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02.29.2012 | Legal Update

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1. Massachusetts Bank Settles ATM Signage Suit With No Payment to Plaintiff
2. CFPB Proposes New Disclosure Forms for Overdrafts and Monthly Mortgage Statements
3. FDIC Issues Guidance on Risks Associated with Payment Processors
4. Banking Agencies Provide Guidance on Junior Lien Loan Loss Allowances
5. Other Developments: Investment Advisory Fees and Homeowner’s Right to Cure

1. Massachusetts Bank Settles ATM Signage Suit With No Payment to Plaintiff
A Massachusetts bank has settled a lawsuit alleging a violation of the ATM signage rules in the Electronic Fund Transfer Act (“EFTA”) without paying any damages, legal fees or costs to the plaintiff. The plaintiff claimed that the bank violated the EFTA by failing to post physical signage at one of the bank’s ATMs disclosing that a fee would be imposed on transactions by cardholders who were not customers of the bank. The bank counterclaimed, alleging that the lawsuit was brought in bad faith. The bank also moved to dismiss the case, arguing that the plaintiff did not suffer any real or concrete injury despite the absence of physical signage at the ATM because he received an on-screen electronic notice disclosing the ATM fee and, as a result, actually knew or had to know that a fee would be imposed. The U.S. Constitution bars a court from deciding any matter in which a plaintiff lacks some real or concrete injury that a court can redress. Within one day after receiving the motion to dismiss, the plaintiff proposed that the parties dismiss their claims with prejudice, with the bank paying no damages, costs, or fees. The bank accepted the proposal, and the case was dismissed on January 31, 2012.

    Nutter Notes: In recent months, plaintiffs across the country have commenced hundreds of cases including more than a dozen in Massachusetts claiming that ATM operators failed to post physical signage on or at ATMs notifying consumers of fees imposed for ATM transactions. In most – if not all – of these cases, the plaintiffs received on-screen notice of the fees before withdrawing funds from the ATMs. This is because the typical ATM requires a consumer to respond to an electronic query and accept the fee before the fund transfer can be completed. Despite receipt of on-screen notice, plaintiffs allege that the failure to post or maintain physical signage violates the EFTA, exposing defendants to liability for damages, costs, and attorneys’ fees. From the defense perspective, these cases amount to opportunistic strike suits. The individuals bringing suit are often professional plaintiffs. When named in these lawsuits, defendants often choose to “pay off” the plaintiffs and settle immediately, presumably because of the high cost of litigation. There are strategies, however, that may enhance a defendant’s position in settlement negotiations or serve as a basis to prevail in the case, including filing a motion to dismiss on the grounds summarized above. For more information, see Nutter’s multi-part client advisory on ATM fee-notice litigation. The first two installments can be found here and here. Additional installments will be posted in publications here and here.

2. CFPB Proposes New Disclosure Forms for Overdrafts and Monthly Mortgage Statements
The Consumer Financial Protection Bureau (“CFPB”) has proposed two new disclosure forms to inform consumers about certain costs of overdrafts and mortgage loans. On February 22, the CFPB released a prototype “penalty fee box” that would appear prominently on the checking account statements of consumers who overdraw their accounts. The prototype disclosure highlights the amount that was overdrawn and the amount of any fees that were incurred. The disclosure would also refer to information appearing later on the statement describing three steps a consumer may take to lower overdraft fees. The release of the prototype penalty fee box disclosure accompanied an announcement that the CFPB has launched an inquiry into checking account overdraft programs to determine how overdraft practices are impacting consumers. The CFPB’s requests for information are focused on four main areas: transaction re-ordering that increases consumer costs, missing or confusing consumer disclosures, misleading marketing materials, and disproportionate impact on low-income and young consumers. For point-of-sale debit card and ATM transactions, Federal Reserve regulations that became effective in 2010 prohibit a bank from charging an overdraft fee unless the consumer has opted-in. For check and online bill payments, as well as recurring debits, a bank may charge an overdraft fee without an affirmative request from the consumer for each transaction that the bank chooses to cover. The prototype penalty fee box disclosure is available on the CFPB’s website and comments may be submitted online. Responses to the CFPB’s requests for information on overdrafts are due by April 30. Further information is available on the CFPB’s web site.

    Nutter Notes: The CFPB released a prototype monthly mortgage statement on February 13 that the agency says is designed to make it easier for homeowners to understand their mortgage loans and avoid unnecessary costs and fees. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) requires that most mortgage borrowers receive periodic statements containing specified information. The Dodd-Frank Act requires that the statement include information about the principal loan amount, the current interest rate, the date on which the interest rate may next reset, a description of any late payment and other punitive fees, information about housing counselors, and a telephone number and email address that may be used to contact the mortgage servicer. Under the Dodd-Frank Act, periodic statements generally must be provided by the creditor, assignee of the loan, or the mortgage servicer. The CFPB is in the process of testing the prototype monthly statement with consumers and is soliciting general feedback from consumers, industry stakeholders, and other interested parties. The CFPB said that it expects to issue a formal rulemaking proposal to implement the monthly mortgage statement later this year. The prototype monthly mortgage statement is available on the CFPB’s website and comments may be submitted online. 

3. FDIC Issues Guidance on Risks Associated with Payment Processors
The FDIC recently revised its guidance on the potential risks associated with relationships with deposit customers that process payments for third-party merchants such as telemarketers and online businesses. The guidance released on January 31, entitled “Revised Guidance on Payment Processor Relationships” (FIL 3-2012), updates the FDIC’s November 2008 guidance on payment processor relationships, outlining certain risk mitigation principles. According to the guidance, the risk profile of payment processors can vary significantly depending on the make-up of their customer base. The guidance advises that payment processors that deal with telemarketers and online merchants, for example, may have a higher risk profile because such merchants tend to display a higher incidence of consumer fraud or potentially illegal activities than other businesses. The guidance suggests that banks that have relationships with such payment processors consider whether the payment processors have effective processes in place for verifying their merchant clients’ identities and reviewing their merchant clients’ business practices. Payment processors that do not have such processes can pose elevated money laundering and fraud risk for financial institutions, as well as legal, reputational, and compliance risks if consumers are harmed, according to the guidance.

    Nutter Notes: The FDIC’s guidance recommends that banks conduct careful due diligence, closely monitor, and practice prudent underwriting on account relationships with third-party payment processors. Increased risks posed by account relationships with high-risk entities according to the guidance include potentially unfair or deceptive acts or practices under Section 5 of the Federal Trade Commission Act. The guidance identifies certain types of payment processors that may pose heightened money laundering and fraud risks if the processor does not verify the identities of merchant clients and does not review the merchants’ business practices. The guidance recommends that banks assess risk tolerance in their overall risk assessment program and develop policies and procedures that address due diligence, underwriting, and ongoing monitoring of high-risk payment processor relationships. According to the guidance, account agreements with payment processors should require processors to provide the bank with access to necessary information in a timely manner, include provisions that protect the bank by providing for immediate account closure, contract termination, or similar action, and require adequate reserves to cover anticipated charge-backs. Improper management of the risks posed by payment processors may result in the imposition of enforcement actions, such as civil money penalties or restitution orders. 

4. Banking Agencies Provide Guidance on Junior Lien Loan Loss Allowances
The federal bank regulatory agencies have issued supervisory guidance on allowance for loan and lease losses (“ALLL”) estimation practices associated with loans and lines of credit secured by junior liens on one- to four-family residential properties. The guidance released on January 31 reiterates existing regulatory policy and reminds depository institutions to monitor all credit quality indicators relevant to credit portfolios, including junior liens. The types of junior liens to which the guidance applies include second mortgages and home equity lines of credit extended to residential mortgage borrowers. The guidance reiterates certain key concepts included in Financial Accounting Standards Board Accounting Standards Codification Section 450-20-25, Contingencies – Loss Contingencies – Recognition (formerly Statement of Financial Accounting Standards No. 5, Accounting for Contingencies) and existing ALLL supervisory guidance related to ALLL and loss estimation practices. The guidance also reminds institutions to follow appropriate risk-management principles in managing junior lien loans and lines of credit.

    Nutter Notes: According to the guidance, depository institutions should ensure that sufficient information is gathered during the ALLL estimation process to adequately assess the probable loss incurred within junior lien portfolios. The guidance provides that, generally, such information should include the delinquency status of senior liens associated with the institution's junior liens and whether the senior lien loan has been modified. When an institution does not own or service the associated senior lien loans, the guidance recommends that the institution use reasonably available tools such as credit reports to determine the payment status of the senior lien loans. According to the guidance, examiners will assess the appropriateness of an institution’s ALLL methodology and documentation related to the loans, and the appropriateness of the level of the ALLL established for the portfolio to the extent an institution has significant holdings of junior liens. If an examiner concludes that the reported ALLL for junior liens is not appropriate or determines that the ALLL evaluation process is deficient, recommendations for correcting these deficiencies will be noted in the examination report and additional supervisory action may be taken.

5. Other Developments: Investment Advisory Fees and Homeowner’s Right to Cure 

• SEC Tightens Rules on Investment Advisory Performance Fees

The Securities and Exchange Commission announced on February 15 that it is amending its rule on investment advisory performance fees to raise the net worth requirement for investors who pay performance fees, by excluding the value of the investor’s home from the net worth calculation.

    Nutter Notes: Under the SEC’s rule, registered investment advisers may charge clients performance fees if the client’s net worth or assets under management by the adviser meet certain dollar thresholds. The revised rule will require such qualified clients to have at least $1 million of assets under management with the adviser, up from $750,000, or a net worth of at least $2 million, up from $1.5 million.

• Effective Date of Massachusetts Right to Cure Regulation Postponed

The Division of Banks has postponed the effective date of a new regulation, 209 CMR 56.00, that implements notice and right-to-cure requirements for mortgage lenders and servicers. The regulation will now become effective on March 2, 2012, and the “Right to Cure Your Mortgage Default” notice set forth in the regulation will become mandatory on May 21, 2012.

    Nutter Notes: The new regulation was issued last month and was originally scheduled to become effective on February 3, with the use of the right-to-cure notice to become mandatory on April 23, 2012.

Nutter Bank Report

Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. The 2009 Chambers and Partners review says that a “real strength of this practice is its strong partners and . . . excellent team work.” Clients praised Nutter banking lawyers as “practical, efficient and smart.” Visit the U.S. rankings at ChambersandPartners.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Eric P. Magnuson and Lisa M. Jentzen. The information in this publication is not legal advice. For further information, contact:

Kenneth F. Ehrlich 
kehrlich@nutter.com
Tel: (617) 439-2989

Michael K. Krebs
mkrebs@nutter.com 
Tel: (617) 439-2288

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.