June 2007

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.

If you have questions or comments concerning the information provided below, please contact the Banking and Finance Update editor at Serena.Lynn@ wolterskluwer.com.

Federal Banking Law Reporter

Fed Seeks Better Credit Card Disclosures
The Federal Reserve Board has proposed amendments to Reg. Z—Truth in Lending (12 CFR 226) that are intended to improve the effectiveness of the disclosures consumers receive in connection with credit card accounts and other revolving credit plans by ensuring that information is provided in a timely manner and in a form that is readily understandable. The proposed amendments principally focus on the rules for open-end credit accounts that are not home-secured—chiefly general-purpose and retail credit card plans. The proposal would require disclosures accompanying credit card applications and solicitations to highlight fees and the reasons penalty rates might be applied, such as for paying late. Creditors would be required to summarize key terms at account opening and when terms are changed. Periodic statements would be required to break out costs for interest and fees. The proposal would also expand the circumstances under which consumers receive written notice of changes in the terms applicable to their accounts, including requiring an advance notice before a penalty is required, and increase the amount of time these notices must be sent before the change becomes effective. The proposal would increase the time period to 45 days. In order to promptly provide subscribers with this proposal, which ran almost 500 pages as drafted, the document was processed and published from the agency’s release, making it available prior to Federal Register publication. It is reported at ¶94-900 (ip access user).

GSE Reform Bill Clears House
The House of Representatives has passed the Federal Housing Finance Reform Act of 2007, H.R. 1427, which is intended to overhaul the regulatory oversight of the government sponsored enterprises (GSEs)—Fannie Mae, Freddie Mac and the Federal Home Loan Banks—and create a new, independent regulator with broad powers similar to those of current banking regulators. The bill also would create an off-budget, non-taxpayer financed affordable housing fund that would be expected to contribute hundreds of millions of dollars for the construction, maintenance and preservation of affordable housing. The first year of the fund would be dedicated to the hurricane-damaged areas of the Gulf Coast. This story appears in Report Letter No. 2219, May 31, 2007.

House Passes Industrial Bank Holding Company Act
The House of Representatives has passed H.R. 698, the Industrial Bank Holding Company Act of 2007, by a vote of 371 to 16. The bill seeks to restore the separation between banking and commerce and prevent branch banking by some commercially-owned Industrial Loan Companies (ILCs), while also strengthening the supervisory authorities of the Federal Deposit Insurance Corp. as a holding company regulator. H.R. 698 would prohibit new commercially-owned ILCs effective Jan. 29, 2007, and would restrict expanded business plans and branching across state lines for some ILCs already owned by commercial firms. It also would enhance the FDIC's supervisory authority at the consolidated holding company level. This story appears in Report Letter No. 2218, May 24, 2007.

Federal Reserve Plans Hearing on Abusive Lending Practices
The Federal Reserve Board plans to hold a June 14 hearing to consider ways it can use its rulemaking authority to curb abusive lending practices in the home mortgage market, including the subprime sector. Fed Governor Randall S. Kroszner, who will chair the hearing, said "the goal is to find ways to promote sustainable homeownership through responsible lending, informed consumer choice, and effective guidance and regulation." Kroszner added that the Fed wants to encourage, not limit, mortgage lending by responsible lenders. "So it is crucial that any actions the Board might take are well calibrated and do not have unintended consequences," he said. This story appears in Report Letter No. 2216, May 10, 2007.

Senators Seek to Help Homeowners in Danger of Foreclosure
Senate Democrats unveiled a plan on May 3 they hope will stem the tide of foreclosures by boosting funds to nonprofit housing agencies that help borrowers refinance their subprime mortgages. In addition, lawmakers have proposed legislation to upgrade the standards used by mortgage brokers and loan originators when they make new loans. Sen. Charles Schumer, D-N.Y., who chairs the Joint Economic Committee, wants to provide $300 million in federal funds via the Department of Housing and Urban Development to community-based non-profit groups that specialize in foreclosure prevention. According to a recent Committee report, an increase in subprime mortgage delinquencies in the early months of 2007 indicates that more foreclosures are likely to occur during the next several years. Nearly two million homeowners with adjustable-rate mortgages will experience payment shocks as their loans reset in a weakening housing market, a harbinger of more foreclosures to come, Schumer said. This story appears in Report Letter No. 2216, May 10, 2007.

Fed Proposes Electronic Consumer Disclosure Rules
In order to clarify the requirements for providing consumer disclosures in electronic form, the Federal Reserve Board has proposed amendments to five consumer financial services and fair lending regulations: Reg. B—Equal Credit Opportunity (12 CFR 202); Reg. E—Electronic fund Transfers (12 CFR 205); Reg. M—Consumer Leasing (12 CFR 213); Reg. Z—Truth in Lending (12 CFR 226); and Reg. DD—Truth in Savings (12 CFR 230). The proposals would simplify the rules and implement provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 that mandate certain disclosures for online credit card solicitations. The Fed notices are reported beginning at ¶94-878 (ip access user).

Consumer Credit Guide

TILA Claims for Rescission of Home Mortgages Dismissed
Although notices of rescission rights given by a mortgage company to borrowers who sought to refinance their home mortgages were not "perfect," the mortgage company still satisfied the disclosure requirements of the federal Truth in Lending Act (TILA) and Federal Reserve Board Regulation Z. The borrowers claimed that the mortgage company did not comply with TILA when it provided them with a notice of rescission rights based on Form H-8 because Form H-8 is designed for general transactions, whereas Form H-9 is designed for same-lender refinancings and should have been provided instead. In addition, the borrowers alleged that the form they received was misleading because it did not adequately explain the effects of rescinding a same-lender refinancing. The U.S. Court of Appeals for the First Circuit ruled that the plain language of TILA and Regulation Z does not require exclusive use of the Fed model forms. Rather, a comparable or substantially similar form of notice is sufficient, and the mortgage company’s notices clearly and conspicuously informed the borrowers that rescission would only pertain to the refinance transaction. Consequently, the first circuit dismissed the borrowers’ TILA claims. Santos-Rodriguez and Betancourt-Castellanos v. Doral Mortgage Corporation (1stCir), ¶52,097 (ip access user).

Attorney Collecting Debt Could Not Claim Common Law Litigation Immunity
A law firm engaged in litigation to collect a debt on behalf of a client was not protected from the consumer's Fair Debt Collection Practices Act (FDCPA) suit by any common law litigation immunity, the U.S. Court of Appeals for the Fourth Circuit has decided. Misrepresentations and other FDCPA violations the consumer claimed existed in the firm's documents could be the basis of a suit, the court said. The consumer alleged a number of FDCPA violations in the attorney's interrogatories and summary judgment motion. The litigation-related documents were subject to the FDCPA even though they were sent to the consumer's attorney rather than the consumer, the court determined; however, the attorney's reliance on the client's statements could provide the basis for assertion of a “bona fide error” defense, the court observed. Sayyed v. Wolpoff & Abramson (4thCir), ¶52,100 (ip access user).

Reliance on Court Records Satisfied FCRA Accuracy Requirements
A consumer reporting agency that relied on records in a court file when it reported that a judgment had been entered against a consumer maintained reasonable procedures to assure that its reports were accurate, according to the U.S. Court of Appeals for the Ninth Circuit. The court also upheld the agency's procedures in reinvestigating the report when the consumer complained that it was inaccurate. The Fair Credit Reporting Act required the agency to maintain reasonable procedures to ensure that its reports were accurate, the court noted, but did not require that the reports be guaranteed to be free from error. The duty to reinvestigate only required the agency to examine the existing court records but did not require the agency to take steps to remove a judgment that was entered in error. Dennis v. BEH-1, LLC (9thCir), ¶52,099 (ip access user).

State Law Update

Colorado: Amendments to the Uniform Consumer Credit Code will prohibit supervised lenders from taking collateral to secure a small consumer loan and from refinancing a small consumer loan more than three times in one year. A small consumer loan is a loan that does not exceed $1,000. The measure also changes the calculation for refunding the unearned portion of the installment-account handling charge when a small consumer loan is prepaid.

Iowa: An amendment to the Iowa Consumer Credit Code will allow banks, thrifts and credit unions to charge borrowers an application fee for consumer loans that do not exceed $3,000 and are repayable in 12 months or less. The application fee may be up to 10 percent of the loan amount or $30, whichever is less, and is in addition to the finance charge and other charges allowed under the Code. If a loan is not approved, the application fee may not exceed the lesser of 10 percent of the amount applied for by the applicant or $30. The fee may not be charged in connection with motor vehicle or mortgage loans. The law (S.B. 347) was approved April 27, 2007, and is effective July 1, 2007. The law appears at Iowa ¶5101 (ip access user).

Minnesota: Governor Tim Pawlenty on April 20, 2007, signed legislation aimed at eliminating predatory lending practices. The law (Ch. 18), which will impose greater restrictions on mortgage lenders and brokers, is effective Aug. 1, 2007. The law is reflected beginning at Minnesota ¶7202 (ip access user), ¶7213 (ip access user), and ¶7215 (ip access user). A separate measure enacts additional protections against predatory lending that bans prepayment penalties on specified subprime loans, creates criminal penalties for mortgage fraud, imposes credit counseling restrictions on the refinancing of "special mortgages" (such as Habitat for Humanity or government guaranteed loans), and provides a private cause of action for aggrieved borrowers. The law (Ch. 74) is effective Aug. 1, 2007. The law appears beginning at Minnesota ¶6308 (ip access user), ¶7202 (ip access user), ¶7213 (ip access user), and ¶7218 (ip access user).

Nevada: Additional identity theft protections will require credit card companies that mail credit card offers to consumers to take reasonable steps to ensure the identity of the applicant. The law (Ch. 23) is effective Oct. 1, 2007. The law appears at Nevada ¶6179 (ip access user), ¶6211A (ip access user), and ¶6460B (ip access user).

Washington: Enhanced enforcement provisions under the check cashers and sellers law will require that a small loan endorsement be obtained by a lender making any small loan to persons physically located in Washington, including Internet or kiosk loans or loans made using other electronic or telephonic means. The legislation also prohibits specific unfair, fraudulent or misleading practices. A loan made in violation of these restrictions is uncollectible and unenforceable. In addition, other penalties may be applicable. The law (Ch. 81) was approved April 18, 2007, and is effective July 22, 2007. The law is reflected at Washington ¶7611 (ip access network).

Product Enhancements

New Credit Card Charges and Fees Smart Chart Available on IRN
Coverage of credit card finance charges and the differing types of fees that may be assessed has been added to the current offering of Consumer Credit Smart Charts available on the CCH Internet Research NetWork. The Credit Card Charges and Fees Smart Chart, which became available in mid-May 2007, highlights the principal features of state regulation of credit card fees and charges. This Topics Smart Chart covers lender credit cards (card issuer agrees to pay third-party debts incurred by cardholder) and seller/retailer credit cards (cardholder purchases goods, property or services directly from card issuer or related, licensed, or franchised party). Official citations and links to the full text of underlying laws, regulations and CCH explanations are included. The following types of charges and fees are reflected: finance charge; annual; delinquency; cash-advance; balance-transfer; credit-limit-increase; over-the-credit-limit; set-up; return-item and miscellaneous. Smart Charts can be exported to Word or Excel.

Secured Transactions Guide

Software Purchaser Obligated to Make Payments Under Ohio Article 2A
A purchaser of software was required to continue making payments to a third-party lessor under a finance lease agreement containing a "hell or high water" clause, even though the software was not suitable for the purchaser's business needs. Under Article 2A of the Ohio UCC, in the case of a commercial finance lease, the lease may provide that a lessee's obligations to a lessor become irrevocable upon acceptance of the goods, requiring the lessee to make payments to the lessor no matter what happens to the goods afterwards. The purchaser argued that it had rejected the goods and that the so-called "hell or high water" clause was unenforceable. The court disagreed and found that the purchaser failed to send the lessor notice of its rejection within a reasonable time, as required by Article 2A of the Ohio UCC. Although it became apparent to the purchaser soon after the software was installed that the software could not meet the purchaser's needs, the purchaser continued to make lease payments for nine months before notifying the lessor that it was rejecting the goods and terminating the finance lease. For this reason, the court concluded that the purchaser had failed to make a proper rejection and had instead accepted the goods, requiring the purchaser to make payments under the finance lease, regardless of whether it could use the goods. D & D RV and Auto, LLC v. Rainmaker Software, Inc. (OhioCtApp), ¶56,114 (ip access user).

Crop Lien Has Priority Over Purchase Money Security Interest in Seeds
The Arkansas Supreme Court has recently ruled that a bank was the first lienholder in a debtor's crops, and its perfected security interest had priority over a seed supplier with a conflicting purchase money security interest because the bank was the first to file its UCC financing statements. In exchange for borrowed funds, the debtor granted the bank a security interest in its crops, which the bank perfected by filing financing statements. A year later, the debtor purchased seeds and other farm equipment from a seed supplier on credit, granting the seed supplier a security interest in its crops, including all proceeds derived from them. The seed supplier subsequently filed financing statements listing the crops as collateral. When the debtor defaulted on its loan from the bank, the bank foreclosed on its liens and sought to have a receiver appointed to harvest and sell the debtor's crops. The bank argued that its security interest in the crops had priority because Revised Article 9 of the Arkansas UCC provides that, where there are conflicting security interests, priority is given to the first party to file or perfect its interest, and the bank was the first to file. However, the seed supplier argued it had a purchase money security interest in the crops and had a "superpriority" status as a seedmoney lender because the Arkansas UCC also provides that a perfected purchase money security interest including any proceeds, has priority over conflicting interests in the same goods. The Arkansas Supreme Court disagreed with the seed supplier's stance and found that the collateral for the supplier's purchase money security interest was actually the seed sold to the debtor, rather than the crops. Although Arkansas's UCC defines "collateral" to include identifiable proceeds of the collateral, the court determined that crops are not the identifiable proceeds of seeds. Searcy Farm Supply, LLC v. Merchants & Planters Bank (ArkSCt), ¶56,116 (ip access user).

Priority of Lessor’s Crop Lien Acknowledged
The Bankruptcy Court for the Eastern District of Arkansas recently held that a partnership, as lessor of a farm, had an interest in crops superior to a bank's properly perfected security interest in the same crops, regardless of when the bank's interest was perfected or of the fact that the bank held unpriced scale tickets for the crops. A bankrupt debtor leased farmland from a family partnership and borrowed funds from a bank to produce crops on the leased farmland. In exchange for the crop-production loan, the debtor granted the bank a security interest in the crops grown on the land, which the bank perfected by filing a financing statement. During harvest season the debtor also assigned and delivered to the bank unpriced scale tickets for soybeans that the debtor stored with a local grain elevator. At about the same time, the partnership brought an action against the debtor to foreclose a landlord's lien for unpaid rent. The debtor subsequently filed for bankruptcy and, with the consent of both the partnership and the bank, the crops were sold by the trustee and the proceeds held in trust. The bank contended that its security interest in the crops was superior to the partnership's conflicting landlord's lien since it had possession of the scale tickets. Even if the landlord's lien was superior, the bank argued, the partnership did not have standing to enforce the lien because the partnership was not the actual landlord of the farmland but was a tenant to the family. However, the Arkansas provision governing a landlord's lien on crops provides that every landlord has a lien in the crops grown on leased land for rent that accrues for that year, continuing for six months after the rent is due. The law also provides that the landlord's lien is perfected and has priority over conflicting liens in the crops regardless of when conflicting liens are perfected. Accordingly, even though the bank properly perfected its security interest by filing pursuant to Article 9 of the Arkansas UCC, the court concluded that the landlord's lien had priority over the bank's conflicting security interest and that the bank had gained nothing by accepting the scale tickets. In re James (Bankr EDArk), ¶56,117 (ip access user).

State Law Update

New Mexico: New Mexico has amended its certificate of title law to carve out an additional exception to the overall titling requirements for vehicles. Accordingly, a certificate of title is not required now for a vehicle that is subject to registration and owned by "a carrier that is from a jurisdiction that is not a participant in the International Fuel Tax Agreement, that is authorized by the United States government or an agency of the United States government to conduct cross-border operations beyond the commercial border zone pursuant to the provisions of the North American Free Trade Agreement and that identifies New Mexico as the carrier's base jurisdiction." A vehicle that is subject to registration and owned by the U.S. government continues to be exempt from New Mexico's certificate of title requirements. The law (Ch. 320) was approved and effective April 2, 2007. Law at New Mexico, ¶1040 (ip access user), ¶1041 (ip access user).

North Dakota: The North Dakota Secretary of State and the office of the recorder in any county in the state with which a verified statement is submitted containing the names and addresses of the parties, a description of the crops or agricultural products, the price agreed upon for processing, the Social Security number or taxpayer identification number of the person for whom the processing was done, and a description of the processing services and the first date the services were furnished, must reject the statement unless proof of mailing of notification of the lien to the debtor's last-known address by registered or certified mail with return receipt requested is filed with the statement. The law (S.B. 2285) was approved April 26, 2007, and it will become effective Aug. 1, 2007. Law appears at North Dakota, ¶1195 (ip access user).

Virginia: Notwithstanding the general requirements for certificates of title in Virginia, a new exception has been added. Under the new law, provided a vehicle is registered and titled elsewhere in the United States, nothing in the vehicle registration and certificate of title statute is to be construed to require titling or registration in the Commonwealth of any vehicle located in the Commonwealth if that vehicle is registered to a non-Virginia resident active duty military service member, activated reserve or national guard member, or mobilized reserve or national guard member living in Virginia. The law (Ch. 934) was approved April 10, 2007. It will take effect July 1, 2007. Law at Virginia, ¶1050 (ip access user).

Financial Privacy Guide

CAN-SPAM Litigator Lacks Standing to Sue
An Internet domain registrant who suffered only inconvenience from unsolicited commercial e-mails could not maintain a private action against two online marketers for violations of the Controlling the Assault of Non-Solicited Pornography and Marketing (CAN-SPAM) Act of 2003. Because he suffered no harm that was unique to a provider of an Internet access service, he was not adversely affected by any alleged violations and lacked standing to sue, according to the U.S. District Court for the Western District of Washington. A story on Gordon v. Virtumundo, Inc. appears in Privacy Extra, May 31, 2007, and the case will be reproduced in an upcoming Report.

N.Y. Attorney General Announces Security Breach Settlement
The New York Attorney General has announced that his office entered into its first settlement agreement under New York's Information Security Breach and Notification Law. A Chicago-based provider of claim management services allegedly failed to notify customers that their personal data was at risk for seven weeks after a laptop containing personal information, including names, addresses and Social Security numbers was stolen by an employee. New York law requires disclosure of any breach of security to the owner or licensee of the private information immediately following discovery of the breach if information was acquired by a person without valid authorization. In addition, the owner and licensee have an obligation to notify any New York resident whose private information was acquired "in the most expedient time possible and without reasonable delay." Without admitting liability, the company agreed to implement more extensive security practices relating to private information and to ensure that proper notifications will be made in the event of any future breach. It will also pay the Attorney General's office $60,000 for costs relating to the investigation. This story appears in Report Letter No. 71, May 16, 2007.

State Security Freeze Law Update

Indiana: Recent legislation allows Indiana residents to place a security freeze on their credit reports in order to prohibit a credit reporting agency from releasing a consumer’s credit report without the consumer’s permission. S.B. 403 is effective Sept. 1, 2007.

Mississippi: Mississippi joins the list of states enacting security freeze protections in an effort to combat identity theft. Mississippi residents will be able to place a security freeze on their credit reports by sending a written request to consumer reporting agencies by certified mail. S.B. 3034 takes effect July 1, 2007, and will be reflected in an upcoming Report.

North Dakota: Recently enacted legislation will allow North Dakota residents to place a security freeze on their credit reports. The measure allows a consumer to request a freeze by mail, telephone or through a security electronic mail connection. H.B. 1417 is effective June 1, 2007.

Tennessee: The Credit Security Act of 2007 authorizes a consumer to place s security freeze on his or her consumer credit report. It provides that a credit reporting agency must develop procedures involving the receipt and processing of the freeze. H.B. 200, Ch. 170, is effective Jan. 1, 2008, and will be reflected in an upcoming Report.

Washington: An amendment to Washington’s credit freeze law allows all consumers who are residents of the state, rather than only victims of identity theft, to place a security freeze on their credit reports. S.B. 5826, Act 499, takes effect Sept. 1, 2008, and will be reflected in an upcoming Report.

Bankruptcy Law Reporter

Tax Overpayments Estate Property Subject to Turnover
Married debtors' prepetition application of their right to tax refunds to postpetition tax obligations constituted an asset that had to be turned over to the bankruptcy trustee. The prepayment of the taxes constituted estate property at the time of the bankruptcy filing. The debtors’ inability to get the funds back from the IRS and the irrevocable nature of their election to apply deposits to future tax liabilities did not prevent the bankruptcy estate from asserting any right to the funds. Nichols v. Birdsell (9thCir) appears at ¶80,926 (ip access user).

IRS Claim Not Satisfied by Property Not Actually Surrendered
Chapter 13 debtors’ proposal to surrender property that the IRS could not levy on and could not otherwise collect without resorting to litigation did not constitute a “surrender” under the Bankruptcy Code. Thus, the debtors could not satisfy the secured claim held by the IRS by surrendering part of the property secured by an IRS lien and paying the remaining secured value through their repayment plan. White (4thCir) appears at ¶80,909 (ip access user).

Change in Circumstances Warrants Departure from Form B22C
In two cases where the debtors' actual income was considerably less than their historical income as a result of changes in employment, circumstances existed under which the court could use Schedule I to determine the debtors' projected disposable income. The net income number obtained from Form B22C represents a debtor's projected disposable income unless the debtor can show a substantial change in circumstances such that the numbers contained in the form are not commensurate with a fair projection of the debtor's future budget and income. However, confirmation of the respective plans was denied because the plans would not necessarily run a full 60 months. Lanning (BankrDKan) appears at ¶80,927 (ip access user).