CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2002 No.10 July 17, 2002

Vol 2002 No. 10 July 17, 2002

Midyear Legal/Judicial Update

Banking issues have taken more than their fair share of governmental attention this year. The judicial branch of government, in particular, while less visible than the legislative and executive branches, is abounding with banking disputes. This is a summary of some of the more significant developments affecting the business of banking in California.

Credit card minimum payments law on hold. As reported earlier, California's credit card minimum payment disclosure law (AB 865) was challenged in court under preemption and commerce clause grounds as applied to federally chartered financial institutions. AB 865 requires credit card issuers to disclose how long it would take consumers to pay off their debt if they made only minimum payments.

After a June 28 hearing in the United States District Court (Eastern District of California), the judge issued an order staying (suspending) implementation of the statute. The judge determined that there was insufficient information before the court for it to decide on the motion for preliminary injunction, and scheduled another hearing on November 8, 2002. In its order, the court determined that it "has serious concerns regarding the validity of at least portions of the statute," and issued the stay "so that [the court] may make an informed decision on a complete record." AB 865 was to become effective this July 1. Note that compliance with the law required lenders to track those borrowers who make only minimum payments for six consecutive months, beginning July 1. It is uncertain what effect the court action will have on this requirement.

Oakland predatory lending ordinances expanded by a state court. The California Superior Court judge hearing a challenge to the City of Oakland's predatory lending ordinances largely rebuffed arguments that they are preempted by state law (AB 344 and AB 489, passed last year). However, the court was sympathetic with the argument that the ordinances violated another law (Civil Code Section 1916.12) that was intended to preserve parity between state and federally chartered financial institutions. The ordinances specifically exempt federally chartered financial institutions.

Unfortunately, rather than overturn the ordinances because they single out state chartered institutions, the court simply struck the exemption. The city had exempted federal institutions from the ordinances partly because of the belief that those institutions would be exempted from local legislation (as the cities of San Francisco and Santa Monica are discovering with respect to ATM surcharge regulation). Thus, what the court accomplished, in an effort to sever an offending provision in one of the ordinances, was to expand its coverage beyond what the city itself had intended.

Oakland passed two ordinances--the first is similar in structure to the state predatory lending laws (but stricter), and the other prohibits the city from engaging the services of any financial institution that is a predatory lender within the meaning of the first ordinance. It defines a "high cost home loan" as one in which the APR threshold for first mortgage loans is 3 percent over the 90-day Fannie Mae or Freddie Mac "standard mandatory delivery commitment" (or 5 percent for junior mortgages), or in which the points and fees charged is the greater of 5 percent of the loan amount or $800. The ordinance applies to loans in which the secured residential property is located in the city of Oakland, and features the usual litany of restrictions. Some restrictions apply to all mortgage loans regardless of whether they come within the definition of "high cost mortgage loan." For a copy of the ordinances, please go to the CBA website at www.calbankers.com.

Escheat amnesty program ruled "retroactive." As reported earlier, the California state legislature passed a new bill (AB 227) that extends the amnesty period for the reporting of property that was not escheated to the State Controller's Office in a timely fashion. The bill gives businesses until December 31, 2002 to return property that was required to be reported on or before November 1, 1999. In a case decided on June 25, the Sacramento County Superior Court ruled that the amnesty law extends to payments of escheated property made before January 1, 2001, the effective date of AB 1888, the original amnesty bill.

In an action by the Controller's office against US Bank, the office alleged that the bank was liable for interest as a result of the bank's delivery of unclaimed property in November 1998, two years before the law was passed. The bank argued that the amnesty bill on its face applies to property delivered "at any time" before December 31, 2001. The bank also noted that Governor Davis had vetoed an earlier version of the legislation which only barred interest on payments of unclaimed property reported within a defined period. He believed that the bill would be unfair for those reporters who had voluntarily made payments before the law's effective date.

It is likely that the Controller's Office will appeal the decision. An action at the Superior Court (trial court) level does not have the authority of legal precedent. Also, the decision cannot be read to entitle a reporter to a refund of interest already paid to the Controller prior to January 1, 2001. This information is provided by Robert Stumpf of the law firm of Sheppard, Mullin, Richter & Hampton, which ably represented US Bank.

Financial privacy--Daly City and beyond. The Sacramento privacy battle has spilled over into Daly City, a territory just south of San Francisco and part of Senator Jackie Speier's Senate District 8. Senator Speier is the author of SB 773, one of the privacy bills still pending in Sacramento. The Daly City ordinance is up for a second reading on August 12, the final stage before passage. It prohibits any financial institution "located" in Daly City, which should be construed to mean one that has any office location in Daly City, from sharing any confidential consumer information with any "third party" without first granting a right of opt out. Third party is defined broadly to include any affiliate, subsidiary, or "agent" of the financial institution. CBA's James Clark, along with representatives of other groups, sent letters to the Mayor and City Council urging them not to pass the ordinance. Other municipalities, including San Francisco, are considering similar ordinances.

Yield spread premium class actions dealt another blow. In the latest in a string of judicial decisions involving yield spread premiums (YSPs), the Ninth Circuit affirmed a decision that lender-provided broker compensation does not constitute a per se violation of section 8 of the Real Estate Settlements Procedures Act (RESPA). The Ninth Circuit's decision was filed on June 10, 2002.

The plaintiff in Schuetz v. Banc One Mortgage Corp.obtained a loan through a mortgage broker, paid the broker $1,600 in fees, and her lender paid the broker $500 for the "above par" rate loan. Plaintiff moved for class certification, which was denied by the trial court. Upholding this decision, the Ninth Circuit cited HUD's 1999 and 2001 Policy Statements, which apply a two- pronged test: (1) whether the broker rendered services for the payments received; and (2) whether the total payments are reasonably related to those services. A section 8 violation may not be proven simply by introduction of evidence that a YSP was paid.

Schuetz follows another typical YSP case in the Eighth Circuit, Glover v. Standard Federal Bank, issued in March. That court denied class action status on the grounds that a class action may be certified only if questions of law or fact common to the members of a class predominate over those applicable to individual members. It noted that HUD's two-pronged test requires case-by-case determination of whether a broker's YSP compensation received in connection with each loan was reasonable in light of services rendered. Therefore, it would be infeasible to adjudicate the disputes as a class action. Taken together, these two decisions rendered after HUD issued its 2001 Policy Statement are formidable obstacles against future YSP class actions. This information was provided courtesy of the law firm of Severson & Werson, an affiliate member of CBA.

Earthquake insurance proceeds. You may recall that a California Court of Appeal (Ziello v. Superior Court) had held in 1995 that a mortgage lender had no security interest in earthquake insurance proceeds (EIP) because the security instrument granted such an interest only as to proceeds of insurance that the lender required the borrower to obtain. In that case, the borrower was deemed to have voluntarily purchased insurance and therefore was solely entitled to its proceeds.

In a decision issued in June (JEM Enterprises v. Washington Mutual Bank, FA), the lender (Coast Federal Bank, a predecessor by merger to Washington Mutual) was held to have a security interest in EIP even though it did not require the borrower to obtain earthquake insurance. The court found that the deed of trust created a security interest in EIP by virtue of its provision that assigned to the lender "all sums due and payable" to the borrower for damage to the secured property. An assignment provision in the deed of trust in the Ziello case encompassed only money received "by judgment or settlement," which did not apply where the insurer paid pursuant to the insurance contract. For those lenders who have used assignment provision similar to the one used by Coast, this decision should be beneficial on summary judgment motions when defending against similar actions related to the Northridge earthquake or future California earthquakes. This information was provided courtesy of the law firm of Stroock & Stroock & Lavan, an affiliate member of CBA.

Loose ends. There is still no word from the Ninth Circuit on two important banking matters: the ATM surcharge litigation and the Lopez v. Washington Mutual request for rehearing. As you will recall, the court is expected to issue a decision on whether the San Francisco propositionand the Santa Monica ordinance, both seeking to ban ATM surcharges within those city limits, are preempted by federal law. CBA and the other named plaintiffs won a lower court decision on summary judgment. As to Lopez, the case that prohibits the charging of overdrafts and overdraft fees on accounts containing social security funds, the court has yet to decide whether to grant a request for a rehearing.

One of the changes incident to the FDIC's restructuring is a change in the phone and address listed in adverse action notices. Rather than to list the regional director of the FDIC for the region in which the bank is located, state nonmember banks are to list the following centralized address:

FDIC Consumer Response Center
2345 Grand Boulevard, Suite 100
Kansas City, Missouri 64108

Affected banks are asked to make the appropriate changes to their adverse action notices "as soon as feasibly possible." The change does not affect any other notices, such as CRA notices. In addition to complaints regarding credit card specialty banks, which are currently handled at this Kansas City location, the new Consumer Response Center will investigate and respond to all consumer complaints, including those currently being handled by the FDIC's regional offices. Consumers may call the toll-free number (877-275-3342) regarding complaints. (See Financial Institutions Letter 73-2002 dated June 28, 2002.)

24th Annual CBA Regulatory Compliance Conference. Please join your colleagues at the Ritz Carlton Hotel and Spa in Pasadena this October 1-4 for the biggest and best regulatory compliance conference in the West. A brochure may be obtained from the CBA's website at www.calbankers.com.