- Banks
- Mortgage Bankers
- Insurance Companies
- Investment Advisors
- Broker Dealers
- E-Sign Vendors
- Health Care & Pharmaceuticals
InfoBytes Breakfast – March 16, 2007 – In conjunction with the American Bar Association's Spring Meeting of the Business Law Section, Buckley Kolar LLP will host a Breakfast for InfoBytes subscribers and other friends of the firm on Friday, March 16th from 7:30 AM until 9:00 AM. We appreciate the large and growing readership of InfoBytes and hope that as many of our subscribers as possible will join us to meet the attorneys and staff of Buckley Kolar who bring you InfoBytes each week. The breakfast will be held at the Embassy Suites near the DC Convention Center where the ABA meeting is being held. Click here for more information and to RSVP.
Topics – Covered This Week (Click to View)
FEDERAL ISSUES
Federal Banking Agencies Propose Statement on Subprime Mortgage Lending. Today, the Federal Banking Agencies (the OCC, FRB, FDIC, OTS, and NCUA) jointly issued a Proposed Statement on Subprime Mortgage Lending and request for comment. The Proposed Statement addresses subprime mortgage lending practices, focusing on the adequate disclosure of the risks and consequences associated with certain adjustable rate mortgage (ARM) products. The Proposed Statement warns against, among other things, teaser rates, payment shock, and onerous prepayment penalties. The Proposed Statement also specifies that an institution’s analysis of a borrower’s repayment capacity should include an evaluation of the borrower’s ability to repay the debt by its final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule. The Agencies invite comments on all aspects of the Proposed Statement, particularly whether (i) certain subprime product features are appropriate in all or some situations, (ii) the Proposed Statement would unduly restrict existing subprime borrowers’ ability to refinance their loans, (iii) alternatives exist to eliminate the risk of payment shock, (iv) the principles described should apply beyond the subprime ARM market, and (v) limiting prepayment penalties to the initial fixed-rate period would provide borrowers with enough time to assess and act on their mortgage needs. Comments must be submitted, in the prescribed form within 60 days of its publication in the Federal Register. The Proposed Statement can be found at http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070302/attachment.pdf.
Freddie Mac Tightens Restrictions on Alt Mortgages. On February 27, Freddie Mac announced that, in order to protect it from growing foreclosure risk in the subprime market, it soon will “cease buying subprime mortgages that have a high likelihood of excessive payment shock and possible foreclosure.” Specifically, Freddie intends to, among other things: (i) only purchase adjustable-rate subprime mortgages where the borrowers qualify at the “fully-indexed and fully-amortizing rate,” and (ii) limit the use of low-documentation underwriting for subprime mortgages to help ensure that future borrowers have the income necessary to afford their homes. These new standards will only apply to mortgages originated on or after September 1, 2007. To help provide options to subprime borrowers while reducing the risk of payment shock and foreclosure, Freddie announced it is developing new fixed-rate products, as well as “hybrid ARMs” with reduced adjustable rate margins, a longer fixed rate, and longer reset periods. Also, to improve underwriting, Freddie will require loans to be underwritten to include tax and insurance costs, and will “strongly recommend” the collection of escrows for taxes and insurance. Due to the infrequent use of escrow accounts in the subprime market, and the “significant infrastructure” they necessitate, Freddie stated that “it is impractical to unilaterally mandate [escrow accounts] as a purchase requirement at this time.” For the full press release, see http://www.freddiemac.com/news/archives/corporate/2007/20070227_subprimelending.html.
OTS Issues Guidance on Gift Card Programs. On February 28, the Office of Thrift Supervision (OTS) issued guidance on gift card programs operated by OTS regulated institutions. In light of the growing popularity of gift cards, the OTS intends for the guidance to help thrifts "ensure adequate account administration, marketing, and sound consumer disclosure practices for gift card programs." The guidance instructs thrifts to develop and maintain adequate policies and procedures for the administration of the gift card programs along with a framework to address inherent program risks and to provide adequate information to customers. The announcement and the guidance may be obtained at http://www.ots.treas.gov/docs/r.cfm?777012.html and http://www.ots.treas.gov/docs/r.cfm?25254.pdf.
Federal Reserve Board Grants Exemption From Section 23A and Reg. W For Transaction to Affiliate Supported By Borrowed Securities. The Federal Reserve Board (the "Board") released an interpretive letter permitting Bank of America, N.A. (Bank) to engage in certain securities lending transactions with its securities broker-dealer affiliate (Affiliate) as a transaction exempt from the requirements of Section 23A of the Federal Reserve Act and the Board’s Regulation W, which limit, among other things, the amount of "covered transactions" that may be made between a bank and any single affiliate and between a bank and all of its affiliates together. In the proposed transaction as described in the letter, Bank would lend to Affiliate certain securities that have been pledged to Bank as collateral by unaffiliated borrowers. In addition, Bank, as agent for an unaffiliated trust or custody customer, would lend to Affiliate securities in the customer’s portfolio and indemnify the customer for any losses incurred as a result of a failure by Affiliate to return the borrowed securities. In both of these transactions, Affiliate could use the securities for its own purposes, but would be required to return the securities on demand by the Bank (or Bank’s customer in cases where Bank is acting as agent). In considering these arrangements, the Board held that each would be considered "covered transactions" subject to Regulation W. Having ruled these to be “covered transactions,” the Board then granted Bank’s request to exempt the transaction from Section 23A and Regulation W for the purpose of allowing Bank to lend securities to Affiliate on terms and conditions that are standard in the industry (and, according to Bank, are the same terms and conditions that Bank would, in good faith, lend securities to unaffiliated broker-dealers). This limited exemption is permitted by the Board only to the extent that the total value of the securities lent does not exceed a certain amount. In supporting its position, the Board noted that the risk of loss to Bank is not substantial, and agreed that the exemption would increase the ability of customers to diversify their portfolios and increase competition in the market. To view the full text of the letter, please see http://www.federalreserve.gov/boarddocs/legalint/FederalReserveAct/2007/.
Frank Introduces Bill to Give Shareholders Vote on Executive Pay. On March 1, Rep. Barney Frank (D – Mass.), chairman of the House Financial Services Committee, introduced a bill (H.R. 1257) to grant shareholders more voice in executive compensation. The new legislation will require public companies to include a non-binding advisory shareholder vote in their annual proxies. The proposed legislation also contains a separate advisory vote on “golden parachutes” offered to executives while negotiations to buy or sell the public company are ongoing. The bill builds on the executive compensation disclosure rules promulgated by the SEC last year. A hearing on the legislation in the House Financial Services Committee is set for March 8, 2007. Text of the bill, not yet on the Library of Congress’ website, can be found at http://www.house.gov/apps/list/press/financialsvcs_dem/shareholder.pdf.
FDIC Reports Bank Loan Growth Threatened by Housing Trends. On February 27, the Federal Deposit Insurance Corporation (FDIC) reported in its Winter 2006 FDIC Outlook that the recent slowdown in residential construction could lessen the demand for mortgages and construction loans. The growth of these sectors in the past has been an important factor in loan growth for banks. The report also suggests, however, that the ongoing expansion in service industries appears to be offsetting the housing slowdown resulting in a sixth consecutive year of record earnings for FDIC-insured banks. For the official FDIC press release, see http://www.fdic.gov/news/news/press/2007/pr07016.html.
COURTS
Court Finds Personal Use of Business Credit Gives Rise to FDCPA Claims. A federal district court has denied a motion to dismiss a plaintiff’s Fair Debt Collection Practices Act (FDCPA) claims, finding that personal use of a corporate credit card, in violation of the card agreement, is sufficient to render the FDCPA applicable. Perk v. Worden, No. 4:06cv127, 2007 WL 219997 (E.D. Va. Jan. 24, 2007). In this case, the plaintiff, through her business, received a corporate credit card, which she instead used for personal, family, and household purposes. The plaintiff subsequently defaulted, and Worden, the defendant, attempted to collect on the debt. The plaintiff alleged violations of the FDCPA in that Worden (i) knowingly filed suit in an improper venue, (ii) failed to provide her notice of debtor’s rights, and (iii) harassed and made misrepresentations to plaintiff. Worden moved to dismiss, claiming that the debt was commercial, and therefore the FDCPA was inapplicable. The court denied the motion, claiming that the FDCPA characterizes debts in terms of end uses, despite any preexisting agreement as to the use of the credit for business purposes. In relevant part, the court said: “Plaintiff may well have violated the terms of the corporate credit card agreement by incurring personal debt with it, but that fact, even if true, cannot change the character of the debt and take it out of the FDCPA’s jurisdiction.” For a copy of the opinion, please contact .
Mortgage Servicer Violated Automatic Stay by Increasing Debtors’ Monthly Escrow Payment to Recover Shortage. On January 26, a federal bankruptcy court in In re Campbell, No. 06-31321, 06-3476, 2007 WL 309944 (Bankr. S.D. Tex. Jan. 26, 2007), held that a mortgage servicer willfully violated the automatic stay in a Chapter 13 bankruptcy proceeding by increasing the debtors’ monthly mortgage escrow payment in order to collect amounts related to the debtors’ property taxes. The servicer did not dispute that it increased the monthly payment to recover an escrow shortage; rather, it argued that it did not violate the automatic stay because the debtors’ property taxes became due after the debtors filed their bankruptcy petition. The court, however, found that the servicer’s claims against the debtors for failure to pay the escrow amounts arose “pre-petition,” rather than at the time when the servicer paid the property taxes. The court also noted that, although the security instrument and RESPA authorized the servicer to recover past-due escrow payments during the ensuing twelve-month period outside of bankruptcy, this authority was “of limited consequence upon the Debtors’ bankruptcy filing.” For a copy of the opinion, please contact .
STATE ISSUES
CSBS and AARMR State Legislative Principles for Universal Mortgage Licensing. On February 20, the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) release six principles (which include draft legislative language) to guide state legislatures in crafting laws to participate in the Residential Mortgage Licensing System (RMLS). The RMLS is hoped, when it becomes operational, to serve as a nationwide mortgage licensing system (last reported in the October 13th, 2006 issue of InfoBytes). The “principals” developed by CSBS and AARMR are as follows: (i) the RMLS does not supersede state law in determining who is granted licensure; (ii) information in the RMLS belongs to the submitting state agency and is governed by the source state’s privacy laws; (iii) the RMLS will maintain a written data breach notification policy consistent with most states’ laws; (iv) the RMLS will be owned and maintained by the State Regulatory Registry LLC (SRR); (v) processing fees will be determined by SRR and will not be negotiated on a state-by-state basis; and (vi) the CSBS and AARMR will continue to, in parallel with the RMLS, pursue standard regulatory and legal standards in all participating states. To view the statement of principles in full, see http://www.csbs.org/AM/Template.cfm?Section=Press_Releases&Template=/ CM/ContentDisplay.cfm&ContentID=10055.
Massachusetts Proposes Data Breach Bill that would Make Retailers Liable for Banks’ Costs. The Massachusetts legislature recently introduced a bill (H. 213) that, if enacted, would require companies, in the event of a data breach, to be liable to banks for the costs of any “reasonable actions undertaken by the bank” to protect the personal information of their customers and their accounts. These would include the costs associated with stop payment orders, reissuing credit cards, closing and/or reopening bank accounts, and refunds issued to bank customers. This provision, the first of its kind in the nation, would impose significant liability on retailers that suffer a data security breach and provide relief to Massachusetts financial institutions affected by other companies’ data breaches. This bill would also override the current judicial trend of denying relief to banks affected by a retailer’s data breach (see the May 5th, 2006 issue of InfoBytes). For a copy of the Massachusetts bill, please see http://www.mass.gov/legis/bills/house/185/ht00pdf/ht00213.pdf.
Colorado Governor to Consider Two Bills Prohibiting Commercial Entities from Owning and Operating Banks. On February 20, the Colorado legislature gave final approval to a bill that prohibits commercial entities from owning and operating banks (H.B. 1175). The bill is expected to be signed by Governor Bill Ritter along with S.B. 40, a bill that prohibits a financial institution from establishing a location within 1.5 miles of “an affiliate that engages in commercial activities” (reported in the February 2nd, 2007 edition of InfoBytes). Both bills are designed to ensure that businesses like Wal-Mart and Home Depot will not be able to open affiliated banks in their stores in Colorado. To view H.B. 1175, please visit http://www.leg.state.co.us/clics/clics2007a/csl.nsf/fsbillcont/ E1BAD9BAEB88DDC9872572600058E994?Open&file=1175_enr.pdf. To view S.B. 40, please visit http://www.leg.state.co.us/clics/clics2007a/csl.nsf/fsbillcont/ D768EF9F58392F1187257251007B27B6?Open&file=040_enr.pdf.
FIRM NEWS
Joseph Lynyak III and Clinton Rockwell recently completed a survey of 2006 California legislative developments affecting financial service companies. This resource is offered free of charge on Buckley Kolar’s website at http://www.buckleykolar.com/publications/documents/2006CALegislativeUpdate.pdf.
On Thursday, April 19, 2007, John Kromer and Clinton Rockwell will be speaking on a Pratt Audio Conference Series regarding non-traditional mortgage loans and federal and state agency guidance.
Lee Negroni attended the Third Annual International Conference of the Information Technology Law Association in Bangalore, India this month. She and Buckley Kolar partner John Kromer have been assisting clients with legal issues in the area of business process outsourcing (BPO) for U.S. and India-based financial institution clients. Lee’s "Blog from Bangalore," composed over the duration of her trip, is available on the Buckley Kolar website in the News section.
Federal Banking Agencies Propose Statement on Subprime Mortgage Lending. Today, the Federal Banking Agencies (the OCC, FRB, FDIC, OTS, and NCUA) jointly issued a Proposed Statement on Subprime Mortgage Lending and request for comment. The Proposed Statement addresses subprime mortgage lending practices, focusing on the adequate disclosure of the risks and consequences associated with certain adjustable rate mortgage (ARM) products. The Proposed Statement warns against, among other things, teaser rates, payment shock, and onerous prepayment penalties. The Proposed Statement also specifies that an institution’s analysis of a borrower’s repayment capacity should include an evaluation of the borrower’s ability to repay the debt by its final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule. The Agencies invite comments on all aspects of the Proposed Statement, particularly whether (i) certain subprime product features are appropriate in all or some situations, (ii) the Proposed Statement would unduly restrict existing subprime borrowers’ ability to refinance their loans, (iii) alternatives exist to eliminate the risk of payment shock, (iv) the principles described should apply beyond the subprime ARM market, and (v) limiting prepayment penalties to the initial fixed-rate period would provide borrowers with enough time to assess and act on their mortgage needs. Comments must be submitted, in the prescribed form within 60 days of its publication in the Federal Register. The Proposed Statement can be found at http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070302/attachment.pdf.
Freddie Mac Tightens Restrictions on Alt Mortgages. On February 27, Freddie Mac announced that, in order to protect it from growing foreclosure risk in the subprime market, it soon will “cease buying subprime mortgages that have a high likelihood of excessive payment shock and possible foreclosure.” Specifically, Freddie intends to, among other things: (i) only purchase adjustable-rate subprime mortgages where the borrowers qualify at the “fully-indexed and fully-amortizing rate,” and (ii) limit the use of low-documentation underwriting for subprime mortgages to help ensure that future borrowers have the income necessary to afford their homes. These new standards will only apply to mortgages originated on or after September 1, 2007. To help provide options to subprime borrowers while reducing the risk of payment shock and foreclosure, Freddie announced it is developing new fixed-rate products, as well as “hybrid ARMs” with reduced adjustable rate margins, a longer fixed rate, and longer reset periods. Also, to improve underwriting, Freddie will require loans to be underwritten to include tax and insurance costs, and will “strongly recommend” the collection of escrows for taxes and insurance. Due to the infrequent use of escrow accounts in the subprime market, and the “significant infrastructure” they necessitate, Freddie stated that “it is impractical to unilaterally mandate [escrow accounts] as a purchase requirement at this time.” For the full press release, see http://www.freddiemac.com/news/archives/corporate/2007/20070227_subprimelending.html.
Mortgage Servicer Violated Automatic Stay by Increasing Debtors’ Monthly Escrow Payment to Recover Shortage. On January 26, a federal bankruptcy court in In re Campbell, No. 06-31321, 06-3476, 2007 WL 309944 (Bankr. S.D. Tex. Jan. 26, 2007), held that a mortgage servicer willfully violated the automatic stay in a Chapter 13 bankruptcy proceeding by increasing the debtors’ monthly mortgage escrow payment in order to collect amounts related to the debtors’ property taxes. The servicer did not dispute that it increased the monthly payment to recover an escrow shortage; rather, it argued that it did not violate the automatic stay because the debtors’ property taxes became due after the debtors filed their bankruptcy petition. The court, however, found that the servicer’s claims against the debtors for failure to pay the escrow amounts arose “pre-petition,” rather than at the time when the servicer paid the property taxes. The court also noted that, although the security instrument and RESPA authorized the servicer to recover past-due escrow payments during the ensuing twelve-month period outside of bankruptcy, this authority was “of limited consequence upon the Debtors’ bankruptcy filing.” For a copy of the opinion, please contact .
CSBS and AARMR State Legislative Principles for Universal Mortgage Licensing. On February 20, the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) release six principles (which include draft legislative language) to guide state legislatures in crafting laws to participate in the Residential Mortgage Licensing System (RMLS). The RMLS is hoped, when it becomes operational, to serve as a nationwide mortgage licensing system (last reported in the October 13th, 2006 issue of InfoBytes). The “principals” developed by CSBS and AARMR are as follows: (i) the RMLS does not supersede state law in determining who is granted licensure; (ii) information in the RMLS belongs to the submitting state agency and is governed by the source state’s privacy laws; (iii) the RMLS will maintain a written data breach notification policy consistent with most states’ laws; (iv) the RMLS will be owned and maintained by the State Regulatory Registry LLC (SRR); (v) processing fees will be determined by SRR and will not be negotiated on a state-by-state basis; and (vi) the CSBS and AARMR will continue to, in parallel with the RMLS, pursue standard regulatory and legal standards in all participating states. To view the statement of principles in full, see http://www.csbs.org/AM/Template.cfm?Section=Press_Releases&Template=/ CM/ContentDisplay.cfm&ContentID=10055.
FDIC Reports Bank Loan Growth Threatened by Housing Trends. On February 27, the Federal Deposit Insurance Corporation (FDIC) reported in its Winter 2006 FDIC Outlook that the recent slowdown in residential construction could lessen the demand for mortgages and construction loans. The growth of these sectors in the past has been an important factor in loan growth for banks. The report also suggests, however, that the ongoing expansion in service industries appears to be offsetting the housing slowdown resulting in a sixth consecutive year of record earnings for FDIC-insured banks. For the official FDIC press release, see http://www.fdic.gov/news/news/press/2007/pr07016.html.
Federal Banking Agencies Propose Statement on Subprime Mortgage Lending. Today, the Federal Banking Agencies (the OCC, FRB, FDIC, OTS, and NCUA) jointly issued a Proposed Statement on Subprime Mortgage Lending and request for comment. The Proposed Statement addresses subprime mortgage lending practices, focusing on the adequate disclosure of the risks and consequences associated with certain adjustable rate mortgage (ARM) products. The Proposed Statement warns against, among other things, teaser rates, payment shock, and onerous prepayment penalties. The Proposed Statement also specifies that an institution’s analysis of a borrower’s repayment capacity should include an evaluation of the borrower’s ability to repay the debt by its final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule. The Agencies invite comments on all aspects of the Proposed Statement, particularly whether (i) certain subprime product features are appropriate in all or some situations, (ii) the Proposed Statement would unduly restrict existing subprime borrowers’ ability to refinance their loans, (iii) alternatives exist to eliminate the risk of payment shock, (iv) the principles described should apply beyond the subprime ARM market, and (v) limiting prepayment penalties to the initial fixed-rate period would provide borrowers with enough time to assess and act on their mortgage needs. Comments must be submitted, in the prescribed form within 60 days of its publication in the Federal Register. The Proposed Statement can be found at http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070302/attachment.pdf.
OTS Issues Guidance on Gift Card Programs. On February 28, the Office of Thrift Supervision (OTS) issued guidance on gift card programs operated by OTS regulated institutions. In light of the growing popularity of gift cards, the OTS intends for the guidance to help thrifts "ensure adequate account administration, marketing, and sound consumer disclosure practices for gift card programs." The guidance instructs thrifts to develop and maintain adequate policies and procedures for the administration of the gift card programs along with a framework to address inherent program risks and to provide adequate information to customers. The announcement and the guidance may be obtained at http://www.ots.treas.gov/docs/r.cfm?777012.html and http://www.ots.treas.gov/docs/r.cfm?25254.pdf.
Federal Reserve Board Grants Exemption From Section 23A and Reg. W For Transaction to Affiliate Supported By Borrowed Securities. The Federal Reserve Board (the "Board") released an interpretive letter permitting Bank of America, N.A. (Bank) to engage in certain securities lending transactions with its securities broker-dealer affiliate (Affiliate) as a transaction exempt from the requirements of Section 23A of the Federal Reserve Act and the Board’s Regulation W, which limit, among other things, the amount of "covered transactions" that may be made between a bank and any single affiliate and between a bank and all of its affiliates together. In the proposed transaction as described in the letter, Bank would lend to Affiliate certain securities that have been pledged to Bank as collateral by unaffiliated borrowers. In addition, Bank, as agent for an unaffiliated trust or custody customer, would lend to Affiliate securities in the customer’s portfolio and indemnify the customer for any losses incurred as a result of a failure by Affiliate to return the borrowed securities. In both of these transactions, Affiliate could use the securities for its own purposes, but would be required to return the securities on demand by the Bank (or Bank’s customer in cases where Bank is acting as agent). In considering these arrangements, the Board held that each would be considered "covered transactions" subject to Regulation W. Having ruled these to be “covered transactions,” the Board then granted Bank’s request to exempt the transaction from Section 23A and Regulation W for the purpose of allowing Bank to lend securities to Affiliate on terms and conditions that are standard in the industry (and, according to Bank, are the same terms and conditions that Bank would, in good faith, lend securities to unaffiliated broker-dealers). This limited exemption is permitted by the Board only to the extent that the total value of the securities lent does not exceed a certain amount. In supporting its position, the Board noted that the risk of loss to Bank is not substantial, and agreed that the exemption would increase the ability of customers to diversify their portfolios and increase competition in the market. To view the full text of the letter, please see http://www.federalreserve.gov/boarddocs/legalint/FederalReserveAct/2007/.
Massachusetts Proposes Data Breach Bill that would Make Retailers Liable for Banks’ Costs. The Massachusetts legislature recently introduced a bill (H. 213) that, if enacted, would require companies, in the event of a data breach, to be liable to banks for the costs of any “reasonable actions undertaken by the bank” to protect the personal information of their customers and their accounts. These would include the costs associated with stop payment orders, reissuing credit cards, closing and/or reopening bank accounts, and refunds issued to bank customers. This provision, the first of its kind in the nation, would impose significant liability on retailers that suffer a data security breach and provide relief to Massachusetts financial institutions affected by other companies’ data breaches. This bill would also override the current judicial trend of denying relief to banks affected by a retailer’s data breach (see the May 5th, 2006 issue of InfoBytes). For a copy of the Massachusetts bill, please see http://www.mass.gov/legis/bills/house/185/ht00pdf/ht00213.pdf.
Colorado Governor to Consider Two Bills Prohibiting Commercial Entities from Owning and Operating Banks. On February 20, the Colorado legislature gave final approval to a bill that prohibits commercial entities from owning and operating banks (H.B. 1175). The bill is expected to be signed by Governor Bill Ritter along with S.B. 40, a bill that prohibits a financial institution from establishing a location within 1.5 miles of “an affiliate that engages in commercial activities” (reported in the February 2nd, 2007 edition of InfoBytes). Both bills are designed to ensure that businesses like Wal-Mart and Home Depot will not be able to open affiliated banks in their stores in Colorado. To view H.B. 1175, please visit http://www.leg.state.co.us/clics/clics2007a/csl.nsf/fsbillcont/ E1BAD9BAEB88DDC9872572600058E994?Open&file=1175_enr.pdf. To view S.B. 40, please visit http://www.leg.state.co.us/clics/clics2007a/csl.nsf/fsbillcont/ D768EF9F58392F1187257251007B27B6?Open&file=040_enr.pdf.
FDIC Reports Bank Loan Growth Threatened by Housing Trends. On February 27, the Federal Deposit Insurance Corporation (FDIC) reported in its Winter 2006 FDIC Outlook that the recent slowdown in residential construction could lessen the demand for mortgages and construction loans. The growth of these sectors in the past has been an important factor in loan growth for banks. The report also suggests, however, that the ongoing expansion in service industries appears to be offsetting the housing slowdown resulting in a sixth consecutive year of record earnings for FDIC-insured banks. For the official FDIC press release, see http://www.fdic.gov/news/news/press/2007/pr07016.html.
Colorado Governor to Consider Two Bills Prohibiting Commercial Entities from Owning and Operating Banks. On February 20, the Colorado legislature gave final approval to a bill that prohibits commercial entities from owning and operating banks (H.B. 1175). The bill is expected to be signed by Governor Bill Ritter along with S.B. 40, a bill that prohibits a financial institution from establishing a location within 1.5 miles of “an affiliate that engages in commercial activities” (reported in the February 2nd, 2007 edition of InfoBytes). Both bills are designed to ensure that businesses like Wal-Mart and Home Depot will not be able to open affiliated banks in their stores in Colorado. To view H.B. 1175, please visit http://www.leg.state.co.us/clics/clics2007a/csl.nsf/fsbillcont/ E1BAD9BAEB88DDC9872572600058E994?Open&file=1175_enr.pdf. To view S.B. 40, please visit http://www.leg.state.co.us/clics/clics2007a/csl.nsf/fsbillcont/ D768EF9F58392F1187257251007B27B6?Open&file=040_enr.pdf.
Massachusetts Proposes Data Breach Bill that would Make Retailers Liable for Banks’ Costs. The Massachusetts legislature recently introduced a bill (H. 213) that, if enacted, would require companies, in the event of a data breach, to be liable to banks for the costs of any “reasonable actions undertaken by the bank” to protect the personal information of their customers and their accounts. These would include the costs associated with stop payment orders, reissuing credit cards, closing and/or reopening bank accounts, and refunds issued to bank customers. This provision, the first of its kind in the nation, would impose significant liability on retailers that suffer a data security breach and provide relief to Massachusetts financial institutions affected by other companies’ data breaches. This bill would also override the current judicial trend of denying relief to banks affected by a retailer’s data breach (see the May 5th, 2006 issue of InfoBytes). For a copy of the Massachusetts bill, please see http://www.mass.gov/legis/bills/house/185/ht00pdf/ht00213.pdf.
Court Finds Personal Use of Business Credit Gives Rise to FDCPA Claims. A federal district court has denied a motion to dismiss a plaintiff’s Fair Debt Collection Practices Act (FDCPA) claims, finding that personal use of a corporate credit card, in violation of the card agreement, is sufficient to render the FDCPA applicable. Perk v. Worden, No. 4:06cv127, 2007 WL 219997 (E.D. Va. Jan. 24, 2007). In this case, the plaintiff, through her business, received a corporate credit card, which she instead used for personal, family, and household purposes. The plaintiff subsequently defaulted, and Worden, the defendant, attempted to collect on the debt. The plaintiff alleged violations of the FDCPA in that Worden (i) knowingly filed suit in an improper venue, (ii) failed to provide her notice of debtor’s rights, and (iii) harassed and made misrepresentations to plaintiff. Worden moved to dismiss, claiming that the debt was commercial, and therefore the FDCPA was inapplicable. The court denied the motion, claiming that the FDCPA characterizes debts in terms of end uses, despite any preexisting agreement as to the use of the credit for business purposes. In relevant part, the court said: “Plaintiff may well have violated the terms of the corporate credit card agreement by incurring personal debt with it, but that fact, even if true, cannot change the character of the debt and take it out of the FDCPA’s jurisdiction.” For a copy of the opinion, please contact .
Mortgage Servicer Violated Automatic Stay by Increasing Debtors’ Monthly Escrow Payment to Recover Shortage. On January 26, a federal bankruptcy court in In re Campbell, No. 06-31321, 06-3476, 2007 WL 309944 (Bankr. S.D. Tex. Jan. 26, 2007), held that a mortgage servicer willfully violated the automatic stay in a Chapter 13 bankruptcy proceeding by increasing the debtors’ monthly mortgage escrow payment in order to collect amounts related to the debtors’ property taxes. The servicer did not dispute that it increased the monthly payment to recover an escrow shortage; rather, it argued that it did not violate the automatic stay because the debtors’ property taxes became due after the debtors filed their bankruptcy petition. The court, however, found that the servicer’s claims against the debtors for failure to pay the escrow amounts arose “pre-petition,” rather than at the time when the servicer paid the property taxes. The court also noted that, although the security instrument and RESPA authorized the servicer to recover past-due escrow payments during the ensuing twelve-month period outside of bankruptcy, this authority was “of limited consequence upon the Debtors’ bankruptcy filing.” For a copy of the opinion, please contact .
Federal Reserve Board Grants Exemption From Section 23A and Reg. W For Transaction to Affiliate Supported By Borrowed Securities. The Federal Reserve Board (the "Board") released an interpretive letter permitting Bank of America, N.A. (Bank) to engage in certain securities lending transactions with its securities broker-dealer affiliate (Affiliate) as a transaction exempt from the requirements of Section 23A of the Federal Reserve Act and the Board’s Regulation W, which limit, among other things, the amount of "covered transactions" that may be made between a bank and any single affiliate and between a bank and all of its affiliates together. In the proposed transaction as described in the letter, Bank would lend to Affiliate certain securities that have been pledged to Bank as collateral by unaffiliated borrowers. In addition, Bank, as agent for an unaffiliated trust or custody customer, would lend to Affiliate securities in the customer’s portfolio and indemnify the customer for any losses incurred as a result of a failure by Affiliate to return the borrowed securities. In both of these transactions, Affiliate could use the securities for its own purposes, but would be required to return the securities on demand by the Bank (or Bank’s customer in cases where Bank is acting as agent). In considering these arrangements, the Board held that each would be considered "covered transactions" subject to Regulation W. Having ruled these to be “covered transactions,” the Board then granted Bank’s request to exempt the transaction from Section 23A and Regulation W for the purpose of allowing Bank to lend securities to Affiliate on terms and conditions that are standard in the industry (and, according to Bank, are the same terms and conditions that Bank would, in good faith, lend securities to unaffiliated broker-dealers). This limited exemption is permitted by the Board only to the extent that the total value of the securities lent does not exceed a certain amount. In supporting its position, the Board noted that the risk of loss to Bank is not substantial, and agreed that the exemption would increase the ability of customers to diversify their portfolios and increase competition in the market. To view the full text of the letter, please see http://www.federalreserve.gov/boarddocs/legalint/FederalReserveAct/2007/.
Frank Introduces Bill to Give Shareholders Vote on Executive Pay. On March 1, Rep. Barney Frank (D – Mass.), chairman of the House Financial Services Committee, introduced a bill (H.R. 1257) to grant shareholders more voice in executive compensation. The new legislation will require public companies to include a non-binding advisory shareholder vote in their annual proxies. The proposed legislation also contains a separate advisory vote on “golden parachutes” offered to executives while negotiations to buy or sell the public company are ongoing. The bill builds on the executive compensation disclosure rules promulgated by the SEC last year. A hearing on the legislation in the House Financial Services Committee is set for March 8, 2007. Text of the bill, not yet on the Library of Congress’ website, can be found at http://www.house.gov/apps/list/press/financialsvcs_dem/shareholder.pdf.
Massachusetts Proposes Data Breach Bill that would Make Retailers Liable for Banks’ Costs. The Massachusetts legislature recently introduced a bill (H. 213) that, if enacted, would require companies, in the event of a data breach, to be liable to banks for the costs of any “reasonable actions undertaken by the bank” to protect the personal information of their customers and their accounts. These would include the costs associated with stop payment orders, reissuing credit cards, closing and/or reopening bank accounts, and refunds issued to bank customers. This provision, the first of its kind in the nation, would impose significant liability on retailers that suffer a data security breach and provide relief to Massachusetts financial institutions affected by other companies’ data breaches. This bill would also override the current judicial trend of denying relief to banks affected by a retailer’s data breach (see the May 5th, 2006 issue of InfoBytes). For a copy of the Massachusetts bill, please see http://www.mass.gov/legis/bills/house/185/ht00pdf/ht00213.pdf.
Court Finds Personal Use of Business Credit Gives Rise to FDCPA Claims. A federal district court has denied a motion to dismiss a plaintiff’s Fair Debt Collection Practices Act (FDCPA) claims, finding that personal use of a corporate credit card, in violation of the card agreement, is sufficient to render the FDCPA applicable. Perk v. Worden, No. 4:06cv127, 2007 WL 219997 (E.D. Va. Jan. 24, 2007). In this case, the plaintiff, through her business, received a corporate credit card, which she instead used for personal, family, and household purposes. The plaintiff subsequently defaulted, and Worden, the defendant, attempted to collect on the debt. The plaintiff alleged violations of the FDCPA in that Worden (i) knowingly filed suit in an improper venue, (ii) failed to provide her notice of debtor’s rights, and (iii) harassed and made misrepresentations to plaintiff. Worden moved to dismiss, claiming that the debt was commercial, and therefore the FDCPA was inapplicable. The court denied the motion, claiming that the FDCPA characterizes debts in terms of end uses, despite any preexisting agreement as to the use of the credit for business purposes. In relevant part, the court said: “Plaintiff may well have violated the terms of the corporate credit card agreement by incurring personal debt with it, but that fact, even if true, cannot change the character of the debt and take it out of the FDCPA’s jurisdiction.” For a copy of the opinion, please contact .
© Buckley Kolar, LLP 2005. INFOBYTES is not intended as legal advice to any person or firm. It is provided as a client service and information contained herein is drawn from various public sources, including other publications.