OCC Rules Unclaimed Property Laws Generally Not Preempted

The OCC issued an interpretive letter ("Letter 1006") ruling that its recent preemption and visitorial powers regulations (see the January 13, 2004 Alert) did not change the previous standards regarding the applicability of state escheat and unclaimed property laws to national banks. (Please click on the 'Next Page link at the bottom of this page to view the Alert mentioned above. Letter 1006 states that a state’s framework regarding abandoned bank deposits generally will apply to a national bank. However, in accordance with US Supreme Court precedent, unusual state provisions, such as a statute providing for automatic forfeiture of deposits to a state after a period of time, would be preempted. Moreover, as to visitorial powers, Letter 1006 references 12 USC 484, which provides that state authorities may review a national bank’s records regarding escheat if the examiners have "reasonable cause to believe" that the bank has not complied with applicable state law.

The SEC proposed amendments to Regulation S-P designed to implement Section 16 of the Fair and Accurate Credit Transactions Act of 2003 ("FACTA"), which requires the SEC and other federal agencies to adopt regulations requiring that any person who maintains or possesses a consumer report or consumer information derived from a consumer report for a business purpose properly dispose of the information. (See the June 15, 2004 Alert for a corresponding proposal by federal banking agencies.) Click on 'Previous Page' link at bottom of page to view this Alert. The proposed disposal rule would require each SEC-registered entity subject to the rule (a "covered entity") that maintains or otherwise possesses consumer report information to take reasonable measures to protect against unauthorized access to or use of that information in connection with its disposal. The proposed rule would define "disposal" to mean the discarding or abandonment of consumer report information, as well as the sale, donation or transfer of any medium, including computer equipment upon which consumer report information is stored. In determining what measures are "reasonable" under the proposed disposal rule, the SEC indicated that it would expect a covered entity to consider the sensitivity of the consumer report information, the size of the entity and complexity of its operations, the costs and benefits of different disposal methods and relevant technological changes. The SEC noted that this flexible standard for disposal is designed to allow covered entities to make decisions appropriate to their particular circumstances and is intended to minimize the burden of compliance on smaller entities. The terms "consumer report" and "consumer report information" as used in the proposed disposal rule incorporate the FACTA meaning of "consumer," which is simply "an individual," without regard for whether the individual is obtaining or has obtained a financial product from the covered entity for personal, family or household purposes (in contrast to the definition of "consumer" used elsewhere in Regulation S-P). The proposed disposal rule would apply to SEC-registered investment advisers and investment companies and to most SEC-registered broker-dealers, all entities currently subject to Regulation S-P. The proposed disposal rule would also apply to SEC-registered transfer agents, which are generally subject to Federal Trade Commission privacy regulations, rather than Regulation S-P.

In connection with the proposed disposal rule, the SEC proposed to require that procedures adopted by SEC-registered broker-dealers, investment companies and investment advisers to safeguard customer information pursuant to the existing requirements of Regulation S-P be in writing. In proposing the "in writing" requirement, the SEC noted that its examination staff had found it difficult to identify policies and procedures designed to meet the Regulation S-P information safeguard requirements in the absence of reasonable documentation. The SEC has requested comments on numerous aspects of both the proposed disposal rule and the written safeguards requirement. Comments should be received by the SEC on or before October 20, 2004.

Julie Williams, OCC Chief Counsel and First Senior Deputy Comptroller, made a presentation to the Consumer Bankers Association at which she urged bankers to analyze promptly the implications to their bank of changes to the Home Mortgage Disclosure Act ("HMDA") that will require banks to address new information on their home mortgage lending performance and publicly disclose more detailed information concerning their home mortgage lending business. Beginning in September 2005, there will be public disclosure of these newly required HMDA data including new information concerning: (1) a bank’s pricing information for higher priced loans analyzed by borrower characteristics (i.e., race, ethnicity, income level and gender), as well as the racial and ethnic composition and income level of the census tract in which the property is located; (2) higher-priced loans for home purchase loan originations, secured home improvements and refinancings; and (3) whether a loan is subject to the Home Ownership and Equity Protection Act, is for a manufactured home, and the lien status of applications and originations. Ms. Williams acknowledged that these new requirements will force banks to expend additional compliance dollars to collect and analyze HMDA data, but she stated that this data also presents banks with an opportunity to learn more about their customers and their financial needs. Ms. Williams also warned banks that they should have already begun analyzing the new data for their bank and correcting any problems they perceive. Should public disclosure in 2005 of the data lead the public to conclude that the bank is engaged in discriminatory lending, lawsuits charging predatory lending practices and adverse publicity may result in harm to the bank. Ms. Williams also noted that during examinations, the OCC (a) will discuss with a bank its own analysis of the newly required data and (b) may undertake its own analysis of the data. Where the OCC concludes that discriminatory practices have in fact taken place it will take appropriate enforcement action. Ms. Williams advised banks to "take steps now to evaluate your own [HMDA] data, identify areas that raise questions, and discover the answers to those questions."

The OCC issued an interpretive letter ("Letter 1007") providing that, as part of its authority to take bank-impermissible property in satisfaction of debts previously contracted ("DPC"), a national bank could acquire equity securities or below investment grade debt in exchange for investment grade debt securities. Letter 1007 declares that this result is proper because a bank should not be permitted to use its DPC authority to acquire an otherwise impermissible asset when a loan is involved, but not when an economically equivalent asset (i.e., the debt security) was at issue. To rely on this authority to exchange investment grade debt for equities or noninvestment grade debt, the bank must be able to show that the instrument taken was acquired "to resolve a troubled credit situation in which the bank otherwise would face credit losses." The company at issue was undergoing a bankruptcy reorganization.

In response to the increasing trend for national banks to replace their paper-based consumer notices and disclosures with electronic disclosures, the OCC issued Advisory Letter AL 2004-11 (the "Letter"), which provides guidance as to the issues that national banks should take into account to ensure that they do not expose themselves to compliance, transaction or reputation risk by failing to provide such electronic disclosures correctly. FRB pronouncements have clarified that banks wishing to deliver notices and disclosures electronically must comply with the E-SIGN Act, with existing consumer disclosure regulations, and, if they so choose, with the interim FRB electronic disclosure rules. The OCC notes in the Letter that the special consumer consent provisions of the E-SIGN Act apply only where a law, rule, or regulation mandates that disclosures be provided "in writing" and where the mandated written disclosures "relate to a transaction." The OCC states that some laws or regulations may contain implied "in writing" requirements. The Letter provides guidance as to the considerations involved in obtaining a consumer’s consent to electronic disclosures under the E-SIGN Act, and also discusses general considerations relating to the electronic provision of disclosures even if the E-SIGN Act does not apply. With respect to the technology used by banks to deliver electronic disclosures, national banks are advised to consider the inherently insecure nature of conventional e-mail in light of the bank’s obligation to protect sensitive customer information, the fact that spam filters could affect the consumer’s ability to reliably receive e-mail disclosures, and the problematic nature of using "pop-up" mobile code technology to deliver notices and disclosures in light of consumer use of pop-up blockers and the fact that pop-up disclosures may be difficult for customers to retain. The OCC also warns banks to educate their customers about "phishing" attacks, other on-line fraud, and the risks associated with identity theft.

Goodwin Procter LLP is one of the nation's leading law firms, with a team of 650 attorneys and offices in Boston, New York and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.

This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. (c) 2004 Goodwin Procter LLP. All rights reserved.