Federal Issues

OTS Fines Thrift $400,000, Orders $12 Million Reimbursement for Excessive Overdraft Protection Fees; Issues Proposed Guidance for Overdraft Practices. On April 23, the Office of Thrift Supervision (OTS) announced that Woodforest Bank will pay a civil money penalty of $400,000 and refund more than $12 million to consumers in connection with the thrift’s overdraft protection program. OTS alleged that the thrift engaged in unsafe or unsound practices by (i) failing to adequately identify, monitor, and control the risks inherent in its overdraft protection program, (ii) failing to ensure that its compliance management program was effective and comprehensive, (iii) engaging in activities that risked the erosion of its capital to unacceptable levels, and (iv) operating under a business model that relied upon an unreasonably high level of aggregate fees. OTS also alleged that the thrift originated loans that it considered, at the time of origination, to be uncollectible and to have a low probability of repayment. Under the enforcement orders, the thrift admitted to no wrongdoing and the thrift agreed, among other things, to (i) cease the unsafe and unsound overdraft fee practices and reform its overdraft protection, (ii) submit a new three-year business plan, and (iii) submit a plan for managing cash flow.

The OTS simultaneously issued proposed Supplemental Guidance on Overdraft Protection Programs (the Guidance). The Guidance revises 2005 OTS guidance on overdraft protection programs (reported in InfoBytes, Feb. 18, 2005). In the Guidance, OTS outlines twelve “best practices” for communicating with consumers, under which thrifts must (i) fairly represent an overdraft protection program, (ii) provide information about alternatives to overdraft protection programs, (iii) clearly explain the discretionary nature of an overdraft protection program, (iv) distinguish overdraft protection from free services, (v) clearly disclose program fees, (vi) clarify that fees will reduce the amount of overdraft protection provided, (vii) demonstrate when multiple fees will be charged, (viii) explain the impact of transaction-clearing policies, (ix) illustrate the type of transactions covered by overdraft protection, (x) disclose account balances to distinguish consumer funds from funds made available through overdraft protection, (xi) promptly notify consumers of overdraft protection program usage each time used, and (xii) inform consumers about reinstating access to overdraft services following a program suspension. The Guidance also updates a discussion of five “best practices” on the manner of providing overdraft protection, which emphasize (i) providing choices to consumers, (ii) reasonably limiting aggregate overdraft fees, (iii) refraining from manipulating transaction-clearing rules to maximize fees, (iv) monitoring overdraft protection program usage, and (v) fairly reporting program usage. Comments on the Guidance are due 60 days after publication in the Federal Register. For a copy of the press release, please see here;
For a copy of the cease and desist order, please see here; for a copy of the civil money penalty assessment, please see here; and for a copy of the Guidance, please see here.

OCC Fines Bank $100,000, Orders $5.1 Million in Restitution for Unsafe and Unsound Practices Violations; Bank to Pay Restitution to Non-Customers. On April 19, the Office of the Comptroller of the Currency (OCC) entered into a settlement agreement with T Bank, N.A., Dallas, Texas regarding the bank’s allegedly unsafe and unsound practices, as well as unfair practices under the Federal Trade Commission Act, pertaining to remotely created checks (RCCs). OCC alleged that a “substantial number” of RCCs, demand drafts and similar instruments deposited at the bank on behalf of a payment processor and several telemarketers and merchants were returned for various reasons, including non-authorization by consumers for withdrawal of funds and claims that the consumers never received the products or services promised by the telemarketers or merchants. Specifically, according to OCC, the bank (i) performed inadequate due diligence prior to opening the accounts, (ii) performed inadequate monitoring of the rates of return on the RCCs and related instruments, and (iii) maintained inadequate policies, procedures, systems, and controls relating to the bank’s relationship with third parties (e.g., merchants and telemarketers). The bank, however, was not alleged to be directly responsible for, among other things, non-authorization of funds or the merchants and telemarketers not providing the products or services. Under the settlement, the bank (i) admits to no wrongdoing, (ii) will pay a $100,000 civil money penalty, and (iii) will make $5.1 million in restitution payments to the approximately 60,000 adversely affected consumers. Notably, restitution will be paid to non-customers of the bank. For a copy of the press release, please see http://occ.treas.gov/ftp/release/2010-45.htm. For a copy of the agreement, please see 
http://occ.treas.gov/ftp/release/2010-45a.pdf. For a copy of the consent order, please see 
http://occ.treas.gov/ftp/release/2010-45b.pdf.

OTS Issues Guidance on Risk Weighting of Early Default Provisions. On April 16, the Office of Thrift Supervision (OTS) issued a CEO Letter providing guidance on risk weighting of early default provisions. In the letter, OTS explains that, under certain circumstances, early default clauses are excluded from the definition of “recourse” and are not subject to risk-based capital holding requirements when carried on a saving association’s (SA’s) books. According to OTS, when an early default clause falls within the 120-day exemption period, an SA is not required to hold additional risk-based capital. However, if an early default clause is actually triggered, or if an SA is unable to track which loans it might be required to repurchase, the SA must hold additional risk-based capital. Likewise, when an early default clause extends beyond 120 days, an SA must hold risk-based capital from the date of transfer of its loans until it can determine that the warranty period has expired. Additionally, if an early default clause is combined with a second representation or warranty, the SA must determine whether the second trigger, sometimes also referred to as a “double trigger,” limits recourse liability. If the second trigger does limit recourse liability, the SA may not be required to hold risk-based capital from the date of transfer. For a copy of the CEO Letter, please see http://www.ots.treas.gov/_files/25344.pdf.

DOJ States Fair Lending Enforcement Is A Top Priority for DOJ Civil Rights Division. On April 20, Thomas E. Perez, Assistant Attorney General in the Department of Justice (DOJ), testified before the United States Senate Committee on the Judiciary on the “restoration and reformation” of the DOJ Civil Right’s Division (Division), during which he stated that fair lending enforcement is a top priority for the Division. Assistant Attorney General Perez also testified that during the first year of the new administration, the Division initiated 38 lending discrimination matters, 29 of which were referrals from bank regulatory agencies. In March, the Division announced a settlement with two AIG subsidiaries resolving allegations of discrimination against African American borrowers by brokers with whom the subsidiaries contracted. The settlement marked the DOJ’s first time to hold a lender accountable for failing to monitor its brokers to ensure that borrowers were not charged higher fees based on their race (as reported in InfoBytes, Mar. 5, 2010). Assistant Attorney General Perez also noted that the Division hired a new Special Counsel for Fair Lending and created a Fair Lending Unit in the Housing Section. For a copy of the statement, please see http://www.justice.gov/crt/speeches/perez_testimony_042010.pdf.

FTC Issues Annual Report; Announces Proposed Rules for Mortgage Advertising Practices, Servicing Forthcoming. On April 23, Federal Trade Commission (FTC) Chairman Jon Leibowitz issued the FTC’s 2010 Annual Report (the Report). The Report generally discusses enforcement actions and rulemakings from the previous year pertaining to, among other things, (i) unfair deceptive acts and practices claims regarding fair lending, debt collection, debt relief services, risk-based pricing, credit repair services, payday lending, and robocalls, (ii) privacy and data security issues, and (iii) mortgage foreclosure rescue and loan modification scams. Specifically, the Report addresses the FTC’s 2009 advanced notice of proposed rulemaking (ANPR) concerning unfair and deceptive practices in the mortgage industry (reported in InfoBytes, May 29, 2009). Notably, the Report states that the FTC anticipates publishing a second proposed rule in the “near future” addressing mortgage advertising practices, which will be followed by a third proposed rule addressing mortgage servicing. The Report, however, does not discuss proposed rules concerning origination and appraisals, which were also noted in the 2009 ANPR, suggesting that the FTC may not be planning to issue rules in those areas. For a copy of the press release and report, please see http://www.ftc.gov/opa/2010/04/annualreport.shtm.

Federal Reserve Announces Public Hearings on HMDA. On April 23, the Federal Reserve Board announced that it will hold four public hearings on potential revisions to Regulation C, which implements the Home Mortgage Disclosure Act. The hearings will take place at the following Federal Reserve Bank locations: Atlanta, July 15; San Francisco, August 5; Chicago, September 16; and Washington, D.C., September 24. Interested parties may deliver oral statements in-person or provide written statements for the record. In addition to identifying general trends and assessing the need to obtain additional data, the hearings will also address whether the 2002 revisions to Regulation C have facilitated obtaining useful and accurate information about the mortgage market. For a copy of the press release, please see http://www.federalreserve.gov/newsevents/press/bcreg/20100423a.htm.

FTC Bans Eight Credit Repair and Loan-Mod Companies from Providing Services, Issues Judgment Over $7.5 Million. On April 22, the Federal Trade Commission (FTC) issued a release announcing the entry of an order by the U.S. District Court for the District of New Jersey dated February 4, 2010 banning several credit repair companies and loan modification companies and their owners from selling credit repair services or selling mortgage loan modification and foreclosure relief services. In addition, the order specifically prohibits the defendants from misleading consumers about any good or service, such as refund terms, government affiliation, and total cost, and also prohibits the defendants from misleading consumers about financial goods and services, such as loan terms or rates, how much a consumer will save by enrolling in a debt relief service, and credit terms other than those a lender actually offers. The ban stems from charges brought by the FTC in early 2009 that the companies made false promises that they would improve consumers’ credit scores by removing negative information (e.g., late payments, charge-offs, accounts discharged in bankruptcy, etc.) or would halt borrower foreclosures, as well as charged consumers high upfront fees. The court issued a $7.5 million judgment against the credit repair companies and a $32,710 judgment against the loan modification companies. For a copy of the notice, please see http://www.ftc.gov/opa/2010/04/unitedcredit.shtm

FTC Settles FCRA Allegations Against Consumer Reporting Agency. On April 22, the Federal Trade Commission (FTC) settled charges with a nationwide specialty consumer reporting agency (Central Credit LLC) that provides credit reports to casinos. The FTC charged the reporting agency with violating the Fair Credit Reporting Act (FCRA) for failing to (i) inform the entities to which it furnished credit information of their legal obligations under FCRA, (ii) inform consumers of their rights under FCRA, and (iii) establish a clear, streamlined process for consumers to obtain a free annual credit report via a toll-free number. Under the settlement, the reporting agency is required to (i) provide FCRA-required notices to users and furnishers of consumer report information, (ii) provide a “Summary of Rights” to consumers, and (iii) implement a clear, streamlined process for consumers to obtain a free annual credit report via a toll-free number. In addition, the settlement requires the reporting agency to pay a $150,000 civil penalty and bars them from future violations of the FCRA. For more information, please see http://www.ftc.gov/opa/2010/04/centralcredit.shtm.

State Issues

Mississippi Enacts Legislation Revising SAFE Act Implementation. The Mississippi legislature recently enacted legislation (H.B. 223) amending Mississippi’s Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) compliance legislation. The bill generally amends certain definitions and exemptions, as well as changes the licensing process. Most notably, H.B. 223 amends the definition of “mortgage loan originator” to include individuals who take residential mortgage loan applications or (rather than and) who offer or negotiate terms of a residential mortgage loan. The bill adds definitions for “taking an application for a residential mortgage loan” and “offering or negotiating a residential mortgage loan.” Furthermore, the bill exempts from the SAFE Act compliance legislation institutions regulated by the Farm Credit Administration, certain licensed lenders, and certain mortgage loan servicers. For a copy of the bill, please see here.

Courts

U.S. Supreme Court Holds Legal Errors Not Bona Fide Errors Under FDCPA. On April 21, the U.S. Supreme Court held that a legal error does not qualify for the bona fide error defense under the Fair Debt Collection Practices Act (FDCPA). Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 559 U.S. –, 2010 WL 1558977 (U.S. Apr. 21, 2010). In Jerman, a defendant law firm sent a foreclosure notice and an FDCPA validation notice to the plaintiff borrower stating that the borrower’s debt would be assumed to be valid unless disputed “in writing.” After successfully disputing the debt and having the complaint dismissed, the borrower filed suit, claiming that the law firm’s validation notice violated the FDCPA because the FDCPA does not require a dispute to be “in writing.” The lower court, including the U.S. Court of Appeals for the Sixth Circuit, found that the law firm’s validation notice violated the FDCPA, and that the FDCPA’s bona fide error provision applied to the law firm’s legal error. The Supreme Court reversed, examining the plain language of the statute, as well as legislative history, to conclude that a legal error, as opposed to a factual or clerical error, does not qualify for the bona fide error defense under the FDCPA. The court’s reasoning included a finding that the FDCPA’s bona fide error provision is analogous to a provision in the Truth in Lending Act that explicitly excludes legal errors as bona fide errors. For a copy of the opinion, please see 
http://www.supremecourt.gov/opinions/09pdf/08-1200.pdf.

California Federal Court Finds Non-Disclosure of YSP Did Not Violate TILA or Certain RESPA Provisions; HOLA Preempts State Law Claims. On April 15, the U.S. District Court for the Eastern District of California, in a ruling on a motion to dismiss and motion to strike, held that a defendant bank’s alleged non-disclosure of a yield spread premium (YSP) did not violate the anti-referral fee and anti-fee split provisions of the Real Estate Settlement Procedures Act (RESPA) or the Truth in Lending Act (TILA) and that the Home Owner’s Loan Act (HOLA) preempts certain state law claims pertaining to the alleged non-disclosure of a YSP. Bassett v. Ruggles, No. CV-F-09-528, 2010 WL 1525554 (E.D. Cal. Apr. 15, 2010). In Bassett, the plaintiff borrowers entered into a mortgage loan transaction through a mortgage broker, and the loan was made by a federal savings bank. The borrowers claimed that the broker received compensation from the bank despite representing that no such compensation would be paid. The borrowers alleged that the non-disclosure of this compensation constituted violations of RESPA, TILA, and a number of state consumer-protection laws. The court dismissed some RESPA claims, finding that Section 8 of RESPA does not require the separate disclosure of a YSP and that RESPA’s provisions related to the delivery of disclosures (Sections 4 and 5) do not authorize a private right of action. However, the court did not dismiss RESPA Section 8 claims, holding that the YSP may violate RESPA if it either is unreasonably high in relation to the services performed or if services were not actually performed for the fee. The court determined that these findings could not be resolved at this stage of the proceedings. The court also dismissed the TILA claim, finding that the non-disclosure of a YSP does not violate TILA because the amount of the YSP is already reflected in the disclosed finance charge. Finally, the court found that, with respect to allegations against Flagstar Bank, HOLA preempted state-law claims of fraud, conspiracy to breach fiduciary duty, and violations of Section 17200 of the California Unfair Competition Law related to the non-disclosure of the YSP. For a copy of the opinion, please see here.

Virginia Federal Court Holds Securitization of Mortgage Does Not Bar Foreclosure; Rejects “Splitting the Note” and “Double Recovery” Theories. On April 8, the United States District Court for the Eastern District of Virginia held that the securitization of a mortgage does not bar foreclosure. Larota-Florez v. Goldman Sachs Mortg. Co., No. 01:09cv1181, 2010 WL 1444026 (E.D. Va. Apr. 8, 2010). In Larota-Florez, a defendant substitute trustee initiated a foreclosure sale of the plaintiff borrowers’ property following the borrowers’ default for failure to meet their monthly mortgage repayment obligations. The borrowers filed a complaint on the same day the foreclosure was scheduled and argued that the substitute trustee had no legal or equitable authority to foreclose on the borrowers’ property and, in response, the defendants (including the original lender, the servicer of the loan, and Mortgage Electronic Registration Systems) filed a motion for summary judgment. In granting the defendants’ motion, the court determined that the substitute trustee had authority to foreclose on the borrowers’ property because (i) it had been legally appointed as substitute trustee with authority to foreclose, and (ii) it was in possession of the original note and deed of trust. In response to the borrowers’ argument that the alleged securitization of the mortgage loan by certain other defendants effectively split the note from the deed of trust and, thereby, barred foreclosure, the court noted that “Virginia law is clear that the negotiation of a note or bond secured by a deed of trust or mortgage carries with it that security.” Additionally, the court emphasized that the creation of mortgage-related securities is explicitly permitted under federal law and that trustees of securitized mortgages regularly and legally conduct foreclosure sales. Finally, the court rejected the borrowers’ argument that the various credit enhancement policies (e.g., credit default swaps) related to the securitized mortgage paid out to certain other defendants had already made these defendants whole and that foreclosure on the borrower’s property would, therefore, result in a “double recovery” for the these defendants in violation of Virginia law. The court reasoned that, in addition to none of the named defendants being able to obtain such a “double recovery” (because none owned or securitized the notes), (i) neither federal nor Virginia law prohibit credit enhancement or credit default swap contracts, and (ii) credit default swap contracts are separate, third-party contracts that do not “indemnify the buyer of protection against loss, but merely allow parties to balance risk.” For a copy of the opinion, please see here.

West Virginia Federal Court Rejects HOLA Preemption of Certain State Law Claims Pertaining to Late Charges. On April 19, the U.S. District Court for the Northern District of West Virginia held that the Home Owner’s Loan Act (HOLA) does not preempt certain state law claims pertaining to late charges made by a federal thrift. Padgett v. OneWest Bank, FSB, No. 3:10-cv-08, 2010 WL 1539839 (N.D.W. Va. Apr. 19, 2010). In a prior bankruptcy, the plaintiff borrower and his lender filed an agreed order treating the borrower as current and moving his one month arrearage to the end of his loan obligation. The defendant, a federal thrift, acquired that lender and allegedly began to treat the borrower as one month late, charging him late fees and reporting his account as delinquent. The borrower sued the federal thrift for, among other things, violations of the West Virginia Consumer Credit and Protection Act (WVCCPA) and breach of contract for the alleged assessment of late charges and for defamation for the alleged improper credit reporting. The federal thrift argued that HOLA preempted the borrower’s claims, however, the court denied the motion to the extent it sought to preempt the borrower’s WVCCPA and breach of contract claims based on the late charges. According to the court, these claims were not preempted because they did not seek to regulate the terms of the loan agreement – an action that HOLA would preempt – but instead sought to hold the federal thrift to the terms of that agreement. The court also denied the federal thrift’s motion with respect to the claims of defamation. Relying on In re Ocwen Loan Servicing, LLC Mortg. Servicing Litig., 491 F.3d 638 (7th Cir. 2007), the court held that the “common law claim of defamation is ‘a good example of [a] claim that the [HOLA] does not preempt,’” noting that HOLA does not deprive a defamed consumer his basic state common law remedy. According to the court, “prohibiting . . . federal savings banks from defaming consumers certainly has no more than an incidental effect on lending operations.” For a copy of the opinion, please see here.

Superior Court of Connecticut Holds Failure to Provide Two Notices of Right to Rescind May Create Entitlement to Three-Year Rescission Period Under TILA. On March 12, the Superior Court of Connecticut held that a technical violation of the Truth in Lending Act’s (TILA) requirement that an obligor be provided with two notices of the right to rescind may trigger the statute’s three-year rescissionary period. Deutsche Bank Nat’l Trust Co. v. Segarra, CV085018505, 2010 WL 1494241 (Conn. Super. Mar. 12, 2010). In this case, the plaintiff trustee for the certificate holders of a home loan trust brought a foreclosure action against the defendant obligor. The obligor answered the complaint, alleging a number of special defenses and counterclaims, including a claim for rescission under TILA and the Connecticut Truth-in-Lending Act. The obligor specifically claimed that the original lender provided him with only one copy of the notice of the right to rescind instead of the two required, thus triggering TILA’s three-year rescissionary period and rendering timely his exercise of that right one day before it expired. In moving for summary judgment, the trustee argued that the three-year period is triggered by a failure to deliver a "conspicuous" notice, and not by a violation so merely technical as the one alleged. The trustee attached a copy of the obligor’s signed notice and argued that his effort to rescind was untimely under the applicable three-day period. While acknowledging recent changes in federal law that have discouraged a "hypertechnical" reading of TILA, the court relied on case law from Michigan and the Sixth Circuit Court of Appeals to find that there was a question of fact precluding summary judgment as to whether a failure to provide two copies of the notice triggers the three-year rescissionary period. For a copy of the opinion, please contact 
infobytes@buckleysandler.com.

Wisconsin Federal Court Dismisses FACTA Statutory Damages Claim for Failing to Adequately Allege Willfulness. On March 31, the U.S. District Court for the Eastern District of Wisconsin dismissed a claim for statutory damages under the Fair and Accurate Credit Transactions Act (FACTA) because the complaint failed to plead more than conclusions and inferences based on generalities. Gardner v. Appleton Baseball Club, Inc., No. 09-C-705, 2010 WL 1368663 (E.D. Wis. Mar. 31, 2010). In Gardner, the plaintiff consumer alleged that the defendant, the operator of a professional sports team, willfully violated FACTA by printing a receipt for a transaction that contained the expiration date of his credit card. The operator moved to dismiss because the complaint failed to adequately create an inference that it acted willfully when it failed to comply with FACTA. While acknowledging that "willfulness" under FACTA includes both knowing and reckless conduct, the court agreed with the operator, holding that the consumer’s complaint was legally insufficient. First, the court held that merely alleging (i) that the operator violated FACTA by printing the expiration date of the consumer’s credit card after June 3, 2008, and (ii) that most of the operator’s peers has “readily” brought themselves into compliance with FACTA, was insufficient to plead a willful violation of FACTA. In arriving at its decision, the court noted that the complaint did not contain allegations that the operator had actual knowledge about the FACTA truncation requirements and noted that several of the decisions cited by the consumer that allowed similarly-pleaded violations of FACTA to proceed were reached prior to the U.S. Supreme Court’s revised pleading standards in Iqbal. The court also noted that, while the operator failed to redact the expiration date of the card, the operator did properly truncate the card number, thus evidencing that the operator attempted to comply with FACTA and could not have acted “willfully.” For a copy of the opinion, please see here.

Firm News

John Kromer will moderate a panel entitled "RESPA Update" at the American Bar Association Business Law Section’s Spring Meeting in Denver, Colorado on April 24. 

Kirk Jensen will speak on a panel addressing the Servicemembers Civil Relief Act at the American Bar Association Business Law Section’s Spring Meeting in Denver, Colorado on April 24. 

Andrew Sandler will speak on April 26 at the National CRA, HMDA & Fair Lending Forum held in Dallas, Texas. Andrew will also host a Welcome Reception at the Dallas/Addison Marriott Quorum Hotel that evening and, on April 27, present a Fair Lending Risk Update.

Andrew Sandler will speak on a panel and roundtable session on the topic “Fair Lending” on May 4 at the MBA Legal Issues and Regulatory Compliance Conference in Coronado, California.

Andrew Sandler will speak on June 6-7 at CBA Live, the Consumer Banker Association Conference being held in Hollywood, Florida. Andrew will be presenting a Fair Lending Industry Overview on Fair Lending on June 6 and will be speaking on Auto Fair Lending on June 7.

Andrew Sandler was recently quoted in the Wall Street Journal regarding the SEC’s recent securities fraud charges against Goldman Sachs.

Jonathan Cannon was quoted in a RESPA News article “Court Certifies Class in Section 8 Overcharge Suit” on April 9.

David Baris spoke regarding bank director liability at the NACD/AABD Bank Director Workshop on April 14.

BuckleySandler LLP hosted its Annual Fair Lending Today Conference on Compliance, Regulatory & Litigation Issues in Today’s Changing Enforcement Environment in Washington, DC on April 19.

Lori Sommerfield co-hosted the Minnesota Banking Law Institute, a one-day symposium of banking law topics, and moderated a panel on "Hot Topics" in mortgage servicing on April 19.

Christopher Witeck presented the topic “What’s up with Ginnie Mae?” on April 21 at the NRMLA Road Show in Atlanta, GA.

Andrew Sandler spoke on April 22 at the American Bar Association Banking Law Committee Spring Meeting in Denver, Colorado on the topic “Retail Banking and Consumer Law; Topic: Fair and Responsible Lending - Regulatory and Enforcement Update”.

Lori Sommerfield spoke at the ABA Banking Law Committee meetings in Denver, Colorado, on April 22-23.

Joe Kolar and David Baris presented a webinar on April 23 to the Community Mortgage Lenders of America on “Banking Opportunities for Mortgage Lenders.”

Ben Klubes spoke at the Sterling National’s Executive Round Table, providing a legal and regulatory update, in Ponte Vedra Beach, FL on April 23.

Jeff Naimon presented on a TILA Panel on April 23 at the American Bar Association Section of Business Law Spring Meeting in Denver, CO.

Mortgages

DOJ States Fair Lending Enforcement Is A Top Priority for DOJ Civil Rights Division. On April 20, Thomas E. Perez, Assistant Attorney General in the Department of Justice (DOJ), testified before the United States Senate Committee on the Judiciary on the “restoration and reformation” of the DOJ Civil Right’s Division (Division), during which he stated that fair lending enforcement is a top priority for the Division. Assistant Attorney General Perez also testified that during the first year of the new administration, the Division initiated 38 lending discrimination matters, 29 of which were referrals from bank regulatory agencies. In March, the Division announced a settlement with two AIG subsidiaries resolving allegations of discrimination against African American borrowers by brokers with whom the subsidiaries contracted. The settlement marked the DOJ’s first time to hold a lender accountable for failing to monitor its brokers to ensure that borrowers were not charged higher fees based on their race (as reported in InfoBytes, Mar. 5, 2010). Assistant Attorney General Perez also noted that the Division hired a new Special Counsel for Fair Lending and created a Fair Lending Unit in the Housing Section. For a copy of the statement, please see http://www.justice.gov/crt/speeches/perez_testimony_042010.pdf.

FTC Issues Annual Report; Announces Proposed Rules for Mortgage Advertising Practices, Servicing Forthcoming. On April 23, Federal Trade Commission (FTC) Chairman Jon Leibowitz issued the FTC’s 2010 Annual Report (the Report). The Report generally discusses enforcement actions and rulemakings from the previous year pertaining to, among other things, (i) unfair deceptive acts and practices claims regarding fair lending, debt collection, debt relief services, risk-based pricing, credit repair services, payday lending, and robocalls, (ii) privacy and data security issues, and (iii) mortgage foreclosure rescue and loan modification scams. Specifically, the Report addresses the FTC’s 2009 advanced notice of proposed rulemaking (ANPR) concerning unfair and deceptive practices in the mortgage industry (reported in InfoBytes, May 29, 2009). Notably, the Report states that the FTC anticipates publishing a second proposed rule in the “near future” addressing mortgage advertising practices, which will be followed by a third proposed rule addressing mortgage servicing. The Report, however, does not discuss proposed rules concerning origination and appraisals, which were also noted in the 2009 ANPR, suggesting that the FTC may not be planning to issue rules in those areas. For a copy of the press release and report, please see here.

Federal Reserve Announces Public Hearings on HMDA. On April 23, the Federal Reserve Board announced that it will hold four public hearings on potential revisions to Regulation C, which implements the Home Mortgage Disclosure Act. The hearings will take place at the following Federal Reserve Bank locations: Atlanta, July 15; San Francisco, August 5; Chicago, September 16; and Washington, D.C., September 24. Interested parties may deliver oral statements in-person or provide written statements for the record. In addition to identifying general trends and assessing the need to obtain additional data, the hearings will also address whether the 2002 revisions to Regulation C have facilitated obtaining useful and accurate information about the mortgage market. For a copy of the press release, please see http://www.federalreserve.gov/newsevents/press/bcreg/20100423a.htm.

FTC Bans Eight Credit Repair and Loan-Mod Companies from Providing Services, Issues Judgment Over $7.5 Million. On April 22, the Federal Trade Commission (FTC) issued a release announcing the entry of an order by the U.S. District Court for the District of New Jersey dated February 4, 2010 banning several credit repair companies and loan modification companies and their owners from selling credit repair services or selling mortgage loan modification and foreclosure relief services. In addition, the order specifically prohibits the defendants from misleading consumers about any good or service, such as refund terms, government affiliation, and total cost, and also prohibits the defendants from misleading consumers about financial goods and services, such as loan terms or rates, how much a consumer will save by enrolling in a debt relief service, and credit terms other than those a lender actually offers. The ban stems from charges brought by the FTC in early 2009 that the companies made false promises that they would improve consumers’ credit scores by removing negative information (e.g., late payments, charge-offs, accounts discharged in bankruptcy, etc.) or would halt borrower foreclosures, as well as charged consumers high upfront fees. The court issued a $7.5 million judgment against the credit repair companies and a $32,710 judgment against the loan modification companies. For a copy of the notice, please see here

Mississippi Enacts Legislation Revising SAFE Act Implementation. The Mississippi legislature recently enacted legislation (H.B. 223) amending Mississippi’s Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) compliance legislation. The bill generally amends certain definitions and exemptions, as well as changes the licensing process. Most notably, H.B. 223 amends the definition of “mortgage loan originator” to include individuals who take residential mortgage loan applications or (rather than and) who offer or negotiate terms of a residential mortgage loan. The bill adds definitions for “taking an application for a residential mortgage loan” and “offering or negotiating a residential mortgage loan.” Furthermore, the bill exempts from the SAFE Act compliance legislation institutions regulated by the Farm Credit Administration, certain licensed lenders, and certain mortgage loan servicers. For a copy of the bill, please see here.

California Federal Court Finds Non-Disclosure of YSP Did Not Violate TILA or Certain RESPA Provisions; HOLA Preempts State Law Claims. On April 15, the U.S. District Court for the Eastern District of California, in a ruling on a motion to dismiss and motion to strike, held that a defendant bank’s alleged non-disclosure of a yield spread premium (YSP) did not violate the anti-referral fee and anti-fee split provisions of the Real Estate Settlement Procedures Act (RESPA) or the Truth in Lending Act (TILA) and that the Home Owner’s Loan Act (HOLA) preempts certain state law claims pertaining to the alleged non-disclosure of a YSP. Bassett v. Ruggles, No. CV-F-09-528, 2010 WL 1525554 (E.D. Cal. Apr. 15, 2010). In Bassett, the plaintiff borrowers entered into a mortgage loan transaction through a mortgage broker, and the loan was made by a federal savings bank. The borrowers claimed that the broker received compensation from the bank despite representing that no such compensation would be paid. The borrowers alleged that the non-disclosure of this compensation constituted violations of RESPA, TILA, and a number of state consumer-protection laws. The court dismissed some RESPA claims, finding that Section 8 of RESPA does not require the separate disclosure of a YSP and that RESPA’s provisions related to the delivery of disclosures (Sections 4 and 5) do not authorize a private right of action. However, the court did not dismiss RESPA Section 8 claims, holding that the YSP may violate RESPA if it either is unreasonably high in relation to the services performed or if services were not actually performed for the fee. The court determined that these findings could not be resolved at this stage of the proceedings. The court also dismissed the TILA claim, finding that the non-disclosure of a YSP does not violate TILA because the amount of the YSP is already reflected in the disclosed finance charge. Finally, the court found that, with respect to allegations against Flagstar Bank, HOLA preempted state-law claims of fraud, conspiracy to breach fiduciary duty, and violations of Section 17200 of the California Unfair Competition Law related to the non-disclosure of the YSP. For a copy of the opinion, please see here.

Virginia Federal Court Holds Securitization of Mortgage Does Not Bar Foreclosure; Rejects “Splitting the Note” and “Double Recovery” Theories. On April 8, the United States District Court for the Eastern District of Virginia held that the securitization of a mortgage does not bar foreclosure. Larota-Florez v. Goldman Sachs Mortg. Co., No. 01:09cv1181, 2010 WL 1444026 (E.D. Va. Apr. 8, 2010). In Larota-Florez, a defendant substitute trustee initiated a foreclosure sale of the plaintiff borrowers’ property following the borrowers’ default for failure to meet their monthly mortgage repayment obligations. The borrowers filed a complaint on the same day the foreclosure was scheduled and argued that the substitute trustee had no legal or equitable authority to foreclose on the borrowers’ property and, in response, the defendants (including the original lender, the servicer of the loan, and Mortgage Electronic Registration Systems) filed a motion for summary judgment. In granting the defendants’ motion, the court determined that the substitute trustee had authority to foreclose on the borrowers’ property because (i) it had been legally appointed as substitute trustee with authority to foreclose, and (ii) it was in possession of the original note and deed of trust. In response to the borrowers’ argument that the alleged securitization of the mortgage loan by certain other defendants effectively split the note from the deed of trust and, thereby, barred foreclosure, the court noted that “Virginia law is clear that the negotiation of a note or bond secured by a deed of trust or mortgage carries with it that security.” Additionally, the court emphasized that the creation of mortgage-related securities is explicitly permitted under federal law and that trustees of securitized mortgages regularly and legally conduct foreclosure sales. Finally, the court rejected the borrowers’ argument that the various credit enhancement policies (e.g., credit default swaps) related to the securitized mortgage paid out to certain other defendants had already made these defendants whole and that foreclosure on the borrower’s property would, therefore, result in a “double recovery” for the these defendants in violation of Virginia law. The court reasoned that, in addition to none of the named defendants being able to obtain such a “double recovery” (because none owned or securitized the notes), (i) neither federal nor Virginia law prohibit credit enhancement or credit default swap contracts, and (ii) credit default swap contracts are separate, third-party contracts that do not “indemnify the buyer of protection against loss, but merely allow parties to balance risk.” For a copy of the opinion, please see here.

Superior Court of Connecticut Holds Failure to Provide Two Notices of Right to Rescind May Create Entitlement to Three-Year Rescission Period Under TILA. On March 12, the Superior Court of Connecticut held that a technical violation of the Truth in Lending Act’s (TILA) requirement that an obligor be provided with two notices of the right to rescind may trigger the statute’s three-year rescissionary period. Deutsche Bank Nat’l Trust Co. v. Segarra, CV085018505, 2010 WL 1494241 (Conn. Super. Mar. 12, 2010). In this case, the plaintiff trustee for the certificate holders of a home loan trust brought a foreclosure action against the defendant obligor. The obligor answered the complaint, alleging a number of special defenses and counterclaims, including a claim for rescission under TILA and the Connecticut Truth-in-Lending Act. The obligor specifically claimed that the original lender provided him with only one copy of the notice of the right to rescind instead of the two required, thus triggering TILA’s three-year rescissionary period and rendering timely his exercise of that right one day before it expired. In moving for summary judgment, the trustee argued that the three-year period is triggered by a failure to deliver a "conspicuous" notice, and not by a violation so merely technical as the one alleged. The trustee attached a copy of the obligor’s signed notice and argued that his effort to rescind was untimely under the applicable three-day period. While acknowledging recent changes in federal law that have discouraged a "hypertechnical" reading of TILA, the court relied on case law from Michigan and the Sixth Circuit Court of Appeals to find that there was a question of fact precluding summary judgment as to whether a failure to provide two copies of the notice triggers the three-year rescissionary period. For a copy of the opinion, please contact 
infobytes@buckleysandler.com.

Banking

OTS Fines Thrift $400,000, Orders $12 Million Reimbursement for Excessive Overdraft Protection Fees; Issues Proposed Guidance for Overdraft Practices. On April 23, the Office of Thrift Supervision (OTS) announced that Woodforest Bank will pay a civil money penalty of $400,000 and refund more than $12 million to consumers in connection with the thrift’s overdraft protection program. OTS alleged that the thrift engaged in unsafe or unsound practices by (i) failing to adequately identify, monitor, and control the risks inherent in its overdraft protection program, (ii) failing to ensure that its compliance management program was effective and comprehensive, (iii) engaging in activities that risked the erosion of its capital to unacceptable levels, and (iv) operating under a business model that relied upon an unreasonably high level of aggregate fees. OTS also alleged that the thrift originated loans that it considered, at the time of origination, to be uncollectible and to have a low probability of repayment. Under the enforcement orders, the thrift admitted to no wrongdoing and the thrift agreed, among other things, to (i) cease the unsafe and unsound overdraft fee practices and reform its overdraft protection, (ii) submit a new three-year business plan, and (iii) submit a plan for managing cash flow.

The OTS simultaneously issued proposed Supplemental Guidance on Overdraft Protection Programs (the Guidance). The Guidance revises 2005 OTS guidance on overdraft protection programs (reported in InfoBytes, Feb. 18, 2005). In the Guidance, OTS outlines twelve “best practices” for communicating with consumers, under which thrifts must (i) fairly represent an overdraft protection program, (ii) provide information about alternatives to overdraft protection programs, (iii) clearly explain the discretionary nature of an overdraft protection program, (iv) distinguish overdraft protection from free services, (v) clearly disclose program fees, (vi) clarify that fees will reduce the amount of overdraft protection provided, (vii) demonstrate when multiple fees will be charged, (viii) explain the impact of transaction-clearing policies, (ix) illustrate the type of transactions covered by overdraft protection, (x) disclose account balances to distinguish consumer funds from funds made available through overdraft protection, (xi) promptly notify consumers of overdraft protection program usage each time used, and (xii) inform consumers about reinstating access to overdraft services following a program suspension. The Guidance also updates a discussion of five “best practices” on the manner of providing overdraft protection, which emphasize (i) providing choices to consumers, (ii) reasonably limiting aggregate overdraft fees, (iii) refraining from manipulating transaction-clearing rules to maximize fees, (iv) monitoring overdraft protection program usage, and (v) fairly reporting program usage. Comments on the Guidance are due 60 days after publication in the Federal Register.For a copy of the press release, please see here;
For a copy of the cease and desist order, please see herefor a copy of the civil money penalty assessment, please see here; and for a copy of the Guidance, please see here.

OCC Fines Bank $100,000, Orders $5.1 Million in Restitution for Unsafe and Unsound Practices Violations; Bank to Pay Restitution to Non-Customers. On April 19, the Office of the Comptroller of the Currency (OCC) entered into a settlement agreement with T Bank, N.A., Dallas, Texas regarding the bank’s allegedly unsafe and unsound practices, as well as unfair practices under the Federal Trade Commission Act, pertaining to remotely created checks (RCCs). OCC alleged that a “substantial number” of RCCs, demand drafts and similar instruments deposited at the bank on behalf of a payment processor and several telemarketers and merchants were returned for various reasons, including non-authorization by consumers for withdrawal of funds and claims that the consumers never received the products or services promised by the telemarketers or merchants. Specifically, according to OCC, the bank (i) performed inadequate due diligence prior to opening the accounts, (ii) performed inadequate monitoring of the rates of return on the RCCs and related instruments, and (iii) maintained inadequate policies, procedures, systems, and controls relating to the bank’s relationship with third parties (e.g., merchants and telemarketers). The bank, however, was not alleged to be directly responsible for, among other things, non-authorization of funds or the merchants and telemarketers not providing the products or services. Under the settlement, the bank (i) admits to no wrongdoing, (ii) will pay a $100,000 civil money penalty, and (iii) will make $5.1 million in restitution payments to the approximately 60,000 adversely affected consumers. Notably, restitution will be paid to non-customers of the bank. For a copy of the press release, please see here. For a copy of the agreement, please see http://occ.treas.gov/ftp/release/2010-45a.pdf. For a copy of the consent order, please see http://occ.treas.gov/ftp/release/2010-45b.pdf.

OTS Issues Guidance on Risk Weighting of Early Default Provisions. On April 16, the Office of Thrift Supervision (OTS) issued a CEO Letter providing guidance on risk weighting of early default provisions. In the letter, OTS explains that, under certain circumstances, early default clauses are excluded from the definition of “recourse” and are not subject to risk-based capital holding requirements when carried on a saving association’s (SA’s) books. According to OTS, when an early default clause falls within the 120-day exemption period, an SA is not required to hold additional risk-based capital. However, if an early default clause is actually triggered, or if an SA is unable to track which loans it might be required to repurchase, the SA must hold additional risk-based capital. Likewise, when an early default clause extends beyond 120 days, an SA must hold risk-based capital from the date of transfer of its loans until it can determine that the warranty period has expired. Additionally, if an early default clause is combined with a second representation or warranty, the SA must determine whether the second trigger, sometimes also referred to as a “double trigger,” limits recourse liability. If the second trigger does limit recourse liability, the SA may not be required to hold risk-based capital from the date of transfer. For a copy of the CEO Letter, please see http://www.ots.treas.gov/_files/25344.pdf.

DOJ States Fair Lending Enforcement Is A Top Priority for DOJ Civil Rights Division. On April 20, Thomas E. Perez, Assistant Attorney General in the Department of Justice (DOJ), testified before the United States Senate Committee on the Judiciary on the “restoration and reformation” of the DOJ Civil Right’s Division (Division), during which he stated that fair lending enforcement is a top priority for the Division. Assistant Attorney General Perez also testified that during the first year of the new administration, the Division initiated 38 lending discrimination matters, 29 of which were referrals from bank regulatory agencies. In March, the Division announced a settlement with two AIG subsidiaries resolving allegations of discrimination against African American borrowers by brokers with whom the subsidiaries contracted. The settlement marked the DOJ’s first time to hold a lender accountable for failing to monitor its brokers to ensure that borrowers were not charged higher fees based on their race (as reported in InfoBytes, Mar. 5, 2010). Assistant Attorney General Perez also noted that the Division hired a new Special Counsel for Fair Lending and created a Fair Lending Unit in the Housing Section. For a copy of the statement, please see http://www.justice.gov/crt/speeches/perez_testimony_042010.pdf.

California Federal Court Finds Non-Disclosure of YSP Did Not Violate TILA or Certain RESPA Provisions; HOLA Preempts State Law Claims. On April 15, the U.S. District Court for the Eastern District of California, in a ruling on a motion to dismiss and motion to strike, held that a defendant bank’s alleged non-disclosure of a yield spread premium (YSP) did not violate the anti-referral fee and anti-fee split provisions of the Real Estate Settlement Procedures Act (RESPA) or the Truth in Lending Act (TILA) and that the Home Owner’s Loan Act (HOLA) preempts certain state law claims pertaining to the alleged non-disclosure of a YSP. Bassett v. Ruggles, No. CV-F-09-528, 2010 WL 1525554 (E.D. Cal. Apr. 15, 2010). In Bassett, the plaintiff borrowers entered into a mortgage loan transaction through a mortgage broker, and the loan was made by a federal savings bank. The borrowers claimed that the broker received compensation from the bank despite representing that no such compensation would be paid. The borrowers alleged that the non-disclosure of this compensation constituted violations of RESPA, TILA, and a number of state consumer-protection laws. The court dismissed some RESPA claims, finding that Section 8 of RESPA does not require the separate disclosure of a YSP and that RESPA’s provisions related to the delivery of disclosures (Sections 4 and 5) do not authorize a private right of action. However, the court did not dismiss RESPA Section 8 claims, holding that the YSP may violate RESPA if it either is unreasonably high in relation to the services performed or if services were not actually performed for the fee. The court determined that these findings could not be resolved at this stage of the proceedings. The court also dismissed the TILA claim, finding that the non-disclosure of a YSP does not violate TILA because the amount of the YSP is already reflected in the disclosed finance charge. Finally, the court found that, with respect to allegations against Flagstar Bank, HOLA preempted state-law claims of fraud, conspiracy to breach fiduciary duty, and violations of Section 17200 of the California Unfair Competition Law related to the non-disclosure of the YSP. For a copy of the opinion, please see here.

West Virginia Federal Court Rejects HOLA Preemption of Certain State Law Claims Pertaining to Late Charges. On April 19, the U.S. District Court for the Northern District of West Virginia held that the Home Owner’s Loan Act (HOLA) does not preempt certain state law claims pertaining to late charges made by a federal thrift. Padgett v. OneWest Bank, FSB, No. 3:10-cv-08, 2010 WL 1539839 (N.D.W. Va. Apr. 19, 2010). In a prior bankruptcy, the plaintiff borrower and his lender filed an agreed order treating the borrower as current and moving his one month arrearage to the end of his loan obligation. The defendant, a federal thrift, acquired that lender and allegedly began to treat the borrower as one month late, charging him late fees and reporting his account as delinquent. The borrower sued the federal thrift for, among other things, violations of the West Virginia Consumer Credit and Protection Act (WVCCPA) and breach of contract for the alleged assessment of late charges and for defamation for the alleged improper credit reporting. The federal thrift argued that HOLA preempted the borrower’s claims, however, the court denied the motion to the extent it sought to preempt the borrower’s WVCCPA and breach of contract claims based on the late charges. According to the court, these claims were not preempted because they did not seek to regulate the terms of the loan agreement – an action that HOLA would preempt – but instead sought to hold the federal thrift to the terms of that agreement. The court also denied the federal thrift’s motion with respect to the claims of defamation. Relying on In re Ocwen Loan Servicing, LLC Mortg. Servicing Litig., 491 F.3d 638 (7th Cir. 2007), the court held that the “common law claim of defamation is ‘a good example of [a] claim that the [HOLA] does not preempt,’” noting that HOLA does not deprive a defamed consumer his basic state common law remedy. According to the court, “prohibiting . . . federal savings banks from defaming consumers certainly has no more than an incidental effect on lending operations.” For a copy of the opinion, please see here.

Consumer Finance

DOJ States Fair Lending Enforcement Is A Top Priority for DOJ Civil Rights Division. On April 20, Thomas E. Perez, Assistant Attorney General in the Department of Justice (DOJ), testified before the United States Senate Committee on the Judiciary on the “restoration and reformation” of the DOJ Civil Right’s Division (Division), during which he stated that fair lending enforcement is a top priority for the Division. Assistant Attorney General Perez also testified that during the first year of the new administration, the Division initiated 38 lending discrimination matters, 29 of which were referrals from bank regulatory agencies. In March, the Division announced a settlement with two AIG subsidiaries resolving allegations of discrimination against African American borrowers by brokers with whom the subsidiaries contracted. The settlement marked the DOJ’s first time to hold a lender accountable for failing to monitor its brokers to ensure that borrowers were not charged higher fees based on their race (as reported in InfoBytes, Mar. 5, 2010). Assistant Attorney General Perez also noted that the Division hired a new Special Counsel for Fair Lending and created a Fair Lending Unit in the Housing Section. For a copy of the statement, please see http://www.justice.gov/crt/speeches/perez_testimony_042010.pdf.

FTC Bans Eight Credit Repair and Loan-Mod Companies from Providing Services, Issues Judgment Over $7.5 Million. On April 22, the Federal Trade Commission (FTC) issued a release announcing the entry of an order by the U.S. District Court for the District of New Jersey dated February 4, 2010 banning several credit repair companies and loan modification companies and their owners from selling credit repair services or selling mortgage loan modification and foreclosure relief services. In addition, the order specifically prohibits the defendants from misleading consumers about any good or service, such as refund terms, government affiliation, and total cost, and also prohibits the defendants from misleading consumers about financial goods and services, such as loan terms or rates, how much a consumer will save by enrolling in a debt relief service, and credit terms other than those a lender actually offers. The ban stems from charges brought by the FTC in early 2009 that the companies made false promises that they would improve consumers’ credit scores by removing negative information (e.g., late payments, charge-offs, accounts discharged in bankruptcy, etc.) or would halt borrower foreclosures, as well as charged consumers high upfront fees. The court issued a $7.5 million judgment against the credit repair companies and a $32,710 judgment against the loan modification companies. For a copy of the notice, please see here

FTC Settles FCRA Allegations Against Consumer Reporting Agency. On April 22, the Federal Trade Commission (FTC) settled charges with a nationwide specialty consumer reporting agency (Central Credit LLC) that provides credit reports to casinos. The FTC charged the reporting agency with violating the Fair Credit Reporting Act (FCRA) for failing to (i) inform the entities to which it furnished credit information of their legal obligations under FCRA, (ii) inform consumers of their rights under FCRA, and (iii) establish a clear, streamlined process for consumers to obtain a free annual credit report via a toll-free number. Under the settlement, the reporting agency is required to (i) provide FCRA-required notices to users and furnishers of consumer report information, (ii) provide a “Summary of Rights” to consumers, and (iii) implement a clear, streamlined process for consumers to obtain a free annual credit report via a toll-free number. In addition, the settlement requires the reporting agency to pay a $150,000 civil penalty and bars them from future violations of the FCRA. For more information, please see here.

U.S. Supreme Court Holds Legal Errors Not Bona Fide Errors Under FDCPA. On April 21, the U.S. Supreme Court held that a legal error does not qualify for the bona fide error defense under the Fair Debt Collection Practices Act (FDCPA). Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 559 U.S. –, 2010 WL 1558977 (U.S. Apr. 21, 2010). In Jerman, a defendant law firm sent a foreclosure notice and an FDCPA validation notice to the plaintiff borrower stating that the borrower’s debt would be assumed to be valid unless disputed “in writing.” After successfully disputing the debt and having the complaint dismissed, the borrower filed suit, claiming that the law firm’s validation notice violated the FDCPA because the FDCPA does not require a dispute to be “in writing.” The lower court, including the U.S. Court of Appeals for the Sixth Circuit, found that the law firm’s validation notice violated the FDCPA, and that the FDCPA’s bona fide error provision applied to the law firm’s legal error. The Supreme Court reversed, examining the plain language of the statute, as well as legislative history, to conclude that a legal error, as opposed to a factual or clerical error, does not qualify for the bona fide error defense under the FDCPA. The court’s reasoning included a finding that the FDCPA’s bona fide error provision is analogous to a provision in the Truth in Lending Act that explicitly excludes legal errors as bona fide errors. For a copy of the opinion, please see here.

West Virginia Federal Court Rejects HOLA Preemption of Certain State Law Claims Pertaining to Late Charges. On April 19, the U.S. District Court for the Northern District of West Virginia held that the Home Owner’s Loan Act (HOLA) does not preempt certain state law claims pertaining to late charges made by a federal thrift. Padgett v. OneWest Bank, FSB, No. 3:10-cv-08, 2010 WL 1539839 (N.D.W. Va. Apr. 19, 2010). In a prior bankruptcy, the plaintiff borrower and his lender filed an agreed order treating the borrower as current and moving his one month arrearage to the end of his loan obligation. The defendant, a federal thrift, acquired that lender and allegedly began to treat the borrower as one month late, charging him late fees and reporting his account as delinquent. The borrower sued the federal thrift for, among other things, violations of the West Virginia Consumer Credit and Protection Act (WVCCPA) and breach of contract for the alleged assessment of late charges and for defamation for the alleged improper credit reporting. The federal thrift argued that HOLA preempted the borrower’s claims, however, the court denied the motion to the extent it sought to preempt the borrower’s WVCCPA and breach of contract claims based on the late charges. According to the court, these claims were not preempted because they did not seek to regulate the terms of the loan agreement – an action that HOLA would preempt – but instead sought to hold the federal thrift to the terms of that agreement. The court also denied the federal thrift’s motion with respect to the claims of defamation. Relying on In re Ocwen Loan Servicing, LLC Mortg. Servicing Litig., 491 F.3d 638 (7th Cir. 2007), the court held that the “common law claim of defamation is ‘a good example of [a] claim that the [HOLA] does not preempt,’” noting that HOLA does not deprive a defamed consumer his basic state common law remedy. According to the court, “prohibiting . . . federal savings banks from defaming consumers certainly has no more than an incidental effect on lending operations.” For a copy of the opinion, please see here.

Superior Court of Connecticut Holds Failure to Provide Two Notices of Right to Rescind May Create Entitlement to Three-Year Rescission Period Under TILA. On March 12, the Superior Court of Connecticut held that a technical violation of the Truth in Lending Act’s (TILA) requirement that an obligor be provided with two notices of the right to rescind may trigger the statute’s three-year rescissionary period. Deutsche Bank Nat’l Trust Co. v. Segarra, CV085018505, 2010 WL 1494241 (Conn. Super. Mar. 12, 2010). In this case, the plaintiff trustee for the certificate holders of a home loan trust brought a foreclosure action against the defendant obligor. The obligor answered the complaint, alleging a number of special defenses and counterclaims, including a claim for rescission under TILA and the Connecticut Truth-in-Lending Act. The obligor specifically claimed that the original lender provided him with only one copy of the notice of the right to rescind instead of the two required, thus triggering TILA’s three-year rescissionary period and rendering timely his exercise of that right one day before it expired. In moving for summary judgment, the trustee argued that the three-year period is triggered by a failure to deliver a "conspicuous" notice, and not by a violation so merely technical as the one alleged. The trustee attached a copy of the obligor’s signed notice and argued that his effort to rescind was untimely under the applicable three-day period. While acknowledging recent changes in federal law that have discouraged a "hypertechnical" reading of TILA, the court relied on case law from Michigan and the Sixth Circuit Court of Appeals to find that there was a question of fact precluding summary judgment as to whether a failure to provide two copies of the notice triggers the three-year rescissionary period. For a copy of the opinion, please contact 
infobytes@buckleysandler.com.

Securities

Virginia Federal Court Holds Securitization of Mortgage Does Not Bar Foreclosure; Rejects “Splitting the Note” and “Double Recovery” Theories. On April 8, the United States District Court for the Eastern District of Virginia held that the securitization of a mortgage does not bar foreclosure. Larota-Florez v. Goldman Sachs Mortg. Co., No. 01:09cv1181, 2010 WL 1444026 (E.D. Va. Apr. 8, 2010). In Larota-Florez, a defendant substitute trustee initiated a foreclosure sale of the plaintiff borrowers’ property following the borrowers’ default for failure to meet their monthly mortgage repayment obligations. The borrowers filed a complaint on the same day the foreclosure was scheduled and argued that the substitute trustee had no legal or equitable authority to foreclose on the borrowers’ property and, in response, the defendants (including the original lender, the servicer of the loan, and Mortgage Electronic Registration Systems) filed a motion for summary judgment. In granting the defendants’ motion, the court determined that the substitute trustee had authority to foreclose on the borrowers’ property because (i) it had been legally appointed as substitute trustee with authority to foreclose, and (ii) it was in possession of the original note and deed of trust. In response to the borrowers’ argument that the alleged securitization of the mortgage loan by certain other defendants effectively split the note from the deed of trust and, thereby, barred foreclosure, the court noted that “Virginia law is clear that the negotiation of a note or bond secured by a deed of trust or mortgage carries with it that security.” Additionally, the court emphasized that the creation of mortgage-related securities is explicitly permitted under federal law and that trustees of securitized mortgages regularly and legally conduct foreclosure sales. Finally, the court rejected the borrowers’ argument that the various credit enhancement policies (e.g., credit default swaps) related to the securitized mortgage paid out to certain other defendants had already made these defendants whole and that foreclosure on the borrower’s property would, therefore, result in a “double recovery” for the these defendants in violation of Virginia law. The court reasoned that, in addition to none of the named defendants being able to obtain such a “double recovery” (because none owned or securitized the notes), (i) neither federal nor Virginia law prohibit credit enhancement or credit default swap contracts, and (ii) credit default swap contracts are separate, third-party contracts that do not “indemnify the buyer of protection against loss, but merely allow parties to balance risk.” For a copy of the opinion, please see here.

Litigation

U.S. Supreme Court Holds Legal Errors Not Bona Fide Errors Under FDCPA. On April 21, the U.S. Supreme Court held that a legal error does not qualify for the bona fide error defense under the Fair Debt Collection Practices Act (FDCPA). Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 559 U.S. –, 2010 WL 1558977 (U.S. Apr. 21, 2010). In Jerman, a defendant law firm sent a foreclosure notice and an FDCPA validation notice to the plaintiff borrower stating that the borrower’s debt would be assumed to be valid unless disputed “in writing.” After successfully disputing the debt and having the complaint dismissed, the borrower filed suit, claiming that the law firm’s validation notice violated the FDCPA because the FDCPA does not require a dispute to be “in writing.” The lower court, including the U.S. Court of Appeals for the Sixth Circuit, found that the law firm’s validation notice violated the FDCPA, and that the FDCPA’s bona fide error provision applied to the law firm’s legal error. The Supreme Court reversed, examining the plain language of the statute, as well as legislative history, to conclude that a legal error, as opposed to a factual or clerical error, does not qualify for the bona fide error defense under the FDCPA. The court’s reasoning included a finding that the FDCPA’s bona fide error provision is analogous to a provision in the Truth in Lending Act that explicitly excludes legal errors as bona fide errors. For a copy of the opinion, please see http://www.supremecourt.gov/opinions/09pdf/08-1200.pdf.

California Federal Court Finds Non-Disclosure of YSP Did Not Violate TILA or Certain RESPA Provisions; HOLA Preempts State Law Claims. On April 15, the U.S. District Court for the Eastern District of California, in a ruling on a motion to dismiss and motion to strike, held that a defendant bank’s alleged non-disclosure of a yield spread premium (YSP) did not violate the anti-referral fee and anti-fee split provisions of the Real Estate Settlement Procedures Act (RESPA) or the Truth in Lending Act (TILA) and that the Home Owner’s Loan Act (HOLA) preempts certain state law claims pertaining to the alleged non-disclosure of a YSP. Bassett v. Ruggles, No. CV-F-09-528, 2010 WL 1525554 (E.D. Cal. Apr. 15, 2010). In Bassett, the plaintiff borrowers entered into a mortgage loan transaction through a mortgage broker, and the loan was made by a federal savings bank. The borrowers claimed that the broker received compensation from the bank despite representing that no such compensation would be paid. The borrowers alleged that the non-disclosure of this compensation constituted violations of RESPA, TILA, and a number of state consumer-protection laws. The court dismissed some RESPA claims, finding that Section 8 of RESPA does not require the separate disclosure of a YSP and that RESPA’s provisions related to the delivery of disclosures (Sections 4 and 5) do not authorize a private right of action. However, the court did not dismiss RESPA Section 8 claims, holding that the YSP may violate RESPA if it either is unreasonably high in relation to the services performed or if services were not actually performed for the fee. The court determined that these findings could not be resolved at this stage of the proceedings. The court also dismissed the TILA claim, finding that the non-disclosure of a YSP does not violate TILA because the amount of the YSP is already reflected in the disclosed finance charge. Finally, the court found that, with respect to allegations against Flagstar Bank, HOLA preempted state-law claims of fraud, conspiracy to breach fiduciary duty, and violations of Section 17200 of the California Unfair Competition Law related to the non-disclosure of the YSP. For a copy of the opinion, please see here.

Virginia Federal Court Holds Securitization of Mortgage Does Not Bar Foreclosure; Rejects “Splitting the Note” and “Double Recovery” Theories. On April 8, the United States District Court for the Eastern District of Virginia held that the securitization of a mortgage does not bar foreclosure. Larota-Florez v. Goldman Sachs Mortg. Co., No. 01:09cv1181, 2010 WL 1444026 (E.D. Va. Apr. 8, 2010). In Larota-Florez, a defendant substitute trustee initiated a foreclosure sale of the plaintiff borrowers’ property following the borrowers’ default for failure to meet their monthly mortgage repayment obligations. The borrowers filed a complaint on the same day the foreclosure was scheduled and argued that the substitute trustee had no legal or equitable authority to foreclose on the borrowers’ property and, in response, the defendants (including the original lender, the servicer of the loan, and Mortgage Electronic Registration Systems) filed a motion for summary judgment. In granting the defendants’ motion, the court determined that the substitute trustee had authority to foreclose on the borrowers’ property because (i) it had been legally appointed as substitute trustee with authority to foreclose, and (ii) it was in possession of the original note and deed of trust. In response to the borrowers’ argument that the alleged securitization of the mortgage loan by certain other defendants effectively split the note from the deed of trust and, thereby, barred foreclosure, the court noted that “Virginia law is clear that the negotiation of a note or bond secured by a deed of trust or mortgage carries with it that security.” Additionally, the court emphasized that the creation of mortgage-related securities is explicitly permitted under federal law and that trustees of securitized mortgages regularly and legally conduct foreclosure sales. Finally, the court rejected the borrowers’ argument that the various credit enhancement policies (e.g., credit default swaps) related to the securitized mortgage paid out to certain other defendants had already made these defendants whole and that foreclosure on the borrower’s property would, therefore, result in a “double recovery” for the these defendants in violation of Virginia law. The court reasoned that, in addition to none of the named defendants being able to obtain such a “double recovery” (because none owned or securitized the notes), (i) neither federal nor Virginia law prohibit credit enhancement or credit default swap contracts, and (ii) credit default swap contracts are separate, third-party contracts that do not “indemnify the buyer of protection against loss, but merely allow parties to balance risk.” For a copy of the opinion, please see here.

West Virginia Federal Court Rejects HOLA Preemption of Certain State Law Claims Pertaining to Late Charges. On April 19, the U.S. District Court for the Northern District of West Virginia held that the Home Owner’s Loan Act (HOLA) does not preempt certain state law claims pertaining to late charges made by a federal thrift. Padgett v. OneWest Bank, FSB, No. 3:10-cv-08, 2010 WL 1539839 (N.D.W. Va. Apr. 19, 2010). In a prior bankruptcy, the plaintiff borrower and his lender filed an agreed order treating the borrower as current and moving his one month arrearage to the end of his loan obligation. The defendant, a federal thrift, acquired that lender and allegedly began to treat the borrower as one month late, charging him late fees and reporting his account as delinquent. The borrower sued the federal thrift for, among other things, violations of the West Virginia Consumer Credit and Protection Act (WVCCPA) and breach of contract for the alleged assessment of late charges and for defamation for the alleged improper credit reporting. The federal thrift argued that HOLA preempted the borrower’s claims, however, the court denied the motion to the extent it sought to preempt the borrower’s WVCCPA and breach of contract claims based on the late charges. According to the court, these claims were not preempted because they did not seek to regulate the terms of the loan agreement – an action that HOLA would preempt – but instead sought to hold the federal thrift to the terms of that agreement. The court also denied the federal thrift’s motion with respect to the claims of defamation. Relying on In re Ocwen Loan Servicing, LLC Mortg. Servicing Litig., 491 F.3d 638 (7th Cir. 2007), the court held that the “common law claim of defamation is ‘a good example of [a] claim that the [HOLA] does not preempt,’” noting that HOLA does not deprive a defamed consumer his basic state common law remedy. According to the court, “prohibiting . . . federal savings banks from defaming consumers certainly has no more than an incidental effect on lending operations.” For a copy of the opinion, please see here.

Superior Court of Connecticut Holds Failure to Provide Two Notices of Right to Rescind May Create Entitlement to Three-Year Rescission Period Under TILA. On March 12, the Superior Court of Connecticut held that a technical violation of the Truth in Lending Act’s (TILA) requirement that an obligor be provided with two notices of the right to rescind may trigger the statute’s three-year rescissionary period. Deutsche Bank Nat’l Trust Co. v. Segarra, CV085018505, 2010 WL 1494241 (Conn. Super. Mar. 12, 2010). In this case, the plaintiff trustee for the certificate holders of a home loan trust brought a foreclosure action against the defendant obligor. The obligor answered the complaint, alleging a number of special defenses and counterclaims, including a claim for rescission under TILA and the Connecticut Truth-in-Lending Act. The obligor specifically claimed that the original lender provided him with only one copy of the notice of the right to rescind instead of the two required, thus triggering TILA’s three-year rescissionary period and rendering timely his exercise of that right one day before it expired. In moving for summary judgment, the trustee argued that the three-year period is triggered by a failure to deliver a "conspicuous" notice, and not by a violation so merely technical as the one alleged. The trustee attached a copy of the obligor’s signed notice and argued that his effort to rescind was untimely under the applicable three-day period. While acknowledging recent changes in federal law that have discouraged a "hypertechnical" reading of TILA, the court relied on case law from Michigan and the Sixth Circuit Court of Appeals to find that there was a question of fact precluding summary judgment as to whether a failure to provide two copies of the notice triggers the three-year rescissionary period. For a copy of the opinion, please contact 
infobytes@buckleysandler.com.

Wisconsin Federal Court Dismisses FACTA Statutory Damages Claim for Failing to Adequately Allege Willfulness. On March 31, the U.S. District Court for the Eastern District of Wisconsin dismissed a claim for statutory damages under the Fair and Accurate Credit Transactions Act (FACTA) because the complaint failed to plead more than conclusions and inferences based on generalities. Gardner v. Appleton Baseball Club, Inc., No. 09-C-705, 2010 WL 1368663 (E.D. Wis. Mar. 31, 2010). In Gardner, the plaintiff consumer alleged that the defendant, the operator of a professional sports team, willfully violated FACTA by printing a receipt for a transaction that contained the expiration date of his credit card. The operator moved to dismiss because the complaint failed to adequately create an inference that it acted willfully when it failed to comply with FACTA. While acknowledging that "willfulness" under FACTA includes both knowing and reckless conduct, the court agreed with the operator, holding that the consumer’s complaint was legally insufficient. First, the court held that merely alleging (i) that the operator violated FACTA by printing the expiration date of the consumer’s credit card after June 3, 2008, and (ii) that most of the operator’s peers has “readily” brought themselves into compliance with FACTA, was insufficient to plead a willful violation of FACTA. In arriving at its decision, the court noted that the complaint did not contain allegations that the operator had actual knowledge about the FACTA truncation requirements and noted that several of the decisions cited by the consumer that allowed similarly-pleaded violations of FACTA to proceed were reached prior to the U.S. Supreme Court’s revised pleading standards in Iqbal. The court also noted that, while the operator failed to redact the expiration date of the card, the operator did properly truncate the card number, thus evidencing that the operator attempted to comply with FACTA and could not have acted “willfully.” For a copy of the opinion, please see here.

Privacy/Data Security

FTC Settles FCRA Allegations Against Consumer Reporting Agency. On April 22, the Federal Trade Commission (FTC) settled charges with a nationwide specialty consumer reporting agency (Central Credit LLC) that provides credit reports to casinos. The FTC charged the reporting agency with violating the Fair Credit Reporting Act (FCRA) for failing to (i) inform the entities to which it furnished credit information of their legal obligations under FCRA, (ii) inform consumers of their rights under FCRA, and (iii) establish a clear, streamlined process for consumers to obtain a free annual credit report via a toll-free number. Under the settlement, the reporting agency is required to (i) provide FCRA-required notices to users and furnishers of consumer report information, (ii) provide a “Summary of Rights” to consumers, and (iii) implement a clear, streamlined process for consumers to obtain a free annual credit report via a toll-free number. In addition, the settlement requires the reporting agency to pay a $150,000 civil penalty and bars them from future violations of the FCRA. For more information, please see here.

Wisconsin Federal Court Dismisses FACTA Statutory Damages Claim for Failing to Adequately Allege Willfulness. On March 31, the U.S. District Court for the Eastern District of Wisconsin dismissed a claim for statutory damages under the Fair and Accurate Credit Transactions Act (FACTA) because the complaint failed to plead more than conclusions and inferences based on generalities. Gardner v. Appleton Baseball Club, Inc., No. 09-C-705, 2010 WL 1368663 (E.D. Wis. Mar. 31, 2010). In Gardner, the plaintiff consumer alleged that the defendant, the operator of a professional sports team, willfully violated FACTA by printing a receipt for a transaction that contained the expiration date of his credit card. The operator moved to dismiss because the complaint failed to adequately create an inference that it acted willfully when it failed to comply with FACTA. While acknowledging that "willfulness" under FACTA includes both knowing and reckless conduct, the court agreed with the operator, holding that the consumer’s complaint was legally insufficient. First, the court held that merely alleging (i) that the operator violated FACTA by printing the expiration date of the consumer’s credit card after June 3, 2008, and (ii) that most of the operator’s peers has “readily” brought themselves into compliance with FACTA, was insufficient to plead a willful violation of FACTA. In arriving at its decision, the court noted that the complaint did not contain allegations that the operator had actual knowledge about the FACTA truncation requirements and noted that several of the decisions cited by the consumer that allowed similarly-pleaded violations of FACTA to proceed were reached prior to the U.S. Supreme Court’s revised pleading standards in Iqbal. The court also noted that, while the operator failed to redact the expiration date of the card, the operator did properly truncate the card number, thus evidencing that the operator attempted to comply with FACTA and could not have acted “willfully.” For a copy of the opinion, please see here.

Credit Cards

Wisconsin Federal Court Dismisses FACTA Statutory Damages Claim for Failing to Adequately Allege Willfulness. On March 31, the U.S. District Court for the Eastern District of Wisconsin dismissed a claim for statutory damages under the Fair and Accurate Credit Transactions Act (FACTA) because the complaint failed to plead more than conclusions and inferences based on generalities. Gardner v. Appleton Baseball Club, Inc., No. 09-C-705, 2010 WL 1368663 (E.D. Wis. Mar. 31, 2010). In Gardner, the plaintiff consumer alleged that the defendant, the operator of a professional sports team, willfully violated FACTA by printing a receipt for a transaction that contained the expiration date of his credit card. The operator moved to dismiss because the complaint failed to adequately create an inference that it acted willfully when it failed to comply with FACTA. While acknowledging that "willfulness" under FACTA includes both knowing and reckless conduct, the court agreed with the operator, holding that the consumer’s complaint was legally insufficient. First, the court held that merely alleging (i) that the operator violated FACTA by printing the expiration date of the consumer’s credit card after June 3, 2008, and (ii) that most of the operator’s peers has “readily” brought themselves into compliance with FACTA, was insufficient to plead a willful violation of FACTA. In arriving at its decision, the court noted that the complaint did not contain allegations that the operator had actual knowledge about the FACTA truncation requirements and noted that several of the decisions cited by the consumer that allowed similarly-pleaded violations of FACTA to proceed were reached prior to the U.S. Supreme Court’s revised pleading standards in Iqbal. The court also noted that, while the operator failed to redact the expiration date of the card, the operator did properly truncate the card number, thus evidencing that the operator attempted to comply with FACTA and could not have acted “willfully.” For a copy of the opinion, please see here.