Financial Services Report, Winter 2005
In this issue:
On the Edge
Editor’s Note
We aim to please. So, to improve customer service we conducted an informal poll to find out what our readers want. And you spoke. You said: Bring back the MoFo totes.
Did I also mention we listen? And care. So, to you, dear readers, we make this our New Year’s pledge: No more reader’s polls.
This quarter, acronyms ruled. Even a few months ago, HMDA seemed so nineties, but now it’s back like a yuletide fruit cake.
In September, the government released this year’s HMDA data which, for the first time, included loan pricing data. A hockey
game broke out. Consumer activists accused lenders of racial discrimination, lenders demurred, commentators commented. For
a moment, it seemed FEMA would have to be called in. If you’re HMDA-phobic, take our advice: Try aromatherapy and read our article, "Do You FICO?"
FCRA was the other neon acronym this quarter. The Seventh and Ninth Circuits issued snarky decisions that call to mind the
First Law of Litigation: There is no theory so dim-witted that some judge, somewhere, won’t accept it. When several judges subscribe, as just happened,
it’s time to check the water supply. These decisions have bred class actions. If you doubted that, there’s an e-mail we need
to forward you from the son of a Nigerian oil minister.
Next year opens with more Supreme Court confirmation hearings, and there will be a lot said about important constitutional
questions. But just once, we wish a Senator would ask about the one thing we really care to know: What’s his position on the Anna Nicole Smith case?
We wish you and yours the best this holiday.
William L. Stern, Editor
Beltway Report
Heimlich, Anyone?
If you think data breach is bad now, just wait. We’re about to choke on conflicting data breach-notification legislation enacted
in almost half the states and Congress is unlikely to take action soon.
There will be no federal data breach-notification legislation passed this year. And none will pass until March 2006 at the
earliest. By then, 21 state data breach-notification laws will be in effect, some of them conflicting. Twelve of these are
new laws that will go into effect between now and March. North Carolina’s law, effective December 1, will prohibit businesses
from notifying consumers of a breach if law enforcement officials request a delay in order to investigate a crime. But Illinois’
law, effective January 1, permits no delay while a law enforcement agency is responding to the breach and if notification
will impede a criminal investigation. The laws differ also in specifying whom to tell. New York’s law, for example, is effective
December 7 and requires a business to notify certain state officials and, if more than 5,000 state residents are affected
the business must also notify consumer reporting agencies. A few states spell out the information a business must include
in the notice to individuals potentially affected by the breach, while most do not.
The full text of this article is available at:
http://www.mofo.com/news/updates/files/update02106.html
California Report
Sacramento was not the place to get a good night’s sleep this year. California’s Democrat-controlled legislature served up
a menu of veto-bait that even a fishmonger would envy. The Governor signed 729 bills and vetoed 232. Among the dead and dying
were bills to establish gender pay equity and raise the minimum wage to $7.75/hour. But some chum got through, and some of
the bills that will affect financial institutions are the following:
Elder Abuse Bill Passes
Abuse cops. That’s what SB 1018 will make of all bank employees. The bill imposes liability of $1,000 if a bank employee fails
to report elder abuse, $5,000 if willful, but it creates an absolute privilege for reporting. The penalty is imposed only
on the bank, however, not the employee. But there is no private right of action; only law enforcement officials may sue. It
becomes effective January 1, 2007.
The full text of this article is available at:
http://www.mofo.com/news/updates/files/update02107.html
Preemption Report
Court to Der Spitzer: "Nicht"
If there was something about "no" that New York Attorney General Eliot Spitzer didn’t understand, the district court in New
York fixed that. On October 12, Judge Sidney Stein permanently enjoined Mr. Spitzer from enforcing New York’s fair lending
laws against national banks and their operating subsidiaries.
The full text of this article is available at:
http://www.mofo.com/news/updates/files/update02108.html
Privacy Report
SB-1’s "Affiliate-Sharing" Provisions Preempted
A federal district court found the "affiliate-sharing" provisions of California’s "SB-1" preempted by the FACT Act. California’s Financial Information Privacy Act, better known as SB-1, marked a departure from federal privacy laws by requiring
customer "opt-in" consent when financial institutions share nonpublic customer information with non-affiliates, and "opt-out"
consent when sharing information with affiliates. (Fin. Code § 4050.) This created compliance headaches because an institution
might have different "bundles" of customer information, each subject to a different privacy regime.
The full text of this article is available at:
http://www.mofo.com/news/updates/files/update02109.html
Operations Report
State-Chartered Banks
The FDIC Board on October 6 approved a proposed rule that would preempt certain state laws that apply to interstate activities
of state-chartered banks. The proposal, intended to provide parity between state banks and national banks, generally allows
state banks with branches in other states to conduct any activity at those branches that are permissible for national banks,
while preventing discrimination against state banks on interest rates. There will be a 60-day comment period on the proposal
after its publication in the Federal Register.
The full text of this article is available at:
http://www.mofo.com/news/updates/files/update02110.html
Ahead of the Summons
Collection Cases Increase Class Action Risk
Pursuing small-dollar collection cases has always been a headache. Now, they may be a Petri dish for incubating class actions.
Here’s how it works: Bring a collection action, draw a counterclaim, and lose, and suddenly your small-dollar collection
action can mushroom into a class action … in a case you’ve already lost.
The full text of this article is available at:
http://www.mofo.com/news/updates/files/update02111.html
Mortgage Report
YSPs Aren’t "Points"
A "yield spread premium" does not count as "points and fees" for purposes of triggering HOEPA disclosures. (See, e.g., Millsv.Equicredit Corp., 344 F. Supp. 2d 1071 (E.D. Mich. 2004).) Likewise, YSPs do not count as fees for purposes of triggering state predatory
lending laws. (See Wolskiv.Fremont Inv. & Loan, 127 Cal. App. 4th 347 (2005) (California’s Fin. Code § 4970); Goldome Credit Corporationv.Burke, No. 1021072. 2005 WL 2108548 (Ala. Sup. Ct. Sept. 2, 2005) (Alabama Consumer Credit Act).)
The full text of this article is available at:
http://www.mofo.com/news/updates/files/update02112.html
Arbitration Report
Trial Lawyers Attack JAMS
In early November, trial lawyers sent a letter to JAMS demanding that arbitrators in California state whether they think mandatory arbitration clauses that prohibit consumer class actions should be enforced. The Consumer
Attorneys of California sent letters to more than 100 JAMS neutrals demanding that they state whether such clauses violate
JAMS’ standards.
A year ago, JAMS got cheers from the plaintiff’s bar and jeers from businesses when it announced that it would no longer enforce
contract clauses that forbid consumer and employment class actions. Businesses revolted, and bolted, so a few months later
JAMS rescinded that policy. Now, the trial lawyers are demanding that JAMS neutrals sign a statement about whether they agree
that such clauses violate JAMS’ fairness standards.
Another Bad Arb Case From California
On November 29, a California appellate court in Los Angeles held that a "no-class action" clause that was part of an arbitration agreement used by defendant EarthLink, Inc. in its DSL
service provider agreements was unconscionable and therefore unenforceable. The decision followed on the heels of Discover Bankv.Superior Court(Boehr) 36 Cal. 4th 148 (2005), discussed in our last issue, in which the California Supreme Court held that such clauses are generally
(but not always) unconscionable when used as part of consumer arbitration agreements. (See Aralv.EarthLink, Inc., No. B177146 (Nov. 29, 2005).)
No Arb for Mortgage Insurance Company
The Fourth Circuit has held that a mortgage insurance company could not enforce an arbitration agreement contained in the
mortgage contract. (Brantleyv.Republic Mortgage Insurance Co., No. 05-1047, 2005 WL 2382214 (4th Cir. Sept. 28, 2005).) The court rejected the MI company’s motion to compel arbitration,
finding that the plaintiffs’ Fair Credit Reporting Act claims were "wholly separate" from the mortgage contract, and that
the MI company was not a third-party beneficiary of the arbitration agreement.
Credit Card Report
Currency Conversion Case Converted
The Christmas elf left an early coal in the stocking of Adam Schwartz. Mr. Schwartz sued Visa and MasterCard under California’s
unfair competition law for failing to require that card-issuing banks include a line-item disclosure of the 1% foreign currency
conversion fee in the monthly bank statements to cardholders. Never mind that Mr. Schwartz never incurred a foreign currency
conversion charge. In fact, Mr. Schwartz never even owned a Visa card or MasterCard!
The trial judge—perhaps eager to prove the First Law of Litigation (see Editor’s Note)—agreed. He entered judgment requiring
Visa to give restitution to a nationwide class of cardholders and MasterCard to give restitution to a class of California
cardholders. Some estimated the exposure at $1 billion and $60 million, respectively.
The court of appeal reversed. It held that because California’s Proposition 64 now bars suits brought by unaffected plaintiffs,
which Mr. Schwartz was, it was error to grant relief under California’s unfair competition law. (Schwartzv.Visa International Service Ass’n,132 Cal. App. 4th 1452 (2005).)
For more information, please contact William Stern (wstern@mofo.com).
Insurance Report
Misery Gets Company
Bankers don’t like SARs. Now, insurance companies get to share in the misery. On October 31, the Treasury’s Financial Crimes
Enforcement Network (FinCEN) issued final rules implementing provisions of the anti-terrorist financing law: requirements
that certain insurers establish procedures to combat money laundering and to file Suspicious Activity Reports. The final rule
imposes anti-money laundering program requirements only on insurance companies, exempting agents and brokers, and limits the
range of products to which the rules apply only to those that pose a risk of abuse by money launderers.
Practice Tip:Although agents and brokers are not covered under the final rule, companies that issue or underwrite certain insurance products
must take responsibility for their actions as part of their overall obligations under the Patriot Act, according to FinCEN.
The two new rules can be found on FinCEN’s Web site at http://www.fincen.gov/newsrelease10312005.pdf
Captive Reinsurance Update
In our last issue, we gave an overview of the captive reinsurance RESPA wars. Since then, lots of companies have been settling
regulators’ charges. Fidelity National Financial has agreed to refund $2.2 million to central Florida residents and about
$1.2 million to consumers nationwide to settle Colorado’s investigation of alleged title insurance-related kickbacks. Fidelity
has reached similar settlements with the Arizona and California insurance departments.
Colorado’s investigation of nine title insurers, including Fidelity, led to the earlier refunding of about $24 million to
consumers by First American Title Insurance Co., and sparked dozens of similar investigations nationwide in states including
Florida, Washington, California, Oklahoma, Minnesota, and Washington.
Note:Several non-title companies have recently been served with HUD enforcement subpoenas.
For more information, please contact Michael Agoglia (magoglia@mofo.com).
Creditor’s Rights Report
Bankruptcy Reform Redux – Comments on TILA Amendments
Mark Twain once wrote, "The rule is perfect: in all matters of opinion our adversaries are insane." Never does this quote
seem to ring more true than in federal rule-making, and indeed, the Federal Reserve Board is seeking public comment through
December 16 on a host of questions relating to proposed changes to Regulation Z to implement the new Truth in Lending disclosure
obligations mandated by the Bankruptcy Abuse and Prevention Act of 2005 ("BAPA").
As we noted in our last newsletter, BAPA provides great benefits for creditors, but it also imposes significant new Truth
in Lending disclosure obligations for solicitations, advertisements, and applications for "open-end" credits, including most
credit card and home equity line transactions. BAPA requires that the Fed promulgate regulations governing minimum payment
disclosures both in periodic statements and in a toll-free telephone number available to borrowers, introductory rate disclosures
in both conventional and Internet-based credit card promotional materials, disclosures relating to payment deadlines and late
payment penalties, and disclosures relating to the tax impact of loans (both open-end and closed-end) that may exceed the
fair market value of the loans.
The Fed seeks comment on a broad range of issues relating to the new BAPA requirements, including such questions as whether
certain types of accounts should be exempt from the new disclosure rules, what assumptions should be used and disclosed in
calculating the estimated repayment period when minimum payments are made, and what standards the Board should use in requiring
that minimum payment disclosures be "clear and conspicuous." Now is the time to let your opinion be heard on these issues,
as the comment period will expire on December 16, 2005.
The Fed has elected to implement the BAPA amendments as part of its broader Regulation Z review to lessen the "regulatory
burden" on creditors that otherwise would result from separate rounds of rule-making. Its stated goal is to "improve the effectiveness
and usefulness of TILA’s open-end credit disclosures" while avoiding "information overload" for borrowers. The new disclosure
regulation will not take effect until at least 12 months after the Fed issues final regulations adopting the changes.
The Fed’s published list of questions for public comment can be accessed directly at http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20051011/attachment.pdf.
Car Report
No FCRA Violation
The Seventh Circuit rejected the claim that a common practice used in automotive financing arrangements violates the Fair Credit Reporting Act. In Stergiopoulosv.First Midwest Bancorp Inc., No. 04-2710, 2005 U.S. App. LEXIS 22997 (7th Cir. Oct. 25, 2005) it held that third-party lenders can review a consumer’s
credit report before they actually commit to making the loan, even without the consumer’s knowledge. In that case, the auto
dealership made a tentative deal on a retail installment purchase, then gave the lender and other lenders the chance to purchase
the loan. No problem with that.
The MoFo Marker
| |
|
22
|
Dollars, in thousands, of federal spending per U.S. household |
|
56
|
Percentage of Americans who label judicial activism a "crisis" |
| 9.4 |
Number of cars in China, in millions, 1994 |
| 28.6 |
Number of cars in China, in millions, 2004 |
| 140 |
Number of cars in China, in millions, by 2020 |
| 30 |
Seconds of lathering needed to kill germs when washing hands |
