Iowa Banking Law Blog

FINANCIAL INSTITUTIONS ENCOURAGED TO REVIEW AND RESTRUCTURE MORTGAGE LOANS

In light of the current mortgage woes faced by many homeowners, the FDIC, the Board of Governors of the Federal Reserve, the OCC, the OTS, NCUA, and CSBS are now encouraging federally-regulated and state-supervised institutions that service mortgage loans to help these homeowners mitigate their losses.  Some ways in which these financial institutions may do so are to identify borrowers who are at high risk of delinquency or default, such as those borrowers whose interest rates are scheduled to reset, contact borrowers to assess their ability to pay, assess whether there is a reasonable basis to conclude that default is reasonably foreseeable, and explore a loss mitigation strategy to avoid foreclosure.   Many subprime mortgage loans have been transferred to securitization trusts, and as a result, the trust documents may actually permit the financial institutions to proactively perform such assessments in light of the Department of Treasury indicating that servicers of loans in qualifying securitization contracts may modify the terms of the loans if default is reasonably foreseeable.

A copy of the statement on loss mitigation strategies for residential mortgage servicers can be found here.

FDIC ISSUES FINAL RULE FOR OPTING OUT OF MARKETING

On July 15, 2004, the Agencies published a joint notice of proposed rulemaking regarding the issuance of opt out notices by institutions that share information with affiliates.  The proposed rulemaking would prohibit affiliates from using that information for marketing purposes, unless the affected consumer has been provided the opportunity to opt out but have elected not to do so.

The FDIC received 29 comments from financial institutions or holding companies, trade associations, businesses, community groups, the National Association of Attorneys General, and various individuals.  Among the highlights of the final rule are as follows:

-          Three conditions must be met before an affiliate may use eligibility information for marketing purposes: 1) an affected consumer must receive clear written notice that the affiliate may use shared eligibility information to make solicitations to that consumer; 2) the consumer must be provided with reasonable opportunity to opt out; 3) the consumer must not have exercised the opportunity to opt out.

-          An opt out must be valid for at least five years.  Thereafter, consumers must be given a renewal notice and a reasonable opportunity to opt out.

-          The opt out notice must be provided by an affiliate that has or has previously had a pre-existing business relationship with the consumer.

-          Service providers may receive eligibility information from an affiliate and market to the affiliate’s customers without a notice and opt out.  This ensures that the affiliate with the pre-existing relationship controls the service provider’s receipt and use of the information.

-          An affiliate marketing notice may be coordinated and consolidated with other notices or disclosures that are required to be issued.

There are certain exceptions to the notice and opt out requirements, such as instances where there is a pre-existing business relationship, responding to a communication initiated by the consumer, and complying with state laws.

A copy of the final rule can be found here.

Can’t Afford Your Loan? Sue a Wall Street Firm

            House Democrats proposed new legislation likely to stir up controversy in the financial services industry. The bill would allow homeowners to sue Wall Street firms for relief from mortgages they couldn’t afford.

            Representative Barney Frank, a Massachusetts Democrat and chair of the House Financial Services Committee, introduced the bill.  The legislation aims to restrict improper lending practices and largely targets for reform practices that grew out of mortgage-backed securities trading.  Specifically, lawmakers continue their mission to stop lenders from offering subprime mortgages to low-income consumers or those with poor credit histories. 

            In the last two years, more than two million consumers obtained subprime loans with low start-up interest rates that drastically increase at the end of their introductory periods.  An estimated one-fourth of these people may lose their homes. 

            The proposed legislation prohibits predatory lending practices.  For example, the bill (1) prohibits financial incentives for steering borrowers to more expensive loans, (2) restricts prepayment penalties on loans, and (3) requires mortgage lenders to confirm that the borrowers have a “reasonable ability to repay” the loan. 

Thus, the statute allows borrowers who can show they had no reasonable ability to repay their loans to demand better deals, better loans, or relief from Wall Street firms that purchased and resold the mortgage.  How does a lender know if a borrower asks for more money than he can realistically expect to pay back?  Frank gave an example of a loan with no reasonable likelihood of being repaid:  one requiring monthly payments equal to half (or more) of the borrower’s income.  Ultimately, the “unpayable loan” determination should be similar to the underwriting guidance issued by federal bank regulators.  However, private lenders and brokers – not commercial or community banks – provided most of the subprime loans (and about half of all mortgages) in recent years.  The new bill requires states to set standards for lenders and brokers.  Failure to establish a standard leaves the private lenders subject to the strict federal standards, requiring action “solely in the best interest” of the borrower.

November Chicago Fed Letters

The Federal Reserve Bank of Chicago has released two Chicago Fed letters.

The Mixing of Banking and Commerce: a conference summary discusses ILC's and the debate over the separation between banking and commerce. 

The Role of Securitization in Mortgage Lending discusses (and defines) MBS's, CDOs, SIVs and the process by which mortgage loans are sold to investors. 

Survey Reports Midwestern Rural Economy Slowing

According to a survey of bank presidents and CEO's in non-urban, agriculturally dependent areas of ten states, rural economy growth has declined for the seventh time this years.  The survey, dubbed the Rural Mainstreet Index, was originated at Creighton University.  A score of 50 indicates growth.  Iowa has the second lowest index score, at 43.9.  The overall index is at 52.1.  In the survey, 60% of CEO's were of the opinion that the benefits of corn-based ethanol have been oversold.  For further information on the RMI see this article from the Omaha World Herald and this release from Creighton University.

Penalties Abound When Bank's Fail to Comply With the Bank Secrecy Act

One Iowa bank recently consented to the issuance of an Order to Cease and Desist by the FDIC as a result of the bank’s failure to comply with certain provisions under the Bank Secrecy Act (“BSA”).  The bank’s violations and unsound banking practices were numerous: 

• operating without adequate oversight by the bank’s board of directors and management to prevent violations of the BSA;
• failing to develop and administer a BSA compliance program;
• operating without an effective system of internal controls or independent testing to ensure compliance with the BSA;
• operating without adequate BSA training program;
• operating without an effective customer identification system;
• failing to develop and implement a system for detecting and reporting suspicious activity;
• failing to comply with the Financial Recordkeeping and Reporting of Currency and Foreign Transactions regulation; and
• failing to file Suspicious Activity Reports.

As a result, the bank was given specific orders to designate an officer to coordinate the bank’s BSA compliance program, review high-risk accounts and transactions and file any necessary CTRs and SARs, and report its findings to the FDIC.  The bank was further required to perform an assessment of its banking operations regarding attempts to launder money and conduct criminal activities, review its BSA risk assessment annually and record that in its board of directors minutes, develop a BSA program and provide for training, and establish policies and procedures.  The bank was also mandated to develop written policies regarding its Customer Identification Program and policies to report suspicious activities.

The Board of Directors was required to document violations which were not eliminated or corrected within a 90-day period and, perhaps most embarrassingly of all, the bank was required to furnish a copy of the Cease and Desist Order to all of its shareholders.

While the order did not indicate a monetary penalty, one would assume it would be forthcoming if the bank continued to fail to comply.  This is posted not to ostracize any particular bank, but merely to show common BSA violations and the remedies for those violations. The lesson learned here is to ensure that your bank has developed and implemented adequate policies and procedures for compliance with the BSA and SAR filing requirements, among other things. 

For more information, please contact Mary A. Zambreno.

Reform of Financial Services Regulation, Long Rumored, Now Questioned

The U.S. Treasury today has begun the long anticipated review of the regulation of financial services in the United States. The U.S. Treasury will be seeking comment and pose a series of questions to determine whether the current system of regulation is working. The agency apparently intends to conduct an in depth inquiry as to whether the federal oversight can be streamlined with the obvious implication that the number of regulatory agencies needs to be reduced. For example, should the Office of Thrift Supervision and the Office of the Comptroller of Currency be combined? What role should the Federal Reserve have in the bank regulation? Should the FDIC serve as both insurer and regulator? No industry is immune from revisiting its regulation. Banking, insurance, securities and commodities are all at issue. These questions should ignite a spirited and vested debate.  A monumental proposal for a changing of the guard may be on the horizon.

The formal notice and request for public comment from the Department of Treasury is available here: Review by the Treasury Department of the Regulatory Structure Associated with Financial Institutions.

FinCEN Releases Suggestions for Addressing Common Errors in SARs

This succint release identifies common errors in the filing of Suspicious Activity Reports and offers suggestions to remedy these errors.  The release notes that these errors were common primarily in SARs filed by Money Service Businesses but that the errors and strategies presented apply equally to financial institutions.  A PDF of the release can be found here.

Court Holds State Licensing Laws Not Preempted By Federal Law

In State Farm Bank, F.S.B. v. John B. Reardon, a case out of the Southern District of Ohio, a federal judge ruled that a thrift's independent contractors are subject to state licensing laws.  State Farm Bank ("SFB") used independent contractors to sell insurance and commercial retail bank products.  It sought to have these agents market mortgages.  In 2004, State Farm Bank was issued a formal opinion from OTS counsel stating that federal law preempts state laws relating to the banking activities of SFB's independent contractors.  SFB notified the Ohio Superintendent of this opinion, but the Superintendent maintained that state law requiring mortgage broker licenses was not preempted.

The court concluded that "while the OTS may have the authority to extend federal preemption to agents of federal depository institutions, it has failed to comply with the Administrative Procedures Act in its efforts to do so."  It held that the OTS could only extend preemption to independent third parties through a formal regulation issued after publication and public hearing.  The letter signed by OTS counsel was insufficient.  The court went on to state that the "mortgage foreclosure crisis" underscores the need to follow the Administrative Procedure Act and that the OTS's proposal would create a situation in which certain mortgage brokers are not licensed by state or federal law.  In sum, the court stated that the OTS may have the authority to preempt the state licensing statutes at issue, but did not take the necessary Administrative steps necessary to effect such preemption.   

The court distinguished Watters v. Wachovia on the basis that Watters dealt with operating subsidiaries of national banks.  While these subsidiaries are supervised and regulated by the OCC to the same extent as the parent bank, wholly independent contractors are not. 

This case is contrary to a 2006 case out of Connecticut with very similar facts.  In State Farm Bank, F.S.B. v. Burke, the court held that OTS regulations preempted state licensing laws.  That court declined to address the argument that the Opinion Letter had not followed the Administrative Procedure Act.  State Farm Bank appealed the decision. 

The facts in these two cases exemplify the delicate nature of many Opinion Letters -- is it an interpretation of existing laws and regulations or is it an improper change in the law?  Also, the Ohio case shows that the preemption tug-of-war is far from over.   

For more information on this case contact Jeffrey Andersen.

PROPOSED LEGISLATION ON ISSUING UNFAIR AND DECEPTIVE PRACTICES RULES

The House Committee on Financial Services recently introduced proposed legislation - H.R. 3526 sponsored by Representative Barney Frank (D-MA) - that would enable all banking agencies to write rules governing unfair and deceptive practices pursuant to the Federal Trade Commission Act.  Currently, only the Federal Reserve Board, the Office of Thrift Supervision and the National Credit Union Administration had this rulemaking authority.  The proposed bill would now allow the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to also issue rules regarding unfair and deceptive practices for those institutions that they each oversee.

While some would argue that the proposed legislation is advantageous because it creates more protections for consumers - for example, credit card practices at national banks overseen by the OCC can be regulated to prevent unfair and deceptive practices - opponents of the bill argue that it would deprive the Federal Reserve of its industrywide authority.

A copy of the full text of the bill can be found here. LINK

Agencies Expand Examination Cycle for Some Small Institutions

The Federal agencies jointly issued final rules on September 21 expanding the range of small institutions eligible for an 18 month on-site examination cycle.  Under the new rules, well-capitalized and well-managed institutions with under $500 million in assets and a composite CAMELS rating of 1 or 2 will now qualify for an 18 month, as opposed to 12-month on-site examination cycle.  The prior cap was $250 million.

For further information see the release published by the Federal Agencies.

LARGEST JUDGMENT IN FTC HISTORY FOR DEBT COLLECTIONS VIOLATIONS

The United States District Court in the District of New Jersey awarded the Federal Trade Commission a $10.2 million judgment and an injunction against a debt collection company earlier this month.  According to the FTC, this judgment constitutes the largest in FTC history for violations of the Fair Debt Collections Practices Act (FDCPA). 

In Federal Trade Commission v. Check Enforcement, et al., the FTC filed a complaint in 2003 alleging, among other things, that Defendants’ debt collection practices on NSF checks violated the FDCPA and the Federal Trade Commission Act.  According to the complaint, Defendants purportedly routinely sent collection letters that failed to identify the face value of the NSF check and merely stated the total amount due without noting the additional charges they were attempting to impose.  Defendants also allegedly threatened consumers with arrest and prosecution through collection letters and harassing telephone calls.  Those who attempted to assert their rights under the FDCPA were further abused and harassed. 

Among Defendants’ arguments were that the check writers’ actions were tantamount to criminal conduct and thus, they should not be afforded the protections of the FDCPA.  Since the FDCPA did not apply, according to the Defendants, then the Defendants could not be considered “debt collectors” subject to the FDCPA.  The Court rejected these arguments and stated, among other things, that Defendants satisfied the FDCPA definition of “debt collector” in that they used “any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts” and they regularly collected or attempted to collect “directly or indirectly, debts owed or due or asserted to be owed or due another.”  The Court further reasoned that there was insufficient evidence that the check writers intentionally wrote checks on accounts with insufficient funds or on closed accounts with the intent to steal the service or merchandise provided.

To read a full copy of the opinion and final order of the Court, as well as other pleadings filed in this case, click here.

For further information contact Mary A. Zambreno.