Consumer Financial Services Alert - July 29, 2008

The Senate passed the Housing and Economic Recovery Act of 2008, H.R. 3221, that reforms the regulation of the GSEs, modernizes the FHA, and provides funds for FHA refinancings of distressed loans. The bill’s GSE provisions would create a new combined regulator for Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The bill would also increase Fannie’s and Freddie’s lines of credit with the Treasury Department, allow Treasury to purchase equity in Fannie and Freddie, and give the FRB authority to consult with the new GSE regulator on setting capital standards for the GSEs. In addition, the bill would authorize the FHA to insure up to $300 billion in refinanced mortgages, increase to $625,000 the size of loans Fannie and Freddie may buy in high-cost areas, allocate $3.9 billion to allow state and local governments to buy and repair foreclosed properties, provide $15 billion in housing tax breaks (including a credit of up to $7,500 for first-time homebuyers), offer up to $200 million to foreclosure-prevention programs, and increase the statutory limit on the national debt by $800 billion to $10.6 trillion. The Senate’s action clears the bill for President Bush’s expected signature. Click here for the bill.

A California federal court has ruled that most aspects of a borrower’s attempt to use California’s Unfair Competition Law to challenge various aspects of his loans is preempted by the Homeowners’ Loan Act. The court dismissed plaintiff’s UCL claims alleging “unfair or fraudulent” acts or practices and those based on alleged violations of California’s Financial Code because the claims challenged “the terms of credit,” “loan-related fees,” and “disclosure and advertising,” all of which are expressly preempted under HOLA’s implementing regulations. The court also found preempted plaintiff’s UCL claim based on alleged violations of the Truth in Lending Act because plaintiff was improperly seeking to use the UCL to expand both TILA’s limitations period and its class action damages cap. The court ruled the breach of contract claim was not preempted by HOLA, however, concluding that plaintiff was only seeking enforcement of the contract, not “imposing requirements on defendant’s lending practices.” Click here for Nava v. Virtual Bank, No. 08-069 (E.D. Ca., July 16, 2008).

A California appellate court recently held that a Nevada choice of law provision contained in California consumer loan agreements was unenforceable because it conflicted with state public policy. The Nevada-based lender made consumer loans in Southern California and its loan agreements contained Nevada choice of law provisions. Plaintiff filed a class action alleging that the lender violated California’s Finance Lenders Law. The court refused to honor the choice of law provision, holding that the “application of Nevada law would deprive a substantial segment of the borrowing public in this state of the substantive and regulatory protection California affords to all of its other customers” and “would impair California’s regulatory interests to a far greater extent than application of California law would impair Nevada’s interests.” Click here for Brack v. Omni Loan Company, Ltd., et al., No. D048198 (Cal. Ct. App. – 4th Dist. July 16, 2008).

The FDIC issued an interim rule establishing its practices for determining deposit and other liability account balances at failed banks. Under the rule, the FDIC will require banks to prominently disclose to sweep account customers whether the swept funds are deposits and the status of the swept funds if the bank were to fail. The FDIC is soliciting comment on all aspects of the rule. Comments are due by September 15, 2008. The rule becomes effective on August 18, 2008; however, the effective date of the sweep account disclosure requirement will be deferred until July 1, 2009, to allow the FDIC to consider comments. Click here for the rule. In related rulemaking, the FDIC also issued a proposed rule concerning recordkeeping requirements for qualified financial contracts held by banks in troubled condition. Click here for this proposal.

The FDIC issued a final rule requiring certain large banks to facilitate the process for determining the insurance status of depositors of a failed bank. The rule applies only to an estimated 159 “covered institutions,” defined as any insured depository institution with at least $2 billion in domestic deposits and either (1) more than 250,000 deposit accounts or (2) total assets over $20 billion, regardless of the number of deposit accounts. The rule takes effect on August 18, 2008, and allows for an 18-month implementation period. Click here for the rule.

The Massachusetts Division of Banks issued an opinion concerning the amendment to Massachusetts’ mortgage lender law that eliminated the licensing exemption for all nonprofit entities, effective July 1, 2008. In its opinion, the Division takes the position that licensure does not apply to a nonprofit agency or corporation incorporated under Massachusetts law, which is tax exempt under Section 501(c)(3) or 501(c)(4) of the Internal Revenue Code, and whose residential mortgage lending or brokering activities are solely limited to government programs and the use of public funds. Click here for the opinion.