Maryland Legal Alert for Financial Services

In this issue:

• WRITTEN AML PROGRAM FOR RMLOs IS NOW AVAILABLE
• INTERNET BANKING, WIRE TRANSFERS, AND ACH CREDITS
• MD COURT CLARIFIES NEED FOR SECURITY INTEREST TO OFFSET CREDIT CARD DEBT
• RELATING TO REAL ESTATE
WRITTEN AML PROGRAM FOR RMLOs IS NOW AVAILABLE

As previously reported in Maryland Legal Alert, beginning August 13, 2012 every non-bank residential mortgage loan lender and broker must develop a written Anti-Money Laundering Program and be prepared to report "suspicious activities" to the Financial Crimes Enforcement Network (FinCEN). On August 2, 2012, we are presenting a workshop for RMLOs. Click here to see if registration is still available. Workshop materials include a sample written Anti-Money Laundering Program for Small to Medium Sized RMLOs that can be individualized for a company's unique business risks. The materials also include informational and supporting materials that will allow development of appropriate anti-money laundering policies and procedures. The Workshop materials will be available for purchase beginning August 3, 2012 at a cost of $325. Please contact Margie Corwin if you would like to purchase the materials.

INTERNET BANKING, WIRE TRANSFERS, AND ACH CREDITS

Generally, under Article 4A of the Uniform Commercial Code, banks receiving payment orders (i.e., instructions to pay money to a beneficiary) bear the risk of loss if funds are transferred without proper authorization. An exception is if the bank and customer have agreed to a "commercially reasonable security procedure" that will be used to authenticate the payment order and the bank proves that it accepted the payment order in good faith, following the security procedure. Whether a security procedure is commercially reasonable is a question of law, to be determined by the customer's circumstances and security procedures in general use – not a very precise test. Guidance concerning which security procedures or are not "commercially reasonable" has been slim since Article 4A's adoption in 1991.
In a recent case, Patco Construction Co. v. People's United Bank (1st Cir., No. 11-2031, July 3, 2012), the Court of Appeals found that the bank's security procedures were not "commercially reasonable," in large part because the bank did not make use of the security system it had. The Court reversed the lower court's grant of summary judgment in favor of the bank on an Article 4A claim. Among the bank's failures was asking for security answers for every $1 transaction (which increased the risk of keylogger fraud for frequent ACH users) and failure to monitor the risk scoring alerts produced by the bank's security system, which indicated that the subject transactions were unusual and suspicious. In addition, "the bank's generic 'one-size-fits-all' approach to customers violates Article 4A's instruction to take the customer's circumstances into account." Given the increase in internet fraud, we can expect additional court guidance on security procedures. The teaching of Patco is clear – courts will not view favorably a bank that fails to utilize the security tools it has at hand. If you have questions about this case or about structuring a "commercially reasonable security procedure," please contact Carla Witzel.

MD COURT CLARIFIES NEED FOR SECURITY INTEREST TO OFFSET CREDIT CARD DEBT

The federal Truth in Lending Act and its implementing Regulation Z have special rules regarding offset that apply only to credit card accounts. In a recent unpublished order deciding issues raised in competing summary judgment motions, the United States District Court for the District of Maryland decided that the defendant credit union's practice of recovering credit card debt from the cardholder's share accounts violated this provision in TILA because the defendant was not enforcing a "consensual security interest" as described in the Official Commentary to Regulation Z. Of note, the Court first needed to decide whether the debtor or the creditor has the burden of proving the existence of a valid consensual security interest. The Court concluded that once the debtor makes a threshold showing that a credit card issuer took funds from a deposit account and used them to satisfy the debtor's consumer credit card debt, then the burden shifts to the creditor – as an affirmative defense – to prove it did not violate the TILA offset prohibition rule. The Court made it clear that the well recognized banker's common law right of offset does not rise to the level of a consensual security interest. (While not addressed by the Court, we note that the federal credit union's statutory lien also does not rise to the level of a consensual security interest.) Relying on the Official Commentary to Regulation Z, the Court concluded that the facts presented by the credit union defendant – language included in an unsigned loan application and in two different sets of standard credit card disclosures – were not sufficient to establish a consensual security interest. Particularly because this is a decision of a Maryland court, we recommend that all credit card issuing depositories in Maryland carefully review their credit card documents to ensure a consensual security interest in deposit accounts is created. Click here for a copy of the opinion. Please contact Carla Witzel or Margie Corwin if you would like to discuss this subject further.

RELATING TO REAL ESTATE

Our Real Estate Group has prepared another excellent synopsis of current developments in the legal real estate world. If you are interested in reading about these current developments, please see the July 2012 issue of Relating to Real Estate. If you have any questions, please contact Ed Levin.