Federal Issues

House Committees Approve Legislation to Create Consumer Financial Protection Agency. In the past ten days, both the House Financial Services Committee (the Financial Services Committee) and the House Energy and Commerce Committee (the Commerce Committee) have approved H.R. 3126, the Consumer Financial Protection Agency (CFPA) Act, clearing the legislation for consideration by the full House of Representatives (reported in Regulatory Restructuring Report Issue 10). If enacted, the bill will establish an independent agency tasked with overseeing the provision of consumer financial products and services. In reporting the legislation out of committee, the Financial Services Committee approved several key amendments. In particular, the bill includes provisions that would codify the preemption standard set forth in Barnett Bank of Marion County, N.A. v. Nelson for national banks, while repealing federal preemption for operating subsidiaries of national banks and federal thrifts – and thus overturning the U.S. Supreme Court decision in Watters v. Wachovia Bank, N.A. (reported in InfoBytes Special Alert, Apr. 17, 2007). The bill also exempts community banks with less than $10 billion in assets and credit unions with less than $1.5 billion in assets from stand-alone CFPA examinations, although such “small banks” would still be subject to other CFPA authority, including as a back-up regulator. Beyond that, the Financial Services Committee also approved amendments that would expand the scope of the CFPA authority, including to “service providers,” defined as any person who provides a “material service” to a covered person when providing a consumer financial product or service. The Financial Services Committee also exempted certain types of businesses, including manufactured home retailers and auto dealers.

Separately, the Commerce Committee approved the bill with minor changes to the legislation reported out of the Financial Services Committee. The Commerce Committee approved a manager’s amendment that changes the leadership of the CFPA from a single director to a panel of five directors with staggered terms and strengthens the Federal Trade Commission’s (FTC) litigation authority under the FTC Act.

For a copy of the Financial Services Committee Print, which includes all of the approved amendments from the markup in the Financial Services Committee, as well as the list of amendments offered in the Commerce Committee, please see http://1.usa.gov/1NdqV6For a copy of the full list of amendments from the Financial Services Committee markup, please click here.  

FTC Delays Red Flags Rule Until June 1, 2010. On October 30, the FTC announced that it will delay enforcement of its Red Flags Rule (the Rule) until June 1, 2010. The FTC had previously scheduled enforcement of the Rule to begin on November 1, 2009 (reported in InfoBytes, July 31, 2009). This is the third time that the FTC has delayed enforcement of the Rule which, among other things, requires creditors and financial institutions develop and implement written Identity Theft Prevention Programs. For a copy of the press release, please see http://www.ftc.gov/opa/2009/10/redflags.shtm. For further information, please see the FTC’s Red Flags Rule website at http://www.ftc.gov/bcp/edu/microsites/redflagsrule.

HUD Mortgagee Review Board Proposes to Withdraw HUD/FHA Approval for HECM Mortgagee. On October 30, the U.S. Department of Housing and Urban Development (HUD) announced that its Mortgagee Review Board (MRB) is proposing to permanently withdraw the HUD/Federal Housing Administration (FHA) approval of Financial Mortgage USA, Inc., a Home Equity Conversion Mortgage (HECM) lender. HUD’s MRB alleges that the lender failed to (i) implement an FHA-required quality control plan, (ii) separate its lending operations from those of its affiliated insurance company, (iii) conform to prudent lending practices, and (iv) properly provide borrowers with housing counseling services. The lender has 30 days to respond to the MRB’s proposed withdrawal and to seek a hearing before an Administrative Law Judge. According to HUD’s press release, the MRB will seek to impose the maximum $97,500 civil money penalty available against the lender. For a copy of the HUD press release, please click here.

Fannie Mae Announces New Loss Mitigation Program for Investors, Owners of Second Homes
. On October 20, Fannie Mae announced its Payment Reduction Plan (PRP) for homeowners who are unable to receive a mortgage loan modification under the Home Affordable Modification Program (HAMP). The PRP replaces and makes several adjustments to Fannie Mae’s HomeSaver Forbearance (HSF) program. Most notably, the PRP’s application includes non-owner occupied properties, such as investment properties and second homes. Further, under the PRP, the borrower’s monthly payment can only be reduced by up to 30%, while the HSF program permitted reductions up to 50%. The HSF program reductions included principal, interest, taxes, insurance and other escrow items, but under the PRP, the reduction only includes the “principal and interest” component of the payment. Effective November 1, 2009, the HSF program can no longer be offered to borrowers. For more information on the retirement of the HSF program and on PRP eligibility guidelines and procedures, please click here.

OTS Announces Amendments to Examination Handbook. On October 27, the Office of Thrift Supervision (OTS) issued Regulatory Bulletin 37-47 to announce amendments to Examination Handbook Section 340 on Internal Control (the Handbook). Many of the substantive changes focus on enhanced management and directorate responsibilities and risk management functions to detect insider fraud or abuse. For example, Section 340 now (i) identifies five control breakdowns typically seen in problem and failed institutions, and (ii) contains a new overview of the Sarbanes-Oxley Act requirements concerning corporate governance, financial disclosures and auditing relationship of public companies, including public banking organizations. Additionally, the revised Handbook states that directors and senior management “must establish a strong culture of compliance at the top of the association, oversee anti-fraud programs at the association, and set a proper ethical tone for governing the conduct of business.” In addition, “[s]taff members at all levels must demonstrate successful completion of an ethics program.” Further, new language was added to emphasize the interrelationship between enterprise risk management and corporate governance. The OTS states that effective enterprise risk management programs take into consideration how one area of an association may affect the legal and reputational risk of other areas, as well as the association as a whole, and discourages associations from following the “silo approach” among business lines. Finally, the OTS provided a list of red flags that signal potential fraud. For a copy of the bulletin and the revised Handbook, please see http://files.ots.treas.gov/74864.pdf.

OTS Issues Memo Regarding Examination Requirements for Capital Purchase Program Participants. On October 21, the Office of Thrift Supervision (OTS) issued a CEO memo to provide entities participating in the Troubled Asset Relief Program’s (TARP) Capital Purchase Program (CPP) guidance for ensuring compliance with the provisions of the Securities Purchase Agreement (the Agreement), the requirements of the Emergency Economic Stabilization Act, and U.S. Department of the Treasury rules. According to the OTS, OTS examiners will conduct an initial, separate TARP examination. Examiners will subsequently conduct the TARP review during regularly-scheduled comprehensive examinations. Prior to such an examination, participants will receive a TARP-related “Preliminary Examination Response Kit” for completion. In the examination, the OTS will monitor the usage of CPP funds “to augment capital and support lending needs in its market.” According to the OTS, while the terms of the Agreement do not mandate specific use of CPP funds, the OTS expects OTS-regulated entities to document the use of CPP funds “as a matter of sound corporate governance.” Specifically, OTS-regulated entities must provide documentation “commensurate with” the amount of TARP funds received and the percentage of funds directed to thrift activities. If applicable, OTS examiners will discuss noncompliance and provide appropriate comments (based on safety and soundness concerns and compliance with the relevant laws and regulations) in the entity’s Report of Examination. For a copy of the memo, please click here.

FDIC Releases List of Enforcement Actions for September. On October 30, the Federal Deposit Insurance Corporation (FDIC) released a list of its orders of administrative enforcement actions taken against banks and individuals for September 2009. According to the list, the FDIC processed a total of forty-eight matters in September 2009, including (i) twenty-six cease and desist orders, (ii) twelve removal and prohibition orders, (iii) six civil money penalties, (iv) two prompt corrective action directives, (v) one voluntary termination of insurance, and (vi) one order terminating an order to cease and desist. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09193.html.

HUD Issues Mortgagee Letter Clarifying Debenture Interest Calculation and Filing Instructions for Certain HECM Claims. On October 23, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2009-44 to clarify the valuation of debenture interest for a Home Equity Conversion Mortgage (HECM) Claim Type 21 and update filing instructions for HECM Claim Types 21 and 24 (Supplemental). With respect to the valuation of debenture interest on a HECM Claim Type 21, the mortgagee letter reiterates that debenture interest is payable from the “due date,” as defined under § 206.27(c). Additionally, the mortgagee letter provides that when filing a HECM Claim Type 21, mortgagees must supply both the due date and the date of death or the date the mortgagor no longer held title to the property. The mortgagee letter further advises that, within six months, mortgagees may correct any Claim Type 21 which (i) contained missing or incorrect due date information and (ii) was submitted after April 1, 2006, by filing a Claim Type 24 (Supplemental) form. For a copy of Mortgagee Letter 2009-44, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-44ml.doc.

HUD Announces EClass Web-Based Training Application. On October 27, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2009-45 to announce the release of its web-based training application, EClass. The EClass system will provide HUD-Approved Servicers, HUD-Approved Housing Counseling Agencies, Non-Profit Housing Counseling Agencies, and HUD Staff with additional training on Federal Housing Administration loss mitigation programs and procedures. The EClass system currently consists of twelve training modules dedicated specifically to loan servicing and loss mitigation issues, including one module devoted exclusively to the Home Affordable Modification Program. Parties interested in EClass can register at https://eclass.hud-nsctraining.com. For a copy of Mortgagee Letter 2009-45, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-45ml.doc.

FDIC Issues Alert Regarding Fraudulent EFT Transfers. On October 29, the Federal Deposit Insurance Corporation (FDIC) warned financial institutions regarding an increase in schemes involving unauthorized electronic funds transfers (EFTs). According to the FDIC, criminals involved in the scheme gain unauthorized access to online deposit accounts and use this access to originate unauthorized EFTs to a transfer agent’s deposit account (the transfer agent is referred to as a “money mule”). The transfer agent then quickly withdraws the funds and wires the funds overseas for a small commission. According to the FDIC, the fraud may be difficult to prevent because the EFTs are often made immediately available by the receiving institution. For a copy of the alert, please click here.

FinCEN Issues Revised Advisory Regarding Anti-Money Laundering, Counter-Terrorist Deficiencies. On October 28, the Financial Crimes Enforcement Network (FinCEN) updated its advisory regarding deficiencies in the anti-money laundering and counter-terrorist financing regimes of Iran, Uzbekistan, Turkmenistan, Pakistan, and Sao Tome and Príncipe. (The original advisory was reported in InfoBytes, July 17, 2009) FinCEN reminds banks and financial institutions that FinCEN regulations require the application of due diligence to correspondent accounts maintained for foreign financial institutions and the filing of suspicious activity reports under certain circumstances. For a copy of the advisory, please see 
http://www.fincen.gov/statutes_regs/guidance/pdf/fin-2009-a007.pdf.

State Issues

Pennsylvania Banking Department Announces Enhancements to Mortgage Examination Procedures. On October 15, the Pennsylvania Department of Banking (the Department) announced that, starting next year, it will begin restructuring its examination process to conform to the multistate examination framework contained in the Cooperative Protocol and Agreement for Mortgage Supervision (reported in InfoBytes, Sept. 4, 2009). As part of this restructuring, the Department is adopting a new automated compliance system capable of pre-screening a licensee’s entire mortgage portfolio before the start of a mortgage examination. In anticipation of this change, the Department encourages licensees to review and modify their data retention and extraction capabilities. Additionally, the Department directs licensees to (i) maintain loan portfolio information in a format that allows electronic extraction of information, (ii) complete and return a “Survey of Licensee Technology Readiness” by November 2, 2009, and (iii) request a registration code for the automated compliance system. The Department plans to fully implement the new examination framework by 2011. For a copy of the Department’s notification, please see http://bit.ly/oF01wa.

Courts

Third Circuit Holds RESPA Claims Survive Dismissal with No Allegation of Overcharge. On October 28, the U.S. Court of Appeals for the Third Circuit reversed the dismissal of a putative class action, holding that the Real Estate Settlement Procedures Act (RESPA) authorizes private rights of action even in the absence of an allegation that there has been an overcharge. Alston v. Countrywide Fin. Corp., No. 08-4334, 2009 WL 3448264 (3rd Cir. Oct. 28, 2009). The plaintiff borrowers in Alston obtained home mortgages from the defendant lender where they were required to obtain private mortgage insurance (PMI) from insurers that would reinsure their policies with the lender’s affiliate reinsurer under a so-called “captive reinsurance agreement.” According to the borrowers, the captive reinsurance agreement violated RESPA’s anti-kickback provisions because it allowed the defendant reinsurer to collect more than $892 million in reinsurance premiums without paying anything for the claims, thus constituting a kickback from the lender to the reinsurer. The defendants moved to dismiss, arguing, in part, that the borrowers lacked standing under Article III of the U.S. Constitution because they did not allege that they were actually overcharged. The borrowers argued that the captive reinsurance arrangements constituted an injury for purposes of standing – even if they did not result in overcharges – because the arrangements kept PMI premiums artificially inflated and decreased competition among PMI providers. The district court granted the defendants’ motion, noting that the borrowers lacked Article III standing to allege that they paid an artificially inflated rate and holding that RESPA’s damages provision authorized the borrowers to sue only when they had been overcharged. The Third Circuit reversed, finding that RESPA’s plain language did not require the borrowers to allege an “overcharge.” According to the court, “the provision of statutory damages based on the entire payment, not on an overcharge, is a certain indication that Congress did not intend to require an overcharge to recover under Section 8 of RESPA.” Agreeing with the conclusion of the Sixth Circuit in In re Carter II, 553 F.3d 979 (6th Cir. 2009), the court held that RESPA’s definition of “any” charge means that charges are not limited to a particular type of charge, such as an overcharge. Accordingly, the court held that the borrowers had suffered an injury sufficient to support Article III standing. The court also agreed with a line of cases holding that the borrowers’ damages could be three times the total payment for the challenged service, not just the resultant overcharge. For a copy of the opinion, please click here.

Eighth Circuit Holds State Law Claims Regarding Document Preparation Fees is Preempted for Federal Savings Associations. On October 20, the U.S. Court of Appeals for the Eighth Circuit affirmed a district court finding that state laws purporting to restrict lenders from charging document preparation fees are preempted by Office of Thrift Supervision (OTS) regulations issued under the Home Owners’ Loan Act. Casey v. Federal Deposit Ins. Corp., No. 09-1096, 2009 WL 3349950 (8th Cir. Oct. 20, 2009). In Casey, the initial claim was brought by seven homeowners against four lenders that were all federal savings associations (FSAs). The homeowners claimed that the FSAs’ practice of charging fees for the preparation of loan documents violated two Missouri laws–one prohibiting the unlicensed practice of law, and another prohibiting fraudulent conduct in commerce. The FSAs moved for dismissal of the claims based on preemption of the Missouri laws by OTS regulations. Under Section § 560.2(b) of the OTS regulations, among the types of preempted state laws are those purporting to impose requirements regarding “loan-related fees, including, without limitation, initial charges.” The homeowners argued that, because the Missouri state laws ”[made] no mention of lending,” they “necessarily fall[] outside the scope of the § 560.2(b) examples,” and are preempted only if they “purport[] to regulate or otherwise affect” credit activities without regard to § 560.2(b). The court concluded that “a state law that either on its face or as applied imposes requirements regarding the examples listed in § 560.2(b) is preempted. A generally applicable state law that imposes no such requirements will not be preempted if, as applied, it ‘only incidentally affect[s] the lending operations of [FSAs] or [is] otherwise consistent with the purposes of [§ 560.2(a)].” In dismissing the homeowners’ claims, the Eighth Circuit stated that the Missouri laws at issue, as applied, would impose requirements regarding loan-related fees and were thus preempted by § 560.2(b) of the OTS regulations. For a copy of the opinion, please click here.  

D.C. Federal Court Rules that Attorneys Are Not Creditors Under FTC’s Red Flag Rule. On October 30, the U.S. District Court for the District of Columbia held that the Federal Trade Commission (FTC) overstepped its statutory authority when it attempted to apply its Red Flags Rule to attorneys. American Bar Ass’n v. Federal Trade Commission, No. 09-cv-01636 (D.D.C. Oct. 29, 2009). The case arose after the American Bar Association (ABA) filed a complaint (reported in InfoBytes, Sept. 4, 2009) and request for declaratory relief against the FTC alleging that the agency’s decision to apply its Red Flags Rule to attorneys violated the Administrative Procedures Act because the decision was (i) in excess of the agency’s statutory jurisdiction, and (ii) arbitrary and capricious. At a hearing on the ABA’s motion for partial summary judgment, the court determined that the FTC overstepped its authority because its interpretation of the term "creditor" was overly broad. In its order granting partial summary judgment, the court stated that it will explain its reasoning in a memorandum opinion that will be published within thirty days. For a copy of the order, please click here.

Second Circuit Approves Application of ERISA “Fractional Test” to Cash Balance Pension Plans. On October 19, the U.S. Court of Appeals for the Second Circuit ruled that a lower federal court erred in finding that the Employee Retirement Income Security Act’s (ERISA) “fractional test” for calculating minimum benefit accruals could not be applied to cash balance pension plans. Lonecke v. Citigroup Pension Plan, No. 08-0459-cv, 2009 WL 3335910 (2nd Cir. Oct. 19, 2009). In Lonecke, the plaintiffs were former employees of Citigroup who brought a class action alleging that the Citibuilder Cash Balance Plan (the Plan), a pension plan, violated ERISA. The lower court found that the Plan violated ERISA’s minimum benefit accrual rules by applying the “fractional test” to its cash balance pension plan, and that Citigroup further violated ERISA’s notice requirement. The Second Circuit reversed the lower court’s ruling, finding that “all defined benefit plans [including cash balance plans] may use any of the three minimum accrual tests to comply with anti-backloading rules.” In addition, the court held that Citigroup’s practice of curing minimum accrual defects at the last minute, by adding money to employees accounts at the time of separation, did not violate ERISA. The statute’s plain language, the court noted, provides that the relevant calculations under minimum accrual rules must be made at the time an employee terminates employment, not on a year-by-year basis. The court also found that Citigroup did not violate ERISA’s requirement that adequate notice be given to employees of a reduction in the accrual of future benefits when it allegedly failed to give participants notice of the detailed methods it intended to use to calculate their benefits. For a copy of the opinion, please click here.

Firm News

Margo Tank will be speaking at the NCHELP Fall Training Conference in St. Pete Beach, Florida on November 16 on building electronic student lending platforms in compliance with ESIGN and the UETA.

Andrew Sandler and Jeff Naimon spoke at the 2009 CRA and Fair Lending Colloquium October 4-7 in New Orleans. Andrew Sandler spoke on Regulatory Reform, and Jeff Naimon spoke on Navigating a HMDA Data Analysis.

Andrew Sandler spoke on October 6 at the Financial Access Roundtable Discussion with Bankers and Regulators, sponsored by Louisiana Appleseed, on a Latino Outreach Roundtable regarding Latino immigrant access to banks.

Jeff Naimon spoke about developments in appraisal requirements and related risks at the North Carolina Bankers Association’s Management Team Conference on October 20 in Greensboro, North Carolina.

Stephen Ambrose and Andrew Sandler spoke about Consumer Arbitration at the American Financial Services Association’s Annual Law Committee meeting on October 26 in Washington, DC.

Andrew Sandler spoke at the District of Columbia Bar regarding the proposed Consumer Financial Protection Agency on October 27 in Washington, DC.

Miscellany

FTC To Host Roundtable Discussion on Debt Collection Litigation. The Federal Trade Commission (FTC) will host a roundtable discussion regarding debt collection litigation in Washington, DC on December 4, 2009. The roundtable is free and open to the public; a live webcast of the event will also be available. The FTC is accepting requests to participate in the roundtable until November 9. The FTC is also accepting written comments or original research pertaining to debt collection litigation or arbitration proceedings until November 30. For more information, please click hereFor a copy of the press release, please click here.

Mortgages

HUD Mortgagee Review Board Proposes to Withdraw HUD/FHA Approval for HECM Mortgagee. On October 30, the U.S. Department of Housing and Urban Development (HUD) announced that its Mortgagee Review Board (MRB) is proposing to permanently withdraw the HUD/Federal Housing Administration (FHA) approval of Financial Mortgage USA, Inc., a Home Equity Conversion Mortgage (HECM) lender. HUD’s MRB alleges that the lender failed to (i) implement an FHA-required quality control plan, (ii) separate its lending operations from those of its affiliated insurance company, (iii) conform to prudent lending practices, and (iv) properly provide borrowers with housing counseling services. The lender has 30 days to respond to the MRB’s proposed withdrawal and to seek a hearing before an Administrative Law Judge. According to HUD’s press release, the MRB will seek to impose the maximum $97,500 civil money penalty available against the lender. For a copy of the HUD press release, please click here.

Fannie Mae Announces New Loss Mitigation Program for Investors, Owners of Second Homes. On October 20, Fannie Mae announced its Payment Reduction Plan (PRP) for homeowners who are unable to receive a mortgage loan modification under the Home Affordable Modification Program (HAMP). The PRP replaces and makes several adjustments to Fannie Mae’s HomeSaver Forbearance (HSF) program. Most notably, the PRP’s application includes non-owner occupied properties, such as investment properties and second homes. Further, under the PRP, the borrower’s monthly payment can only be reduced by up to 30%, while the HSF program permitted reductions up to 50%. The HSF program reductions included principal, interest, taxes, insurance and other escrow items, but under the PRP, the reduction only includes the “principal and interest” component of the payment. Effective November 1, 2009, the HSF program can no longer be offered to borrowers. For more information on the retirement of the HSF program and on PRP eligibility guidelines and procedures, please click here.

HUD Issues Mortgagee Letter Clarifying Debenture Interest Calculation and Filing Instructions for Certain HECM Claims. On October 23, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2009-44 to clarify the valuation of debenture interest for a Home Equity Conversion Mortgage (HECM) Claim Type 21 and update filing instructions for HECM Claim Types 21 and 24 (Supplemental). With respect to the valuation of debenture interest on a HECM Claim Type 21, the mortgagee letter reiterates that debenture interest is payable from the “due date,” as defined under § 206.27(c). Additionally, the mortgagee letter provides that when filing a HECM Claim Type 21, mortgagees must supply both the due date and the date of death or the date the mortgagor no longer held title to the property. The mortgagee letter further advises that, within six months, mortgagees may correct any Claim Type 21 which (i) contained missing or incorrect due date information and (ii) was submitted after April 1, 2006, by filing a Claim Type 24 (Supplemental) form. For a copy of Mortgagee Letter 2009-44, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-44ml.doc.

HUD Announces EClass Web-Based Training Application. On October 27, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2009-45 to announce the release of its web-based training application, EClass. The EClass system will provide HUD-Approved Servicers, HUD-Approved Housing Counseling Agencies, Non-Profit Housing Counseling Agencies, and HUD Staff with additional training on Federal Housing Administration loss mitigation programs and procedures. The EClass system currently consists of twelve training modules dedicated specifically to loan servicing and loss mitigation issues, including one module devoted exclusively to the Home Affordable Modification Program. Parties interested in EClass can register at https://eclass.hud-nsctraining.com. For a copy of Mortgagee Letter 2009-45, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-45ml.doc.

Pennsylvania Banking Department Announces Enhancements to Mortgage Examination Procedures. On October 15, the Pennsylvania Department of Banking (the Department) announced that, starting next year, it will begin restructuring its examination process to conform to the multistate examination framework contained in the Cooperative Protocol and Agreement for Mortgage Supervision (reported in InfoBytes, Sept. 4, 2009). As part of this restructuring, the Department is adopting a new automated compliance system capable of pre-screening a licensee’s entire mortgage portfolio before the start of a mortgage examination. In anticipation of this change, the Department encourages licensees to review and modify their data retention and extraction capabilities. Additionally, the Department directs licensees to (i) maintain loan portfolio information in a format that allows electronic extraction of information, (ii) complete and return a “Survey of Licensee Technology Readiness” by November 2, 2009, and (iii) request a registration code for the automated compliance system. The Department plans to fully implement the new examination framework by 2011. For a copy of the Department’s notification, please see http://bit.ly/oF01wa.

Third Circuit Holds RESPA Claims Survive Dismissal with No Allegation of Overcharge. On October 28, the U.S. Court of Appeals for the Third Circuit reversed the dismissal of a putative class action, holding that the Real Estate Settlement Procedures Act (RESPA) authorizes private rights of action even in the absence of an allegation that there has been an overcharge. Alston v. Countrywide Fin. Corp., No. 08-4334, 2009 WL 3448264 (3rd Cir. Oct. 28, 2009). The plaintiff borrowers in Alstonobtained home mortgages from the defendant lender where they were required to obtain private mortgage insurance (PMI) from insurers that would reinsure their policies with the lender’s affiliate reinsurer under a so-called “captive reinsurance agreement.” According to the borrowers, the captive reinsurance agreement violated RESPA’s anti-kickback provisions because it allowed the defendant reinsurer to collect more than $892 million in reinsurance premiums without paying anything for the claims, thus constituting a kickback from the lender to the reinsurer. The defendants moved to dismiss, arguing, in part, that the borrowers lacked standing under Article III of the U.S. Constitution because they did not allege that they were actually overcharged. The borrowers argued that the captive reinsurance arrangements constituted an injury for purposes of standing – even if they did not result in overcharges – because the arrangements kept PMI premiums artificially inflated and decreased competition among PMI providers. The district court granted the defendants’ motion, noting that the borrowers lacked Article III standing to allege that they paid an artificially inflated rate and holding that RESPA’s damages provision authorized the borrowers to sue only when they had been overcharged. The Third Circuit reversed, finding that RESPA’s plain language did not require the borrowers to allege an “overcharge.” According to the court, “the provision of statutory damages based on the entire payment, not on an overcharge, is a certain indication that Congress did not intend to require an overcharge to recover under Section 8 of RESPA.” Agreeing with the conclusion of the Sixth Circuit in In re Carter II, 553 F.3d 979 (6th Cir. 2009), the court held that RESPA’s definition of “any” charge means that charges are not limited to a particular type of charge, such as an overcharge. Accordingly, the court held that the borrowers had suffered an injury sufficient to support Article III standing. The court also agreed with a line of cases holding that the borrowers’ damages could be three times the total payment for the challenged service, not just the resultant overcharge. For a copy of the opinion, please click here.

Banking

House Committees Approve Legislation to Create Consumer Financial Protection Agency. In the past ten days, both the House Financial Services Committee (the Financial Services Committee) and the House Energy and Commerce Committee (the Commerce Committee) have approved H.R. 3126, the Consumer Financial Protection Agency (CFPA) Act, clearing the legislation for consideration by the full House of Representatives (reported in Regulatory Restructuring Report Issue 10). If enacted, the bill will establish an independent agency tasked with overseeing the provision of consumer financial products and services. In reporting the legislation out of committee, the Financial Services Committee approved several key amendments. In particular, the bill includes provisions that would codify the preemption standard set forth in Barnett Bank of Marion County, N.A. v. Nelson for national banks, while repealing federal preemption for operating subsidiaries of national banks and federal thrifts – and thus overturning the U.S. Supreme Court decision in Watters v. Wachovia Bank, N.A. (reported in Special Alert, Apr. 17, 2007). The bill also exempts community banks with less than $10 billion in assets and credit unions with less than $1.5 billion in assets from stand-alone CFPA examinations, although such “small banks” would still be subject to other CFPA authority, including as a back-up regulator. Beyond that, the Financial Services Committee also approved amendments that would expand the scope of the CFPA authority, including to “service providers,” defined as any person who provides a “material service” to a covered person when providing a consumer financial product or service. The Financial Services Committee also exempted certain types of businesses, including manufactured home retailers and auto dealers.

Separately, the Commerce Committee approved the bill with minor changes to the legislation reported out of the Financial Services Committee. The Commerce Committee approved a manager’s amendment that changes the leadership of the CFPA from a single director to a panel of five directors with staggered terms and strengthens the Federal Trade Commission’s (FTC) litigation authority under the FTC Act.

For a copy of the Financial Services Committee Print, which includes all of the approved amendments from the markup in the Financial Services Committee, as well as the list of amendments offered in the Commerce Committee, please see http://1.usa.gov/1NdqV6.  For a copy of the full list of amendments from the Financial Services Committee markup, please click here.  

OTS Announces Amendments to Examination Handbook. On October 27, the Office of Thrift Supervision (OTS) issued Regulatory Bulletin 37-47 to announce amendments to Examination Handbook Section 340 on Internal Control (the Handbook). Many of the substantive changes focus on enhanced management and directorate responsibilities and risk management functions to detect insider fraud or abuse. For example, Section 340 now (i) identifies five control breakdowns typically seen in problem and failed institutions, and (ii) contains a new overview of the Sarbanes-Oxley Act requirements concerning corporate governance, financial disclosures and auditing relationship of public companies, including public banking organizations. Additionally, the revised Handbook states that directors and senior management “must establish a strong culture of compliance at the top of the association, oversee anti-fraud programs at the association, and set a proper ethical tone for governing the conduct of business.” In addition, “[s]taff members at all levels must demonstrate successful completion of an ethics program.” Further, new language was added to emphasize the interrelationship between enterprise risk management and corporate governance. The OTS states that effective enterprise risk management programs take into consideration how one area of an association may affect the legal and reputational risk of other areas, as well as the association as a whole, and discourages associations from following the “silo approach” among business lines. Finally, the OTS provided a list of red flags that signal potential fraud. For a copy of the bulletin and the revised Handbook, please see http://files.ots.treas.gov/74864.pdf.

OTS Issues Memo Regarding Examination Requirements for Capital Purchase Program Participants. On October 21, the Office of Thrift Supervision (OTS) issued a CEO memo to provide entities participating in the Troubled Asset Relief Program’s (TARP) Capital Purchase Program (CPP) guidance for ensuring compliance with the provisions of the Securities Purchase Agreement (the Agreement), the requirements of the Emergency Economic Stabilization Act, and U.S. Department of the Treasury rules. According to the OTS, OTS examiners will conduct an initial, separate TARP examination. Examiners will subsequently conduct the TARP review during regularly-scheduled comprehensive examinations. Prior to such an examination, participants will receive a TARP-related “Preliminary Examination Response Kit” for completion. In the examination, the OTS will monitor the usage of CPP funds “to augment capital and support lending needs in its market.” According to the OTS, while the terms of the Agreement do not mandate specific use of CPP funds, the OTS expects OTS-regulated entities to document the use of CPP funds “as a matter of sound corporate governance.” Specifically, OTS-regulated entities must provide documentation “commensurate with” the amount of TARP funds received and the percentage of funds directed to thrift activities. If applicable, OTS examiners will discuss noncompliance and provide appropriate comments (based on safety and soundness concerns and compliance with the relevant laws and regulations) in the entity’s Report of Examination. For a copy of the memo, please click here.

FDIC Releases List of Enforcement Actions for September. On October 30, the Federal Deposit Insurance Corporation (FDIC) released a list of its orders of administrative enforcement actions taken against banks and individuals for September 2009. According to the list, the FDIC processed a total of forty-eight matters in September 2009, including (i) twenty-six cease and desist orders, (ii) twelve removal and prohibition orders, (iii) six civil money penalties, (iv) two prompt corrective action directives, (v) one voluntary termination of insurance, and (vi) one order terminating an order to cease and desist. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09193.html.

FDIC Issues Alert Regarding Fraudulent EFT Transfers. On October 29, the Federal Deposit Insurance Corporation (FDIC) warned financial institutions regarding an increase in schemes involving unauthorized electronic funds transfers (EFTs). According to the FDIC, criminals involved in the scheme gain unauthorized access to online deposit accounts and use this access to originate unauthorized EFTs to a transfer agent’s deposit account (the transfer agent is referred to as a “money mule”). The transfer agent then quickly withdraws the funds and wires the funds overseas for a small commission. According to the FDIC, the fraud may be difficult to prevent because the EFTs are often made immediately available by the receiving institution. For a copy of the alert, please click here.

FinCEN Issues Revised Advisory Regarding Anti-Money Laundering, Counter-Terrorist Deficiencies. On October 28, the Financial Crimes Enforcement Network (FinCEN) updated its advisory regarding deficiencies in the anti-money laundering and counter-terrorist financing regimes of Iran, Uzbekistan, Turkmenistan, Pakistan, and Sao Tome and Príncipe. (The original advisory was reported in InfoBytes, July 17, 2009) FinCEN reminds banks and financial institutions that FinCEN regulations require the application of due diligence to correspondent accounts maintained for foreign financial institutions and the filing of suspicious activity reports under certain circumstances. For a copy of the advisory, please see 
http://www.fincen.gov/statutes_regs/guidance/pdf/fin-2009-a007.pdf.

Eighth Circuit Holds State Law Claims Regarding Document Preparation Fees is Preempted for Federal Savings Associations. On October 20, the U.S. Court of Appeals for the Eighth Circuit affirmed a district court finding that state laws purporting to restrict lenders from charging document preparation fees are preempted by Office of Thrift Supervision (OTS) regulations issued under the Home Owners’ Loan Act. Casey v. Federal Deposit Ins. Corp., No. 09-1096, 2009 WL 3349950 (8th Cir. Oct. 20, 2009). In Casey, the initial claim was brought by seven homeowners against four lenders that were all federal savings associations (FSAs). The homeowners claimed that the FSAs’ practice of charging fees for the preparation of loan documents violated two Missouri laws–one prohibiting the unlicensed practice of law, and another prohibiting fraudulent conduct in commerce. The FSAs moved for dismissal of the claims based on preemption of the Missouri laws by OTS regulations. Under Section § 560.2(b) of the OTS regulations, among the types of preempted state laws are those purporting to impose requirements regarding “loan-related fees, including, without limitation, initial charges.” The homeowners argued that, because the Missouri state laws ”[made] no mention of lending,” they “necessarily fall[] outside the scope of the § 560.2(b) examples,” and are preempted only if they “purport[] to regulate or otherwise affect” credit activities without regard to § 560.2(b). The court concluded that “a state law that either on its face or as applied imposes requirements regarding the examples listed in § 560.2(b) is preempted. A generally applicable state law that imposes no such requirements will not be preempted if, as applied, it ‘only incidentally affect[s] the lending operations of [FSAs] or [is] otherwise consistent with the purposes of [§ 560.2(a)].” In dismissing the homeowners’ claims, the Eighth Circuit stated that the Missouri laws at issue, as applied, would impose requirements regarding loan-related fees and were thus preempted by § 560.2(b) of the OTS regulations. For a copy of the opinion, please click here.  

Consumer Finance

House Committees Approve Legislation to Create Consumer Financial Protection Agency. In the past ten days, both the House Financial Services Committee (the Financial Services Committee) and the House Energy and Commerce Committee (the Commerce Committee) have approved H.R. 3126, the Consumer Financial Protection Agency (CFPA) Act, clearing the legislation for consideration by the full House of Representatives (reported in Regulatory Restructuring Report Issue 10). If enacted, the bill will establish an independent agency tasked with overseeing the provision of consumer financial products and services. In reporting the legislation out of committee, the Financial Services Committee approved several key amendments. In particular, the bill includes provisions that would codify the preemption standard set forth in Barnett Bank of Marion County, N.A. v. Nelson for national banks, while repealing federal preemption for operating subsidiaries of national banks and federal thrifts – and thus overturning the U.S. Supreme Court decision in Watters v. Wachovia Bank, N.A. (reported in Special Alert, Apr. 17, 2007). The bill also exempts community banks with less than $10 billion in assets and credit unions with less than $1.5 billion in assets from stand-alone CFPA examinations, although such “small banks” would still be subject to other CFPA authority, including as a back-up regulator. Beyond that, the Financial Services Committee also approved amendments that would expand the scope of the CFPA authority, including to “service providers,” defined as any person who provides a “material service” to a covered person when providing a consumer financial product or service. The Financial Services Committee also exempted certain types of businesses, including manufactured home retailers and auto dealers.

Separately, the Commerce Committee approved the bill with minor changes to the legislation reported out of the Financial Services Committee. The Commerce Committee approved a manager’s amendment that changes the leadership of the CFPA from a single director to a panel of five directors with staggered terms and strengthens the Federal Trade Commission’s (FTC) litigation authority under the FTC Act.

For a copy of the Financial Services Committee Print, which includes all of the approved amendments from the markup in the Financial Services Committee, as well as the list of amendments offered in the Commerce Committee, please see http://1.usa.gov/1NdqV6.  For a copy of the full list of amendments from the Financial Services Committee markup, please click here.  

FTC Delays Red Flags Rule Until June 1, 2010. On October 30, the FTC announced that it will delay enforcement of its Red Flags Rule (the Rule) until June 1, 2010. The FTC had previously scheduled enforcement of the Rule to begin on November 1, 2009 (reported in InfoBytes, July 31, 2009). This is the third time that the FTC has delayed enforcement of the Rule which, among other things, requires creditors and financial institutions develop and implement written Identity Theft Prevention Programs. For a copy of the press release, please see http://www.ftc.gov/opa/2009/10/redflags.shtm. For further information, please see the FTC’s Red Flags Rule website at http://www.ftc.gov/bcp/edu/microsites/redflagsrule.

D.C. Federal Court Rules that Attorneys Are Not Creditors Under FTC’s Red Flag Rule. On October 30, the U.S. District Court for the District of Columbia held that the Federal Trade Commission (FTC) overstepped its statutory authority when it attempted to apply its Red Flags Rule to attorneys. American Bar Ass’n v. Federal Trade Commission, No. 09-cv-01636 (D.D.C. Oct. 29, 2009). The case arose after the American Bar Association (ABA) filed a complaint (reported in InfoBytes, Sept. 4, 2009) and request for declaratory relief against the FTC alleging that the agency’s decision to apply its Red Flags Rule to attorneys violated the Administrative Procedures Act because the decision was (i) in excess of the agency’s statutory jurisdiction, and (ii) arbitrary and capricious. At a hearing on the ABA’s motion for partial summary judgment, the court determined that the FTC overstepped its authority because its interpretation of the term "creditor" was overly broad. In its order granting partial summary judgment, the court stated that it will explain its reasoning in a memorandum opinion that will be published within thirty days. For a copy of the order, please click here.

FTC To Host Roundtable Discussion on Debt Collection Litigation. The Federal Trade Commission (FTC) will host a roundtable discussion regarding debt collection litigation in Washington, DC on December 4, 2009. The roundtable is free and open to the public; a live webcast of the event will also be available. The FTC is accepting requests to participate in the roundtable until November 9. The FTC is also accepting written comments or original research pertaining to debt collection litigation or arbitration proceedings until November 30.For more information, please click hereFor a copy of the press release, please click here.

Securities

Second Circuit Approves Application of ERISA “Fractional Test” to Cash Balance Pension Plans. On October 19, the U.S. Court of Appeals for the Second Circuit ruled that a lower federal court erred in finding that the Employee Retirement Income Security Act’s (ERISA) “fractional test” for calculating minimum benefit accruals could not be applied to cash balance pension plans. Lonecke v. Citigroup Pension Plan, No. 08-0459-cv, 2009 WL 3335910 (2nd Cir. Oct. 19, 2009). In Lonecke, the plaintiffs were former employees of Citigroup who brought a class action alleging that the Citibuilder Cash Balance Plan (the Plan), a pension plan, violated ERISA. The lower court found that the Plan violated ERISA’s minimum benefit accrual rules by applying the “fractional test” to its cash balance pension plan, and that Citigroup further violated ERISA’s notice requirement. The Second Circuit reversed the lower court’s ruling, finding that “all defined benefit plans [including cash balance plans] may use any of the three minimum accrual tests to comply with anti-backloading rules.” In addition, the court held that Citigroup’s practice of curing minimum accrual defects at the last minute, by adding money to employees accounts at the time of separation, did not violate ERISA. The statute’s plain language, the court noted, provides that the relevant calculations under minimum accrual rules must be made at the time an employee terminates employment, not on a year-by-year basis. The court also found that Citigroup did not violate ERISA’s requirement that adequate notice be given to employees of a reduction in the accrual of future benefits when it allegedly failed to give participants notice of the detailed methods it intended to use to calculate their benefits. For a copy of the opinion, please click here.

Insurance

Third Circuit Holds RESPA Claims Survive Dismissal with No Allegation of Overcharge. On October 28, the U.S. Court of Appeals for the Third Circuit reversed the dismissal of a putative class action, holding that the Real Estate Settlement Procedures Act (RESPA) authorizes private rights of action even in the absence of an allegation that there has been an overcharge. Alston v. Countrywide Fin. Corp., No. 08-4334, 2009 WL 3448264 (3rd Cir. Oct. 28, 2009). The plaintiff borrowers in Alstonobtained home mortgages from the defendant lender where they were required to obtain private mortgage insurance (PMI) from insurers that would reinsure their policies with the lender’s affiliate reinsurer under a so-called “captive reinsurance agreement.” According to the borrowers, the captive reinsurance agreement violated RESPA’s anti-kickback provisions because it allowed the defendant reinsurer to collect more than $892 million in reinsurance premiums without paying anything for the claims, thus constituting a kickback from the lender to the reinsurer. The defendants moved to dismiss, arguing, in part, that the borrowers lacked standing under Article III of the U.S. Constitution because they did not allege that they were actually overcharged. The borrowers argued that the captive reinsurance arrangements constituted an injury for purposes of standing – even if they did not result in overcharges – because the arrangements kept PMI premiums artificially inflated and decreased competition among PMI providers. The district court granted the defendants’ motion, noting that the borrowers lacked Article III standing to allege that they paid an artificially inflated rate and holding that RESPA’s damages provision authorized the borrowers to sue only when they had been overcharged. The Third Circuit reversed, finding that RESPA’s plain language did not require the borrowers to allege an “overcharge.” According to the court, “the provision of statutory damages based on the entire payment, not on an overcharge, is a certain indication that Congress did not intend to require an overcharge to recover under Section 8 of RESPA.” Agreeing with the conclusion of the Sixth Circuit in In re Carter II, 553 F.3d 979 (6th Cir. 2009), the court held that RESPA’s definition of “any” charge means that charges are not limited to a particular type of charge, such as an overcharge. Accordingly, the court held that the borrowers had suffered an injury sufficient to support Article III standing. The court also agreed with a line of cases holding that the borrowers’ damages could be three times the total payment for the challenged service, not just the resultant overcharge. For a copy of the opinion, please click here.

Litigation

Third Circuit Holds RESPA Claims Survive Dismissal with No Allegation of Overcharge. On October 28, the U.S. Court of Appeals for the Third Circuit reversed the dismissal of a putative class action, holding that the Real Estate Settlement Procedures Act (RESPA) authorizes private rights of action even in the absence of an allegation that there has been an overcharge. Alston v. Countrywide Fin. Corp., No. 08-4334, 2009 WL 3448264 (3rd Cir. Oct. 28, 2009). The plaintiff borrowers in Alstonobtained home mortgages from the defendant lender where they were required to obtain private mortgage insurance (PMI) from insurers that would reinsure their policies with the lender’s affiliate reinsurer under a so-called “captive reinsurance agreement.” According to the borrowers, the captive reinsurance agreement violated RESPA’s anti-kickback provisions because it allowed the defendant reinsurer to collect more than $892 million in reinsurance premiums without paying anything for the claims, thus constituting a kickback from the lender to the reinsurer. The defendants moved to dismiss, arguing, in part, that the borrowers lacked standing under Article III of the U.S. Constitution because they did not allege that they were actually overcharged. The borrowers argued that the captive reinsurance arrangements constituted an injury for purposes of standing – even if they did not result in overcharges – because the arrangements kept PMI premiums artificially inflated and decreased competition among PMI providers. The district court granted the defendants’ motion, noting that the borrowers lacked Article III standing to allege that they paid an artificially inflated rate and holding that RESPA’s damages provision authorized the borrowers to sue only when they had been overcharged. The Third Circuit reversed, finding that RESPA’s plain language did not require the borrowers to allege an “overcharge.” According to the court, “the provision of statutory damages based on the entire payment, not on an overcharge, is a certain indication that Congress did not intend to require an overcharge to recover under Section 8 of RESPA.” Agreeing with the conclusion of the Sixth Circuit in In re Carter II, 553 F.3d 979 (6th Cir. 2009), the court held that RESPA’s definition of “any” charge means that charges are not limited to a particular type of charge, such as an overcharge. Accordingly, the court held that the borrowers had suffered an injury sufficient to support Article III standing. The court also agreed with a line of cases holding that the borrowers’ damages could be three times the total payment for the challenged service, not just the resultant overcharge. For a copy of the opinion, please click here.

Eighth Circuit Holds State Law Claims Regarding Document Preparation Fees is Preempted for Federal Savings Associations. On October 20, the U.S. Court of Appeals for the Eighth Circuit affirmed a district court finding that state laws purporting to restrict lenders from charging document preparation fees are preempted by Office of Thrift Supervision (OTS) regulations issued under the Home Owners’ Loan Act. Casey v. Federal Deposit Ins. Corp., No. 09-1096, 2009 WL 3349950 (8th Cir. Oct. 20, 2009). In Casey, the initial claim was brought by seven homeowners against four lenders that were all federal savings associations (FSAs). The homeowners claimed that the FSAs’ practice of charging fees for the preparation of loan documents violated two Missouri laws–one prohibiting the unlicensed practice of law, and another prohibiting fraudulent conduct in commerce. The FSAs moved for dismissal of the claims based on preemption of the Missouri laws by OTS regulations. Under Section § 560.2(b) of the OTS regulations, among the types of preempted state laws are those purporting to impose requirements regarding “loan-related fees, including, without limitation, initial charges.” The homeowners argued that, because the Missouri state laws ”[made] no mention of lending,” they “necessarily fall[] outside the scope of the § 560.2(b) examples,” and are preempted only if they “purport[] to regulate or otherwise affect” credit activities without regard to § 560.2(b). The court concluded that “a state law that either on its face or as applied imposes requirements regarding the examples listed in § 560.2(b) is preempted. A generally applicable state law that imposes no such requirements will not be preempted if, as applied, it ‘only incidentally affect[s] the lending operations of [FSAs] or [is] otherwise consistent with the purposes of [§ 560.2(a)].” In dismissing the homeowners’ claims, the Eighth Circuit stated that the Missouri laws at issue, as applied, would impose requirements regarding loan-related fees and were thus preempted by § 560.2(b) of the OTS regulations. For a copy of the opinion, please click here.    

D.C. Federal Court Rules that Attorneys Are Not Creditors Under FTC’s Red Flag Rule. On October 30, the U.S. District Court for the District of Columbia held that the Federal Trade Commission (FTC) overstepped its statutory authority when it attempted to apply its Red Flags Rule to attorneys.American Bar Ass’n v. Federal Trade Commission, No. 09-cv-01636 (D.D.C. Oct. 29, 2009). The case arose after the American Bar Association (ABA) filed a complaint (reported in InfoBytes, Sept. 4, 2009) and request for declaratory relief against the FTC alleging that the agency’s decision to apply its Red Flags Rule to attorneys violated the Administrative Procedures Act because the decision was (i) in excess of the agency’s statutory jurisdiction, and (ii) arbitrary and capricious. At a hearing on the ABA’s motion for partial summary judgment, the court determined that the FTC overstepped its authority because its interpretation of the term "creditor" was overly broad. In its order granting partial summary judgment, the court stated that it will explain its reasoning in a memorandum opinion that will be published within thirty days. For a copy of the order, please click here.

Second Circuit Approves Application of ERISA “Fractional Test” to Cash Balance Pension Plans. On October 19, the U.S. Court of Appeals for the Second Circuit ruled that a lower federal court erred in finding that the Employee Retirement Income Security Act’s (ERISA) “fractional test” for calculating minimum benefit accruals could not be applied to cash balance pension plans. Lonecke v. Citigroup Pension Plan, No. 08-0459-cv, 2009 WL 3335910 (2nd Cir. Oct. 19, 2009). In Lonecke, the plaintiffs were former employees of Citigroup who brought a class action alleging that the Citibuilder Cash Balance Plan (the Plan), a pension plan, violated ERISA. The lower court found that the Plan violated ERISA’s minimum benefit accrual rules by applying the “fractional test” to its cash balance pension plan, and that Citigroup further violated ERISA’s notice requirement. The Second Circuit reversed the lower court’s ruling, finding that “all defined benefit plans [including cash balance plans] may use any of the three minimum accrual tests to comply with anti-backloading rules.” In addition, the court held that Citigroup’s practice of curing minimum accrual defects at the last minute, by adding money to employees accounts at the time of separation, did not violate ERISA. The statute’s plain language, the court noted, provides that the relevant calculations under minimum accrual rules must be made at the time an employee terminates employment, not on a year-by-year basis. The court also found that Citigroup did not violate ERISA’s requirement that adequate notice be given to employees of a reduction in the accrual of future benefits when it allegedly failed to give participants notice of the detailed methods it intended to use to calculate their benefits. For a copy of the opinion, please click here.

Privacy/Data Security

FTC Delays Red Flags Rule Until June 1, 2010. On October 30, the FTC announced that it will delay enforcement of its Red Flags Rule (the Rule) until June 1, 2010. The FTC had previously scheduled enforcement of the Rule to begin on November 1, 2009 (reported in InfoBytes, July 31, 2009). This is the third time that the FTC has delayed enforcement of the Rule which, among other things, requires creditors and financial institutions develop and implement written Identity Theft Prevention Programs. For a copy of the press release, please see http://www.ftc.gov/opa/2009/10/redflags.shtm. For further information, please see the FTC’s Red Flags Rule website at http://www.ftc.gov/bcp/edu/microsites/redflagsrule.

D.C. Federal Court Rules that Attorneys Are Not Creditors Under FTC’s Red Flag Rule. On October 30, the U.S. District Court for the District of Columbia held that the Federal Trade Commission (FTC) overstepped its statutory authority when it attempted to apply its Red Flags Rule to attorneys. American Bar Ass’n v. Federal Trade Commission, No. 09-cv-01636 (D.D.C. Oct. 29, 2009). The case arose after the American Bar Association (ABA) filed a complaint (reported in InfoBytes, Sept. 4, 2009) and request for declaratory relief against the FTC alleging that the agency’s decision to apply its Red Flags Rule to attorneys violated the Administrative Procedures Act because the decision was (i) in excess of the agency’s statutory jurisdiction, and (ii) arbitrary and capricious. At a hearing on the ABA’s motion for partial summary judgment, the court determined that the FTC overstepped its authority because its interpretation of the term "creditor" was overly broad. In its order granting partial summary judgment, the court stated that it will explain its reasoning in a memorandum opinion that will be published within thirty days. For a copy of the order, please click here.