Consumer Financial Services Alert - June 15, 2010 June 15, 2010
In This Issue

Court Dismisses Lawsuit Alleging Lender and Appraisal Management Company Owe Appraisers Common Law Duty of Fair Procedure Prior to Removal from Approved Vendor List

The U.S. District Court for the Northern District of California dismissed with prejudice a class action lawsuit filed by appraisers against lender Wells Fargo Bank, N.A. and its appraisal management company, Rels Valuation. The appraisers alleged that the companies owed appraisers a common law duty of fair procedure prior to removing them from an approved vendor list. The Court determined that lenders and appraisal management companies are not “gatekeeper organizations” with the substantial power to significantly impair an individual’s ability to work in the appraisal field such that they have a duty to provide fair procedure under California law. The Court rejected the argument that the appraisers’ loss of income following their removal from the approved list demonstrated sufficient power to attach a duty of fair procedure, noting that neither the lender nor the appraisal management company regulated the appraisal industry and the removal did not affect the appraisers’ ability to perform appraisals for other lenders. The Court also dismissed the appraisers' common law conspiracy claim based on the same conduct. Notably, the Court dismissed the lawsuit with prejudice because the appraisers had amended their complaint after the Court dismissed their prior claims for a violation of the Racketeer Influenced and Corrupt Organizations Act, California’s unfair competition law, and common law interference.  David Permut and Brooks Brown represented Wells Fargo. Click here for Sound Appraisal, et al. v. Wells Fargo Bank, N.A., et al. (No. C 09-01630 CW).

OCC Issues Bulletin on National Flood Insurance Program Lapse

The OCC issued a bulletin which provides guidance to national banks on how to deal with periods during which the authority of the Federal Emergency Management Agency to issue flood insurance contracts under the National Flood Insurance Program has lapsed. On May 31, 2010 the current reauthorization of the National Flood Insurance Program lapsed. The bulletin also provides guidance that will apply if there are any future lapses in the National Flood Insurance Program.

According to the OCC, national banks may continue to make loans subject to the Flood Disaster Protection Act and OCC regulations without flood insurance when the National Flood Insurance Program is not available. However, national banks must continue to make flood determinations, provide timely, complete, and accurate notices to borrowers, and comply with other parts of the flood insurance regulations. In addition they must evaluate safety and soundness and legal risks and manage those risks during the lapse period. Further, national banks should have a system in place to ensure that policies are obtained as soon as available following reauthorization for properties that are subject to mandatory flood insurance coverage.

Click here for the OCC’s bulletin and here for a memorandum from FEMA regarding the lapse.

HUD Issues Advance Notice of Proposed Rulemaking on RESPA’s “Required Use” Prohibition

HUD issued an Advance Notice of Proposed Rulemaking seeking public comment on complaints that homebuilders are offering homebuyers discounts and upgrades in exchange for agreeing to use the homebuilder’s affiliated mortgage lender without giving the homebuyers adequate time to research the contract or to seek other loan offers. According to HUD, comments provided may be used in a future revision or clarification of the Real Estate Settlement Procedure Act’s “required use” rule, which prohibits the required use of affiliated settlement service providers. In particular, HUD seeks comments on (1) how to arrange the rule so that it prohibits only those affiliate arrangements that harm consumers, (2) the effects of forward loan commitments purchased by homebuilders from mortgage lenders, (3) how the pricing and appraisal value of a home is affected when a homebuyer receives incentives from a homebuilder, (4) state and local enforcement agencies’ experiences with affiliate arrangements, (5) the benefits of the “one-stop shopping” option that affiliate arrangements provide to homebuyers, and (6) the distinction between providing a homebuyer with an incentive to use a particular mortgage lender and providing a disincentive against using any other mortgage lender. Comments are due by September 1, 2010. Click here for the notice.

FDIC Issues Guidance Deposit Placement Activities

The FDIC issued guidance on what steps insured institutions that collect or place deposits on behalf of customers must take to insure that customers’ deposits are eligible for pass-through insurance when an institution enters into third-party arrangements to collect and place deposits. According to the guidance, banks must (1) maintain records showing that the deposit is eligible for pass through insurance, (2) maintain detailed records of the name and location of the bank receiving the deposits, the owners of the deposits, and the amount, interest rate and maturity date of the deposits, (3) provide customers with the name of the receiving bank and the amount deposited, (4) ensure that marketing materials, customer statements, and disclosures are not misleading and accurately represent FDIC coverage of the deposits, and (5) provide training for all relevant personnel involved in collecting and placing deposits from third parties and affinity groups. Click here for the guidance.