InfoBytes, April 10, 2009
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
Multi-Agency Group to Target Mortgage Foreclosure Rescue Scams, Loan Modification Fraud. On April 6, U.S. Department of the Treasury (Treasury), the U.S. Department of Justice (DOJ), the U.S. Department of Housing and Urban Development (HUD), the Federal Trade Commission (FTC), and the Attorney General of Illinois announced new measures to target mortgage foreclosure rescue scams and loan modification fraud. Under the new initiative, there will be “strong coordination” between federal and state governmental agencies. To this end, (i) the FTC is joining with an array of government, non-profit, and mortgage industry members to launch a new consumer education campaign, and has conducted a survey of online and print advertising for mortgage foreclosure rescue operations and identified 71 companies for potential violations, (ii) several national loan servicers are distributing FTC consumer alerts in monthly statements in correspondence to delinquent borrowers, in counseling sessions, and on their websites, (iii) HUD will distribute literature for consumers to HUD field offices and staff, housing authorities, state and local agencies, and non-profit organizations, (iv) the DOJ has recently successfully convicted several mortgage scam artists and will continue to coordinate and exchange intelligence with other agencies, especially to investigate and prosecute lenders that unlawfully discriminate against borrowers, and (v) the Treasury and the Financial Crimes Enforcement Network have undertaken an “advanced targeting effort” to combat fraudulent loan modification schemes. In addition, on April 6, the FTC announced that it is suing five companies for allegedly using deceptive techniques to market their mortgage relief services. According to complaints filed by the FTC, several of these companies misled borrowers by falsely advertising, among other items, that they were a part of or affiliated with the federal government. For a copy of the joint press release, please see http://www.usdoj.gov/opa/pr/2009/April/09-opa-311.html. For a copy of the FTC’s press release, please see http://www.ftc.gov/opa/2009/04/hud.shtm.
FinCEN Issues Advisory to Address Foreclosure Rescue Scams. On April 6, the Financial Crimes Enforcement Network (FinCEN) issued an advisory to highlight loan modification/foreclosure rescue scams so that financial institutions may better assist law enforcement when filing Suspicious Activity Reports (SARs). FinCEN requests that, when applicable, "foreclosure rescue scam" be included in the narrative portions of any relevant SARs. Red flags of a “foreclosure rescue scam” include when a homeowner (i) makes payments to a party other than the mortgage holder or servicer, (ii) pays advance fees for foreclosure or loan modification services, (iii) pays for assistance to find a federal housing program, and/or (iv) maintains that he/she does not need to pay a mortgage because the loan contract is invalid, or the customer attempts to pay with fraudulent instruments. For a copy of the advisory, please see http://www.buckleysandler.com/fin-2009-a001.pdf.
Treasury Updates Guidance on the Legacy Securities Program. On April 6, the U.S. Department of the Treasury (Treasury) supplemented its March 23 Public Private Investment Program announcement (reported in InfoBytes, Mar. 27, 2009) by releasing additional guidance regarding its Legacy Securities Program (LSP). The announcement notifies all applicants for fund manager pre-qualification that the application deadline has been extended to May 15. All applications should be submitted via e-mail to . In addition, Treasury clarified the LSP’s interaction with the Term Asset Lending Facility (TALF), underscoring that TALF funds will be available to eligible investors regardless of whether or not they participate in LSP. Finally, Treasury discussed the possibilities of expanding the LSP. First, Treasury is encouraging private asset managers to partner with small, veteran, minority- and women-owned businesses to ensure broad based participation in the LSP. Second, Treasury may expand the program to include fund managers passed over in the pre-qualification process and may expand the class of assets eligible for sale under the program. For a copy of the announcement, please see http://www.treas.gov/press/releases/tg82.htm.
FTC Releases Guide on Red Flags Rule. On April 2, the Federal Trade Commission (FTC) issued a guide entitled “Fighting Fraud with the Red Flags Rule: A How-To Guide for Business.” The guide aims to clarify the duties of entities covered by the Red Flags Rule, which was promulgated by the FTC and the federal banking regulatory agencies in November of 2007. Under the Red Flags Rule, covered entities must establish and administer an Identity Theft Prevention Program (Program) that meets four general requirements. First, a covered entity must establish policies and procedures to identify the “red flags” (suspicious patterns or practices) of identity theft that it encounters in its day-to-day operations. Second, a covered entity must create procedures to detect red flags. Third, the entity must outline the appropriate actions it would take when a red flag is detected. Finally, the entity must establish how often it will re-evaluate its Program to respond to new risks. The FTC’s new handbook provides step-by-step guidance on how to implement an Identity Theft Prevention Program, as well as guidance on the types of entities covered by the rule. Entities covered by the Red Flags Rule must establish an Identity Theft Prevention Program by May 1. For a copy of the guide, please see http://www.ftc.gov/bcp/edu/pubs/business/idtheft/bus23.pdf. In related news, the FTC will be conducting a full-day workshop regarding red flags detection on April 29 at the Fordham Law Center on Law and Information Policy in New York, NY. For more information on the upcoming workshop, please see http://www.ftc.gov/opa/2009/04/datasec.shtm.
Fannie Mae Announcement Outlines Changes to Selling Guide. On April 3, Fannie Mae released announcement 09-09, which identifies and summarizes recent changes to Fannie Mae’s requirements relevant to determining whether a government mortgage loan is eligible for purchase or securitization by Fannie Mae. The announcement also clarifies policies relative to a lender’s eligibility to underwrite loans with a lease-purchase option, and outlines changes to the Community Living mortgage product. Additionally, the announcement explains that the new Selling Guide no longer includes the policies and requirements of federal agencies, and instead, includes only the Fannie Mae policies and requirements that differ from those of the federal agencies. Most of the changes discussed in the announcement are reflected in Fannie Mae’s new Selling Guide, which was released (and became effective) on April 1. To view the announcement, please see https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2009/0909.pdf.
Treasury Releases Capital Purchase Program Term Sheets for Mutual Holding Companies. On April 7, the U.S. Department of the Treasury released three term sheets in connection with the Capital Purchase Program (CPP). The term sheets are for use by mutual bank or savings and loan holding companies that engage “solely or predominately in activities permissible for financial holding companies under relevant law.” The term sheets provide for the issuance of (i) preferred stock at publicly-traded subsidiary holding companies, (ii) preferred stock at privately-held subsidiary holding companies, and (iii) debt by top-tier mutual holding companies that do not have subsidiary holding companies. Financial institutions should submit applications to their supervising federal banking agency. The application deadline is May 7, 2009. For a copy of the press release, which contains links to the term sheets and a FAQ, please see http://www.financialstability.gov/latest/tg-04072009.html.
State Issues
Kansas Governor Signs Bill Amending State Mortgage Law, Safeguarding Personal Financial Information. On March 27, Kansas Governor Kathleen Sebelius signed SB 240, a bill that amends Kansas state mortgage law to reflect compliance with the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) and to impose requirements regarding the protection of personal consumer financial information. The bill implements the mandate of the SAFE Act by providing for the licensing of all mortgage loan originators under the Nationwide Mortgage Licensing System. The bill also prohibits certain conduct, including (i) earning a fee or commission through “best efforts” to obtain a loan when no loan is actually obtained, (ii) the solicitation, advertisement, or entering into a contract for specific rates, points, or other financing terms that are not actually available at the time of the offer, and (iii) making any payment, threat or promise to influence to any person in connection with a residential mortgage loan, including an appraiser. The bill further provides for data security measures to protect against the potential misuse of personal consumer financial information. To this effect, (i) every licensee and any assignee or servicer of a consumer credit transaction, and every person required to file notification, must have written policies and procedures “reasonably designed” to protect against the misuse of personal information, (ii) before discontinuing business, a licensee must arrange for the keeping of required books and records for a specified period, and (iii) any records required to be retained may be electronically preserved. Such electronic records must (i) permit “immediate” location of the record, (ii) be able to be copied, printed, or faxed, and (iii) be maintained using policies and procedures to “reasonably safeguard” the records from loss or alteration. The bill becomes effective upon its publication in the Kansas Statute Book. For a copy of the bill, please see http://www.buckleysandler.com/KS_SB_240.pdf.
Arkansas Amends Fair Mortgage Lending Act. On April 1, Arkansas Governor Mike Beebe signed HB 1881, a bill that amends the Arkansas Fair Mortgage Lending Act. In general, the bill amends the Act’s definitions, surety bond requirements, license application procedures, reporting requirements, prohibited activities, and penalties. Specifically, the bill revises the statutory definition of “mortgage loan” to mean “a loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, reverse mortgage, or other equivalent consensual security interest encumbering” either (i) a “dwelling,” as defined by the Truth in Lending Act or (ii) residential real estate that is constructed or intended to be constructed as a dwelling. The bill also removes a licensing exemption for persons who only broker, make, or service nonresidential mortgage loans. Regarding licensee duties, the bill requires the inclusion of the full name, address, and telephone number of the licensee in all solicitations and advertisements. The bill also requires the unique identifier of a person soliciting or originating a mortgage loan to be clearly shown on all mortgage loan application forms, solicitations, advertisements, business cards, websites, and related documents. For a copy of the bill, please see http://www.buckleysandler.com/AK_HB_1881.pdf.
New Mexico Passes Mortgage Loan Originator Licensing Act. On April 6, New Mexico Governor Bill Richardson signed into law SB 342, the “New Mexico Mortgage Loan Originator Licensing Act” (the Act). The Act implements the mandate of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) by providing for the licensing of all mortgage loan originators under the Nationwide Mortgage Licensing System. In addition, the act imposes a host of new requirements on loan originators, including background checks, surety bonds, testing and education requirements, fiduciary duties, and examination requirements. The Act also amends portions of the Mortgage Loan Company Act and the Home Loan Protection Act. Notably, the Act will require mortgage loan companies to become licensed (rather than merely registered) and to designate a qualified manager to oversee operations in New Mexico. The effective date for most provisions of the Act is July 31, 2009, but the mortgage loan originator licensing provisions become effective July 31, 2010. For a copy of the Act, please see http://legis.state.nm.us/Sessions/09%20Regular/final/SB0342.pdf.
Massachusetts Attorney General Obtains Temporary Restraining Order Against Loan Modification Companies. On April 7, Massachusetts Attorney General Martha Coakley obtained a temporary restraining order against two mortgage loan modification companies. The companies allegedly claimed to be attorney-based, loan modification experts that could guarantee “drastically reduced” interest rates. The complaint also alleges the collection of up-front fees, which are illegal under 2007 Massachusetts Attorney General regulations. For a copy of the press release, please see http://www.mass.gov/?pageID=cagohomepage&L=1&L0=Home&sid=Cago.
Kentucky Attorney General Issues Opinion on Mortgage Recordation. On March 20, Kentucky Attorney General Jack Conway issued an opinion concluding that the Kentucky County Clerk does not have the authority to refuse to file amended mortgages. The opinion letter clarifies that the relevant Kentucky statute (KRS 382.300) does not require a document to be titled “mortgage” or a “mortgage amendment” to be recorded. For a copy of the opinion letter, please see http://www.buckleysandler.com/KY_03_2009_AG_Opinion.pdf.
Courts
First Circuit Holds State Law Claims Insufficient to Defeat HOLA Preemption Defense. On April 3, the U.S. Court of Appeals for the First Circuit upheld the denial of a plaintiff’s state law claims in a case involving default interest charged on a credit card. Yeomalakis v. Federal Deposit Insurance Corporation, No. 08-1444, 2009 WL 884936 (1st Cir. Apr. 3, 2009). The plaintiff’s credit card issuer, Washington Mutual Bank (WaMu), charged an increased annual percentage rate (APR) on unpaid credit card balances on accounts where the holder defaulted. The increased rate was charged as of the first day of the billing cycle in which the default occurred. James Yeomalakis brought suit against WaMu to challenge this practice. The plaintiff claimed that WAMU (i) imposed an illegal penalty by retroactively increasing the APR and (ii) engaged in unfair and deceptive acts and practices in violation of Mass. Gen. Law ch. 93A, § 2, alleging that the retroactive increases were unfair and had not been adequately disclosed. The district court granted WaMu’s motion to dismiss the claims on the basis that both counts were preempted by the Home Owners’ Loan Act of 1933 (HOLA) and various regulations promulgated under HOLA, based on preemption of state interest rates (which includes penalties) and disclosures. On appeal, the plaintiff failed to make any plausible arguments as to why the penalty claim would not be preempted, and, further, the plaintiff provided no clear chapter 93A claim that would avoid preemption. The court of appeals indicated that the plaintiff could have alleged state contractual claims (that the card agreement did not permit the “retroactive” increase in APR) and/or state fraud claims, which may not be preempted by HOLA. However, the court pointed out that it is not the job of the court to provide arguments for a party that has not provided them, and the court upheld the lower court’s dismissal of the claims. For a copy of the opinion, please see http://www.buckleysandler.com/Yeomalakis_v_FDIC.pdf.
Eleventh Circuit Holds FACTA Statutory Damages Provision Not Facially Vague, Excessive. On April 9, the U.S. Court of Appeals for the Eleventh Circuit held that the statutory damages provision of the Fair and Accurate Credit Transactions Act (FACTA) is not unconstitutionally vague or excessive on its face. Harris v. Mexican Specialty Foods, Inc., - F.3d -, 2009 WL 944201 (11th Cir. Apr. 9, 2009). In this case, the plaintiffs alleged, in separate disputes, that the defendants willfully violated FACTA by including the last five digits of a customer’s credit card number and/or its expiration date. The plaintiffs filed putative class actions and sought, among other remedies, statutory damages. The district court found that FACTA’s statutory damages provision is unconstitutionally vague and excessive and dismissed the claims (the Grimes v. Rave Motion Pictures Birmingham, No. 07-AR-1397, 2008 WL 2338131 (N.D. Ala. May 28, 2008) decision was reported in InfoBytes, June 13, 2008). On appeal, the circuit court vacated the rulings of the district court and remanded for future proceedings. The circuit court found that FACTA’s statutory damages provision is not unconstitutionally vague on its face because merchants have notice of the consequences of violations, as “what conduct is prohibited and the potential range of fine that accompanies noncompliance” is clearly defined. Moreover, the provision will not lead to “arbitrary” verdicts because it limits jury discretion by specifying an exact range of statutory damages. The circuit court also found that FACTA’s statutory damages provision is not unconstitutionally excessive on its face because the district court’s analysis of the damages as “punitive” was incorrect. The court reasoned that “[the Fair Credit Reporting Act] already contains a punitive damages provision and specifies that statutory damages may only be awarded in lieu of actual damages.” The court also stated that, even if the damages can be construed as punitive, the mere possibility of an unconstitutional application does not render the provision itself facially unconstitutional. The court further held that the as-applied excessiveness challenge is not yet ripe because many of the district court’s assumptions required the resolution of issues that were directly disputed. For a copy of the opinion, please see http://www.buckleysandler.com/Harris_v_MSF.pdf.
Ohio Federal Court Holds Mortgage Refinancing Was a Consumer “Debt” Under FDCPA. On March 31, the U.S. District Court for the Southern District of Ohio concluded that a mortgage refinancing constituted a consumer “debt” under the Fair Debt Collection Practices Act (FDCPA) because most of the funds were used to pay off a loan securing the borrower’s primary residence. Graham v. Manley Deas Kochalski LLC, No. 08-CV-120, 2009 WL 891743 (S.D. Ohio Mar. 31, 2009). The plaintiff in the case entered into three loan transactions between December 2005 and March 2006. The first transaction, in December 2005, was a cash-out refinancing of a loan securing the plaintiff’s principal residence. Although the transaction resulted in less favorable loan terms, it provided the plaintiff over $10,000 in cash, which she used to purchase two investment properties. In the second and third transactions, in March 2006, the plaintiff refinanced the 2005 loan (with a first- and subordinate-lien loan) to improve the loan terms and pay off credit card debt. After defaulting on the first-lien loan—which led to initiation of foreclosure—the plaintiff brought FDCPA claims against the defendants. The defendants argued that the claims should be dismissed because the loans were not for a consumer purpose. According to the defendants, because the 2005 loan increased the interest rate, the court should only look to the purpose of the loan’s cash-out proceeds to ascertain its purpose. Further, the defendants argued that, because the 2006 loans were needed to pay off the 2005 loan—which had a commercial purpose—both loans should be considered ”commercial.” In response, the plaintiff claimed that it was inappropriate to look back to the 2005 loan. According to her, the first-lien loan was used solely to refinance a loan secured by her primary residence and consequently had a consumer purpose. The court analyzed the 2006 transactions as a whole, and found that the vast majority of the loans was used to pay off the 2005 loan securing the plaintiff’s residence. It also agreed with the plaintiff that only the 2006 loans were relevant to the analysis, but also noted that, even if it did look back to the 2005 loan, the vast majority of that loan was used to pay off a loan for her primary residence, and only a small portion was used for a commercial purpose. As a result, the court denied the defendants’ motion for judgment on the pleadings. For a copy of the opinion, please see http://www.buckleysandler.com/Graham_v_MDK.pdf.
New Jersey Supreme Court Holds Electronic Fund Transfer Privacy Act Applies to Accounts with Electronic Fund Transfer Capability. On April 1, the New Jersey Supreme Court held that the Electronic Fund Transfer Privacy Act (EFTPA) applies to all bank accounts with electronic fund transfer capability. Hirl v. Bank of America, N.A., No. A-42, 2009 WL 838108 (N.J. Apr. 1, 2009) (per curiam). Previously, the lower court held that the defendant violated the EFTPA by providing the plaintiff’s banking records to the attorney of the plaintiff’s ex-husband. The defendant provided the information in response to a subpoena that was initially disputed by the plaintiff and subsequently quashed. The New Jersey Supreme Court rejected the defendant’s argument that the EFTPA applies only to “electronic fund transfers,” concluding that the EFTPA applies to “’an electronic fund transfer or an account with electronic fund transfer capability.’” As a result, the court affirmed the lower court’s judgment and remanded the case for further proceedings. For a copy of the opinion, please e-mail .
New York Federal Court Grants Summary Judgment for Defendants in FDCPA, FCRA Case. On March 25, the U.S. District Court for the Eastern District of New York granted defendants’ motion for summary judgment on claims brought under the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA). Fashakin v. Nextel Communications, No. 05-CV-3080, 2009 WL 790350 (E.D.N.Y. Mar. 25, 2009). In Fashakin, the plaintiff, among other claims, alleged that the defendant violated the FDCPA by (i) calling her office without her permission, (ii) calling her repeatedly, (iii) refusing to disclose its identity or phone numbers, and (iv) telling her that if she did not pay her debt, it would report her to a consumer reporting agency. The plaintiff also alleged that a different defendant, a credit reporting agency, violated FCRA by failing to reinvestigate disputed information on the plaintiff’s credit report. Regarding claims i, ii, and iv, the court found that the plaintiff failed to provide enough evidence to substantiate the respective claims, and granted summary judgment for the defendant. Regarding the failure to disclose claim, the court rejected four arguments by the plaintiff. First, the court held that the FDCPA prohibits a debt collector from calling a place of employment only if the debt collector knows or has reason to know that the consumer’s employer prohibits such communication. Second, the court held that placing six calls in eight days, some of which went unanswered and some where no message was left, does not constitute “harassing” behavior as contemplated by FDCPA. Third, the court held that requirements to disclose the debt collector’s identity apply only to calls made directly to the consumer or a consumer’s representative, and that debt collectors cannot disclose their identity as a debt collector to a third-party (in this case, the plaintiff’s office staff) because of the privacy-protective provisions of the FDCPA. Fourth, the court held that threatening to report information about unpaid debts to a consumer reporting agency is expressly permitted under the FDCPA. The court also granted summary judgment for the defendant regarding the plaintiff’s FCRA claim. The court found that the plaintiff failed to provide evidence that the disputed information was “inaccurate,” and, thus, required a “reasonable” investigation of the dispute. The court further noted that the plaintiff failed to show that any creditor or other person ever learned of the derogatory credit information. For a copy of the opinion, please see http://www.buckleysandler.com/Fashakin_v_Nextel.pdf.
Louisiana Federal Court Holds Risk of Credit Fraud, Identity Theft Not Sufficient to Maintain Negligence Claim. On March 24, the U.S. District Court for the Eastern District of Louisiana ruled that class-action plaintiffs claiming increased risk of credit fraud and identity theft lacked sufficient actual damages to sustain a negligence claim. Belle Chasse Automotive Care, Inc. v. Advanced Auto Parts, Inc., No. 08-1568, 2009 WL 799760 (E.D. La. Mar. 24, 2009). In this case, the defendant’s computer system was breached; the breach affected 14 out of the defendant’s 3,000 stores, and the defendant notified all of its customers immediately about the breach. The plaintiffs subsequently filed suit, alleging that the defendant failed to adequately protect their financial information, subjecting them to the risk of credit fraud and mental anguish, fear, stress, and anxiety. The court, in granting the defendant’s motion to dismiss, found that the plaintiff could not prove the “actual damages” prong of the court’s test for negligence. The court ruled that, because damages must be proved with legal certainty, speculative damages are not sufficient to maintain a cause of action. The court also held that identity theft without actual harm, and emotional damage absent physical injury, generally are not recognized under Louisiana case law. For a copy of the opinion, please see http://www.buckleysandler.com/Belle_Chase_v_Advanced_Auto.pdf.
Rhode Island Bankruptcy Court Holds Post-Foreclosure Bankruptcy Filing Does Not Void Foreclosure Sale. On April 1, the U.S. Bankruptcy Court for the District of Rhode Island held that a debtor’s filing for bankruptcy after the foreclosure sale of the debtor’s residence, but before the recording of the buyer’s deed, does not void the foreclosure sale. In re Medaglia, BK No. 08-12804, 2009 WL 874528 (Bankr. D.R.I. Apr. 1, 2009). In this case, the debtor’s residence was sold at a foreclosure sale. After the sale, but before the purchaser recorded his deed, the debtor filed for bankruptcy relief. The debtor argued that this filing gave rise to a right to cure the loan default, while the buyer argued that the right to cure terminated at the moment the sale was complete. The court ruled in favor of the buyer, finding that “when the gavel falls, the right to cure no longer exists.” The court overturned its previous precedent on this issue, but the previous decisions had been made prior to the enactment of the relevant section of the bankruptcy code. For a copy of the opinion, please see http://www.buckleysandler.com/In_Re_Medaglia.pdf.
Firm News
Sara Emley will be a panelist on a webcast sponsored by the Investment Adviser Association on April 21. Her panel is entitled “Compliance Programs for Smaller Advisers: Best Practices for COOs.”
Margo Tank will be speaking at the MBA Government Housing and Loan Production Conference in Washington, DC on April 28 on a panel titled “The Next Generation of Operations - What’s In It for Me?.”
Margo Tank will also be speaking at the MBA’s Legal Issues and Regulatory Compliance Conference being held in Chicago, IL from May 3 – 6. Her session is entitled “Update on Legal Issues in Mortgage Technology.”
Joe Kolar presented a speech on RESPA at the Old Republic National Title Insurance Company 2009 Annual Seminar in Columbus, Ohio on March 10.
Margo Tank spoke at the Mortgage Bankers Association Technology in Mortgage Banking Conference/ Expo on March 15 – 18 in Las Vegas, NV regarding e-Mortgage legal and risk management issues.
Andy Sandler spoke at the Securities Industry & Financial Markets Association’s Annual Seminar held in Phoenix, Arizona on March 24 - 28.
Jerry Buckley was quoted in the March 31 issue of American Banker. The featured article is entitled “Mortgage Bill Could Push Lenders Out.”
Andy Sandler spoke in New York City on April 1 at the American Conference Institute’s Advanced Forum on Financial Institutions Insurance.
Jeff Naimon and Grant Mitchell spoke about the new RESPA rule at the Annual RESPRO Conference on April 7.
Jon Jerison presented at an audio conference on April 9, “The HELOC Balancing Act – Consumer Laws and Agency Guidance.” The conference was sponsored by AS Pratt.
Mortgages
Multi-Agency Group to Target Mortgage Foreclosure Rescue Scams, Loan Modification Fraud. On April 6, U.S. Department of the Treasury (Treasury), the U.S. Department of Justice (DOJ), the U.S. Department of Housing and Urban Development (HUD), the Federal Trade Commission (FTC), and the Attorney General of Illinois announced new measures to target mortgage foreclosure rescue scams and loan modification fraud. Under the new initiative, there will be “strong coordination” between federal and state governmental agencies. To this end, (i) the FTC is joining with an array of government, non-profit, and mortgage industry members to launch a new consumer education campaign, and has conducted a survey of online and print advertising for mortgage foreclosure rescue operations and identified 71 companies for potential violations, (ii) several national loan servicers are distributing FTC consumer alerts in monthly statements in correspondence to delinquent borrowers, in counseling sessions, and on their websites, (iii) HUD will distribute literature for consumers to HUD field offices and staff, housing authorities, state and local agencies, and non-profit organizations, (iv) the DOJ has recently successfully convicted several mortgage scam artists and will continue to coordinate and exchange intelligence with other agencies, especially to investigate and prosecute lenders that unlawfully discriminate against borrowers, and (v) the Treasury and the Financial Crimes Enforcement Network have undertaken an “advanced targeting effort” to combat fraudulent loan modification schemes. In addition, on April 6, the FTC announced that it is suing five companies for allegedly using deceptive techniques to market their mortgage relief services. According to complaints filed by the FTC, several of these companies misled borrowers by falsely advertising, among other items, that they were a part of or affiliated with the federal government. For a copy of the joint press release, please see http://www.usdoj.gov/opa/pr/2009/April/09-opa-311.html. For a copy of the FTC’s press release, please see http://www.ftc.gov/opa/2009/04/hud.shtm.
FinCEN Issues Advisory to Address Foreclosure Rescue Scams. On April 6, the Financial Crimes Enforcement Network (FinCEN) issued an advisory to highlight loan modification/foreclosure rescue scams so that financial institutions may better assist law enforcement when filing Suspicious Activity Reports (SARs). FinCEN requests that, when applicable, "foreclosure rescue scam" be included in the narrative portions of any relevant SARs. Red flags of a “foreclosure rescue scam” include when a homeowner (i) makes payments to a party other than the mortgage holder or servicer, (ii) pays advance fees for foreclosure or loan modification services, (iii) pays for assistance to find a federal housing program, and/or (iv) maintains that he/she does not need to pay a mortgage because the loan contract is invalid, or the customer attempts to pay with fraudulent instruments. For a copy of the advisory, please see http://www.buckleysandler.com/fin-2009-a001.pdf.
Fannie Mae Announcement Outlines Changes to Selling Guide. On April 3, Fannie Mae released announcement 09-09, which identifies and summarizes recent changes to Fannie Mae’s requirements relevant to determining whether a government mortgage loan is eligible for purchase or securitization by Fannie Mae. The announcement also clarifies policies relative to a lender’s eligibility to underwrite loans with a lease-purchase option, and outlines changes to the Community Living mortgage product. Additionally, the announcement explains that the new Selling Guide no longer includes the policies and requirements of federal agencies, and instead, includes only the Fannie Mae policies and requirements that differ from those of the federal agencies. Most of the changes discussed in the announcement are reflected in Fannie Mae’s new Selling Guide, which was released (and became effective) on April 1. To view the announcement, please see https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2009/0909.pdf.
Kansas Governor Signs Bill Amending State Mortgage Law, Safeguarding Personal Financial Information. On March 27, Kansas Governor Kathleen Sebelius signed SB 240, a bill that amends Kansas state mortgage law to reflect compliance with the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) and to impose requirements regarding the protection of personal consumer financial information. The bill implements the mandate of the SAFE Act by providing for the licensing of all mortgage loan originators under the Nationwide Mortgage Licensing System. The bill also prohibits certain conduct, including (i) earning a fee or commission through “best efforts” to obtain a loan when no loan is actually obtained, (ii) the solicitation, advertisement, or entering into a contract for specific rates, points, or other financing terms that are not actually available at the time of the offer, and (iii) making any payment, threat or promise to influence to any person in connection with a residential mortgage loan, including an appraiser. The bill further provides for data security measures to protect against the potential misuse of personal consumer financial information. To this effect, (i) every licensee and any assignee or servicer of a consumer credit transaction, and every person required to file notification, must have written policies and procedures “reasonably designed” to protect against the misuse of personal information, (ii) before discontinuing business, a licensee must arrange for the keeping of required books and records for a specified period, and (iii) any records required to be retained may be electronically preserved. Such electronic records must (i) permit “immediate” location of the record, (ii) be able to be copied, printed, or faxed, and (iii) be maintained using policies and procedures to “reasonably safeguard” the records from loss or alteration. The bill becomes effective upon its publication in the Kansas Statute Book. For a copy of the bill, please see http://www.buckleysandler.com/KS_SB_240.pdf.
Arkansas Amends Fair Mortgage Lending Act. On April 1, Arkansas Governor Mike Beebe signed HB 1881, a bill that amends the Arkansas Fair Mortgage Lending Act. In general, the bill amends the Act’s definitions, surety bond requirements, license application procedures, reporting requirements, prohibited activities, and penalties. Specifically, the bill revises the statutory definition of “mortgage loan” to mean “a loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, reverse mortgage, or other equivalent consensual security interest encumbering” either (i) a “dwelling,” as defined by the Truth in Lending Act or (ii) residential real estate that is constructed or intended to be constructed as a dwelling. The bill also removes a licensing exemption for persons who only broker, make, or service nonresidential mortgage loans. Regarding licensee duties, the bill requires the inclusion of the full name, address, and telephone number of the licensee in all solicitations and advertisements. The bill also requires the unique identifier of a person soliciting or originating a mortgage loan to be clearly shown on all mortgage loan application forms, solicitations, advertisements, business cards, websites, and related documents. For a copy of the bill, please see http://www.buckleysandler.com/AK_HB_1881.pdf.
New Mexico Passes Mortgage Loan Originator Licensing Act. On April 6, New Mexico Governor Bill Richardson signed into law SB 342, the “New Mexico Mortgage Loan Originator Licensing Act” (the Act). The Act implements the mandate of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) by providing for the licensing of all mortgage loan originators under the Nationwide Mortgage Licensing System. In addition, the act imposes a host of new requirements on loan originators, including background checks, surety bonds, testing and education requirements, fiduciary duties, and examination requirements. The Act also amends portions of the Mortgage Loan Company Act and the Home Loan Protection Act. Notably, the Act will require mortgage loan companies to become licensed (rather than merely registered) and to designate a qualified manager to oversee operations in New Mexico. The effective date for most provisions of the Act is July 31, 2009, but the mortgage loan originator licensing provisions become effective July 31, 2010. For a copy of the Act, please see http://legis.state.nm.us/Sessions/09%20Regular/final/SB0342.pdf.
Massachusetts Attorney General Obtains Temporary Restraining Order Against Loan Modification Companies. On April 7, Massachusetts Attorney General Martha Coakley obtained a temporary restraining order against two mortgage loan modification companies. The companies allegedly claimed to be attorney-based, loan modification experts that could guarantee “drastically reduced” interest rates. The complaint also alleges the collection of up-front fees, which are illegal under 2007 Massachusetts Attorney General regulations. For a copy of the press release, please see http://www.mass.gov/?pageID=cagohomepage&L=1&L0=Home&sid=Cago.
Kentucky Attorney General Issues Opinion on Mortgage Recordation. On March 20, Kentucky Attorney General Jack Conway issued an opinion concluding that the Kentucky County Clerk does not have the authority to refuse to file amended mortgages. The opinion letter clarifies that the relevant Kentucky statute (KRS 382.300) does not require a document to be titled “mortgage” or a “mortgage amendment” to be recorded. For a copy of the opinion letter, please see http://www.buckleysandler.com/KY_03_2009_AG_Opinion.pdf.
Ohio Federal Court Holds Mortgage Refinancing Was a Consumer “Debt” Under FDCPA. On March 31, the U.S. District Court for the Southern District of Ohio concluded that a mortgage refinancing constituted a consumer “debt” under the Fair Debt Collection Practices Act (FDCPA) because most of the funds were used to pay off a loan securing the borrower’s primary residence. Graham v. Manley Deas Kochalski LLC, No. 08-CV-120, 2009 WL 891743 (S.D. Ohio Mar. 31, 2009). The plaintiff in the case entered into three loan transactions between December 2005 and March 2006. The first transaction, in December 2005, was a cash-out refinancing of a loan securing the plaintiff’s principal residence. Although the transaction resulted in less favorable loan terms, it provided the plaintiff over $10,000 in cash, which she used to purchase two investment properties. In the second and third transactions, in March 2006, the plaintiff refinanced the 2005 loan (with a first- and subordinate-lien loan) to improve the loan terms and pay off credit card debt. After defaulting on the first-lien loan—which led to initiation of foreclosure—the plaintiff brought FDCPA claims against the defendants. The defendants argued that the claims should be dismissed because the loans were not for a consumer purpose. According to the defendants, because the 2005 loan increased the interest rate, the court should only look to the purpose of the loan’s cash-out proceeds to ascertain its purpose. Further, the defendants argued that, because the 2006 loans were needed to pay off the 2005 loan—which had a commercial purpose—both loans should be considered ”commercial.” In response, the plaintiff claimed that it was inappropriate to look back to the 2005 loan. According to her, the first-lien loan was used solely to refinance a loan secured by her primary residence and consequently had a consumer purpose. The court analyzed the 2006 transactions as a whole, and found that the vast majority of the loans was used to pay off the 2005 loan securing the plaintiff’s residence. It also agreed with the plaintiff that only the 2006 loans were relevant to the analysis, but also noted that, even if it did look back to the 2005 loan, the vast majority of that loan was used to pay off a loan for her primary residence, and only a small portion was used for a commercial purpose. As a result, the court denied the defendants’ motion for judgment on the pleadings. For a copy of the opinion, please see http://www.buckleysandler.com/Graham_v_MDK.pdf.
Rhode Island Bankruptcy Court Holds Post-Foreclosure Bankruptcy Filing Does Not Void Foreclosure Sale. On April 1, the U.S. Bankruptcy Court for the District of Rhode Island held that a debtor’s filing for bankruptcy after the foreclosure sale of the debtor’s residence, but before the recording of the buyer’s deed, does not void the foreclosure sale. In re Medaglia, BK No. 08-12804, 2009 WL 874528 (Bankr. D.R.I. Apr. 1, 2009). In this case, the debtor’s residence was sold at a foreclosure sale. After the sale, but before the purchaser recorded his deed, the debtor filed for bankruptcy relief. The debtor argued that this filing gave rise to a right to cure the loan default, while the buyer argued that the right to cure terminated at the moment the sale was complete. The court ruled in favor of the buyer, finding that “when the gavel falls, the right to cure no longer exists.” The court overturned its previous precedent on this issue, but the previous decisions had been made prior to the enactment of the relevant section of the bankruptcy code. For a copy of the opinion, please see http://www.buckleysandler.com/In_Re_Medaglia.pdf.
Banking
Treasury Updates Guidance on the Legacy Securities Program. On April 6, the U.S. Department of the Treasury (Treasury) supplemented its March 23 Public Private Investment Program announcement (reported in InfoBytes, Mar. 27, 2009) by releasing additional guidance regarding its Legacy Securities Program (LSP). The announcement notifies all applicants for fund manager pre-qualification that the application deadline has been extended to May 15. All applications should be submitted via e-mail to . In addition, Treasury clarified the LSP’s interaction with the Term Asset Lending Facility (TALF), underscoring that TALF funds will be available to eligible investors regardless of whether or not they participate in LSP. Finally, Treasury discussed the possibilities of expanding the LSP. First, Treasury is encouraging private asset managers to partner with small, veteran, minority- and women-owned businesses to ensure broad based participation in the LSP. Second, Treasury may expand the program to include fund managers passed over in the pre-qualification process and may expand the class of assets eligible for sale under the program. For a copy of the announcement, please see http://www.treas.gov/press/releases/tg82.htm.
FTC Releases Guide on Red Flags Rule. On April 2, the Federal Trade Commission (FTC) issued a guide entitled “Fighting Fraud with the Red Flags Rule: A How-To Guide for Business.” The guide aims to clarify the duties of entities covered by the Red Flags Rule, which was promulgated by the FTC and the federal banking regulatory agencies in November of 2007. Under the Red Flags Rule, covered entities must establish and administer an Identity Theft Prevention Program (Program) that meets four general requirements. First, a covered entity must establish policies and procedures to identify the “red flags” (suspicious patterns or practices) of identity theft that it encounters in its day-to-day operations. Second, a covered entity must create procedures to detect red flags. Third, the entity must outline the appropriate actions it would take when a red flag is detected. Finally, the entity must establish how often it will re-evaluate its Program to respond to new risks. The FTC’s new handbook provides step-by-step guidance on how to implement an Identity Theft Prevention Program, as well as guidance on the types of entities covered by the rule. Entities covered by the Red Flags Rule must establish an Identity Theft Prevention Program by May 1. For a copy of the guide, please see http://www.ftc.gov/bcp/edu/pubs/business/idtheft/bus23.pdf. In related news, the FTC will be conducting a full-day workshop regarding red flags detection on April 29 at the Fordham Law Center on Law and Information Policy in New York, NY. For more information on the upcoming workshop, please see http://www.ftc.gov/opa/2009/04/datasec.shtm.
Treasury Releases Capital Purchase Program Term Sheets for Mutual Holding Companies. On April 7, the U.S. Department of the Treasury released three term sheets in connection with the Capital Purchase Program (CPP). The term sheets are for use by mutual bank or savings and loan holding companies that engage “solely or predominately in activities permissible for financial holding companies under relevant law.” The term sheets provide for the issuance of (i) preferred stock at publicly-traded subsidiary holding companies, (ii) preferred stock at privately-held subsidiary holding companies, and (iii) debt by top-tier mutual holding companies that do not have subsidiary holding companies. Financial institutions should submit applications to their supervising federal banking agency. The application deadline is May 7, 2009. For a copy of the press release, which contains links to the term sheets and a FAQ, please see http://www.financialstability.gov/latest/tg-04072009.html.
New Jersey Supreme Court Holds Electronic Fund Transfer Privacy Act Applies to Accounts with Electronic Fund Transfer Capability. On April 1, the New Jersey Supreme Court held that the Electronic Fund Transfer Privacy Act (EFTPA) applies to all bank accounts with electronic fund transfer capability. Hirl v. Bank of America, N.A., No. A-42, 2009 WL 838108 (N.J. Apr. 1, 2009) (per curiam). Previously, the lower court held that the defendant violated the EFTPA by providing the plaintiff’s banking records to the attorney of the plaintiff’s ex-husband. The defendant provided the information in response to a subpoena that was initially disputed by the plaintiff and subsequently quashed. The New Jersey Supreme Court rejected the defendant’s argument that the EFTPA applies only to “electronic fund transfers,” concluding that the EFTPA applies to “’an electronic fund transfer or an account with electronic fund transfer capability.’” As a result, the court affirmed the lower court’s judgment and remanded the case for further proceedings. For a copy of the opinion, please e-mail .
Consumer Finance
FTC Releases Guide on Red Flags Rule. On April 2, the Federal Trade Commission (FTC) issued a guide entitled “Fighting Fraud with the Red Flags Rule: A How-To Guide for Business.” The guide aims to clarify the duties of entities covered by the Red Flags Rule, which was promulgated by the FTC and the federal banking regulatory agencies in November of 2007. Under the Red Flags Rule, covered entities must establish and administer an Identity Theft Prevention Program (Program) that meets four general requirements. First, a covered entity must establish policies and procedures to identify the “red flags” (suspicious patterns or practices) of identity theft that it encounters in its day-to-day operations. Second, a covered entity must create procedures to detect red flags. Third, the entity must outline the appropriate actions it would take when a red flag is detected. Finally, the entity must establish how often it will re-evaluate its Program to respond to new risks. The FTC’s new handbook provides step-by-step guidance on how to implement an Identity Theft Prevention Program, as well as guidance on the types of entities covered by the rule. Entities covered by the Red Flags Rule must establish an Identity Theft Prevention Program by May 1. For a copy of the guide, please see http://www.ftc.gov/bcp/edu/pubs/business/idtheft/bus23.pdf. In related news, the FTC will be conducting a full-day workshop regarding red flags detection on April 29 at the Fordham Law Center on Law and Information Policy in New York, NY. For more information on the upcoming workshop, please see http://www.ftc.gov/opa/2009/04/datasec.shtm.
New York Federal Court Grants Summary Judgment for Defendants in FDCPA, FCRA Case. On March 25, the U.S. District Court for the Eastern District of New York granted defendants’ motion for summary judgment on claims brought under the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA). Fashakin v. Nextel Communications, No. 05-CV-3080, 2009 WL 790350 (E.D.N.Y. Mar. 25, 2009). In Fashakin, the plaintiff, among other claims, alleged that the defendant violated the FDCPA by (i) calling her office without her permission, (ii) calling her repeatedly, (iii) refusing to disclose its identity or phone numbers, and (iv) telling her that if she did not pay her debt, it would report her to a consumer reporting agency. The plaintiff also alleged that a different defendant, a credit reporting agency, violated FCRA by failing to reinvestigate disputed information on the plaintiff’s credit report. Regarding claims i, ii, and iv, the court found that the plaintiff failed to provide enough evidence to substantiate the respective claims, and granted summary judgment for the defendant. Regarding the failure to disclose claim, the court rejected four arguments by the plaintiff. First, the court held that the FDCPA prohibits a debt collector from calling a place of employment only if the debt collector knows or has reason to know that the consumer’s employer prohibits such communication. Second, the court held that placing six calls in eight days, some of which went unanswered and some where no message was left, does not constitute “harassing” behavior as contemplated by FDCPA. Third, the court held that requirements to disclose the debt collector’s identity apply only to calls made directly to the consumer or a consumer’s representative, and that debt collectors cannot disclose their identity as a debt collector to a third-party (in this case, the plaintiff’s office staff) because of the privacy-protective provisions of the FDCPA. Fourth, the court held that threatening to report information about unpaid debts to a consumer reporting agency is expressly permitted under the FDCPA. The court also granted summary judgment for the defendant regarding the plaintiff’s FCRA claim. The court found that the plaintiff failed to provide evidence that the disputed information was “inaccurate,” and, thus, required a “reasonable” investigation of the dispute. The court further noted that the plaintiff failed to show that any creditor or other person ever learned of the derogatory credit information. For a copy of the opinion, please see http://www.buckleysandler.com/Fashakin_v_Nextel.pdf.
Litigation
First Circuit Holds State Law Claims Insufficient to Defeat HOLA Preemption Defense. On April 3, the U.S. Court of Appeals for the First Circuit upheld the denial of a plaintiff’s state law claims in a case involving default interest charged on a credit card. Yeomalakis v. Federal Deposit Insurance Corporation, No. 08-1444, 2009 WL 884936 (1st Cir. Apr. 3, 2009). The plaintiff’s credit card issuer, Washington Mutual Bank (WaMu), charged an increased annual percentage rate (APR) on unpaid credit card balances on accounts where the holder defaulted. The increased rate was charged as of the first day of the billing cycle in which the default occurred. James Yeomalakis brought suit against WaMu to challenge this practice. The plaintiff claimed that WaMu (i) imposed an illegal penalty by retroactively increasing the APR and (ii) engaged in unfair and deceptive acts and practices in violation of Mass. Gen. Law ch. 93A, § 2, alleging that the retroactive increases were unfair and had not been adequately disclosed. The district court granted WaMu’s motion to dismiss the claims on the basis that both counts were preempted by the Home Owners’ Loan Act of 1933 (HOLA) and various regulations promulgated under HOLA, based on preemption of state interest rates (which includes penalties) and disclosures. On appeal, the plaintiff failed to make any plausible arguments as to why the penalty claim would not be preempted, and, further, the plaintiff provided no clear chapter 93A claim that would avoid preemption. The court of appeals indicated that the plaintiff could have alleged state contractual claims (that the card agreement did not permit the “retroactive” increase in APR) and/or state fraud claims, which may not be preempted by HOLA. However, the court pointed out that it is not the job of the court to provide arguments for a party that has not provided them, and the court upheld the lower court’s dismissal of the claims. For a copy of the opinion, please see http://www.buckleysandler.com/Yeomalakis_v_FDIC.pdf.
Eleventh Circuit Holds FACTA Statutory Damages Provision Not Facially Vague, Excessive. On April 9, the U.S. Court of Appeals for the Eleventh Circuit held that the statutory damages provision of the Fair and Accurate Credit Transactions Act (FACTA) is not unconstitutionally vague or excessive on its face. Harris v. Mexican Specialty Foods, Inc., - F.3d -, 2009 WL 944201 (11th Cir. Apr. 9, 2009). In this case, the plaintiffs alleged, in separate disputes, that the defendants willfully violated FACTA by including the last five digits of a customer’s credit card number and/or its expiration date. The plaintiffs filed putative class actions and sought, among other remedies, statutory damages. The district court found that FACTA’s statutory damages provision is unconstitutionally vague and excessive and dismissed the claims (the Grimes v. Rave Motion Pictures Birmingham, No. 07-AR-1397, 2008 WL 2338131 (N.D. Ala. May 28, 2008) decision was reported in InfoBytes, June 13, 2008). On appeal, the circuit court vacated the rulings of the district court and remanded for future proceedings. The circuit court found that FACTA’s statutory damages provision is not unconstitutionally vague on its face because merchants have notice of the consequences of violations, as “what conduct is prohibited and the potential range of fine that accompanies noncompliance” is clearly defined. Moreover, the provision will not lead to “arbitrary” verdicts because it limits jury discretion by specifying an exact range of statutory damages. The circuit court also found that FACTA’s statutory damages provision is not unconstitutionally excessive on its face because the district court’s analysis of the damages as “punitive” was incorrect. The court reasoned that “[the Fair Credit Reporting Act] already contains a punitive damages provision and specifies that statutory damages may only be awarded in lieu of actual damages.” The court also stated that, even if the damages can be construed as punitive, the mere possibility of an unconstitutional application does not render the provision itself facially unconstitutional. The court further held that the as-applied excessiveness challenge is not yet ripe because many of the district court’s assumptions required the resolution of issues that were directly disputed. For a copy of the opinion, please see http://www.buckleysandler.com/Harris_v_MSF.pdf.
Ohio Federal Court Holds Mortgage Refinancing Was a Consumer “Debt” Under FDCPA. On March 31, the U.S. District Court for the Southern District of Ohio concluded that a mortgage refinancing constituted a consumer “debt” under the Fair Debt Collection Practices Act (FDCPA) because most of the funds were used to pay off a loan securing the borrower’s primary residence. Graham v. Manley Deas Kochalski LLC, No. 08-CV-120, 2009 WL 891743 (S.D. Ohio Mar. 31, 2009). The plaintiff in the case entered into three loan transactions between December 2005 and March 2006. The first transaction, in December 2005, was a cash-out refinancing of a loan securing the plaintiff’s principal residence. Although the transaction resulted in less favorable loan terms, it provided the plaintiff over $10,000 in cash, which she used to purchase two investment properties. In the second and third transactions, in March 2006, the plaintiff refinanced the 2005 loan (with a first- and subordinate-lien loan) to improve the loan terms and pay off credit card debt. After defaulting on the first-lien loan—which led to initiation of foreclosure—the plaintiff brought FDCPA claims against the defendants. The defendants argued that the claims should be dismissed because the loans were not for a consumer purpose. According to the defendants, because the 2005 loan increased the interest rate, the court should only look to the purpose of the loan’s cash-out proceeds to ascertain its purpose. Further, the defendants argued that, because the 2006 loans were needed to pay off the 2005 loan—which had a commercial purpose—both loans should be considered ”commercial.” In response, the plaintiff claimed that it was inappropriate to look back to the 2005 loan. According to her, the first-lien loan was used solely to refinance a loan secured by her primary residence and consequently had a consumer purpose. The court analyzed the 2006 transactions as a whole, and found that the vast majority of the loans was used to pay off the 2005 loan securing the plaintiff’s residence. It also agreed with the plaintiff that only the 2006 loans were relevant to the analysis, but also noted that, even if it did look back to the 2005 loan, the vast majority of that loan was used to pay off a loan for her primary residence, and only a small portion was used for a commercial purpose. As a result, the court denied the defendants’ motion for judgment on the pleadings. For a copy of the opinion, please see http://www.buckleysandler.com/Graham_v_MDK.pdf.
New Jersey Supreme Court Holds Electronic Fund Transfer Privacy Act Applies to Accounts with Electronic Fund Transfer Capability. On April 1, the New Jersey Supreme Court held that the Electronic Fund Transfer Privacy Act (EFTPA) applies to all bank accounts with electronic fund transfer capability. Hirl v. Bank of America, N.A., No. A-42, 2009 WL 838108 (N.J. Apr. 1, 2009) (per curiam). Previously, the lower court held that the defendant violated the EFTPA by providing the plaintiff’s banking records to the attorney of the plaintiff’s ex-husband. The defendant provided the information in response to a subpoena that was initially disputed by the plaintiff and subsequently quashed. The New Jersey Supreme Court rejected the defendant’s argument that the EFTPA applies only to “electronic fund transfers,” concluding that the EFTPA applies to “’an electronic fund transfer or an account with electronic fund transfer capability.’” As a result, the court affirmed the lower court’s judgment and remanded the case for further proceedings. For a copy of the opinion, please e-mail .
New York Federal Court Grants Summary Judgment for Defendants in FDCPA, FCRA Case. On March 25, the U.S. District Court for the Eastern District of New York granted defendants’ motion for summary judgment on claims brought under the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA). Fashakin v. Nextel Communications, No. 05-CV-3080, 2009 WL 790350 (E.D.N.Y. Mar. 25, 2009). In Fashakin, the plaintiff, among other claims, alleged that the defendant violated the FDCPA by (i) calling her office without her permission, (ii) calling her repeatedly, (iii) refusing to disclose its identity or phone numbers, and (iv) telling her that if she did not pay her debt, it would report her to a consumer reporting agency. The plaintiff also alleged that a different defendant, a credit reporting agency, violated FCRA by failing to reinvestigate disputed information on the plaintiff’s credit report. Regarding claims i, ii, and iv, the court found that the plaintiff failed to provide enough evidence to substantiate the respective claims, and granted summary judgment for the defendant. Regarding the failure to disclose claim, the court rejected four arguments by the plaintiff. First, the court held that the FDCPA prohibits a debt collector from calling a place of employment only if the debt collector knows or has reason to know that the consumer’s employer prohibits such communication. Second, the court held that placing six calls in eight days, some of which went unanswered and some where no message was left, does not constitute “harassing” behavior as contemplated by FDCPA. Third, the court held that requirements to disclose the debt collector’s identity apply only to calls made directly to the consumer or a consumer’s representative, and that debt collectors cannot disclose their identity as a debt collector to a third-party (in this case, the plaintiff’s office staff) because of the privacy-protective provisions of the FDCPA. Fourth, the court held that threatening to report information about unpaid debts to a consumer reporting agency is expressly permitted under the FDCPA. The court also granted summary judgment for the defendant regarding the plaintiff’s FCRA claim. The court found that the plaintiff failed to provide evidence that the disputed information was “inaccurate,” and, thus, required a “reasonable” investigation of the dispute. The court further noted that the plaintiff failed to show that any creditor or other person ever learned of the derogatory credit information. For a copy of the opinion, please see http://www.buckleysandler.com/Fashakin_v_Nextel.pdf.
Louisiana Federal Court Holds Risk of Credit Fraud, Identity Theft Not Sufficient to Maintain Negligence Claim. On March 24, the U.S. District Court for the Eastern District of Louisiana ruled that class-action plaintiffs claiming increased risk of credit fraud and identity theft lacked sufficient actual damages to sustain a negligence claim. Belle Chasse Automotive Care, Inc. v. Advanced Auto Parts, Inc., No. 08-1568, 2009 WL 799760 (E.D. La. Mar. 24, 2009). In this case, the defendant’s computer system was breached; the breach affected 14 out of the defendant’s 3,000 stores, and the defendant notified all of its customers immediately about the breach. The plaintiffs subsequently filed suit, alleging that the defendant failed to adequately protect their financial information, subjecting them to the risk of credit fraud and mental anguish, fear, stress, and anxiety. The court, in granting the defendant’s motion to dismiss, found that the plaintiff could not prove the “actual damages” prong of the court’s test for negligence. The court ruled that, because damages must be proved with legal certainty, speculative damages are not sufficient to maintain a cause of action. The court also held that identity theft without actual harm, and emotional damage absent physical injury, generally are not recognized under Louisiana case law. For a copy of the opinion, please see http://www.buckleysandler.com/Belle_Chase_v_Advanced_Auto.pdf.
Rhode Island Bankruptcy Court Holds Post-Foreclosure Bankruptcy Filing Does Not Void Foreclosure Sale. On April 1, the U.S. Bankruptcy Court for the District of Rhode Island held that a debtor’s filing for bankruptcy after the foreclosure sale of the debtor’s residence, but before the recording of the buyer’s deed, does not void the foreclosure sale. In re Medaglia, BK No. 08-12804, 2009 WL 874528 (Bankr. D.R.I. Apr. 1, 2009). In this case, the debtor’s residence was sold at a foreclosure sale. After the sale, but before the purchaser recorded his deed, the debtor filed for bankruptcy relief. The debtor argued that this filing gave rise to a right to cure the loan default, while the buyer argued that the right to cure terminated at the moment the sale was complete. The court ruled in favor of the buyer, finding that “when the gavel falls, the right to cure no longer exists.” The court overturned its previous precedent on this issue, but the previous decisions had been made prior to the enactment of the relevant section of the bankruptcy code. For a copy of the opinion, please see http://www.buckleysandler.com/In_Re_Medaglia.pdf.
E-Financial Services
Kansas Governor Signs Bill Amending State Mortgage Law, Safeguarding Personal Financial Information. On March 27, Kansas Governor Kathleen Sebelius signed SB 240, a bill that amends Kansas state mortgage law to reflect compliance with the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) and to impose requirements regarding the protection of personal consumer financial information. The bill implements the mandate of the SAFE Act by providing for the licensing of all mortgage loan originators under the Nationwide Mortgage Licensing System. The bill also prohibits certain conduct, including (i) earning a fee or commission through “best efforts” to obtain a loan when no loan is actually obtained, (ii) the solicitation, advertisement, or entering into a contract for specific rates, points, or other financing terms that are not actually available at the time of the offer, and (iii) making any payment, threat or promise to influence to any person in connection with a residential mortgage loan, including an appraiser. The bill further provides for data security measures to protect against the potential misuse of personal consumer financial information. To this effect, (i) every licensee and any assignee or servicer of a consumer credit transaction, and every person required to file notification, must have written policies and procedures “reasonably designed” to protect against the misuse of personal information, (ii) before discontinuing business, a licensee must arrange for the keeping of required books and records for a specified period, and (iii) any records required to be retained may be electronically preserved. Such electronic records must (i) permit “immediate” location of the record, (ii) be able to be copied, printed, or faxed, and (iii) be maintained using policies and procedures to “reasonably safeguard” the records from loss or alteration. The bill becomes effective upon its publication in the Kansas Statute Book. For a copy of the bill, please see http://www.buckleysandler.com/KS_SB_240.pdf.
New Jersey Supreme Court Holds Electronic Fund Transfer Privacy Act Applies to Accounts with Electronic Fund Transfer Capability. On April 1, the New Jersey Supreme Court held that the Electronic Fund Transfer Privacy Act (EFTPA) applies to all bank accounts with electronic fund transfer capability. Hirl v. Bank of America, N.A., No. A-42, 2009 WL 838108 (N.J. Apr. 1, 2009) (per curiam). Previously, the lower court held that the defendant violated the EFTPA by providing the plaintiff’s banking records to the attorney of the plaintiff’s ex-husband. The defendant provided the information in response to a subpoena that was initially disputed by the plaintiff and subsequently quashed. The New Jersey Supreme Court rejected the defendant’s argument that the EFTPA applies only to “electronic fund transfers,” concluding that the EFTPA applies to “’an electronic fund transfer or an account with electronic fund transfer capability.’” As a result, the court affirmed the lower court’s judgment and remanded the case for further proceedings. For a copy of the opinion, please e-mail .
Louisiana Federal Court Holds Risk of Credit Fraud, Identity Theft Not Sufficient to Maintain Negligence Claim. On March 24, the U.S. District Court for the Eastern District of Louisiana ruled that class-action plaintiffs claiming increased risk of credit fraud and identity theft lacked sufficient actual damages to sustain a negligence claim. Belle Chasse Automotive Care, Inc. v. Advanced Auto Parts, Inc., No. 08-1568, 2009 WL 799760 (E.D. La. Mar. 24, 2009). In this case, the defendant’s computer system was breached; the breach affected 14 out of the defendant’s 3,000 stores, and the defendant notified all of its customers immediately about the breach. The plaintiffs subsequently filed suit, alleging that the defendant failed to adequately protect their financial information, subjecting them to the risk of credit fraud and mental anguish, fear, stress, and anxiety. The court, in granting the defendant’s motion to dismiss, found that the plaintiff could not prove the “actual damages” prong of the court’s test for negligence. The court ruled that, because damages must be proved with legal certainty, speculative damages are not sufficient to maintain a cause of action. The court also held that identity theft without actual harm, and emotional damage absent physical injury, generally are not recognized under Louisiana case law. For a copy of the opinion, please see http://www.buckleysandler.com/Belle_Chase_v_Advanced_Auto.pdf.
Privacy/Data Security
FTC Releases Guide on Red Flags Rule. On April 2, the Federal Trade Commission (FTC) issued a guide entitled “Fighting Fraud with the Red Flags Rule: A How-To Guide for Business.” The guide aims to clarify the duties of entities covered by the Red Flags Rule, which was promulgated by the FTC and the federal banking regulatory agencies in November of 2007. Under the Red Flags Rule, covered entities must establish and administer an Identity Theft Prevention Program (Program) that meets four general requirements. First, a covered entity must establish policies and procedures to identify the “red flags” (suspicious patterns or practices) of identity theft that it encounters in its day-to-day operations. Second, a covered entity must create procedures to detect red flags. Third, the entity must outline the appropriate actions it would take when a red flag is detected. Finally, the entity must establish how often it will re-evaluate its Program to respond to new risks. The FTC’s new handbook provides step-by-step guidance on how to implement an Identity Theft Prevention Program, as well as guidance on the types of entities covered by the rule. Entities covered by the Red Flags Rule must establish an Identity Theft Prevention Program by May 1. For a copy of the guide, please see http://www.ftc.gov/bcp/edu/pubs/business/idtheft/bus23.pdf. In related news, the FTC will be conducting a full-day workshop regarding red flags detection on April 29 at the Fordham Law Center on Law and Information Policy in New York, NY. For more information on the upcoming workshop, please see http://www.ftc.gov/opa/2009/04/datasec.shtm.
Kansas Governor Signs Bill Amending State Mortgage Law, Safeguarding Personal Financial Information. On March 27, Kansas Governor Kathleen Sebelius signed SB 240, a bill that amends Kansas state mortgage law to reflect compliance with the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) and to impose requirements regarding the protection of personal consumer financial information. The bill implements the mandate of the SAFE Act by providing for the licensing of all mortgage loan originators under the Nationwide Mortgage Licensing System. The bill also prohibits certain conduct, including (i) earning a fee or commission through “best efforts” to obtain a loan when no loan is actually obtained, (ii) the solicitation, advertisement, or entering into a contract for specific rates, points, or other financing terms that are not actually available at the time of the offer, and (iii) making any payment, threat or promise to influence to any person in connection with a residential mortgage loan, including an appraiser. The bill further provides for data security measures to protect against the potential misuse of personal consumer financial information. To this effect, (i) every licensee and any assignee or servicer of a consumer credit transaction, and every person required to file notification, must have written policies and procedures “reasonably designed” to protect against the misuse of personal information, (ii) before discontinuing business, a licensee must arrange for the keeping of required books and records for a specified period, and (iii) any records required to be retained may be electronically preserved. Such electronic records must (i) permit “immediate” location of the record, (ii) be able to be copied, printed, or faxed, and (iii) be maintained using policies and procedures to “reasonably safeguard” the records from loss or alteration. The bill becomes effective upon its publication in the Kansas Statute Book. For a copy of the bill, please see http://www.buckleysandler.com/KS_SB_240.pdf.
Eleventh Circuit Holds FACTA Statutory Damages Provision Not Facially Vague, Excessive. On April 9, the U.S. Court of Appeals for the Eleventh Circuit held that the statutory damages provision of the Fair and Accurate Credit Transactions Act (FACTA) is not unconstitutionally vague or excessive on its face. Harris v. Mexican Specialty Foods, Inc., - F.3d -, 2009 WL 944201 (11th Cir. Apr. 9, 2009). In this case, the plaintiffs alleged, in separate disputes, that the defendants willfully violated FACTA by including the last five digits of a customer’s credit card number and/or its expiration date. The plaintiffs filed putative class actions and sought, among other remedies, statutory damages. The district court found that FACTA’s statutory damages provision is unconstitutionally vague and excessive and dismissed the claims (the Grimes v. Rave Motion Pictures Birmingham, No. 07-AR-1397, 2008 WL 2338131 (N.D. Ala. May 28, 2008) decision was reported in InfoBytes, June 13, 2008). On appeal, the circuit court vacated the rulings of the district court and remanded for future proceedings. The circuit court found that FACTA’s statutory damages provision is not unconstitutionally vague on its face because merchants have notice of the consequences of violations, as “what conduct is prohibited and the potential range of fine that accompanies noncompliance” is clearly defined. Moreover, the provision will not lead to “arbitrary” verdicts because it limits jury discretion by specifying an exact range of statutory damages. The circuit court also found that FACTA’s statutory damages provision is not unconstitutionally excessive on its face because the district court’s analysis of the damages as “punitive” was incorrect. The court reasoned that “[the Fair Credit Reporting Act] already contains a punitive damages provision and specifies that statutory damages may only be awarded in lieu of actual damages.” The court also stated that, even if the damages can be construed as punitive, the mere possibility of an unconstitutional application does not render the provision itself facially unconstitutional. The court further held that the as-applied excessiveness challenge is not yet ripe because many of the district court’s assumptions required the resolution of issues that were directly disputed. For a copy of the opinion, please see http://www.buckleysandler.com/Harris_v_MSF.pdf.
New Jersey Supreme Court Holds Electronic Fund Transfer Privacy Act Applies to Accounts with Electronic Fund Transfer Capability. On April 1, the New Jersey Supreme Court held that the Electronic Fund Transfer Privacy Act (EFTPA) applies to all bank accounts with electronic fund transfer capability. Hirl v. Bank of America, N.A., No. A-42, 2009 WL 838108 (N.J. Apr. 1, 2009) (per curiam). Previously, the lower court held that the defendant violated the EFTPA by providing the plaintiff’s banking records to the attorney of the plaintiff’s ex-husband. The defendant provided the information in response to a subpoena that was initially disputed by the plaintiff and subsequently quashed. The New Jersey Supreme Court rejected the defendant’s argument that the EFTPA applies only to “electronic fund transfers,” concluding that the EFTPA applies to “’an electronic fund transfer or an account with electronic fund transfer capability.’” As a result, the court affirmed the lower court’s judgment and remanded the case for further proceedings. For a copy of the opinion, please e-mail .
Louisiana Federal Court Holds Risk of Credit Fraud, Identity Theft Not Sufficient to Maintain Negligence Claim. On March 24, the U.S. District Court for the Eastern District of Louisiana ruled that class-action plaintiffs claiming increased risk of credit fraud and identity theft lacked sufficient actual damages to sustain a negligence claim. Belle Chasse Automotive Care, Inc. v. Advanced Auto Parts, Inc., No. 08-1568, 2009 WL 799760 (E.D. La. Mar. 24, 2009). In this case, the defendant’s computer system was breached; the breach affected 14 out of the defendant’s 3,000 stores, and the defendant notified all of its customers immediately about the breach. The plaintiffs subsequently filed suit, alleging that the defendant failed to adequately protect their financial information, subjecting them to the risk of credit fraud and mental anguish, fear, stress, and anxiety. The court, in granting the defendant’s motion to dismiss, found that the plaintiff could not prove the “actual damages” prong of the court’s test for negligence. The court ruled that, because damages must be proved with legal certainty, speculative damages are not sufficient to maintain a cause of action. The court also held that identity theft without actual harm, and emotional damage absent physical injury, generally are not recognized under Louisiana case law. For a copy of the opinion, please see http://www.buckleysandler.com/Belle_Chase_v_Advanced_Auto.pdf.
Credit Cards
First Circuit Holds State Law Claims Insufficient to Defeat HOLA Preemption Defense. On April 3, the U.S. Court of Appeals for the First Circuit upheld the denial of a plaintiff’s state law claims in a case involving default interest charged on a credit card. Yeomalakis v. Federal Deposit Insurance Corporation, No. 08-1444, 2009 WL 884936 (1st Cir. Apr. 3, 2009). The plaintiff’s credit card issuer, Washington Mutual Bank (WaMu), charged an increased annual percentage rate (APR) on unpaid credit card balances on accounts where the holder defaulted. The increased rate was charged as of the first day of the billing cycle in which the default occurred. James Yeomalakis brought suit against WaMu to challenge this practice. The plaintiff claimed that WAMU (i) imposed an illegal penalty by retroactively increasing the APR and (ii) engaged in unfair and deceptive acts and practices in violation of Mass. Gen. Law ch. 93A, § 2, alleging that the retroactive increases were unfair and had not been adequately disclosed. The district court granted WaMu’s motion to dismiss the claims on the basis that both counts were preempted by the Home Owners’ Loan Act of 1933 (HOLA) and various regulations promulgated under HOLA, based on preemption of state interest rates (which includes penalties) and disclosures. On appeal, the plaintiff failed to make any plausible arguments as to why the penalty claim would not be preempted, and, further, the plaintiff provided no clear chapter 93A claim that would avoid preemption. The court of appeals indicated that the plaintiff could have alleged state contractual claims (that the card agreement did not permit the “retroactive” increase in APR) and/or state fraud claims, which may not be preempted by HOLA. However, the court pointed out that it is not the job of the court to provide arguments for a party that has not provided them, and the court upheld the lower court’s dismissal of the claims. For a copy of the opinion, please see http://www.buckleysandler.com/Yeomalakis_v_FDIC.pdf.
Eleventh Circuit Holds FACTA Statutory Damages Provision Not Facially Vague, Excessive. On April 9, the U.S. Court of Appeals for the Eleventh Circuit held that the statutory damages provision of the Fair and Accurate Credit Transactions Act (FACTA) is not unconstitutionally vague or excessive on its face. Harris v. Mexican Specialty Foods, Inc., - F.3d -, 2009 WL 944201 (11th Cir. Apr. 9, 2009). In this case, the plaintiffs alleged, in separate disputes, that the defendants willfully violated FACTA by including the last five digits of a customer’s credit card number and/or its expiration date. The plaintiffs filed putative class actions and sought, among other remedies, statutory damages. The district court found that FACTA’s statutory damages provision is unconstitutionally vague and excessive and dismissed the claims (the Grimes v. Rave Motion Pictures Birmingham, No. 07-AR-1397, 2008 WL 2338131 (N.D. Ala. May 28, 2008) decision was reported in InfoBytes, June 13, 2008). On appeal, the circuit court vacated the rulings of the district court and remanded for future proceedings. The circuit court found that FACTA’s statutory damages provision is not unconstitutionally vague on its face because merchants have notice of the consequences of violations, as “what conduct is prohibited and the potential range of fine that accompanies noncompliance” is clearly defined. Moreover, the provision will not lead to “arbitrary” verdicts because it limits jury discretion by specifying an exact range of statutory damages. The circuit court also found that FACTA’s statutory damages provision is not unconstitutionally excessive on its face because the district court’s analysis of the damages as “punitive” was incorrect. The court reasoned that “[the Fair Credit Reporting Act] already contains a punitive damages provision and specifies that statutory damages may only be awarded in lieu of actual damages.” The court also stated that, even if the damages can be construed as punitive, the mere possibility of an unconstitutional application does not render the provision itself facially unconstitutional. The court further held that the as-applied excessiveness challenge is not yet ripe because many of the district court’s assumptions required the resolution of issues that were directly disputed. For a copy of the opinion, please see http://www.buckleysandler.com/Harris_v_MSF.pdf.