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									Capitol Hill - Capitol Comments                                                 http://www.ibat.org/print_version.asp?s_title=Capitol%20Comments&s_...



          IBAT                                                                                              Capitol Comments



                                                        JANUARY 2005 * 1.2005


          BANKRUPTCY
          In Dawson v. Washington Mutual Bank, F.A., http://caselaw.lp.findlaw.com/data2/circs/9th/0216903p.pdf, the 9th Circuit
          held that a bankruptcy debtor can seek damages for emotional distress against a creditor that violates the automatic stay that
          follows the filing of a petition in Bankruptcy. The court cited what it called “the legislative history as a whole,” and “an
          emerging consensus” in favor of emotional distress damages among some other courts and commentators. However, there
          is a split among the circuits. For example, in Aiello v. Providan Financial Corp. 239 F.3d 876 (2001), the Seventh Circuit
          said debtors might be able to recover damages for emotional distress, but only if they suffered a financial loss.



          Comment: The split of authority will ultimately have to be resolved by the U.S. Supreme Court. Meanwhile, just
          think, the financial loss required by Aiello could have been satisfied by a trip to the psychiatrist’s office. Bankruptcy
          Courts take the violation of the automatic stay very seriously, so if you get a Bankruptcy Notice on one of your
          customers, cease any further collection efforts, even scheduled foreclosures. You are not supposed to even
          communicate with the debtors except through their attorney.




          COMMERCIAL ELECTRONIC MAIL MESSAGES—FTC RULE
          The FTC has issued a final rule that sets forth the criteria for determining the primary purpose of various kinds of e-mail
          messages for the purposes of the CAN-SPAM Act. These include:



                 For e-mail messages that contain only the commercial advertisement or promotion of a commercial product or
                 service (“commercial content”), the primary purpose of the message will be deemed to be commercial;
                 For e-mail messages that contain both commercial content and “transactional or relationship” content, the primary
                 purpose of the message will be deemed to be commercial if either: 1) a recipient reasonably interpreting the subject
                 line of the e-mail would likely conclude that the message contains commercial content; or 2) the e-mail’s
                 “transactional or relationship” content does not appear in whole or substantial part at the beginning of the body of
                 the message;
                 For e-mail messages that contain both commercial content and content that is neither “commercial” nor
                 “transactional or relationship,” the primary purpose of the message will be deemed to be commercial if either: 1) a
                 recipient reasonably interpreting the subject line of the message would likely conclude that the message contains
                 commercial content; or 2) a recipient reasonably interpreting the body of the message would likely conclude that the
                 primary purpose of the message is commercial.
                 For e-mail messages that contain only “transactional or relationship” content, the message will be deemed to have a
                 “transactional or relationship” primary purpose.

          The link to the final rule is: http://www.ftc.gov/opa/2004/12/canspamfrn.htm.



          Comment: The rule incorporates the “Sexually Explicit Labeling Rule,” but we know you would not even consider
          sending out sexually explicit emails, so we just won’t go into that. If you are emailing to your online customers,
          remember that these rules apply to you.




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          DIRECT DEPOSITED SOCIAL SECURITY
          In Miller v. Bank of America, Cal. Super. Ct., No 301917 (no free web link available), the California Superior Court for
          San Francisco upheld a February 2004 jury verdict awarding damages to BofA customers who had funds withdrawn from
          accounts into which Social Security checks were directly deposited to pay NSF fees. The plaintiffs in this class action
          were awarded an estimated $1.3 – 1.6 million in refunds and an estimated amount of damages of $1.3 billion. The class
          covers all California residents who had a BofA checking account at any time between August 1994 and December 2003
          into which Social Security payments were deposited. This case has caused national attention and has prompted numerous
          phone calls to our association.



          Our take on this case: Calm down! First of all, this case has no authority outside the San Francisco Superior Court
          jurisdiction. Secondly, BofA has already announced its intent to appeal this case. Thirdly, you may recall that in
          2002, the (federal) Ninth Circuit had to reverse itself in the case of Lopez v. Washington Mutual Bank, after making
          a similar ruling that WaMu had illegally deducted funds to pay overdrafts out of accounts into which Social Security
          was deposited. Even before the reversal of that decision, we pointed out that that ruling was binding only in the 9th
          Circuit. For banks in states outside of the 9th Circuit (the 9th Circuit includes: CA, OR, WA, AZ, MT, ID, NV, AK
          and HI), they need only adequately disclose their fees and charges and their overdraft protection program, if they
          have one. Finally, even the Social Security Administration is concerned that this sort of case will chill the use of
          direct deposit of Social Security benefits, because, as you all know, they are trying to encourage the use of direct
          deposit.




          FACT ACT—FINAL RULES

          The FFIEC agencies have announced interagency final rules to require financial institutions to adopt measures for properly
          disposing of consumer information derived from credit reports. Current law requires financial institutions to protect
          customer information by implementing information security programs. The final rules require banks to make modest
          adjustments to their information security programs to include measures for the proper disposal of consumer information.
          They also add a new definition of “consumer information.” The final rules implement section 216 of the FACT Act. The
          final rules will take effect on July 1, 2005. The link to the Federal Register Notice is: http://www.federalreserve.gov
          /boarddocs/press/bcreg/2004/20041221/attachment.pdf.



          Comment: The amendments to the Guidelines generally require a financial institution to properly dispose of
          “consumer information” derived from a consumer credit report consistent with existing obligations under the
          Guidelines. This is probably going to be the least complex of all the FACT Act regulations that have yet to be
          promulgated, so we can all say “thank you” to the regulators for this one.



          The FTC has published a final rule that became effective on December 1 establishing definitions for the terms, “identity
          theft,” and “identity theft report;” the duration of an “active duty alert;” and the “appropriate proof of identity” for purposes
          of fraud alerts and active duty alerts for the purposes of the FACT Act. As previously reported, the FACT Act became
          effective December 1, 2004 without implementing or clarifying regulations, and it may be many more months before the last
          of the regs come out by the bank regulators and the FTC. While the clarifications in this publication apply mostly to credit
          reporting agencies, banks are also impacted in providing information to a credit reporting agency. For example, if a bank is
          going to report some information to a credit reporting agency and finds out that the account is blocked because of identity
          theft, then the bank must have procedures in place to ensure that the information is not further reported until the consumer
          verifies that it is correct information. Here is a link to the final rule: http://www.occ.treas.gov/fr/fedregister
          /69fr63922.pdf.




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          Comment: As we said in the previous comment, this is not going to be easy.



          And on December 17, the FTC approved a Federal Register notice regarding the ceiling on allowable charges for certain
          disclosures under the Fair Credit Reporting Act (FCRA), where the FCRA permits a credit reporting agency to impose a
          reasonable charge for certain disclosures. Here is a link to that notice: http://www.ftc.gov/opa/2004/12/fyi0471.htm.



          Comment: Remember this does not apply to consumers’ requests for free annual disclosures of their credit reports
          under §211(a) of the FACT Act. Also remember that although these charges can be passed on to the consumer,
          there should be no up-charging of those fees.




          FINCEN POLICY ON OFAC HITS AND SARS

          FinCEN released an Interpretive Guidance to reverse a controversial policy that mandated a Suspicious Activity Report
          (SAR) for every match of an OFAC listed entity or person, http://www.fincen.gov/31cfr12232004.pdf. Under the new
          Interpretive Guidance, reports filed with the Department of the Treasury’s Office of Foreign Assets Control (OFAC) of
          blocked transactions with Specially Designated Global Terrorists, Specially Designated Terrorists, Foreign Terrorist
          Organization, Specially Designated Narcotics Trafficker Kingpins, and Specially Designated Narcotics Traffickers will be
          deemed by FinCEN to fulfill the requirement to file a SAR. However, the filing of a blocking report with OFAC will not
          be deemed to satisfy the obligation to file a SAR if the transaction would be reportable under FinCEN’s suspicious activity
          reporting rules, even if there were no OFAC. Additionally, to the extent that the bank is in possession of information not
          included on the blocking report filed with OFAC, a separate SAR should be filed with FinCEN including that information.



          Comment: Got that? All together now: “Under the New Interpretive Guidance, reports filed with OFAC….” Not
          exactly a memorable tune. The old rule might have been controversial and duplicative, but at least it was
          understandable.




          HMDA—ASSET-SIZE EXEMPTION

          The Fed published its annual notice of the asset-size exemption threshold for depository institutions under Reg C, which
          implements the Home Mortgage Disclosure Act (HMDA). The asset-size exemption for depository institutions will
          increase $1 million to a level of $34 million, based on the Consumer Price Index. As a result, depository institutions with
          assets of $34 million or less as of December 31, 2004 are exempt from data collection in 2005. The adjustment is effective
          January 1, 2005. Here is a link to the notice: http://www.federalreserve.gov/boarddocs/press/bcreg/2004/200412212
          /attachment.pdf.



          Comment: This is about the only case that we can think of where inflation might work to a bank’s advantage, by
          exempting larger small banks from the onerous compliance burdens of HMDA, in our opinion, the worst of all of the
          compliance regs—and the least effective in preventing Fair Housing violations. It seems to be designed as a trap for
          the unwary, and it is even offensive to some consumers to be asked about their race and ethnicity. They should
          repeal the Act and tear up the reg and start over.




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          HMDA—GUIDANCE ON REPORTING

          The FFIEC has published new Additional Guidance on HMDA reporting to take into account the Reg C changes that
          became effective January 1, 2004. The areas of discussion include the transition rules; ethnicity, race and sex (government
          monitoring information); property loan information on refinancing and preapprovals; lien status reporting; loans subject to
          HOEPA; and reporting the sale of home purchase loans. Here is a link to the Additional Guidance: http://www.ffiec.gov
          /hmda/RegC.htm.



          Comment: We have been reporting the HMDA reporting changes in this newsletter, so you should already be
          familiar with the changes. But this is a good (free!) source to review the changes, and we all know, in this business,
          you can’t get enough review.




          NACHA RULES CHANGES--EXAMINATION PROCEDURES

          The FFIEC agencies have come out with advice to banks and bank examiners of the three amendments to the National
          Automated Clearing House Association (NACHA) rules, which we have previously advised you about in this newsletter.
          To refresh your recollection, the three changes are 1) Accounts Receivable Conversion (ARC), effective June 11, 2004; 2)
          Network Security Amendment, effective September 10, 2004; and 3) Third Party Senders Amendment, effective December
          10, 2004. The OCC version can be found at the following link: http://www.occ.treas.gov/ftp/bulletin/2004-58.txt. The
          other regulators’ examination procedures are identical except for the addressees. It supplements the guidance in the FFIEC
          IT handbook, Retail Payment Systems, dated March 2004, http://www.ffiec.gov/ffiecinfobase/html_pages/it_01.html#rps.



          Comment: So now you know what the bank examiners will be looking for by way of compliance with the NACHA
          rule changes.




          OKLAHOMA STATE LEGISLATURE

          The Oklahoma legislature is in session. Each agency has its own appropriations/budget bill. CBAO has contacted the
          Oklahoma Department of Banking to determine whether there are any anticipated problems with adequate funding of its
          activities. Commissioner Mick Thompson has assured us that there are no problems on the horizon. We will continue to
          monitor the progress of this legislative session.




          PAYMENT SYSTEMS

          In TME Enterprises, Inc., et al v. Norwest Corporation http://caselaw.lp.findlaw.com/data2/californiastatecases
          /b164022.pdf, in connection with a fraud scheme, the bank accepted wire transfers and applied them to the account number
          rather than the named beneficiary. The bank, having the deep pockets, of course, was the one that got sued. The court held
          that the bank could rely on the account numbers as long as it had no actual knowledge of the inconsistency.



          Comment: This case is cited because the decision is based on an interpretation of § 4 - 207 of the Uniform
          Commercial Code and Federal Reserve Reg J. If the court had sided with the plaintiffs and held that the bank must


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          have established procedures to scrutinize each wire transfer to make sure that the account numbers and the
          accountholders line up, the wire transfer business, most of which is automated, would have come to a screeching halt
          because of the impossibility of checking the huge numbers of transaction that regularly move through the system.




          PREEMPTION

          The OCC has filed a brief with the U.S. Court of Appeals for the Fourth Circuit, asking them to reconsider the ruling in
          Wachovia Bank, N.A. v. Schmidt, http://caselaw.lp.findlaw.com/data2/circs/4th/032061p.pdf, which could force some
          national banks to litigate in state courts. The court held that for purposes of federal diversity jurisdiction, a national bank is
          a citizen of every state where it has a branch office, thereby denying access to the federal courts by reason of diversity.
          The case had been filed in a South Carolina state court by South Carolina citizens. Wachovia had tried to move the case to
          federal court on the basis of diversity jurisdiction. Three other Federal Circuits have held that a national bank with
          branches in one or more other states is located in the state where the main office is located, which if that holding were to
          have been applied to the case in question, would have resulted in diversity of residence and allowed for federal court
          jurisdiction.



          Comment: It should be interesting to find out if the OCC has enough clout to get the Fourth Circuit to reconsider
          this case or whether it will be appealed to the U.S. Supreme Court.




          REPORTS AND STUDIES

          The FDIC has released a study on a type of identity theft known as account-hijacking, one of the fastest growing forms of
          identity theft in the country. The FDIC is soliciting comments (through February 11) that it will use to formulate guidance to
          bankers. Here is the link: http://www.fdic.gov/news/news/press/2004/pr12504.html.



          Comment: We don’t usually comment on a report or study, but in this case, the study is being used to solicit
          comment before issuing formal guidelines. So please read this and see what the FDIC is considering by way of
          regulation. If you disagree with their proposals or have an idea as to how to more effectively prevent account-
          hijacking, please comment.



          The June 2004 issue of the OCC’s Quarterly Journal, Vol. 23, No. 2 for the first quarter 2004 is now available at the
          following link: http://www.occ.treas.gov/qj/qj.htm.



          The Fed’s Statistical Release – E.2 Survey of Terms of Business lending is available at the following link:
          http://www.federalreserve.gov/Releases/E2/Current/.



          The Consumer Credit Research Foundation released a 27-page report, “Payday Lending: A Practical Overview of a
          Growing Component of America’s Economy.” The report, prepared by five academic economists, says that payday lending
          fills a market and need not met by conventional financial institutions (banks), and that it can be a less expensive alternative
          to other types of short-term credit or “bridge” borrowing: http://www.consumercreditresearchfoundation.com/_files
          /PaydayLendingFinal.pdf.




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          Comment: So why do bank regulators always associate payday lending with predatory lending and prohibit banks
          from engaging in it, if it can be structured so as not to unfairly gouge the consumer?



          The FTC Report to Congress on the FACT Act, http://www.ftc.gov/reports/facta/041209factarpt.pdf, concludes that the
          administrative recommendations on Section 318 of FACTA are inappropriate at this time, as is additional legislation. The
          report states that FACTA is working to make credit reports more accurate and complete, but the full impact of the changes
          will not be apparent for some time.



          Comment: It is a relief to know that no new FACT Act legislation is being recommended by the FTC, and we can
          only hope that Congress will not initiate any more changes. We have enough on our plate trying to keep up with
          what has already been done.



          The OCC has written a paper, “The Wealth Effects of OCC Preemption Announcements After the Passage of the Georgia
          Fair Lending Act,” http://www.occ.treas.gov/wp2004-4.htm, which offers empirical evidence on how preemption affects
          national banks’ performance. The study finds that preemption benefits are larger for smaller, multi-state national bank
          holding companies than they are for larger national bank companies or similarly sized companies operating in one state.



          The Federal Reserve Board has reported to Congress on “Further Restrictions on Unsolicited Written Offers of Credit and
          Insurance,” http://www.federalreserve.gov/BoardDocs/rptcongress/UnsolicitedCreditOffers2004.pdf .



          The Federal Reserve’s Statistical Release E.15, Agricultural Finance Databook, December 2004, is available at the
          following link: http://www.federalreserve.gov/releases/e15/current/SectionA.htm.



          The Government Accountability Office (GAO) has issued a Report to the Chairman, Subcommittee on Housing and
          Community Opportunity Committee on Financial Services, House of Representatives entitled “Rural Housing—Changing
          the Definition of Rural Could Improve Eligibility Determinations.” The link to the GAO report is: http://www.gao.gov
          /new.items/d05110.pdf.



          Comment: There are some interesting and worthwhile recommendations in this report. But remember, at this point
          this is all they are—recommendations. They are far from becoming law. We believe this will be of interest to banks
          whose market areas include areas that are in that gray area, somewhere between urban and rural, where a lot of
          development is currently taking place. We would appreciate your feedback. If there is enough interest, we could do
          a comment letter, based upon the concerns of our members.



          The FDIC’s Winter 2004 Supervisory Insights is available at the following link: http://www.fdic.gov/regulations
          /examinations/supervisory/insights/siwin04/.



          Comment: There are some good articles in here, such as “Tapping the Latino Immigrant Market” and “Importance
          of a Loan Policy ‘Tune-Up’.”




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          The Texas Department of Banking’s December 2004 Agency Profile: State Charted Banking in Texas is available at the
          following link: http://www.banking.state.tx.us/PODES/maindog.pdf.




          RETAIL LENDING EXAMINATION PROCEDURES (OCC)

          During the last several years, the OCC has seen significant changes in the retail lending activities of national banks. For
          many banks, retail lending has become a more prominent part of lending activities and a major contributor to overall
          profitability. More generally, the mix and complexity of products that banks offer and the availability of credit to
          consumers has expanded. Concurrent with this growth have been changes in the ways that banks manage their retail
          portfolios. In light of these developments, the OCC is issuing new Retail Lending Examination Procedures, available at the
          following link: http://www.occ.treas.gov/ftp/bulletin/2004-59a.pdf.




          TELEMARKETING FRAUD

          The FTC has reached a settlement with First American Payment Processing, Inc which bars them from processing any
          payments for outbound telemarketers, and, as part of the settlement, First American has to pay the FTC an amount in excess
          of $1.5 million by way of redress. See the full FTC news release at the following link: http://www.ftc.gov/opa/2004
          /11/firstamerican.htm. The FTC’s complaint alleged that First American violated the Telemarketing Sales Rule and the
          FTC Act by providing substantial assistance and support to numerous telemarketing clients whom they knew or should have
          known were engaging in deceptive or abusive telemarketing practices. The telemarketers were initiating unauthorized
          debits through the ACH system and unauthorized paper demand drafts (see UCC § 3-104(k)) through the check collection
          system. The ban permanently prohibits the defendants from processing payments through any mechanism—not just through
          the ACH network—for outbound telemarketers. This would include the unauthorized demand drafts, as well.



          Comment: The telemarketing scam described here is one of the most insidious and also one of the most pervasive of
          all of the telemarketing abuses. The telemarketer calls a consumer (your bank’s customer), usually at a most
          inconvenient time, and using a high-pressure sales pitch, attempts to get the consumer to divulge the name of their
          bank and their bank account number and also will trick them into saying “yes,” or “I agree,” even if the question is
          “don’t you agree that this is an offer you can’t pass up?” Usually by this point, the consumer is ready to say
          anything to terminate the call, but the sly telemarketer will have already recorded the consumer’s “yes” or “I
          agree” to initiate the “preauthorized” automatic debit or demand draft. And by the time the customers realize they
          have been “had,” it is usually too late for your bank to do anything about it. In this case, First American Payment
          Processing was being used to initiate the ACH debits or the demand drafts, and they are being punished for failure
          to verify the authenticity of the ACH debits or demand drafts before sending them through the payment system.
          Thus, they became an accessory to the crime. Banks could be similarly punished if they facilitated a fraudulent
          telemarketer in this fashion. Remember the rule: Know Your Customer!



          That is one telemarketing scam out of business. Unfortunately, there are many more out there, so this action by the
          FTC is like swatting one fly out of a swarm.



          TRUTH IN LENDING
          In Koons Buick Pontiac GMC, Inc. v. Nigh, http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=US&navby=case&
          vol=000&invol=03-377, the U.S. Supreme Court held that consumers who seek statutory damages for violations of the
          Truth in Lending Act in connection with a personal property loan are limited to $1,000 for each violation. In this same
          case, the Fourth Circuit had held that Congress doubled the $1,000 cap when it amended TIL in 1995. But the U.S.
          Supreme Court reversed, saying Congress only raised the damages cap with respect to loans secured by real property and
          homes without disturbing the $1,000 cap for personal property loans.


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          Comment: This was a clear win for the bankers. Several bank trade associations had filed a joint friend of the court
          brief in this case, arguing that Congress never intended to lift the damages cap on personal property loans.




          Independent Bankers Association of Texas                                                            www.ibat.org




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