BACKGROUND

In 2010 New Jersey passed a new abandoned property law that, if upheld, would have been devastating for gift card and prepaid card issuers doing business in New Jersey.

• First, the new law shortened the dormancy period for prepaid cards and gift cards from being not even subject to escheat, to requiring escheat after 2 years of inactivity (a shorter period than other states, and far shorter than the required 5 years validity under the CARD Act).
• Second, the new law also required prepaid card issuers to retroactively escheat all funds from inactive prepaid cards sold in the last 5 years.
• Third, the new law required sellers of prepaid cards (both open and closed loop cards) to collect the name and address of the purchaser, or at the very least, the purchaser’s zip code. Later this requirement was modified so that only collection of the purchaser’s zip code was “mandatory.”
• Fourth, if the purchasers name and address (or zip code) was not known or collected, the purchaser’s address would be deemed to be the address of the store where the card was purchased.

NOTE – The reason New Jersey wants sellers to collect purchasers’ name and address, or otherwise wants to “deem” the purchasers’ address to be in New Jersey, is because under the uniform abandoned property laws, unused funds from gift cards and other prepaid cards would be paid to the state of the last known address of the purchaser. But if the last known address of the purchaser is not known (which is the case for virtually ALL gift cards), then the unused funds are paid to the state where the card issuer is domiciled. New Jersey’s new law, deeming purchasers’ addresses to be in NJ, or otherwise requiring collection of zip code data from purchasers, was intended to make sure that more of the unused funds escheat to NJ rather than to other states where the card issuers are domiciled. Since many prepaid card issuers are domiciled in states that don’t require escheat, the imposition of NJ’s new law as initially passed, with retroactivity, could have had serious consequences for many prepaid card programs.

BOTTOM LINE

The Third Circuit’s Opinion represents both good news and bad news for the gift card and prepaid card industry. See details below.

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 NJ Abandoned Property Litigation – Detailed Analysis

 A. Two-year dormancy period – bad news 

• The 2-year dormancy period requiring escheat after 2 years of inactivity was upheld. The court held that the shorter period was not expressly preempted by the CARD Act and has a rational purpose of protecting consumer property.
• Allowing card issuers not to honor gift cards, after they have been escheated to the state in 2 years, is also not impliedly preempted by the requirement in the CARD Act that all gift cards remain valid at least 5 years. The law does not thwart Congress’ intentions because consumer funds will be protected well beyond the 5 years in the CARD Act, in perpetuity. This supposedly is good for consumers. The Court stated that the fact that a consumer might have to go to the state of NJ to get his or her gift card funds back after 2 years doesn’t make it less beneficial for consumers.

B. Retroactive application with respect to cards sold/distributed in the past – good news (mostly) 

• The retroactive application of the abandoned property law against prepaid cards usable for goods/services that have already been sold violates the Constitution’s Contracts Clause and cannot be enforced.
• A contract exists between cards issuers and the card purchasers, and card issuers have a right to earn a profit and get the benefit of their bargain.
• Previous law did not require escheat and to retroactively apply it would impair existing contracts with card purchaser.
• BUT this favorable decision on retroactivity only applies with respect to cards usable solely for goods/services.
  
• No arguments were raised to show that a contract exists between the cash- accessible card issuers and purchasers and thus the Contract Clause arguments regarding cash-accessible prepaid cards were “waived.”
• Moreover, the Court suggests that the decision on retroactivity might have been different if the NJ law had taken only a percentage (such as 60%) of the funds and allowed the card issuers to earn some profit from the gift cards.
• Because the Court affirmed the preliminary injunction based on the Contracts Clause, the Court declined to address the other arguments raised, such as the Takings Clause and Derivative Rights Rule.

C. The Place of Purchase Presumption (or “third priority rule”) – good news 

• New Jersey’s attempt to require escheat of unused prepaid card funds to the Place of Purchase if the Cardholder’s address is not known, and if the issuers’ state of domicile does not escheat the property, was held to be unenforceable.
• The Place of Purchase Presumption was preempted by Federal common law – because the presumption departs from the two priority rules set forth by the US Supreme Court.
• Even if the issuer gets a “windfall” because the issuer’s domicile does not require escheat – that does not merit departing from the settled priority rules set forth in Texas v. New Jersey.
• A state should be able to choose whether or not to escheat; otherwise it violates principles of state sovereignty.

NOTE  –This is one of the most valuable and important rulings by the Court. Roughly 30 states have passed what is known as the “third priority rule,” a rule which, like New Jersey’s, would purport to require unused funds to be escheated to the state where the purchase was made or the transaction occurred, if the purchasers’ name/address is not known, and if the card issuer is domiciled in a state that doesn’t require escheat. The validity of the “third priority rule” has been debated for years, but this is the first time it has been litigated in this context. This decision is welcome news to any gift card or prepaid card issuer that has established a special purpose gift card entity in a state with favorable gift card laws. It means it is less likely now that New Jersey and other states will succeed in asserting their “third priority rule” with respect to unused gift card funds.

D. The Data Collection (Name, Address and/or Zip Code) requirements – bad news. 

• The Court upheld the NJ law’s requirement that name, address or zip code be collected from purchasers, finding that the data collection requirements further a legitimate state goal of wanting to reunite purchasers with their property.
• The Court noted that the fact that the purchaser of a gift card may not be the end user/recipient is not relevant. Collecting the last known address of the purchaser has been authorized by Texas v. New Jersey and other similar cases.
• The section of the NJ law that requires data collection can be separated from the unenforceable portions of the law and can still be enforced.
• The data collection requirements are not preempted by Federal common law and there are rational legitimate reasons for doing so – including determining which state has the right to escheat the property under the first priority rule (that is, based on which state the purchaser resides in).

NOTE – The concern about this part of the decision isn’t just that it’s burdensome or invasive of privacy to collect such data. The concern is that once NJ requires collection of name, address, or zip code, and such address is in NJ, then NJ has a “first priority claim” that takes precedence over the second priority claim of the card issuer’s domicile. So for gift card or prepaid card issuers that have established special purpose gift card entities in a state with favorable escheat laws, that gift card entity will not protect you from a NJ claim. Unless this portion of the ruling is changed, it appears you’ll have to escheat to New Jersey but ONLY for cards purchased in New Jersey. The bigger concern is what happens if other states follow suit.

CONCLUSION

We understand that the New Jersey Treasury has indicated they do not intend to enforce immediately the data collection obligations, but will be issuing new guidance in the future.

Of course it is possible that either the state or the plaintiffs will attempt further legal proceedings, either by petitioning for a rehearing, or by petitioning for certiorari to have the matter appealed to the US Supreme Court. Whether the parties will pursue this case further is currently unknown. In the meantime, gift card issuers and sellers may wish to consider how to implement the collection and retention of purchaser’s name, address and /or zip code for gift card sales in New Jersey.

A copy of the opinion may be found here.

A pdf copy of this Client Alert may be found here.

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Should you have questions, feel free to contact:

 Judith Rinearson
(212) 541-1135
judith.rinearson@bryancave.com

Margo Hirsch Strahlberg
(312) 602-5094
mhstrahlberg@bryancave.com

]]> http://bankbryancave.com/2012/02/third-circuit-issues-opinion-in-new-jersey-abandoned-property-litigation/feed/ 0 http://bankbryancave.com/2012/02/self-exam-improve-the-health-of-the-bank-and-its-standing-with-regulators/ http://bankbryancave.com/2012/02/self-exam-improve-the-health-of-the-bank-and-its-standing-with-regulators/#comments Fri, 03 Feb 2012 04:02:18 +0000 Jonathan Hightower http://bankbryancave.com/?p=8161 Doctors recommend various self exams to catch disease early, so it can be treated before it’s too late. As it turns out, a self examination can be good for the health of a bank as well. My colleagues and I recommend that our banking clients and friends undertake a regular self examination in order to identify potential internal and external challenges that the bank may face. As discussed more thoroughly below, these self examinations can also be very helpful when the bank’s doctor (your friendly regulator) comes in for a check-up.

Enlist internal audit

To initiate the self examination, the audit committee of the bank’s board of directors should charge management with preparing a report that outlines the current and projected status of the bank’s key areas of risk. Ideally, the bank’s internal audit function will take the lead in performing the examination and preparing the related report. In order to maximize the value of this report, the audit committee should direct management to deliver the report at least 60 days prior to the bank’s next scheduled regulatory exam. The self examination report, in its most basic form, should cover the areas that are the focus of the bank’s regulators: CAMELS (capital, asset quality, management, earnings, liquidity and sensitivity to market risk). The report should also address any key areas of risk identified by the directors.

Analyze your market

In addition to analyzing the typical CAMELS components and other areas of risk, a very important part of the self examination process is a market study. The report should present facts, trends and projections related to the market area in order to define the opportunities and challenges being faced by the bank’s customers. While many bank directors have a good feel for market trends, we have found that this data, when presented with specific facts and trends, can inform the board’s discussions of a variety of topics a great deal. It can also provide the bank with support for dealing with its examiners, who conduct their own market analysis prior to each examination.

Evaluate the bank

In the report, management should report on the current status of the various risk areas (for example, capital levels and levels of problem assets), comparisons to peers and steps being taken to improve the current status. While it may be difficult for the officers of the bank to evaluate the bank’s management in the way that the bank’s examiners would, the management portion of the report should address the organizational chart of the bank to ensure that appropriate resources are allocated to each of the bank’s functions. After reviewing the draft report, the audit committee can evaluate the need for further analysis before presenting the final report to the full board. This report should give the audit committee, and eventually the full board, good perspective on the condition of the bank and the need for corrective actions.

Use self exam in multiple ways

The final self examination report should be clearly organized and comprehensive, though concise. The report can be used to color a variety of discussions that the board may have in the normal course of overseeing the bank’s operations. It can serve as the basis for strategic planning discussions in analyzing the opportunities in the bank’s market and the adequacy of the bank’s earnings. It can also be a guide to more basic discussions, such as the pricing of deposits, based on the information related to the bank’s liquidity and opportunities for loan growth. Essentially, the report provides a comprehensive guide to the current and projected health of the bank that the bank’s directors can use for a quick point of reference in making their decisions.

Prepare a presentation for regulators

In addition to business planning purposes, the self examination can be a key tool in preparing for a regulatory examination. Using the results of the self examination, management should prepare a presentation for the examiners that highlights the bank’s key metrics, areas of progress and actions taken to address areas of concern. The market analysis portion of the self examination can be a key component of this presentation. While the bank’s examiners should be generally familiar with the bank’s market, they will not have the specific and direct perspective that the self examination report can provide. Using this market data, the bank can provide factual, documented support for its projections and for any actions it is taking. This presentation should be conveyed to the bank’s examiners at the initial meeting related to the exam, at which a representative of the board should be present. By alerting the bank’s examiners to the focus of the board on the bank’s condition and the steps being taken to improve the bank’s condition, the bank increases the likelihood that the examiners will conclude that the board is performing its duties and that the bank’s internal controls are adequate.

The self examination report can be a very useful tool for bank directors. At its best, it will provide a roadmap for making key strategic decisions. In its most basic form, it documents the board’s focus on oversight of the bank. While producing such a report will use management resources, much of the analysis that should be included in the report can be extracted from management’s ongoing reports to the board. Producing and discussing the self examination report is a healthy exercise, and the bank’s examiners will agree.

This article was first published on BankDirector.com.

In particular, the bureau is asking the public to identify provisions of such regulations that it should make the highest priority for updating, modifying or eliminating because they are outdated, unduly burdensome or unnecessary, including:

• Certain definitions in Reg E, Reg P, Reg Z
• Annual privacy notices under Reg P
• ATM fee disclosures under Reg E
• Coverage and scope of Reg Z
• Electronic disclosures required under Reg E and Reg Z

Publication of the CFPB’s notice in the Federal Register is available at http://www.gpo.gov/fdsys/pkg/FR-2011-12-05/pdf/2011-31030.pdf. Comments are due by March 5, 2012; commenters will have until April 3, 2012, to respond to other comments.

The preambles to the interim final rules state that the regulations do not impose any new substantive obligations on persons subject to the existing regulations as published by the Federal Reserve.

The interim final rules became effective Dec. 30, 2011. The Reg E interim final rule is available at http://www.gpo.gov/fdsys/pkg/FR-2011-12-27/pdf/2011-31725.pdf; comments are due by Feb. 27, 2012. Reg P is available at http://www.gpo.gov/fdsys/pkg/FR-2011-12-21/pdf/2011-31729.pdf; comments are due by Feb. 21, 2012. Reg Z is available at http://www.gpo.gov/fdsys/pkg/FR-2011-12-22/pdf/2011-31715.pdf; comments are due by Feb. 21, 2012.

What if participants could tell the lead that it had to keep the losses while they kept the loan payments? A recent bankruptcy case from Kansas provides an interesting illustration of that situation. In the case of In re Brooke Corp., the debtor filed bankruptcy after having made three payments to Stockton National Bank, the lead bank, totaling $487,973 in the 90 days prior to filing. Stockton kept its portion of those payments and forwarded the remainder to the participants. The Bankruptcy Trustee later sued Stockton for recovery of the three payments on the grounds that they were preferential transfers. Stockton, which had sold 94.44% of the loan to the participants, prepared to take the pretty standard defense of the matter arguing that it had merely served as a “conduit” for the payments and should thus have very limited liability. Interestingly, the participants filed pleadings arguing that the lead bank was in fact liable for the entire amount, arguing that the lead bank had dominion and control over the loan proceeds.

In effect, the participants sought to bifurcate the lead-participant relationship by arguing that the lead bank had a certain amount of discretion over what to do with the loan proceeds it received and the fact that it passed them along to the participants was a nice gesture but was no different than using the proceeds to pay salaries or the rent. In a lengthy opinion the bankruptcy court rejected multiple arguments by the participants and found that whatever discretion the lead had was solely as to the administration of the loan, not to whether it could decide to keep the loan proceeds for itself rather than passing them along to the participants. Ultimately, the Trustee would be allowed to pursue the participants if in fact all of the elements of preferential transfer were met.

If you are a lead bank how do you protect yourself in this type of situation?

First, your loan participation agreement should contain express provisions requiring participants to reimburse the lead if the lead is forced to disgorge any payments arising out of litigation by a bankruptcy trustee claiming that the payments were fraudulent or preferential transfers.

Second, part of the lead’s strategy will involve working with the bankruptcy trustee. In the In re Brooke case, the Trustee originally sought full recovery from the lead bank but later amended its pleadings to confirm that it would seek recovery from the participants if the court determined that the lead did not exercise complete control and dominion over the payments.

Specifically, FDIC examiners have begun to scrutinize bank insurance policies to determine whether the policies provide coverage for civil money penalties (“CMPs”) that may be assessed against bank officers or directors. If any bank insurance policies are found on examination to contain an endorsement extending coverage for CMPs to officers or directors, the FDIC is citing such policies as being in violation of Part 359 of the FDIC’s Rules and Regulations.

Part 359, among other things, prohibits banks and affiliated holding companies from making certain “prohibited indemnification payments.” These prohibited payments include any payment or agreement to pay or reimburse bank officers or directors for any CMP or judgment resulting from any administrative or civil action which results in a final order or settlement in which that officer or director is assessed a CMP, removed from office or ordered to cease and desist from certain activities. As a matter of public policy, this provision is designed to prevent banks from bearing the costs of penalties assessed against individuals for actions that could result in harm or potential harm to a bank or to the safety and soundness or integrity of the banking system more generally.

Part 359 explicitly permits reasonable payments by banks to purchase commercial insurance policies, provided that the policy not be used to pay or reimburse an officer or director the cost of any judgment or CMP assessed against him or her. However, Part 359 does permit the insurance paid for by the bank to cover (1) legal or professional expenses incurred in connection with such a proceeding and (2) the amount of any restitution to the bank, its holding company, or its receiver.

For individuals serving as officers or directors of banks, CMP assessments represent a potential risk to personal assets. In addition, CMPs are generally assessed not through the civil litigation process, but rather through an administrative proceeding or enforcement action, where burdens of proof and standards of review generally favor the assessing agency, and intent to violate the rule giving rise to a CMP assessment is not necessarily required in order for the penalty to be assessed. As a result, there has been a long-standing demand for some form of coverage for bank officers and directors to address this risk. A solution used by the insurance industry for decades has been to offer CMP coverage by way of a separate endorsement to the D&O insurance policy purchased by the bank. This endorsement is then invoiced separately, and the individuals covered under the endorsement pay the premium associated with the endorsement out of their own pockets.

However, in recent months, this approach has been criticized by the FDIC, which has cited any policy written in the name of the bank or its holding company that, by endorsement, provides CMP coverage for individual officers or directors, regardless of who actually paid the premium associated with such coverage.

In response, as policies with CMP endorsements begin to expire, insurance carriers are likely to begin pulling the CMP endorsements from these policies on renewal. While Part 359 would not prohibit individual officers and directors from independently purchasing their own policies for CMP coverage, outside of the framework of the bank’s base policy document, insurance professionals have indicated that such stand-alone policies are not generally available at the present time. Given the generally low premiums historically associated with CMP coverage in the community bank space, carriers will not necessarily have strong economic motivation to rush to develop stand-alone CMP products for community bankers. In addition, a stand-alone CMP product, if and when created, may likely carry with it a somewhat elevated premium, as carriers would need to recover the incremental costs of that product’s development.

Even with strong economic motivation, it would likely take time for such products to be developed, resulting in an intermittent period where coverage remains unavailable and this risk to officers and directors remains unmitigated. As a point of comparison, products designed over the past several years to address the shortfalls in the regulatory coverage being offered by primary carriers only began to appear in the community bank space some months after shortfalls in regulatory coverage began to become a widespread phenomenon, notwithstanding that the premiums associated with regulatory coverage products were proportionally much larger than CMP coverage premiums.

A stopgap solution could be for carriers to restrict the definition of losses covered under the CMP endorsement to account for “defense costs” and reimbursement to the institution only — those items specifically carved out by the language of Part 359 – but such an approach, from the perspective of the individual, would not mitigate the risks to personal assets posed by the CMPs themselves.

Exactly how things will develop on this front remains to be seen. However, the likely net result of this trend – at least in the near term – will be increased costs to individuals serving as officers and directors of financial institutions, whether actual or contingent. The general trend of increasing exposure for bank officers and directors continues notwithstanding that salaries and fees for services rendered by officers and directors remain subject to increased scrutiny and, in many cases, are being frozen or cut proactively in the interests of cost savings. In addition, officers and directors continue to face elevated demands on their time as they seek to navigate the challenging economic waters and ensure the safe and sound operation of their institutions. At some point, finding or retaining qualified individuals who are willing to bear the costs associated with service – particularly service as a director – may become a challenge for some financial institutions.

The specific terms and scope of coverage provided by insurance policies vary widely, and bankers with questions about their specific insurance policies should contact their insurance professional or coverage counsel.

]]> http://bankbryancave.com/2011/12/fdic-criticizes-civil-money-penalty-insurance/feed/ 0 http://bankbryancave.com/2011/10/potential-securities-relief-on-the-horizon/ http://bankbryancave.com/2011/10/potential-securities-relief-on-the-horizon/#comments Thu, 27 Oct 2011 13:45:01 +0000 Rob Klingler http://bankbryancave.com/?p=7807 While any relief still has a long (and uncertain) path before it would be effective, on October 26, 2011, the House Financial Services Committee approved four bills (with bipartisan support) that would remove regulatory federal securities law obstacles to capital formation.

H.R. 1965 would, for banks and bank holding companies, raise the SEC registration threshold to 2,000 shareholders and the deregistration threshold to 1,200 shareholders.

H.R. 2167, the “Private Company Flexibility and Growth Act,” would raise the SEC registration threshold for all companies to 1,000 shareholders and would exclude accredited investors and certain employees from the definition of “held of record” for registration purposes.

H.R. 2940, the “Access to Capital for Job Creators Act,” would permit general solicitation and general advertising for private offerings conducted under Rule 506, so long as all purchasers were accredited investors.

H.R. 2930, the “Entrepreneur Access to Capital Act,” would permit companies to conduct “crowd source” capital raises under a new exemption under the federal securities laws.  The proposed exemption would permit offerings of up to $5 million in which each investor contributed no more than the lesser of $10,000 and 10 percent of the investor’s annual income.  Any investors purchasing under this exemption would be excluded from the number of investors “held of record” for purposes of SEC registration.

Comparable attempts to raise the SEC registration threshold and otherwise alleviate the regulatory burden associated with capital raises have failed to gain traction over the last several years.  We will continue to monitor the progress of these bills, but will also continue to advise existing public banks and bank holding companies on potential means to deregister from the SEC and “go private.”

The CFPB will use the Manual initially to supervise the more than 100 large banks, thrifts, and credit unions that are subject to the CFPB’s examination authority pursuant to the Dodd-Frank Act (those with total assets over $10 billion, as well as their affiliates). The Bureau’s examiners will also ultimately use the Manual to supervise non-depository consumer financial service companies (e.g., mortgage lenders), with the stated goal of promoting “fair, transparent, and competitive consumer financial markets where consumers can have access to credit and other products and services, and where providers can compete for their business on a level playing field where everyone has to play by the rules.”

The CFPB Examination Framework and Philosophy

While only certain entities will be subject to CFPB examination, the Manual outlines an examination approach that is illustrative of the Bureau’s bend on matters over which it has rulemaking authority. This is particular true of its view of its authority over matters it considers unfair, deceptive or abusive acts or practices (UDAAP).

Like other bank regulators, the CFPB will prepare for examinations by gathering and reviewing a wide array of regulatory and public data about an institution:  state and/or prudential regulator reports of examination and correspondence, enforcement actions, state licensing and registration information, complaint data, call reports, HMDA LARs, HAMP data, fair lending analyses, SEC or other securities-related filings, the institution’s website and advertising, and, among other things, “newspaper articles, web postings, or blogs that raise examination related issues.” The CFPB will then contact the institution about the examination and prepare its customized Information Request.

The CPFB’s “Risk Assessment” is a living document—a profile of a particular institution that will be maintained and used to guide its examination and supervision generally. As stated in the Manual (emphasis added):

CFPB’s Risk Assessment is designed to evaluate on a consistent basis the extent of risk to consumers arising from the activities of a supervised entity or particular lines of business within it and to identify the sources of that risk. “Risk to consumers” for the purpose of the CFPB Risk Assessment is the potential for consumers to suffer economic loss or other legally-cognizable injury (e.g., invasion of privacy) from a violation of Federal consumer financial law. The risk assessment includes factors related particularly to the potential for unfair, deceptive or abusive practices, or discrimination. Two sets of factors interact to result in a finding that the overall risk in a business or entity is low, moderate, or high. The first set of factors relate to the inherent risk in the particular line of business or the entity overall. The second set of factors is the quality of controls that manage and mitigate that risk. The Risk Assessment also includes a judgment, based on current or recent information, about the expected change in the overall risk: decreasing, increasing, or unchanged.

The Risk Assessment provides the basis for an institution’s “Supervision Plan”—the Bureau’s custom approach to supervising a particular depository institution and its affiliates and for allocating supervision resources. A sample Risk Assessment is provided beginning on page four of the Manual’s Part III.

As with any other bank regulatory examination, the examination process would conclude with an exit meeting with management, the assignment of a rating, and the production of a Report of Examination (“ROE”). Prior to delivery of the ROE, the CFPB will submit its draft report to the entity’s prudential bank regulator, if any. If the report concerns other types of regulated entities, opportunities for comment by state regulators will depend on whether CFPB is conducting joint or coordinated examinations with the relevant state regulators.

The CFPB will also require a meeting with a supervised entity’s board of directors or principals when or more of the following circumstances are present:

• The proposed compliance rating is “3,” “4,” or “5”;
• An informal supervisory agreement or formal enforcement action is recommended; or
• The supervised entity’s management, board, or principals requests such a meeting.

Unfair, Deceptive or Abusive Acts or Practices

One section of the Manual provides new insight into the CFPB’s intended use of its authority under Dodd-Frank to prohibit what it considers to be an “unfair, deceptive or abusive act or practice.” Under the Dodd-Frank Act, it is unlawful for any provider of consumer financial products or services to engage in any unfair, deceptive or abusive act or practice. The Act also provides CFPB with rulemaking authority and, with respect to entities within its jurisdiction, enforcement authority to prevent unfair, deceptive, or abusive acts or practices in connection with the provision of consumer financial product or services or offers to do so.

While standards for what is “unfair” or “deceptive” are somewhat established, the CFPB’s ability under Dodd-Frank to regulate practices it considers “abusive” is new territory. Under the Act, an act or practice is not “abusive” unless it:

1. Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
2. Takes unreasonable advantage of –
   a. A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
   b. The inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or
   c. The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

Unlike its overview of the “unfair” and “deceptive” legal standards, the Manual does not—and arguably could not yet—provide examples of enforcement activity based on practices that are “abusive.” The Manual does, however suggest an approach to the new standard:

Based on the results of the risk assessment of the entity, examiners should review for potential unfair, deceptive, or abusive acts or practices, taking into account an entity’s marketing programs, product and service mix, customer base, and other factors, as appropriate. Even if the risk assessment has not identified potential unfair, deceptive, or abusive acts or practices, examiners should be alert throughout an examination for situations that warrant review.

Needless to say, the list of materials subject to CFPB review and transaction testing in a UDAAP analysis is comprehensive. More significantly, the template Risk Assessment provided in the Manual illustrates the CFPB’s potential reach. Many items on the Assessment’s “risk checklist” are qualitative and/or highly subjective:

“Products are bundled in a way that may obscure relative costs.”

“The terms of the product are subject to change at the discretion of the entity, and the entity has frequently made changes in the terms.”

“Complex products are marketed to consumers not likely to benefit from them or who may be likely to be harmed by them.”

CFPB architect Elizabeth Warren has said that the Bureau’s focus will be on improving disclosures, not prohibiting products. In the first iteration of the Bureau’s Examination Manual, there is room for both approaches. Describing an element of the test for “unfairness,” that the injury caused by an allegedly harmful product was “not reasonably avoidable,” the Manual states (emphasis added):

A key question is not whether a consumer could have made a better choice. Rather, the question is whether an act or practice hinders a consumer’s decision-making. For example, not having access to important information could prevent consumers from comparing available alternatives, choosing those that are most desirable to them, and avoiding those that are inadequate or unsatisfactory. In addition, if almost all market participants engage in a practice, a consumer’s incentive to search elsewhere for better terms is reduced, and the practice may not be reasonably avoidable.

Referred to by CFPB insiders as the “restatement project,” the CFPB is preparing to reissue over 3,000 pages of regulations through approximately fourteen Federal Register notices. The reissued regulations will be changed to reflect jurisdictional changes and some scope changes, but they are not expected to change substantively at this time (although we will be watching). We expect publication of these reissued regulations to begin within days.

The possible source of confusion will be a new numbering system. The regulations will still be in Title 12 of the Code of Federal Regulations, but moved to Chapter X. We understand that most of the numbers will be unchanged after the decimal point, but the other numbers could be very different. So, for example, 12 CFR § 226.1 of Regulation Z could become 12 CFR § 1000.1. In some cases, however, due to rules of the Office of the Federal Register, new numbers will be required. For example, Regulation Z sections 226.5a and 226.5b could become 12 CFR § 10XX.40 and 12 CFR § 10XX.60.

None of this is all that earth shaking except to lawyers with nothing else to worry about. All those years memorizing regulation numbers for naught.

The record established that the FDIC sold the loan and all related documents, including the guaranties and the court rejected the argument put forth by the guarantors. In a helpful comment, the court noted that even if the assignment from the FDIC had not referenced the guaranties, under Georgia law, the assignment of the note carried with it the assignment of the guaranties.  The guarantors also argued that there were genuine issues of fact concerning the amounts owed under the note.

The court rejected these arguments as well based on evidence from the FDIC loan portfolio manager accounting for the loan balance from its inception. The case is typical of some of the lender liability litigation that lenders are having to grapple with right now as well heeled borrowers and guarantors attempt to put off the day of reckoning. The litigation can be lengthy and expensive and the loan obligors are seeking to use that to extract a settlement form the lender that is favorable to the obligors.

Lenders seeking to collect against loan obligors that have sufficient assets to cover the loan should enter into collection activities with realistic expectations about the time and cost involved. Bank counsel’s awareness of typical or new lender liability theories is also vital to a successful collection effort.