November 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

Agencies Issue Final Rules on Affiliate Marketing
Federal regulators have adopted a final rule that will provide consumers with an opportunity to opt out before a financial institution uses information provided by an affiliated company to market its products and services to the consumer. The final rule generally prohibits financial institutions from using certain information received from an affiliate to make a solicitation to a consumer about products or services unless the consumer is given notice, a reasonable opportunity and a reasonable and simple method to opt out of the making of such solicitations, and the consumer does not opt out. The joint agency notice is reported at ¶95-055.

JEC Report Forecasts Two Million Foreclosures by 2009
A report from the Joint Economic Committee estimated that two million foreclosures will occur by the time the riskiest subprime adjustable rate mortgages reset over the course of this year and next. This is expected to result in a direct loss of approximately $71 billion in housing wealth, while states are forecast to lose more than $917 million in property tax revenue. The report also forecasts that more than $32 billion in housing wealth will be indirectly destroyed by the spillover effect of foreclosures, which will reduce the value of neighboring properties. On top of foreclosures the report forecasts a 10-percent decline in housing prices resulting in a $2.3 trillion economic loss. This story appears in Report Letter No. 2240, Nov. 1, 2007.

FinCEN Addresses Common SAR Filing Errors
The Financial Crimes Enforcement Network has issued guidance on common errors that occur in the filing of Suspicious Activity Reports (SARs). The guidance provides an explanation of the 10 most common errors and ways to mitigate them. FinCEN emphasizes that when completed correctly, SARs provide users with important information that can be used to analyze broad sets of data and to apprehend suspected criminals and terrorists. The FinCEN guidance is reproduced at ¶52-004 (ip access user).

Agencies Propose Best Practices for Garnishment Orders
The federal financial regulators are requesting comment on a proposed statement encouraging financial institutions to follow best practices to protect federal benefit payments from garnishment orders. The agencies have developed this proposed guidance to encourage financial institutions to minimize the hardships encountered by federal benefit funds recipients and to do so while remaining in compliance with applicable law. The joint agency notice is reported at ¶95-036 (ip access user).

Debit Card Growth Is Strong
Transactions for debit cards increased three times faster than for credit cards between 2005 and 2007, and, looking forward, the debit card's popularity is expected to remain high, fueled by a combination of current economic trends, customer convenience and card rewards programs. In a new study, TowerGroup Senior Analyst Brian Riley says that against the backdrop of the current challenges in the credit market, and despite consumer deposits hitting record lows, the debit card's increasingly dominant position as a payment method will continue through 2009 and beyond. This story appeared in Report Letter No. 2238, Oct. 18, 2007.

State Gift Card Laws Could Be Preempted for Nonbank Sellers
A state law that prohibited expiration dates on gift cards might be preempted by federal laws and regulations when applied to gift cards issued by a national bank but sold and administered by a third party, according to the U.S. Court of Appeals for the Second Circuit. On the other hand, the portion of the state law prohibiting the imposition of inactivity or other fees was not preempted, the court said. The court reversed a ruling in favor of the state relating to expiration dates and returned the case to the trial court to allow the gift card seller an opportunity to prove its factual claims. SPGGC, LLC v. Blumenthal (2ndCir) is at ¶100-984 (ip access user).

Results of Discussions over EU Privacy Concerns Released
The Office of Foreign Assets Control has released documents pertaining to discussions among U.S. and European authorities on the operation of the Terrorist Finance Tracking Program (TFTP) as it pertains to their respective counterterrorism efforts and data privacy laws. After public media disclosure of the TFTP in June 2006, concerns were raised in the European Union about the program and, in particular, the possibility that the Treasury Department might have access to EU personal data through Society for Worldwide Interbank Financial Telecommunication (SWIFT) transaction records. Treasury Department officials have engaged in a series of discussions with EU representatives on the operation of the TFTP and its conformity with EU data privacy laws. The European Union has acknowledged that the Treasury Department has the authority to subpoena SWIFT data and has stated that, once SWIFT and the financial institutions using its services have completed the necessary arrangements to respect the European Data Protection Directive and the U.S. Department of Commerce's "Safe Harbor" principles, they will be in compliance with their respective legal responsibilities under European data protection law. The OFAC notice is reported at ¶95-053 (ip access user).

Joint Proposal Would Ban Illegal Internet Gambling Payments
A joint proposed rule would prohibit gambling businesses from accepting payments in connection with unlawful Internet gambling, including payments made through credit cards, electronic funds transfers and checks. The proposed rule would require U.S. financial institutions that participate in designated payment systems to have policies and procedures that are reasonably designed to prevent payments being made to gambling businesses in connection with unlawful Internet gambling. The joint notice is reported at ¶95-042 (ip access user).

GLB Act Bank Broker Exception Rules Examined
New rules adopted by the Federal Reserve Board and Securities and Exchange Commission implementing the bank broker provisions of the Gramm-Leach-Bliley Act of 1999 (see ¶95-030 (ip access user).) have been explained by CCH Principal Analyst James Hamilton, J.D., LL.M., in a White Paper entitled, "SEC-Federal Reserve Board Regulation R: The Gramm-Leach-Bliley Bank Broker Exception Rules." According to Hamilton, the rules end "eight years of stalled negotiations and impasse." The joint rules, codified as Regulation R, are designed to accommodate the business practices of banks while protecting investors. The CCH White Paper is reproduced at ¶95-031 (ip access user).

Consumer Credit Guide

FTC Issues Advisory Opinion on Notifying Debtor That Collection Efforts Have Ceased
The Federal Trade Commission (FTC) has issued an advisory opinion clarifying when the federal Fair Debt Collection Practices Act (FDCPA) allows a debt collector to notify a consumer that it has ceased trying to collect a debt. In the view of the FTC, merely informing the consumer that debt collection efforts have been terminated would not be an attempt to collect a debt and, consequently, would not violate the FDCPA. According to the FTC, allowing a debt collector to notify the consumer that it has ceased collection efforts, without conveying any other message, would benefit the consumer because the consumer would be informed that calls and letters from that particular debt collector would stop and that the collector would not renew collection efforts. The full text of the FTC's advisory opinion letter will appear in an upcoming Report.

Debt Collection Not Always a Permissible Purpose Under FCRA
While debt collection may sometimes be a "permissible purpose" under the federal Fair Credit Reporting Act (FCRA) for obtaining a credit report, the debt collection must be related to a credit transaction in which the consumer has directly and voluntarily participated to qualify as a "permissible purpose," the U.S. Court of Appeals for the Ninth Circuit held. When the consumer failed to reclaim or pay the outstanding charges on her impounded and towed vehicle, the towing company assigned its claim to a debt collector. After the debt collector obtained a credit report on the consumer from a credit reporting agency, the consumer alleged that the collection agency violated the FCRA because it obtained her credit report without any FCRA-sanctioned purpose. The court determined that the debt collector did not have a "permissible purpose" to obtain the credit report in violation of the FCRA since the consumer did not voluntarily seek credit, incurred the debt involuntarily as a result of the impounding, towing and operation of a lien on her vehicle, and was never granted credit under a credit transaction. Pintos v. Pacific Creditors Association (9thCir), ¶52,122.

Credit Reporting Agency Liable for Handling of Court Records
The U.S. Court of Appeals for the Ninth Circuit recently revisited the issue of a credit reporting agency's liability under the federal Fair Credit Reporting Act (FCRA) for the agency's treatment of information obtained from court records. In changing its posture, the Ninth Circuit ruled that since the consumer made an initial showing that his credit report was inaccurate, the credit reporting agency was subject to liability under the FCRA provision requiring consumer reporting agencies to maintain "reasonable procedures" to ensure the accuracy of credit reports. The Ninth Circuit also ruled that the credit reporting agency negligently failed to conduct a reasonable reinvestigation of disputed information to determine whether the credit report was inaccurate. Dennis v. BEH-1, LLC (9thCir), ¶52,124 (ip access user).

State Law Update

California: Amendments to the Financial Code make it unlawful under the California Finance Lenders Law and the California Deferred Deposit Transaction Law to violate Section 670 of the John Warner National Defense Authorization Act for Fiscal Year 2007, which provides consumer protections for service members and their dependents in connection with consumer credit transactions. The laws are at California ¶6814 (ip access user) and ¶6888C (ip access user). Separate legislation extends the federal guidance on nontraditional mortgage product risks to state-regulated mortgage lenders and brokers in an attempt to ensure that all mortgage lenders are subject to the same federal guidance on nontraditional loan products. The law is at California ¶6759B (ip access user).

North Carolina: Businesses that sell or lease products or services to consumers pursuant to contracts that automatically renew unless cancelled must: disclose the renewal clause clearly and conspicuously in the contract or contract offer; and clearly and conspicuously disclose how to cancel the contract in the initial contract, contract offer, or with delivery of products or services. A violation renders the automatic renewal clause void and unenforceable. The requirements do not apply to banks and other specified financial institutions. The law is at North Carolina ¶6211 (ip access user).

Oregon: Comprehensive legislation took effect this month implementing consumer protection measures to prevent identity theft. The Oregon Consumer Identity Theft Protection Act: provides for consumer notification of breaches of security of computerized data; allows consumers to place and temporally lift a freeze on their consumer report; restricts the printing or displaying of Social Security numbers; creates a duty for businesses that own, maintain or possess data to safeguard personal information; and authorizes the Department of Consumer and Business Services to enforce and make rules to implement the Act. The law appears beginning at Oregon ¶6321 (ip access user).

Smart Charts Highlights

Some of the latest changes reflected in Consumer Credit Smart Charts include:

  • Consumer Credit Topics Smart Charts — reflect the monthly and quarterly state interest rate changes. (Interest-Usury—Maximum Rates—Contract Rate).
  • Quick Reference Smart Charts — updates reflect amendments to Montana's Deferred Deposit Loan Act and Title Loan Act that became effective October 1.
  • Legislative Developments Smart Charts — includes over 140 consumer credit related laws enacted to date during the 2007 state legislative sessions with links to legislative summaries and to full text of laws amended, repealed. Recent updates include:
    • California: Mortgage Lenders and Brokers—Federal Guidance on Nontraditional Mortgage Product Risks; Finance Lenders, Deferred Deposit Transaction Licensees—Extensions of Credit to Armed Services Members; Gift Certificates.

Secured Transactions Guide

Buyer Afforded Protection of Food Security Act
In accordance with the federal Food Security Act (FSA), a buyer who purchases cattle in the ordinary course of business from a farming operation takes the cattle free of a creditor's security interest in the cattle, so long as the creditor's financing statement is ineffective, the U.S. Court of Appeals for the Fifth Circuit has ruled. The court concluded that so long as the seller operated the business as a sole proprietorship, there was no requirement that the creditor list both the debtor's name and the entity's name; however, if the entity operated as a limited liability partnership the creditor was required to name both the entity and the debtor in order to claim an interest in the cattle. The court remanded the issue to the lower court to determine whether the entity was a sole proprietorship or limited liability partnership. Peoples Bank v. Bryan Bros. Cattle Co. (5thCir), ¶56,124 (ip access user).

Discharge of Obligation to Assignor Appropriate
In accordance with Article 9 of the South Dakota UCC, a debtor was entitled to accept cattle in settlement of a debt without his lender's prior approval. The court concluded that Section 9-406 of the South Dakota UCC, which provides that until an account debtor receives notice of an assignment the debtor is entitled to discharge its obligation by payment to the assignor, was instructive. Although there was no assignment of the account, the farmer was entitled to settle its debt with the debtor since it had not received notice from the lender that payment or settlement was due to someone other than the debtor. The farmer had discharged its debt to the debtor when it transferred the cattle in settlement of its account. Fin-Ag v. Feldman Bros. (SDSCt), ¶56,125 (ip access user).

State Law Update

Michigan: An applicant for a certificate of title in Michigan may request expeditious treatment of his or her title application, but must pay an additional fee of $5 for such request, in addition to the standard $10 title application fee. This additional $5 fee, which was to have expired on Sept. 30, 2006, has been extended until Sept. 30, 2008. The law is at Michigan ¶1104 (ip access user).

Washington: When a vehicle is titled in another state or country, specific ownership documents are required to title and license the vehicle in the state of Washington. The Department of Licensing has modified those requirements by substituting "ownership documents" for "title and registration" references. Furthermore, in relation to vehicles from a state or country that neither registers nor titles, the Department will no longer accept a statement from the applicant certifying when and where they purchased the vehicle, or that the previous state or country does not register or title this type of vehicle. The requirement that a bill of sale from the previous state or country be presented has been deleted. Rather, the applicant must simply follow the regulatory ownership in doubt procedures set out in the certificate of title regulations. Finally, the federal agency form referenced in the regulation for vehicles from a foreign country has been changed from the United States Department of Treasury Service to the Department of Homeland Security U. S. Customs and Border Protection Entry Summary. The regulation is at Washington ¶1335 (ip access user).

Financial Privacy Law Guide

Defense Strategies Against Truncation Lawsuits Discussed
The credit card number truncation requirement contained in the Fair and Accurate Credit Transaction Act (FACT Act) that became fully phased in on Dec. 4, 2006, has given rise to many federal class action suits. Because the FACT Act provides for statutory damages of $100 to $1,000 per willful violation, a company's liability for a willful violation of this requirement could run into the hundreds of millions of dollars. An article by attorneys at the international law firm Jones Day explains the truncation requirement, examines the recent U.S. Supreme Court decision regarding a "willful" violation, and discusses three approaches to defending a class action suit alleging violation of the truncation requirement. The article appears at ¶100-349 (ip access user).

Customer Disclosure Precludes Claims Against Retailer
A lawsuit brought by financial institutions against the retailer TJX Companies, Inc. (TJX) to recover damages related to the data security breach at TJX will move forward without allegations of violations of the Gramm-Leach-Bliley Act (GLB Act) or Massachusetts' consumer protection laws. A U.S. District Court ruled that a retailer cannot violate the GLB Act when customers, not a financial institution, make the decision to disclose their nonpublic personal information to the retailer when they use credit and debit cards to make purchases at the store. Therefore, because the GLB Act did not apply, any alleged violations of Massachusetts' consumer protection law could not be based on violations of the GLB Act. In a related matter, TJX announced that a separate suit brought against it by consumers settled for an undisclosed amount. TJX denied the allegations in the complaint but said more legal action would be time-consuming and expensive. A story on In re TJX Companies Retail Security Breach Litigation (DMass) appears in Privacy Extra (Oct. 31, 2007), and it will be reflected in an upcoming Report.

California Adds Medical and Health Insurance Information to Data Breach Law
A new law in California adds medical and health insurance information to the categories of personal information that are covered by the state’s data breach law. Medical information is defined as any information regarding an individual's medical history, mental or physical condition or medical treatment or diagnosis by a health care professional. Health insurance information is defined as an individual's health insurance policy number or subscriber identification number, any unique identifier used by a health insurer to identify the individual or any information in an individual's application and claims history, including any appeals records. A story on the law appears in Privacy Extra (Oct. 31, 2007), and the law will be reproduced in an upcoming Report.

Bankruptcy Law Reporter

Tenth Circuit Ends Student Loan Discharge by Declaration
The U.S. Court of Appeals, in an en banc decision, has overturned its precedent of allowing student loans to be discharged through a process known as “discharge by declaration,” giving preclusive effect to uncontested assertions of undue hardship in a Chapter 13 plan. An undue hardship issue has to be raised through an adversary proceeding. It does not have preclusive effect unless it is actually litigated, and the debtor proves the elements of undue hardship. In re Mersmann (10thCir) appears in Report 737, and the decision will be reproduced in an upcoming Report.

Bankrupt Tenant’s Damage to Church Property Not Capped
The statutory cap imposed by Bankruptcy Code Sec. 502(b)(6) on claims arising from a debtor’s lease termination does not limit a landlord’s claim for tort-related damages. Thus, a church’s $23-million lost rent claims stemming from the termination of the lease and various tort claims for waste, nuisance and trespass for clay and equipment left on its property were not subject to the Sec. 502(b)(6) cap. El Toro Materials Company, Inc. (9thCir) ¶81,021 (ip access user).

Proceeds from Auction of Licenses Not Estate Property
The proceeds from the Federal Communications Commission’s (FCC) cancellation and sale of a debtor’s spectrum licenses were not part of a debtor’s bankruptcy estate. The FCC’s cancellation of the debtor’s licenses extinguished the debtor’s interest in those licenses and the underlying radio spectrum. Thus, the Chapter 7 debtor no longer had any right in them, and its estate had no entitlement to the proceeds from the sale. In re Magnacom Wireless, LLC (9thCir) appears at ¶81,013 (ip access user).

Hot Topic of the Month

This month’s hot topics are fees and assessments. Financial institutions are subject to many different types of fees by federal and state regulators. Information on fees arising from federal and state regulation of financial services activities is found in the Federal Banking Law Reporter, Secured Transactions Guide and Consumer Credit Guide in CCH explanations, Smart Charts, agency issuances and current interest stories in report letters, as well as the full text of laws and regulations.

Federal Banking Law Reporter: The Comptroller of the Currency (OCC) collects semiannual assessments from national banks and the Office of Thrift Supervision (OTS) charges savings associations and savings and loan holding companies semi-annual assessments. Fees must also accompany various types of applications. In addition, the Federal Deposit Insurance Corp. (FDIC) collects assessments from depository institutions on a quarterly basis to fund the Deposit Insurance Fund. State regulators often impose filing and licensing fees for various types of documents and financial services activities.

An ideal starting point for federal banking is the Federal Banking Law Reporter Index. Looking under the main heading “assessment,” you will find entries such as:

If your area of interest is the FDIC’s insurance assessment system, open up the “Deposit Insurance” division in the Federal Banking Law Reporter Researcher and a section entitled “Assessments” is found. Once opened, the menu displays CCH explanations covering topics such as “Assessment Risk Classifications” at ¶55-207 (ip access user), followed by interpretive agency issuances such as the FDIC’s “Assessment Rate Adjustment Guidelines for Large Institutions and Insured Foreign Branches in Risk Category I” at ¶55-259 (ip access user). The explanations include references to the full text of underlying laws and regulations.

Another technique is to search the Federal Banking Law Report Summary to determine what regulatory changes have taken place in the last year, for example. A search of the report letters for “assessment schedule” yields results such as:

  • FDIC Amends Deposit Insurance Assessment Regulations, Federal Banking Law Report Letter No. 2195, Dec. 7, 2006.
  • OTS Adjusts Assessment Schedules for Inflation, Federal Banking Law Report Letter No. 2196, Dec. 14, 2006.

Secured Transactions Guide: The easiest way to find fees for filing of documents with state or local filing officers for secured credit transactions under Article 9 of the UCC is to look at the Secured Transactions Topics Smart Chart on UCC Filing Fees. The fees that secured parties are required to submit along with their financing statements to complete the filing process to secure their interests and the fees that must be paid for information requests when attempting to determine whether there is already a lien on a particular piece of property are included. The Smart Chart also covers fees charged and collected for information searches and copies of documents. Results include links to the full text of underlying laws and regulations. In addition, the central filing location for each state and links to filing offices and agencies are provided in the companion UCC Administrators Smart Chart. An example of the Smart Charts content appears below:

  • Financing Statements – Michigan: $15 for one or two debtor names on standard form; add $10 per debtor name over original two; add $12 for any record over 100 pages; add $7 for non-standard filings – Michigan Code §440.9525.

Another way of researching filing fees under Article 9 is by consulting explanations in the state divisions. Since the explanations in the Secured Transactions Guide are arranged under a uniform plan of topics and paragraph numbers, simply consult ¶210 for the state of interest to find a discussion of UCC filing fees.

In addition, the Motor Vehicles Chart at ¶24 compiles requirements governing motor vehicle liens, including fee provisions. Changing fee requirements are identified in report letter stories, such as:

  • Fee for Title Applications Extended, Secured Transactions Guide Report Letter, No. 1004, Oct. 17, 2007.

Consumer Credit Guide: The explanations governing credit regulation are also arranged under a Uniform Topical Outline and paragraph numbering plan that aids in state-to-state, point-by-point comparison for consumer credit licensing fees. For example, licensing fee requirements can be found in state divisions in the Consumer Credit Guide for the following:

  • ¶4330 Collection Agencies
  • ¶4655 Deferred Deposit or Payday Lenders
  • ¶4671 Finance Companies
  • ¶4700 Insurance Premium Finance Companies