Consumer Financial Services Alert - October 7, 2008

President Bush signed the Emergency Economic Stabilization Act of 2008 (H.R. 1424), authorizing the Treasury Department’s Troubled Assets Relief Program. The Program is to be administered by Treasury’s new Office of Financial Security in consultation with the FRB, OCC, OTS and HUD. Under the Program, Treasury has graduated authority to purchase up to $700 billion in financial institution assets (including whole loans or securitized assets), of which $250 billion will be available immediately, $100 billion with Presidential certification, and $350 billion following a Presidential request and a 15-day waiting period in which Congress may object by joint resolution. Treasury is authorized to manage and sell troubled assets or enter into securities loans, repurchase transactions or other financial transactions. In addition, the law (1) requires servicers of assets acquired by the Treasury to engage in reasonable foreclosure mitigation efforts, such as term extensions, rate reductions, and principal write downs, (2) places limitations on executive compensation for entities that sell assets to the government under the Program, and (3) temporarily increases the FDIC’s deposit insurance from $100,000 to $250,000. Click here for the law.

The FDIC adopted an interim rule aimed at simplifying and modernizing deposit insurance rules for revocable trust accounts. The rule eliminates the concept of qualifying beneficiaries. For account owners with revocable trust accounts totaling no more than $500,000, coverage will be determined without regard to the beneficial interest of each beneficiary in the trust. Under the rule, a trust account owner with up to five different beneficiaries named in all his or her revocable trust accounts at one FDIC-insured institution will be insured up to $100,000 per beneficiary. Revocable trust account owners with more than $500,000 and more than five different beneficiaries named in the trust(s) will be insured for the greater of either $500,000 or the aggregate amount of all the beneficiaries' interests in the trust(s), limited to $100,000 per beneficiary. The effective date of the rule is September 26, 2008. Written comments must be received by the FDIC no later than December 1, 2008. Click here for the rule.

A federal judge in Augusta, Georgia granted a motion to compel arbitration and stayed all proceedings in a class action in which plaintiffs alleged that Select Portfolio Servicing, Inc. failed to properly adjust plaintiffs’ interest rate, required plaintiffs to overpay on their loans, and otherwise did not properly service the loans. The court compelled arbitration over plaintiffs’ arguments that the Federal Arbitration Act did not apply, that the arbitration agreement was unenforceable because plaintiffs did not initial it, that plaintiffs’ equitable claims were not arbitrable and that the arbitration agreement was unconscionable. Goodwin Procter partners Tom Hefferon and Joe Yenouskas represented defendants.

The Massachusetts Office of Consumer Affairs and Business Regulation issued final regulations affecting all entities having personal information of Massachusetts residents. The regulations have broad coverage, applying to all entities that own, license, store or maintain personal information about Massachusetts residents, regardless of whether or not the entity has operations in Massachusetts. Federally regulated financial and other entities are not exempt from the regulations, raising the question of whether entities that are in compliance with Gramm-Leach-Bliley, HIPAA and/or SEC information security requirements will be considered to meet the new Massachusetts requirements. “Personal information” has a somewhat limited scope, and is defined as a resident’s first and last name or first initial and last name in combination with a Social Security number, driver’s license number or financial account number. The regulations impose two principal requirements: (1) the duty to develop, implement and maintain a very comprehensive written information security program that meets very specific requirements; and (2) the obligation to meet specific computer information security requirements. The regulations go into effect on January 1, 2009. Click here for the regulations and here for a separate Client Alert on the regulations.