Federal Issues

Obama Administration Proposes Creation of a Small Business Lending Fund. On February 2, President Obama outlined plans to create a Small Business Lending Fund (SBLF). Under the proposal, the U.S. Department of the Treasury would divert $30 billion in funds from the Troubled Asset Relief Program (TARP) outside the TARP program to the SBLF, which would then invest the funds in small- and medium-sized banks with assets under $10 billion. Though the fund’s final design has yet to receive Congressional approval, the administration’s current proposal would provide eligible banks with capital investments anywhere between 3% and 5% depending on the bank’s size. Banks participating in the program would be required to pay dividends of 5% on SBLF capital investments. However, if participants are able to demonstrate increased small business lending relative to a baseline set in 2009, they would receive a 1% point decrease in their dividend rate for every 2.5% increase in incremental business lending they achieve over a two-year period, down to a minimum dividend rate of 1%. After five years, the dividend rate would gradually increase in order to wind down the program and encourage timely repayment of funds. The administration hopes that Congress will approve the SBLF’s creation via legislation, which would allow the program to not be restricted by many of TARP’s current restrictions. For a summary of the administration’s proposal, please see http://1.usa.gov/dbf6wU.

Senate Committee Addresses Anti-Money Laundering Reform. On February 4, the Senate Permanent Subcommittee on Investigations held a hearing on an extensive report regarding foreign corruption in the U.S. banking system. The report documented in detail four cases in which Politically Exposed Persons utilized the U.S. financial system to avoid disclosing the transfer of funds. As a result of the report’s factual findings, Chairman Carl Levin (D-MI) called for legislation requiring persons setting up U.S. shell companies to identify the beneficial owners of those companies. Chairman Levin also called for U.S. Department of the Treasury regulations requiring (i) real estate and escrow agents to “know their customers” and affirmatively evaluate the source of the funds used to purchase properties, (ii) financial institutions to obtain certifications from attorney-client and law office accounts that they will not circumvent anti-money laundering controls, and (iii) stronger bank oversight of foreign wire transfers.

Financial Crimes Enforcement Network (FinCEN) Director James Freis Jr. testified that FinCEN is exploring ways to address the problem of identifying beneficial owners or companies and is working with the American Bar Association to develop standards for “good practices” when handling bank accounts. Director Freis also stated that FinCEN will continue to develop the AML requirements for persons involved in real estate closings and settlements, as addressed in FinCEN’s April 10, 2003 Advance Notice of Proposed Rulemaking. Of particular interest to mortgage lenders or originators, Director Freis also noted that FinCEN is developing a Notice of Proposed Rulemaking to impose AML requirements for loan and finance companies that are engaged in residential mortgage lending or origination that are not currently subject to AML program requirements under the Bank Secrecy Act or other federal law. This proposed regulation will be shaped by the comments FinCEN received on its Advance Notice of Proposed Rulemaking in July 2009 concerning applying AML Program and Suspicious Activity Reports requirements to non-bank residential mortgage lenders and originators (reported in InfoBytes, July 17, 2009). For a copy of the report and testimony from the hearing, please see http://1.usa.gov/cs2i1x.  

Obama Administration Releases Final Terms on CDFI Investment Program.  On February 3, the Obama Administration released final guidance on an initiative to provide capital investments to Community Development Financial Institutions (CDFIs) as part of the Troubled Asset Relief Program (TARP). Under this program, CDFIs that have been certified by the U.S. Department of the Treasury (Treasury) as targeting more than 60 percent of their small business lending and economic development activities to underserved communities are eligible to receive capital investments at a dividend rate of 2% – 3% lower than the rate offered under the Capital Purchase Program. Additionally, under the guidance, (i) institutions can apply for Treasury investments of up to 5% of risk-weighted assets, (ii) CDFIs must be approved by their supervising regulator to participate in the program, but for CDFIs that might not otherwise be approved by their supervising regulator, Treasury will match capital investments up to 5% of risk-weighted assets against private investments on a dollar-for-dollar basis, so long as the combined amount would return the institution to viability, (iii) CDFI credit unions can apply for subordinated debt at rates and terms similar to CDFI banks and thrifts, up to 3.5% of total assets, and (iv) institutions that might not otherwise be approved by their supervising regulator can participate if they raise sufficient capital to reach viability when matched with Treasury capital up to 5% of risk-weighted assets. To see the final terms, please click here.  

FTC Proposes Ban on Up-Front Fees for Mortgage Relief Companies. On February 4, the Federal Trade Commission (FTC) proposed a rule that would prohibit companies from charging up-front fees for foreclosure-rescue or loan-modification services. The proposed rule would apply to for-profit companies that, in exchange for a fee, represent consumers seeking mortgage loan modifications or foreclosure relief, although the rule generally would not apply to entities that own or service mortgage loans. A limited exemption would also be available to attorneys. The proposed rule would preclude a company from receiving payments for modification or foreclosure-rescue services until the company has a documented offer from a mortgage lender or servicer that reflects the representations the company has made to the consumer. The proposed rule would also prohibit certain practices by modification companies, such as (i) telling consumers to stop communicating with the mortgage company, and (ii) misleading consumers about such facts as the likelihood of success, the company’s affiliation with private or public entities, and the company’s refund and cancellation policies. Further, the proposed rule would mandate the disclosure of (i) the company’s status as a for-profit business, (ii) the total amount consumers will pay, (iii) the fact that neither the government nor the lender has approved the service, and (iv) the lack of any guarantee of a modification. The comment period ends March 29, 2010. For a copy of the Notice of Proposed Rulemaking, please see http://ftc.gov/opa/2010/02/mars.shtm. For a copy of the FTC’s press release, please see http://ftc.gov/os/2010/02/100204marsfrn.pdf.  

FTC Requires Mortgage Lender to Hire Third-Party Fair Lending Consultant. On January 29, the Federal Trade Commission (FTC) announced that a mortgage lender must hire a third-party fair lending consultant to comply with a 2008 FTC settlement. The lender allegedly violated the Equal Credit Opportunity Act when it allegedly gave mortgage loan officers nearly complete discretion to charge "overages," but failed to monitor whether African-American and Hispanic consumers were paying higher overages than non-Hispanic white borrowers (reported in InfoBytes, Dec. 19, 2008). According to the FTC, this lack of oversight "resulted in African-American and Hispanic applicants being charged higher overages because of their race or ethnicity.” In a December 2008 settlement, the lender agreed to, among other things, create an effective fair lending monitoring program. However, according to the FTC, the lender failed to comply with this provision. Under the modified order, the company must hire a third-party fair lending consultant, who must be approved by the FTC, to assess the lending practices of the company for five years. The lender is required to follow the recommendations of the consultant and the lender’s discretion over pricing will be limited until the consultant certifies that the company maintains an adequate fair lending monitoring program. For a copy of the press release, please see http://www.ftc.gov/opa/2010/01/gateway.shtm. For a copy of the order, please click here.

HUD Awards Grants to Fight Housing Discrimination. On January 21, the U.S. Department of Housing and Urban Development (HUD) awarded $26.3 million to 98 fair housing organizations and other non-profit agencies via HUD’s Fair Housing Initiatives Program. In particular, HUD awarded $21.1 million in Private Enforcement Initiative grants to help groups investigate alleged housing discrimination and to enforce the Fair Housing Act and substantially equivalent state and local laws. It rewarded the remaining funds to groups that (i) educate the public and housing providers about their rights and responsibilities under federal, state and local housing laws, and (ii) serve rural and immigrant populations in areas where there is currently no fair housing organization or is otherwise underserved. For a copy of the press release, please see http://1.usa.gov/8MjTtj.

FTC Releases Annual Report on Enforcement Actions. The Federal Trade Commission (FTC) has issued its annual report to the Federal Reserve Board (Board) on FTC enforcement efforts in 2009 related to the Truth in Lending Act, the Consumer Leasing Act, the Equal Credit Opportunity Act, and the Electronic Fund Transfer Act. The Board will use the report for preparing its 2009 Annual Report to the U.S. Congress. For a copy of the report, please see http://www.ftc.gov/os/2010/02/100202fredistatutesreport.pdf.

FTC Announces Settlement with Debt Collection Agency Senior Managers. On January 7, the Federal Trade Commission (FTC) announced additional settlements related to an October 2008 settlement with a debt collection agency. According to the FTC, the debt collection agency allegedly, among other things, (i) made harassing and abusive calls to consumers, (ii) contacted consumers at work while aware that such communications were prohibited by the consumers’ employers, (iii) deposited postdated checks early, and (iv) made unauthorized withdrawals from consumers’ bank accounts (the settlement with the debt collection agency was reported in InfoBytes, Nov. 21, 2008). The complaint also alleged (i) inadequate investigations of consumer complaints, (ii) inadequate discipline of the collection agency’s collectors, and (iii) the rehiring of collectors who were terminated for violating the Fair Debt Collection Practices Act. Under the current settlement, two senior managers of the debt collection agency’s collection center will (i) pay a civil penalty, and (ii) be barred from future related violations. For a copy of the press release, please see http://www.ftc.gov/opa/2010/01/academy.shtm.

Federal Reserve Board Announces Website Addressing Safety, Soundness of Bank Operations. On February 1, the Federal Reserve Board (Board) launched a website to assist bank directors with ensuring the safety and soundness of a financial institution. The website, http:///www.BankDirectorsDesktop.org, among other things, includes (i) an interactive training course, (ii) the latest edition of the Board’s guide on directors’ roles and responsibilities, and (iii) links to additional resources. For a copy of the press release, please click here.

State Issues

Oregon Regulator Issues Proposed Mortgage Lending Rules. The Oregon Department of Consumer and Business Services (the Department) has proposed administrative rules to coordinate the Oregon mortgage lending rules with Oregon’s recent implementation of the SAFE Act minimum requirements (implemented by House Bill 2189, as reported in InfoBytes, Aug. 7, 2009). Specifically, the proposed rules implement the requirements for a new mortgage loan originator license and make conforming changes to the rules governing mortgage bankers, mortgage brokers, and consumer finance licensees who employ mortgage loan originators. In addition, with respect to mortgage bankers and brokers, the proposed rules (i) revise the bonding requirements, (ii) update advertising requirements, and (iii) amend the retention of loan file documents to meet updated mortgage loan originator licensing requirements and data required by the Nationwide Mortgage Licensing System and Registry (NMLSR). Further, as related to consumer finance lenders, the proposed rules (i) update advertising requirements, (ii) create a new bonding requirement, (iii) create a new state background check requirement, and (iv) amend the retention of loan file documents to meet updated mortgage loan originator licensing requirements and data required by the NMLSR. The Department will hold a hearing regarding the proposed rules on March 1, 2010, and the proposed rules are open for public comment until March 5, 2010. For the full text of the proposed administrative rules, please click here.

Florida Attorney General Files Suit Against Foreclosure Rescue Services Company. On February 4, Florida Attorney General Bill McCollum announced a lawsuit against 21st Century Legal Services, Inc. (21st Century), a foreclosure rescue services company. 21st Century allegedly (i) charged consumers as much as $2,500 in illegal up-front fees, (ii) failed to provide promised foreclosure relief services, and (iii) did not issue refunds to customers. The complaint seeks (i) full restitution for affected homeowners, (ii) civil penalties of up to $15,000 per violation, and (iii) a permanent prohibition against the company from future violations of Florida law. Other states have sued 21st Century, and the Federal Bureau of Investigations raided several of the company’s California offices in September 2009. For a copy of the press release, please click here.  

California Department of Real Estate Issues Statistics Regarding License Surrenders, License Revocations, Disciplinary Action for 2009. On January 29, the California State Department of Real Estate (DRE) announced statistics pertaining to license surrenders, license revocations, and disciplinary actions for 2009. According to the DRE, (i) license revocations increased over 50%, to 672, (ii) license surrenders increased nearly 80%, to 105, and (iii) 122 cases resulted in license suspensions. The DRE also noted that it initiated over 2,000 investigations involving loan modification complaints in 2009, and that it issued over 180 orders to nearly 348 different respondents to stop or change their loan modification business practices. For a copy of the press release, please click here.

Courts

Ninth Circuit Holds Higher Education Act Preempts Claims Against Student Loan Servicer. On January 25, the U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s decision that the Higher Education Act (HEA) preempted California’s business, contract, and consumer protection laws in a putative class action challenging certain Sallie Mae loan servicing practices. Chae v. SLM Corp., No. 08-56154, 2010 WL 253215 (9th Cir. Jan. 25, 2010). In Chae, Sallie Mae serviced various educational loans that the plaintiffs originated with from several lenders. The plaintiffs alleged that Sallie Mae violated California law by (i) using the “daily simple interest” or “simple daily interest” method to calculate interest, (ii) charging late fees, and (iii) setting the first repayment date on certain loans within 60 days while also charging interest during that period, so as to “deceptively increase[] the cost and life span of the loan.” The Ninth Circuit concluded that express preemption and conflict preemption barred the claims of the putative class. According to the court, the plaintiffs’ allegations were prohibited, in part, by the express preemption provision of the HEA. The court held that the remaining claims were preempted because they conflicted with congressional purposes and objectives to promote the funding of student loans. The court noted that the plaintiffs are not left without redress. It explained that the Department of Education (DOE) has the power to initiate informal compliance procedures against a third-party servicer that is the subject of a complaint, file a civil suit again the servicer, impose civil penalties, or terminate the servicer’s participation in the student loan program. For a copy of the opinion, please click here.

California Federal Court Finds Certain California State Law Claims Preempted by HOLA. On January 27, the U.S. District Court for the Southern District of California held that certain state law claims arising from the origination of a mortgage loan were preempted by the Home Owners Loan Act (HOLA) and OTS regulations. Ibarra v. Loan City, No. 09-CV-02228 (S.D. Cal. Jan. 27, 2010). In Ibarra, the plaintiff borrower alleged that his loan servicer (i) violated the California Business and Professions Code § 17200, (ii) engaged in predatory lending, constructive fraud, fraud, and negligent misrepresentation, and (iii) breached its fiduciary duty to him in connection with the origination of his mortgage loan. The servicer – a wholly owned operating subsidiary of a federally chartered bank – moved to dismiss, arguing, among other things, that the borrower’s state law claims were preempted by HOLA and OTS regulations. The court granted the motion in part, and denied it in part. Specifically, the court held that the borrower’s claims of constructive fraud, fraud, and negligent misrepresentation, as well as a portion of plaintiff’s § 17200 claim – each of which were based on alleged misrepresentations relating to the terms of the loan – were not preempted. According to the court, “when plaintiffs rely on the duty not to misrepresent material facts, which is generally applicable to all businesses, and when application of the law would not regulate lending activity, such claims are not preempted.” On the other hand, the court found that the borrower’s claim under California’s predatory lending laws were preempted because those laws “explicitly impose requirements of the type listed in [HOLA] Section 560.2(b), including ‘loan-related fees’ and ‘terms of credit,’ ‘disclosures,’ and the ‘processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages.’” As such, these claims would more than “incidentally affect the lending operations of Federal savings associations.” Likewise, the court found that the borrower’s § 17200 claim – to the extent that it was based on claims that the servicer violated state lending laws and failed to extend loan modification assistance – was preempted because it “explicitly affects banking and lending.” Notably, the court did not decide whether the borrower’s breach of fiduciary duty claim was preempted, because, according to the court, “it is well established that a financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.” For a copy of the opinion, please click here.

Washington Federal Court Complaint Alleges TCPA Violation by Sallie Mae. On February 2, a plaintiff brought a putative class action suit in the U.S. District Court for the Western District of Washington against Sallie Mae for alleged violations of the Telephone Consumer Protection Act (TCPA) in connection with student loans provided by Sallie Mae. Arthur v. SLM Corp., No. C 10-0198 (W.D. Wash. Feb. 2, 2010). The complaint alleges that Sallie Mae violated the TCPA and a Federal Communication Commission (FCC) declaratory ruling by (i) contacting the plaintiff’s cellular phone number without obtaining the number at the time of the transaction that resulted in the debt owed to Sallie Mae, and without express consent to make automated calls to the plaintiff’s cellular phone, and (ii) making repeated, harassing calls via an "automatic telephone dialing system" for non-emergency purposes. The TCPA prohibits the use of automated telephone equipment, or "autodialers," to make any call to a wireless number in the absence of an emergency or the prior express consent of the called party. Moreover, an FCC declaratory ruling states that a consumer must provide a creditor with a wireless number during the transaction that resulted in the debt owed in order for the creditor to lawfully contact a consumer using the consumer’s wireless number. The plaintiff is seeking, among other things, (i) $500 in statutory damages for each call in violation of the TCPA, and (ii) treble damages of up to $1,500 for each call involving knowing and/or willful violations of the TCPA. For a copy of the complaint, please click here.  

California Federal Magistrate Judge Grants Class Certification in TILA Case Against Mortgage Broker. On January 22, a California federal magistrate judge granted class certification in a case against a California mortgage broker accused of fraud (based on concealment of relevant facts) and of violating the federal Truth in Lending Act (TILA) and California’s Unfair Competition Law. Lymburner v. U.S. Fin. Funds, Inc. No. C-08-00325 (N.D. Cal. Jan. 22, 2010). The plaintiff, who obtained an IndyMac Bank 5-year fixed payment adjustable rate mortgage from the defendant mortgage broker in November 2006, alleged that the loan closing documents omitted certain information regarding interest rates and the applicability of negative amortization. In certifying the class, the judge determined that there was a class of as many as 121 borrowers, all with common issues of fact regarding disclosures in the loan documents. The court rejected the defendant’s argument that the claims of the proposed class were not “typical” because the availability of rescission would have to be examined individually for each class member. Additionally, the court found that there were common questions of law and fact predominant among the class members because (i) regarding the TILA claim, there was only one version of the loan documents, and (ii) regarding the fraud claim, the allegations regarded the disclosures on the loan documents of all of the class members – not individual representations made about the disclosures. Additionally, the court rejected the defendant’s argument that the plaintiff’s claims were subject to an “unclean hands” defense because the plaintiff misstated her income on the loan application. The court reasoned that the presence of this possible defense was not a basis to deny class certification. For a copy of the opinion, please click here.

Virginia Federal Court Recommends Class Certification and Settlement in FCRA Case. On January 27, the U.S. District Court for the Western District of Virginia recommended preliminary class certification and certain aspects of the parties’ proposed class settlement in a suit challenging the notice that the defendant provided to consumers regarding the use of credit scores in certain residential real estate financing transactions. Domonoske v. Bank of America, N.A., Nos 5:08cv066 and 5:09cv080, 2010 WL 329961 (W.D. Va. Jan. 27, 2010). In these consolidated actions, the plaintiffs alleged that the defendant bank failed to comply with the Fair Credit Reporting Act’s (FCRA) requirement that the bank send a disclosure to the consumer “as soon as reasonably practicable” after its use of the consumer’s credit score. The bank argued that it had disclosure protocols in place, which were developed with the assistance of counsel, that complied with FCRA. Because the plaintiffs have not asserted evidence of actual damages, the issue in the suit is whether there was a willful violation of FCRA (i.e., knowing violation or objectively unreasonable conduct), which could lead to statutory damages. The bank joined the plaintiff’s motion for preliminary approval of the class action settlement, which the district court referred to a magistrate judge for consideration and a recommendation. The magistrate judge recommended that preliminary approval of the proposed class action be granted and that preliminary approval of the settlement be granted in part and denied in part. The settlement, among other things, would establish a gross settlement fund of $9.95 million, plus costs of administration. The magistrate judge concluded that the settlement agreement’s provision of attorneys’ fees in the amount of $2.35 million and the amount designated for the class representatives was unreasonably high and therefore should not be approved. The magistrate judge also concluded that the provision of the settlement agreement providing injunctive relief should not be approved because injunctive relief is not available to private parties under FCRA. For a copy of the magistrate judge’s report and recommendation, please click here.

Rhode Island Federal Court Certifies Class of Recipients of Form Debt Collection Letter. On January 27, the U.S. District Court for the District of Rhode Island granted a motion for class certification in an action alleging that the defendant debt collector’s standard debt collection letter sent to class members violated the federal Fair Debt Collection Practices Act (FDCPA). Gordon v. Corporate Receivables, Inc., No. 09-230S (D.R.I. Jan. 27, 2010). In Gordon, the defendant collection agency sent the plaintiff debtor a debt collection letter indicating that the debtor could only dispute the validity of the debt in writing. The debtor alleged that the letter violated the FDCPA and proposed a class of all recipients of the standard debt collection letter in four states and Puerto Rico. The court concluded that the class satisfied Rule 23(a)’s numerosity element because the debt collection agency did not respond to the debtor’s request for an admission that the size of the class exceeded one-hundred individuals and the debt collection agency’s client identified on the debt collection letter was a national credit card issuer. The court also found that the class satisfied the commonality, typicality, and adequacy of representation prongs of Rule 23(a). Next, the court found that common questions of law and fact predominated over individual questions because the claim focused on the legality of the language in a standard letter received by all class members. Finally, the court held that the commonality of the claims and the small amount of recovery of each class member made the class mechanism a superior method of resolving the disputes. For a copy of the opinion, please click here.  

Washington Federal Court Asserts Jurisdiction over Michigan Utility in FCRA Case. On January 26, the U.S. District Court for the Western District of Washington held that it had personal jurisdiction over a Michigan utility that was alleged to have failed to correct inaccurate information contained in the credit report of a Washington resident. Gordon v. DTE Energy, No. C09-1020, 2010 WL 323117 (W.D. Wash. Jan. 26, 2010). In Gordon, the plaintiff, a Washington resident, alleged that the utility reverified to reporting agencies that the resident’s account was seriously delinquent, even though the plaintiff had made several attempts to show the utility that the accounts resulted from identity theft. The plaintiff alleged that the negative information resulted in her receiving a less-than-optimum mortgage rate, and she sued under the Fair Credit Reporting Act (FCRA) and state laws. The utility moved for dismissal, asserting that the Washington court lacked personal jurisdiction over it. The court denied the motion, holding that (i) the utility’s data transmissions to reporting agencies constituted intentional acts, (ii) the utility knew the transmissions could cause harm to a Washington resident, in Washington, (iii) the resident had sufficiently alleged that the transmissions had caused her actual harm, and (iv) the utility had failed to present a compelling case that jurisdiction in Washington was unreasonable. For a copy of the opinion, please click here.

Firm News

John Kromer will be a participant in a panel entitled "Federal Registration of Mortgage Loan Originators and NMLS" on February 10 at the 2010 NMLS User Conference in San Diego, CA.

Sara Emley will speak at the Investment Adviser Association/ACA Insight 2010 Adviser Compliance Forum on February 25 in Arlington, VA. Her topic is “Current Hot Topics for Managers with Individual Clients.”

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

Kirk Jensen spoke on January 9 at the winter meeting of the Consumer Financial Services Committee of the American Bar Association’s Business Law Section in Park City, Utah. He gave one presentation entitled "Consumer Financial Protection Agency: Past, Present and Future," and another entitled “Government Enforcement Trends and Servicing Best Practices.” Kirk has also been named chair of the Residential Real Estate Subcommittee of the ABA Litigation Section’s Real Estate Litigation Committee.

Jeff Naimon spoke on January 10 at the winter meeting of the Consumer Financial Services Committee of the American Bar Association’s Business Law Section in Park City, Utah on Truth in Lending Act case law developments.

Jeff Naimon spoke on January 12 in an American Bankers Association Telephone Briefing focusing on “RESPA and TILA Compliance in the NEW Mortgage World.”

Joe Kolar spoke to member institutions of the Federal Home Loan Bank of Chicago on the new RESPA and TILA rules on January 13.

Andrew Sandler was selected to receive a Good Apple Award at the Louisiana Appleseed’s Good Apple Gala for his vision aimed at expanding access to financial institutions for Latino immigrants and his leadership in bringing together Louisiana banks and Federal banking regulators to discuss barriers to access and solutions. The Gala was held on January 21 in New Orleans, LA.

Jonathan Cannon was quoted in a January 22 article in RESPA News entitled “Judge Issues Another Ruling in RESPA ‘Thing of Value’ Case Involving Inflated Appraisals.”

Margo Tank presented a one-hour, one-credit CLE telephone seminar entitled “Electronic Signatures and Records—What’s the Current Law?” on January 26.

Andrew Sandler spoke at the American Conference Institute’s 9th Annual Conference on Consumer Finance Class Actions & Litigation in Washington, DC on January 27-8.

Jennifer Slagle Peck spoke at an event at American University Washington College of Law on Thursday, February 4 regarding legal careers.

Mortgages

Senate Committee Addresses Anti-Money Laundering Reform. On February 4, the Senate Permanent Subcommittee on Investigations held a hearing on an extensive report regarding foreign corruption in the U.S. banking system. The report documented in detail four cases in which Politically Exposed Persons utilized the U.S. financial system to avoid disclosing the transfer of funds. As a result of the report’s factual findings, Chairman Carl Levin (D-MI) called for legislation requiring persons setting up U.S. shell companies to identify the beneficial owners of those companies. Chairman Levin also called for U.S. Department of the Treasury regulations requiring (i) real estate and escrow agents to “know their customers” and affirmatively evaluate the source of the funds used to purchase properties, (ii) financial institutions to obtain certifications from attorney-client and law office accounts that they will not circumvent anti-money laundering controls, and (iii) stronger bank oversight of foreign wire transfers.

Financial Crimes Enforcement Network (FinCEN) Director James Freis Jr. testified that FinCEN is exploring ways to address the problem of identifying beneficial owners or companies and is working with the American Bar Association to develop standards for “good practices” when handling bank accounts. Director Freis also stated that FinCEN will continue to develop the AML requirements for persons involved in real estate closings and settlements, as addressed in FinCEN’s April 10, 2003 Advance Notice of Proposed Rulemaking. Of particular interest to mortgage lenders or originators, Director Freis also noted that FinCEN is developing a Notice of Proposed Rulemaking to impose AML requirements for loan and finance companies that are engaged in residential mortgage lending or origination that are not currently subject to AML program requirements under the Bank Secrecy Act or other federal law. This proposed regulation will be shaped by the comments FinCEN received on its Advance Notice of Proposed Rulemaking in July 2009 concerning applying AML Program and Suspicious Activity Reports requirements to non-bank residential mortgage lenders and originators (reported in InfoBytes, July 17, 2009). For a copy of the report and testimony from the hearing, please see http://1.usa.gov/cs2i1x.  

FTC Proposes Ban on Up-Front Fees for Mortgage Relief Companies. On February 4, the Federal Trade Commission (FTC) proposed a rule that would prohibit companies from charging up-front fees for foreclosure-rescue or loan-modification services. The proposed rule would apply to for-profit companies that, in exchange for a fee, represent consumers seeking mortgage loan modifications or foreclosure relief, although the rule generally would not apply to entities that own or service mortgage loans. A limited exemption would also be available to attorneys. The proposed rule would preclude a company from receiving payments for modification or foreclosure-rescue services until the company has a documented offer from a mortgage lender or servicer that reflects the representations the company has made to the consumer. The proposed rule would also prohibit certain practices by modification companies, such as (i) telling consumers to stop communicating with the mortgage company, and (ii) misleading consumers about such facts as the likelihood of success, the company’s affiliation with private or public entities, and the company’s refund and cancellation policies. Further, the proposed rule would mandate the disclosure of (i) the company’s status as a for-profit business, (ii) the total amount consumers will pay, (iii) the fact that neither the government nor the lender has approved the service, and (iv) the lack of any guarantee of a modification. The comment period ends March 29, 2010. For a copy of the Notice of Proposed Rulemaking, please see http://ftc.gov/opa/2010/02/mars.shtm. For a copy of the FTC’s press release, please see http://ftc.gov/os/2010/02/100204marsfrn.pdf.  

FTC Requires Mortgage Lender to Hire Third-Party Fair Lending Consultant. On January 29, the Federal Trade Commission (FTC) announced that a mortgage lender must hire a third-party fair lending consultant to comply with a 2008 FTC settlement. The lender allegedly violated the Equal Credit Opportunity Act when it allegedly gave mortgage loan officers nearly complete discretion to charge "overages," but failed to monitor whether African-American and Hispanic consumers were paying higher overages than non-Hispanic white borrowers (reported in InfoBytes, Dec. 19, 2008). According to the FTC, this lack of oversight "resulted in African-American and Hispanic applicants being charged higher overages because of their race or ethnicity.” In a December 2008 settlement, the lender agreed to, among other things, create an effective fair lending monitoring program. However, according to the FTC, the lender failed to comply with this provision. Under the modified order, the company must hire a third-party fair lending consultant, who must be approved by the FTC, to assess the lending practices of the company for five years. The lender is required to follow the recommendations of the consultant and the lender’s discretion over pricing will be limited until the consultant certifies that the company maintains an adequate fair lending monitoring program. For a copy of the press release, please see http://www.ftc.gov/opa/2010/01/gateway.shtmFor a copy of the order, please click here.

HUD Awards Grants to Fight Housing Discrimination. On January 21, the U.S. Department of Housing and Urban Development (HUD) awarded $26.3 million to 98 fair housing organizations and other non-profit agencies via HUD’s Fair Housing Initiatives Program. In particular, HUD awarded $21.1 million in Private Enforcement Initiative grants to help groups investigate alleged housing discrimination and to enforce the Fair Housing Act and substantially equivalent state and local laws. It rewarded the remaining funds to groups that (i) educate the public and housing providers about their rights and responsibilities under federal, state and local housing laws, and (ii) serve rural and immigrant populations in areas where there is currently no fair housing organization or is otherwise underserved. For a copy of the press release, please see http://1.usa.gov/8MjTtj.

Oregon Regulator Issues Proposed Mortgage Lending Rules. The Oregon Department of Consumer and Business Services (the Department) has proposed administrative rules to coordinate the Oregon mortgage lending rules with Oregon’s recent implementation of the SAFE Act minimum requirements (implemented by House Bill 2189, as reported in InfoBytes, Aug. 7, 2009). Specifically, the proposed rules implement the requirements for a new mortgage loan originator license and make conforming changes to the rules governing mortgage bankers, mortgage brokers, and consumer finance licensees who employ mortgage loan originators. In addition, with respect to mortgage bankers and brokers, the proposed rules (i) revise the bonding requirements, (ii) update advertising requirements, and (iii) amend the retention of loan file documents to meet updated mortgage loan originator licensing requirements and data required by the Nationwide Mortgage Licensing System and Registry (NMLSR). Further, as related to consumer finance lenders, the proposed rules (i) update advertising requirements, (ii) create a new bonding requirement, (iii) create a new state background check requirement, and (iv) amend the retention of loan file documents to meet updated mortgage loan originator licensing requirements and data required by the NMLSR. The Department will hold a hearing regarding the proposed rules on March 1, 2010, and the proposed rules are open for public comment until March 5, 2010. For the full text of the proposed administrative rules, please click here.

Florida Attorney General Files Suit Against Foreclosure Rescue Services Company. On February 4, Florida Attorney General Bill McCollum announced a lawsuit against 21st Century Legal Services, Inc. (21st Century), a foreclosure rescue services company. 21st Century allegedly (i) charged consumers as much as $2,500 in illegal up-front fees, (ii) failed to provide promised foreclosure relief services, and (iii) did not issue refunds to customers. The complaint seeks (i) full restitution for affected homeowners, (ii) civil penalties of up to $15,000 per violation, and (iii) a permanent prohibition against the company from future violations of Florida law. Other states have sued 21st Century, and the Federal Bureau of Investigations raided several of the company’s California offices in September 2009. For a copy of the press release, please click here

California Department of Real Estate Issues Statistics Regarding License Surrenders, License Revocations, Disciplinary Action for 2009. On January 29, the California State Department of Real Estate (DRE) announced statistics pertaining to license surrenders, license revocations, and disciplinary actions for 2009. According to the DRE, (i) license revocations increased over 50%, to 672, (ii) license surrenders increased nearly 80%, to 105, and (iii) 122 cases resulted in license suspensions. The DRE also noted that it initiated over 2,000 investigations involving loan modification complaints in 2009, and that it issued over 180 orders to nearly 348 different respondents to stop or change their loan modification business practices. For a copy of the press release, please click here.

California Federal Court Finds Certain California State Law Claims Preempted by HOLA. On January 27, the U.S. District Court for the Southern District of California held that certain state law claims arising from the origination of a mortgage loan were preempted by the Home Owners Loan Act (HOLA) and OTS regulations. Ibarra v. Loan City, No. 09-CV-02228 (S.D. Cal. Jan. 27, 2010). In Ibarra, the plaintiff borrower alleged that his loan servicer (i) violated the California Business and Professions Code § 17200, (ii) engaged in predatory lending, constructive fraud, fraud, and negligent misrepresentation, and (iii) breached its fiduciary duty to him in connection with the origination of his mortgage loan. The servicer – a wholly owned operating subsidiary of a federally chartered bank – moved to dismiss, arguing, among other things, that the borrower’s state law claims were preempted by HOLA and OTS regulations. The court granted the motion in part, and denied it in part. Specifically, the court held that the borrower’s claims of constructive fraud, fraud, and negligent misrepresentation, as well as a portion of plaintiff’s § 17200 claim – each of which were based on alleged misrepresentations relating to the terms of the loan – were not preempted. According to the court, “when plaintiffs rely on the duty not to misrepresent material facts, which is generally applicable to all businesses, and when application of the law would not regulate lending activity, such claims are not preempted.” On the other hand, the court found that the borrower’s claim under California’s predatory lending laws were preempted because those laws “explicitly impose requirements of the type listed in [HOLA] Section 560.2(b), including ‘loan-related fees’ and ‘terms of credit,’ ‘disclosures,’ and the ‘processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages.’” As such, these claims would more than “incidentally affect the lending operations of Federal savings associations.” Likewise, the court found that the borrower’s § 17200 claim – to the extent that it was based on claims that the servicer violated state lending laws and failed to extend loan modification assistance – was preempted because it “explicitly affects banking and lending.” Notably, the court did not decide whether the borrower’s breach of fiduciary duty claim was preempted, because, according to the court, “it is well established that a financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.” For a copy of the opinion, please click here.

Banking

Obama Administration Proposes Creation of a Small Business Lending Fund. On February 2, President Obama outlined plans to create a Small Business Lending Fund (SBLF). Under the proposal, the U.S. Department of the Treasury would divert $30 billion in funds from the Troubled Asset Relief Program (TARP) outside the TARP program to the SBLF, which would then invest the funds in small- and medium-sized banks with assets under $10 billion. Though the fund’s final design has yet to receive Congressional approval, the administration’s current proposal would provide eligible banks with capital investments anywhere between 3% and 5% depending on the bank’s size. Banks participating in the program would be required to pay dividends of 5% on SBLF capital investments. However, if participants are able to demonstrate increased small business lending relative to a baseline set in 2009, they would receive a 1% point decrease in their dividend rate for every 2.5% increase in incremental business lending they achieve over a two-year period, down to a minimum dividend rate of 1%. After five years, the dividend rate would gradually increase in order to wind down the program and encourage timely repayment of funds. The administration hopes that Congress will approve the SBLF’s creation via legislation, which would allow the program to not be restricted by many of TARP’s current restrictions. For a summary of the administration’s proposal, please see http://1.usa.gov/dbf6wU.

Senate Committee Addresses Anti-Money Laundering Reform. On February 4, the Senate Permanent Subcommittee on Investigations held a hearing on an extensive report regarding foreign corruption in the U.S. banking system. The report documented in detail four cases in which Politically Exposed Persons utilized the U.S. financial system to avoid disclosing the transfer of funds. As a result of the report’s factual findings, Chairman Carl Levin (D-MI) called for legislation requiring persons setting up U.S. shell companies to identify the beneficial owners of those companies. Chairman Levin also called for U.S. Department of the Treasury regulations requiring (i) real estate and escrow agents to “know their customers” and affirmatively evaluate the source of the funds used to purchase properties, (ii) financial institutions to obtain certifications from attorney-client and law office accounts that they will not circumvent anti-money laundering controls, and (iii) stronger bank oversight of foreign wire transfers.

Financial Crimes Enforcement Network (FinCEN) Director James Freis Jr. testified that FinCEN is exploring ways to address the problem of identifying beneficial owners or companies and is working with the American Bar Association to develop standards for “good practices” when handling bank accounts. Director Freis also stated that FinCEN will continue to develop the AML requirements for persons involved in real estate closings and settlements, as addressed in FinCEN’s April 10, 2003 Advance Notice of Proposed Rulemaking. Of particular interest to mortgage lenders or originators, Director Freis also noted that FinCEN is developing a Notice of Proposed Rulemaking to impose AML requirements for loan and finance companies that are engaged in residential mortgage lending or origination that are not currently subject to AML program requirements under the Bank Secrecy Act or other federal law. This proposed regulation will be shaped by the comments FinCEN received on its Advance Notice of Proposed Rulemaking in July 2009 concerning applying AML Program and Suspicious Activity Reports requirements to non-bank residential mortgage lenders and originators (reported in InfoBytes, July 17, 2009). For a copy of the report and testimony from the hearing, please see http://1.usa.gov/cs2i1x.  

Obama Administration Releases Final Terms on CDFI Investment Program.  On February 3, the Obama Administration released final guidance on an initiative to provide capital investments to Community Development Financial Institutions (CDFIs) as part of the Troubled Asset Relief Program (TARP). Under this program, CDFIs that have been certified by the U.S. Department of the Treasury (Treasury) as targeting more than 60 percent of their small business lending and economic development activities to underserved communities are eligible to receive capital investments at a dividend rate of 2% – 3% lower than the rate offered under the Capital Purchase Program. Additionally, under the guidance, (i) institutions can apply for Treasury investments of up to 5% of risk-weighted assets, (ii) CDFIs must be approved by their supervising regulator to participate in the program, but for CDFIs that might not otherwise be approved by their supervising regulator, Treasury will match capital investments up to 5% of risk-weighted assets against private investments on a dollar-for-dollar basis, so long as the combined amount would return the institution to viability, (iii) CDFI credit unions can apply for subordinated debt at rates and terms similar to CDFI banks and thrifts, up to 3.5% of total assets, and (iv) institutions that might not otherwise be approved by their supervising regulator can participate if they raise sufficient capital to reach viability when matched with Treasury capital up to 5% of risk-weighted assets. To see the final terms, please click here.  

Federal Reserve Board Announces Website Addressing Safety, Soundness of Bank Operations. On February 1, the Federal Reserve Board (Board) launched a website to assist bank directors with ensuring the safety and soundness of a financial institution. The website, http:///www.BankDirectorsDesktop.org, among other things, includes (i) an interactive training course, (ii) the latest edition of the Board’s guide on directors’ roles and responsibilities, and (iii) links to additional resources. For a copy of the press release, please click here.

California Federal Court Finds Certain California State Law Claims Preempted by HOLA. On January 27, the U.S. District Court for the Southern District of California held that certain state law claims arising from the origination of a mortgage loan were preempted by the Home Owners Loan Act (HOLA) and OTS regulations. Ibarra v. Loan City, No. 09-CV-02228 (S.D. Cal. Jan. 27, 2010). In Ibarra, the plaintiff borrower alleged that his loan servicer (i) violated the California Business and Professions Code § 17200, (ii) engaged in predatory lending, constructive fraud, fraud, and negligent misrepresentation, and (iii) breached its fiduciary duty to him in connection with the origination of his mortgage loan. The servicer – a wholly owned operating subsidiary of a federally chartered bank – moved to dismiss, arguing, among other things, that the borrower’s state law claims were preempted by HOLA and OTS regulations. The court granted the motion in part, and denied it in part. Specifically, the court held that the borrower’s claims of constructive fraud, fraud, and negligent misrepresentation, as well as a portion of plaintiff’s § 17200 claim – each of which were based on alleged misrepresentations relating to the terms of the loan – were not preempted. According to the court, “when plaintiffs rely on the duty not to misrepresent material facts, which is generally applicable to all businesses, and when application of the law would not regulate lending activity, such claims are not preempted.” On the other hand, the court found that the borrower’s claim under California’s predatory lending laws were preempted because those laws “explicitly impose requirements of the type listed in [HOLA] Section 560.2(b), including ‘loan-related fees’ and ‘terms of credit,’ ‘disclosures,’ and the ‘processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages.’” As such, these claims would more than “incidentally affect the lending operations of Federal savings associations.” Likewise, the court found that the borrower’s § 17200 claim – to the extent that it was based on claims that the servicer violated state lending laws and failed to extend loan modification assistance – was preempted because it “explicitly affects banking and lending.” Notably, the court did not decide whether the borrower’s breach of fiduciary duty claim was preempted, because, according to the court, “it is well established that a financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.” For a copy of the opinion, please click here.

Consumer Finance

FTC Releases Annual Report on Enforcement Actions. The Federal Trade Commission (FTC) has issued its annual report to the Federal Reserve Board (Board) on FTC enforcement efforts in 2009 related to the Truth in Lending Act, the Consumer Leasing Act, the Equal Credit Opportunity Act, and the Electronic Fund Transfer Act. The Board will use the report for preparing its 2009 Annual Report to the U.S. Congress. For a copy of the report, please see http://www.ftc.gov/os/2010/02/100202fredistatutesreport.pdf.

FTC Proposes Ban on Up-Front Fees for Mortgage Relief Companies. On February 4, the Federal Trade Commission (FTC) proposed a rule that would prohibit companies from charging up-front fees for foreclosure-rescue or loan-modification services. The proposed rule would apply to for-profit companies that, in exchange for a fee, represent consumers seeking mortgage loan modifications or foreclosure relief, although the rule generally would not apply to entities that own or service mortgage loans. A limited exemption would also be available to attorneys. The proposed rule would preclude a company from receiving payments for modification or foreclosure-rescue services until the company has a documented offer from a mortgage lender or servicer that reflects the representations the company has made to the consumer. The proposed rule would also prohibit certain practices by modification companies, such as (i) telling consumers to stop communicating with the mortgage company, and (ii) misleading consumers about such facts as the likelihood of success, the company’s affiliation with private or public entities, and the company’s refund and cancellation policies. Further, the proposed rule would mandate the disclosure of (i) the company’s status as a for-profit business, (ii) the total amount consumers will pay, (iii) the fact that neither the government nor the lender has approved the service, and (iv) the lack of any guarantee of a modification. The comment period ends March 29, 2010. For a copy of the Notice of Proposed Rulemaking, please see http://ftc.gov/opa/2010/02/mars.shtm. For a copy of the FTC’s press release, please see http://ftc.gov/os/2010/02/100204marsfrn.pdf.

FTC Requires Mortgage Lender to Hire Third-Party Fair Lending Consultant. On January 29, the Federal Trade Commission (FTC) announced that a mortgage lender must hire a third-party fair lending consultant to comply with a 2008 FTC settlement. The lender allegedly violated the Equal Credit Opportunity Act when it allegedly gave mortgage loan officers nearly complete discretion to charge "overages," but failed to monitor whether African-American and Hispanic consumers were paying higher overages than non-Hispanic white borrowers (reported in InfoBytes, Dec. 19, 2008). According to the FTC, this lack of oversight "resulted in African-American and Hispanic applicants being charged higher overages because of their race or ethnicity.” In a December 2008 settlement, the lender agreed to, among other things, create an effective fair lending monitoring program. However, according to the FTC, the lender failed to comply with this provision. Under the modified order, the company must hire a third-party fair lending consultant, who must be approved by the FTC, to assess the lending practices of the company for five years. The lender is required to follow the recommendations of the consultant and the lender’s discretion over pricing will be limited until the consultant certifies that the company maintains an adequate fair lending monitoring program. For a copy of the press release, please see http://www.ftc.gov/opa/2010/01/gateway.shtmFor a copy of the order, please click here.

FTC Announces Settlement with Debt Collection Agency Senior Managers. On January 7, the Federal Trade Commission (FTC) announced additional settlements related to an October 2008 settlement with a debt collection agency. According to the FTC, the debt collection agency allegedly, among other things, (i) made harassing and abusive calls to consumers, (ii) contacted consumers at work while aware that such communications were prohibited by the consumers’ employers, (iii) deposited postdated checks early, and (iv) made unauthorized withdrawals from consumers’ bank accounts (the settlement with the debt collection agency was reported in InfoBytes, Nov. 21, 2008). The complaint also alleged (i) inadequate investigations of consumer complaints, (ii) inadequate discipline of the collection agency’s collectors, and (iii) the rehiring of collectors who were terminated for violating the Fair Debt Collection Practices Act. Under the current settlement, two senior managers of the debt collection agency’s collection center will (i) pay a civil penalty, and (ii) be barred from future related violations. For a copy of the press release, please see http://www.ftc.gov/opa/2010/01/academy.shtm.

Ninth Circuit Holds Higher Education Act Preempts Claims Against Student Loan Servicer. On January 25, the U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s decision that the Higher Education Act (HEA) preempted California’s business, contract, and consumer protection laws in a putative class action challenging certain Sallie Mae loan servicing practices. Chae v. SLM Corp., No. 08-56154, 2010 WL 253215 (9th Cir. Jan. 25, 2010). In Chae, Sallie Mae serviced various educational loans that the plaintiffs originated with from several lenders. The plaintiffs alleged that Sallie Mae violated California law by (i) using the “daily simple interest” or “simple daily interest” method to calculate interest, (ii) charging late fees, and (iii) setting the first repayment date on certain loans within 60 days while also charging interest during that period, so as to “deceptively increase[] the cost and life span of the loan.” The Ninth Circuit concluded that express preemption and conflict preemption barred the claims of the putative class. According to the court, the plaintiffs’ allegations were prohibited, in part, by the express preemption provision of the HEA. The court held that the remaining claims were preempted because they conflicted with congressional purposes and objectives to promote the funding of student loans. The court noted that the plaintiffs are not left without redress. It explained that the Department of Education (DOE) has the power to initiate informal compliance procedures against a third-party servicer that is the subject of a complaint, file a civil suit again the servicer, impose civil penalties, or terminate the servicer’s participation in the student loan program. For a copy of the opinion, please click here.

Seventh Circuit Affirms Enjoining Application of Indiana’s UCCC to Out-of-State Title Lender. On January 28, the U.S. Court of Appeals for the Seventh Circuit affirmed an Indiana district court’s decision to permanently enjoin the application of the Indiana Uniform Consumer Credit Code (IUCCC) against an out-of-state title lender. Midwest Title Loans, Inc. v. Mills, No. 09-2083, 2010 WL 308967 (7th Cir. Jan. 28, 2010). Under the IUCCC’s territorial application provision, the IUCCC applies to consumer loan transactions conducted between out-of-state creditors and Indiana residents, as long as the out-of-state creditors had “advertised or solicited sales, leases, or loans in Indiana by any means.” Midwest Title Loans, Inc. (Midwest) challenged the application of the provision to its conduct as a violation of the U.S. Constitution’s Commerce Clause. Midwest advertised in Indiana, but did not, among other things, (i) maintain a physical presence in Indiana, (ii) conduct business in Indiana, or (iii) avail itself of Indiana courts. The district court ruled in favor of Midwest, finding that the provision did not merely burden interstate commerce or have an extraterritorial effect, but, rather, attempted to regulate extraterritorial activities directly. According to the district court, upholding the provision would give “carte blanche to states to impose their diverse regulatory schemes on any commercial activity which affects any other state’s interests and satisfies a rudimentary minimum contacts test.” Midwest Title Loans, Inc. v. Ripley, 616 F.Supp.2d 897, 908 (S.D. Ind., 2009). On appeal, the Seventh Circuit affirmed the district court’s decision, finding that “[t]o allow Indiana to apply its laws against title loans when its residents transact in a different state that has a different law would be arbitrarily to exalt the public policy of one state over that of another.” As a result, the court of appeals upheld the district court’s grant of an injunction. For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=09-2083_002.pdf.

Washington Federal Court Complaint Alleges TCPA Violation by Sallie Mae. On February 2, a plaintiff brought a putative class action suit in the U.S. District Court for the Western District of Washington against Sallie Mae for alleged violations of the Telephone Consumer Protection Act (TCPA) in connection with student loans provided by Sallie Mae. Arthur v. SLM Corp., No. C 10-0198 (W.D. Wash. Feb. 2, 2010). The complaint alleges that Sallie Mae violated the TCPA and a Federal Communication Commission (FCC) declaratory ruling by (i) contacting the plaintiff’s cellular phone number without obtaining the number at the time of the transaction that resulted in the debt owed to Sallie Mae, and without express consent to make automated calls to the plaintiff’s cellular phone, and (ii) making repeated, harassing calls via an "automatic telephone dialing system" for non-emergency purposes. The TCPA prohibits the use of automated telephone equipment, or "autodialers," to make any call to a wireless number in the absence of an emergency or the prior express consent of the called party. Moreover, an FCC declaratory ruling states that a consumer must provide a creditor with a wireless number during the transaction that resulted in the debt owed in order for the creditor to lawfully contact a consumer using the consumer’s wireless number. The plaintiff is seeking, among other things, (i) $500 in statutory damages for each call in violation of the TCPA, and (ii) treble damages of up to $1,500 for each call involving knowing and/or willful violations of the TCPA. For a copy of the complaint, please click here.

Virginia Federal Court Recommends Class Certification and Settlement in FCRA Case. On January 27, the U.S. District Court for the Western District of Virginia recommended preliminary class certification and certain aspects of the parties’ proposed class settlement in a suit challenging the notice that the defendant provided to consumers regarding the use of credit scores in certain residential real estate financing transactions. Domonoske v. Bank of America, N.A., Nos 5:08cv066 and 5:09cv080, 2010 WL 329961 (W.D. Va. Jan. 27, 2010). In these consolidated actions, the plaintiffs alleged that the defendant bank failed to comply with the Fair Credit Reporting Act’s (FCRA) requirement that the bank send a disclosure to the consumer “as soon as reasonably practicable” after its use of the consumer’s credit score. The bank argued that it had disclosure protocols in place, which were developed with the assistance of counsel, that complied with FCRA. Because the plaintiffs have not asserted evidence of actual damages, the issue in the suit is whether there was a willful violation of FCRA (i.e., knowing violation or objectively unreasonable conduct), which could lead to statutory damages. The bank joined the plaintiff’s motion for preliminary approval of the class action settlement, which the district court referred to a magistrate judge for consideration and a recommendation. The magistrate judge recommended that preliminary approval of the proposed class action be granted and that preliminary approval of the settlement be granted in part and denied in part. The settlement, among other things, would establish a gross settlement fund of $9.95 million, plus costs of administration. The magistrate judge concluded that the settlement agreement’s provision of attorneys’ fees in the amount of $2.35 million and the amount designated for the class representatives was unreasonably high and therefore should not be approved. The magistrate judge also concluded that the provision of the settlement agreement providing injunctive relief should not be approved because injunctive relief is not available to private parties under FCRA. For a copy of the magistrate judge’s report and recommendation, please click here.

Rhode Island Federal Court Certifies Class of Recipients of Form Debt Collection Letter. On January 27, the U.S. District Court for the District of Rhode Island granted a motion for class certification in an action alleging that the defendant debt collector’s standard debt collection letter sent to class members violated the federal Fair Debt Collection Practices Act (FDCPA). Gordon v. Corporate Receivables, Inc., No. 09-230S (D.R.I. Jan. 27, 2010). In Gordon, the defendant collection agency sent the plaintiff debtor a debt collection letter indicating that the debtor could only dispute the validity of the debt in writing. The debtor alleged that the letter violated the FDCPA and proposed a class of all recipients of the standard debt collection letter in four states and Puerto Rico. The court concluded that the class satisfied Rule 23(a)’s numerosity element because the debt collection agency did not respond to the debtor’s request for an admission that the size of the class exceeded one-hundred individuals and the debt collection agency’s client identified on the debt collection letter was a national credit card issuer. The court also found that the class satisfied the commonality, typicality, and adequacy of representation prongs of Rule 23(a). Next, the court found that common questions of law and fact predominated over individual questions because the claim focused on the legality of the language in a standard letter received by all class members. Finally, the court held that the commonality of the claims and the small amount of recovery of each class member made the class mechanism a superior method of resolving the disputes. For a copy of the opinion, please click here.   

Washington Federal Court Asserts Jurisdiction over Michigan Utility in FCRA Case. On January 26, the U.S. District Court for the Western District of Washington held that it had personal jurisdiction over a Michigan utility that was alleged to have failed to correct inaccurate information contained in the credit report of a Washington resident. Gordon v. DTE Energy, No. C09-1020, 2010 WL 323117 (W.D. Wash. Jan. 26, 2010). In Gordon, the plaintiff, a Washington resident, alleged that the utility reverified to reporting agencies that the resident’s account was seriously delinquent, even though the plaintiff had made several attempts to show the utility that the accounts resulted from identity theft. The plaintiff alleged that the negative information resulted in her receiving a less-than-optimum mortgage rate, and she sued under the Fair Credit Reporting Act (FCRA) and state laws. The utility moved for dismissal, asserting that the Washington court lacked personal jurisdiction over it. The court denied the motion, holding that (i) the utility’s data transmissions to reporting agencies constituted intentional acts, (ii) the utility knew the transmissions could cause harm to a Washington resident, in Washington, (iii) the resident had sufficiently alleged that the transmissions had caused her actual harm, and (iv) the utility had failed to present a compelling case that jurisdiction in Washington was unreasonable. For a copy of the opinion, please click here.

Litigation

Ninth Circuit Holds Higher Education Act Preempts Claims Against Student Loan Servicer. On January 25, the U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s decision that the Higher Education Act (HEA) preempted California’s business, contract, and consumer protection laws in a putative class action challenging certain Sallie Mae loan servicing practices. Chae v. SLM Corp., No. 08-56154, 2010 WL 253215 (9th Cir. Jan. 25, 2010). In Chae, Sallie Mae serviced various educational loans that the plaintiffs originated with from several lenders. The plaintiffs alleged that Sallie Mae violated California law by (i) using the “daily simple interest” or “simple daily interest” method to calculate interest, (ii) charging late fees, and (iii) setting the first repayment date on certain loans within 60 days while also charging interest during that period, so as to “deceptively increase[] the cost and life span of the loan.” The Ninth Circuit concluded that express preemption and conflict preemption barred the claims of the putative class. According to the court, the plaintiffs’ allegations were prohibited, in part, by the express preemption provision of the HEA. The court held that the remaining claims were preempted because they conflicted with congressional purposes and objectives to promote the funding of student loans. The court noted that the plaintiffs are not left without redress. It explained that the Department of Education (DOE) has the power to initiate informal compliance procedures against a third-party servicer that is the subject of a complaint, file a civil suit again the servicer, impose civil penalties, or terminate the servicer’s participation in the student loan program. For a copy of the opinion, please click here.

Seventh Circuit Affirms Enjoining Application of Indiana’s UCCC to Out-of-State Title Lender. On January 28, the U.S. Court of Appeals for the Seventh Circuit affirmed an Indiana district court’s decision to permanently enjoin the application of the Indiana Uniform Consumer Credit Code (IUCCC) against an out-of-state title lender. Midwest Title Loans, Inc. v. Mills, No. 09-2083, 2010 WL 308967 (7th Cir. Jan. 28, 2010). Under the IUCCC’s territorial application provision, the IUCCC applies to consumer loan transactions conducted between out-of-state creditors and Indiana residents, as long as the out-of-state creditors had “advertised or solicited sales, leases, or loans in Indiana by any means.” Midwest Title Loans, Inc. (Midwest) challenged the application of the provision to its conduct as a violation of the U.S. Constitution’s Commerce Clause. Midwest advertised in Indiana, but did not, among other things, (i) maintain a physical presence in Indiana, (ii) conduct business in Indiana, or (iii) avail itself of Indiana courts. The district court ruled in favor of Midwest, finding that the provision did not merely burden interstate commerce or have an extraterritorial effect, but, rather, attempted to regulate extraterritorial activities directly. According to the district court, upholding the provision would give “carte blanche to states to impose their diverse regulatory schemes on any commercial activity which affects any other state’s interests and satisfies a rudimentary minimum contacts test.” Midwest Title Loans, Inc. v. Ripley, 616 F.Supp.2d 897, 908 (S.D. Ind., 2009). On appeal, the Seventh Circuit affirmed the district court’s decision, finding that “[t]o allow Indiana to apply its laws against title loans when its residents transact in a different state that has a different law would be arbitrarily to exalt the public policy of one state over that of another.” As a result, the court of appeals upheld the district court’s grant of an injunction. For a copy of the opinion, please seehttp://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=09-2083_002.pdf.

California Federal Court Finds Certain California State Law Claims Preempted by HOLA. On January 27, the U.S. District Court for the Southern District of California held that certain state law claims arising from the origination of a mortgage loan were preempted by the Home Owners Loan Act (HOLA) and OTS regulations. Ibarra v. Loan City, No. 09-CV-02228 (S.D. Cal. Jan. 27, 2010). In Ibarra, the plaintiff borrower alleged that his loan servicer (i) violated the California Business and Professions Code § 17200, (ii) engaged in predatory lending, constructive fraud, fraud, and negligent misrepresentation, and (iii) breached its fiduciary duty to him in connection with the origination of his mortgage loan. The servicer – a wholly owned operating subsidiary of a federally chartered bank – moved to dismiss, arguing, among other things, that the borrower’s state law claims were preempted by HOLA and OTS regulations. The court granted the motion in part, and denied it in part. Specifically, the court held that the borrower’s claims of constructive fraud, fraud, and negligent misrepresentation, as well as a portion of plaintiff’s § 17200 claim – each of which were based on alleged misrepresentations relating to the terms of the loan – were not preempted. According to the court, “when plaintiffs rely on the duty not to misrepresent material facts, which is generally applicable to all businesses, and when application of the law would not regulate lending activity, such claims are not preempted.” On the other hand, the court found that the borrower’s claim under California’s predatory lending laws were preempted because those laws “explicitly impose requirements of the type listed in [HOLA] Section 560.2(b), including ‘loan-related fees’ and ‘terms of credit,’ ‘disclosures,’ and the ‘processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages.’” As such, these claims would more than “incidentally affect the lending operations of Federal savings associations.” Likewise, the court found that the borrower’s § 17200 claim – to the extent that it was based on claims that the servicer violated state lending laws and failed to extend loan modification assistance – was preempted because it “explicitly affects banking and lending.” Notably, the court did not decide whether the borrower’s breach of fiduciary duty claim was preempted, because, according to the court, “it is well established that a financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.” For a copy of the opinion, please click here.

Washington Federal Court Complaint Alleges TCPA Violation by Sallie Mae. On February 2, a plaintiff brought a putative class action suit in the U.S. District Court for the Western District of Washington against Sallie Mae for alleged violations of the Telephone Consumer Protection Act (TCPA) in connection with student loans provided by Sallie Mae. Arthur v. SLM Corp., No. C 10-0198 (W.D. Wash. Feb. 2, 2010). The complaint alleges that Sallie Mae violated the TCPA and a Federal Communication Commission (FCC) declaratory ruling by (i) contacting the plaintiff’s cellular phone number without obtaining the number at the time of the transaction that resulted in the debt owed to Sallie Mae, and without express consent to make automated calls to the plaintiff’s cellular phone, and (ii) making repeated, harassing calls via an "automatic telephone dialing system" for non-emergency purposes. The TCPA prohibits the use of automated telephone equipment, or "autodialers," to make any call to a wireless number in the absence of an emergency or the prior express consent of the called party. Moreover, an FCC declaratory ruling states that a consumer must provide a creditor with a wireless number during the transaction that resulted in the debt owed in order for the creditor to lawfully contact a consumer using the consumer’s wireless number. The plaintiff is seeking, among other things, (i) $500 in statutory damages for each call in violation of the TCPA, and (ii) treble damages of up to $1,500 for each call involving knowing and/or willful violations of the TCPA. For a copy of the complaint, please click here.  

California Federal Magistrate Judge Grants Class Certification in TILA Case Against Mortgage Broker. On January 22, a California federal magistrate judge granted class certification in a case against a California mortgage broker accused of fraud (based on concealment of relevant facts) and of violating the federal Truth in Lending Act (TILA) and California’s Unfair Competition Law. Lymburner v. U.S. Fin. Funds, Inc. No. C-08-00325 (N.D. Cal. Jan. 22, 2010). The plaintiff, who obtained an IndyMac Bank 5-year fixed payment adjustable rate mortgage from the defendant mortgage broker in November 2006, alleged that the loan closing documents omitted certain information regarding interest rates and the applicability of negative amortization. In certifying the class, the judge determined that there was a class of as many as 121 borrowers, all with common issues of fact regarding disclosures in the loan documents. The court rejected the defendant’s argument that the claims of the proposed class were not “typical” because the availability of rescission would have to be examined individually for each class member. Additionally, the court found that there were common questions of law and fact predominant among the class members because (i) regarding the TILA claim, there was only one version of the loan documents, and (ii) regarding the fraud claim, the allegations regarded the disclosures on the loan documents of all of the class members – not individual representations made about the disclosures. Additionally, the court rejected the defendant’s argument that the plaintiff’s claims were subject to an “unclean hands” defense because the plaintiff misstated her income on the loan application. The court reasoned that the presence of this possible defense was not a basis to deny class certification. For a copy of the opinion, please click here.

Virginia Federal Court Recommends Class Certification and Settlement in FCRA Case. On January 27, the U.S. District Court for the Western District of Virginia recommended preliminary class certification and certain aspects of the parties’ proposed class settlement in a suit challenging the notice that the defendant provided to consumers regarding the use of credit scores in certain residential real estate financing transactions. Domonoske v. Bank of America, N.A., Nos 5:08cv066 and 5:09cv080, 2010 WL 329961 (W.D. Va. Jan. 27, 2010). In these consolidated actions, the plaintiffs alleged that the defendant bank failed to comply with the Fair Credit Reporting Act’s (FCRA) requirement that the bank send a disclosure to the consumer “as soon as reasonably practicable” after its use of the consumer’s credit score. The bank argued that it had disclosure protocols in place, which were developed with the assistance of counsel, that complied with FCRA. Because the plaintiffs have not asserted evidence of actual damages, the issue in the suit is whether there was a willful violation of FCRA (i.e., knowing violation or objectively unreasonable conduct), which could lead to statutory damages. The bank joined the plaintiff’s motion for preliminary approval of the class action settlement, which the district court referred to a magistrate judge for consideration and a recommendation. The magistrate judge recommended that preliminary approval of the proposed class action be granted and that preliminary approval of the settlement be granted in part and denied in part. The settlement, among other things, would establish a gross settlement fund of $9.95 million, plus costs of administration. The magistrate judge concluded that the settlement agreement’s provision of attorneys’ fees in the amount of $2.35 million and the amount designated for the class representatives was unreasonably high and therefore should not be approved. The magistrate judge also concluded that the provision of the settlement agreement providing injunctive relief should not be approved because injunctive relief is not available to private parties under FCRA. For a copy of the magistrate judge’s report and recommendation, please click here.

Rhode Island Federal Court Certifies Class of Recipients of Form Debt Collection Letter. On January 27, the U.S. District Court for the District of Rhode Island granted a motion for class certification in an action alleging that the defendant debt collector’s standard debt collection letter sent to class members violated the federal Fair Debt Collection Practices Act (FDCPA). Gordon v. Corporate Receivables, Inc., No. 09-230S (D.R.I. Jan. 27, 2010). In Gordon, the defendant collection agency sent the plaintiff debtor a debt collection letter indicating that the debtor could only dispute the validity of the debt in writing. The debtor alleged that the letter violated the FDCPA and proposed a class of all recipients of the standard debt collection letter in four states and Puerto Rico. The court concluded that the class satisfied Rule 23(a)’s numerosity element because the debt collection agency did not respond to the debtor’s request for an admission that the size of the class exceeded one-hundred individuals and the debt collection agency’s client identified on the debt collection letter was a national credit card issuer. The court also found that the class satisfied the commonality, typicality, and adequacy of representation prongs of Rule 23(a). Next, the court found that common questions of law and fact predominated over individual questions because the claim focused on the legality of the language in a standard letter received by all class members. Finally, the court held that the commonality of the claims and the small amount of recovery of each class member made the class mechanism a superior method of resolving the disputes. For a copy of the opinion, please click here.   

Washington Federal Court Asserts Jurisdiction over Michigan Utility in FCRA Case. On January 26, the U.S. District Court for the Western District of Washington held that it had personal jurisdiction over a Michigan utility that was alleged to have failed to correct inaccurate information contained in the credit report of a Washington resident. Gordon v. DTE Energy, No. C09-1020, 2010 WL 323117 (W.D. Wash. Jan. 26, 2010). In Gordon, the plaintiff, a Washington resident, alleged that the utility reverified to reporting agencies that the resident’s account was seriously delinquent, even though the plaintiff had made several attempts to show the utility that the accounts resulted from identity theft. The plaintiff alleged that the negative information resulted in her receiving a less-than-optimum mortgage rate, and she sued under the Fair Credit Reporting Act (FCRA) and state laws. The utility moved for dismissal, asserting that the Washington court lacked personal jurisdiction over it. The court denied the motion, holding that (i) the utility’s data transmissions to reporting agencies constituted intentional acts, (ii) the utility knew the transmissions could cause harm to a Washington resident, in Washington, (iii) the resident had sufficiently alleged that the transmissions had caused her actual harm, and (iv) the utility had failed to present a compelling case that jurisdiction in Washington was unreasonable. For a copy of the opinion, please click here.

Privacy/Data Security

Washington Federal Court Complaint Alleges TCPA Violation by Sallie Mae. On February 2, a plaintiff brought a putative class action suit in the U.S. District Court for the Western District of Washington against Sallie Mae for alleged violations of the Telephone Consumer Protection Act (TCPA) in connection with student loans provided by Sallie Mae. Arthur v. SLM Corp., No. C 10-0198 (W.D. Wash. Feb. 2, 2010). The complaint alleges that Sallie Mae violated the TCPA and a Federal Communication Commission (FCC) declaratory ruling by (i) contacting the plaintiff’s cellular phone number without obtaining the number at the time of the transaction that resulted in the debt owed to Sallie Mae, and without express consent to make automated calls to the plaintiff’s cellular phone, and (ii) making repeated, harassing calls via an "automatic telephone dialing system" for non-emergency purposes. The TCPA prohibits the use of automated telephone equipment, or "autodialers," to make any call to a wireless number in the absence of an emergency or the prior express consent of the called party. Moreover, an FCC declaratory ruling states that a consumer must provide a creditor with a wireless number during the transaction that resulted in the debt owed in order for the creditor to lawfully contact a consumer using the consumer’s wireless number. The plaintiff is seeking, among other things, (i) $500 in statutory damages for each call in violation of the TCPA, and (ii) treble damages of up to $1,500 for each call involving knowing and/or willful violations of the TCPA. For a copy of the complaint, please click here.  

Virginia Federal Court Recommends Class Certification and Settlement in FCRA Case. On January 27, the U.S. District Court for the Western District of Virginia recommended preliminary class certification and certain aspects of the parties’ proposed class settlement in a suit challenging the notice that the defendant provided to consumers regarding the use of credit scores in certain residential real estate financing transactions. Domonoske v. Bank of America, N.A., Nos 5:08cv066 and 5:09cv080, 2010 WL 329961 (W.D. Va. Jan. 27, 2010). In these consolidated actions, the plaintiffs alleged that the defendant bank failed to comply with the Fair Credit Reporting Act’s (FCRA) requirement that the bank send a disclosure to the consumer “as soon as reasonably practicable” after its use of the consumer’s credit score. The bank argued that it had disclosure protocols in place, which were developed with the assistance of counsel, that complied with FCRA. Because the plaintiffs have not asserted evidence of actual damages, the issue in the suit is whether there was a willful violation of FCRA (i.e., knowing violation or objectively unreasonable conduct), which could lead to statutory damages. The bank joined the plaintiff’s motion for preliminary approval of the class action settlement, which the district court referred to a magistrate judge for consideration and a recommendation. The magistrate judge recommended that preliminary approval of the proposed class action be granted and that preliminary approval of the settlement be granted in part and denied in part. The settlement, among other things, would establish a gross settlement fund of $9.95 million, plus costs of administration. The magistrate judge concluded that the settlement agreement’s provision of attorneys’ fees in the amount of $2.35 million and the amount designated for the class representatives was unreasonably high and therefore should not be approved. The magistrate judge also concluded that the provision of the settlement agreement providing injunctive relief should not be approved because injunctive relief is not available to private parties under FCRA. For a copy of the magistrate judge’s report and recommendation, please click here.

Washington Federal Court Asserts Jurisdiction over Michigan Utility in FCRA Case. On January 26, the U.S. District Court for the Western District of Washington held that it had personal jurisdiction over a Michigan utility that was alleged to have failed to correct inaccurate information contained in the credit report of a Washington resident. Gordon v. DTE Energy, No. C09-1020, 2010 WL 323117 (W.D. Wash. Jan. 26, 2010). In Gordon, the plaintiff, a Washington resident, alleged that the utility reverified to reporting agencies that the resident’s account was seriously delinquent, even though the plaintiff had made several attempts to show the utility that the accounts resulted from identity theft. The plaintiff alleged that the negative information resulted in her receiving a less-than-optimum mortgage rate, and she sued under the Fair Credit Reporting Act (FCRA) and state laws. The utility moved for dismissal, asserting that the Washington court lacked personal jurisdiction over it. The court denied the motion, holding that (i) the utility’s data transmissions to reporting agencies constituted intentional acts, (ii) the utility knew the transmissions could cause harm to a Washington resident, in Washington, (iii) the resident had sufficiently alleged that the transmissions had caused her actual harm, and (iv) the utility had failed to present a compelling case that jurisdiction in Washington was unreasonable. For a copy of the opinion, please click here.