from rolling over the funds in a timely manner. IRS Letter Ruling 201130014 is at ¶6286 (IntelliConnect, IRN, ip access user).
