InfoBytes, January 22, 2010
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Topics in this issue:
- Federal Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Securities
- Litigation
- E-Financial Services
- Privacy/Data Security
Federal Issues
Obama Proposes New Bank Limitations on Size, Activities. On January 21, President Obama announced his intention to work with Congress to limit the size of financial institutions, as well as the activities in which they may engage. Specifically, under the so-called “Volcker Rule,” the President is seeking to prohibit banks and financial institutions with bank subsidiaries from owning, investing in, or sponsoring hedge funds, private equity funds, and related trading operations. The President is also proposing a limit on the percentage of a financial institution’s liabilities as a percent of market share, which would be in addition to existing limitations. A BuckleySandler Regulatory Restructuring Report will be issued when the actual text of the proposal is made available. For a copy of the announcement, please see http://www.whitehouse.gov/the-press-office/remarks-president-financial-reform; for a copy of the fact sheet, please see http://www.whitehouse.gov/the-press-office/president-obama-calls-new-restrictions-size-and-scope-financial-institutions-rein-e.
FHA Announces Policy Changes to Manage FHA’s Risk. On January 20, the Federal Housing Administration (FHA) announced a number of policy changes intended to help the FHA manage its risk. The policy changes include (i) an increase to the mortgage insurance premium (MIP), (ii) an update to the combination of FICO score and down payment requirements for new borrowers, (iii) a reduction in seller concessions from 6% to 3%, and (iv) an implementation of a series of significant measures aimed at increasing enforcement authority. Specifically, the up-front MIP will be increased from 1.75% to 2.25%, and the FHA is also requesting legislative authority to increase the maximum MIP and to shift some of the premium increase from up-front MIP to annual MIP. New borrowers will be required to have a minimum FICO score of 580 to qualify for the FHA’s 3.5% down payment program; borrowers with a score of less than 580 will be required to put 10% down. A reduction in seller credits is intended to bring FHA into conformity with industry standards on seller concessions. Finally, the increase in enforcement on FHA lenders will include publicly reporting lender performance rankings and seeking additional legislative authority to increase enforcement authority over FHA lenders. In connection with this increase in enforcement, the U.S. Department of Housing and Urban Development (HUD) released Mortgagee Letter 2010-02 to clarify up-front and annual premium amounts. The FHA stated that it will announce additional details on its changes before the end of January. For a copy of the press release, please see http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-016. For a copy of the Mortgagee Letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-02ml.pdf.
FCC Announces Proposal for Tougher Restrictions on “Robocalls” to Track FTC Standard. On January 20, the Federal Communications Commission (FCC) announced a proposal to amend the regulation under the Telephone Consumer Protection Act (TCPA) pertaining to prerecorded telemarketing calls (so-called “robocalls”). According to the FCC, the new rules are more restrictive than the current regulation and are intended to further prevent unwanted telephone solicitations. The proposal would align the FCC’s regulation of prerecorded telemarketing calls with the Federal Trade Commission’s (FTC) recent amendments to its Telemarketing Sales Rule and extend the FTC’s stricter standards to entities that are not currently subject to FTC rules. The proposed amendments include requiring (i) consumers’ express written consent (including electronic methods) to receive prerecorded telemarketing calls, even if there is an established business relationship between the caller and the consumer, and (ii) the inclusion of an automated, interactive mechanism by which a consumer may “opt out” of receiving future telemarketing calls. The FCC noted that the proposal would not affect categories of prerecorded calls that are not currently covered by its TCPA rules, including calls that are purely “informational.” For a copy of the release, please see http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-295839A2.doc.
Federal Banking Regulatory Agencies Issue Risk-Based Capital Final Rule. On January 21, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision announced a final rule that generally subjects covered financial institutions to higher risk-based capital requirements and changes how covered institutions account for certain items (e.g., securitized assets) that had previously been excluded from balance sheets. The rule allows for an optional phase-in period for four quarters in connection with the impact on risk-weighted assets and tier 2 capital. The final rule will become effective 60 days after publication in the Federal Register. Institutions may elect to comply with the final rule as of the beginning of the first annual reporting period after November 15, 2009. For a copy of the press release, please see http://www.occ.treas.gov/ftp/release/2010-6.htm. For a copy of the final rule, please see http://www.occ.treas.gov/ftp/release/2010-6a.pdf.
House Committee on Financial Services Holds Hearing on Executive Compensation. On January 22, the House Committee on Financial Services held a committee hearing entitled "Compensation in the Financial Industry." The witnesses at the hearing were Professor Lucian A. Bebchuck of Harvard Law School, Professor Joseph E. Stiglitz of Columbia Business School, and Ms. Nell Minow, Editor and Founder of The Corporate Library. For a copy of the prepared testimonies and to view an archived webcast of the hearing, please see http://www.house.gov/apps/list/hearing/financialsvcs_dem/fcher_01222010.shtml.
HUD Announces Temporary Waiver of 90-Day Anti-Flipping Rule. On January 15, the U.S. Department of Housing and Urban Development (HUD) announced that, for one year, it will waive a regulation that generally prohibits the FHA from insuring a mortgage on a property if the seller has owned the property for less than 90 days. According to the press release, the purpose of the waiver is to “allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities.” The waiver only applies to forward mortgages and to sales where there is no identity of interest between the buyer and seller or others participating in the transaction. Additionally, the waiver does not apply if the property’s sales price exceeds the seller’s acquisition cost by 20% or more, unless certain documentation and inspection requirements are met. The waiver is currently set to be effective from February 1, 2010 until February 1, 2011. For a copy of the press release, please see http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-011. For a copy of the waiver, please see http://www.hud.gov/offices/hsg/sfh/waivpropflip2010.pdf.
HUD to Impose Stricter Standards for Direct Endorsement Terminations. On January 21, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2010-03 to alert mortgagees that it will terminate a mortgagee’s underwriting authority in geographic areas where the lender has a rate of early defaults and claims in excess of Credit Watch Termination thresholds. The letter states that, every three months, HUD will review default rates and claims on all FHA-insured single family loans with an amortization commencement date within the preceding 24 months. Currently, the termination threshold is 300% of the field office rate, but that threshold will decrease to 250% on June 30, 2010 and to 200% on December 31, 2010. HUD notes that it will consider lending in underserved census tracts as a mitigating factor. Prior to authority termination, mortgagees will be entitled to an informal conference with the Deputy Assistant Secretary for Single Family Housing and to submit a written presentation in opposition of the termination. These submissions must be made within 30 calendar days of the date of receipt of the proposed termination notice. Loan correspondents with only one sponsor in a particular area will have 30 days in which to establish a new relationship with an FHA-approved mortgagee before the loan correspondent’s approval is terminated. Terminated mortgagees may apply for reinstatement after six months, subject to meeting certain requirements. For a copy of the letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-03ml.pdf.
HUD Extends Authority for Processing Extension Requests. On January 11, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 10-01 to announce the continuation of extension requests in connection with processing Pre-application Firm Invitations and Firm Commitments. According to the letter, Multifamily Hub/Program Center Directors may grant an extension of up to 90 days of the Pre-application Firm Invitation letter and an extension of up to 120 days of an issued Firm Commitment. The extension authority was set to expire on December 31, 2009; however, according to HUD, the extension authority has been extended because of market conditions. For a copy of the letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-01ml.pdf.
OTS Announces Changes to Examination Handbook. On January 15, the Office of Thrift Supervision (OTS) announced “extensive changes” to Examination Handbook Section 530 (Liquidity Risk Management) and Section 540 (Investment Securities). According to OTS, the changes to Section 530 include new information for stress testing and contingency planning. Additionally, the changes to Section 540 addresses downgraded securities, recent changes to guidance on fair value by the Financial Accounting Standards Board’s guidance on fair value, classification guidance, and includes information on models. For a copy of the bulletin and the revised Examination Handbook Sections 530 and 540, please see http://files.ots.treas.gov/74868.pdf.
FTC Reaches Settlement with Mortgage Broker Regarding Improper Disposal of Consumer Information. On January 20, the Federal Trade Commission (FTC) reached a $35,000 settlement with a mortgage broker who allegedly discarded consumers’ personal financial records into a publicly-accessible dumpster. The FTC alleged that the mortgage broker improperly disposed of 40 boxes of records, which included tax returns, mortgage applications, bank statements, and at least 230 credit reports. The FTC charged the defendant with failing to take reasonable measures to protect credit report information and for misrepresenting the company’s data security practices. Under the settlement, the mortgage broker will (i) pay a $35,000 penalty, (ii) be barred from making certain misrepresentations regarding protecting consumer information, (iii) be barred from failing to take reasonable measures to protect credit report information during its disposal, (iv) implement a comprehensive information security program for sensitive consumer information, and (v) hire an independent third-party to annually monitor the program (for the next 10 years). For a copy of the notice, please see http://www.ftc.gov/opa/2010/01/navone.shtm.
Courts
California Superior Court Holds HOLA Preempts State Law Mortgage Servicing Provision. On January 4, the Superior Court of the State of California held that the federal Home Owner’s Loan Act (HOLA) preempts the “declaration” and “contact” requirements of Cal. Civil Code § 2923.5 because the state provision attempts to impose requirements on the manner in which the operating subsidiary of a federal savings association services loans. Chavez v. Aurora Loan Servs., LLC, No. 56-2009-00361141 (Cal. Super. Ct. Jan. 4, 2010). In this case, the plaintiff homeowner brought an action to prevent a foreclosure. The homeowner argued that the defendant servicer, a direct subsidiary of a federal savings association, failed to comply with the statutory requirements of Civil Code § 2923.5, thus defeating the servicer’s right to foreclose on the property. Although the court noted that there was no binding authority on point, the court found that the requirement of § 2923.5(a)(2) that the lender “assess the borrower’s financial situation and explore options for the borrower to avoid foreclosure” is not “mere procedural mechanics” and relates directly to the terms/servicing of the loan. As such, the court held that HOLA preemption applied to this provision, while noting that HOLA does not preempt other provisions of California law that address the procedural mechanics of conducting a non-judicial foreclosure sale. For a copy of the opinion, please email .
Second Circuit Holds New York Champerty Statute Not a Bar to Trust’s Lawsuit Against Loan Originator. On January 11, the U.S. Court of Appeals for the Second Circuit held that a trust’s acquisition of rights to sue a loan originator for breach of a loan purchase agreement did not violate the New York Champerty Statute, and therefore was not barred by the affirmative defense of champerty. Trust for the Certificate Holders of the Merrill Lynch Mortg. Investors, Inc., v. Love Funding Corp., No. 07-1050-cv, 2010 WL 59276 (2nd Cir. Jan. 11, 2010). In this case, a trust sued the originator of a defaulted mortgage for breach of the representations and warranties made in the loan purchase agreement. The lawsuit came after the trust reached a settlement with the entity that purchased the loan from the originator and assigned it to the trust. As part of the settlement, the trust acquired the rights of the assignor as against the originator. In the instant case, despite having granted summary judgment in favor of the trust on its claims of breach of contract, the district court found that the trust’s claims were barred by the New York champerty statute because “the Trust’s primary purpose in accepting the Assignment was to buy a lawsuit against [the originator].” The trust appealed and the Second Circuit certified questions about the New York champerty statute to the New York Court of Appeals. In response, the New York Court of Appeals clarified that the champerty statute “does not apply when the purpose of an assignment is the collection of a legitimate claim,” and therefore “if a party acquires a debt instrument for the purpose of enforcing it, that is not champerty simply because the party intends to do so by litigation.” According to the New York Court of Appeals, “if, as a matter of fact, the Trust’s purpose in taking assignment of [the assignor’s] rights under the [originator’s loan purchase agreement] was to enforce its rights, then, as a matter of law, given that the Trust had a preexisting proprietary interest in the loan, it did not violate [the New York champerty statute].” Accepting the New York Court of Appeals’ answer, and noting that, even before the prior settlement, “the Trust had a significant interest in the repayment of the [defaulted loan],” the Second Circuit held that the evidence on the record did not allow, as a matter of law, for a finding that the assignment was champertous. Accordingly, the Second Circuit reversed the judgment of the district court and remanded the case for entry of judgment in favor of the trust. For a copy of the opinion, please see http://www.buckleysandler.com/Trust_v_Love.pdf.
Indiana Federal Court Holds Clickwrap Agreement Not Unconscionable. On December 22, the U.S. District Court for the Southern District of Indiana held that a clickwrap agreement containing a forum-selection clause was not procedurally unconscionable and was, thus, binding. Appliance Zone, LLC v. NexTag, Inc., No. 09-89, 2009 WL 5200572 (S.D. Ind. Dec. 22, 2009). In this case, an employee of the plaintiff clicked a hyperlink stating “I accept the NexTag Terms of Service” in connection with an online advertising agreement with the defendant, NexTag. The agreement contained, among other things, a forum-selection clause. The plaintiff later sued NexTag for alleged trademark infringement and argued that the forum-selection clause was invalid because the agreement was, among other things, procedurally unconscionable. Holding that the agreement was not procedurally unconscionable – and, thus, binding – the court reasoned that the terms of the agreement were “highly visible and easily accessible, and required as well an affirmative acceptance of the terms of the Agreement as a prerequisite to completing registration.” Because the forum-selection clause was binding and applicable to the trademark infringement dispute, the court granted NexTag’s motion to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/AZ_v_NT.pdf.
Firm News
Margo Tank will present a one-hour, one-credit CLE telephone seminar entitled “Electronic Signatures and Records—What’s the Current Law?” on Tuesday, January 26 at 12PM ET. The seminar will be replayed on Friday, February 5 at 12PM. For more information, visit http://www.vacle.org/php-bin/ecomm4/products.php?product_id=2400.
Sara Emley will speak at the Investment Adviser Association/ACA Insight 2010 Adviser Compliance Forum on February 25 in Arlington, VA. Her topic is “Current Hot Topics for Managers with Individual Clients.”
Kirk Jensen spoke on January 9 at the winter meeting of the Consumer Financial Services Committee of the American Bar Association’s Business Law Section in Park City, Utah. He gave one presentation entitled "Consumer Financial Protection Agency: Past, Present and Future," and another entitled “Government Enforcement Trends and Servicing Best Practices.” Kirk has also been named chair of the Residential Real Estate Subcommittee of the ABA Litigation Section’s Real Estate Litigation Committee.
Jeff Naimon spoke on January 10 at the winter meeting of the Consumer Financial Services Committee of the American Bar Association’s Business Law Section in Park City, Utah on Truth in Lending Act case law developments.
Jeff Naimon spoke on January 12 in an American Bankers Association Telephone Briefing “RESPA and TILA Compliance in the NEW Mortgage World.”
Joe Kolar spoke to member institutions of the Federal Home Loan Bank of Chicago on the new RESPA and TILA rules on January 13.
Andrew Sandler was selected to receive a Good Apple Award at the Louisiana Appleseed’s Good Apple Gala for his vision aimed at expanding access to financial institutions for Latino immigrants and his leadership in bringing together Louisiana banks and Federal banking regulators to discuss barriers to access and solutions. The Gala was held on January 21 in New Orleans, LA.
Mortgages
FHA Announces Policy Changes to Manage FHA’s Risk. On January 20, the Federal Housing Administration (FHA) announced a number of policy changes intended to help the FHA manage its risk. The policy changes include (i) an increase to the mortgage insurance premium (MIP), (ii) an update to the combination of FICO score and down payment requirements for new borrowers, (iii) a reduction in seller concessions from 6% to 3%, and (iv) an implementation of a series of significant measures aimed at increasing enforcement authority. Specifically, the up-front MIP will be increased from 1.75% to 2.25%, and the FHA is also requesting legislative authority to increase the maximum MIP and to shift some of the premium increase from up-front MIP to annual MIP. New borrowers will be required to have a minimum FICO score of 580 to qualify for the FHA’s 3.5% down payment program; borrowers with a score of less than 580 will be required to put 10% down. A reduction in seller credits is intended to bring FHA into conformity with industry standards on seller concessions. Finally, the increase in enforcement on FHA lenders will include publicly reporting lender performance rankings and seeking additional legislative authority to increase enforcement authority over FHA lenders. In connection with this increase in enforcement, the U.S. Department of Housing and Urban Development (HUD) released Mortgagee Letter 2010-02 to clarify up-front and annual premium amounts. The FHA stated that it will announce additional details on its changes before the end of January. For a copy of the press release, please see http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-016. For a copy of the Mortgagee Letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-02ml.pdf.
HUD Announces Temporary Waiver of 90-Day Anti-Flipping Rule. On January 15, the U.S. Department of Housing and Urban Development (HUD) announced that, for one year, it will waive a regulation that generally prohibits the FHA from insuring a mortgage on a property if the seller has owned the property for less than 90 days. According to the press release, the purpose of the waiver is to “allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities.” The waiver only applies to forward mortgages and to sales where there is no identity of interest between the buyer and seller or others participating in the transaction. Additionally, the waiver does not apply if the property’s sales price exceeds the seller’s acquisition cost by 20% or more, unless certain documentation and inspection requirements are met. The waiver is currently set to be effective from February 1, 2010 until February 1, 2011. For a copy of the press release, please see http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-011. For a copy of the waiver, please see http://www.hud.gov/offices/hsg/sfh/waivpropflip2010.pdf.
HUD to Impose Stricter Standards for Direct Endorsement Terminations. On January 21, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2010-03 to alert mortgagees that it will terminate a mortgagee’s underwriting authority in geographic areas where the lender has a rate of early defaults and claims in excess of Credit Watch Termination thresholds. The letter states that, every three months, HUD will review default rates and claims on all FHA-insured single family loans with an amortization commencement date within the preceding 24 months. Currently, the termination threshold is 300% of the field office rate, but that threshold will decrease to 250% on June 30, 2010 and to 200% on December 31, 2010. HUD notes that it will consider lending in underserved census tracts as a mitigating factor. Prior to authority termination, mortgagees will be entitled to an informal conference with the Deputy Assistant Secretary for Single Family Housing and to submit a written presentation in opposition of the termination. These submissions must be made within 30 calendar days of the date of receipt of the proposed termination notice. Loan correspondents with only one sponsor in a particular area will have 30 days in which to establish a new relationship with an FHA-approved mortgagee before the loan correspondent’s approval is terminated. Terminated mortgagees may apply for reinstatement after six months, subject to meeting certain requirements. For a copy of the letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-03ml.pdf.
HUD Extends Authority for Processing Extension Requests. On January 11, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 10-01 to announce the continuation of extension requests in connection with processing Pre-application Firm Invitations and Firm Commitments. According to the letter, Multifamily Hub/Program Center Directors may grant an extension of up to 90 days of the Pre-application Firm Invitation letter and an extension of up to 120 days of an issued Firm Commitment. The extension authority was set to expire on December 31, 2009; however, according to HUD, the extension authority has been extended because of market conditions. For a copy of the letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-01ml.pdf.
FTC Reaches Settlement with Mortgage Broker Regarding Improper Disposal of Consumer Information. On January 20, the Federal Trade Commission (FTC) reached a $35,000 settlement with a mortgage broker who allegedly discarded consumers’ personal financial records into a publicly-accessible dumpster. The FTC alleged that the mortgage broker improperly disposed of 40 boxes of records, which included tax returns, mortgage applications, bank statements, and at least 230 credit reports. The FTC charged the defendant with failing to take reasonable measures to protect credit report information and for misrepresenting the company’s data security practices. Under the settlement, the mortgage broker will (i) pay a $35,000 penalty, (ii) be barred from making certain misrepresentations regarding protecting consumer information, (iii) be barred from failing to take reasonable measures to protect credit report information during its disposal, (iv) implement a comprehensive information security program for sensitive consumer information, and (v) hire an independent third-party to annually monitor the program (for the next 10 years). For a copy of the notice, please see http://www.ftc.gov/opa/2010/01/navone.shtm.
California Superior Court Holds HOLA Preempts State Law Mortgage Servicing Provision. On January 4, the Superior Court of the State of California held that the federal Home Owner’s Loan Act (HOLA) preempts the “declaration” and “contact” requirements of Cal. Civil Code § 2923.5 because the state provision attempts to impose requirements on the manner in which the operating subsidiary of a federal savings association services loans. Chavez v. Aurora Loan Servs., LLC, No. 56-2009-00361141 (Cal. Super. Ct. Jan. 4, 2010). In this case, the plaintiff homeowner brought an action to prevent a foreclosure. The homeowner argued that the defendant servicer, a direct subsidiary of a federal savings association, failed to comply with the statutory requirements of Civil Code § 2923.5, thus defeating the servicer’s right to foreclose on the property. Although the court noted that there was no binding authority on point, the court found that the requirement of § 2923.5(a)(2) that the lender “assess the borrower’s financial situation and explore options for the borrower to avoid foreclosure” is not “mere procedural mechanics” and relates directly to the terms/servicing of the loan. As such, the court held that HOLA preemption applied to this provision, while noting that HOLA does not preempt other provisions of California law that address the procedural mechanics of conducting a non-judicial foreclosure sale. For a copy of the opinion, please email .
Second Circuit Holds New York Champerty Statute Not a Bar to Trust’s Lawsuit Against Loan Originator. On January 11, the U.S. Court of Appeals for the Second Circuit held that a trust’s acquisition of rights to sue a loan originator for breach of a loan purchase agreement did not violate the New York Champerty Statute, and therefore was not barred by the affirmative defense of champerty. Trust for the Certificate Holders of the Merrill Lynch Mortg. Investors, Inc., v. Love Funding Corp., No. 07-1050-cv, 2010 WL 59276 (2nd Cir. Jan. 11, 2010). In this case, a trust sued the originator of a defaulted mortgage for breach of the representations and warranties made in the loan purchase agreement. The lawsuit came after the trust reached a settlement with the entity that purchased the loan from the originator and assigned it to the trust. As part of the settlement, the trust acquired the rights of the assignor as against the originator. In the instant case, despite having granted summary judgment in favor of the trust on its claims of breach of contract, the district court found that the trust’s claims were barred by the New York champerty statute because “the Trust’s primary purpose in accepting the Assignment was to buy a lawsuit against [the originator].” The trust appealed and the Second Circuit certified questions about the New York champerty statute to the New York Court of Appeals. In response, the New York Court of Appeals clarified that the champerty statute “does not apply when the purpose of an assignment is the collection of a legitimate claim,” and therefore “if a party acquires a debt instrument for the purpose of enforcing it, that is not champerty simply because the party intends to do so by litigation.” According to the New York Court of Appeals, “if, as a matter of fact, the Trust’s purpose in taking assignment of [the assignor’s] rights under the [originator’s loan purchase agreement] was to enforce its rights, then, as a matter of law, given that the Trust had a preexisting proprietary interest in the loan, it did not violate [the New York champerty statute].” Accepting the New York Court of Appeals’ answer, and noting that, even before the prior settlement, “the Trust had a significant interest in the repayment of the [defaulted loan],” the Second Circuit held that the evidence on the record did not allow, as a matter of law, for a finding that the assignment was champertous. Accordingly, the Second Circuit reversed the judgment of the district court and remanded the case for entry of judgment in favor of the trust. For a copy of the opinion, please see http://www.buckleysandler.com/Trust_v_Love.pdf.
Banking
Obama Proposes New Bank Limitations on Size, Activities. On January 21, President Obama announced his intention to work with Congress to limit the size of financial institutions, as well as the activities in which they may engage. Specifically, under the so-called “Volcker Rule,” the President is seeking to prohibit banks and financial institutions with bank subsidiaries from owning, investing in, or sponsoring hedge funds, private equity funds, and related trading operations. The President is also proposing a limit on the percentage of a financial institution’s liabilities as a percent of market share, which would be in addition to existing limitations. A BuckleySandler Regulatory Restructuring Report will be issued when the actual text of the proposal is made available. For a copy of the announcement, please see http://www.whitehouse.gov/the-press-office/remarks-president-financial-reform; for a copy of the fact sheet, please see http://www.whitehouse.gov/the-press-office/president-obama-calls-new-restrictions-size-and-scope-financial-institutions-rein-e.
Federal Banking Regulatory Agencies Issue Risk-Based Capital Final Rule. On January 21, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision announced a final rule that generally subjects covered financial institutions to higher risk-based capital requirements and changes how covered institutions account for certain items (e.g., securitized assets) that had previously been excluded from balance sheets. The rule allows for an optional phase-in period for four quarters in connection with the impact on risk-weighted assets and tier 2 capital. The final rule will become effective 60 days after publication in the Federal Register. Institutions may elect to comply with the final rule as of the beginning of the first annual reporting period after November 15, 2009. For a copy of the press release, please see http://www.occ.treas.gov/ftp/release/2010-6.htm. For a copy of the final rule, please see http://www.occ.treas.gov/ftp/release/2010-6a.pdf.
House Committee on Financial Services Holds Hearing on Executive Compensation. On January 22, the House Committee on Financial Services held a committee hearing entitled "Compensation in the Financial Industry." The witnesses at the hearing were Professor Lucian A. Bebchuck of Harvard Law School, Professor Joseph E. Stiglitz of Columbia Business School, and Ms. Nell Minow, Editor and Founder of The Corporate Library. For a copy of the prepared testimonies and to view an archived webcast of the hearing, please see http://www.house.gov/apps/list/hearing/financialsvcs_dem/fcher_01222010.shtml.
California Superior Court Holds HOLA Preempts State Law Mortgage Servicing Provision. On January 4, the Superior Court of the State of California held that the federal Home Owner’s Loan Act (HOLA) preempts the “declaration” and “contact” requirements of Cal. Civil Code § 2923.5 because the state provision attempts to impose requirements on the manner in which the operating subsidiary of a federal savings association services loans. Chavez v. Aurora Loan Servs., LLC, No. 56-2009-00361141 (Cal. Super. Ct. Jan. 4, 2010). In this case, the plaintiff homeowner brought an action to prevent a foreclosure. The homeowner argued that the defendant servicer, a direct subsidiary of a federal savings association, failed to comply with the statutory requirements of Civil Code § 2923.5, thus defeating the servicer’s right to foreclose on the property. Although the court noted that there was no binding authority on point, the court found that the requirement of § 2923.5(a)(2) that the lender “assess the borrower’s financial situation and explore options for the borrower to avoid foreclosure” is not “mere procedural mechanics” and relates directly to the terms/servicing of the loan. As such, the court held that HOLA preemption applied to this provision, while noting that HOLA does not preempt other provisions of California law that address the procedural mechanics of conducting a non-judicial foreclosure sale. For a copy of the opinion, please email .
Consumer Finance
FCC Announces Proposal for Tougher Restrictions on “Robocalls” to Track FTC Standard. On January 20, the Federal Communications Commission (FCC) announced a proposal to amend the regulation under the Telephone Consumer Protection Act (TCPA) pertaining to prerecorded telemarketing calls (so-called “robocalls”). According to the FCC, the new rules are more restrictive than the current regulation and are intended to further prevent unwanted telephone solicitations. The proposal would align the FCC’s regulation of prerecorded telemarketing calls with the Federal Trade Commission’s (FTC) recent amendments to its Telemarketing Sales Rule and extend the FTC’s stricter standards to entities that are not currently subject to FTC rules. The proposed amendments include requiring (i) consumers’ express written consent (including electronic methods) to receive prerecorded telemarketing calls, even if there is an established business relationship between the caller and the consumer, and (ii) the inclusion of an automated, interactive mechanism by which a consumer may “opt out” of receiving future telemarketing calls. The FCC noted that the proposal would not affect categories of prerecorded calls that are not currently covered by its TCPA rules, including calls that are purely “informational.” For a copy of the release, please see http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-295839A2.doc.
FTC Reaches Settlement with Mortgage Broker Regarding Improper Disposal of Consumer Information. On January 20, the Federal Trade Commission (FTC) reached a $35,000 settlement with a mortgage broker who allegedly discarded consumers’ personal financial records into a publicly-accessible dumpster. The FTC alleged that the mortgage broker improperly disposed of 40 boxes of records, which included tax returns, mortgage applications, bank statements, and at least 230 credit reports. The FTC charged the defendant with failing to take reasonable measures to protect credit report information and for misrepresenting the company’s data security practices. Under the settlement, the mortgage broker will (i) pay a $35,000 penalty, (ii) be barred from making certain misrepresentations regarding protecting consumer information, (iii) be barred from failing to take reasonable measures to protect credit report information during its disposal, (iv) implement a comprehensive information security program for sensitive consumer information, and (v) hire an independent third-party to annually monitor the program (for the next 10 years). For a copy of the notice, please see http://www.ftc.gov/opa/2010/01/navone.shtm.
Securities
Obama Proposes New Bank Limitations on Size, Activities. On January 21, President Obama announced his intention to work with Congress to limit the size of financial institutions, as well as the activities in which they may engage. Specifically, under the so-called “Volcker Rule,” the President is seeking to prohibit banks and financial institutions with bank subsidiaries from owning, investing in, or sponsoring hedge funds, private equity funds, and related trading operations. The President is also proposing a limit on the percentage of a financial institution’s liabilities as a percent of market share, which would be in addition to existing limitations. A BuckleySandler Regulatory Restructuring Report will be issued when the actual text of the proposal is made available. For a copy of the announcement, please see http://www.whitehouse.gov/the-press-office/remarks-president-financial-reform; for a copy of the fact sheet, please see http://www.whitehouse.gov/the-press-office/president-obama-calls-new-restrictions-size-and-scope-financial-institutions-rein-e.
Litigation
California Superior Court Holds HOLA Preempts State Law Mortgage Servicing Provision. On January 4, the Superior Court of the State of California held that the federal Home Owner’s Loan Act (HOLA) preempts the “declaration” and “contact” requirements of Cal. Civil Code § 2923.5 because the state provision attempts to impose requirements on the manner in which the operating subsidiary of a federal savings association services loans. Chavez v. Aurora Loan Servs., LLC, No. 56-2009-00361141 (Cal. Super. Ct. Jan. 4, 2010). In this case, the plaintiff homeowner brought an action to prevent a foreclosure. The homeowner argued that the defendant servicer, a direct subsidiary of a federal savings association, failed to comply with the statutory requirements of Civil Code § 2923.5, thus defeating the servicer’s right to foreclose on the property. Although the court noted that there was no binding authority on point, the court found that the requirement of § 2923.5(a)(2) that the lender “assess the borrower’s financial situation and explore options for the borrower to avoid foreclosure” is not “mere procedural mechanics” and relates directly to the terms/servicing of the loan. As such, the court held that HOLA preemption applied to this provision, while noting that HOLA does not preempt other provisions of California law that address the procedural mechanics of conducting a non-judicial foreclosure sale. For a copy of the opinion, please email .
Second Circuit Holds New York Champerty Statute Not a Bar to Trust’s Lawsuit Against Loan Originator. On January 11, the U.S. Court of Appeals for the Second Circuit held that a trust’s acquisition of rights to sue a loan originator for breach of a loan purchase agreement did not violate the New York Champerty Statute, and therefore was not barred by the affirmative defense of champerty. Trust for the Certificate Holders of the Merrill Lynch Mortg. Investors, Inc., v. Love Funding Corp., No. 07-1050-cv, 2010 WL 59276 (2nd Cir. Jan. 11, 2010). In this case, a trust sued the originator of a defaulted mortgage for breach of the representations and warranties made in the loan purchase agreement. The lawsuit came after the trust reached a settlement with the entity that purchased the loan from the originator and assigned it to the trust. As part of the settlement, the trust acquired the rights of the assignor as against the originator. In the instant case, despite having granted summary judgment in favor of the trust on its claims of breach of contract, the district court found that the trust’s claims were barred by the New York champerty statute because “the Trust’s primary purpose in accepting the Assignment was to buy a lawsuit against [the originator].” The trust appealed and the Second Circuit certified questions about the New York champerty statute to the New York Court of Appeals. In response, the New York Court of Appeals clarified that the champerty statute “does not apply when the purpose of an assignment is the collection of a legitimate claim,” and therefore “if a party acquires a debt instrument for the purpose of enforcing it, that is not champerty simply because the party intends to do so by litigation.” According to the New York Court of Appeals, “if, as a matter of fact, the Trust’s purpose in taking assignment of [the assignor’s] rights under the [originator’s loan purchase agreement] was to enforce its rights, then, as a matter of law, given that the Trust had a preexisting proprietary interest in the loan, it did not violate [the New York champerty statute].” Accepting the New York Court of Appeals’ answer, and noting that, even before the prior settlement, “the Trust had a significant interest in the repayment of the [defaulted loan],” the Second Circuit held that the evidence on the record did not allow, as a matter of law, for a finding that the assignment was champertous. Accordingly, the Second Circuit reversed the judgment of the district court and remanded the case for entry of judgment in favor of the trust. For a copy of the opinion, please see http://www.buckleysandler.com/Trust_v_Love.pdf.
Indiana Federal Court Holds Clickwrap Agreement Not Unconscionable. On December 22, the U.S. District Court for the Southern District of Indiana held that a clickwrap agreement containing a forum-selection clause was not procedurally unconscionable and was, thus, binding. Appliance Zone, LLC v. NexTag, Inc., No. 09-89, 2009 WL 5200572 (S.D. Ind. Dec. 22, 2009). In this case, an employee of the plaintiff clicked a hyperlink stating “I accept the NexTag Terms of Service” in connection with an online advertising agreement with the defendant, NexTag. The agreement contained, among other things, a forum-selection clause. The plaintiff later sued NexTag for alleged trademark infringement and argued that the forum-selection clause was invalid because the agreement was, among other things, procedurally unconscionable. Holding that the agreement was not procedurally unconscionable – and, thus, binding – the court reasoned that the terms of the agreement were “highly visible and easily accessible, and required as well an affirmative acceptance of the terms of the Agreement as a prerequisite to completing registration.” Because the forum-selection clause was binding and applicable to the trademark infringement dispute, the court granted NexTag’s motion to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/AZ_v_NT.pdf.
E-Financial Services
Indiana Federal Court Holds Clickwrap Agreement Not Unconscionable. On December 22, the U.S. District Court for the Southern District of Indiana held that a clickwrap agreement containing a forum-selection clause was not procedurally unconscionable and was, thus, binding. Appliance Zone, LLC v. NexTag, Inc., No. 09-89, 2009 WL 5200572 (S.D. Ind. Dec. 22, 2009). In this case, an employee of the plaintiff clicked a hyperlink stating “I accept the NexTag Terms of Service” in connection with an online advertising agreement with the defendant, NexTag. The agreement contained, among other things, a forum-selection clause. The plaintiff later sued NexTag for alleged trademark infringement and argued that the forum-selection clause was invalid because the agreement was, among other things, procedurally unconscionable. Holding that the agreement was not procedurally unconscionable – and, thus, binding – the court reasoned that the terms of the agreement were “highly visible and easily accessible, and required as well an affirmative acceptance of the terms of the Agreement as a prerequisite to completing registration.” Because the forum-selection clause was binding and applicable to the trademark infringement dispute, the court granted NexTag’s motion to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/AZ_v_NT.pdf.
Privacy/Data Security
FCC Announces Proposal for Tougher Restrictions on “Robocalls” to Track FTC Standard. On January 20, the Federal Communications Commission (FCC) announced a proposal to amend the regulation under the Telephone Consumer Protection Act (TCPA) pertaining to prerecorded telemarketing calls (so-called “robocalls”). According to the FCC, the new rules are more restrictive than the current regulation and are intended to further prevent unwanted telephone solicitations. The proposal would align the FCC’s regulation of prerecorded telemarketing calls with the Federal Trade Commission’s (FTC) recent amendments to its Telemarketing Sales Rule and extend the FTC’s stricter standards to entities that are not currently subject to FTC rules. The proposed amendments include requiring (i) consumers’ express written consent (including electronic methods) to receive prerecorded telemarketing calls, even if there is an established business relationship between the caller and the consumer, and (ii) the inclusion of an automated, interactive mechanism by which a consumer may “opt out” of receiving future telemarketing calls. The FCC noted that the proposal would not affect categories of prerecorded calls that are not currently covered by its TCPA rules, including calls that are purely “informational.” For a copy of the release, please see http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-295839A2.doc.