Source: https://www.calbankers.com/post/2009-cba-regulatory-and-litigation-summary
Timestamp: 2019-04-18 22:22:55+00:00

Document:
As expected, 2009 saw a flood of initiatives at all levels of government to address the financial crisis. Thanks to the CBA state government relations team, only one major banking bill was enacted in the state this year—AB 7, the foreclosure moratorium bill. And in response to frenetic activity in Congress, by the Administration, and the federal banking agencies, opposition mounted on major reform efforts, including the creation of a federal consumer agency, establishing a resolution authority for economically significant institutions, and consolidation of bank charters. As of the beginning of 2010, none of these proposals has yet been enacted.
The year also saw significant pushes by local governments to regulate banks, particularly the City and County of Los Angeles. One of the proposals—to divest government relationships with banks that do not adequately “cooperate” with foreclosure prevention measures—may be taken up by the state this year.
One of the biggest challenges in this and the coming years may be trying to manage the aftermath of the demise of federal preemption. Not only did the U.S. Supreme Court deal a blow to preemption in Cuomo v. The Clearing House Association, Congress will almost certainly give states more authority to enact their own consumer protection standards even as it is poised to enact legislation to create the federal Consumer Financial Protection Agency. The threat of federal preemption of state and local laws traditionally has acted as a damper on some of the more extreme legislative initiatives in California, of which there has been many, something that benefits all banks regardless of charter. With the doctrine of federal preemption in decline, the industry’s work will be that much more challenging.
In 2009 with the shining exception of Miller v. Bank of America (discussed in this Summary), the courts have not been kind to the industry. As a result of judicial losses, deposit account customers in some circumstances are owed a fiduciary duty, title insurance companies will not stand behind title policies if the originator committed fraud, and escrow companies do not owe a duty to warehouse lenders (CBA will participate in an appeal on the last two issues). One of the biggest cases is still pending before the California Supreme Court, which will decide how broadly can employers apply the “administrative” exemption from wage and hour laws. An adverse ruling may require banks to re-classify highly-skilled and independent employees currently exempt under the Administrative category.
CBA comment letters and bulletins are available as links in the body of this Summary. Amicus briefs filed by CBA may be obtained by contacting Leland Chan at lchan@calbankers.com.
Congress and the Administration undertook a number of significant initiatives to respond to the economic crisis, all requiring prompt industry response. Working closely with the ABA and with CBA’s membership, CBA issued comment letters, organized grassroots efforts, and made personal visits with lawmakers and regulatory authorities to add the California banking industry’s voice in this effort to rewrite the nation’s banking laws and regulations.
Issue: The Obama Administration has set as a high priority the creation of a new federal agency, the Consumer Financial Protection Agency, to assume responsibility over most of the consumer protection laws currently written and enforced by the banking agencies. The CFPA will have rulemaking and examination authority over banks and other financial service providers. It will have authority to set rules pertaining to the offering of “standard” financial products or services, as opposed to “alternative” products or services. The protection standards that it will enforce will not preempt any state or local laws, regulations, and ordinances, which means that national standards will be impossible to maintain.
Among the most significant effects of the CFPA will be the agency’s single focus on consumer protection, resulting from its legal and regulatory separation from safety and soundness. For decades, the two regimes were under the supervision of the banking agencies, as fitting the reality that the two missions are intricately intertwined. To bifurcate these responsibilities among separate agencies will inevitably deprive the CFPA on the one hand, and the banking agencies on the other of perspective. Recently, a proposal to limit the CFPA’s authority to larger banks means, among other things, that the banking agencies would retain their consumer protection mission with most banks.
Another major consequence of the CFPA will be the substantial elimination of national standards. By intention, the proposals protect states (and by implication local agencies) in their efforts to enact additional restrictions on banks. This could be a serious problem especially in California as both the state legislature and local municipalities actively seek to impose local controls and restrictions, making it extremely difficult to conduct the business of banking within a uniform legal environment. More recently, the house bill (H.R. 3126) would preserve National Bank Act and federal thrift preemption to an extent by freezing the status of preemption as articulated by the U.S. Supreme Court decision in Barnett Bank of Marion County NA v. Nelson, which was decided in 1996.
CBA action: Opposition to the establishment of the CFPA was one of CBA’s top priorities in 2009. See CBA Regulatory Compliance Bulletin Summary of the Consumer Financial Protection Agency Act of 2009 dated July 6, 2009.
Issue: The economic stimulus bill (American Recovery and Reinvestment Act of 2009) and the Emergency Economic Stabilization Act of 2008 both included limits on executive compensation, including the compensation of top officers of financial institutions receiving federal recovery funds. The provisions pertain to “excessive” risk-taking, recovery of compensation based on inaccurate results, golden parachutes, incentive compensation, unreasonable entertainment and other expenses, and manipulation of earnings to boost compensation. Institutions are required to establish board compensation committees, and shareholders must be allowed a separate shareholder vote to approve the compensation of executives. See CBA Regulatory Compliance Bulletin Summary of Executive Compensation Limits on TARP Recipients, dated February 23, 2009.
Issue: Part of the Obama Administration’s regulatory initial restructuring plan included creation of the National Bank Supervisor. The functions of the Comptroller of the Currency and the Director of the Office of Thrift Supervision, together with staff, will be transferred to the NBS, except that OTS functions relating to the supervision of state savings associations are transferred to the FDIC. Savings associations are required to declare whether they will become a national bank, mutual national bank, state bank, or state savings association. If an association does not make an election, it will become a national bank or mutual national bank by operation of law. See CBA Regulatory Compliance Bulletin Treasury Releases Proposal to Create National Bank Supervisor, July 27, 2009.
Following the Administration’s introduction of the proposal, Congressional leaders have modified it in several ways. The most extreme proposal was introduced by Sen. Dodd, which would not only eliminate the OCC and OTS but also strip prudential regulation from the FDIC and the Federal Reserve, creating one new bank regulator. It would also prohibit new thrift charters.
Issue: The Treasury Department is seeking to establish a system where the FDIC or the SEC (in the case of registered brokers or dealers) may be designated to act as a conservator or receiver of a bank holding company that is in default or is in danger of default. The Federal Reserve Board, FDIC or SEC will be authorized to make such a recommendation to the Treasury Department, describing the effect that the default would have on economic conditions or to financial stability in the U.S., and also recommending the kind of government assistance or actions that is warranted. The Treasury Secretary could then appoint the FDIC or the SEC as conservator or receiver.
When appointed, the FDIC or SEC succeeds to the bank holding company’s rights and authorities, and may operate the firm; transfer its assets, rights, and liabilities to a bridge bank holding company (BBHC); merge the company with another company; or liquidate the company. The conservator/receiver may also provide assistance by making loans to the company, purchasing its assets, assuming or guaranteeing its obligations, acquiring its equity interests or securities, taking liens, and selling and disposing of the assets, liabilities, obligations, equity interests or securities of the holding company or its subsidiaries.
One of the industry’s major concerns over the proposal is the deployment of the FDIC as the primary resolution authority. Public confidence in deposit insurance must not be eroded as the FDIC’s mission is extended to resolve a myriad of other companies. See CBA Regulatory Compliance Bulletin Proposal Establishes Bank Holding Company Conservator, dated August 3, 2009. Since the Treasury Department released its initial proposal, legislation has taken several forms and is pending.
Issue: The pressures on the FDIC deposit insurance fund (DIF) have forced the FDIC to consider various options to replenish it in a manner that does not unduly burden the industry or exacerbate banks’ financial challenges. Seeking to avoid using a substantial Treasury credit line, the FDIC considered and ultimately imposed special assessments on the industry. CBA supported a bill to expand the FDIC’s $30 billion line of credit from the Treasury to $100 billion as a means to relieve some pressure on the FDIC to make a large special assessment. We also asked that premiums paid to support the Temporary Liquidity Guarantee Program (TLGP) should be made available to, and be incorporated with, the DIF since the banking industry is obligated to pay for losses emanating from either the DIF or the TLGP. We also urged the FDIC to moderate the effect of any special assessment on banks’ ratings, for example by disallowing examiners from downgrading a bank’s CAMELS rating solely because of the impact of any special assessment. See CBA’s comment letter to the FDIC dated April 2, 2009.
Issue: When the Treasury Department and the FDIC proposed the Legacy Loans Program, which included the creation of Public Private Investment Funds, CBA generally supported it. It is intended to create a public-private partnership to acquire distressed assets from financial institutions through a combination of Treasury and private equity investments, FDIC debt guarantees, and sharing of profits and risks. What CBA did not support is the FDIC’s debt guarantee. If the FDIC experiences losses in excess of the fees it collects to manage the program, the FDIC may seek to recover the losses through assessments on all insured banks regardless of whether they participate in the LLP. This could conflict with the FDIC’s primary role as insurer of bank deposits. We also asked that the program be made available for a broad range of assets, not just those backed by mortgages, and that banks are not excluded from participating in the LLP as purchasers. See CBA’s comment letter to the FDIC dated April 9, 2009.
Issue: The banking industry is subject to general accounting standards issued by non-banking standards-setting bodies like the Financial Accounting Standards Board (FASB). While accounting standards are central to the way that banks report and account for tax, capital, earnings, and reserves, neither the industry nor its supervising agencies play a direct role in developing them. Accounting rules took center stage during the financial crisis when banks were forced to write down the value of certain assets based primarily on their market value rather than actual performance. During unusual market circumstances when the market fails to provide reliable valuation signals for certain assets, it can be terribly misleading to account for impaired assets based on perceived market values. Commercial real estate, for example, is not comparable to stocks in that they are not liquid assets and their value is long term.
CBA Action: In letters and visits with Congressional leaders CBA, under ABA’s effective leadership on these issues, has articulated to the banking agencies and to FASB that banks are being required to record losses on assets that have experienced little or no credit problems and that are performing in accordance with their terms. Accounting treatment that unnecessarily force write-downs affect earnings and place strains on capital, and it misleads investors and other users of financial statements.
One proposal (FSP FAS 107-b and APB 28-a) would enhance the interim disclosure of fair value of financial instruments. CBA, in its comment letter, argued that the proposal would require banks to expend more resources to prepare additional reports, which would not be outweighed by benefits to investors. Such reporting entails establishing systems, producing documentation, and performing internal and external reviews, all of which are time-consuming and costly. See CBA’s comment letter to the Financial Accounting Standards Board dated March 2, 2009.
Another proposal (FSP FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed) provides additional guidance on determining whether a market for a financial asset is not active, and whether a transaction is distressed for purposes of fair value measurements under FASB Statement No. 157. We supported this proposal, as the current guidance assumes that the value of a financial asset is exchanged in an orderly transaction among motivated market participants. It lists specific factors that the reporting entity should consider when determining whether a market for a financial asset is inactive and whether a transaction is distressed. If these conditions exist, then the reporting entity could use another method of valuation, such as a present value technique, to estimate fair value. The proposal is helpful because it gives banks a means to demonstrate the need to use a valuation method other than mark-to-market when that method is inappropriate. Still, CBA asked that FASB consider additional ways to reduce the work necessary to arrive at a valuation. See CBA’s comment letter to FASB dated March 30, 2009.
CBA also generally supported a proposal (FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, Recognition and Presentation of Other-Than-Temporary Impairments or OTTI) which improves upon existing guidance that states, in order to avoid considering an impairment to be other-than-temporary, management must assert it has both the intent and the ability to hold an impaired security for a period of time sufficient to allow for any anticipated recovery in its fair value. We supported a modification such that management is required to assert that (a) it does not have the intent to sell the security and (b) it is more likely than not that it will not have to sell the security before recovery of its cost basis. In such circumstances the impairment would be separated into credit losses and all other factors. The impairment related to credit losses would be included in earnings and the amount related to all other factors would be included in other comprehensive income. CBA also asked FASB to provide that recoveries of OTTI should be reversible. See CBA’s comment letter to the Financial Accounting Standards Board dated April 1, 2009.
Later in the year FASB issued another proposal addressing the treatment of credit quality of financing receivables and the allowance for credit losses. The proposal would substantially increase the volume of disclosures with respect to the allowance. It requires a creditor to disclose a description, by portfolio segment, of the accounting policies and methodology used to estimate the allowance; a description of management’s policy for charging off uncollectible financing receivables; the activity in the total allowance for credit losses by portfolio segment; and the activity in the financing receivables related to the allowance. Creditors must disclose management’s policy for determining past-due or delinquency status by class of financing receivable depending on whether it is carried at “amortized cost” or at a measurement other than amortized cost if it is neither past-due nor impaired. With respect to financing receivables that are past-due, but not impaired, the creditor must provide an analysis of the age of the carrying amount of the financing receivables at the end of the reporting period. The carrying amount will have to be disclosed for receivables that are 90 days or more past-due, but not impaired, for which interest is still accruing. Other requirements apply.
CBA questioned whether the costs of enhanced disclosures justify the questionable benefit of transparency to users of financial reports. We also expressed concerns about the ability of banks to comply, as the proposal would be effective for financial statements beginning with the first interim or annual reporting period ending after December 15, 2009. Finally, we noted potential privacy concerns as the level of detail of the proposals may allow individual borrowers to be identified. See CBA’s comment letter to FASB dated August 24, 2009.
Issue: Federal Reserve Board, Office of Thrift Supervision, and National Credit Union Administration jointly issued a final rule prohibiting certain credit card practices under the authority of the Unfair and Deceptive Acts and Practices regulation (UDAP) and Regulation Z (Truth in Lending Act).
The rule identifies several credit card acts and practices that are deemed to be unfair and deceptive within the meaning of the Federal Trade Commission Act. They are: (i) treating a payment as late for any purpose (other than expiration of a grace period), unless the consumer has been provided a reasonable amount of time to make that payment; (ii) allocating amounts paid in excess of the required minimum periodic payment in a manner that maximizes balances with the highest APR; (iii) increasing the APR applicable to an outstanding balance except in specified circumstances; (iv) assessing interest charges on balances for days in prior billing cycles when such charges are imposed as a result of the loss of a grace period; and (v) charging security deposits or fees that exceed applicable limits for the issuance or availability of credit. Further restrictions on credit card issuers are included in legislation currently being debated in Congress.
CBA action: CBA distributed a Regulatory Compliance Bulletin, Summary and Analysis of Credit Card UDAP Rule, dated January 30, 2009, when the rule was finalized.
Issue: The federal banking agencies issued a joint rule regarding the accuracy and integrity of reported information and furnishers’ responsibility to reinvestigate disputes based on direct disputes from consumers. Furnishers are also required to establish policies and procedures to implement the requirements. They should include how consumer information is reported, maintaining records, maintaining internal controls, training, oversight, furnishing consumer information in connection with mergers and other transactions, data integrity, dispute resolution, controls related to consumer reports furnished to CRAs, conducting periodic evaluations of procedures, and complying with applicable laws and regulations. See CBA Regulatory Compliance Bulletin New FACT Act/FCRA Furnisher Requirements Effective 2010, dated June 22, 2009.
Issue: Two cases, one before the California Supreme Court and the other in federal court, address whether a furnisher of credit information (such as a bank) to a consumer reporting agency in California may be sued by the subject of a report for making an allegedly erroneous report. In the federal case, Gorman v. Wolpoff & Abramson and MBNA, a credit card customer of MBNA sued the bank under California’s version of the Fair Credit Reporting Act (California Civil Code section 1785.25(a) for failing to note that a chargeoff was disputed. The FCRA makes a furnisher liable only after it was notified by a consumer reporting agency of a discrepancy, which triggers an obligation to review, and the furnisher fails to conduct a reasonable investigation. The FCRA also provides that a claim for violation of this requirement can be pursued only by federal or state officials, and not by a private party. A federal district court held that the plaintiff’s California claim was preempted by the FCRA, and plaintiff appealed. In January 2009 a panel of the Ninth Circuit Court of Appeals reversed the decision. In the state case, Sanai v. Saltz, the identical issue is raised and was appealed to the California Supreme Court.
CBA Action: In the MBNA case, CBA filed a brief to support the bank’s petition for review by the entire Ninth Circuit. The key issue that CBA addressed was whether the FCRA standard preempts California’s statute. We argued that the FCRA is intended to create a national standard for creditors and other furnishers of credit information in terms of their liability for providing inaccurate information. Furnishers are under no legal duty to provide credit information. Yet the collection and availability of reliable consumer credit information is pivotal to the effective credit market and helps minimize the cost of credit. Without such information, creditors would be hampered in their ability to assess risks, and thus would be less willing to offer credit on affordable terms. The FCRA balances the need to facilitate the availability of credit information with the need to protect consumers by carefully crafting dispute resolution procedures within the FCRA. One of the elements of that balancing is that furnishers are subject to a single national standard and that they are not unduly left exposed to private litigation.
CBA noted that the purpose of Section 1681t(b)(1)(F) of the FCRA is to create such a national standard. If the Ninth Circuit would allow only furnishers in California to be sued privately and without regard to whether it had been notified of a discrepancy by a CRA first and given a chance to conduct an investigation, then California companies would become exposed to liability not experienced by companies in other states. Unfortunately, the full Ninth Circuit denied the bank’s petition for rehearing. In the Sanai case, the California Supreme Court also denied review.
CBA action: CBA filed a brief to the Ninth Circuit Court of Appeals to argue that the negative equity advance is secured purchase-money debt since the transaction cannot be completed unless the existing indebtedness on the trade-in vehicle is discharged. The transaction in it totality is a purchase money transaction and the lender does not seek to bifurcate the loan. Also, we argued that the ruling would open the door to abuse. The case, In re: Marlene A. Penrod (Americredit Financial Services v. Marlene A. Penrod), which was heard in November, contravenes the decisions in other federal circuits.
Issue: The California state attorney general’s office filed an action against the three major tax preparation service providers. All but the smallest of the three, Liberty Tax Services, settled. One of the claims against the company is that an account fee charged by a bank that Liberty contracts with to accept tax refund from the IRS for its clients amounts to a finance charge within the meaning of Regulation Z. Because Liberty did not provide Regulation Z disclosures it was accused of violating the Truth in Lending Act. The refund comes to the bank in the form of an electronic transfer, and neither Liberty nor the bank advances any funds to the client. The client is not required to pay any fees up front, as Liberty’s and the bank’s charges are deducted from the refund. The state claims that, because a consumer may delay payment of fees until the tax return is prepared and submitted and the transaction is received from the IRS, Liberty is, in a sense, financing the fee. The bank is not a defendant in the action. The trial court returned a decision against Liberty and Liberty is filing a notice of appeal.
CBA Action: CBA is preparing an amicus brief in support of Liberty. The state brought numerous claims against Liberty, but the only issue that CBA will address in its brief is the Regulation Z issue. As no credit is advanced in these transactions Regulation Z is inapplicable. The bank’s fee, which it does not even share with Liberty, is charged to compensate it for the cost of establishing the account and receiving the IRS transaction. Moreover, because the bank’s services is an integral part of the overall transaction, the account fee is imposed whether or not the client pays up front for the tax preparation service or through a deduction from proceeds. In other words, the same fee is charged in a comparable “cash” transaction within the meaning of Regulation Z, and thus by definition is not a finance charge. CBA’s interest in this matter rests on the importance of how courts treat the application of Regulation Z in the context of deposit operations. The case is People v. Liberty Tax Services Inc.
Issue: The long standing case involving the legality of charging overdraft fees on accounts containing social security funds was finally decided in the bank’s favor by the California Supreme Court. In a unanimous decision, the Court clarified that its own decision in Kruger v. Wells Fargo Bank back in 1974 does not apply to overdraft fees, and only to collection of debt external to the account be debited. The Court also restored the plain meaning of Financial Code Section 864, enacted the year after Kruger was decided, which clearly excluded overdraft fees from the statute that limits a bank’s right to set off an account. In the end, Miller’s attorneys were able to convince only one judge of the merits of their argument—the trial judge. The First Appellate District Court had also unanimously reversed the trial court’s decision.
Like the Appellate Court, the Supreme Court did not address whether the trial court’s ruling was preempted by the National Bank Act and the OCC’s regulations. That analysis was unnecessary because the case was decided based on California law alone. CBA did not raise the preemption issue in its brief. It is very fortunate that the outcome of the decision was based on state law because a ruling based solely on federal preemption would have left state chartered depository institutions exposed to liability.
CBA filed four amicus briefs at various stages of the litigation, including in the Supreme Court. See CBA Regulatory Compliance Bulletin Supreme Court Closes Chapter on Overdraft Fees dated June 8, 2009.
Issue: The Federal Reserve Board issued a final rule amending Regulation DD, which implements the Truth-in-Savings Act, to require banks to make certain disclosures regarding overdraft fees. The Board also issued a proposed rule to amend Regulation E (Electronic Funds Transfer Act) to limit the ability of banks to charge overdraft fees in connection with ATM withdrawals and debit card transactions, and to provide an opportunity to opt in or opt out. That final rule was issued late November (see next section).
Banks are required to disclose overdraft charges for the statement period and year to date on each periodic statement without regard to whether the bank promotes its overdraft services. Disclosures of balance information through automated systems may not include amounts available to cover overdrawing items. New advertising limitations regarding customers’ ability to avoid overdraft protection apply.
CBA Action: CBA had sent comment letters on the Regulation DD and a related UDAP proposals in 2008, as reported in last year’s Summary (the UDAP proposal has not been acted upon). CBA also distributed a Regulatory Compliance Bulletin, Summary of Overdraft Fee Disclosure Amendments to Regulation DD, dated February 4, 2009.
Issue: The Federal Reserve Board adopted a tough opt-in rule on the charging of overdraft fees on ATM and one-time (i.e., non-recurring) debit card transactions. The notice of the opt-in right must be provided, and the consumer’s affirmative consent must be obtained, before overdraft fees may be assessed. The requirement applies to both existing and new accounts, and to any “overdraft service” whether or not it is promoted. The rule does not apply to the payment of overdrafts pursuant to a Regulation Z-covered line of credit (including transfers from a credit card account), home equity line of credit, or overdraft line of credit.
The rule is particularly harsh because it does not allow exceptions for charging a fee when a bank reasonably believed the account had sufficient funds when it paid the transaction, such as when intervening transactions cause a previously authorized but uncleared payment to overdraw the account and the network rules require payment. Other situations in which banks could face difficulties because of the rule include paying paper-based transactions that a bank had not previously authorized; a transaction was not submitted because it is below the floor limits established by card network rules, and a payment is made when a stand-in processor is used to authorize the transaction because the card network was temporarily off-line.
For accounts opened prior to July 1, 2010, which is the mandatory compliance date, an overdraft fee may not be assessed on or after August 15, 2010 with respect to a covered transaction unless the notice and consent provisions are satisfied. For accounts opened on or after July 1, no such fee may be assessed unless the customer has opted in. Early adoption is permitted.
CBA Action: CBA filed a comment letter to the Federal Reserve Board in March this year, and was successful in some respects. We opposed issuance of a rule under the Board’s Unfair and Deceptive Acts and Practices (UDAP) authority, which would have exposed banks to enhanced litigation exposure. Earlier this year, in connection with its Regulation DD overdraft rule, the Board agreed not to invoke UDAP. We asked that the rule not cover ACH transactions because of operational difficulties, and the Board agreed. Finally, we asked for a form of safe harbor for meeting the challenge of distinguishing between one-time and recurring debit card transactions, which was granted. However, in light of political pressures surrounding overdraft fees, the Board declined to adopt an opt out approach, which we advocated. We said that an opt-in approach would substantially eliminate this form of overdraft coverage because banks would find it difficult to offer a service to suit a small percentage of consumers who would opt in rather than accept the default position. See CBA’s Regulatory Compliance Bulletin Opt-In OD Fee Rule For One-Time Debit Card and ATM Transactions, dated November 16, 2009 and CBA’s comment letter to the Federal Reserve Board dated March 30, 2009.
Issue: The Federal Reserve Board amended Regulation D to loosen restrictions on the types of transfers or withdrawals allowed for savings deposits, to authorize non-member banks to pass required reserve balances through a correspondent institution, expand the definition of “vault cash,” and to make other minor changes. See CBA Regulatory Compliance Bulletin Regulation D Amendments Effective July 2, dated June 15, 2009.
Issue: Commercial Code Section 4406 requires a bank that provides to a customer a statement of account must either return or make available to the customer the items paid or, alternatively, provide information in the statement of account “sufficient to allow the customer reasonably to identify the items paid.” The provision currently states that the statement of account provides sufficient information if the transaction is described by item number, amount, and date of payment. This gives banks clear guidance on what constitutes a reasonable disclosure. Section 4406 is set at the end of this year to revert to historical language that is less clear. AB 1566, which CBA sponsored, ensures that, at least until January 1, 2015, banks can continue to provide the check number, amount, and date of payment to comply with Section 4406. See CBA Regulatory Compliance Bulletin Safe Harbor For Periodic Statements Extended to 2015, dated October 15, 2009.
Issue: The FDIC had proposed rules pertaining to assessing deposit insurance premiums in order to replenish the Deposit Insurance Fund (DIF). Included was a proposal to incorporate into the risk analysis a bank’s reliance on brokered deposits. In March, the FDIC issued a final rule to make its assessment system more sensitive to risk and to limit subsidization of riskier institutions by safer ones. Factors include an institution’s reliance on brokered deposits when combined with rapid growth and the amount of its unsecured debt and secured liabilities. As a result of comments by CBA and others, reciprocal deposits are not considered for Risk Category I institutions. See CBA Regulatory Compliance Bulletin Summary of FDIC Deposit Insurance Amendments, dated March 13, 2009.
Issue: Last year, a California appellate court held that a bank owes a fiduciary duty to a deposit accountholder because of the high degree of personal services it provided and because the accountholder was elderly and suffered from physical disabilities. CBA supported the bank on appeal on the grounds that the bank-depositor relationship is a contractual rather than a fiduciary one. This year, CBA requested that the decision be depublished, which would have the effect of removing it from the body of case law and thus eliminating the decision as a legal precedent. Unfortunately, the court denied the request. As this decision is highly fact specific, the effect of the decision may not be widespread as a direct risk to banks. But the decision may have the effect of supporting future judicial rulings in more typical cases where the plaintiff seeks the status of a protected beneficiary of a bank’s heightened duty of care. The case is Brown Family Trust w. Wells Fargo Bank.
Issue: California’s liberal unfair competition law (Business & Professions Code Section 17200) fosters frivolous law suits that cost businesses millions in defense and settlement costs each year. The Wells Fargo Home Mortgage Overtime Litigation will determine whether that law may be applied in a suit brought by non-California residents for violations of federal employment law against a non-California employer solely because the lawyer who furnished legal advice to the employer works and resides in California. Because the federal District Court in this matter would allow the litigation to be governed by California law simply on the basis of such a slim nexus, this decision, if left to stand, could loosen the criteria by which non-California plaintiffs can take advantage of California’s generous litigation laws.
Another issue in the case is whether plaintiffs may pursue their claims as a class. The district court would allow class action certification based largely on the fact that the bank described the duties of the mortgage professionals in a unified policy statement. The court did not ascertain whether common issues prevailed over unique ones across the entire class.
CBA action: CBA filed an amicus brief to the federal Ninth Circuit Court of Appeals to support review and then, when review was accepted, we filed a brief on the merits. In July, the Ninth Circuit held that the district court should not have relied solely on the manner that the bank characterized the plaintiffs in a policy document as the basis for certifying the class. It reversed the decision and remanded to the trial court.
Issue: Together with the Civil Justice Association of California, CBA filed a brief with the California Supreme Court in a class action litigation case. Here, an appellate court allowed a plaintiff representative to use discovery in order to seek out a suitable plaintiff who actually suffered harm in an insurance matter, in order to satisfy the state’s Proposition 64 reform of Business & Professions Code Section 17200. The existing plaintiff representative could not meet this requirement. Proposition 64 was an initiative that sought to prevent frivolous law suits against businesses in California by instituting sensible restrictions against class action-like law suits, such as the requirement that the class representative actually suffer harm for which relief is sought. The appellate court’s decision to allow the case to proceed so that a plaintiff could be fished out undercuts the purpose of tort reform. Unfortunately, the Supreme Court denied review. The case is Safeco Insurance Co. v. Superior Court.
Issue: A class of merchants that accept American Express cards is suing American Express for anti-trust violations arising from the card company’s “accept all cards” policy. The relevant card agreement includes a class arbitration waiver, which is a prohibition against plaintiffs joining as a class to arbitrate disputes. An federal appellate court held that the waiver is not enforceable because it effectively prevents the merchants from pursuing relief. Among other things, the expert witness costs are too high for any single claimant to afford, making arbitration impracticable. The agreement also includes a non-disclosure provision, which effectively prevents findings in arbitration hearings to be shared. CBA joined in a brief supporting U.S. Supreme Court review because of the importance of allowing commercial parties (i.e., transactions not involving consumers) to determine the kind of methods they wish to employ to settle their disputes. The case, In re American Express Merchants’ Litigation, is pending.
Issue: Following last year’s SB 1137, which requires mortgage lenders to contact residential borrowers who are behind in their payments to discuss alternatives to foreclosure before filing a notice of default, the State of California enacted a foreclosure moratorium that extends the waiting period for filing a notice of sale by 90 days unless the lender adopts a comprehensive loan modification program, including the federal Home Affordable Mortgage Program or “HAMP.” The purpose of the legislation is to reduce the number of residential mortgage foreclosures.
CBA action: CBA worked into the bill provisions to ease compliance, including ensuring that the bill tracks as much as possible a federal foreclosure prevention program. CBA also worked closely with the Department of Corporations and Department of Financial Institutions to develop regulations to implement the bill. One result is that the DFI exemption application for banks is streamlined, and most national banks could work with the Department of Financial Institutions rather than the Department of Corporations in obtaining exemptions. See CBA’s Regulatory Compliance Bulletins, Summary of New State Foreclosure Moratorium dated February 23, 2009 and State Issues Emergency Foreclosure Moratorium Regulation dated June 1, 2009. See also CBA’s comment letters to the DFI, DOC, and DRE dated May 6, 2009 and May 19, 2009.
Issue: The New York Attorney General, Fannie Mae, Freddie Mac, and the Office of Federal Housing Enterprise Oversight (OFHEO) entered into an agreement to adopt the Home Valuation Code of Conduct pertaining to appraisal practices related to mortgage loans purchased by the mortgage GSEs. Lenders are prohibited from influencing an appraisal through a number of specified ways. The loan production staff may not be involved in the appraisal process, nor may mortgage brokers, real estate agents, and other third parties. The borrower must be provided with a copy of the appraisal not less than three days prior to the closing of the loan. If the lender uses an in-house or affiliated appraiser, then reporting must be independent of sales or loan production. Other restrictions apply.
CBA Action: CBA sent a letter to OFHEO (succeeded by the Federal Housing Finance Agency), the GSEs, and the New York AG opposing the validity of the agreements which, together with other comments, led to removal of the outright restriction against use of in-house and affiliated appraisers. See CBA’s Regulatory Compliance Bulletin, Appraisers Code of Conduct Effective May 1, 2009, dated February 23, 2009.
Issue: The state legislature extended California’s foreign language translation requirement to residential mortgage loans. Under new Section 1632.5 of the California Civil Code, a lender that negotiates primarily in Spanish, Chinese, Tagalog, Vietnamese, or Korean in the course of entering into a loan agreement that is secured by residential real property is required to provide a form translation that will be furnished by the Department of Financial Institutions (DFI) or Department of Corporations (DOC), as applicable. AB 1160 applies to any “loan or extension of credit secured by residential real property,” a broad description that would apply not only to owner-occupied purchase money loans and refinances but presumably also to home equity loans, HELOCs, business loans secured by residences, secured guarantees (to the extent that the guarantee is an extension of credit), non-owner occupied borrowers (investors and second homes), and possibly even not be limited to loans secured by 1-4 residential units. CBA helped ensure that the bill did not include any private right of action for a violation. See CBA Regulatory Compliance Bulletin, Translation Requirement Extended to Mortgage Loans, October 15, 2009.
Issue: Amendments to the Truth in Lending Act (promulgated through Regulation Z) under the Mortgage Disclosure Improvement Act of 2008 (MDIA) extend the mortgage closed-end credit disclosure requirement to loans other than those obtained to finance a purchase or initial construction of the consumer’s dwelling. The disclosure must be provided within 3 days after the application, and it must be placed in the mail not later than the seventh business day before consummation of the transaction, which essentially establishes a floor for when a loan may be closed. CBA had filed a comment letter to the Federal Reserve Board, which is responsible for issuing rules implementing MDIA. As the statute was already enacted, CBA asked the Board to consider the reality that the banking industry is facing a barrage of new regulations and restrictions from all levels of government, and to work closely with other agencies such as the Department of Housing and Urban Development to ensure that new regulatory burdens placed on the industry are minimized without compromising statutory and regulatory goals. See CBA’s comment letter to the Federal Reserve Board dated February 9, 2009. See also CBA Regulatory Compliance Bulletin, Regulation Z Amendments: Mortgage Disclosures, May 12, 2009.
Issue: The Department of Housing and Urban Development finalized amendments to its regulation implementing the Real Estate Settlement Procedures Act. The final rule increases the length of both the Good Faith Estimate (GFE) and HUD 1/1A forms to three pages each. The new GFE requires more detailed disclosure of settlement services, including the way yield spread premiums (paid to mortgage brokers by lenders) are disclosed. A separate section concerning escrow accounts is included. Amounts for settlement services are cross-referenced between the GFE and HUD 1/1A settlement statements to facilitate comparison. The final rule also strengthens the restrictions on using affiliated businesses. However, due to intense opposition after issuance of the final rule, including from homebuilders, HUD announced a delay of this provision.
CBA Action: As reported in last year’s Regulatory and Litigation Summary, CBA had sent a comment letter to HUD expressing industry concerns. When the rule was finalized, CBA issued a Regulatory Compliance Bulletin, Summary of New RESPA Regulations, dated January 23, 2009.
Issue: A new California law, SB 633, sponsored by CBA, has been enacted to allow lenders to require establishment of an impound account on loans made in compliance with the requirements for a “higher priced mortgage loan” within the meaning of the Federal Reserve Board’s Regulation Z. Under the existing state law codified at Civil Code Section 2954, a lender may not impose the use of impound accounts except under specified circumstances. One of the new requirements pertaining to higher-priced mortgage loans is the establishment of an escrow account for taxes and insurance. Interestingly, the California restriction on mandatory impound accounts was originally enacted because it was perceived to be unfair to borrowers; now it is perceived to be so prudent for borrowers that Congress mandates it. See CBA Regulatory Compliance Bulletin, Impound Accounts Allowed For “Higher Priced Mortgage Loans,” dated August 17, 2009.
Issue: The City of Los Angeles proposed an ordinance requiring the divestiture of government deposits and investments from any financial institution that it determined was not making sufficient efforts to mitigate the number of foreclosures in the city. Moreover, the proposal’s proponent Los Angeles City Councilman Richard Alarcón sought to have the League of California Cities, a statewide advocacy group, adopt a similar proposal for its members, which are municipalities throughout California.
CBA Action: CBA expressed concerns with Councilman Alarcón, with the City Council, and the League through correspondence, letters, and testimony. We discussed the industry’s efforts and the many laws and programs already being implemented at the state and federal levels. We also pointed out legal restrictions against local agencies making banking decisions based on factors other than sound fiscal considerations. As a result, the League of California Cities declined to support the proposal, and Councilman Alarcón is moving forward with an amended proposal that involves CRA-like requirements and is still pending. See CBA’s letters to the City of Los Angeles dated September 4, 2009 and the League of California Cities dated September 10, 2009.
Issue: Stresses in the commercial real estate market, following on the heels of the residential mortgage crisis, are being exacerbated by the regulatory environment. Focused solely on safety and soundness during a falling economy and in the face of political scrutiny, many examiners of the various federal banking agencies have become increasingly stringent. In particular, they are requiring downgrades of loans that are otherwise performing based on the decline in value of real estate collateral and requiring frequent appraisals which, in a declining market, tends to depress asset values further. These pressures not only place stress on banks’ capital but also on borrowers, who are expected to contribute more capital, pay down loans, and pay more appraisal and other fees. In addition, these added regulatory pressures hamper banks’ ability to respond to Congressional demands to make more loans.
CBA Action: In visits with lawmakers and policy makers and through comment letters, CBA and its members have consistently raised these concerns and called for more flexibility by the banking agencies in these troubled times. Specifically we stressed the need not to adhere strictly to a fixed loan-to-value ratio approach to classifying loans if the predominant factor were simply a market-based de-valuation of the property. Additionally, we highlighted the risk of rigid appraisal practices that unduly emphasize very recent market activity as the primary basis for valuations. In a severely declining market this approach results in artificially low asset values that fail to account for the intrinsic, long term economic value of real estate.
Issue: Two separate actions arose when a mortgage company manufactured a number of bogus residential mortgage loans that were funded by innocent warehouse lenders, closed them through an escrow company, and then absconded with the loan proceeds. Last year CBA filed a brief that addressed the liability of the title insurer to the lender under its policies of title. The trial court found that the title company was not liable because a policy could not be issued on bogus transactions. Since there is no underlying obligation, there is no obligation to insure against.
CBA Action: CBA filed a brief supporting the lender’s argument that it was entitled to enforce the policy as the innocent successor to the mortgage company (i.e., the originator). We argued that the decision not to hold the insurer liable for the fraudulent loans left innocent purchasers and other successors exposed. It is this kind of risk that title insurers protect against and which successor lenders and investors rely on. The court’s decision, if upheld, would have a chilling effect on the secondary market for residential mortgage obligations originated in the state. In spite of the lender’s and CBA’s arguments, the appellate court in August rendered a decision affirming the trial court’s ruling. The case is First American Title Insurance Company v. Access Lending.
Issue: In a companion case involving a different lender but the same fraudulent originator and transactions, the issue is whether the escrow company owes a duty to the lender where only the mortgage company—and not the warehouse lender—delivered instructions into escrow. In this case, even though the negligent escrow company was fully aware that the warehouse lender provided the funding for the mortgage company, the escrow company was found at the trial court not responsible for the lender’s losses because it owed no duty to the lender.
CBA Action: CBA filed an amicus brief in this matter as well. We argued that the trial court erred by holding that the bare fact that the lender did not provide separate escrow instructions negates any duty of care. Whether a duty exists is partly a question of fact, and in this case the escrow company had closed many loans with the lender as the true source of the originator’s funds. The fraudulent transactions could not have been perpetrated but for the escrow company’s failure to carry out its duties with care. As with the Access Lending case, the appellate court in November affirmed the trial court decision. The case is Gateway Bank v. Ticor Title Company.
Issue: A provision in a federal appropriations bill (H.R. 1105) would grant broad authority to the Federal Trade Commission and the 50 state attorneys general to enforce residential lending laws, including the Truth in Lending Act. TILA is already enforced by the federal banking agencies and in some instances by state banking officials. The legislative provision is a less than thoughtful ad hoc attempt to multiply enforcement authority that would only increase liability and compliance costs for all mortgage lenders. CBA opposed the provision and it was not included in the bill.
Issue: CBA is preparing to file a brief in support of a bank on the issue of whether California’s Unruh Civil Rights Act prevents a bank from refusing to grant credit if the applicant has a criminal record. In this case the bank refused to provide credit to a real estate development consortium that involved an individual who was an ex-felon convicted of a crime involving dishonesty. The individual sued based on alleged illegal discrimination under the Unruh Act. The Act has never been held to extend to protect felons. An adverse decision would introduce a new source of legal liability for banks, and would also interfere with banks’ credit underwriting decisions. The case is Semler v. Wells Fargo Bank.
Issue: A Bankruptcy Court ruling (Aura Systems, Inc. v. Barovich (In re Aura Systems, Inc.)) had denied the validity of judgment liens in California as applied against the assets of a judgment debtor that is a corporation or other organization incorporated or registered in another jurisdiction. Normally, a lien is perfected by filing a notice with the California Secretary of State. However, the decision required creditors to perfect the lien in the state of the debtor’s registration. AB 1549 restores creditors’ ability to file in California as long as either the debtor’s tangible assets are located in California or, with respect to certain types of assets, its place of business (if the debtor has only one place of business) or its chief executive office is in California. In addition, the bill clarifies the priority of judgment liens on timber, “as-extracted collateral,” and agricultural liens. It also amends the provision for designating centralized service of levies to banks. See CBA Regulatory Compliance Bulletin, Amendments to Laws on Liens and Levies, October 16, 2009.
Issue: A California Appellate Court (Franke v. BAM Building Company) held that a levying creditor who supplies a bond as an undertaking in connection with a levy on an asset is liable for all damages incurred by the secured creditor even in excess of the amount of the bond and in excess of the amount of the levying creditor’s claim. In this case a levying creditor had a competing claim against the same assets as an attorney that represents the owner of the assets, now in bankruptcy. The attorney had a claim for his fees. In a dispute over priority that went in favor of the attorney, the levying creditor was ordered to pay to the attorney amounts that exceeded the amount of the creditor’s claim, including attorneys fees, compensation for the delay in receiving a distribution from the assets, and interest. See CBA Regulatory Compliance Bulletin, Court Decision Raises Stakes For Secured Creditors, dated June 8, 2009.
Issue: A U.S. Tax Court ruled that a bank that is a qualified subsidiary of a subchapter S corporation (QSub) is not entitled to a full deduction of expenses related to qualified tax-exempt obligations such as municipal bonds (QTEOs). The IRS’s position is based on I.R.C. Section 291(a)(3), which reduces the interest expense deductions relating to the QTEOs by 20% if the filer is a financial institution, and on tax regulation 27 CFR 1-1361-4(a)(3). As a result of this decision, the owners of banks that are S corporations may be liable for back taxes on municipal bond investments. The banks themselves would not be directly liable for the money, but many subchapter S banks have agreements to reimburse their owners for tax mistakes. The ruling was finalized on July 13. See CBA Regulatory Compliance Bulletin, Tax Ruling Jeopardizes Deductions By Bank Subsidiary of S Corp, dated August 17, 2009.
A California appellate court ruled that the administrative exemption is reserved for those employees at the highest management levels who are responsible for developing or administering company-wide policies. The decision represents a substantial departure from current understandings of the exemption. In reliance on the existing rules, industry currently considers employees as administrative if their work requires a high degree of skill and autonomy and it is directly related to or executes the general business operations of the employer. Since a court ruling would be considered an interpretation of existing law, if it is upheld, companies could immediately be forced to re-categorize existing employees, and would be liable to pay back overtime pay and penalties for “wrongly-exempted” employees.
CBA Action: CBA filed amicus briefs with both the appellate court and Supreme Court opposing the appellate court’s narrow interpretation of the exemption. We noted that banks legitimately rely on the current rules, for example, to exempt commercial loan officers under this category. They exercise a high degree of discretion, and their duties include business development, analyzing financial records of commercial enterprises, evaluating business plans, underwriting risks, structuring and documenting loan terms, and binding the bank to large obligations. Their work requires special knowledge, training, and experience, and these employees tend to be highly compensated. Yet, they would not be considered exempt under the appellate court’s notion of “administrative” work. In our brief, we noted that this approach is novel and it could result in significant costs and risks to the banking industry. A change of this magnitude should not be made by a court, but by the legislature. The case, Harris v. Superior Court (Liberty Mutual Insurance), is pending.
Issue: The U.S. Supreme Court’s decision in Cuomo v. The Clearing House Association raises questions about the ability of national banks to invoke federal preemption of state laws. The 5-4 decision invalidates an OCC regulation that broadly bars states from enforcing their own laws against national banks. The regulation states that state officials may not exercise visitorial powers with respect to national banks, which includes “prosecuting enforcement actions.” The Court noted that the OCC on the one hand admits that certain state laws apply to national banks but, on the other, claims that states are prohibited from enforcing them under the OCC’s visitation rule.
The outcome of the decision was that the New York Attorney General’s office could not issue requests “in lieu of a subpoena” requiring certain national banks to disclose information related to their lending practices. This is a violation of the OCC’s exclusive visitation authority. However, visitation is no bar to a state when it acts in its capacity as “sovereign-as-law-enforcer” in which it seeks court action to enforce its laws upon a national bank. Any fears about a state exercising undue authority over national banks would be tempered by the normal rules of discovery under the authority of a trial judge. As discussed above, the proposed Consumer Financial Protection Agency in its latest iteration would pare back preemption for both national banks and federal thrifts to the state of the law as existing when Barnett Bank of Marion County NA v. Nelson was decided by the Supreme Court in 1996.
CBA action: CBA joined the ABA, together with other state banking associations, in a brief with the U.S. Supreme Court. See CBA Regulatory Compliance Bulletin, Clearing House Association v. Cuomo: Preemption at the Crossroads, dated July 20, 2009.
Issue: A provision in a major California health spending bill (ABX4 5) requires financial institutions to furnish the California Department of Health Care Services (“DHCS”), or its designee, with information regarding the “assets” of any person who is applying for or receiving benefits through DHCS, if the person has provided the DHCS with an authorization. The requirement on the state to verify an applicant’s financial condition s one of the conditions attached to continued receipt of federal Medi-Cal payments pursuant to the federal American Recovery and Reinvestment Act.
The bill makes a number of references to the federal Right to Financial Privacy Act of 1978 (“RFPA”), which generally requires federal government agencies to pursue legal process in order to gain access to financial records unless the customer authorizes such disclosure. Curiously, the bill focuses only on the RFPA, which on its face applies to federal agencies, and makes no reference to the California Right to Financial Privacy Act, which governs state agency requests. The California Act applies to civil and criminal investigations, which are not the focus of this bill. However, because financial institutions will not know the purpose of a DHCS request, they may be subject to liability if the underlying purpose of a request were investigative in nature. The DHCS is required to reimburse financial institutions for disclosure requests. See CBA Regulatory Compliance Bulletin, New Obligation to Disclose Financial Records, dated October 27, 2009.
Issue: The County of Los Angeles, in an effort to recover delinquent and unpaid property taxes, sought to prevent entities from doing business with any agency in the county if it fails to pay its taxes in a timely manner. This in itself it not a concern, but the scope of the proposal failed to account for taxes owed on mortgaged property where the bank is not the mortgagee but rather, the servicer. Also, the timing restrictions for bringing payments current were unrealistic where a bank is a mortgagee and the property is subject to foreclosure.
CBA Action: CBA assisted bank representatives in Los Angeles to work with officials at the County Tax Collector’s Office and the Board of Supervisors to amend the proposal to ensure that the proposed ordinance does not treat mortgage servicers as legal owners, and to adjust the compliance requirements in light of the unusually heavy foreclosure activities. See CBA’s comment letters to the LA County Tax Collector’s Office dated July 8, 2009 and July 13, 2009.
Comment letters and bulletins are linked within the body of the Summary where discussed. Amicus briefs may be obtained by contacting Leland Chan.
People v. Liberty Tax Services, Inc.

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