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Hello? Anyone Home?

Hate those pesky prerecorded telephone solicitations? So does the FTC. On October 4, the FTC announced it would begin aggressive enforcement against telemarketers of prerecorded voice messages—even where the called party has an established business relationship (“EBR”) with the caller. Compare this to the FCC’s telemarketing rule, which has an EBR exception. The FTC’s comment period expires December 18, 2006.

Confused? Contact Obrea Poindexter at opoindexter@mofo.com.

Regulatory Relief

Congress enacted the Financial Services Regulatory Relief Act of 2006 (S. 2856), something of an anticipointment. This is a regulator’s bill, not something bankers could love. Much of it expands the authority of regulators and grants them the ability to share information or decline to disclose certain supervisory information, and creates equal parity in enforcement authority. Break into small groups and discuss:

Section 607 is a “bank examination privilege” provision, something the regulators wanted so that banks would not refuse to give them reports. It confirms that an institution does not waive the privilege by telling a regulator. Financial institutions had wanted this protection for years to ward off civil suits seeking information reported to regulators in which a private party argues that the privilege has been waived.

Section 101 concerns banks’ registration as broker-dealers. Prior to the Gramm-Leach-Bliley Act, banks didn’t have to register but thrifts did. This section facilitates what the GLB Act intended by requiring the SEC to issue regulations with the Federal Reserve Board. The regulations are to be drafted within 180 days, but there is no deadline by which they must be finalized.

Sections 303 and 702, two more pro-regulator provisions, expand enforcement authority against Institution Affiliated Parties (IAPs). The bill expands the definition of IAPs to the holding company level. This is perhaps the worst provision in the bill from the standpoint of the industry.

There are corporate governance provisions as well. For example, national banks don’t have to use cumulative voting; greater leniency on the ability to pay dividends subject to certain caps; thrifts get some relief on previously low lending limits for residential housing units; federal savings banks get parity by obtaining a provision clarifying that for purposes of diversity jurisdiction a savings bank is a citizen of the state in which it has its main office; and a section permitting law enforcement to use third parties to enforce the Fair Debt Collection Practices Act.

For more information, contact Oliver Ireland at oireland@mofo.com.

Micro Payments and Me

On December 1, the Federal Reserve Board published a proposed rule to create an exception from the Regulation E terminal receipt requirements for small-dollar transactions of $15 or less. The proposed rule is intended to facilitate electronic transactions in circumstances where the receipt requirements are sufficiently burdensome or impractical so as to potentially deter merchants from allowing consumers to use electronic payments. (71 Fed. Reg. 69,500.) The FRB specifically requests comment on whether additional consumer protections are necessary for consumers who would not receive receipts under the proposed rule and the dollar amount threshold set forth in the proposed rule. Comments due January 30, 2007.

Internet Gambling

What does Internet gambling have to do with port security? If you said “nothing,” guess again. Tucked into the Security and Accountability for Every Port Act (SAFE) is the Unlawful Internet Gambling Act (UIGA). The UIGA (H.R. 4411) would make it illegal for banks, credit card companies and other financial intermediaries to transfer funds to online gambling sites. “Financial transaction provider” is broadly defined to cover everyone who participates in transferring money for illegal Internet gambling. This expressly includes an “operator of a terminal at which an electronic fund transfer may be initiated” as well as international payment networks. The UIGA does not outlaw sites, it just makes it illegal to settle online wagers.

The law authorizes the Treasury Department and Federal Reserve to jointly write regulations by July 2007. The bill has sown confusion over a “safe harbor” designed to protect payment systems providers, such as credit card companies, which may inadvertently block legal gambling transactions in the effort to block those designated in the law as illegal. One of the goals of the regulations will be to clarify the “safe harbor.”

We suspect the regulations will require everyone connected with a “designated payment system” to identify and block all restricted transactions. The first step undoubtedly will be to expand the credit card merchant code “7995” to all money transfers. (VISA created the “7995” classification in 2001 to avoid having its credit cards used for online gambling.)

There are silver linings. The Act allows federal regulators to exempt transactions where it would be impractical to require identifying and blocking. This was added at the instigation of the banking industry to exempt paper checks; banks have no way of determining whether the payee on a paper check is an illegal gambling site. Also, any financial institution that follows the regs cannot be sued.

For more information, contact Obrea Poindexter at opoindexter@mofo.com.

Multi-Factor Authentication

Picture the Ball descending in Times Square on New Year’s Eve. Once it drops, you need to be in compliance with the Federal Financial Institutions Examination Council guidance on multi-factor authentication. Financial institutions that transact with individual and business customers on the Internet must perform a risk assessment by this date to determine the steps that may be necessary to enhance their security controls vis-à-vis the Internet. Multi-factor authentication is not mandated under all circumstances, but the federal banking agencies advise financial institutions to use these controls as one of several methods to mitigate various types of risk.

For more information, contact Tom Scanlon at tscanlon@mofo.com.

Pentagon Declares War on Interest Rates

Rummy may be gone but the Pentagon will soon regulate banks. Congress enacted and the President signed into law the John Warner National Defense Authorization Act for Fiscal Year 2007. The Act contains the so-called “Talent Amendment,” which will cap at 36% the rate of interest that can be charged to soldiers. The Talent Amendment also contains special disclosure requirements. Interest and all cost elements (fees, premiums, etc.) are included for purposes of calculating interest. It also prohibits arbitration. The Talent Amendment does not apply to residential mortgages, car loans, or loans to purchase personal property secured by the car or personal property, but it has card issuers alarmed. But a leading Banking Committee member (Tim Johnson (D-S.D.)) has expressed concern that the measure could restrict credit cards and overdraft programs. Will it get undone? Consider this: The bill’s chief sponsor, Sen. Jim Talent (R-Mo.), lost his re-election bid.

For more information, contact Joe Gabai at jgabai@mofo.com.

ACH Guidance

The OCC issued OCC Bulletin 2006-39, dated September 1, 2006, providing guidance to national banks on managing risks of automated clearing house (“ACH”) activity. The bulletin outlines the components of a sound risk management program. National banks are encouraged to develop an enterprise-wide risk management program relative to ACH activities. The bulletin should serve as that guide.

Note, however, that the bulletin fails to take into account risks arising from a bank’s customer’s compliance with the recent changes to Regulation E, to become effective January 1, 2007, relating to electronic check conversion transactions. Under the new Reg. E, when someone uses information drawn from a check to originate an electronic fund transfer, the person must secure the authorization of the check drawer (read, consumer). If a customer fails to comply with the new changes in the NACHA operating rules, which are designed to conform to the new Reg. E changes, the bank may face a breach of warranty claim.

For more information, contact Joan Warrington at jwarrington@mofo.com.

Summer Vacation?

Last August, the FDIC announced that it will postpone by at least six months its decisions on applications by Wal-Mart (and others) to own industrial loan companies (ILCs). Now, the new Congress wants to weigh in on the issue. Representatives Barney Frank (D-Mass.) and Paul Gillmor (R-Ohio) have written to the FDIC requesting an extension of the FDIC’s self-imposed moratorium until July 31.