Iowa Banking Law Blog

AGENCIES ISSUE NEW IDENTITY THEFT RULES

The Board of Governors of the Federal Reserve, the FDIC, the FTC, the NCUA, the OCC, OTC, and the FTC have published final rules requiring all financial institutions and creditors holding consumer accounts to develop and implement an Identity Theft Prevention Program.  The purpose of the Program will be to combat identity theft by requiring financial institutions and creditors to identify patterns of activity that would raise “red flags” which would signal possible identity theft, respond to any detected red flags, and update the Program periodically to reflect changes in identity theft risks.  The final rules also require credit and debit card issuers to develop procedures that assess the validity of a request for change of address and require consumer reports to develop policies when they receive a notice of address discrepancy from a consumer reporting agency.

A copy of the joint rulemaking can be found here.

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.

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.

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.

When Federal and State Law Collide in Garnishment Procedures

The Agencies have issued a proposed guidance concerning garnishment orders received by financial institutions.

Generally, federal law protects certain federal benefits – such as Social Security, Supplemental Security income, Veterans’ benefits, Federal Civil Service retirement benefits, and Federal Railroad retirement benefits – from inclusion in garnishment orders.  Unfortunately, however, when garnishment orders are sought in state court by creditors and debt collectors, either some orders may not provide that certain funds are exempt from garnishment due to federal law or the customer’s account is a commingled mixture of exempt and non-exempt funds.  Financial institutions, in an effort to comply with the state court order, typically put a freeze on the account until the issue can be resolved but because these exempt federal benefits are sometimes the only source of income for individuals, even a temporary freeze on the account can wreak havoc on an individual’s financial security. 

The proposed guidance is intended to solicit comments regarding how to comply with both federal and state laws.  The proposed guidance also proposes best practices, such as promptly notifying the customer of a garnishment order, determining whether accounts contain only exempt funds, notifying the creditor that the account may contain exempt funds, minimizing the cost to the customer by refraining from charging certain fees, and lifting the freeze as soon as permissible.

Comments can be made via the Federal Reserve’s website or by email, fax, or snail mail.

For further information contact Mary Zambreno.

Regulators Issue Statement on Avoiding Losses Associated with Securitized Mortgages

The federal banking regulators (the FDIC, Federal Reserve, OCC, OTS, and NCUA), along with the Conference of State Bank Supervisors (CSBS) issued a statement encouraging regulated institutions that service mortgage loans to employ certain "loss mitigation techniques" that would preserve homeownership.  The statement is a follow-up to the April 2007 Statement on Working with Mortgage Borrowers and the July 2007 Statement on Subprime Mortgage Lending.  Unlike these previous statements, which urged prudent workout arrangements, the new statement is focused on mortgage loans that have been transferred into securitization trusts. 

The regulators state that when faced with an increased risk of default, servicers of loans should: contact the borrower and assess their ability to repay, assess whether default is reasonably foreseeable, and explore, where appropriate, a loss mitigation strategy that avoids foreclosure, such as loan modifications, payment deferral, conversion into fixed rate, and capitalization of delinquent amounts.

In considering loss mitigation techniques, the statement urges services to consider the borrower's income, debt, and housing related expenses.  Servicers are also urged to refer borrowers to government programs, non-profits, and counseling services that could assist the borrower.  The statement claims that "loss mitigation techniques" that preserve homeownership are less costly than foreclosure. 

This guidance was issued as political pressure to address the mortgage industry mounts.  Presidential candidates have increasingly integrated mortgage and foreclosure issues into their agendas.  President Bush threw his hat in the ring last week by announcing that his administration would put forth proposals to prevent some expected defaults over the next two years.

Unfortunately, this regulatory statement may not stem the congressional tide to over-regulate the industry.

Agencies Issue Proposed Illustrations on Subprime Mortage Lending

          The federal agencies this week issued proposed illustrations contemplated by last month's jointly issued Statement on Subprime Mortgage Lending (Subprime Statement).  Triggered by the agencies' concerns over subprime mortgage lending practices for certain adjustable-rate mortgage (ARM) products, the illustrations aim to improve communications between lenders and consumers by providing examples of the types of communications anticipated by July's Subprime Statement. 

          The Subprime Statement encourages lenders to provide consumers clear, balanced, and timely information to help consumers more effectively weigh the costs and benefits of certain ARM products.  The illustrations both:

• explain some important features and hazards identified in the Subprime Statement (such as payment shock), and
• provide a chart of potential implications of payment shock in a specific, easy-to-understand fashion.

          Use of the illustrations is completely voluntary.  Institutions are free to tailor the illustrations to reflect their product offerings, current market conditions, and a consumer's particular loan requirements.  Whether institutions choose to use the illustrations or not, they should review their statements to consumers regarding subprime lending to ensure that they are clear, balanced, and full explain the terms and risks of such loans.

         The agencies seek public comment on the proposed illustrations.  Comments are due 60 days from the Federal Register publication.  The proposed illustrations are available here on the OTS website.

          For more information on ensuring that your institution is making the necessary disclosures, contact Megan Erickson of Dickinson, Mackaman, Tyler & Hagen, P.C. at 515-244-2600. 

OTS Issues Notice of Proposed Rulemaking on Unfair and Deceptive Practices

On August 3, 2007, the Office of Thrift Supervision (OTS) issued an Advance Notice of Proposed Rulemaking seeking comments not only about defining unfair and deceptive practices but also about whether the OTS should expand current prohibitions against unfair or deceptive acts.  The OTS seeks comment on various issues, including:

• Should the OTS consider further rulemaking on unfair and deceptive practices that would cover products and services in addition to consumer credit? 
• Should the rulemaking cover non-savings institution entities that are related to a savings institution? 
• What principles should OTS consider in defining an act or pratice as unfair and deceptive? 
• Is the FTC guidance on unfair and deceptive practices appropriate for the OTS?
• Should the OTS expand its advertising regulation?

The OTS's proposal does not commit the agency to any particular course of action, if merely seeks comment on the most effective course of action.  Nonetheless, it is a strong indication that the OTS intends to strengthen its unfair and deceptive practices regualtions.  Many analysts think that, at the very least, any OTS rule or guideline will address issues related to unfair mortgages due to the increasing delinquency and foreclosure rates on home loans.

As a bit of background, the Federal Trade Commission Act shields depository institutions from FTC enforcement, leaving unfair and deceptive practices to the Federal Reserve, OTS, and NCUA to deal with.  In June, Rep. Barney Frank threatened the Federal Reserve, stating that if it does not use its rulemaking authority to address unfair and deceptive pratices, and subprime lending specifically, then Congress may take away the Federal Reserve's rulemaking authority on the issue and give it back to the FTC. 

By taking this step, the OTS has put further pressure on the Federal Reserve to take action.  To date, the Federal Reserve has expressed a preference for using its supervisory authority on a case-by-case basis, as opposed to writing proscriptive regulations.  (link to article on Federal Reserve Governor Kroszner's statements in House hearing). 

The full text of the proposed rulemaking can be found here:  http://www.ots.treas.gov/docs/7/73373.pdf

For further information contact Mary A. Zambreno and Jeffrey J. Andersen of Dickinson, Mackaman, Tyler & Hagen, P.C.

What to do When Served with a Subpoena for a SAR

The purpose of suspicious activity reports is to enable law enforcement to fully investigate serious crimes such as money laundering and terrorist funding and to provide them with valuable information the perpetration of the crimes.  The information provided in SARs may also be of value to those involved in the suspicious transaction or to third parties, such as private litigants.  These parties often know or suspect of a SAR's existence and issue a subpeona for the SAR and any supporting documents.  How should you respond to such a subpoena?

Federal law is very clear on how to respond.  Under 31 U.S.C. 5318(g), after a SAR has been reported, “the financial institution, director, officer, employee, or agent may not notify any person involved in the transaction that the transaction has been reported.”  Although this provision would seem to allow the reporting of a SAR to someone not involved in the transactions, the Federal Regulations on SARs clearly state otherwise. 

The Regulations for the OCC (12 CFR 21.11), FDIC (12 CFR 353.1), and Federal Reserve (12 CFR 208.62) say the exact same thing: any bank subpoenaed or requested to disclose a SAR or the information contained therein “shall decline to produce the [SAR] or to provide any information that would disclose that a [SAR] has been prepared or filed," citing the applicable regulations, applicable law (e.g., 31 U.S.C. 5318(g)), or both, and notify the appropriate regulatory agency.  If a bank is regulated by the Federal Reserve and the OCC, to be on the safe side it should notify both agencies of the subpoena.  There is a safe harbor in the regulations for disclosure to law enforcement or bank supervisory agencies.  Nonetheless, it may still be prudent to contact the appropriate regulatory agency before disclosure.       

It is important to remember that in declining production of the SAR, you cannot even disclose that a SAR exists.  Although your bank keeps the SAR, it is not your property; it should be treated accordingly.

Banks should have a policy in place on handling SARs and should educate all employees who deal with SARs on proper SAR procedures.  If you have any questions regarding SARs, including what should be reported or what documentation is required, contact Jeffrey J. Andersen.