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  • Succession Planning Part 2: Communicating with Family Members After the Death of a Customer
    February 24, 2015
    Richard E. Gottlieb & Andrew W. Grant

    Your bank customer has died. Her husband, who is well known to the bank, calls to discuss his deceased wife’s account and seeks to “add” his name to the account so he can access some of the funds for funeral expenses. You would like to help, but there are some obvious problems. For one, this is not a joint account. For another, you have privacy obligations, and your customer never authorized the bank to discuss the account with anyone else, not even her husband. And perhaps of greatest importance, you have no way to know whether other persons have any entitlement to the funds, or (for that matter) whether the husband has any rights to the funds in that account after his wife has died.

    Under these circumstances, may you speak with the husband about the account? May you add the husband’s name to the account? Try as we might to help our customers and their families during situations like this, the law is not always as pristine as one might assume, and the answers frequently depend on the underlying facts and governing law.

    Originally printed in Illinois Banker. Reprinted with permission. 

  • A New Balancing Act: The DOJ Provides New Direction Regarding the SCRA's Interest Rate Benefit
    February 10, 2015
    Kirk Jensen, Jeffery Naimon & Sasha Leonhardt

    When Congress reenacted the Servicemembers’ Civil Relief Act (“SCRA”) in 2003, Congress designed the SCRA to balance the interests of active duty servicemembers and their creditors, as it had done under the SCRA’s predecessor legislation. One of the benefits provided by the SCRA is a six-percent cap on interest for credit obligations a servicemember incurs prior to entering active duty military service. Drawing upon decades of real-world experience, and consistent with the intended balancing of interests, Congress placed the burden on servicemembers to provide documentation showing eligibility for the interest rate benefit. Specifically, Congress crafted the SCRA to require a servicemember to submit “written notice and a copy of the military orders calling the servicemember to military service.”

    Since the SCRA became law in 2003, the prevailing interpretation of this requirement was that a servicemember was required (1) to request the SCRA’s interest rate benefit in writing; and (2) to provide a copy of the orders calling the servicemember to active duty (i.e., calling the servicemember from civilian life to military service). A recent settlement between the Department of Justice (“DOJ”) and Sallie Mae now signals that the DOJ interprets the SCRA’s requirements differently. Instead of a written request, mere written notice of military service appears sufficient. And instead of the military orders calling the borrower to active duty, the DOJ has taken the position that any document from a military or Department of Defense source that indicates active duty status is sufficient. The DOJ also appears to expect creditors to take greater steps to elicit qualifying documentation from servicemembers who have indicated military service in some way but have not provided qualifying documents. This is a substantial departure from the prevailing interpretation in the financial services industry and elsewhere. Creditors and servicers should read the Sallie Mae Complaint and Consent Order with caution.

    Originally published in The Banking Law Journal; reprinted with permission.

  • Writing the Facilitating Payments Exception Out of the FCPA
    February 8, 2015
    David Krakoff, Lauren Randell & Paige Ammons

    Last summer, a lawsuit brought by the Securities and Exchange Commission (SEC) alleging Foreign Corrupt Practices Act (FCPA) violations against two individuals related to Noble Corporation, a global oil and gas drilling services company, nearly went to trial in federal court in Texas. SEC v. Jackson and Ruehlen, No. 12-cv-563 (S.D. Tex.). (Note: The authors represented Mr. Jackson in this case. The views expressed herein are theirs alone.) As one of the only civil FCPA cases to proceed to that stage of litigation, the case provided unique insights into the SEC's interpretation of key provisions of the FCPA. The case ultimately settled on very favorable terms for the individuals, but the SEC's position on the facilitating payments exception to the FCPA was a notable departure from its own stated guidance and may herald a renewed attempt by the SEC to further narrow the exception to the point of irrelevance.

    Originally published in Business Crimes Bulletin; reprinted with permission. 


  • Lender-Placed Insurance Actions Continue to Simmer
    February 3, 2015
    Robyn C. Quattrone & Stephen M. LeBlanc

    Litigation and regulatory scrutiny surrounding lender-placed insurance (“LPI”) practices, initiated in large part on the heels of the mortgage crisis, continues to simmer. While the largest LPI class actions have settled, litigation continues as objectors appeal the fairness of such settlements and new individual lawsuits are filed at the district court level. Similarly, state and federal regulators continue to keep a keen eye on LPI practices. This article surveys the current litigation and regulatory trends concerning LPI.

    Recent Trends in LPI Litigation — Class Objectors and Individual Lawsuits

    LPI is insurance coverage obtained by mortgage lenders or servicers to protect mortgaged properties when borrowers fail to maintain adequate insurance, as required by most standard mortgage agreements. Class actions challenging LPI practices began in earnest in 2011 and soon proliferated to dozens of actions filed across the country. These cases typically alleged that mortgage servicers colluded with LPI providers to charge excessive LPI premiums to borrowers, as a result of so-called “kickback” payments from LPI providers to servicers in return for the right to provide exclusive LPI services, issuing so-called “backdated” LPI coverage to charge for retroactive periods of time, or issuing LPI for excessive coverage amounts or for periods when other insurance was in place. Based on these allegations, plaintiffs asserted various state common law claims, as well as federal causes of action under the Racketeer Influenced and Corrupt Organizations Act, Truth in Lending Act and Real Estate Settlement Procedures Act.

    Originally published in Law360; reposted with permission. 

Knowledge + Insights

  • Special Alert: OCC Guidance Applies Consumer Protection Requirements to Overdraft Lines and Protection Services
    February 16, 2015

    UPDATE: On February 20, the OCC announced that it would be removing the “Deposited-Related Consumer Credit” booklet, originally issued on February 11, from its website. The OCC’s February 11 booklet seemingly required banks to change overdraft protection services, however the agency has since stated that the booklet was not intended to establish new policy. According to the OCC’s website, the agency will “[revise] the booklet to clarify and restate the existing law, rules, and policy.” When the OCC releases its amended version of the booklet, we will update the February 16 Special Alert to reflect the agency’s modifications.

    On February 11, 2015, the OCC issued the “Deposit-Related Consumer Credit” booklet of the Comptroller’s Handbook, which replaced the “Check Credit” booklet. The booklet provides updated guidance and examination procedures that the OCC will use to assess a bank’s deposit-related consumer credit (DRCC) products, which include check credit (overdraft lines of credit, cash reserves, and special drafts), overdraft protection services, and deposit advances. In many respects, it tracks the CFPB’s proposed prepaid rule, which would apply the Truth-in-Lending Act and Regulation Z to a broad range of credit features associated with prepaid products.

    The OCC sets forth certain supervisory principles that apply to all DRCC products, which appear to meld consumer protection and safety and soundness concerns. These principles require that banks provide substantive consumer protections in connection with certain DRCC products that are not currently required by the applicable consumer protection regulations. Specifically, the supervisory principles include the following:

    • Opt-In and Regulation E: Banks should not automatically enroll any customer in DRCC products, and should only enroll customers who affirmatively have so requested. In contrast, the opt-in requirement applies, under Regulation E, only to overdraft services in connection with ATM and one-time debit card transactions.
    • Ability to Repay and Regulation Z: Banks should ensure ability to repay for all applicants enrolled in DRCC products, meaning that the associated underwriting practices should analyze the applicant’s income or assets and debt obligations. In contrast, under Regulation Z, this ability-to-pay requirement applies to credit card accounts, not DRCC products like overdraft lines of credit accessed by a debit card or account number or overdraft protection services. If the final CFPB prepaid rules are substantially similar to the proposed rules, then certain credit features associated with prepaid cards will also require compliance with the ability-to-pay rule.
    • Fee Limits: Banks must ensure that any fees charged in connection with DRCC products are reasonably related to the program’s costs and associated risks. In contrast, under Regulation Z, the requirement that penalty fees represent a reasonable proportion of the total costs incurred as a result of the violation applies to credit cards, not DRCC products.

    The OCC also expects banks to monitor the volume of revenue that DRCC products generate, and to evaluate whether the bank unduly relies on fees generated by a DRCC product. Bank management should also guard against “an over reliance on fee income from any single product.”

    In addition, the OCC expects banks to monitor customer behavior and any outlier usage of DRCC products to avoid what the guidance frames as operational, compliance, reputational, and credit risk. For example, the OCC posits that repeated extensions of credit may constitute “loan flipping” and subject the bank to credit risk. Additional supervisory principles address disclosures, program availability and eligibility, consumer usage, credit terms and repayment methods, and credit reporting.

    The OCC’s risk management expectations may also have tangible effects on a bank’s current operating practices, including higher capital requirements insofar as DRCC portfolios may have subprime credit characteristics. In this regard, the OCC’s requirement that banks report DRCC products in regulatory reports as loans may also have practical effects on banks.

    It is worth noting that, two years ago, the OCC published proposed guidance relating to deposit advance products in the Federal Register, which allowed for public comment and time to prepare for any new compliance and supervisory expectations. The OCC published final guidance in the Federal Register in November 2013 (previously covered here) and OCC Bulletin 2013-40. This time, the OCC has dispensed with the opportunity for public comment and appears to require immediate compliance, notwithstanding that many of the expectations outlined with respect to certain DRCC products are radically new—including for overdraft protection services, as to which the OCC previously stated that “[b]anks generally do not underwrite overdraft protection services on an individual basis when enrolling the consumer.”

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    Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

  • Special Alert: CFPB States Supervisory Obligations Trump Nondisclosure Agreements
    January 29, 2015

    On January 27, the CFPB issued Compliance Bulletin 2015-01 to remind supervised financial institutions of their obligations concerning the disclosure of confidential supervisory information (CSI) to the CFPB and to third parties. Specifically, the Bulletin addresses the interaction between a financial institution’s obligations with respect to the CFPB and its contractual obligations under nondisclosure agreements (NDAs) with a third party that restrict the sharing of information. Such NDAs typically (i) restrict sharing protected information with any third party (which would include a supervisory agency) other than in connection with a subpoena or similar legal requirement and (ii) require the institution to advise the third party before it shares information as required by law (which again would include sharing protected information with a supervisory agency).

    Supervised financial institutions and other persons, with limited exceptions outlined in the Bulletin, are generally prohibited from disclosing CSI to third parties. According to the Bulletin, a supervised financial institution should not rely on the provisions of an NDA to justify disclosing CSI in a manner not otherwise permitted, either through a valid exception or prior written approval from the CFPB. The Bulletin appears to take the position that the fact that information has been shared with the CFPB is itself CSI.

    The Bulletin also warns supervised financial institutions that an NDA between an institution and a third party does not alter or limit the CFPB’s supervisory authority, and that the failure based on an NDA to provide CSI or other information required by the CFPB to conduct its supervisory activities is a violation of law for which the CFPB will pursue all available remedies.

    In that supervised institutions such as banks and bank holding companies have been subject to the same issue for many years, this bulletin may be aimed at non-banks that are new to being subject to federal financial supervision.  

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    Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

    • Jeffrey P. Naimon, (202) 349-8030
    • Jonice Gray Tucker, (202) 349-8005
    • Andrea K. Mitchell, (202) 349-8028
    • Valerie L. Hletko, (202) 349-8054
    • Michelle L. Rogers, (202) 349-8013
    • Benjamin K. Olson, (202) 349-7924
    • John P. Kromer, (202) 349-8040
    • Joseph M. Kolar, (202) 349-8020
    • Jeremiah S. Buckley, (202) 349-8010
  • Special Alert: CFPB Finalizes Amendments to TILA-RESPA Integrated Mortgage Disclosures
    January 21, 2015

    On January 20, 2015, the CFPB finalized amendments to the TILA-RESPA Integrated Disclosure (“TRID”) rule that make a number of amendments, clarifications, and corrections, including:

    • Relaxing the redisclosure requirements after a rate lock.  The final rule permits creditors to provide a revised Loan Estimate within three business days after an interest rate is locked, instead of the current requirement to provide the revised Loan Estimate on the date the rate is locked (and instead of the proposed rule that would have allowed only one business day)
    • Creating room on the Loan Estimate for the disclosure that must be provided on the initial Loan Estimate as a condition of issuing a revised estimate for construction loans where the creditor reasonably expects settlement to occur more than 60 days after the initial estimate is provided
    • Adding the Loan Estimate and Closing Disclosure to the list of loan documents that must disclose the name and NMLSR ID number of the loan originator organization and individual loan originator under 12 C.F.R. § 1026.36(g)
    • Providing additional guidance related to the disclosure of escrow accounts, such as when an escrow account is established but escrow payments are not required with a particular periodic payment or range of payments
    • Clarifying that, consistent with the requirement for the Loan Estimate, the addresses for all properties securing the loan must be provided on the Closing Disclosure, although an addendum may be used for this purpose

    For your convenience, we have updated our summary of the TRID rule to identify the most significant changes.  Please visit our TRID Resource Center for additional information and analysis regarding all aspects of the TRID rule. 

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    Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

  • Special Alert: Supreme Court Hears Oral Arguments on Fair Housing Act Disparate Impact Case
    January 21, 2015

    This morning, the Supreme Court heard oral arguments in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, in which Texas challenged the disparate impact theory of discrimination under the Fair Housing Act (FHA). Twice before, the Court granted certiorari on this issue, but in both cases the parties reached a settlement prior to oral arguments.   

    As described further below, in their questions to counsel, the Justices focused on (i) whether the phrase “making unavailable” in the FHA provides a textual basis for disparate impact, (ii) whether three provisions within the 1988 amendments to the FHA demonstrate congressional acknowledgement that the FHA permits disparate impact claims, and (iii) whether they should defer to HUD’s disparate impact rule.  

    “Disparate treatment” discrimination under the FHA is defined as intentional discrimination in the provision of housing on the basis of a protected class, such as race, religion, or national origin. However, to assert a “disparate impact” claim, a plaintiff need not show any intent to discriminate by the defendant in order to establish a prima facie case. Although eleven federal courts of appeals have recognized disparate impact discrimination, all of these decisions were issued prior to the Supreme Court’s holding in Smith v. City of Jackson. In Smith, the Court held that language addressing “adverse effects” in the Age Discrimination in Employment Act (ADEA) provided textual support for disparate impact claims under the ADEA, as it does under Title VII. One of the issues addressed in Inclusive Communities is whether the FHA contains “effects-based” language permitting disparate impact claims.  

    Counsel for Texas argued that the Court’s holding in Smith required the Court to hold here that disparate impact claims were barred by the statutory text of the FHA, because the FHA lacks the “effects” language present in the ADEA and Title VII. Justices Scalia, Breyer, Sotomayor, and Kagan, however, focused on the language of Section 804 of the FHA which provides that it is unlawful to “otherwise make unavailable or deny a dwelling to any person because of race, color, religion, sex, familial status, or national origin.” These Justices asked whether the phrase “otherwise make unavailable” is the equivalent of the “adversely affect” language in other civil rights statutes. Counsel for Texas responded that “making unavailable” is an active verb, and therefore requires an affirmative action intended to make a dwelling unavailable. In response, Justice Scalia asked whether “adversely affects” similarly required action on the part of a defendant. 

    The Justices also focused on Congress’s 1988 amendments to the FHA, which created three exceptions from liability under the FHA for (i) appraisers under Section 805(c), (ii) decisions based upon an individual’s prior conviction for manufacturing or distributing illegal drugs under Section 807(b)(4), or (iii) the application of local, state, or federal restrictions regarding the maximum number of occupants permitted to occupy a dwelling under Section 807(b)(1).  Justice Scalia stated that the Court is required to read the statute as a whole, including these exceptions. Justice Scalia noted that “what hangs me up” is how these exceptions can be reconciled with the statutory text if the FHA does not permit disparate impact claims. Counsel for Texas responded that these exceptions also apply to disparate treatment claims, and do not suggest specific Congressional acknowledgement that the FHA permits disparate impact claims.  

    Next, the Justices asked counsel for Respondent Inclusive Communities whether the FHA’s “because of” language required intent to discriminate. Justices Kagan and Breyer specifically noted that the Court had recognized disparate impact claims under other civil rights statutes containing similar “because of” language. Counsel agreed and argued that there was no basis for treating the FHA’s “because of” language differently.    

    Justice Alito asked counsel for Respondents whether the 1988 amendments make disparate impact claims cognizable under the FHA if the original act did not. Justice Alito asked whether the 1988 amendments expanded the act. Counsel responded that the amendments did not expand the FHA—rather, that disparate impact was permitted in the original act.  

    Next, the Solicitor General directed the Court to HUD’s recent disparate impact rule and urged the Court to give deference to HUD’s interpretation under Chevron and noted that HUD issued its rule within days of the Court’s grant of certiorari in Magner v. Gallagher, a prior case raising the same issue. Justice Alito asked whether the Court should be “troubled” by the use of Chevron to “manipulate” the Court’s decisions. The Solicitor General responded that HUD had taken the position that the FHA permits disparate impact claims since 1992.  

    The Solicitor General further noted that defendants in disparate impact cases have protections under the burden-shifting framework, because claimants must point to a “specific practice” that gives rise to the alleged disparity to establish a prima facie case. Justice Breyer responded by asking whether it is necessary to eliminate disparate impact altogether given the protections provided by the burden-shifting framework.   

    NOTE: Quotations in this client alert are based on the notes of those who attended oral arguments, and not from any official transcript.

  • Special Alert: Supreme Court Holds That Notice of Rescission Is Sufficient For Borrowers to Exercise TILA’s Extended Right to Rescind
    January 15, 2015

    The Supreme Court on January 13, 2015 held in Jesinoski v. Countrywide Home Loans, Inc. that a borrower seeking to rescind a loan pursuant to the Truth In Lending Act’s (“TILA’s”) extended right of rescission need only submit notice to the creditor within three years to comply with the three-year limitation on the rescission right.  TILA gives certain borrowers a right to rescind their mortgage loans.  Although that right typically lasts only for three days from the time the loan is made, 15 U.S.C. § 1635(a), it can extend to three years if the creditor fails to make certain disclosures required by TILA, 15 U.S.C. § 1635(f).  Petitioners in the case had mailed a notice of rescission to Respondents exactly three years after the loan was made and Respondents responded shortly thereafter by denying that Petitioners’ had a right to rescind.  A year after submitting their notice of rescission—four years after the loan was made—Petitioners filed a lawsuit seeking a declaration of rescission and damages.  

    The Court’s opinion resolved a circuit split over whether borrowers exercising their right to rescind certain loans pursuant to Section 1635(f) must file a lawsuit to rescind their loans within the three-year period set forth in that section or can satisfy the timing requirements by merely submitting notice of rescission to the creditor.  In his opinion for the unanimous Court, Justice Scalia stated that the statutory language “leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind.  It follows that, so long as the borrower notifies within three years after the transaction is consummated, his rescission is timely.”  The Court rejected Respondents’ argument that a court must be involved in a rescission under Section 1635(f).  

    As a result of the Court’s decision, we now expect that a creditor receiving a post three-day notice of rescission from a borrower would immediately file a lawsuit against the borrower to address the validity of the purported rescission in order to avoid ongoing ambiguity regarding the status of the loan, and, if the rescission were validly noticed, to condition the rescission on the return of the loan principal.   

    BuckleySandler submitted an amicus curiae brief in the case on behalf of industry groups, arguing that notice alone is insufficient to effectuate rescission under Section 1635(f).