Federal Issues

FTC Delays “Red Flags” Rule Enforcement Until November 1. On July 29, the Federal Trade Commission (FTC) announced that it will delay, for the second time, enforcement of its “Red Flags” rule to give creditors and financial institutions additional time to develop and implement written Identity Theft Prevention Programs. The new enforcement date is November 1, 2009. The FTC had previously delayed its implementation of the rule until August 1, 2009 (reported in InfoBytes, May 1, 2009). This announcement does not affect the FTC’s address discrepancy rule, which applies to all users of consumer reports, and its change-of-address rule, which applies to card issuers, which became effective November 1, 2008. The FTC has released a FAQ to assist with compliance with the rule, which is available here. For a copy of the press release, please see http://1.usa.gov/mviAt.

FHA Announces Loan Modification Program. On July 30, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2009-23 to implement the FHA-Home Affordable Modification Program (FHA-HAMP), which permits defaulted FHA mortgagors to obtain a loan modification to permanently reduce their monthly payments. In many respects, the FHA-HAMP program mirrors the federal Making Home Affordable (MHA) modification program available to non-FHA borrowers (for a description of MHA, please see InfoBytes, Mar. 6, 2009). For example, FHA-HAMP has similar eligibility requirements, including that mortgagors must have a front-end debt-to-income ratio of greater than 31 percent and a back-end debt-to-income ratio of less than 55 percent. In addition, the servicer must obtain a Hardship Affidavit from every mortgagor and co-mortgagor seeking an FHA-HAMP. Likewise, a mortgagor seeking a permanent modification in FHA-HAMP must successfully complete a three-month trial payment plan. Notably, FHA-HAMP is only available if the mortgagor does not already qualify for the existing FHA loss mitigation alternatives of special forbearance, loan modification, and partial claims (in that priority order).

Under FHA-HAMP, a borrower’s monthly mortgage payment is permanently reduced through the use of a partial claim, which defers repayment of principal through an interest-free subordinate mortgage that is deferred until the first mortgage is paid off. The maximum partial claim amount cannot exceed 30 percent of the unpaid principal balance as of the date of default. The principal deferment amount is limited to an amount that will bring the borrower’s total monthly payment to 31 percent of the borrower’s gross monthly income. Servicers are eligible for incentives of up to $1250 for each FHA loan modified under the program. If the borrower does not successfully complete the trial payment plan, the mortgagee must pursue other loss mitigation options prior to commencing or continuing a foreclosure. The participation guidelines are available at http://1.usa.gov/nZMHrj. For a copy of the press release, please see http://1.usa.gov/n6j3vw
For a copy of the Mortgagee Letter, please see http://1.usa.gov/pqeP0y.

Fed Amends Reg. Z to Implement HEOA. On July 30, the Federal Reserve Board (Fed) adopted final amendments to Regulation Z that implement the provisions of the Higher Education Opportunity Act (HEOA). The amendments require creditors offering private student loans to provide a series of disclosures throughout the student loan application process. Under the amended rules, creditors must disclose in their solicitations and applications general information about the cost of credit, including actual loan rates offered, fees charged, and the interest rates available to consumers that qualify for loans under competing federal programs. Additionally, creditors must provide consumer-specific disclosures at the time a loan is approved or consummated. Furthermore, consistent with the proposed amendments (reported in InfoBytes, Mar. 13, 2009), the amended rules permit the required approval and final disclosures to be provided in electronic form, subject to compliance with the consumer consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act (E-Sign Act). Solicitation and application disclosures may also be made electronically, but need not comply with E-Sign’s requirements. In addition to the new disclosure requirements, the Fed’s amendments also implement HEOA’s restriction on the use of an educational institution’s name, emblem, mascot, or logo in a way that implies that the institution endorses a creditor’s loan product. Along with the amended rules, the Fed has published model disclosure forms that creditors may use to comply with the new disclosure requirements. The mandatory effective date for the amendments is 180 days after publication in the Federal Register. For a copy of the press release, which includes links to model disclosure forms and samples, please see http://www.federalreserve.gov/newsevents/press/bcreg/20090730a.htm. For a copy of the final rule, please seehttp://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090730a1.pdf.

FTC Proposes Amendments to Telemarketing Sales Rule; Seeks Public Comment. On July 30, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking to amend the FTC’s Telemarketing Sales Rule (TSR) to address the sale of debt relief services (e.g., credit counseling, debt management plans, debt settlement, and debt negotiation). The proposed amendments would, among other things, (i) define the term “debt relief service,” (ii) ensure that telemarketing transactions involving debt relief services are subject to the TSR, regardless of the medium through which such services are initially advertised, by making the general media and direct mail exceptions to the TSR unavailable to debt relief services telemarketers, (iii) mandate certain disclosures and prohibit misrepresentations in the telemarketing of debt relief services, and (iv) require full performance and documentation to the consumer before a debt relief services company requests and/or receives payment for debt relief services. The FTC is seeking written comments on the proposed amendments, which are due by October 9, 2009. At the end of the comment period, the FTC will hold a public forum to discuss the proposed amendments. For a copy of the notice, please see http://1.usa.gov/oMSuqs.

OCC Issues Guidance Regarding CCARD Look-Back Provision. On July 30, the Office of the Comptroller of the Currency (OCC) issued guidance regarding the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CCARD). The guidance specifically addresses the “look-back” provision of CCARD, under which increases in annual percentage rates (APRs) after January 1, 2009 must be reviewed at least once every six months to assess whether factors contributing to the APR increase have changed. According to the OCC, APRs might require reduction if such factors are no longer present, although the OCC notes that CCARD does not “require a reduction in any specific amount.” Effective August 22, 2010, OCC-regulated institutions must conduct such reviews on any accounts on which the APRs were increased on or after January 1, 2009. Accordingly, OCC-regulated institutions must maintain and have available information concerning APR increases for such accounts as needed to enable them to conduct the required reviews. The guidance follows similar recent statements by the Federal Reserve Board and the Office of Thrift Supervision (reported in InfoBytes, July 17, 2009) on the heels of Senator Christopher J. Dodd’s (D-CT) July 9 letter (reported in InfoBytes, July 10, 2009) urging the heads of the federal banking regulatory agencies to implement and enforce the look-back provision of CCARD. For a copy of the guidance, please see http://www.occ.treas.gov/ftp/bulletin/2009-25.html.

FTC Imposes Temporary Ban on Telemarketer That Allegedly Violated Do-Not-Call Rules. On July 29, the Federal Trade Commission (FTC) approved a federal court order banning a telemarketer from engaging in telemarketing to consumers for five years. The telemarketer allegedly violated the FTC’s Do-Not-Call Rules by calling consumers on the National Do-Not-Call Registry (Registry) in an attempt to sell financial products, including mortgages and related financing services. The defendants, Global Mortgage Funding, Inc. and its owner, were investigated by the FTC and charged by the Department of Justice (DOJ) with violating the FTC’s Do-Not-Call Rules by (i) making hundreds of thousands of telemarketing calls to individuals on the Registry, (ii) failing to pay requisite fees to access the Registry, (iii) failing to transmit accurate caller identification information, and (iv) abandoning calls by not connecting customers to live representatives within two seconds after the phone was answered. Under the order, the defendants are, among other things, (i) banned from engaging in telemarketing for five years, (ii) ordered to pay a $6 million civil penalty (which is currently suspended due to the defendants’ inability to pay), and (iii) ordered to follow specific record keeping provisions to permit the FTC to monitor compliance. For a copy of the press release, please see http://www.ftc.gov/opa/2009/07/globalmgt.shtm. For a copy of the order, please see http://www.ftc.gov/os/caselist/0623107/090717globalmortfundstip.pdf.

FDIC Announces First Test of Legacy Loans Program. On July 31, the Federal Deposit Insurance Corporation (FDIC) announced the commencement of the first test of the Legacy Loan Program’s (LLP) funding mechanism. Under the LLP, financial institutions, their primary regulators, and the FDIC will designate pools of real estate loans to place on auction. In the transaction to be offered, the receivership will transfer a portfolio of residential mortgage loans on a servicing-released basis to a limited liability company (LLC) in exchange for an ownership interest in the LLC. The LLC will also sell an equity interest to an accredited investor who will manage the loan portfolio. Under the funding mechanism initiated this week, the receivership offers financing to the LLC using an amortizing note guaranteed by the FDIC. For more information about the LLP, please see InfoBytes, Mar. 27, 2009. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09131.html.

State Issues

Colorado Division of Real Estate Adopts New Mortgage Loan Originator Rules. The Colorado Division of Real Estate recently adopted new rules relating to the business practices and licensing of mortgage loan originators. Among other items, the new rules (i) establish minimum surety bond requirements for licensees (Rule 1-2-2), (ii) set forth when the Division may inactivate a license (Rule 1-5-1), (iii) explain how and when a temporary license may be issued (Rule 1-1-2), (iv) clarify a licensee’s duties in connection with an investigation by the Division (Rule 3-1-2), (v) require that a licensee’s contact information and all other information required for licensing be kept current (Rule 3-1-3), (vi) identify disclosures to be provided by licensees to borrowers (Rule 5-1-2), (vii) set forth requirements applicable to transactions containing specific prepayment penalty terms (Rule 3-1-4), (viii) define compliance with the requirement that licensees maintain contracts with borrowers and mortgage lenders (Rule 5-1-1), and (ix) establish guidelines for licensee advertising (Rule 8-1-1). Additionally, Rule 3-1-1 explains how a licensee must comply with the “reasonable inquiry” and “net tangible benefit” requirements associated with the licensee’s duty of good faith and fair dealing in all communications and transactions with borrowers. Finally, Rule 1-2-1 repeals the surety bond requirement for mortgage brokers. Certain rules become effective August 30, 2009, while others become effective September 30, 2009. For a copy of the rules, please see http://www.dora.state.co.us/real-estate/rulemaking/index.htm#MB.

Illinois Regulator Announces Statewide Title Loan Compliance Sweep. On July 30, the Illinois Department of Financial and Professional Regulation announced a statewide compliance sweep to enforce new title loan rules that recently became effective. The new rules are intended to reduce the likelihood that borrowers will default on their loans and have their cars repossessed, and establish a database to prevent borrowers from being forced to take out additional loans to repay outstanding balances. The examiners will visit title lenders and review randomly selected loan files opened after April 1, 2009 to ensure that, among other things, (i) the principal amount of the loan does not exceed $4,000, (ii) the loan payments do not exceed 50 percent of the borrower’s gross monthly income, (iii) there are no balloon payments, (iv) each loan agreement includes an attestation that the borrower has not had an outstanding title-secured loan within the preceding 15 days, (v) any notice of delinquency or default sent or given to the consumer contains the Department’s hotline telephone number, and (vi) no cars have been repossessed and leased back to the consumer. For a copy of the press release, please see
http://www.idfpr.com/newsrls/07302009StateConductsStatewideComplainceSweet.asp.

Missouri Governor Signs Bill Regarding Security Breach Notification. On July 9, Missouri Governor Jay Nixon signed HB 62, an omnibus crime bill containing a provision that requires companies to notify Missouri consumers regarding a security breach of personal information. The provision does not create a private right of action and instead grants the Missouri Attorney General exclusive authority to bring an action (for up to $150,000 per security breach) for an alleged violation of the provision. The provision becomes effective August 28, 2009. For a copy of the bill, please click here.

Courts

D.C. Federal Court Upholds HUD RESPA Rule Amending Disclosure of Yield Spread Premiums. On July 29, the U.S. District Court for the District of Columbia held that the U.S. Department of Housing and Urban Development’s (HUD) recently-promulgated rule regarding the disclosure of yield spread premiums on the Good Faith Estimate (the “Rule to Simplify and Improve the Process of Obtaining Mortgages and Reduce Customer Settlement Costs” – hereinafter, the Rule) is not arbitrary and capricious under the Administrate Procedures Act (APA). Nat’l Ass’n of Mortg. Bankers, Inc. v. Donovan, No. Civ. A. 08-2208, 2009 WL 2259085 (D.D.C. July 29, 2009). This case arose after the National Association of Mortgage Bankers, Inc. (NAMB) challenged the Rule as arbitrary and capricious under the APA because (i) HUD failed to supply a reasoned explanation for why the Rule had asymmetric disclosure requirements for brokers and direct lenders, (ii) HUD failed to consider reasonable alternatives to the Rule and explain why it rejected them, and (iii) HUD substantially relied on data to formulate the Rule that it never produced for public comment. The court rejected each of NAMB’s claims. First, the court held that HUD provided several adequate explanations for the Rule’s asymmetric disclosure requirements. HUD explained that the Real Estate Settlement Procedures Act (RESPA) only requires the disclosure of all charges imposed “in connection with the settlement” and that, because the premiums a direct lender receives on the secondary market are separate from any settlement-related costs, RESPA does not mandate their disclosure. HUD also noted that direct lenders cannot disclose the premiums that they may receive on the secondary market because those premiums are unknown at settlement. Finally, HUD cited consumer testing data demonstrating that asymmetric disclosures did not create a statistically significant anti-broker bias. Addressing the NAMB’s second claim, the court found that HUD adequately considered possible alternatives to the Rule because HUD had (i) studied various alternatives for six years, and (ii) examined the feasibility of alternatives through seven separate rounds of consumer testing. Addressing the NAMB’s third claim, the court found that any unpublished data HUD relied on in finalizing the Rule was “supplementary data” of a type that prior courts have found acceptable under the APA. As a result, the court granted HUD’s motion for summary judgment. For a copy of the opinion, please click here.

D.C. Federal Court Rules D.C. Mortgage Licensing Requirements Preempted for Exclusive Agents of Federal Savings Bank. On July 28, the U.S. District Court for the District of Columbia held that agents marketing mortgage loans exclusively for a federal savings bank are not subject to the District of Columbia Mortgage Lender and Broker Act of 1996 (Act) because of federal preemption. State Farm Bank, F.S.B. v. District of Columbia. Civ. Action No. 05-611, 2009 WL 2245242 (D.D.C. July 28, 2009). The Act requires that individuals engaged in mortgage lending activities, including marketing and advertising, be licensed and trained, pay annual fees, and submit to general oversight by the D.C. Commissioner of Insurance, Securities, and Banking. Following the reasoning of the U.S. Supreme Court decision in Watters v. Wachovia Bank, N.A., 550 U.S. 1 (U.S. 2007) (reported in Special Alert, Apr. 17, 2007), and the nearly identical case of State Farm Bank, F.S.B. v. Reardon, 539 F.3d 336 (6th Cir. 2008) (reported in InfoBytes, Aug. 29, 2008), the court found that the federal Home Owners Loan Act (HOLA), which exclusively governs the activities of federal savings banks, contemplates third-party activity on behalf of such banks, and the Office of Thrift Supervision (OTS) allows such banks to act via independent contractors as long as the OTS retains regulatory authority. Thus, the court ruled that D.C. may not regulate the marketing activities of State Farm Bank’s agents – at least where State Farm Bank has an exclusive arrangement and substantial control over the agents, and where those agents are subject to OTS oversight. For a copy of the opinion, please see here.

Illinois Bankruptcy Judge Refuses Debtor’s Cramdown Attempt. On June 16, the U.S. Bankruptcy Court for the Northern District of Illinois held that an auto finance creditor’s purchase-money security interest (PMSI) included all components of a new vehicle purchase, including financing of negative equity from a trade-in vehicle, and thus rejected a debtor’s attempt to “cramdown” his claim. In re Howard, No. 08-32998, 405 B.R. 901 (Bankr. N.D. Ill. June 16, 2009). In this case, the debtor traded in a vehicle in which he held “negative equity” (i.e., the amount owed on the trade-in vehicle exceeded the value of that vehicle) in conjunction with financing a new car purchase. The amount financed to purchase the new car included the “negative equity” from the trade-in vehicle to allow the loan on the trade-in vehicle to be paid off. Approximately fifteen months after purchasing the new car, the debtor filed for Chapter 13 bankruptcy protection. The creditor filed a proof of secured claim for the full amount outstanding on the loan for the new car. The debtor, on the other hand, attempted to “cramdown” his plan by bifurcating the creditor’s claim into (i) a secured portion (the new car’s current market value), and (ii) an unsecured portion (the remainder of the outstanding amount of the loan, which included the negative equity from the trade-in vehicle). The bankruptcy judge sustained the creditor’s objection, relying on the “hanging paragraph” of Section 1325(a) of the U.S. Bankruptcy Code, which excludes certain bankruptcy claims from “cramdown” when the creditor has a PMSI. Recognizing a split among the courts regarding whether negative equity is considered a component of the creditor’s PMSI, and noting that neither the Seventh Circuit Court of Appeals nor any court in the Northern District of Illinois had ruled on the issue, the court concluded that a creditor’s PMSI includes all the components of a new vehicle purchase, including any financing of negative equity of a trade-in vehicle. In arriving at its decision, the court interpreted Article 9 of the Illinois Uniform Commercial Code in conjunction with the Illinois Motor Vehicle Retail Installment Sales Act to find that the money loaned to pay off “negative equity” is “inextricably intertwined” with the value given to enable a buyer to buy a new vehicle and that “[t]here is a close nexus between financing of negative equity and the purchase of the collateral, the motor vehicle.” As a result, the debtor was not entitled to “cramdown” the creditor’s claim. For a copy of the opinion, please click here.

California Federal Court Certifies Class in FACTA Suit Despite Lack of Injury to Plaintiff. On July 16, the U.S. District Court for the Central District of California granted class certification in a suit alleging violations of the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act (FACTA). Tchoboian v. Parking Concepts, Inc., No. SACV 09-422, 2009 WL 2169883 (C.D. Cal. July 16, 2009). In this case, the consumer plaintiff alleged that the defendant, Parking Concepts, Inc. (PCI), violated FACTA by printing multiple electronically-printed receipts that contained the last five digits of his credit/debit card and/or the expiration date of his credit/debit card. The plaintiff sought to bring his claims on behalf of a class of persons consisting of certain consumers to whom PCI provided an electronically printed receipt after December 3, 2006 that displayed more than the last five digits of the consumers’ credit/debit card number. Following the Seventh Circuit’s reasoning in Murray v. GMAC Mortgage Corp., 434 F.3d 948 (7th Cir. 2006) (reported in InfoBytes, Jan. 20, 2006), the court rejected PCI’s argument that class certification would result in disproportionate damages and held that the magnitude of the potential damage award did not affect the superiority of a class action for adjudication of this dispute. Moreover, the court rejected PCI’s argument that certification was unjust based on the minor risk of identity theft and actual harm because “FCRA does not require [a] showing of actual harm for recovery of statutory damages.” The court further reasoned that the damages claim for each potential class member would likely not be large enough to sustain individual actions. Accordingly, the court granted the consumer’s motion to certify the class. For a copy of the opinion, please click here.  

Mississippi Federal Court Compels Arbitration in FCRA Case. On June 4, the U.S. District Court for the Southern District of Mississippi granted a defendant creditor’s motion to compel arbitration in a case brought under the Fair Credit Reporting Act (FCRA). Anglin v. Tower Loan of Mississippi, Inc., 2009 WL 2163482, Civ. Act. No. 3:09CV29 (S.D. Miss. June 4, 2009). In Anglin, the plaintiff, a former customer of the defendant, Tower Loan of Mississippi (Tower), claimed that Tower obtained unauthorized credit reports on the plaintiff, in violation of FCRA. Tower, however, asserted that the reports were obtained for “account review purposes.” The plaintiff attempted to certify a class of previous customers of Tower whose credit reports were obtained by Tower for “account review purposes” after their business relationship ended. Tower moved to compel arbitration pursuant to the arbitration agreement contained in the borrower’s loan agreement with Tower, in which the parties agreed to arbitrate all claims over $5,000 arising out of, in connection with, or relating to any loans the borrower obtained from Tower. The plaintiff countered that, among other things, (i) his claim was independent of his loan agreement with Tower, which was no longer in effect, and (ii) the arbitration agreement was unenforceable because its class action waiver provision was unconscionable. The court rejected both arguments. First, the court held that the claims are related to the previous loan agreement. As the court explained, it perceived that Tower’s defense would be that “the very fact of plaintiff’s previous loan with Tower is what gave it the right under FCRA to obtain plaintiff’s credit report.” The court further explained that the Fifth Circuit favors resolving the arbitrability of a claim in favor of arbitration. The court also held that the class action waiver was not unconscionable, and hence valid, because (i) the plaintiff made no showing that the waiver prohibits a class action asserting “negative value” claims, and (ii) punitive damages and attorney’s fees may be claimed under FCRA. For a copy of the opinion, please click here.

Firm News

Andrew Sandler will be presenting at the American Bar Association’s Annual Meeting in Chicago on August 1. The title of his presentation is “Subprime Redux: Recent Developments in Subprime Enforcement and Litigation.” 

Jonice Gray Tucker and Kirk Jensen will be speaking at the ABA’s Annual Conference on August 2 in Chicago; the title of Jonice’s presentation is “Anticipated Litigation Related to the Mortgage Disclosure Improvement Act.”

Jonice Gray Tucker will also be giving a presentation entitled “Trends in Enforcement Actions Against Mortgage Servicers and Recommended Best Practices” at the CMBA’s Loan Servicing Conference on August 10 in Las Vegas.

Joe KolarBenjamin KlubesColgate Selden, and Jonathan Cannon are speaking at the Lenders One Conference on August 3 and 4. Joe and Benjamin’s presentation is titled "An Expert View from Washington: Top Issues in Mortgage Finance—Introduction and Overview - Consumer Financial Services Protection Agency." Colgate’s presentation is titled “Preparing for the New RESPA Rules in 2010” and Jonathan’s presentation is titled “Understanding New Consumer Protections Under TILA/HOEPA and UDAP Rules.”

Jonathan Jerison is a featured speaker for the A.S. Pratt Audio Conference Series “Privacy Implications of Loss-Mitigation/FCRA” on August 6 at 1pm ET. For more information on the audio conference please seehttp://www.aspratt.com/store/11300809.php.  

John Kromer will be speaking on a panel addressing “The Changing Standards in the Regulation of the Mortgage Industry” at the American Association of Residential Mortgage Regulator’s annual conference in Savannah, GA on August 12. Seewww.aarmr.org for additional information.

Jeff Naimon appeared on a Fox Business News segment on residential loan modifications on Tuesday, July 28.

An interview of Andrew Sandler was featured in the July 21 American Banker article “Next Consumer Backlash: Arbitration.” The interview discusses the National Arbitration Forum pulling out of credit card arbitration and how this will affect the credit card industry. Andrew was also interviewed for a July 21 article by Karen Freifeld for Bloomberg regarding auction-rate securities. To view the full article, please see http://www.bloomberg.com/apps/news?pid=20601110&sid=a2mfbkO74rDI.

Jerry Buckley was recently quoted in a BankInfoSecurity.com article regarding the Obama Administration’s proposed regulatory reforms. See http://www.bankinfosecurity.com/articles.php?art_id=1560 for the text of the article.

Mortgages

FHA Announces Loan Modification Program. On July 30, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2009-23 to implement the FHA-Home Affordable Modification Program (FHA-HAMP), which permits defaulted FHA mortgagors to obtain a loan modification to permanently reduce their monthly payments. In many respects, the FHA-HAMP program mirrors the federal Making Home Affordable (MHA) modification program available to non-FHA borrowers (for a description of MHA, please see InfoBytes, Mar. 6, 2009). For example, FHA-HAMP has similar eligibility requirements, including that mortgagors must have a front-end debt-to-income ratio of greater than 31 percent and a back-end debt-to-income ratio of less than 55 percent. In addition, the servicer must obtain a Hardship Affidavit from every mortgagor and co-mortgagor seeking an FHA-HAMP. Likewise, a mortgagor seeking a permanent modification in FHA-HAMP must successfully complete a three-month trial payment plan. Notably, FHA-HAMP is only available if the mortgagor does not already qualify for the existing FHA loss mitigation alternatives of special forbearance, loan modification, and partial claims (in that priority order).

Under FHA-HAMP, a borrower’s monthly mortgage payment is permanently reduced through the use of a partial claim, which defers repayment of principal through an interest-free subordinate mortgage that is deferred until the first mortgage is paid off. The maximum partial claim amount cannot exceed 30 percent of the unpaid principal balance as of the date of default. The principal deferment amount is limited to an amount that will bring the borrower’s total monthly payment to 31 percent of the borrower’s gross monthly income. Servicers are eligible for incentives of up to $1250 for each FHA loan modified under the program. If the borrower does not successfully complete the trial payment plan, the mortgagee must pursue other loss mitigation options prior to commencing or continuing a foreclosure. The participation guidelines are available at http://1.usa.gov/nZMHrj. For a copy of the press release, please see http://1.usa.gov/n6j3vw
For a copy of the Mortgagee Letter, please see http://1.usa.gov/pqeP0y.

Colorado Division of Real Estate Adopts New Mortgage Loan Originator Rules. The Colorado Division of Real Estate recently adopted new rules relating to the business practices and licensing of mortgage loan originators. Among other items, the new rules (i) establish minimum surety bond requirements for licensees (Rule 1-2-2), (ii) set forth when the Division may inactivate a license (Rule 1-5-1), (iii) explain how and when a temporary license may be issued (Rule 1-1-2), (iv) clarify a licensee’s duties in connection with an investigation by the Division (Rule 3-1-2), (v) require that a licensee’s contact information and all other information required for licensing be kept current (Rule 3-1-3), (vi) identify disclosures to be provided by licensees to borrowers (Rule 5-1-2), (vii) set forth requirements applicable to transactions containing specific prepayment penalty terms (Rule 3-1-4), (viii) define compliance with the requirement that licensees maintain contracts with borrowers and mortgage lenders (Rule 5-1-1), and (ix) establish guidelines for licensee advertising (Rule 8-1-1). Additionally, Rule 3-1-1 explains how a licensee must comply with the “reasonable inquiry” and “net tangible benefit” requirements associated with the licensee’s duty of good faith and fair dealing in all communications and transactions with borrowers. Finally, Rule 1-2-1 repeals the surety bond requirement for mortgage brokers. Certain rules become effective August 30, 2009, while others become effective September 30, 2009. For a copy of the rules, please see http://www.dora.state.co.us/real-estate/rulemaking/index.htm#MB.

D.C. Federal Court Upholds HUD RESPA Rule Amending Disclosure of Yield Spread Premiums. On July 29, the U.S. District Court for the District of Columbia held that the U.S. Department of Housing and Urban Development’s (HUD) recently-promulgated rule regarding the disclosure of yield spread premiums on the Good Faith Estimate (the “Rule to Simplify and Improve the Process of Obtaining Mortgages and Reduce Customer Settlement Costs” – hereinafter, the Rule) is not arbitrary and capricious under the Administrate Procedures Act (APA). Nat’l Ass’n of Mortg. Bankers, Inc. v. Donovan, No. Civ. A. 08-2208, 2009 WL 2259085 (D.D.C. July 29, 2009). This case arose after the National Association of Mortgage Bankers, Inc. (NAMB) challenged the Rule as arbitrary and capricious under the APA because (i) HUD failed to supply a reasoned explanation for why the Rule had asymmetric disclosure requirements for brokers and direct lenders, (ii) HUD failed to consider reasonable alternatives to the Rule and explain why it rejected them, and (iii) HUD substantially relied on data to formulate the Rule that it never produced for public comment. The court rejected each of NAMB’s claims. First, the court held that HUD provided several adequate explanations for the Rule’s asymmetric disclosure requirements. HUD explained that the Real Estate Settlement Procedures Act (RESPA) only requires the disclosure of all charges imposed “in connection with the settlement” and that, because the premiums a direct lender receives on the secondary market are separate from any settlement-related costs, RESPA does not mandate their disclosure. HUD also noted that direct lenders cannot disclose the premiums that they may receive on the secondary market because those premiums are unknown at settlement. Finally, HUD cited consumer testing data demonstrating that asymmetric disclosures did not create a statistically significant anti-broker bias. Addressing the NAMB’s second claim, the court found that HUD adequately considered possible alternatives to the Rule because HUD had (i) studied various alternatives for six years, and (ii) examined the feasibility of alternatives through seven separate rounds of consumer testing. Addressing the NAMB’s third claim, the court found that any unpublished data HUD relied on in finalizing the Rule was “supplementary data” of a type that prior courts have found acceptable under the APA. As a result, the court granted HUD’s motion for summary judgment. For a copy of the opinion, please click here.

Banking

FDIC Announces First Test of Legacy Loans Program. On July 31, the Federal Deposit Insurance Corporation (FDIC) announced the commencement of the first test of the Legacy Loan Program’s (LLP) funding mechanism. Under the LLP, financial institutions, their primary regulators, and the FDIC will designate pools of real estate loans to place on auction. In the transaction to be offered, the receivership will transfer a portfolio of residential mortgage loans on a servicing-released basis to a limited liability company (LLC) in exchange for an ownership interest in the LLC. The LLC will also sell an equity interest to an accredited investor who will manage the loan portfolio. Under the funding mechanism initiated this week, the receivership offers financing to the LLC using an amortizing note guaranteed by the FDIC. For more information about the LLP, please see InfoBytes, Mar. 27, 2009. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09131.html.

D.C. Federal Court Rules D.C. Mortgage Licensing Requirements Preempted for Exclusive Agents of Federal Savings Bank. On July 28, the U.S. District Court for the District of Columbia held that agents marketing mortgage loans exclusively for a federal savings bank are not subject to the District of Columbia Mortgage Lender and Broker Act of 1996 (Act) because of federal preemption. State Farm Bank, F.S.B. v. District of Columbia. Civ. Action No. 05-611, 2009 WL 2245242 (D.D.C. July 28, 2009). The Act requires that individuals engaged in mortgage lending activities, including marketing and advertising, be licensed and trained, pay annual fees, and submit to general oversight by the D.C. Commissioner of Insurance, Securities, and Banking. Following the reasoning of the U.S. Supreme Court decision in Watters v. Wachovia Bank, N.A., 550 U.S. 1 (U.S. 2007) (reported in Special Alert, Apr. 17, 2007), and the nearly identical case of State Farm Bank, F.S.B. v. Reardon, 539 F.3d 336 (6th Cir. 2008) (reported in InfoBytes, Aug. 29, 2008), the court found that the federal Home Owners Loan Act (HOLA), which exclusively governs the activities of federal savings banks, contemplates third-party activity on behalf of such banks, and the Office of Thrift Supervision (OTS) allows such banks to act via independent contractors as long as the OTS retains regulatory authority. Thus, the court ruled that D.C. may not regulate the marketing activities of State Farm Bank’s agents – at least where State Farm Bank has an exclusive arrangement and substantial control over the agents, and where those agents are subject to OTS oversight. For a copy of the opinion, please see here.

Consumer Finance

FTC Delays “Red Flags” Rule Enforcement Until November 1. On July 29, the Federal Trade Commission (FTC) announced that it will delay, for the second time, enforcement of its “Red Flags” rule to give creditors and financial institutions additional time to develop and implement written Identity Theft Prevention Programs. The new enforcement date is November 1, 2009. The FTC had previously delayed its implementation of the rule until August 1, 2009 (reported in InfoBytes, May 1, 2009). This announcement does not affect the FTC’s address discrepancy rule, which applies to all users of consumer reports, and its change-of-address rule, which applies to card issuers, which became effective November 1, 2008.  The FTC has released a FAQ to assist with compliance with the rule, which is available here. For a copy of the press release, please see http://1.usa.gov/mviAt.

Fed Amends Reg. Z to Implement HEOA. On July 30, the Federal Reserve Board (Fed) adopted final amendments to Regulation Z that implement the provisions of the Higher Education Opportunity Act (HEOA). The amendments require creditors offering private student loans to provide a series of disclosures throughout the student loan application process. Under the amended rules, creditors must disclose in their solicitations and applications general information about the cost of credit, including actual loan rates offered, fees charged, and the interest rates available to consumers that qualify for loans under competing federal programs. Additionally, creditors must provide consumer-specific disclosures at the time a loan is approved or consummated. Furthermore, consistent with the proposed amendments (reported in InfoBytes, Mar. 13, 2009), the amended rules permit the required approval and final disclosures to be provided in electronic form, subject to compliance with the consumer consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act (E-Sign Act). Solicitation and application disclosures may also be made electronically, but need not comply with E-Sign’s requirements. In addition to the new disclosure requirements, the Fed’s amendments also implement HEOA’s restriction on the use of an educational institution’s name, emblem, mascot, or logo in a way that implies that the institution endorses a creditor’s loan product. Along with the amended rules, the Fed has published model disclosure forms that creditors may use to comply with the new disclosure requirements. The mandatory effective date for the amendments is 180 days after publication in the Federal Register. For a copy of the press release, which includes links to model disclosure forms and samples, please see http://www.federalreserve.gov/newsevents/press/bcreg/20090730a.htm. For a copy of the final rule, please seehttp://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090730a1.pdf.

FTC Proposes Amendments to Telemarketing Sales Rule; Seeks Public Comment. On July 30, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking to amend the FTC’s Telemarketing Sales Rule (TSR) to address the sale of debt relief services (e.g., credit counseling, debt management plans, debt settlement, and debt negotiation). The proposed amendments would, among other things, (i) define the term “debt relief service,” (ii) ensure that telemarketing transactions involving debt relief services are subject to the TSR, regardless of the medium through which such services are initially advertised, by making the general media and direct mail exceptions to the TSR unavailable to debt relief services telemarketers, (iii) mandate certain disclosures and prohibit misrepresentations in the telemarketing of debt relief services, and (iv) require full performance and documentation to the consumer before a debt relief services company requests and/or receives payment for debt relief services. The FTC is seeking written comments on the proposed amendments, which are due by October 9, 2009. At the end of the comment period, the FTC will hold a public forum to discuss the proposed amendments. For a copy of the notice, please see http://1.usa.gov/oMSuqs.

FTC Imposes Temporary Ban on Telemarketer That Allegedly Violated Do-Not-Call Rules. On July 29, the Federal Trade Commission (FTC) approved a federal court order banning a telemarketer from engaging in telemarketing to consumers for five years. The telemarketer allegedly violated the FTC’s Do-Not-Call Rules by calling consumers on the National Do-Not-Call Registry (Registry) in an attempt to sell financial products, including mortgages and related financing services. The defendants, Global Mortgage Funding, Inc. and its owner, were investigated by the FTC and charged by the Department of Justice (DOJ) with violating the FTC’s Do-Not-Call Rules by (i) making hundreds of thousands of telemarketing calls to individuals on the Registry, (ii) failing to pay requisite fees to access the Registry, (iii) failing to transmit accurate caller identification information, and (iv) abandoning calls by not connecting customers to live representatives within two seconds after the phone was answered. Under the order, the defendants are, among other things, (i) banned from engaging in telemarketing for five years, (ii) ordered to pay a $6 million civil penalty (which is currently suspended due to the defendants’ inability to pay), and (iii) ordered to follow specific record keeping provisions to permit the FTC to monitor compliance. For a copy of the press release, please see http://www.ftc.gov/opa/2009/07/globalmgt.shtm. For a copy of the order, please see http://www.ftc.gov/os/caselist/0623107/090717globalmortfundstip.pdf.

Illinois Bankruptcy Judge Refuses Debtor’s Cramdown Attempt. On June 16, the U.S. Bankruptcy Court for the Northern District of Illinois held that an auto finance creditor’s purchase-money security interest (PMSI) included all components of a new vehicle purchase, including financing of negative equity from a trade-in vehicle, and thus rejected a debtor’s attempt to “cramdown” his claim. In re Howard, No. 08-32998, 405 B.R. 901 (Bankr. N.D. Ill. June 16, 2009). In this case, the debtor traded in a vehicle in which he held “negative equity” (i.e., the amount owed on the trade-in vehicle exceeded the value of that vehicle) in conjunction with financing a new car purchase. The amount financed to purchase the new car included the “negative equity” from the trade-in vehicle to allow the loan on the trade-in vehicle to be paid off. Approximately fifteen months after purchasing the new car, the debtor filed for Chapter 13 bankruptcy protection. The creditor filed a proof of secured claim for the full amount outstanding on the loan for the new car. The debtor, on the other hand, attempted to “cramdown” his plan by bifurcating the creditor’s claim into (i) a secured portion (the new car’s current market value), and (ii) an unsecured portion (the remainder of the outstanding amount of the loan, which included the negative equity from the trade-in vehicle). The bankruptcy judge sustained the creditor’s objection, relying on the “hanging paragraph” of Section 1325(a) of the U.S. Bankruptcy Code, which excludes certain bankruptcy claims from “cramdown” when the creditor has a PMSI. Recognizing a split among the courts regarding whether negative equity is considered a component of the creditor’s PMSI, and noting that neither the Seventh Circuit Court of Appeals nor any court in the Northern District of Illinois had ruled on the issue, the court concluded that a creditor’s PMSI includes all the components of a new vehicle purchase, including any financing of negative equity of a trade-in vehicle. In arriving at its decision, the court interpreted Article 9 of the Illinois Uniform Commercial Code in conjunction with the Illinois Motor Vehicle Retail Installment Sales Act to find that the money loaned to pay off “negative equity” is “inextricably intertwined” with the value given to enable a buyer to buy a new vehicle and that “[t]here is a close nexus between financing of negative equity and the purchase of the collateral, the motor vehicle.” As a result, the debtor was not entitled to “cramdown” the creditor’s claim. For a copy of the opinion, please click here.

California Federal Court Certifies Class in FACTA Suit Despite Lack of Injury to Plaintiff. On July 16, the U.S. District Court for the Central District of California granted class certification in a suit alleging violations of the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act (FACTA). Tchoboian v. Parking Concepts, Inc., No. SACV 09-422, 2009 WL 2169883 (C.D. Cal. July 16, 2009). In this case, the consumer plaintiff alleged that the defendant, Parking Concepts, Inc. (PCI), violated FACTA by printing multiple electronically-printed receipts that contained the last five digits of his credit/debit card and/or the expiration date of his credit/debit card. The plaintiff sought to bring his claims on behalf of a class of persons consisting of certain consumers to whom PCI provided an electronically printed receipt after December 3, 2006 that displayed more than the last five digits of the consumers’ credit/debit card number. Following the Seventh Circuit’s reasoning in Murray v. GMAC Mortgage Corp., 434 F.3d 948 (7th Cir. 2006) (reported in InfoBytes, Jan. 20, 2006), the court rejected PCI’s argument that class certification would result in disproportionate damages and held that the magnitude of the potential damage award did not affect the superiority of a class action for adjudication of this dispute. Moreover, the court rejected PCI’s argument that certification was unjust based on the minor risk of identity theft and actual harm because “FCRA does not require [a] showing of actual harm for recovery of statutory damages.” The court further reasoned that the damages claim for each potential class member would likely not be large enough to sustain individual actions. Accordingly, the court granted the consumer’s motion to certify the class. For a copy of the opinion, please click here.

Mississippi Federal Court Compels Arbitration in FCRA Case. On June 4, the U.S. District Court for the Southern District of Mississippi granted a defendant creditor’s motion to compel arbitration in a case brought under the Fair Credit Reporting Act (FCRA). Anglin v. Tower Loan of Mississippi, Inc., 2009 WL 2163482, Civ. Act. No. 3:09CV29 (S.D. Miss. June 4, 2009). In Anglin, the plaintiff, a former customer of the defendant, Tower Loan of Mississippi (Tower), claimed that Tower obtained unauthorized credit reports on the plaintiff, in violation of FCRA. Tower, however, asserted that the reports were obtained for “account review purposes.” The plaintiff attempted to certify a class of previous customers of Tower whose credit reports were obtained by Tower for “account review purposes” after their business relationship ended. Tower moved to compel arbitration pursuant to the arbitration agreement contained in the borrower’s loan agreement with Tower, in which the parties agreed to arbitrate all claims over $5,000 arising out of, in connection with, or relating to any loans the borrower obtained from Tower. The plaintiff countered that, among other things, (i) his claim was independent of his loan agreement with Tower, which was no longer in effect, and (ii) the arbitration agreement was unenforceable because its class action waiver provision was unconscionable. The court rejected both arguments. First, the court held that the claims are related to the previous loan agreement. As the court explained, it perceived that Tower’s defense would be that “the very fact of plaintiff’s previous loan with Tower is what gave it the right under FCRA to obtain plaintiff’s credit report.” The court further explained that the Fifth Circuit favors resolving the arbitrability of a claim in favor of arbitration. The court also held that the class action waiver was not unconscionable, and hence valid, because (i) the plaintiff made no showing that the waiver prohibits a class action asserting “negative value” claims, and (ii) punitive damages and attorney’s fees may be claimed under FCRA. For a copy of the opinion, please click here.

Litigation

D.C. Federal Court Upholds HUD RESPA Rule Amending Disclosure of Yield Spread Premiums. On July 29, the U.S. District Court for the District of Columbia held that the U.S. Department of Housing and Urban Development’s (HUD) recently-promulgated rule regarding the disclosure of yield spread premiums on the Good Faith Estimate (the “Rule to Simplify and Improve the Process of Obtaining Mortgages and Reduce Customer Settlement Costs” – hereinafter, the Rule) is not arbitrary and capricious under the Administrate Procedures Act (APA). Nat’l Ass’n of Mortg. Bankers, Inc. v. Donovan, No. Civ. A. 08-2208, 2009 WL 2259085 (D.D.C. July 29, 2009). This case arose after the National Association of Mortgage Bankers, Inc. (NAMB) challenged the Rule as arbitrary and capricious under the APA because (i) HUD failed to supply a reasoned explanation for why the Rule had asymmetric disclosure requirements for brokers and direct lenders, (ii) HUD failed to consider reasonable alternatives to the Rule and explain why it rejected them, and (iii) HUD substantially relied on data to formulate the Rule that it never produced for public comment. The court rejected each of NAMB’s claims. First, the court held that HUD provided several adequate explanations for the Rule’s asymmetric disclosure requirements. HUD explained that the Real Estate Settlement Procedures Act (RESPA) only requires the disclosure of all charges imposed “in connection with the settlement” and that, because the premiums a direct lender receives on the secondary market are separate from any settlement-related costs, RESPA does not mandate their disclosure. HUD also noted that direct lenders cannot disclose the premiums that they may receive on the secondary market because those premiums are unknown at settlement. Finally, HUD cited consumer testing data demonstrating that asymmetric disclosures did not create a statistically significant anti-broker bias. Addressing the NAMB’s second claim, the court found that HUD adequately considered possible alternatives to the Rule because HUD had (i) studied various alternatives for six years, and (ii) examined the feasibility of alternatives through seven separate rounds of consumer testing. Addressing the NAMB’s third claim, the court found that any unpublished data HUD relied on in finalizing the Rule was “supplementary data” of a type that prior courts have found acceptable under the APA. As a result, the court granted HUD’s motion for summary judgment. For a copy of the opinion, please click here.

D.C. Federal Court Rules D.C. Mortgage Licensing Requirements Preempted for Exclusive Agents of Federal Savings Bank. On July 28, the U.S. District Court for the District of Columbia held that agents marketing mortgage loans exclusively for a federal savings bank are not subject to the District of Columbia Mortgage Lender and Broker Act of 1996 (Act) because of federal preemption. State Farm Bank, F.S.B. v. District of Columbia. Civ. Action No. 05-611, 2009 WL 2245242 (D.D.C. July 28, 2009). The Act requires that individuals engaged in mortgage lending activities, including marketing and advertising, be licensed and trained, pay annual fees, and submit to general oversight by the D.C. Commissioner of Insurance, Securities, and Banking. Following the reasoning of the U.S. Supreme Court decision in Watters v. Wachovia Bank, N.A., 550 U.S. 1 (U.S. 2007) (reported in Special Alert, Apr. 17, 2007), and the nearly identical case of State Farm Bank, F.S.B. v. Reardon, 539 F.3d 336 (6th Cir. 2008) (reported in InfoBytes, Aug. 29, 2008), the court found that the federal Home Owners Loan Act (HOLA), which exclusively governs the activities of federal savings banks, contemplates third-party activity on behalf of such banks, and the Office of Thrift Supervision (OTS) allows such banks to act via independent contractors as long as the OTS retains regulatory authority. Thus, the court ruled that D.C. may not regulate the marketing activities of State Farm Bank’s agents – at least where State Farm Bank has an exclusive arrangement and substantial control over the agents, and where those agents are subject to OTS oversight. For a copy of the opinion, please see here.

Illinois Bankruptcy Judge Refuses Debtor’s Cramdown Attempt. On June 16, the U.S. Bankruptcy Court for the Northern District of Illinois held that an auto finance creditor’s purchase-money security interest (PMSI) included all components of a new vehicle purchase, including financing of negative equity from a trade-in vehicle, and thus rejected a debtor’s attempt to “cramdown” his claim. In re Howard, No. 08-32998, 405 B.R. 901 (Bankr. N.D. Ill. June 16, 2009). In this case, the debtor traded in a vehicle in which he held “negative equity” (i.e., the amount owed on the trade-in vehicle exceeded the value of that vehicle) in conjunction with financing a new car purchase. The amount financed to purchase the new car included the “negative equity” from the trade-in vehicle to allow the loan on the trade-in vehicle to be paid off. Approximately fifteen months after purchasing the new car, the debtor filed for Chapter 13 bankruptcy protection. The creditor filed a proof of secured claim for the full amount outstanding on the loan for the new car. The debtor, on the other hand, attempted to “cramdown” his plan by bifurcating the creditor’s claim into (i) a secured portion (the new car’s current market value), and (ii) an unsecured portion (the remainder of the outstanding amount of the loan, which included the negative equity from the trade-in vehicle). The bankruptcy judge sustained the creditor’s objection, relying on the “hanging paragraph” of Section 1325(a) of the U.S. Bankruptcy Code, which excludes certain bankruptcy claims from “cramdown” when the creditor has a PMSI. Recognizing a split among the courts regarding whether negative equity is considered a component of the creditor’s PMSI, and noting that neither the Seventh Circuit Court of Appeals nor any court in the Northern District of Illinois had ruled on the issue, the court concluded that a creditor’s PMSI includes all the components of a new vehicle purchase, including any financing of negative equity of a trade-in vehicle. In arriving at its decision, the court interpreted Article 9 of the Illinois Uniform Commercial Code in conjunction with the Illinois Motor Vehicle Retail Installment Sales Act to find that the money loaned to pay off “negative equity” is “inextricably intertwined” with the value given to enable a buyer to buy a new vehicle and that “[t]here is a close nexus between financing of negative equity and the purchase of the collateral, the motor vehicle.” As a result, the debtor was not entitled to “cramdown” the creditor’s claim. For a copy of the opinion, please click here.

California Federal Court Certifies Class in FACTA Suit Despite Lack of Injury to Plaintiff. On July 16, the U.S. District Court for the Central District of California granted class certification in a suit alleging violations of the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act (FACTA). Tchoboian v. Parking Concepts, Inc., No. SACV 09-422, 2009 WL 2169883 (C.D. Cal. July 16, 2009). In this case, the consumer plaintiff alleged that the defendant, Parking Concepts, Inc. (PCI), violated FACTA by printing multiple electronically-printed receipts that contained the last five digits of his credit/debit card and/or the expiration date of his credit/debit card. The plaintiff sought to bring his claims on behalf of a class of persons consisting of certain consumers to whom PCI provided an electronically printed receipt after December 3, 2006 that displayed more than the last five digits of the consumers’ credit/debit card number. Following the Seventh Circuit’s reasoning in Murray v. GMAC Mortgage Corp., 434 F.3d 948 (7th Cir. 2006) (reported in InfoBytes, Jan. 20, 2006), the court rejected PCI’s argument that class certification would result in disproportionate damages and held that the magnitude of the potential damage award did not affect the superiority of a class action for adjudication of this dispute. Moreover, the court rejected PCI’s argument that certification was unjust based on the minor risk of identity theft and actual harm because “FCRA does not require [a] showing of actual harm for recovery of statutory damages.” The court further reasoned that the damages claim for each potential class member would likely not be large enough to sustain individual actions. Accordingly, the court granted the consumer’s motion to certify the class. For a copy of the opinion, please click here.

Mississippi Federal Court Compels Arbitration in FCRA Case. On June 4, the U.S. District Court for the Southern District of Mississippi granted a defendant creditor’s motion to compel arbitration in a case brought under the Fair Credit Reporting Act (FCRA). Anglin v. Tower Loan of Mississippi, Inc., 2009 WL 2163482, Civ. Act. No. 3:09CV29 (S.D. Miss. June 4, 2009). In Anglin, the plaintiff, a former customer of the defendant, Tower Loan of Mississippi (Tower), claimed that Tower obtained unauthorized credit reports on the plaintiff, in violation of FCRA. Tower, however, asserted that the reports were obtained for “account review purposes.” The plaintiff attempted to certify a class of previous customers of Tower whose credit reports were obtained by Tower for “account review purposes” after their business relationship ended. Tower moved to compel arbitration pursuant to the arbitration agreement contained in the borrower’s loan agreement with Tower, in which the parties agreed to arbitrate all claims over $5,000 arising out of, in connection with, or relating to any loans the borrower obtained from Tower. The plaintiff countered that, among other things, (i) his claim was independent of his loan agreement with Tower, which was no longer in effect, and (ii) the arbitration agreement was unenforceable because its class action waiver provision was unconscionable. The court rejected both arguments. First, the court held that the claims are related to the previous loan agreement. As the court explained, it perceived that Tower’s defense would be that “the very fact of plaintiff’s previous loan with Tower is what gave it the right under FCRA to obtain plaintiff’s credit report.” The court further explained that the Fifth Circuit favors resolving the arbitrability of a claim in favor of arbitration. The court also held that the class action waiver was not unconscionable, and hence valid, because (i) the plaintiff made no showing that the waiver prohibits a class action asserting “negative value” claims, and (ii) punitive damages and attorney’s fees may be claimed under FCRA. For a copy of the opinion, please click here.

 

E-Financial Services

Fed Amends Reg. Z to Implement HEOA. On July 30, the Federal Reserve Board (Fed) adopted final amendments to Regulation Z that implement the provisions of the Higher Education Opportunity Act (HEOA). The amendments require creditors offering private student loans to provide a series of disclosures throughout the student loan application process. Under the amended rules, creditors must disclose in their solicitations and applications general information about the cost of credit, including actual loan rates offered, fees charged, and the interest rates available to consumers that qualify for loans under competing federal programs. Additionally, creditors must provide consumer-specific disclosures at the time a loan is approved or consummated. Furthermore, consistent with the proposed amendments (reported in InfoBytes, Mar. 13, 2009), the amended rules permit the required approval and final disclosures to be provided in electronic form, subject to compliance with the consumer consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act (E-Sign Act). Solicitation and application disclosures may also be made electronically, but need not comply with E-Sign’s requirements. In addition to the new disclosure requirements, the Fed’s amendments also implement HEOA’s restriction on the use of an educational institution’s name, emblem, mascot, or logo in a way that implies that the institution endorses a creditor’s loan product. Along with the amended rules, the Fed has published model disclosure forms that creditors may use to comply with the new disclosure requirements. The mandatory effective date for the amendments is 180 days after publication in the Federal Register. For a copy of the press release, which includes links to model disclosure forms and samples, please see http://www.federalreserve.gov/newsevents/press/bcreg/20090730a.htm. For a copy of the final rule, please seehttp://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090730a1.pdf.

Privacy/Data Security

Missouri Governor Signs Bill Regarding Security Breach Notification. On July 9, Missouri Governor Jay Nixon signed HB 62, an omnibus crime bill containing a provision that requires companies to notify Missouri consumers regarding a security breach of personal information. The provision does not create a private right of action and instead grants the Missouri Attorney General exclusive authority to bring an action (for up to $150,000 per security breach) for an alleged violation of the provision. The provision becomes effective August 28, 2009. For a copy of the bill, please click here.

California Federal Court Certifies Class in FACTA Suit Despite Lack of Injury to Plaintiff. On July 16, the U.S. District Court for the Central District of California granted class certification in a suit alleging violations of the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act (FACTA). Tchoboian v. Parking Concepts, Inc., No. SACV 09-422, 2009 WL 2169883 (C.D. Cal. July 16, 2009). In this case, the consumer plaintiff alleged that the defendant, Parking Concepts, Inc. (PCI), violated FACTA by printing multiple electronically-printed receipts that contained the last five digits of his credit/debit card and/or the expiration date of his credit/debit card. The plaintiff sought to bring his claims on behalf of a class of persons consisting of certain consumers to whom PCI provided an electronically printed receipt after December 3, 2006 that displayed more than the last five digits of the consumers’ credit/debit card number. Following the Seventh Circuit’s reasoning in Murray v. GMAC Mortgage Corp., 434 F.3d 948 (7th Cir. 2006) (reported in InfoBytes, Jan. 20, 2006), the court rejected PCI’s argument that class certification would result in disproportionate damages and held that the magnitude of the potential damage award did not affect the superiority of a class action for adjudication of this dispute. Moreover, the court rejected PCI’s argument that certification was unjust based on the minor risk of identity theft and actual harm because “FCRA does not require [a] showing of actual harm for recovery of statutory damages.” The court further reasoned that the damages claim for each potential class member would likely not be large enough to sustain individual actions. Accordingly, the court granted the consumer’s motion to certify the class. For a copy of the opinion, please click here.  

Mississippi Federal Court Compels Arbitration in FCRA Case. On June 4, the U.S. District Court for the Southern District of Mississippi granted a defendant creditor’s motion to compel arbitration in a case brought under the Fair Credit Reporting Act (FCRA). Anglin v. Tower Loan of Mississippi, Inc., 2009 WL 2163482, Civ. Act. No. 3:09CV29 (S.D. Miss. June 4, 2009). In Anglin, the plaintiff, a former customer of the defendant, Tower Loan of Mississippi (Tower), claimed that Tower obtained unauthorized credit reports on the plaintiff, in violation of FCRA. Tower, however, asserted that the reports were obtained for “account review purposes.” The plaintiff attempted to certify a class of previous customers of Tower whose credit reports were obtained by Tower for “account review purposes” after their business relationship ended. Tower moved to compel arbitration pursuant to the arbitration agreement contained in the borrower’s loan agreement with Tower, in which the parties agreed to arbitrate all claims over $5,000 arising out of, in connection with, or relating to any loans the borrower obtained from Tower. The plaintiff countered that, among other things, (i) his claim was independent of his loan agreement with Tower, which was no longer in effect, and (ii) the arbitration agreement was unenforceable because its class action waiver provision was unconscionable. The court rejected both arguments. First, the court held that the claims are related to the previous loan agreement. As the court explained, it perceived that Tower’s defense would be that “the very fact of plaintiff’s previous loan with Tower is what gave it the right under FCRA to obtain plaintiff’s credit report.” The court further explained that the Fifth Circuit favors resolving the arbitrability of a claim in favor of arbitration. The court also held that the class action waiver was not unconscionable, and hence valid, because (i) the plaintiff made no showing that the waiver prohibits a class action asserting “negative value” claims, and (ii) punitive damages and attorney’s fees may be claimed under FCRA. For a copy of the opinion, please click here

OCC Issues Guidance Regarding CCARD Look-Back Provision. On July 30, the Office of the Comptroller of the Currency (OCC) issued guidance regarding the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CCARD). The guidance specifically addresses the “look-back” provision of CCARD, under which increases in annual percentage rates (APRs) after January 1, 2009 must be reviewed at least once every six months to assess whether factors contributing to the APR increase have changed. According to the OCC, APRs might require reduction if such factors are no longer present, although the OCC notes that CCARD does not “require a reduction in any specific amount.” Effective August 22, 2010, OCC-regulated institutions must conduct such reviews on any accounts on which the APRs were increased on or after January 1, 2009. Accordingly, OCC-regulated institutions must maintain and have available information concerning APR increases for such accounts as needed to enable them to conduct the required reviews. The guidance follows similar recent statements by the Federal Reserve Board and the Office of Thrift Supervision (reported in InfoBytes, July 17, 2009) on the heels of Senator Christopher J. Dodd’s (D-CT) July 9 letter (reported in InfoBytes, July 10, 2009) urging the heads of the federal banking regulatory agencies to implement and enforce the look-back provision of CCARD. For a copy of the guidance, please see http://www.occ.treas.gov/ftp/bulletin/2009-25.html.

California Federal Court Certifies Class in FACTA Suit Despite Lack of Injury to Plaintiff. On July 16, the U.S. District Court for the Central District of California granted class certification in a suit alleging violations of the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act (FACTA). Tchoboian v. Parking Concepts, Inc., No. SACV 09-422, 2009 WL 2169883 (C.D. Cal. July 16, 2009). In this case, the consumer plaintiff alleged that the defendant, Parking Concepts, Inc. (PCI), violated FACTA by printing multiple electronically-printed receipts that contained the last five digits of his credit/debit card and/or the expiration date of his credit/debit card. The plaintiff sought to bring his claims on behalf of a class of persons consisting of certain consumers to whom PCI provided an electronically printed receipt after December 3, 2006 that displayed more than the last five digits of the consumers’ credit/debit card number. Following the Seventh Circuit’s reasoning in Murray v. GMAC Mortgage Corp., 434 F.3d 948 (7th Cir. 2006) (reported in InfoBytes, Jan. 20, 2006), the court rejected PCI’s argument that class certification would result in disproportionate damages and held that the magnitude of the potential damage award did not affect the superiority of a class action for adjudication of this dispute. Moreover, the court rejected PCI’s argument that certification was unjust based on the minor risk of identity theft and actual harm because “FCRA does not require [a] showing of actual harm for recovery of statutory damages.” The court further reasoned that the damages claim for each potential class member would likely not be large enough to sustain individual actions. Accordingly, the court granted the consumer’s motion to certify the class. For a copy of the opinion, please click here.

Credit Cards

OCC Issues Guidance Regarding CCARD Look-Back Provision. On July 30, the Office of the Comptroller of the Currency (OCC) issued guidance regarding the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CCARD). The guidance specifically addresses the “look-back” provision of CCARD, under which increases in annual percentage rates (APRs) after January 1, 2009 must be reviewed at least once every six months to assess whether factors contributing to the APR increase have changed. According to the OCC, APRs might require reduction if such factors are no longer present, although the OCC notes that CCARD does not “require a reduction in any specific amount.” Effective August 22, 2010, OCC-regulated institutions must conduct such reviews on any accounts on which the APRs were increased on or after January 1, 2009. Accordingly, OCC-regulated institutions must maintain and have available information concerning APR increases for such accounts as needed to enable them to conduct the required reviews. The guidance follows similar recent statements by the Federal Reserve Board and the Office of Thrift Supervision (reported in InfoBytes, July 17, 2009) on the heels of Senator Christopher J. Dodd’s (D-CT) July 9 letter (reported in InfoBytes, July 10, 2009) urging the heads of the federal banking regulatory agencies to implement and enforce the look-back provision of CCARD. For a copy of the guidance, please see http://www.occ.treas.gov/ftp/bulletin/2009-25.html.

California Federal Court Certifies Class in FACTA Suit Despite Lack of Injury to Plaintiff. On July 16, the U.S. District Court for the Central District of California granted class certification in a suit alleging violations of the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act (FACTA). Tchoboian v. Parking Concepts, Inc., No. SACV 09-422, 2009 WL 2169883 (C.D. Cal. July 16, 2009). In this case, the consumer plaintiff alleged that the defendant, Parking Concepts, Inc. (PCI), violated FACTA by printing multiple electronically-printed receipts that contained the last five digits of his credit/debit card and/or the expiration date of his credit/debit card. The plaintiff sought to bring his claims on behalf of a class of persons consisting of certain consumers to whom PCI provided an electronically printed receipt after December 3, 2006 that displayed more than the last five digits of the consumers’ credit/debit card number. Following the Seventh Circuit’s reasoning in Murray v. GMAC Mortgage Corp., 434 F.3d 948 (7th Cir. 2006) (reported in InfoBytes, Jan. 20, 2006), the court rejected PCI’s argument that class certification would result in disproportionate damages and held that the magnitude of the potential damage award did not affect the superiority of a class action for adjudication of this dispute. Moreover, the court rejected PCI’s argument that certification was unjust based on the minor risk of identity theft and actual harm because “FCRA does not require [a] showing of actual harm for recovery of statutory damages.” The court further reasoned that the damages claim for each potential class member would likely not be large enough to sustain individual actions. Accordingly, the court granted the consumer’s motion to certify the class. For a copy of the opinion, please click here.