InfoBytes, June 16, 2006
Sign up for weekly updates
RSS feed
Topics in this issue:
Federal Issues
SEC Brings First Enforcement Case Under the Advisers Act’s Compliance Program Rule. On June 6, the Securities and Exchange Commission (SEC) brought and settled its first case under Rule 206(4)-7 under the Investment Advisers Act of 1940 – the Act’s compliance program rule. In that case, the SEC sanctioned CapitalWorks Investment Partners, LLC, a registered investment adviser, and Mark J. Correnti, a principal of the firm and its director of client service and marketing, for (i) making false and misleading representations to existing and prospective clients in responses to requests for proposals (RFPs) and other documents and (ii) failing to have written compliance policies and procedures in place relating to client communications. According to the order, in mid-2002, the SEC’s examination staff conducted an inspection of CapitalWorks and issued a deficiency letter which identified various problems that needed to be corrected. In its order, the SEC alleged that from August 2002 to December 2004, CapitalWorks and Correnti misrepresented facts to existing and prospective clients about the results of that inspection. It found, for example, that in 10 responses to RFPs, CapitalWorks falsely stated that “[t]he SEC did not find any deficiencies and required no follow-up actions” or that “[n]o violations were found" in connection with the inspection. The SEC also stated that, even though investment advisers were required to adopt written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules by October 2004, CapitalWorks had not adopted procedures that would address inaccurate responses to RFPs until April 2005. The SEC found that CapitalWorks violated the antifraud provisions of Sections 206(2) and 206(4) of the Advisers Act as well as Rule 206(4)-7 thereunder and that Correnti aided and abetted in the firm’s violations. Without admitting or denying the SEC’s findings, CapitalWorks and Correnti settled the charges brought by the SEC by agreeing to a censure, a cease-and-desist order and civil penalties of $40,000 and $25,000, respectively, among other sanctions. A copy of the order is available at www.sec.gov/litigation/admin/2006/ia-2520.pdf.
Congress holds HMDA Hearings to Assess Lending Disparities; Regulators Respond to Federal Reserve Board Referrals. The Financial Institutions and Consumer Credit Subcommittee of the House Financial Services Committee held a hearing this past Tuesday on the meaning of the pricing data collected recently under the Home Mortgage Disclosure Act (HMDA). Federal Reserve Board Governor Mark Olson testified at the hearing. Copies of the testimony may be viewed at http://financialservices.house.gov/hearings.asp?formmode=detail&hearing=480. Of note in the testimony are the letters from the banking agencies to Rep. Barnie Frank (D-MA) regarding their examination of the lenders who were referred to them by the Federal Reserve Board following the Board’s analysis of the 2004 HMDA pricing data. Most agencies indicated that their examinations are continuing and any final decisions are yet to be made, although the Office of Thrift Supervision (OTS) and the National Credit Union Administration (NCUA) indicated that, after their review, additional objective credit information used by their regulated institutions to price loans fully explained the disparities in the Board’s analysis, leading to a conclusion that no evidence existed of unlawful discrimination.
HUD Announces Post-Katrina Public Housing Plan. On June 14, Housing and Urban Development (HUD) Secretary Alphonso Jackson outlined his plan to restore public housing in areas damaged by Hurricane Katrina. In New Orleans , the plan consists of: (i) reopening 1,000 public housing units in the next 60 days; (ii) raising the values of HUD Disaster Vouchers; and (iii) redeveloping New Orleans public housing. In Mississippi, HUD has provided guidance regarding the Federal Community Development Block Grant specific to FHA insured loans to assist owners that suffered flood damage. As a part of this broader effort HUD requests on behalf of the Mississippi Development Authority, which administers Federal Community Development Block Grant in Mississippi, in a recent mortgagee letter (ML 2006-16), that mortgagees manage the grant closing and funds disbursement process on behalf of their customers. The press release can be read in its entirety at http://www.hud.gov/news/release.cfm?content=pr06-066.cfm. The mortgagee letter can be found at http://www.hudclips.org/cgi/index.cgi.
HUD Finalizes Change in Default Reporting Period. Recently, HUD issued a final rule requiring mortgagees to report the status of Federal Housing Administration (FHA) insured mortgages that are 30 or more days delinquent on the last day of the month. Previously, mortgagees were required only to report FHA-insured mortgage loan delinquency for those mortgages that were in default after 60 days or that were 90 or more days delinquent, as applicable. HUD cited its need for more up-to-date information for loss mitigation monitoring purposes as the motivation for this change. This brings FHA’s requirements closer to the default data reporting requirements of Fannie Mae, Freddie Mac, and those recommended by the Mortgage Bankers Association. To view the Federal Register publication and explanation of the rule, please see http://a257.g.akamaitech.net/7/257/2422/01jan20061800/edocket.access.gpo.gov/2006/06-3083.htm.
Fed Orders Assessment of $4,000 Civil Money Penalty for Alleged Flood Insurance Act Violations. On June 12, the Federal Reserve Board announced the issuance of a consent Order of Assessment of a Civil Money Penalty against Bank of Tazewell County, Tazewell, Virginia, resulting from an alleged pattern or practice of violations of Regulation H, among other things, the Board’s regulations implementing the National Flood Insurance Act. Under the order, the bank is required to pay a civil money penalty of $4,000, which will be remitted to FEMA for deposit into the National Flood Mitigation Fund. A copy of the order can be found at http://www.federalreserve.gov/boarddocs/press/enforcement/2006/20060612/attachment.pdf.
FRB Governor Discusses Compliance-Risk Management. In a recent presentation to the American Bankers Association Regulatory Compliance Conference, Federal Reserve Board (the “Board") Governor Mark Olson discussed managing and monitoring compliance risk. Mr. Olson made special note of the value of HMDA data in evaluating potential disparities and investigating whether bank policies are followed. On a separate but similar note, in recent testimony to the U.S. House Subcommittee on Financial Institutions and Consumer Credit, Mr. Olson discussed the history of HMDA data and its use by the Board to help supervise financial institutions’ compliance. Mr. Olson also expressed the Board’s intent to continue to conduct and promote research that further explores racial and ethnic differences in the incidence of higher-priced lending. For the full text of Mr. Olson’s recent comments, see http://www.federalreserve.gov/boarddocs/speeches/2006/20060612/default.htm and for the full text of his Subcommittee testimony, see http://www.federalreserve.gov/boarddocs/testimony/2006/20060613/default.htm.
State Issues
CSBS and AARMR Consider Non-traditional Mortgage Guidance. On June 7, the Conference of State Banking Supervisors (CSBS) and American Association of Residential Mortgage Regulators (AAMR) announced that they are considering guidance on non-traditional mortgages with the hope that it will be adopted by state agencies regulating mortgage brokers and lenders. The guidance being developed is based upon the guidance proposed by federal banking agencies earlier this year but according to CSBS and AAMR will be modified to focus on residential mortgage underwriting and consumer protection. CSBS and AAMR have requested that state-licensed residential mortgage brokers and lenders supply comments regarding the proposed federal guidance before August 14, 2006. More information can be found at http://www.csbs.org/AM/Template.cfm?Section=Press_Releases&Template=/CM/HTMLDisplay.cfm &ContentID=7461.
Louisiana Governor Passes Bill Restricting Use of Prepayment Penalties. On June 2, Governor Kathleen Blanco of Louisiana signed HB 602 into law (effective August 15, 2006). HB 602, first introduced in the House on March 16, 2006, prohibits lenders from charging prepayment penalties in consumer credit transactions and residential mortgage loan transactions if the loans are paid, in whole or in part, from proceeds of insurance policies insuring against casualty, flood or other physical damage to secured property caused by a gubernatorially declared disaster. For the full ext of HB 602 please see http://www.legis.state.la.us/billdata/streamdocument.asp?did=398027.
Mississippi Amends Mortgage Consumer Protection Law Regulations. The Mississippi Department of Banking and Consumer Finance has recently adopted a new rule regarding the Mississippi Mortgage Consumer Protection Law. The rule contains new requirements for the display of licenses, principal officer qualifications, and restricts the collection of lock-in fees. The new rule will be effective July 1, 2006. Full text of the new rule can be found at http://www.dbcf.state.ms.us/documents/proposedmtg06.pdf.
Courts
Two Federal Courts Interpret the Meaning of “File” in the FCRA. On June 9, 2006, the U.S. Court of Appeals for the Eleventh Circuit held in an interlocutory appeal that the Fair Credit Reporting Act (FCRA) does not require a consumer reporting agency (CRA) to provide to consumers a full consumer report following a reinvestigation of the consumer’s file under Section 609 of FCRA. Instead, a summary of the changes – in this case, a one-page letter explaining that the change had been made – is sufficient. The district court held that consumer report involves more than just the results of a reinvestigation, and therefore simply providing the letter did not suffice. The Court of Appeals reversed and remanded with instructions to dismiss, stating that all that is required is to provide a report based upon the file as that file is revised, and a letter explaining the results of the reinvestigation and showing the revised information was sufficient. Nunnally et al. v. Equifax Information Services, LLC, No. 05-12029, 2006 U.S. App. LEXIS 14153 (11th Cir. 2006).
In the second case, an Illinois federal district court held that the term “file” under Section 609 of FCRA, which requires a CRA to disclose “[a]ll information in the consumer’s file at the time of the request” to the consumer on request, does not require disclosure “all of the information on that consumer recorded and retained,” but rather only the information that would be contained in a consumer credit report. The consumer had argued that the CRA should have disclosed the “purge date” – the date when the information would no longer be reported under FCRA’s obsolescence provision, Section 605, but the court, citing the FTC Commentary on FCRA, 16 C.F.R. pt. 600 app., held that the CRA is required to disclose only the information that would be contained in a consumer report. Gillespie, et al. v. Trans Union, LLC, No. 04-8299, 2006 WL 1430213 (N.D. Ill. May 15, 2006). For copies of either of these cases, please contact Sue Kilgore at (202) 349-8054.
Federal Court Allows Plaintiff to Serve Process on Foreign Defendant Via E-mail. On May 30 the U.S. District Court for the Middle District of Florida held that a plaintiff could serve process on a foreign defendant via e-mail and other methods. MPS IP Svcs. Corp. v. Modis Comm., Inc., No. 3:06-cv-270-J-20HTS, (M.D. Fla. May 30, 2006). The court noted that the Federal Rules of Civil Procedure allow for alternative service on foreign defendants via methods that do not contravene the foreign jurisdiction’s laws or applicable treaties. Based upon the plaintiff’s assertions that: (i) defendants did not have a valid physical address, and (ii) the plaintiffs previously contacted defendants via e-mail, the court determined that an e-mail sent through the defendant’s website could constitute valid service of process in combination with service by regular mail and facsimile. Please contact Sue Kilgore at (202) 349-8054 for a copy of the Order.
Firm News
Buckley Kolar attorney Robert Serino will be speaking at the American Association of Bank Directors and the Pennsylvania Association of Community Bankers’ Annual Spring Conference on Saturday June 17th regarding the “Essential BSA Training for Outside Directors.” He will address a range of topics in Bank Secrecy Act related compliance.
Banking
Board and FinCEN Issue ANPR on Lowering or Eliminating Funds Transfer Information Retention Requirement Threshold. On June 15, the Federal Reserve Board (the Board) and the Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury (the Treasury) issued a joint advance notice of proposed rulemaking (ANPR) reviewing the threshold for the rule that requires banks and nonbank financial institutions to collect and retain information on funds transfers and transmittals of funds. In 1995, the Board and the Treasury set the threshold for compliance with the requirement to collect, retain, and transmit information on funds transfers and transmittals of funds at $3,000 or more. Generally, institutions subject to the rules must keep information regarding: (i) name and address of the originator and transmitter; (ii) amount of the transmission; (iii) execution date of the order; (iv) any payment instructions received with the order; and (v) the identity of the beneficiary’s bank or recipient’s financial institution. Such institutions must also maintain as much information as they receive regarding the name, address, account number, and any other specific identifier of the beneficiary or recipient of the transfer. The ANPR requests comment on the proposal of lowering, or eliminating altogether, the threshold amount for the retention requirement. Similar proposals by the Treasury have not been finalized in the past due to concerns regarding the burden imposed by such requirements. For the text of the ANPR, see http://www.fincen.gov/notice_proposed_rulemaking_funds_transfers.pdf.
OTS Issues Gift Card Preemption Letter. On June 9, the Office of Thrift Supervision (OTS) issued a new preemption letter concluding that the Home Owners’ Loan Act (HOLA) and OTS implementing regulations preempted state law restrictions on the sale of gift cards. Specifically, OTS found that the issuance of gift cards, as a form of fund transfer, was clearly a permissible activity for a federal association or its operating subsidiaries and that certain identified categories of state law restrictions are preempted if imposed they would impermissibly affect the operations of a federal thrift. The five specific categories of state laws that the letter addresses are licensing, disclosure, fee restrictions, expiration dates, and redemption limits. It is noteworthy that although these state law restrictions relate to state provisions dealing with unfair or deceptive acts or practices, or abandoned property, OTS found them preempted because of the scope of “field preemption” created by HOLA and the OTS regulations. Finally, OTS indicated that its regulatory authority would not create an enforcement vacuum, and states that (i) OTS expects thrifts to ensure that customers receive all pertinent information about gift cards such as how they work, fees, and expiration dates; and (ii) thrifts issuing gift cards are subject to a host of federal regulations and consumer protections. A copy of the letter may be obtained at http://www.ots.treas.gov/docs/5/56218.pdf.
Banking Agencies Issue Host State Loan-to-Deposit Ratios. On June 13, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of Currency (the Agencies) issued host state loan-to-deposit ratios that will be used to determine compliance with the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Act). The host state loan-to-deposit ratio is the ratio of total loans in a state to total deposits in the state in all banks that have that state as their home state. Section 109 of the Act generally prohibits a bank from establishing or acquiring a branch outside of its home state primarily for the purpose of deposit production. The Agencies use a two step test to determine compliance with Section 109 of the Act. The appropriate agency first compares a bank’s statewide loan-to-deposit ratio to the host state loan-to-deposit ratio for a particular state. If the bank’s statewide loan-to-deposit ratio is at least one-half of the published host state loan-to-deposit ratio, the bank has complied with Section 109. A second step is conducted if a bank’s statewide loan-to-deposit ratio is less than one-half of the published ratio for that state or if data are not available at the bank to conduct the first step. The second step requires the appropriate banking agency to determine whether the bank is reasonably helping to meet the credit needs of the communities served by the bank’s interstate branches. A bank that fails both steps is in violation of Section 109 and subject to sanctions by the appropriate agency. The updated host state loan-to-deposit ratios can be found at http://www.federalreserve.gov/boarddocs/press/bcreg/2006/20060613/attachment.pdf.
OCC Moves Forward on Implementing Basel II Accord. On June 7, Comptroller of the Currency John C. Dugan spoke to the Center for the Study Financial Innovation about implementation of Basel II. Basel II is the international agreement which institutes a revised capital management regime that relies on economic models for risk evaluation. American banking agencies are insisting on more stringent safeguards, such as: (i) delaying the adoption of Basel II for one year; (ii) extending the transition period after adoption for three years; and (iii) limiting reductions in reserve requirements through conservative capital floors. The banking agencies will also maintain the leverage ratio as a fundamental capital backstop. The text of the speech can be found at http://www.occ.treas.gov/ftp/release/2006-69a.pdf.