Please join fellow CFSC members and other business lawyers at the Spring Meeting of the Business Law Section at the Hilton Anatole Hotel in Dallas. The CFSC's meetings begin on Thursday, April 10 at 8:00 a.m. with the Welcome session and end on Saturday, April 12 at 11:30 am. Our meeting schedule may be found here. Meeting registration materials are available on the Section website. We have an outstanding set of subcommittee meetings and Programs, including Programs and presentations on key topics such as subprime lending and the "mortgage meltdown," consumer privacy and information security and cross-border transactions in consumer financial services.

CLE credit will be available for Programs and Forums. In addition to cutting-edge substantive presentations, we will see you at our special social events, including our Welcome Reception beginning at 5:00 to 7:00 pm on Wednesday, April 9, graciously sponsored by McGlinchey Stafford. Our Committee Dinner is a Texas-style dinner with other events at a nearby dude ranch, the Double D Ranch in Mesquite, Texas, on Thursday April 10. Click here for the Dinner Registration Form.

The CFSC will hold its meetings in connection with the ABA's Annual Meeting in New York City, August 7-12, 2008. Our actual meeting days and times will be established in the near future, but please make a note of the dates now. The last time we met in the Big Apple, we had a great time, including dinners, shows and just walking the busy streets, all with that big city feel. Not to mention the great programs and learning opportunities that will be in store...

For those who plan WAY far ahead, we are pleased to inform you that our standalone Winter Meeting in 2009 is scheduled for Scottsdale, Arizona, January 10-14, 2009. The venue is the Hyatt Regency Gainey Ranch Resort and Spa. Stay tuned for more details.

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The Young Lawyers Subcommittee held their first ever "Basics and Beer" at the Winter Meeting. The session featured a roundtable of seasoned practitioners who provided background information on some of the topics that were covered in the other scheduled programs at the Winter Meeting and participated in an informal Q&A with members of the Young Lawyers Subcommittee. The panelists were Jean Noonan of Hudson Cook, LLP, Tom Eck of CapitalOne, Jim Milano of Weiner Brodsky Sidman Kider PC, and Lois Woodward of Balch & Bingham LLP.

Ms. Noonan opened the session by providing background information on the Home Mortgage Disclosure Act (HMDA) and an overview of the changing approaches to the use and analysis of HMDA data since its inception. The presentation also included an explanation of the differences between intentional discrimination, disparate treatment, and disparate impact. The presentation included examples using each type of analysis to show how certain loan data can be used to identify possible discriminatory lending patterns and concluded with an overview of what creditors can do to protect themselves from discrimination claims.

Mr. Eck discussed the FTC Act which established the Federal Trade Commission and prohibits unfair methods of competition and unfair and deceptive practices. The FTC is charged with enforcing the Act with respect to most businesses, although banks and many other types of financial institutions are not subject to the FTC's oversight. Banks and certain other types of financial institutions are subject to the supervisory authority of their respective regulatory agencies. While these regulatory agencies cannot issue regulations implementing the FTC Act, they can take actions to enforce it.

Mr. Milano discussed reverse mortgages. Reverse mortgages are non-recourse consumer credit loans secured by the consumer's principal residence. There are no monthly payments and the loan becomes payable when the consumer either sells the property or dies. Between 80% and 90% of reverse mortgages made today are FHA insured. TILA disclosures must be given in connection with reverse mortgages and there are additional specific reverse mortgage disclosures that are required. Section 8 of RESPA also applies to reverse mortgages. Most states have not adopted laws that specifically regulate reverse mortgages, although some states have addressed these products in their high-cost loan laws or in future advance statutes.

For most reverse mortgage products, the borrower must be at least 62. The amount of the loan depends on several factors including: the age of the borrower, the value of the home, the interest rates, and the HUD property value limits. One of the big difference between reverse mortgages and traditional "forward mortgages" is that the origination fee is based on the property value and not the loan amount. Currently the fee is approximately 2% of the property value. Under the federal program, a borrower can expect up to $14,000-$16,000 in closing costs. Borrowers must get counseling before obtaining a reverse mortgage and having a reverse mortgage may adversely affect some Medicaid benefits.

Currently foreclosure rates for reverse mortgages are low, but lenders are seeing high property tax and insurance defaults.

Ms. Woodward provided a very brief overview of certain federal laws that preempt state laws. She discussed the preemption provisions of the National Bank Act and the Home Owners Loan Act. She also discussed DIDMCA, AMPTA, the Riegel-Neal Interstate Banking Act and GLBA.

Ms. Woodward also discussed how industrial loan companies (ILCs) functioned. She explained that these entities are creatures of state law, can be operated by a non-financial business, and have the right to export interest rates on a nationwide basis to the same extent as other depository institutions.

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The Fair Access to Services Subcommittee session at the Winter Meeting introduced a new home equity option financing product offered by REX & Co. Barry Abbott, Chief Legal Officer and Director of Government Relations for REX & Co., introduced the REX Agreement as an equity finance product that allows homeowners to take equity out of their homes without selling the home and without incurring any debt. Mr. Abbott explained that the product is not a loan, but instead is an option agreement between the homeowner and REX & Co. that allows REX & Co. to share in the future appreciation (or depreciation) of the home value in exchange for an up front option payment to the homeowner. The value of the home is determined at consummation of the REX Agreement and the amount of appreciation or depreciation is determined upon the sale of the home, or at the time the agreement otherwise terminates (typically 50 years, unless the homeowner decides to buy out REX & Co's interest or breaches the REX Agreement). If the home does not appreciate or depreciate, upon the sale of the home, REX & Co. effectively gets back the amount of money it advanced to the homeowner on the option, and the homeowner gets the balance of the sales proceeds. REX & Co. and the homeowner share in any loss in value, with REX & Co.'s capped at the amount paid as an advance on the option. Mr. Abbott also explained that the product is geared towards homeowners in their late 30's to mid-60's, with FICO scores over 680 and who own single-family detached homes (although condos and townhouses will be accepted shortly). Mr. Abbott addressed the legal aspects of the four documents comprising the REX Agreement, two of which are recorded in the real property records. Mr. Abbott also provided an article on "The Nuts & Bolts of a REX™ Agreement" that appeared in the Summer, 2007 Consumer Finance Law Quarterly Report.

Nina Simon, of the AARP Foundation, addressed consumer concerns regarding the REX Agreement. She noted that the product is only available to homeowners with homes valued at $200,000-$5,000,000. Ms. Simon also noted that in an appreciation scenario, if a homeowner wanted to buy out REX & Co., the homeowner may need to acquire a large mortgage to terminate the REX Agreement. She stressed concern that in such a scenario, the homeowner may not be able to afford the cost of a larger mortgage and therefore the homeowner could be forced to sell the home. Ms. Simon also stated that it appeared that the most a homeowner would be advanced in the REX Agreement is 10% to 15% of the home's value. She also noted that REX & Co's loss is capped in a depreciation scenario, but that REX & Co's profit in an appreciation scenario is not capped.

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The Preemption and Federalism Subcommittee presented a panel discussion on three topics.

Nina Simon of AARP discussed her organization's involvement in Seventh Circuit litigation related to loan servicing practices by Ocwen Loan Servicing and the application of OTS preemption to those practices.

Charles Gall of Dreher, Langer & Tomkies, LLP, discussed the "valid when made" doctrine which was recently analyzed in Munoz v. PipestoneFinancial, LLC, 2007 WL 2509755 (D. Minn. Aug. 20, 2007). The Munoz court held that a debt buyer was able to assert the federal preemption of state usury law initially relied upon by the originating creditor when the debt buyer attempted to enforce the underlying contractual agreement. Essentially, because the applicable interest rate was "valid when [the contract was] made," the court held that the rate continued to remain valid and enforceable despite the transfer of the loan to a third party who otherwise is not able to preempt state usury limits.

Tom Billings of Van Cott, Bagley, Cornwall & McCarthy, and Jeff Langer of Dreher, Janger and Tomkies, LLP, and Ashby Hilman of Advanta Bank Corp., discussed industrial loan companies ('ILCs"). ILCs are regulated by the state in which they are formed and also by the FDIC. Currently there are seven states that provide ILC charters. ILCs operate similarly to state-chartered banks, except that ILCs may not maintain demand deposit accounts. ILCs recently garnered media coverage when Wal-Mart attempted to obtain an ILC charter. The increased scrutiny that arose as a result of Wal-Mart's interest led the FDIC to declare a moratorium on ILC applications until January 31, 2008. Mr. Billings advised that it appeared that that moratorium would not be extended.

The panel discussed the qualities of ILCs that often generated interest. As a state-chartered FDIC insured bank, an ILC is able to export interest rates to other states. The panel noted that Utah was a popular location for ILC charters because of the lack of a usury limit. The deposits of ILCs are FDIC insured. The panel opined that with the anticipated lifting of the moratorium, more institutions would investigate the merits of obtaining an ILC charter in one of the seven states.

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Jeffrey Naimon moderated the TILA subcommittee panel featuring Jeremy Rosenblum (Ballard Spahr, Philadelphia, PA), Nina Simon (AARP Foundation, Washington, D.C.), and Tom Hefferon (Goodwin Proctor, Washington, D.C.). The panel focused on two topics: (1) actions seeking class-wide rescission of mortgage loans; and (2) the question of whether a loan can be rescinded after it has been paid off or otherwise refinanced.

McKenna v. First Horizon Loan Corp., 475 F.3d 418 (1st Cir. 2007).

Tom Hefferon presented the background and holding of McKenna, a case in which he successfully won denial of class certification. The First Circuit, as a matter of first impression, held that a class action could not be maintained under the rescission provisions of TILA. The Court based its holding on an analysis of 15 U.S.C. §§ 1635 and 1640. Notably, § 1635 (giving the rescission right) does not specifically provide for class certification for rescission claims, direct or declaratory, and caps damages at $500,000. First Horizon successfully argued to the First Circuit that this indicates that Congress did not intend to permit class actions under § 1635 (as opposed to § 1640, which specifically discusses class actions).

Andrews v. Chevy Chase Bank FSB, 05-C-0454 (E.D. Wis. 2007).

Nina Simon discussed the Andrews case, which is currently pending before the Seventh Circuit. Andrews also addresses the validity of rescission class actions. The District Court granted class certification in Andrews. The amicus brief submitted by AARP takes the position that because TILA does not specifically forbid rescission class actions, the availability of the remedy ought to be determined under Rule 23 of the Federal Rules of Civil Procedure.

Rescission After Pay Off

Approximately 65% of the loans in the McKenna putative class had been refinanced. TILA does not address whether rescission can occur after the loan has been paid off or refinanced. The courts are currently split on this issue. The Sixth and Seventh Circuits have found that a discharged loan may be rescinded. The Ninth Circuit and the Supreme Judicial Court of Massachusetts have held that a discharged loan may not be rescinded. The panelists believe that in light of the subprime meltdown, there will be more cases addressing this issue.

Mr. Rosenblum presented his new theory on how creditors should handle rescission cases. He recently published an article in Consumer Financial Services Law Journal discussing this topic. He believes that when faced with rescission actions, creditors should ask the court for an equitable remedy. For example, if a borrower sought to rescind a loan that had already been refinanced at a lower rate than the original loan, then arguably the borrower suffered no damage. In addition, the borrower had the benefit of using this money over time. Mr. Rosenblum argued that the court should take this into consideration when making damages determinations.

For further information on this topic, the panelists suggest review of the McKenna and Andrews briefs. The panelists also recommend a 1974 Duke Law Journal article discussing the TILA right of rescission. Note, Truth-in-Lending: Judicial Modification of the Right of Rescission, 1974 DUKE L.J. 1227, 1234 (1974).

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The subcommittee of Litigation and Arbitration and the subcommittee of Housing Finance and RESPA jointly presented a program at the Winter Meeting regarding HMDA data and recent related litigation. Joshua Davidson, Varga, Berger, Ledsky, Hayes & Casey PC moderated the discussion by Brad Blower, Relman & Dane, Washington DC; C. Terrence Ireland, Hudson Cook, LLP, Washington DC; and Paul F. Hancock, K&L Gates, Miami, Florida.

HMDA was amended in 2002 to require new data fields among the information reported to the FRB. Those new categories of data were first submitted to federal regulators in 2004 and became available in the public reports in 2005. Subsequently, litigation relying on the data commenced shortly thereafter. Notwithstanding the FRB's cautions that HMDA data does not include a variety of borrower-specific information and cannot therefore establish discrimination by itself, these cases rely all, or in part, on HMDA data.

Mr. Blower questioned what factors have led to recent increases in HMDA litigation. The subprime market "meltdown" has resulted in very disparate effects when analyzed in relation to the socio-economic characteristics of the borrowers. Using statistical examples from several United States cities, Mr. Blower noted that high cost loans are often concentrated in minority neighborhoods. As part of this market downturn, foreclosures in these areas have increased dramatically. In Detroit, for example, foreclosure rates have doubled in the past two years. In one case involving high-priced loans, the plaintiff's experts found significant price discrepancies between African American and white borrowers. HMDA data have also been used to reveal redlining of certain areas (such as neighborhoods with rowhouses) within cities. See, for example, National Community Reinvestment Coalition v. Accredit Home Lenders Holding Company, filed in the District of Columbia (the plaintiff's brief included in the meeting materials).


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The Debt Elimination Scams session at the Winter Meeting addressed fraudulent debt elimination products that are marketed through the internet. Gregg D. Stevens, a member of McGlinchey Stafford PLLC, discussed who the scams target, what the scams claim to offer, and what they actually end up doing.

These scams often are targeted at individuals who are unable to discern their fraudulent nature, including individuals who are uneducated, newly divorced, or facing bankruptcy. These debt elimination products often require the consumer to sign contracts in which he or she agrees to indemnify the scammers for any damages, pay large liquidated damages, and (perhaps the most obvious sign that something is not right) certify that the consumer is not an undercover agent.

The numbers of scams vary, but often involve a consumer paying large fees for a product that claims to let them stop making monthly payments on the amounts they owe while still allowing them to eliminate their debt. One such product encourages consumers to unilaterally change the arbitration forum contained in their credit card agreement. The scammers claim that national banks may not extend credit and therefore the cardholder agreement is not valid and may be changed by the consumer. The new arbitration forum that is chosen is one suggested by the scammer (which actually owns the company offering it), who then gives the consumer a large award through a bogus arbitration proceeding. When the consumer tries to confirm the eventual arbitration award in court, he or she finds out that it is essentially worthless. Another fraud involves consumers paying for a product that contains form "billing error" letters that can be sent to the consumer's credit card company. The letters claim that (usually an amount of time long enough in the past where records may not be readily available) the credit card company failed to give required notices in its billing statements, and therefore, unlawfully collected finance charges on the account. The consumer is encouraged to make demands for detailed information regarding all billing statements and to possibly bring suit. If a consumer does bring a suit, usually with nothing more than these internet-generated allegations, he or she often faces a lack of sufficient evidence, 60 day billing dispute limitations, and statutes of limitations.

Many of the consumers who purchase these products were current on their accounts before taking the advice to stop making payments. As a result, consumers actually incur more debt and damage their relationships with creditors. The session noted that there are legitimate debt elimination companies on the market which makes it more difficult to stop the scammers.

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The Deposit Products and Payment Systems Subcommittee presented a summary of decoupled debit products and internet gambling rules. Paul Ayres, of Capital One in Glenn Allen, Virginia, presented on decoupled debit products. Nessa Feddis, of the American Bankers Association in Washington, D.C., presented on the proposed internet gambling rules.

Paul Ayres described a "decoupled debit product" as a debit card offered by one particular service provider that is attached to a separate demand deposit account (DDA). Banks often use this product to expand consumers' use of checking accounts while decreasing the bank costs of processing checks.

With a decoupled debit card, the card service providers fund debits through a single ACH debit under a PPD code to the underlying deposit account at the end of each day. Accounts are limited to pre set limits per day. The cards are entitled to full Regulation E protection, have virtually no fees, and can be used at over 25,000 ATMs. Currently, the card does not offer on-time verification and has no overdraft fee, although consumers' banks may charge such a fee.

Nessa Feddis then summarized the proposed internet gambling rules that apply to credit card issuers. Law enforcement faces a number of problems regulating internet gambling products. According to Ms. Feddis, the rules were developed out of an ineffective system that used designated payment systems to block internet gambling and merchant codes to filter out unlawful Internet gambling.

The current attempt to regulate internet gambling initially had a July 2007 effective date but was delayed because of concerns regarding traditional industries such as horse racing and the inability to block certain unlawful transactions without blocking legal transactions. The proposals require payment system participants to design reasonable procedures to block unlawful internet gambling transactions, but exempt certain industries (i.e. horse racing). The proposed Department of Treasury rules can be found at 31 CFR Part 132.

Some of the issues presented were whether unlawful gambling should be defined and what activities would then constitute it (intrastate, inter-travel and horse racing). Another key issue is determining how to enforce regulations against institutions in jurisdictions where internet gambling is legal. Countries may protest such rules and assert the U.S. is not allowed to prohibit the actions of an industry that is legal in that country. "Over blocking" is another significant concern, particularly in the horse racing industry. Further, banks are concerned about blocking legitimate transactions.

One proposal suggests developing a list modeled on the OFAC list that identifies internet gambling companies. From a bank's perspective this proposal is easier to implement. However, this proposal still poses difficulties in execution and inherent problems with keeping the list current.

Many industry leaders believe the proposed regulations will be ineffective since they provide many loopholes. Regulators face the obstacle of regulating telephone cards or internet payment systems located outside the U.S. Further, regulators face challenges with regulating dog tracks and state lotteries without completing shutting down industries that have become an integral part of certain economies.

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The Internet Delivery/Electronic Banking Subcommittee, along with the Federal and State Trade Practices, sponsored a joint session at the Winter Meeting on the bank agency rulemaking under the Federal Trade Commission ("FTC") Act, the Federal Truth in Lending Act ("TILA") and the Home Ownership and Equity Protection Act ("HOPEA"). Andrew Smith of Morrison & Foerster led the discussion. The panelists included Suzanne McQueen of the Office of Thrift Supervision ("OTS"), Kathleen Ryan of the Federal Reserve Board's Division of Consumer and Community Affairs ("FRB"), Roberta Carney of Advanta Bank, Russell Schrader of Visa, Inc., and Jim Brown of the University of Wisconsin-Milwaukee.

UDAP

Mr. Smith began the presentation by noting the OTS published a request for comment on an unfair and deceptive practices rule ("UDAP") in August of 2007. He noted the FRB also proposed a rule to prohibit certain mortgage practices under TILA and HOPEA. Mr. Smith commented that while the TILA authority to regulate advertising is well-established, the banking agencies do not typically make rules addressing unfair and deceptive acts and practices ("UDAP") unless prompted by the Federal Trade Commission.


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The Personal Property Financing Subcommittee sponsored a discussion of recent legislative developments and significant court decisions that have impacted different aspects of personal property financing. Thomas Buiteweg of GMAC Financial Services, Mark Edelman of McGlinchey Stafford, and Robert Aitken of Ford Motor Credit Company led the discussion.

The discussion focused on the following subjects: (1) an amendment to California's Car Buyer's Bill of Rights for off-lease vehicle sales; (2) a Seventh Circuit decision that requires Chapter 13 debtors to remain liable for any deficiency balance after the surrender of vehicles; (3) recent developments under the Graves Amendment (federal preemption of lessor liability); and (4) a California appellate court decision that requires specific disclosures to appear in post-repossession notices of intent to sell under the Rees-Levering Act in California.


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The Compliance Management Subcommittee's session at the Winter Meeting covered updates on the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) issues and upcoming challenges for 2008. The speakers were Sara Satten, CAMS/SVP/Deputy BSA Officer and Interim OFAC Officer, Wells Fargo & Co. and Nina Nichols, Attorney, Federal Reserve Board.

Ms. Satten discussed the challenges faced by compliance officers in large decentralized organizations. She touched on issues including the importance of ensuring there are internal controls, adequate training, testing, risk assessment, and oversight. Ms. Satten explained that without effective oversight, any BSA compliance programs will not be effective. She also opined that one key difference between being an outside counsel and an internal compliance officer is you cannot just give advice. A compliance officer must be able to implement compliance programs and be able to make things happen. She recommended that compliance officers have strong relationships with regulators and audit partners. Ms. Satten suggested that compliance officers should inquire about their outside counsel's relationship with regulators and know what experience the outside counsel have had with regulators. Clients want to know the risks and benefits, not just what the law says.

Ms. Nichols also discussed topics she believes are going to be challenges for the industry in 2008. She talked about issues involving international operations and correspondent banking and opined that businesses want to know how much due diligence is enough. She highlighted the areas of trade finance, OFAC compliance, and international ACH as other places that business will face AML challenges in 2008. Ms. Nichols also touched on the process challenges businesses face, such as not having the oversight to deal with the amount of growth of the institution. Ms. Satten noted that prepaid cards could be another challenging AML issue for 2008.

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The Consumer Financial Services Committee sponsored a session on ethical issues faced in the consumer financial services practice. The speakers were Therese G. Franzen, Franzen and Salzano, P.C., and J. Douglas Cuthbertson, Miles & Stockbridge, P.C. The speakers led a lively discussion of the ethical issues commonly faced by attorneys in the areas of conflicts of interest, expenses in litigation, discovery and confidentiality. The speakers engaged the members of the audience by presenting factual scenarios that raised ethical questions and analyzed those scenarios under the Rules of Professional Conduct. Specifically, Mr. Cuthbertson kicked off the session with a discussion of the potential conflict of interest that arises when a senior associate attorney is approached by a competing law firm to leave her current firm and the firms involved represent conflicting interests in pending litigation matters. Ms. Franzen ended the session by discussing a recent Georgia case regarding the ability of a third-party recipient of attorney-client information to sue the attorney who prepared the information when the third-party relies on the information to his or her detriment. Members of the audience posed questions about the factual scenarios presented by the speakers and participated in the analysis of those scenarios.

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