Capitol Hill - Capitol Comments

In Farfaras v. Citizens Bank and Trust of Chicago, http://caselaw.lp.findlaw.com/data2/circs/7th/052082p.pdf, a former bank employee was steadily subjected to inappropriate comments by her employer’s director, by the bank’s president, and by the CEO/Chairman of the Board. Ms. Farfaras was subject to a steady stream of inappropriate comments and actions by each of the individual bank employees, and after her voluntary termination, she brought suit against the individual employees and the bank on the basis of assault, battery and sex discrimination. The jury awarded Ms. Farfaras a $200,000 judgment against the bank, which was later reduced by the court to $50,000. In addition, the district court awarded Ms. Farfaras $436,766.75 in attorneys’ fees and costs, plus $9,314.48 in lost wages. The Seventh Circuit held that the former bank employee was entitled to recover damages and attorneys fees not only from the three individual bank employees but also from the bank itself. The court also stated that there was no error in the granting of compensatory and punitive damages, since the punitive damages award was not duplicative of the compensatory damages, but was calculated to achieve a different goal: deterrence of similar future conduct.

Comment: Every bank must provide a safe working environment, not only safe from a standpoint of preventing workers comp claims, but also safe from inappropriate behavior by other employees. This underscores the need for every bank to have a code of conduct and ensure that it is enforced, even against the bank’s CEO/Chairman. Lack of enforcement of a code of conduct may result in the bank being liable for the inappropriate actions of other employees, in addition to being liable for attorneys’ fees and punitive damages.

In a joint news release, the federal bank regulatory agencies have given advanced notification of proposed rulemaking, revising the Call Reports to conform with the Deposit Insurance Reform Act of 2005, which increased deposit insurance limit for certain retirement plan deposit accounts from $100,000 to $250,000. The link to the ANPR is: http://www.fdic.gov/news/news/financial/2006/fil06044.html. The reason for the short 14-day comment period is because the law was enacted in February 2006 and the FDIC issued its interim rule effective April 1.

CLASS ACTION SUIT NOTICES—OCC

The Class Action Fairness Act of 2005, http://frwebgate.access.gpo.gov/cgi-bin/useftp.cgi?IPaddress=162.140.64.88&filename=publ002.pdf&directory=/diskb/wais/data/109_cong_public_laws, requires notification to appropriate federal and state officials of proposed class action settlements, which we reported last year in this newsletter. The bank regulators are now providing guidance for filing notices of proposed class action settlements under this law. Within 10 days of filing the proposed settlement with the court, the notice should be sent to the institutions supervisory office and the director of litigation. The notice must include the following eight items:

Comment: We don’t know why only the OCC has come out with this guidance. In any event, class action suits are more likely to be aimed at very large banks (deep pockets) than community banks.

The FDIC has issued revised compliance examination procedures that update the procedures issued in 2003. In 2004 the FDIC conducted banker outreach meetings, and as a result of the banker input, the FDIC made a number of changes to the examination procedures that should improve the focus of the examination and also reduce the regulatory burden. The latest version of the compliance examination procedures, along with appendices that contain templates for standard examination documents, including the new interview sheet, the entry letter and Compliance Information and Document Request, and the Report of Examination, can be accessed at: http://www.fdic.gov/regulations/compliance/manual/revised.html.

Comment: We are in favor of anything that reduces compliance burden. Hopefully, the new compliance examination procedures will be easier for bankers to deal with. We hope that the other banking agencies will do something similar.

The FDIC has voted to keep the assessment rates charged to insured banks and savings associations unchanged for the second half of 2006. See the Press Release at: http://www.fdic.gov/news/news/press/2006/pr06045.html. In the meantime, the FDIC has issued three proposed rulemaking notices; one dealing with the one-time assessment credit, http://www.fdic.gov/news/board/0659r4.pdf, another one dealing with dealing with the merged fund dividend requirements, http://www.fdic.gov/news/board/0659r5.pdf, and the third one dealing with the operational requirements of the assessment system, based on institutions’ risk profiles, http://www.fdic.gov/news/board/0659r6.pdf.

Comment: The proposals are all pursuant to the Deposit Insurance Reform Act of 2005, which not only changed deposit insurance amounts, but also changed the method of assessments.

During the month of May, NACHA and the Federal Reserve Banks, together with banks, credit unions, non-profit associations, business and governments across the nation will once again be asking consumers to increase their use of Direct Deposit and Direct Payment in place of paper checks. A recent study showed that large companies are much more likely to use Direct Deposit that small and medium size businesses. Although 75% of small businesses were aware of Direct Deposit, only 26% used the service to pay their employees. Direct Deposit can be a time and money saver for businesses, and it can be a more convenient and secure method of payment for employees. See the NACHA News Release for more details at the following link: http://www.nacha.org/news/news/pressreleases/2006/Pr041206/pr041206.htm.

Comment: We remember the time when direct deposit of payroll was not generally available, and what a hassle that was! We would have to take time off from work to go to the bank and deposit the paycheck, make the rent or mortgage payment, and get cash back. Usually this would be the same day that the Social Security checks arrived in the mail, and the bank lobby would be full of employees depositing their paychecks and making other transactions and retirees depositing their Social Security check and making other transactions. The bank tellers seemed as annoyed as the customers, and it was definitely not a pleasant banking experience.

Fair Lending Examination Procedures, April 2006 - Revised Consumer Compliance booklet is now incorporated in the Comptroller's Handbook. Please note several changes in Regulation B and the "Interagency Fair Lending Procedures" issued in 2004. www.occ.treas.gov/handbook/fairlep.pdf.

Comment: We have previously discussed the Interagency Fair Lending Procedures in this newsletter upon its effective date. Similarly, we have discussed the changes to Reg B, specifically the evidence of a joint application that must be evidenced on the application, which they sneaked in by way of the Commentary to Reg B and Appendix B. So there should not be much in the Fair Lending Examination Procedures that you are not already aware of.

The OCC is publishing Spanish-language materials explaining the agency’s consumer assistance programs, http://www.occ.treas.gov/Spanish/customer_spanish.pdf. Meanwhile, the Texas Department of Banking has added Leilani Lim to staff in the position of financial education coordinator for minorities. Among other things, the Department has added a Financial Education Section to their webpage in both English and Spanish, http://www.banking.state.tx.us/EXEC/PRESS/pr06_04-10.htm?id=1493&PHPSESSID=rc7814ks3rijg9qpsc2egqph70.

Comment: It seems to us that if we could get immigrants assimilated into the U.S. financial system, there would be less of an issue about how to keep them out or to punish those who have jobs in this country. They would then be productive, tax-paying workers, making it easier to get money to support their families in their country of origin; and that, in turn, should ease the pressure for additional emigration.

In a Special Compliance Bulletin dated October 18, 2005, http://www.ibat.org/ch_cbulletin_051018.asp, we updated you on the status of the lawsuit filed by ACORN against the Finance Commission and the Credit Union Commission acting jointly in promulgating certain of the Interpretive Rules regarding home equity lending, which the joint commissions were authorized to do by a constitutional amendment in 2003. In that Special Compliance Bulletin we told you about a letter that the presiding judge of the district court had sent to the parties, indicating how he was going to rule. At that time, we thought the ruling would follow shortly. After months of legal maneuvering, a final summary judgment and temporary stay order was issued May 1, 2006. As expected, the order invalidated a number of the interpretive rules. However the order does state “It is further ORDERED that this judgment is stayed in all respects for thirty days, and the rules declared to be invalid by this judgment remain in effect during that time regardless of whether this judgment is superseded by the posting of a bond, filing notice of appeal or other action of a party.” In short, the interpretative rules are still valid until June 1, 2006, during which time we expect that an appeal will be filed, and that will mean that the rules will remain in effect until an appellate court rules.

Comment: A Notice of Appeal was filed on May 2, http://www.fc.state.tx.us/Home%20Equity/acorn-appeal.pdf. That means the order will be further stayed pending the decision of the court of appeals. In the meantime, the joint commissions have published for comment revised interpretive rules which will probably be adopted at the next joint commissions meeting on June 9. Additionally, in the meantime, if you want to continue making home equity loans without having to rely on the Interpretive Rules, see the Q&A section in the Special Compliance Bulletin referred to above.

In the case of Guerra v. Regions Bank, http://www.texasbarcle.com/materials/digests/opinions/18902.pdf, Jerry L. Maines opened a joint checking account under his name and the name of Pedro Guerra. Maines listed his address as 600 Baylor Drive, Apartment 234, Longview, Texas, and he listed Guerra’s address as 600 Baylor Drive, Apartment 231, Longview, Texas. Maines opened the account with a tax refund check payable to Pedro Guerra in the amount of $300. The account card Regions had on file showed Guerra’s address, a social security number, home phone number and date of birth. The account card also included a notation that Guerra was identified by an “Arkansas identification.” It appears Guerra never went in person to open the account.

Once the account was opened, some 31 checks were written against the account by “Pedro Guerra,” and virtually all of them were returned NSF. The IRS served a request for reclamation on the bank, as Pedro Guerra, whose address was 1407 North Eastman Road, Apartment C, Longview, Texas, claimed that Maines had cashed his check. Maines was arrested, and in his possession was a driver’s license bearing the name of “Pedro Hugo Guerra” with the Baylor Drive address in Longview. Eight merchants in Longview had filed charges against Pedro Guerra at the Baylor Drive address in Longview, and the Gregg County DA’s Office had issued a warrant for Guerra’s arrest. A month later, the police in the City of Bellaire, some 200 miles from Longview, stopped a person named Pedro Guerra for running a red light and for not having auto insurance. During the traffic stop, the police discovered the Gregg County warrant for Pedro Guerra that had the Bellaire Guerra’s driver’s license listed on it. The wrong Guerra was hauled off to Gregg County, where he spent about a week in jail before he was cleared and released, and it is this Guerra that sued the bank for negligence in opening the checking account.

Summary judgment in favor of the bank was affirmed. Because Guerra was not a bank customer and had no other relationship with the bank, as a matter of law, the bank owed no duty to him. It was not reasonable to expect the bank to foresee that an individual with the same first and last name living over 200 miles away would be affected by the opening of this checking account.

Comment: We believe the bank was lucky on this decision. Had the bank done its identification due diligence, the account would never have been opened in the first place. They may have had an Arkansas driver’s license, but they never compared the photo with the person who was not present in opening the account.

FinCEN has issued further guidance on whether a business that cashes its own employees’ payroll checks is a money services business, plus two other business check related questions: http://www.fincen.gov/msb_faqs_guidance_03312006.pdf.

Comment: We are happy to see that these three scenarios are not considered MSBs. There are enough problems in monitoring accounts that we know fall under the classification of Money Services Businesses.

FinCEN has issued an advisory about a growing money laundering threat involving the smuggling large amounts of U.S. currency into

Mexico

, http://www.fincen.gov/advis04282006.html. This trend has been on the increase because of the combined efforts of U.S. financial institutions and law enforcement have made it much more difficult for drug traffickers to place currency proceeds directly into

U.S.

financial institutions. Thus the drug traffickers are turning to other methods of getting U.S. currency into

Mexico

, such as:

· The sale of large denomination U.S. bank notes to Mexican institutions by

U.S.

banks;

· Small denomination U.S. bank notes smuggled into

Mexico

being exchanged for large denomination U.S. bank notes processed by Mexican financial institutions.

· Large volumes of small denomination U.S. bank notes being sent from Mexican casas de cambio to their accounts in the U.S. via armored transport, or sold directly to

U.S.

banks;

· Multiple wire transfers initiated by casas de cambio that direct U.S. financial institutions to remit funds to jurisdictions outside of Mexico that bear no apparent business relationship with the casa de cambio;

· The exchange of small denomination U.S. bank notes for large denomination U.S. bank notes that may be sent to jurisdictions outside of Mexico, including jurisdictions associated with Black Market Peso Exchange-type activities;

· Deposits by casas de cambio to their accounts at a

U.S.

financial institution that include third party items, including sequentially numbered monetary instruments; and

· Deposits of currency and third-party items by Mexican casas de cambio to their accounts at Mexican financial institutions and thereafter direct wire transfers to the casas accounts at

U.S.

financial institutions.

Comment: The success of the BSA/AML regulations has prevented the drug traffickers from laundering money directly through U.S. financial institutions, so now they are turning to smuggling U.S. currency, less directly involving U.S. financial institutions. Be alert to any of the transactions described in the Advisory.

NACHA, at the recommendation of its outside counsel, has approved a Code of Conduct, establishing in writing the standards of behavior expected of NACHA members and participants. The overwhelming majority of members and participants are already abiding by these rules, but it gives NACHA, by application for membership renewal, the opportunity to disassociate itself from any organization that does not follow the rules. The link to the Code of Conduct is: http://www.nacha.org/NACHA_Issue_Alert_2006-1.pdf.

Comment by Dennis Simmons of SWACHA: NACHA wants to distance itself from any entity that uses any of the payments system, but especially ACH, to originate illegal or

unscrupulous transactions into the payments stream. This would include third party processors or senders that have high return rates, those that have been subject to enforcement actions by regulatory authorities and state attorneys general. We have been faced with the situation in the past where a financial institution is a member of a NACHA council and it has been originating transactions that were ultimately subject to an FTC action or an OCC action stemming from those transactions, which casts an unfavorable light on NACHA.

The Texas Department of Banking Agency Profile of March 2006 (statistics as of December 2005) is available at the following link: http://www.banking.state.tx.us/PODES/maindog.pdf.

The Condition of the Texas State Banking System in Texas, a joint study by the Texas Department of Banking and the Texas Department of Savings and Mortgage Lending, presented to the Texas Finance Commission, is available at the following link: http://www.fc.state.tx.us/Reports/conditionofbank03-06.pdf.

The Regional Update of the Federal Reserve Bank of Dallas, dated April 2006, indicates that the near-term outlook for the Texas economy is favorable. Consumer confidence in the West South Central census region (of which Texas residents make up 68 percent) remains higher than consumer confidence in the nation as a whole, http://dallasfed.org/eyi/regional/archived/0604update.html.

Texas A&M has issued a Texas Real Estate Market Report 2006 that covers the state’s 25 metropolitan statistical areas: http://www.recenter.tamu.edu/mreports/.

The FDIC Regional Profile and the FDIC State Profiles identify flat yield curve and slowing housing markets as possible sources of concern for the remainder of the year, http://www.fdic.gov/news/news/press/2006/pr06036.html.

Appleseed, a nonprofit community development organization, offers a toolkit for reaching the unbanked in the Latin American community, http://appleseeds.net/servlet/GetArticleFile?articleFileId=184, which contains ideas and success stories on topics such as financial education, international remittances, home mortgages, account opening identification procedures and cross-selling services.

The Fed has a new Data Download application from which data from the following four releases are now available: Industrial Production and Capacity Utilization (G.17), Flow of Funds Accounts of the United States (Z.1), Commercial Paper, and Selected Interest Rates (H.15). The link is: http://www.federalreserve.gov/datadownload/.

U.S. Census and Department of Housing and Urban Development are used to determine income levels of geographies in Community Reinvestment Act performance evaluations: http://www.occ.treas.gov/ftp/bulletin/2006-21a.pdf.

The Spring 2006 edition of the OCC’s Community Developments provides strategies and recommendations aimed at preserving homeownership by preventing mortgage foreclosures. The link to the publication is: http://www.occ.treas.gov/cdd/spring06b/cd/index.html.

The OCC’s Quarterly Journal, Volume 25-No. 1 for the 4^th quarter of calendar year 2005 can be found at the following link: http://www.occ.treas.gov/qj/qj.htm.

In the case of Lister v. Lee-Swofford Investments, L.L.P., http://www.texasbarcle.com/materials/digests/opinions/18963.pdf, the Listers were the makers of notes payable to First State Bank of Miami, Texas, secured by liens on collateral that included the inventory and equipment of their business, Lisco Tractor Parts. There was a default on the notes and the bank took possession of the collateral and sold it at a public auction for $13,644. After expenses, the amount applied against the debt was $6,304.19, and then the bank sued to collect the deficiency balance on the notes. The Listers asserted in their answer that the equipment and inventory had not been sold in a commercially reasonable manner. They also asserted counterclaims for damages caused by the improper disposition of the collateral. After a trial to the court, judgment was granted against the Listers for $181,629.79. They appealed the trial court’s finding that the collateral was sold in a commercially reasonable manner. The Court of Appeals affirmed the trial court’s decision.

Comment: We recommend that you read this case for the details concerning the sale of the collateral and the analysis of Article 9 of the UCC, the controlling law on disposition of collateral after default. Although this is a Texas case and the citations are to the Business and Commerce Code, all states have adopted a version of Article 9, and the results would probably be the same, given the same facts, in other states. Although there was testimony that some of the tractor parts were sold at bargain-basement prices, the public auction was advertised extensively, and the fact that more specialty dealers did not show up to bid up the prices did not render the sale commercially unreasonable.

SECURED LENDING—FINANCING STATEMENTS AND REVISED UCC ARTICLE 9

The Permanent Editorial Board for the UCC issued a report discussing some issues concerning UCC Section 9-705, and in particular the further continuation statements that were continued during the first half of 2001. Secured parties who are protected by financing statements that were filed under former Article 9 and the effective of which has not been continued under Revised Article 9, generally need to take action by June 30, 2006 in order to maintain the perfection of their security interests. We recommend that you seek legal counsel for interpretation and guidance and take appropriate action. The link to the PEB report is: https://www.ali.org/ali/DEC2005PEB-statement.pdf.

Comment: We understand that most states’ UCC filing offices have already notified secured parties. The greater risk is that affected secured parties will file continuations too EARLY rather than too LATE. The applicable section of the UCC (and the section that is causing the problem) is explicit that they must be filed no later than June 30, so anyone who had read that section should realize they must file a continuation by June 30. The problem is whether the normal six-month window runs backward from June 30 or whether it runs backward from the later date the filing would have expired but for the revision to the UCC. If a filing would have been good until December 1, 2006 but for the revision, when is the earliest the continuation can be filed? Is it six months before December 1, leaving a one-month window to file the continuation (June 1-30)? Or is it six months before June 30? If the former is correct, there could be some awfully small filing windows – one day in the case of a filing that otherwise would expire on December 30. Unfortunately the UCC is ambiguous on this point. Thanks to Roger Bartlett, an IBAT Affiliate Member attorney, at to IBAT’s General Counsel Karen Neeley for pointing this out.

USA

PATRIOT ACT—INTERNATIONAL CORRESPONDENT BANKING AND PRIVATE BANKING PROVISIONS

Here is a link to the final rule: http://a257.g.akamaitech.net/7/257/2422/01jan20061800/edocket.access.gpo.gov/2006/pdf/06-3045.pdf.

Comment: We don’t think many community banks have international correspondent bank accounts or private banking accounts to warrant further discussion, but they are considered higher risk and do require more oversight. So, if applicable, here is another reason to hate the USA PATRIOT Act.