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FHFA Holds Maximum Loan Limits Steady for 2013
On November 29, the FHFA announced that the maximum conforming loan limits in 2013 for mortgages acquired by Fannie Mae and Freddie Mac will remain unchanged from the current levels. The FHFA announcement includes the full list of county-level loan limits, which are $417,000 across most of the country for one-unit properties. Under the Housing and Economic Recovery Act (HERA), the FHFA is required to adjust the baseline loan limit each year to reflect changes in the national average home price. However, HERA also requires that, following a period of declining home prices, prior price declines be fully offset before a loan limit increase can occur. The FHFA determined that despite evidence of price increases over the past year, those increases have not been sufficient to offset prior price declines and, therefore, the baseline could not be adjusted.
Eleventh Circuit Holds Bank Security Procedure Insufficient to Provide Safe Harbor from Liability for Fraudulent Wire Transfer
On November 27, the U.S. Court of Appeals for the Eleventh Circuit held that a bank may be liable for an allegedly fraudulent in-person wire transfer because it failed to implement a commercially reasonable security procedure to verify the authenticity of the wire transfer order and to detect transmission or content errors. Chavez v. Mercantil Commercebank N.A., No. 11-15804, 2012 WL 5907151 (11th Cir. Nov. 27, 2012). The plaintiff, a Venezuelan resident who opened an account at a Florida bank, elected a security procedure under the account’s Funds Transfer Agreement that provided only that the bank require written authorization by him in order to process any orders for the account. The plaintiff sued the bank for lost funds, claiming that the bank allowed an unauthorized individual to initiate a fraudulent in-person wire transfer of funds out of the account. The district court granted summary judgment in favor of the bank, holding that state law creates a safe harbor that relieves banks of liability for fraudulent payment orders if the bank and the customer agree to a commercially reasonable security procedure and the bank follows that procedure in good faith. The appellate court held that the agreed-upon security procedure was not in fact a security procedure as defined by statute. The court explained that state law disavows security procedures that require only a comparison of a signature on a payment order with an authorized specimen signature of the customer. In this case, the security procedure required written authorization, but was silent as to how the bank was to verify that authorization, i.e., it did not even require that the signature be compared to one on file. The court held that because the bank and the account holder did not agree to a security procedure, the bank could not seek safe harbor protection and reversed the district court’s order. One judge dissented from the majority opinion and argued that the Funds Transfer Agreement encompassed both the required and discretionary security procedures, which, taken together, were commercially reasonable and followed in good faith, therefore affording the bank safe harbor protection.
House Financial Services Subcommittees Hold Joint Hearing on Impact of Basel III Proposals
On November 29, two Subcommittees of the House Financial Services Committee held a joint hearing regarding the federal banking agency proposals to implement the Basel III international regulatory capital accords. As with a Senate hearing on the same topic last week, committee members focused bipartisan attention on the proposals’ potential impact on community banks and insurance companies that are holders of depository institutions. The committee also explored the interplay between the Basel III proposals and the pending rules to set forth the “qualified mortgage” standard and the “qualified residential mortgage” standard. The regulators promised lawmakers that they would carefully consider the concerns of community bankers. The regulators did not provide a timeline for their final rulemaking.
U.S. Supreme Court Passes on Two Banking Cases
This week the Supreme Court denied petitions for a writ of certiorari in two banking-related appeals. In Cummings v. Doughty, No. 12-351, the petitioners, a bank and its CEO, asked the Supreme Court to determine whether the safe harbor established by the Annunzio-Wylie Anti-Money Laundering Act provides absolute (versus qualified) immunity from claims that arise from the submission of a suspicious activity report (SAR). The petitioners were appealing a Louisiana state court holding, which the state appellate courts declined to review, that denied petitioners immunity under the Act after the CEO reported a bank president for possible suspicious activity. The bank president claimed that the petitioners lacked a good faith basis to report him and, therefore, could not receive absolute immunity. The petitioners argued that the First Circuit and the Second Circuit have held, based on the plain language of the Act, that financial institutions have absolute immunity from any cause of action relating to the submission of a SAR, while the Eleventh Circuit has held that the Act only grants qualified immunity. The Supreme Court declined to remedy the apparent circuit split.
In Parks v. MBNA America Bank, N.A., No 12-359, the Supreme Court denied review of a California Supreme Court decision that held that the National Bank Act preempts state requirements that certain disclosures accompany preprinted or “convenience checks” provided by a credit card issuer to its cardholders. The plaintiff filed suit on behalf of a putative class after he used such checks and was assessed finance charges that were greater than those that he would have been assessed had he used his credit card instead. He alleged that California law requires certain disclosures to be provided with the checks, including those related to convenience checks. In June, the California Supreme Court held the specific disclosure obligations imposed by the state law at issue, including precise language and placement of the disclosures, exceeded any federal law requirements and is preempted as an obstacle to the broad grant of power given to national banks by the NBA to conduct the business of banking.
FinCEN, Federal Reserve Board Propose Changes to Certain Bank Secrecy Act Definitions
On November 29, FinCEN and the Federal Reserve Board announced that they are seeking comments on a proposed rule to amend the definitions of "funds transfer" and "transmittal of funds" set forth in the regulations implementing the Bank Secrecy Act. The proposed rule explains that the changes are designed to ensure that the current scope of the definitions is not expanded, following recent related amendments to the Electronic Fund Transfer Act. Comments on the proposed rule are due by January 25, 2013.
Republican House Members Elect Representative Hensarling Financial Services Committee Chairman, Representative Waters Expected to Fill Ranking Member Position
On November 28, the Republican caucus of the House of Representatives elected Representative Jeb Hensarling (R-TX) Chairman of the House Financial Services Committee for the 113th Congress, which will convene next year. Mr. Hensarling has served as the vice-chair of the Committee under Representative Spencer Bachus (R-AL) who could not retain the position due to caucus-imposed term limits. In a statement, Mr. Hensarling expressed his commitment to “end[ing] the phenomenon of ‘too big to fail’ and reinstat[ing] market discipline,” as well as reducing taxpayer risk and cutting the weight, volume, complexity, and uncertainty of federal regulations. Democrats reportedly are expected to elect Representative Maxine Waters (D-CA) to succeed retiring Representative Barney Frank (D-MA) as Ranking Member on the Committee.
Ohio Supreme Court Upholds Dismissal of Class Action Challenging Bank's Interest Calculation Method
On November 21, the Ohio Supreme Court reinstated a lower court’s grant of summary judgment to a bank defending a putative class action challenging its interest calculation method as described in its promissory note for a commercial loan. JNT Properties, LLC v. KeyBank N.A., No. 2012-Ohio-5369, 2012 WL 5911063 (Ohio Nov. 21, 2012). The borrower alleged that the bank was in breach of contract by calculating interest using the 365/360 method, resulting in a higher effective rate than the rate stated in the promissory note. The bank maintained that the note clearly fixed the interest rate according to the 365/360 method. The trial court found in favor of the bank on summary judgment, but the appellate court reversed, concluding that the note was ambiguous and created a genuine issue of material fact as to which interest rate the note meant to impose. The Ohio Supreme Court reversed the appellate court and reinstated the trial court’s grant of summary judgment in favor of the bank. It held that the note’s “inartful use of the term ‘annual interest rate,’ which is clearly at variance with the next phrase setting the 365/360 method as the applicable method for computing interest,” does not render the clause defining the interest calculation method ambiguous. The court reasoned that the note was not so confusing that a reasonable person would think that the rate would be calculated using something other than the 365/360 method, and held that the note made clear that the term being defined was not the annual interest rate, but rather the interest computation method.
CFPB Announces Remittance Transfer Rule Delay and Changes
On November 27, the CFPB issued a bulletin announcing that it intends to delay the effective date of the new remittance transfer rule finalized earlier this year and already once modified. Per Bulletin 2012-08, the CFPB plans to pursue a fast-track rulemaking next month to alter provisions of the final rule relating to: (i) situations in which incorrect account numbers are provided by senders of remittance transfers, and (ii) the disclosure of certain foreign taxes and fees charged by financial institutions receiving remittance transfers. The rulemaking also will propose an extension of the February 7, 2013 effective date of the rule until 90 days after the CFPB finalizes the rulemaking. The CFPB’s Bulletin follows pleas from industry groups and Members of Congress to change the rule and the implementation timeline. The CFPB action also follows an announcement this week by the Federal Home Loan Bank of New York (FHLBNY) that it plans to stop processing international wire transfers for its members on December 31, 2012, based on its concern that the CFPB rule would create potential risks that are too great for what the FHLBNY considers a non-core service.
Federal District Court Protects Law Firm Advice to Bank Directors Sought by FDIC as Receiver
On November 19, the U.S. District Court for the Northern District of Illinois held that the FDIC, as receiver for a failed bank, is not entitled to memoranda prepared by a law firm in connection with the firm’s representation of two directors of the failed bank. FDIC v. Belongia Shapiro & Franklin, LLP, No. 12-2889, 2012 WL 5877559 (N.D. Ill. Nov. 19, 2012). The FDIC petitioned the court to enforce an administrative subpoena seeking legal opinions the firm provided to the bank in which the firm counseled the bank to pay the legal fees of bank personnel in three lawsuits. The court held that even though the FDIC stands in the shoes of the bank and generally holds any privilege the firm may assert, the firm was not required to turn over its legal advice provided to two of the bank’s directors who faced an administrative enforcement action by the FDIC. The court reasoned that because the firm was providing advice to the directors and not to the bank, the FDIC does not hold the attorney-client privilege. Further, the court explained that even though the firm provided advice to the bank before it represented the individual directors, such representation does not establish a joint-client or common interest exception to the privilege. Moreover, the bank’s payment of the firm’s fees does not entitle the bank to be privy to the firm’s communications with the directors. The court did require the firm to produce materials regarding two other matters in which the firm provided advice to the bank.
Federal Banking Regulators Issue Statement on Conversions of Troubled Banks
On November 26, the Federal Reserve Board, the FDIC, and the OCC, together with the CSBS, issued guidance on implementation of section 612 of the Dodd-Frank Act, which imposes restrictions on conversions of national banks and federal savings associations to state-chartered institutions and vice versa. As the Interagency Statement describes, section 612 generally prohibits such charter conversions while an institution is subject to either a formal enforcement order issued by its primary regulator involving a significant supervisory matter or to a memorandum of understanding entered into with its primary regulator involving a significant supervisory matter. The Statement (i) explains that federal and state agencies consider the prohibition to cover all formal enforcement actions by a federal or state agency, (ii) encourages institutions subject to the prohibition that are seeking conversion under one of the several exceptions to notify regulators prior to submitting a conversion application, and (iii) outlines the processes by which federal and state agencies will comply with the notification and information sharing requirements of section 612.