InfoBytes, April 18, 2008

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Federal Issues

New Bills Proposed in House To Provide Foreclosure Stabilization. On April 17, members of the House Financial Services Committee introduced legislation to combat the rise in foreclosures and the associated impact on cities and states. The legislation first announced by Chairman Barney Frank (D-MA) in March (reported in InfoBytes, March 14, 2008) will be divided into two measures. The first measure, the FHA Housing and Homeowner Retention Act (H.R.  5830), would expand the FHA program to help refinance at-risk borrowers into viable mortgages. This voluntary program would permit FHA to provide up to $300 billion in new guarantees. In exchange for the acceptance of a substantial write-down of principal, the existing lender who chooses to participate would receive a “short payment” (i.e., a payment for less than the outstanding balance as payment in full) from the proceeds of a new FHA-guaranteed loan if the new loan would have terms that the borrower can reasonably be expected to pay and the borrower agrees to share future home appreciation with the government. If the current lender or mortgage holder agrees to a write-down that is sufficient to meet the requirements of the program and make the new loan affordable, the FHA-lender will pay off the discounted existing mortgage. The program would run for 2 years, with flexibility for additional 6 month extensions not to exceed 2 more years. H.R. 5830 would also (i) require the Federal Reserve Board to conduct a study on the need for an auction or bulk refinancing mechanism, and (ii) authorize $200 million dollars for foreclosure counseling.

The second measure, the Neighborhood Stabilization Act of 2008 (H.R.  5818), would establish a $15 billion HUD loan and grant program for states to purchase and rehabilitate vacant, foreclosed homes for resale or rental. H.R. 5818 proposes $7.5 billion in non-recourse, zero-interest loans to states to finance acquisition and rehabilitation costs. The loans would have to be repaid within 2 years for homeownership properties and 5 years for rental properties with 20 percent of appreciation at resale being paid back to the federal government. The Bill also proposes $7.5 billion in grants to states to cover operating costs while the property is being stabilized. Each state’s loan and grant would be based on the state’s percentage of nationwide foreclosures over the last four calendar quarters, adjusted for the state’s relative median home price. States would be able to use government entities, such as housing authorities, to purchase, rehabilitate, and sell/rent these properties. Homes purchased for resale would be required to be sold to families having incomes not exceeding 140 percent of area median income (AMI). Properties purchased for rental would be required to serve families having incomes at or below AMI. Lastly, the Bill would provide eviction protections to tenants in foreclosed properties and prohibit discrimination against voucher holders.

A committee mark up session and vote on the two measures are scheduled for April 23 and 24. For a copy of H.R. 5830, please see http://www.house.gov/apps/list/press/financialsvcs_dem/5830.pdf.  For a copy of H.R. 5818, please see http://www.house.gov/apps/list/press/financialsvcs_dem/reo_bill_intro_5818.pdf.

House Subcommittee Holds Hearings on Credit Card Reform. On April 17, the U.S. House of Representatives Subcommittee on Financial Institutions and Consumer Credit of the Financial Services Committee held a hearing on credit card reform focusing on changes to assist average Americans, whom increasingly rely on credit cards to make ends meet. Critics charged that many credit card issuers have engaged in “unfair” practices and that regulators have done a poor job of policing credit card issuers and their pricing policies. More than half of the 15 witnesses that testified before the Subcommittee, including FDIC Vice Chairman Martin Gruenberg, endorsed the Credit Cardholder’s Bill of Rights Act of 2008 (H.R.  5244). H.R. 5244 would amend the Truth in Lending Act, which, along with its implementing regulation (Regulation Z), are the primary federal law applicable to credit card lending. The Bill would prohibit a creditor from using certain adverse information, including any change in a consumer’s credit score, as the basis for increasing any annual percentage rate (APR) of interest on the consumer’s outstanding balance under an open end consumer credit plan, except for actions or omissions of the consumer directly related to such account. The proposed Bill would also: (i) bar credit card creditors from changing any term of the contract until contract renewal; (ii) require advance notice of credit card account rate increases and authorize a consumer who receives such notice to cancel the credit card without penalty and pay any outstanding balance that accrued before the effective date of the increase of the APR and in the repayment period in effect before notice was received; (iii) require each periodic statement of account to provide specified information on obtaining the payoff balance; (iv) prohibit credit card creditors from furnishing information to a consumer reporting agency concerning a newly opened credit card account until the consumer has used or activated the credit card; (v) authorize a consumer to opt-out of creditor authorization of over-the-limit transactions if fees are imposed; (vi) restrict the frequency of over-the-limit fees; and (vii) prescribe a standard for the initial issuance of subprime or “fee harvester” cards. While acknowledging some industry practices need to be revised, credit card issuers warned that the new legislation could have unintended consequences by making credit more expensive and less readily available. Among bank regulators testifying on the legislation, FDIC Vice Chairman Martin Gruenberg generally endorsed a fee cap of 25% of the amount of authorized credit in the first year that an account is open. However, testimony from witnesses for the Office of the Comptroller of the Currency and the Office of Thrift Supervision did not endorse such a cap. For a copy of H.R. 5244, please see http://www.buckleykolar.com/documents/HR5244CreditCardholdersBillofRightsActof2008.pdf.

FTC Approves Filing of Staff Comment to FRB Regarding Proposed TILA Rule. On April 16, the Federal Trade Commission (FTC) approved the filing of a staff comment to the Federal Reserve Board (FRB) regarding the FRB’s proposed rule to restrict certain mortgage practices under the Truth in Lending Act and the Home Ownership Equity Protection Act. In the comment, the FTC staff generally supports the FRB’s goals of: (i) protecting consumers in the mortgage market from unfair, abusive, or deceptive lending and servicing practices while preserving responsible lending and sustainable home ownership; (ii) ensuring that advertisements for mortgage loans are accurate and not misleading; and (iii) providing consumers with transaction-specific disclosures early enough to use while shopping for a mortgage. The staff comment further states that, while the proposed restrictions on a new category of higher-priced mortgage loans appear to strike a reasonable balance, the FTC staff encourages the Board to continue to weigh the restrictions’ potential benefits and costs, and to consider any empirical evidence submitted in response to its proposed rulemaking to confirm that this balance is reasonable. Also, the FTC staff has concerns that the proposed requirement for loan servicers to provide a current schedule of servicing fees and charges may not adequately protect consumers. The staff comment suggests that providing a schedule of servicing fees and charges, as the FRB has proposed, would provide consumers with some information, but would not ensure that consumers get adequate notice of each fee imposed on their accounts. Thus, the FTC staff comment suggests that the FRB consider the costs and benefits of requiring servicers to itemize each new fee assessed during a month or other reasonable period of time. Lastly, while the FTC staff supports the FRB’s goal of making mortgage shopping easier for consumers, it urges the FRB to reconsider the proposed rule’s provisions requiring disclosures of compensation to mortgage brokers. According to the staff comment, FTC staff research has shown that such disclosures are likely to harm consumers and competition by making broker loans appear more expensive than identical, or even more costly, direct lender loans. For a copy of the FTC press release, please see http://www.ftc.gov/opa/2008/04/frb.shtm.

President Bush Nominates SBA Administrator Steve Preston as New HUD Secretary. On April 18, President Bush nominated current head of the Small Business Administration (SBA) Steve Preston to become the new Secretary of the Department of Housing and Urban Development (HUD). If confirmed by the Senate, Preston would replace HUD Secretary Alphonso Jackson, who announced his resignation on March 31 (reported in InfoBytes, April 4, 2008). Preston was sworn in as Administrator of SBA in July 2006, after his nomination was unanimously confirmed by the Senate. Preston has a background of 25 years in financial and operational leadership positions. Before joining SBA, he was executive vice president of The ServiceMaster Co., where he also served as chief financial officer. Before that, he was a senior vice president and treasurer of First Data Corp. and an investment banker at Lehman Brothers.

MBA Voices Concerns About Waters Bill. On April 16, Chairman-Elect of the Mortgage Bankers Association (MBA) David Kittle testified before the U.S. House of Representatives Subcommittee on Housing and Community Opportunity, Committee on Financial Services, voicing concerns about the Foreclosure Prevention and Sound Mortgage Servicing Act of 2008 (H.R. 5679) (reported in InfoBytes, April 11, 2008). The testimony stressed that while the MBA shares the goal of preventing foreclosures, the MBA opposes H.R. 5679 because of the harm it will cause to the mortgage market and borrowers. Specifically, the testimony argued against five components of H.R. 5679, including the Bill’s: (i) effective moratorium on foreclosures; (ii) rewriting of mortgage terms; (iii) effective requirement that first mortgage lien-holders subsidize second mortgage lien-holders and unsecured creditors; (iv) elimination of flexibility needed to work out loans; and (v) expensive and time consuming paperwork burden without any corresponding benefit to borrowers. The testimony argued that H.R. 5679 will increase rates, reduce availability of credit, and dampen investor interest in mortgage instruments. Combined with additional regulatory burdens placed on mortgage servicers through paperwork and more bureaucracy, the testimony argued that H.R. 5679 would strike a significant financial blow to the industry. Lastly, the testimony laid out tools mortgage loan servicers have already begun to implement to prevent foreclosures, including informal forbearance and repayment plans, loan modifications, refinances and partial claims. For a copy of the MBA testimony or of H.R. 5679, please contact .

FinCEN Issues Guidance on SARs Regarding Proceeds of Foreign Corruption. On April 17, the Financial Crimes Enforcement Network (FinCEN) issued “Guidance to Financial Institutions on Filing Suspicious Activity Reports regarding the Proceeds of Foreign Corruption” (the “Guidance”) to guide financial institutions to better assist law enforcement when filing Suspicious Activity Reports regarding financial transactions that may involve senior foreign political figures seeking to move the proceeds of foreign corruption to or through the U.S. financial system. In order to assist law enforcement in its efforts to target foreign corruption and related money laundering and, ultimately, deny the perpetrators access to the fruits of such corruption, FinCEN requests that financial institutions include the term “foreign corruption” in the narrative portions of all Suspicious Activity Reports filed in connection with such activity. The Guidance defines “proceeds of foreign corruption” as “any asset or property that is acquired by, through, or on behalf of such corrupt public figures through misappropriation, theft, or embezzlement of public funds, the unlawful conversion of property of a foreign government, or through acts of bribery or extortion, and includes any property into which any such assets have been transformed or converted.” The Guidance also reminds financial institutions of their responsibilities regarding the provision of private banking services to non-U.S. persons pursuant to section 312 of the USA PATRIOT Act, which requires banks, brokers or dealers in securities, futures commission merchants and introducing brokers in commodities, and mutual funds to establish and maintain a due diligence program for such private banking accounts that is reasonably designed to detect and report any known or suspected money laundering or other suspicious activity. Included in this requirement is the duty to conduct enhanced scrutiny of any private banking account that is maintained for senior foreign political figures in order to detect and report the proceeds of foreign corruption. For a copy of the Guidance, please see http://www.fincen.gov/fin-2008-g005.pdf.

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State Issues

Mississippi Requires Mortgage Licensees to Use Multistate Licensing System. On April 7, 2008, Mississippi Governor Haley Barbour signed S.B. 2605 into law, amending the Mississippi Mortgage Consumer Protection Law (MMCPL), Miss. Code Ann. §§ 81-18-1 et seq., to clarify the statute and require the use of a multistate licensing system. The new law allows mortgage loan originators to work at any licensed location in Mississippi of the licensed company for which he/she works and creates a de minimis exemption from the MMCPL for persons who enter into no more than 12 residential mortgage loan transactions per calendar year. S.B. 2605 also requires individuals who own or acquire more than 10% of a licensed entity, down from 25%, to file an application for a license. Finally, S.B. 2605 requires any entity or individual licensed under the MMCPL to use the multistate licensing system for application, renewal, surrender and any other activity required by the Commissioner of the Department of Banking and Consumer Finance. S.B. 2605 became effective on April 7, 2008. For a copy of the bill, please see http://billstatus.ls.state.ms.us/documents/2008/pdf/SB/2600-2699/SB2605SG.pdf.

Massachusetts Loan Originator Applicants Must Complete 24 Hour Education Course. The Massachusetts Division of Banks (the Division) recently finalized and released Regulatory Bulletin 5.1-105 outlining the educational requirements that loan originator applicants must satisfy before securing licensure. Most notably, within 2 years of approval of individual licensure, Massachusetts loan originator applicants must complete an approved educational course consisting of at least 24 hours of classroom-based instruction. In addition, licensed loan originators must annually complete at least 8 hours of continuing residential mortgage lending education. Individuals are not required to fulfill the 24 hour course requirement if they (i) met the definition of mortgage loan originator prior to November 30, 2007, and (ii) apply for licensure prior to May 27, 2008. The Division instituted the new education requirements to ensure that applicants are knowledgeable about mortgage lending concepts, applicable law and regulations specific to the mortgage origination profession. We note that the Bulletin also outlines the requirements for a company seeking the Division’s approval of its mortgage loan origination educational courses. For the full text of Regulatory Bulletin 5.1-105, please see http://www.buckleykolar.com/documents/MARegBulletin51_105.pdf.

Texas Launches “Closed Account Notification System.” The Texas Department of Banking recently launched the Closed Account Notification System (“CANS”) to implement the anti-identity theft provisions of H.B. 2002. H.B. 2002, authored by Rep. Helen Giddings, requires financial institutions operating in Texas to submit information, upon a customer’s request, concerning suspected compromised deposit accounts to CANS, a secure electronic notification system, which then alerts all major check verification companies to the potential fraudulent activity. In order to request the alert, a customer must: (i) provide to the bank either a copy of the incident or case number of the police report filed by the victim, (ii) sign a sworn statement confirming that the customer is a victim of identity theft, and (iii) sign a written authorization permitting the financial institution to submit the account information to CANS. This system is the first of its kind in the United States. For a copy of the Texas Department of Banking press release, please see http://www.banking.state.tx.us/cve/memo03-18-08.htm.

Tennessee Legislature Passes Bill To Amend Residential Lending, Brokerage and Servicing Act. On April 14, the Tennessee General Assembly passed a Bill (S.B.  4160) to amend and add various provisions to the Tennessee Residential Lending, Brokerage and Servicing Act of 1988. Among other things, the Bill would: (i) require applicants for a license as a mortgage lender, mortgage loan broker, mortgage loan servicer, or mortgage loan originator to complete an educational training course; (ii) authorize the Tennessee Commissioner of Financial Institutions to require continuing education of licensees and registrants as a condition of license and registration; (iii) require criminal background checks for mortgage lender, mortgage loan broker, mortgage loan servicer, or mortgage loan originator applicants, and for registered mortgage loan originators seeking to continue registration; (iv) authorize the Commissioner to suspend or revoke any mortgage loan originator registration certificate if the Commissioner finds, after notice and hearing, that the mortgage loan originator engaged in certain prohibited activities (as detailed in present law), such as accepting any fees at closing that were not disclosed; and (v) authorize the Commissioner to participate in the establishment and implementation of a multi-state automated licensing system. The Bill was sent to Governor Phil Bredesen on April 17 for approval. For the full text of S.B. 4160, please see http://www.legislature.state.tn.us/bills/currentga/BILL/SB4160.pdf.

Kentucky Legislature Passes New Mortgage Lending Regulations. On April 15, the Kentucky General Assembly passed H.B. 552, an “emergency” bill, imposing new requirements on mortgage lenders and brokers. The Bill would narrow licensure exemptions by: (i) eliminating the five mortgage loan de minimis exemption; (ii) requiring non-profit corporations that engage in mortgage lending to submit exemption claims annually; and (iii) mandating that to qualify for the HUD exemption, lenders must have funded at least twelve FHA loans in the previous year, and held a license or HUD exemption for the previous five years. The Bill would also: (i) require registration of mortgage loan originators and mortgage loan processors; (ii) require any person applying for a license, registration, or claim of exemption to pass a written examination prior to issuance of a license, registration, or claim of exemption (to be effective January 1, 2010); (iii) require mortgage brokers to exercise “good faith and fair dealing” and act in the “best interest” of the borrower; (iv) prohibit origination of mortgage loans if “total net income” received (origination fees, discount points, administrative fees, yield spread premiums, but excluding interest) by the mortgage lender or broker, and its affiliates, exceeds the greater of $2,000 or 4% of the total loan amount; (v) prohibit any person from “improperly influencing” real estate appraisals; (vi) prohibit prepayment penalties after the third anniversary of the mortgage or after 60 days prior to the date of the first interest rate reset, whichever is less; (vii) create new actions for which the executive director of the Office of Financial Institutions may suspend or revoke a license or take other action against an applicant, licensee, person, or registrant; (viii) lower the points fees threshold for high-cost home loans under the Kentucky Fair Lending Act to the greater of 6% of the total loan amount or $3,000; and (ix) require mortgage lenders to verify the borrower’s ability to repay at the maximum margin before making a high-cost home loan, but a safe harbor exists if the loan is approved by the Federal National Mortgage Association automated underwriting system. Lastly, the Bill would also create the Kentucky Residential Mortgage Fraud Act which bans any fraud, failure to disburse funds, and material misstatements made to borrowers or regulators. The provisions in this Bill will take affect immediately when signed by Kentucky Governor Steve Beshear, which is expected to be sometime next week. For a copy of this bill, please see http://www.buckleykolar.com/documents/KYHB552.pdf.

Pennsylvania House Passes Bill To Require New Mortgage Licensing Requirements. On April 8, the Pennsylvania House of Representatives passed a bill (H.B.  2179) that would require licensure of all persons engaged in the mortgage loan business as a mortgage broker, mortgage lender, mortgage loan correspondent, or mortgage originator, as the case may be. Presently, the Pennsylvania Department of Banking issues licenses to mortgage companies, but not to individual employees who sell mortgages to customers. The Bill would also: (i) set new application requirements and fees; and (ii) set forth the powers conferred on certain licensees engaged in the mortgage loan business. The Bill is now in the Senate and was referred to the Banking and Insurance Committee.

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Courts

Seventh Circuit Limits Cole, Applies Safeco in Firm Offer Cases. In the consolidated appeal of three FCRA firm-offer cases, the U.S. Court of Appeals for Seventh Circuit significantly narrowed the scope of its earlier opinion in Cole v. U.S. Capital, Inc. (reported in InfoBytes, Dec. 17, 2004), which had triggered a wave of class-action litigation around the country with potential exposure to lenders in the hundreds of billions of dollars. Murray v. New Cingular Wireless Services, Inc., Nos. 06-2477, 06-4368, 07-2370 (7th Cir., corrected opinion issued Apr. 16, 2008). First, the court, in the opinion written by Chief Judge Easterbrook, restricted the “value” test of Cole – which had been read to require that the initial mailer describe an offer of credit that would be valuable to a reasonable consumer – to mixed offers of merchandise and credit, where the court must endeavor to “disentangle an offer of merchandise from an offer of credit when they are made jointly.” (Emphasis included in original.) According to the court, the Cole value test does not apply to “pure offers of credit” because FCRA requires only a firm offer of credit, not a valuable firm offer of credit. The court also held that the inclusion of a free product in connection with the extension of credit does not mean the offer itself is not “of credit.” Next, the court held that a lender’s omission of certain material terms – including the loan amount, term, interest rate and/or fees – from an offer does not mean the offer is not firm. Again, many district courts, within the Seventh Circuit and elsewhere, had read Cole and the Seventh Circuit’s opinion in Murray v. GMAC (reported in InfoBytes, Jan. 20, 2006), to require that the mailer include all the “material” terms, which the Seventh Circuit in the New Cingular opinion acknowledged can be very difficult because of the complexity of credit offers. Noting that “firm offer” is a defined term in FCRA, the court held that the statute requires only that the offer “be honored (if the verification checks out), not [that] all terms appear in the initial mailing.” The court also held that reserving the right to vary the terms of the deal offered, absent some evidence that the caveats are used to render the offer illusory, does not mean the offer is not firm. Finally, the court held that FCRA’s required disclosures are not “clear and conspicuous” if made in six-point type. But the court held that, although the lender’s violation in this case may have subjected it to actual damages, it did not subject it to statutory damages of $100-$1000 for a “willful violation,” because the lender’s interpretation was not objectively unreasonable, and, therefore, the violation was not reckless and the lender’s conduct was not “willful” within the meaning of FCRA. Applying the Supreme Court’s decision in Safeco Insurance Co. v. Burr (reported in InfoBytes Special Alert, June 4, 2007), the Seventh Circuit panel noted that, at the time the decision to issue the disclosure was made, the FTC had not issued guidance on font size and the two Courts of Appeals to rule on the issue had disagreed as to whether such font size was clear and conspicuous. Thus, the lender’s failure was not “reckless,” or “objectively unreasonable” under the Safeco standard.  For a copy of the opinion, please see http://www.buckleykolar.com/documents/MurrayvNewCingularWireless.pdf.

Court Holds that California Identity Theft Law Not Preempted by FCRA. A federal district court in California recently held that the Fair Credit Reporting Act (FCRA) does not preempt a California statute (Cal. Civ. Code §§ 1798.92 et seq.) that gives identity theft victims a private right of action against lenders attempting to collect fraudulent accounts. Pasternak v. Trans Union, No. C07-04980 MJJ, 2008 WL 928840 (N.D. Cal. Apr. 3, 2008). The plaintiff in the case alleged that an identity thief obtained a credit card in her name from Capital One Bank, and after the plaintiff notified Capital One of the identity theft, Capital One nevertheless brought a collection suit against her. According to the plaintiff, by wrongfully continuing its collection efforts, Capital One engaged in malicious prosecution and violated California’s identity theft law and FCRA. Capital One argued that FCRA’s provisions regulating the activities of credit information furnishers preempted the state identity theft law claim, but the court disagreed, concluding (among other things) that preemption did not extend to state regulation of the direct relationship between a consumer and a creditor. The court also found that the plaintiff’s malicious prosecution and FCRA claims were adequately pleaded. For a copy of the opinion, please see http://www.buckleykolar.com/documents/PasternakvTransUnion.pdf.

Court Holds “Firm Offer” Exists Where Lender Will Not Deny Credit If Pre-Selection Criteria Met. On April 9, District Judge Catherine Perry of the Eastern District of Missouri revisited her previous determination of the definition of a “firm offer of credit” under the Fair Credit Reporting Act (FCRA), finding that a mailer for a home mortgage constituted a “firm offer of credit” so long as the lender would not deny credit to the consumer if the consumer met the lender’s pre-selection criteria. Klutho v. Oxford Lending Group, LLC, 2008 WL 1701171, No. 4:07CV2112 CDP (E.D. Mo. Apr. 9, 2008). The consumer plaintiff sued Oxford Lending Group, alleging that, in violation of FCRA, Oxford obtained information about the plaintiff’s credit without her consent in order to send her a marketing letter. Oxford claimed that accessing the plaintiff’s credit was permissible under FCRA’s “firm offer of credit” exception. In several previous decisions, Judge Perry had defined “firm offer of credit” as necessarily including some value to the consumer that is more than nominal. However, in light of the decision in Sullivan v. Greenwood, 2008 WL 726135 (1st Cir. Mar. 19, 2008) (reported in InfoBytes, March 21, 2008), in which the First Circuit found that “an offer of credit meets the statutory definition [of a firm offer of credit] so long as the creditor will not deny credit to the consumer if the consumer meets the creditor’s pre-selection criteria,” Judge Perry determined that “[s]o long as the statutory criteria are met, then the absence of interest rates and other terms does not prevent the offer from being a ‘firm offer of credit.’” On this basis, and because the plaintiff had not alleged that Oxford would have denied her credit if she met Oxford’s pre-selection criteria, the court granted Oxford’s motion to dismiss. For a copy of this decision, please see http://www.buckleykolar.com/documents/KluthovOxfordLendingGroup.pdf.

Court Holds No Violation of FCRA Reinvestigation Requirement if Reported Information Is Accurate. The U.S. Court of Appeals for the First Circuit has affirmed a district court’s ruling of summary judgment in favor of a consumer reporting agency in a case alleging violations of the Fair Credit Reporting Act’s (FCRA’s) reinvestigation requirement. DeAndrade v. Trans Union, LLC, No. 07-1844, 2008 WL 1722237 (1st Cir. Apr. 15, 2008). In this case, the consumer plaintiffs purchased new windows for their home, and the financing was secured by a lien on the home. When the consumers asked to view the loan documents, they discovered that their signatures granting a mortgage on the home to KeyBank (which was not the original creditor) appeared to have been forged. They filed suit in state court to determine the validity of the mortgage. While that suit was pending, the consumers stopped making payments to KeyBank and instead deposited funds into an escrow account. KeyBank notified the three major credit bureaus that the payments were delinquent, and, when the consumers urged the bureaus to investigate the transaction, Trans Union contacted KeyBank to verify the accuracy of the items. KeyBank affirmed that the items were accurate, and the consumers’ credit reports remained unchanged. The consumers then filed suit in federal court, alleging that Trans Union violated § 1681i of FCRA by failing to conduct a lawful reinvestigation. The district court found that there was no FCRA violation and granted summary judgment. On appeal, the First Circuit affirmed, adopting the reasoning of the majority of other appellate courts with respect to § 1681i allegations, which agree that a violation of the reinvestigation requirement means that there must first be inaccurate information in the credit report. In this case, the court affirmed that Trans Union accurately reported the information provided to it by KeyBank, and that the validity of the underlying transaction was “a legal issue that a credit agency such as Trans Union is neither qualified nor obligated to resolve under FCRA.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/DeAndradevTransUnion.pdf.

Court Awards Attorney Fees to US Bank for Defending Meritless State Debt Collection Claims. In a recent case, an Oregon federal district court awarded attorney fees and costs to defendant US Bank for its expenses in defending against state unlawful debt collection claims that were determined to be meritless. Thomas v. U.S. Bank, 2008 WL 974374, No. 05-1725-MO (D. Or. Apr. 8, 2008). In this case, the plaintiffs alleged that US Bank’s harassing and threatening behavior to collect a debt violated Oregon’s Unlawful Debt Collection Practices Act and Unlawful Trade Practices Act. However, all of the state law claims were dismissed before trial, either in summary judgment or because of de minimus value, and US Bank subsequently filed a motion to recoup attorney fees and costs for defending those state law claims. Oregon sets out by statute the factors that a court must consider before awarding attorney fees. Following the statute, the court found that several of the factors weighed heavily in favor of awarding attorney fees to US Bank. In particular, the court cited (i) the fact that all of the state law claims were dismissed before trial suggests that the claims were objectively unreasonable; (ii) an award would deter other potential plaintiffs from pursuing unreasonable or frivolous claims; and (iii) the court found that the plaintiffs acted unreasonably in rejecting a $30,000 settlement offer in order to pursue a claim with de minimus value. After weighing these factors, along with the relative financial positions of the two parties, the court determined that an amount in between what would fully recompense US Bank and an amount that would be a sufficient deterrent to filing a frivolous lawsuit was required, and awarded court costs plus $45,000 in attorney fees. For a copy of this decision, please see http://www.buckleykolar.com/documents/ThomasvUSBank.pdf.

Court Awards Attorney Fees to Capital One in FCRA Case. On April 8, a U.S. District Court for the District of Arizona granted attorney fees to defendant Capital One in connection with expenses it incurred in defending against the plaintiff’s claim under the Fair Credit Reporting Act (FCRA). Grismore v. Capital One F.S.B., 2008 WL 961623 (D. Ariz. Apr. 8, 2008). The plaintiff sued Capital One alleging violation of the FCRA, but failed throughout the course of the case to provide Capital One with critical discovery materials, including a redacted credit report and income tax returns. The plaintiff’s failure to provide materials continued despite the court’s repeated requests for the plaintiff to produce documents necessary for Capital One to defend its case. As a result, Capital One successfully moved to dismiss the complaint and subsequently petitioned the court to award reasonable attorney fees and costs. An Arizona statute requires courts to award reasonable attorney fees to a successful party in any contract action “upon clear and convincing evidence that the claim or defense constitutes harassment, is groundless and is not made in good faith.” Ariz. Rev. Stat. § 12-341.01. While the court has discretion under the statute to award such fees, the court took into account several factors before making its determination (i.e., the merits of the claim, whether the claim could have been settled, and the novelty of the legal question). Upon completing its review of the facts of the case, the court granted Capital One’s request for attorney fees, finding that the extreme hardship imposed on the plaintiff by the fees is outweighed by the fact that “[the] Plaintiff has a history of vexatious litigation, noncompliance with court orders and fail[ure] to cooperate during discovery, all of which drastically increase the fees and costs incurred during litigation.” The court awarded Capital One court costs and over $10,000 in attorney fees. For a copy of the order, please see http://www.buckleykolar.com/documents/GrismorevCapitalOne.pdf.

Court Grants Class Certification in FACTA Truncation Case. On March 31, the U.S. District Court for the Northern District of Illinois granted class certification to plaintiffs in a Fair and Accurate Credit Transactions Act (FACTA) truncation case under Rule 23 of the Federal Rules of Civil Procedure (FRCP). Cicilline v. Jewel Food Stores, Inc., 2008 WL 895682, No. 07-CV-2333 (N.D.Ill. March 31, 2008). This opinion is a companion to the summary judgment opinion reported in last week’s InfoBytes. See Cicilline v. Jewel Food Stores, Inc., 2008 WL 895677, No. 07-CV-2333 (N.D.Ill. March 31, 2008). Plaintiffs’ complaint alleges that Jewel Food Stores (Jewel) violated the FACTA, 15 U.S.C. § 1681c(g), by printing the expiration date on their credit card receipts. The court’s decision on the above-referenced summary judgment motion granted the plaintiffs’ motions for summary judgment on two of Jewel’s affirmative defenses. In a separate opinion, the court granted class certification to the plaintiffs, holding that the plaintiffs satisfied the prerequisites of FRCP Rule 23(a), which are numerosity of plaintiffs, commonality of the legal and factual questions, typicality of the claims or defenses of the representative parties to the claims or defenses of the class, and adequacy of the representation. The court then stated that plaintiffs must meet the requirements of FRCP Rule 23(b), which are predominance of common over individual questions, and superiority of class action over other available means of redress. On the issue of predominance, the court found that all the members of the class received receipts from Jewel that allegedly violated the FACTA truncation requirement, and that this issue outweighed any individual questions. On the issue of superiority, Jewel cited In re Rhone-Poulenc Rorer Inc., 51 F.3d 1293, 1298 (7th Cir. 1995), arguing that by certifying the class, the court would effectively push Jewel into a blackmail settlement because of the potentially large judgment that could be awarded. However, the court distinguished Rhode-Poulenc on the facts, stating that the Seventh Circuit “was dealing with a situation” where (i) evidence showed a great likelihood that the plaintiffs’ claims lacked legal merit and (ii) “individual suits were not ‘infeasible’ because the claim of each class member was not ‘tiny relative to the expense of litigation.’” Here, the court did not find evidence of a lack of merit in the plaintiffs’ claims and the individual damages would not be large enough to sustain individual actions. Therefore, the court granted the plaintiffs’ motion to certify the class. For a copy of the opinion, please see http://www.buckleykolar.com/documents/CicillinevJewelFoodStores.pdf.

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Firm News

Jeffrey Naimon spoke as a panelist at the American Bar Association Consumer Financial Services Committee’s panel on the Federal Reserve Board’s HOEPA rule proposal. The panel took place on April 10.

Matthew Previn was quoted in the April 14 issue of Mortgage Law Central in an article entitled, “Mortgage Litigation: Trends to Watch.” In the article, Mr. Previn said that three major developments that have helped set recent mortgage litigation trends should be monitored: the expanded use of the disparate impact theory, servicers’ ability to exercise foreclosure rights, and regulation through enforcement. He also discussed the use of disparate impact theory in ECOA and FHA cases.

Jon Jerison will be the featured speaker on an A.S. Pratt audio conference series entitled, “Fair Credit Reporting Act Developments: How They Affect Your Institution,” on April 24 from 1-2:30p.m. EST. Mr. Jerison will review current developments under the Fair Credit Reporting Act, how these developments affect institutions and how they can avoid penalties. For more information or to register, please see http://www.aspratt.com/store/15D.php.

Margo Tank will be speaking at the Mortgage Bankers Association’s Legal Issues and Regulatory Compliance Conference being held April 28-May 1 in Carlsbad, California. Ms. Tank’s speech is entitled, “Legal Issues in Mortgage Technology.” For more information or to register, please see http://events.mortgagebankers.org/legalissues2008/default.html.

Robert Serino will be speaking at the National Institute on Banking Law II: Risk as the Centerpiece of Bank Regulation seminar being held May 8-9 in Chicago, Illinois. Mr. Serino’s speech is entitled, “Anti-money Laundering and Bank Secrecy.” For more information or to register, please see www.abanet.org/cle/programs/n08bla1.html.

Jeremiah Buckley, Margo Tank and Lane Macalester will be speaking at the Managing Electronic Records Conference on May 19-21 in Chicago, Illinois. Their panel entitled, “Legal Considerations for Conducting Business Electronically: Practical Guidance,” will focus on how the Electronic Signatures and Global and National Commerce Act (ESIGN) and the Uniform Electronic Transactions Act (UETA) now make it possible to present and store information and to sign agreements electronically in circumstances where, in the past, paper documents and wet signatures would have been required. Mr. Buckley, Ms. Tank, and Ms. Macalester will discuss the new challenges presented and provide practical guidance to the industry. For more information or to register, please visit www.merconference.com.

Joseph Kolar will be speaking at the Mealey’s Subprime Mortgage Litigation & Insurance Coverage Conference on June 20 in Washington, DC. Mr. Kolar’s presentation is entitled, “The New Structure of the Mortgage Lending Industry,” and will discuss a smaller mortgage origination market, the economic impact on home building and home ownership and his experiences representing Bank of America and Countrywide. For more information or to register, please see http://bookstore.lexis.com/bookstore/product/69880t.html.

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Mortgages

New Bills Proposed in House To Provide Foreclosure Stabilization. On April 17, members of the House Financial Services Committee introduced legislation to combat the rise in foreclosures and the associated impact on cities and states. The legislation first announced by Chairman Barney Frank (D-MA) in March (reported in InfoBytes, March 14, 2008) will be divided into two measures. The first measure, the FHA Housing and Homeowner Retention Act (H.R.  5830), would expand the FHA program to help refinance at-risk borrowers into viable mortgages. This voluntary program would permit FHA to provide up to $300 billion in new guarantees. In exchange for the acceptance of a substantial write-down of principal, the existing lender who chooses to participate would receive a “short payment” (i.e., a payment for less than the outstanding balance as payment in full) from the proceeds of a new FHA-guaranteed loan if the new loan would have terms that the borrower can reasonably be expected to pay and the borrower agrees to share future home appreciation with the government. If the current lender or mortgage holder agrees to a write-down that is sufficient to meet the requirements of the program and make the new loan affordable, the FHA-lender will pay off the discounted existing mortgage. The program would run for 2 years, with flexibility for additional 6 month extensions not to exceed 2 more years. H.R. 5830 would also (i) require the Federal Reserve Board to conduct a study on the need for an auction or bulk refinancing mechanism, and (ii) authorize $200 million dollars for foreclosure counseling.

The second measure, the Neighborhood Stabilization Act of 2008 (H.R.  5818), would establish a $15 billion HUD loan and grant program for states to purchase and rehabilitate vacant, foreclosed homes for resale or rental. H.R. 5818 proposes $7.5 billion in non-recourse, zero-interest loans to states to finance acquisition and rehabilitation costs. The loans would have to be repaid within 2 years for homeownership properties and 5 years for rental properties with 20 percent of appreciation at resale being paid back to the federal government. The Bill also proposes $7.5 billion in grants to states to cover operating costs while the property is being stabilized. Each state’s loan and grant would be based on the state’s percentage of nationwide foreclosures over the last four calendar quarters, adjusted for the state’s relative median home price. States would be able to use government entities, such as housing authorities, to purchase, rehabilitate, and sell/rent these properties. Homes purchased for resale would be required to be sold to families having incomes not exceeding 140 percent of area median income (AMI). Properties purchased for rental would be required to serve families having incomes at or below AMI. Lastly, the Bill would provide eviction protections to tenants in foreclosed properties and prohibit discrimination against voucher holders.

A committee mark up session and vote on the two measures are scheduled for April 23 and 24. For a copy of H.R. 5830, please see http://www.house.gov/apps/list/press/financialsvcs_dem/5830.pdf.  For a copy of H.R. 5818, please see http://www.house.gov/apps/list/press/financialsvcs_dem/reo_bill_intro_5818.pdf.

FTC Approves Filing of Staff Comment to FRB Regarding Proposed TILA Rule. On April 16, the Federal Trade Commission (FTC) approved the filing of a staff comment to the Federal Reserve Board (FRB) regarding the FRB’s proposed rule to restrict certain mortgage practices under the Truth in Lending Act and the Home Ownership Equity Protection Act. In the comment, the FTC staff generally supports the FRB’s goals of: (i) protecting consumers in the mortgage market from unfair, abusive, or deceptive lending and servicing practices while preserving responsible lending and sustainable home ownership; (ii) ensuring that advertisements for mortgage loans are accurate and not misleading; and (iii) providing consumers with transaction-specific disclosures early enough to use while shopping for a mortgage. The staff comment further states that, while the proposed restrictions on a new category of higher-priced mortgage loans appear to strike a reasonable balance, the FTC staff encourages the Board to continue to weigh the restrictions’ potential benefits and costs, and to consider any empirical evidence submitted in response to its proposed rulemaking to confirm that this balance is reasonable. Also, the FTC staff has concerns that the proposed requirement for loan servicers to provide a current schedule of servicing fees and charges may not adequately protect consumers. The staff comment suggests that providing a schedule of servicing fees and charges, as the FRB has proposed, would provide consumers with some information, but would not ensure that consumers get adequate notice of each fee imposed on their accounts. Thus, the FTC staff comment suggests that the FRB consider the costs and benefits of requiring servicers to itemize each new fee assessed during a month or other reasonable period of time. Lastly, while the FTC staff supports the FRB’s goal of making mortgage shopping easier for consumers, it urges the FRB to reconsider the proposed rule’s provisions requiring disclosures of compensation to mortgage brokers. According to the staff comment, FTC staff research has shown that such disclosures are likely to harm consumers and competition by making broker loans appear more expensive than identical, or even more costly, direct lender loans. For a copy of the FTC press release, please see http://www.ftc.gov/opa/2008/04/frb.shtm.

President Bush Nominates SBA Administrator Steve Preston as New HUD Secretary. On April 18, President Bush nominated current head of the Small Business Administration (SBA) Steve Preston to become the new Secretary of the Department of Housing and Urban Development (HUD). If confirmed by the Senate, Preston would replace HUD Secretary Alphonso Jackson, who announced his resignation on March 31 (reported in InfoBytes, April 4, 2008). Preston was sworn in as Administrator of SBA in July 2006, after his nomination was unanimously confirmed by the Senate. Preston has a background of 25 years in financial and operational leadership positions. Before joining SBA, he was executive vice president of The ServiceMaster Co., where he also served as chief financial officer. Before that, he was a senior vice president and treasurer of First Data Corp. and an investment banker at Lehman Brothers.

MBA Voices Concerns About Waters Bill. On April 16, Chairman-Elect of the Mortgage Bankers Association (MBA) David Kittle testified before the U.S. House of Representatives Subcommittee on Housing and Community Opportunity, Committee on Financial Services, voicing concerns about the Foreclosure Prevention and Sound Mortgage Servicing Act of 2008 (H.R. 5679) (reported in InfoBytes, April 11, 2008). The testimony stressed that while the MBA shares the goal of preventing foreclosures, the MBA opposes H.R. 5679 because of the harm it will cause to the mortgage market and borrowers. Specifically, the testimony argued against five components of H.R. 5679, including the Bill’s: (i) effective moratorium on foreclosures; (ii) rewriting of mortgage terms; (iii) effective requirement that first mortgage lien-holders subsidize second mortgage lien-holders and unsecured creditors; (iv) elimination of flexibility needed to work out loans; and (v) expensive and time consuming paperwork burden without any corresponding benefit to borrowers. The testimony argued that H.R. 5679 will increase rates, reduce availability of credit, and dampen investor interest in mortgage instruments. Combined with additional regulatory burdens placed on mortgage servicers through paperwork and more bureaucracy, the testimony argued that H.R. 5679 would strike a significant financial blow to the industry. Lastly, the testimony laid out tools mortgage loan servicers have already begun to implement to prevent foreclosures, including informal forbearance and repayment plans, loan modifications, refinances and partial claims. For a copy of the MBA testimony or of H.R. 5679, please contact .

Mississippi Requires Mortgage Licensees to Use Multistate Licensing System. On April 7, 2008, Mississippi Governor Haley Barbour signed S.B. 2605 into law, amending the Mississippi Mortgage Consumer Protection Law (MMCPL), Miss. Code Ann. §§ 81-18-1 et seq., to clarify the statute and require the use of a multistate licensing system. The new law allows mortgage loan originators to work at any licensed location in Mississippi of the licensed company for which he/she works and creates a de minimis exemption from the MMCPL for persons who enter into no more than 12 residential mortgage loan transactions per calendar year. S.B. 2605 also requires individuals who own or acquire more than 10% of a licensed entity, down from 25%, to file an application for a license. Finally, S.B. 2605 requires any entity or individual licensed under the MMCPL to use the multistate licensing system for application, renewal, surrender and any other activity required by the Commissioner of the Department of Banking and Consumer Finance. S.B. 2605 became effective on April 7, 2008. For a copy of the bill, please see http://billstatus.ls.state.ms.us/documents/2008/pdf/SB/2600-2699/SB2605SG.pdf.

Massachusetts Loan Originator Applicants Must Complete 24 Hour Education Course. The Massachusetts Division of Banks (the Division) recently finalized and released Regulatory Bulletin 5.1-105 outlining the educational requirements that loan originator applicants must satisfy before securing licensure. Most notably, within 2 years of approval of individual licensure, Massachusetts loan originator applicants must complete an approved educational course consisting of at least 24 hours of classroom-based instruction. In addition, licensed loan originators must annually complete at least 8 hours of continuing residential mortgage lending education. Individuals are not required to fulfill the 24 hour course requirement if they (i) met the definition of mortgage loan originator prior to November 30, 2007, and (ii) apply for licensure prior to May 27, 2008. The Division instituted the new education requirements to ensure that applicants are knowledgeable about mortgage lending concepts, applicable law and regulations specific to the mortgage origination profession. We note that the Bulletin also outlines the requirements for a company seeking the Division’s approval of its mortgage loan origination educational courses. For the full text of Regulatory Bulletin 5.1-105, please see http://www.buckleykolar.com/documents/MARegBulletin51_105.pdf.

Tennessee Legislature Passes Bill To Amend Residential Lending, Brokerage and Servicing Act. On April 14, the Tennessee General Assembly passed a Bill (S.B.  4160) to amend and add various provisions to the Tennessee Residential Lending, Brokerage and Servicing Act of 1988. Among other things, the Bill would: (i) require applicants for a license as a mortgage lender, mortgage loan broker, mortgage loan servicer, or mortgage loan originator to complete an educational training course; (ii) authorize the Tennessee Commissioner of Financial Institutions to require continuing education of licensees and registrants as a condition of license and registration; (iii) require criminal background checks for mortgage lender, mortgage loan broker, mortgage loan servicer, or mortgage loan originator applicants, and for registered mortgage loan originators seeking to continue registration; (iv) authorize the Commissioner to suspend or revoke any mortgage loan originator registration certificate if the Commissioner finds, after notice and hearing, that the mortgage loan originator engaged in certain prohibited activities (as detailed in present law), such as accepting any fees at closing that were not disclosed; and (v) authorize the Commissioner to participate in the establishment and implementation of a multi-state automated licensing system. The Bill was sent to Governor Phil Bredesen on April 17 for approval. For the full text of S.B. 4160, please see http://www.legislature.state.tn.us/bills/currentga/BILL/SB4160.pdf.

Kentucky Legislature Passes New Mortgage Lending Regulations. On April 15, the Kentucky General Assembly passed H.B. 552, an “emergency” bill, imposing new requirements on mortgage lenders and brokers. The Bill would narrow licensure exemptions by: (i) eliminating the five mortgage loan de minimis exemption; (ii) requiring non-profit corporations that engage in mortgage lending to submit exemption claims annually; and (iii) mandating that to qualify for the HUD exemption, lenders must have funded at least twelve FHA loans in the previous year, and held a license or HUD exemption for the previous five years. The Bill would also: (i) require registration of mortgage loan originators and mortgage loan processors; (ii) require any person applying for a license, registration, or claim of exemption to pass a written examination prior to issuance of a license, registration, or claim of exemption (to be effective January 1, 2010); (iii) require mortgage brokers to exercise “good faith and fair dealing” and act in the “best interest” of the borrower; (iv) prohibit origination of mortgage loans if “total net income” received (origination fees, discount points, administrative fees, yield spread premiums, but excluding interest) by the mortgage lender or broker, and its affiliates, exceeds the greater of $2,000 or 4% of the total loan amount; (v) prohibit any person from “improperly influencing” real estate appraisals; (vi) prohibit prepayment penalties after the third anniversary of the mortgage or after 60 days prior to the date of the first interest rate reset, whichever is less; (vii) create new actions for which the executive director of the Office of Financial Institutions may suspend or revoke a license or take other action against an applicant, licensee, person, or registrant; (viii) lower the points fees threshold for high-cost home loans under the Kentucky Fair Lending Act to the greater of 6% of the total loan amount or $3,000; and (ix) require mortgage lenders to verify the borrower’s ability to repay at the maximum margin before making a high-cost home loan, but a safe harbor exists if the loan is approved by the Federal National Mortgage Association automated underwriting system. Lastly, the Bill would also create the Kentucky Residential Mortgage Fraud Act which bans any fraud, failure to disburse funds, and material misstatements made to borrowers or regulators. The provisions in this Bill will take affect immediately when signed by Kentucky Governor Steve Beshear, which is expected to be sometime next week. For a copy of this bill, please see http://www.buckleykolar.com/documents/KYHB552.pdf.

Pennsylvania House Passes Bill To Require New Mortgage Licensing Requirements. On April 8, the Pennsylvania House of Representatives passed a bill (H.B.  2179) that would require licensure of all persons engaged in the mortgage loan business as a mortgage broker, mortgage lender, mortgage loan correspondent, or mortgage originator, as the case may be. Presently, the Pennsylvania Department of Banking issues licenses to mortgage companies, but not to individual employees who sell mortgages to customers. The Bill would also: (i) set new application requirements and fees; and (ii) set forth the powers conferred on certain licensees engaged in the mortgage loan business. The Bill is now in the Senate and was referred to the Banking and Insurance Committee.

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Banking

FinCEN Issues Guidance on SARs Regarding Proceeds of Foreign Corruption. On April 17, the Financial Crimes Enforcement Network (FinCEN) issued “Guidance to Financial Institutions on Filing Suspicious Activity Reports regarding the Proceeds of Foreign Corruption” (the “Guidance”) to guide financial institutions to better assist law enforcement when filing Suspicious Activity Reports regarding financial transactions that may involve senior foreign political figures seeking to move the proceeds of foreign corruption to or through the U.S. financial system. In order to assist law enforcement in its efforts to target foreign corruption and related money laundering and, ultimately, deny the perpetrators access to the fruits of such corruption, FinCEN requests that financial institutions include the term “foreign corruption” in the narrative portions of all Suspicious Activity Reports filed in connection with such activity. The Guidance defines “proceeds of foreign corruption” as “any asset or property that is acquired by, through, or on behalf of such corrupt public figures through misappropriation, theft, or embezzlement of public funds, the unlawful conversion of property of a foreign government, or through acts of bribery or extortion, and includes any property into which any such assets have been transformed or converted.” The Guidance also reminds financial institutions of their responsibilities regarding the provision of private banking services to non-U.S. persons pursuant to section 312 of the USA PATRIOT Act, which requires banks, brokers or dealers in securities, futures commission merchants and introducing brokers in commodities, and mutual funds to establish and maintain a due diligence program for such private banking accounts that is reasonably designed to detect and report any known or suspected money laundering or other suspicious activity. Included in this requirement is the duty to conduct enhanced scrutiny of any private banking account that is maintained for senior foreign political figures in order to detect and report the proceeds of foreign corruption. For a copy of the Guidance, please see http://www.fincen.gov/fin-2008-g005.pdf.

Texas Launches “Closed Account Notification System.” The Texas Department of Banking recently launched the Closed Account Notification System (“CANS”) to implement the anti-identity theft provisions of H.B. 2002. H.B. 2002, authored by Rep. Helen Giddings, requires financial institutions operating in Texas to submit information, upon a customer’s request, concerning suspected compromised deposit accounts to CANS, a secure electronic notification system, which then alerts all major check verification companies to the potential fraudulent activity. In order to request the alert, a customer must: (i) provide to the bank either a copy of the incident or case number of the police report filed by the victim, (ii) sign a sworn statement confirming that the customer is a victim of identity theft, and (iii) sign a written authorization permitting the financial institution to submit the account information to CANS. This system is the first of its kind in the United States. For a copy of the Texas Department of Banking press release, please see http://www.banking.state.tx.us/cve/memo03-18-08.htm.

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Consumer Finance

House Subcommittee Holds Hearings on Credit Card Reform. On April 17, the U.S. House of Representatives Subcommittee on Financial Institutions and Consumer Credit of the Financial Services Committee held a hearing on credit card reform focusing on changes to assist average Americans, whom increasingly rely on credit cards to make ends meet. Critics charged that many credit card issuers have engaged in “unfair” practices and that regulators have done a poor job of policing credit card issuers and their pricing policies. More than half of the 15 witnesses that testified before the Subcommittee, including FDIC Vice Chairman Martin Gruenberg, endorsed the Credit Cardholder’s Bill of Rights Act of 2008 (H.R.  5244). H.R. 5244 would amend the Truth in Lending Act, which, along with its implementing regulation (Regulation Z), are the primary federal law applicable to credit card lending. The Bill would prohibit a creditor from using certain adverse information, including any change in a consumer’s credit score, as the basis for increasing any annual percentage rate (APR) of interest on the consumer’s outstanding balance under an open end consumer credit plan, except for actions or omissions of the consumer directly related to such account. The proposed Bill would also: (i) bar credit card creditors from changing any term of the contract until contract renewal; (ii) require advance notice of credit card account rate increases and authorize a consumer who receives such notice to cancel the credit card without penalty and pay any outstanding balance that accrued before the effective date of the increase of the APR and in the repayment period in effect before notice was received; (iii) require each periodic statement of account to provide specified information on obtaining the payoff balance; (iv) prohibit credit card creditors from furnishing information to a consumer reporting agency concerning a newly opened credit card account until the consumer has used or activated the credit card; (v) authorize a consumer to opt-out of creditor authorization of over-the-limit transactions if fees are imposed; (vi) restrict the frequency of over-the-limit fees; and (vii) prescribe a standard for the initial issuance of subprime or “fee harvester” cards. While acknowledging some industry practices need to be revised, credit card issuers warned that the new legislation could have unintended consequences by making credit more expensive and less readily available. Among bank regulators testifying on the legislation, FDIC Vice Chairman Martin Gruenberg generally endorsed a fee cap of 25% of the amount of authorized credit in the first year that an account is open. However, testimony from witnesses for the Office of the Comptroller of the Currency and the Office of Thrift Supervision did not endorse such a cap. For a copy of H.R. 5244, please see http://www.buckleykolar.com/documents/HR5244CreditCardholdersBillofRightsActof2008.pdf.

Seventh Circuit Limits Cole, Applies Safeco in Firm Offer Cases. In the consolidated appeal of three FCRA firm-offer cases, the U.S. Court of Appeals for Seventh Circuit significantly narrowed the scope of its earlier opinion in Cole v. U.S.  Capital, Inc. (reported in InfoBytes, Dec. 17, 2004), which had triggered a wave of class-action litigation around the country with potential exposure to lenders in the hundreds of billions of dollars. Murray v. New Cingular Wireless Services, Inc., Nos. 06-2477, 06-4368, 07-2370 (7th Cir., corrected opinion issued Apr. 16, 2008). First, the court, in the opinion written by Chief Judge Easterbrook, restricted the “value” test of Cole – which had been read to require that the initial mailer describe an offer of credit that would be valuable to a reasonable consumer – to mixed offers of merchandise and credit, where the court must endeavor to “disentangle an offer of merchandise from an offer of credit when they are made jointly.” (Emphasis included in original.) According to the court, the Cole value test does not apply to “pure offers of credit” because FCRA requires only a firm offer of credit, not a valuable firm offer of credit. The court also held that the inclusion of a free product in connection with the extension of credit does not mean the offer itself is not “of credit.” Next, the court held that a lender’s omission of certain material terms – including the loan amount, term, interest rate and/or fees – from an offer does not mean the offer is not firm. Again, many district courts, within the Seventh Circuit and elsewhere, had read Cole and the Seventh Circuit’s opinion in Murray v. GMAC (reported in InfoBytes, Jan. 20, 2006), to require that the mailer include all the “material” terms, which the Seventh Circuit in the New Cingular opinion acknowledged can be very difficult because of the complexity of credit offers. Noting that “firm offer” is a defined term in FCRA, the court held that the statute requires only that the offer “be honored (if the verification checks out), not [that] all terms appear in the initial mailing.” The court also held that reserving the right to vary the terms of the deal offered, absent some evidence that the caveats are used to render the offer illusory, does not mean the offer is not firm. Finally, the court held that FCRA’s required disclosures are not “clear and conspicuous” if made in six-point type. But the court held that, although the lender’s violation in this case may have subjected it to actual damages, it did not subject it to statutory damages of $100-$1000 for a “willful violation,” because the lender’s interpretation was not objectively unreasonable, and, therefore, the violation was not reckless and the lender’s conduct was not “willful” within the meaning of FCRA. Applying the Supreme Court’s decision in Safeco Insurance Co. v. Burr (reported in InfoBytes Special Alert, June 4, 2007), the Seventh Circuit panel noted that, at the time the decision to issue the disclosure was made, the FTC had not issued guidance on font size and the two Courts of Appeals to rule on the issue had disagreed as to whether such font size was clear and conspicuous. Thus, the lender’s failure was not “reckless,” or “objectively unreasonable” under the Safeco standard. For a copy of the opinion, please see http://www.buckleykolar.com/documents/MurrayvNewCingularWireless.pdf.

Court Holds “Firm Offer” Exists Where Lender Will Not Deny Credit If Pre-Selection Criteria Met. On April 9, District Judge Catherine Perry of the Eastern District of Missouri revisited her previous determination of the definition of a “firm offer of credit” under the Fair Credit Reporting Act (FCRA), finding that a mailer for a home mortgage constituted a “firm offer of credit” so long as the lender would not deny credit to the consumer if the consumer met the lender’s pre-selection criteria. Klutho v. Oxford Lending Group, LLC, 2008 WL 1701171, No. 4:07CV2112 CDP (E.D. Mo. Apr. 9, 2008). The consumer plaintiff sued Oxford Lending Group, alleging that, in violation of FCRA, Oxford obtained information about the plaintiff’s credit without her consent in order to send her a marketing letter. Oxford claimed that accessing the plaintiff’s credit was permissible under FCRA’s “firm offer of credit” exception. In several previous decisions, Judge Perry had defined “firm offer of credit” as necessarily including some value to the consumer that is more than nominal. However, in light of the decision in Sullivan v. Greenwood, 2008 WL 726135 (1st Cir. Mar. 19, 2008) (reported in InfoBytes, March 21, 2008), in which the First Circuit found that “an offer of credit meets the statutory definition [of a firm offer of credit] so long as the creditor will not deny credit to the consumer if the consumer meets the creditor’s pre-selection criteria,” Judge Perry determined that “[s]o long as the statutory criteria are met, then the absence of interest rates and other terms does not prevent the offer from being a ‘firm offer of credit.’” On this basis, and because the plaintiff had not alleged that Oxford would have denied her credit if she met Oxford’s pre-selection criteria, the court granted Oxford’s motion to dismiss. For a copy of this decision, please see http://www.buckleykolar.com/documents/KluthovOxfordLendingGroup.pdf.

Court Holds No Violation of FCRA Reinvestigation Requirement if Reported Information Is Accurate. The U.S. Court of Appeals for the First Circuit has affirmed a district court’s ruling of summary judgment in favor of a consumer reporting agency in a case alleging violations of the Fair Credit Reporting Act’s (FCRA’s) reinvestigation requirement. DeAndrade v. Trans Union, LLC, No. 07-1844, 2008 WL 1722237 (1st Cir. Apr. 15, 2008). In this case, the consumer plaintiffs purchased new windows for their home, and the financing was secured by a lien on the home. When the consumers asked to view the loan documents, they discovered that their signatures granting a mortgage on the home to KeyBank (which was not the original creditor) appeared to have been forged. They filed suit in state court to determine the validity of the mortgage. While that suit was pending, the consumers stopped making payments to KeyBank and instead deposited funds into an escrow account. KeyBank notified the three major credit bureaus that the payments were delinquent, and, when the consumers urged the bureaus to investigate the transaction, Trans Union contacted KeyBank to verify the accuracy of the items. KeyBank affirmed that the items were accurate, and the consumers’ credit reports remained unchanged. The consumers then filed suit in federal court, alleging that Trans Union violated § 1681i of FCRA by failing to conduct a lawful reinvestigation. The district court found that there was no FCRA violation and granted summary judgment. On appeal, the First Circuit affirmed, adopting the reasoning of the majority of other appellate courts with respect to § 1681i allegations, which agree that a violation of the reinvestigation requirement means that there must first be inaccurate information in the credit report. In this case, the court affirmed that Trans Union accurately reported the information provided to it by KeyBank, and that the validity of the underlying transaction was “a legal issue that a credit agency such as Trans Union is neither qualified nor obligated to resolve under FCRA.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/DeAndradevTransUnion.pdf.

Court Awards Attorney Fees to US Bank for Defending Meritless State Debt Collection Claims. In a recent case, an Oregon federal district court awarded attorney fees and costs to defendant US Bank for its expenses in defending against state unlawful debt collection claims that were determined to be meritless. Thomas v. U.S. Bank, 2008 WL 974374, No. 05-1725-MO (D. Or. Apr. 8, 2008). In this case, the plaintiffs alleged that US Bank’s harassing and threatening behavior to collect a debt violated Oregon’s Unlawful Debt Collection Practices Act and Unlawful Trade Practices Act. However, all of the state law claims were dismissed before trial, either in summary judgment or because of de minimus value, and US Bank subsequently filed a motion to recoup attorney fees and costs for defending those state law claims. Oregon sets out by statute the factors that a court must consider before awarding attorney fees. Following the statute, the court found that several of the factors weighed heavily in favor of awarding attorney fees to US Bank. In particular, the court cited (i) the fact that all of the state law claims were dismissed before trial suggests that the claims were objectively unreasonable; (ii) an award would deter other potential plaintiffs from pursuing unreasonable or frivolous claims; and (iii) the court found that the plaintiffs acted unreasonably in rejecting a $30,000 settlement offer in order to pursue a claim with de minimus value. After weighing these factors, along with the relative financial positions of the two parties, the court determined that an amount in between what would fully recompense US Bank and an amount that would be a sufficient deterrent to filing a frivolous lawsuit was required, and awarded court costs plus $45,000 in attorney fees. For a copy of this decision, please see http://www.buckleykolar.com/documents/ThomasvUSBank.pdf.

Court Awards Attorney Fees to Capital One in FCRA Case. On April 8, a U.S. District Court for the District of Arizona granted attorney fees to defendant Capital One in connection with expenses it incurred in defending against the plaintiff’s claim under the Fair Credit Reporting Act (FCRA). Grismore v. Capital One F.S.B., 2008 WL 961623 (D. Ariz. Apr. 8, 2008). The plaintiff sued Capital One alleging violation of the FCRA, but failed throughout the course of the case to provide Capital One with critical discovery materials, including a redacted credit report and income tax returns. The plaintiff’s failure to provide materials continued despite the court’s repeated requests for the plaintiff to produce documents necessary for Capital One to defend its case. As a result, Capital One successfully moved to dismiss the complaint and subsequently petitioned the court to award reasonable attorney fees and costs. An Arizona statute requires courts to award reasonable attorney fees to a successful party in any contract action “upon clear and convincing evidence that the claim or defense constitutes harassment, is groundless and is not made in good faith.” Ariz. Rev. Stat. § 12-341.01. While the court has discretion under the statute to award such fees, the court took into account several factors before making its determination (i.e., the merits of the claim, whether the claim could have been settled, and the novelty of the legal question). Upon completing its review of the facts of the case, the court granted Capital One’s request for attorney fees, finding that the extreme hardship imposed on the plaintiff by the fees is outweighed by the fact that “[the] Plaintiff has a history of vexatious litigation, noncompliance with court orders and fail[ure] to cooperate during discovery, all of which drastically increase the fees and costs incurred during litigation.” The court awarded Capital One court costs and over $10,000 in attorney fees. For a copy of the order, please see http://www.buckleykolar.com/documents/GrismorevCapitalOne.pdf.

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Litigation

Seventh Circuit Limits Cole, Applies Safeco in Firm Offer Cases. In the consolidated appeal of three FCRA firm-offer cases, the U.S. Court of Appeals for Seventh Circuit significantly narrowed the scope of its earlier opinion in Cole v. U.S.  Capital, Inc. (reported in InfoBytes, Dec. 17, 2004), which had triggered a wave of class-action litigation around the country with potential exposure to lenders in the hundreds of billions of dollars. Murray v. New Cingular Wireless Services, Inc., Nos. 06-2477, 06-4368, 07-2370 (7th Cir., corrected opinion issued Apr. 16, 2008). First, the court, in the opinion written by Chief Judge Easterbrook, restricted the “value” test of Cole – which had been read to require that the initial mailer describe an offer of credit that would be valuable to a reasonable consumer – to mixed offers of merchandise and credit, where the court must endeavor to “disentangle an offer of merchandise from an offer of credit when they are made jointly.” (Emphasis included in original.) According to the court, the Cole value test does not apply to “pure offers of credit” because FCRA requires only a firm offer of credit, not a valuable firm offer of credit. The court also held that the inclusion of a free product in connection with the extension of credit does not mean the offer itself is not “of credit.” Next, the court held that a lender’s omission of certain material terms – including the loan amount, term, interest rate and/or fees – from an offer does not mean the offer is not firm. Again, many district courts, within the Seventh Circuit and elsewhere, had read Cole and the Seventh Circuit’s opinion in Murray v. GMAC (reported in InfoBytes, Jan. 20, 2006), to require that the mailer include all the “material” terms, which the Seventh Circuit in the New Cingular opinion acknowledged can be very difficult because of the complexity of credit offers. Noting that “firm offer” is a defined term in FCRA, the court held that the statute requires only that the offer “be honored (if the verification checks out), not [that] all terms appear in the initial mailing.” The court also held that reserving the right to vary the terms of the deal offered, absent some evidence that the caveats are used to render the offer illusory, does not mean the offer is not firm. Finally, the court held that FCRA’s required disclosures are not “clear and conspicuous” if made in six-point type. But the court held that, although the lender’s violation in this case may have subjected it to actual damages, it did not subject it to statutory damages of $100-$1000 for a “willful violation,” because the lender’s interpretation was not objectively unreasonable, and, therefore, the violation was not reckless and the lender’s conduct was not “willful” within the meaning of FCRA. Applying the Supreme Court’s decision in Safeco Insurance Co. v. Burr (reported in InfoBytes Special Alert, June 4, 2007), the Seventh Circuit panel noted that, at the time the decision to issue the disclosure was made, the FTC had not issued guidance on font size and the two Courts of Appeals to rule on the issue had disagreed as to whether such font size was clear and conspicuous. Thus, the lender’s failure was not “reckless,” or “objectively unreasonable” under the Safeco standard. For a copy of the opinion, please see http://www.buckleykolar.com/documents/MurrayvNewCingularWireless.pdf.

Court Holds that California Identity Theft Law Not Preempted by FCRA. A federal district court in California recently held that the Fair Credit Reporting Act (FCRA) does not preempt a California statute (Cal. Civ. Code §§ 1798.92 et seq.) that gives identity theft victims a private right of action against lenders attempting to collect fraudulent accounts. Pasternak v. Trans Union, No. C07-04980 MJJ, 2008 WL 928840 (N.D. Cal. Apr. 3, 2008). The plaintiff in the case alleged that an identity thief obtained a credit card in her name from Capital One Bank, and after the plaintiff notified Capital One of the identity theft, Capital One nevertheless brought a collection suit against her. According to the plaintiff, by wrongfully continuing its collection efforts, Capital One engaged in malicious prosecution and violated California’s identity theft law and FCRA. Capital One argued that FCRA’s provisions regulating the activities of credit information furnishers preempted the state identity theft law claim, but the court disagreed, concluding (among other things) that preemption did not extend to state regulation of the direct relationship between a consumer and a creditor. The court also found that the plaintiff’s malicious prosecution and FCRA claims were adequately pleaded. For a copy of the opinion, please see http://www.buckleykolar.com/documents/PasternakvTransUnion.pdf.

Court Holds “Firm Offer” Exists Where Lender Will Not Deny Credit If Pre-Selection Criteria Met. On April 9, District Judge Catherine Perry of the Eastern District of Missouri revisited her previous determination of the definition of a “firm offer of credit” under the Fair Credit Reporting Act (FCRA), finding that a mailer for a home mortgage constituted a “firm offer of credit” so long as the lender would not deny credit to the consumer if the consumer met the lender’s pre-selection criteria. Klutho v. Oxford Lending Group, LLC, 2008 WL 1701171, No. 4:07CV2112 CDP (E.D. Mo. Apr. 9, 2008). The consumer plaintiff sued Oxford Lending Group, alleging that, in violation of FCRA, Oxford obtained information about the plaintiff’s credit without her consent in order to send her a marketing letter. Oxford claimed that accessing the plaintiff’s credit was permissible under FCRA’s “firm offer of credit” exception. In several previous decisions, Judge Perry had defined “firm offer of credit” as necessarily including some value to the consumer that is more than nominal. However, in light of the decision in Sullivan v. Greenwood, 2008 WL 726135 (1st Cir. Mar. 19, 2008) (reported in InfoBytes, March 21, 2008), in which the First Circuit found that “an offer of credit meets the statutory definition [of a firm offer of credit] so long as the creditor will not deny credit to the consumer if the consumer meets the creditor’s pre-selection criteria,” Judge Perry determined that “[s]o long as the statutory criteria are met, then the absence of interest rates and other terms does not prevent the offer from being a ‘firm offer of credit.’” On this basis, and because the plaintiff had not alleged that Oxford would have denied her credit if she met Oxford’s pre-selection criteria, the court granted Oxford’s motion to dismiss. For a copy of this decision, please see http://www.buckleykolar.com/documents/KluthovOxfordLendingGroup.pdf.

Court Holds No Violation of FCRA Reinvestigation Requirement if Reported Information Is Accurate. The U.S. Court of Appeals for the First Circuit has affirmed a district court’s ruling of summary judgment in favor of a consumer reporting agency in a case alleging violations of the Fair Credit Reporting Act’s (FCRA’s) reinvestigation requirement. DeAndrade v. Trans Union, LLC, No. 07-1844, 2008 WL 1722237 (1st Cir. Apr. 15, 2008). In this case, the consumer plaintiffs purchased new windows for their home, and the financing was secured by a lien on the home. When the consumers asked to view the loan documents, they discovered that their signatures granting a mortgage on the home to KeyBank (which was not the original creditor) appeared to have been forged. They filed suit in state court to determine the validity of the mortgage. While that suit was pending, the consumers stopped making payments to KeyBank and instead deposited funds into an escrow account. KeyBank notified the three major credit bureaus that the payments were delinquent, and, when the consumers urged the bureaus to investigate the transaction, Trans Union contacted KeyBank to verify the accuracy of the items. KeyBank affirmed that the items were accurate, and the consumers’ credit reports remained unchanged. The consumers then filed suit in federal court, alleging that Trans Union violated § 1681i of FCRA by failing to conduct a lawful reinvestigation. The district court found that there was no FCRA violation and granted summary judgment. On appeal, the First Circuit affirmed, adopting the reasoning of the majority of other appellate courts with respect to § 1681i allegations, which agree that a violation of the reinvestigation requirement means that there must first be inaccurate information in the credit report. In this case, the court affirmed that Trans Union accurately reported the information provided to it by KeyBank, and that the validity of the underlying transaction was “a legal issue that a credit agency such as Trans Union is neither qualified nor obligated to resolve under FCRA.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/DeAndradevTransUnion.pdf.

Court Awards Attorney Fees to US Bank for Defending Meritless State Debt Collection Claims. In a recent case, an Oregon federal district court awarded attorney fees and costs to defendant US Bank for its expenses in defending against state unlawful debt collection claims that were determined to be meritless. Thomas v. U.S. Bank, 2008 WL 974374, No. 05-1725-MO (D. Or. Apr. 8, 2008). In this case, the plaintiffs alleged that US Bank’s harassing and threatening behavior to collect a debt violated Oregon’s Unlawful Debt Collection Practices Act and Unlawful Trade Practices Act. However, all of the state law claims were dismissed before trial, either in summary judgment or because of de minimus value, and US Bank subsequently filed a motion to recoup attorney fees and costs for defending those state law claims. Oregon sets out by statute the factors that a court must consider before awarding attorney fees. Following the statute, the court found that several of the factors weighed heavily in favor of awarding attorney fees to US Bank. In particular, the court cited (i) the fact that all of the state law claims were dismissed before trial suggests that the claims were objectively unreasonable; (ii) an award would deter other potential plaintiffs from pursuing unreasonable or frivolous claims; and (iii) the court found that the plaintiffs acted unreasonably in rejecting a $30,000 settlement offer in order to pursue a claim with de minimus value. After weighing these factors, along with the relative financial positions of the two parties, the court determined that an amount in between what would fully recompense US Bank and an amount that would be a sufficient deterrent to filing a frivolous lawsuit was required, and awarded court costs plus $45,000 in attorney fees. For a copy of this decision, please see http://www.buckleykolar.com/documents/ThomasvUSBank.pdf.

Court Awards Attorney Fees to Capital One in FCRA Case. On April 8, a U.S. District Court for the District of Arizona granted attorney fees to defendant Capital One in connection with expenses it incurred in defending against the plaintiff’s claim under the Fair Credit Reporting Act (FCRA). Grismore v. Capital One F.S.B., 2008 WL 961623 (D. Ariz. Apr. 8, 2008). The plaintiff sued Capital One alleging violation of the FCRA, but failed throughout the course of the case to provide Capital One with critical discovery materials, including a redacted credit report and income tax returns. The plaintiff’s failure to provide materials continued despite the court’s repeated requests for the plaintiff to produce documents necessary for Capital One to defend its case. As a result, Capital One successfully moved to dismiss the complaint and subsequently petitioned the court to award reasonable attorney fees and costs. An Arizona statute requires courts to award reasonable attorney fees to a successful party in any contract action “upon clear and convincing evidence that the claim or defense constitutes harassment, is groundless and is not made in good faith.” Ariz. Rev. Stat. § 12-341.01. While the court has discretion under the statute to award such fees, the court took into account several factors before making its determination (i.e., the merits of the claim, whether the claim could have been settled, and the novelty of the legal question). Upon completing its review of the facts of the case, the court granted Capital One’s request for attorney fees, finding that the extreme hardship imposed on the plaintiff by the fees is outweighed by the fact that “[the] Plaintiff has a history of vexatious litigation, noncompliance with court orders and fail[ure] to cooperate during discovery, all of which drastically increase the fees and costs incurred during litigation.” The court awarded Capital One court costs and over $10,000 in attorney fees. For a copy of the order, please see http://www.buckleykolar.com/documents/GrismorevCapitalOne.pdf.

Court Grants Class Certification in FACTA Truncation Case. On March 31, the U.S. District Court for the Northern District of Illinois granted class certification to plaintiffs in a Fair and Accurate Credit Transactions Act (FACTA) truncation case under Rule 23 of the Federal Rules of Civil Procedure (FRCP). Cicilline v. Jewel Food Stores, Inc., 2008 WL 895682, No. 07-CV-2333 (N.D.Ill. March 31, 2008). This opinion is a companion to the summary judgment opinion reported in last week’s InfoBytes. See Cicilline v. Jewel Food Stores, Inc., 2008 WL 895677, No. 07-CV-2333 (N.D.Ill. March 31, 2008). Plaintiffs’ complaint alleges that Jewel Food Stores (Jewel) violated the FACTA, 15 U.S.C. § 1681c(g), by printing the expiration date on their credit card receipts. The court’s decision on the above-referenced summary judgment motion granted the plaintiffs’ motions for summary judgment on two of Jewel’s affirmative defenses. In a separate opinion, the court granted class certification to the plaintiffs, holding that the plaintiffs satisfied the prerequisites of FRCP Rule 23(a), which are numerosity of plaintiffs, commonality of the legal and factual questions, typicality of the claims or defenses of the representative parties to the claims or defenses of the class, and adequacy of the representation. The court then stated that plaintiffs must meet the requirements of FRCP Rule 23(b), which are predominance of common over individual questions, and superiority of class action over other available means of redress. On the issue of predominance, the court found that all the members of the class received receipts from Jewel that allegedly violated the FACTA truncation requirement, and that this issue outweighed any individual questions. On the issue of superiority, Jewel cited In re Rhone-Poulenc Rorer Inc., 51 F.3d 1293, 1298 (7th Cir. 1995), arguing that by certifying the class, the court would effectively push Jewel into a blackmail settlement because of the potentially large judgment that could be awarded. However, the court distinguished Rhode-Poulenc on the facts, stating that the Seventh Circuit “was dealing with a situation” where (i) evidence showed a great likelihood that the plaintiffs’ claims lacked legal merit and (ii) “individual suits were not ‘infeasible’ because the claim of each class member was not ‘tiny relative to the expense of litigation.’” Here, the court did not find evidence of a lack of merit in the plaintiffs’ claims and the individual damages would not be large enough to sustain individual actions. Therefore, the court granted the plaintiffs’ motion to certify the class. For a copy of the opinion, please see http://www.buckleykolar.com/documents/CicillinevJewelFoodStores.pdf.

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E-Financial Services

Texas Launches “Closed Account Notification System.” The Texas Department of Banking recently launched the Closed Account Notification System (“CANS”) to implement the anti-identity theft provisions of H.B. 2002. H.B. 2002, authored by Rep. Helen Giddings, requires financial institutions operating in Texas to submit information, upon a customer’s request, concerning suspected compromised deposit accounts to CANS, a secure electronic notification system, which then alerts all major check verification companies to the potential fraudulent activity. In order to request the alert, a customer must: (i) provide to the bank either a copy of the incident or case number of the police report filed by the victim, (ii) sign a sworn statement confirming that the customer is a victim of identity theft, and (iii) sign a written authorization permitting the financial institution to submit the account information to CANS. This system is the first of its kind in the United States. For a copy of the Texas Department of Banking press release, please see http://www.banking.state.tx.us/cve/memo03-18-08.htm.

Court Grants Class Certification in FACTA Truncation Case. On March 31, the U.S. District Court for the Northern District of Illinois granted class certification to plaintiffs in a Fair and Accurate Credit Transactions Act (FACTA) truncation case under Rule 23 of the Federal Rules of Civil Procedure (FRCP). Cicilline v. Jewel Food Stores, Inc., 2008 WL 895682, No. 07-CV-2333 (N.D.Ill. March 31, 2008). This opinion is a companion to the summary judgment opinion reported in last week’s InfoBytes. See Cicilline v. Jewel Food Stores, Inc., 2008 WL 895677, No. 07-CV-2333 (N.D.Ill. March 31, 2008). Plaintiffs’ complaint alleges that Jewel Food Stores (Jewel) violated the FACTA, 15 U.S.C. § 1681c(g), by printing the expiration date on their credit card receipts. The court’s decision on the above-referenced summary judgment motion granted the plaintiffs’ motions for summary judgment on two of Jewel’s affirmative defenses. In a separate opinion, the court granted class certification to the plaintiffs, holding that the plaintiffs satisfied the prerequisites of FRCP Rule 23(a), which are numerosity of plaintiffs, commonality of the legal and factual questions, typicality of the claims or defenses of the representative parties to the claims or defenses of the class, and adequacy of the representation. The court then stated that plaintiffs must meet the requirements of FRCP Rule 23(b), which are predominance of common over individual questions, and superiority of class action over other available means of redress. On the issue of predominance, the court found that all the members of the class received receipts from Jewel that allegedly violated the FACTA truncation requirement, and that this issue outweighed any individual questions. On the issue of superiority, Jewel cited In re Rhone-Poulenc Rorer Inc., 51 F.3d 1293, 1298 (7th Cir. 1995), arguing that by certifying the class, the court would effectively push Jewel into a blackmail settlement because of the potentially large judgment that could be awarded. However, the court distinguished Rhode-Poulenc on the facts, stating that the Seventh Circuit “was dealing with a situation” where (i) evidence showed a great likelihood that the plaintiffs’ claims lacked legal merit and (ii) “individual suits were not ‘infeasible’ because the claim of each class member was not ‘tiny relative to the expense of litigation.’” Here, the court did not find evidence of a lack of merit in the plaintiffs’ claims and the individual damages would not be large enough to sustain individual actions. Therefore, the court granted the plaintiffs’ motion to certify the class. For a copy of the opinion, please see http://www.buckleykolar.com/documents/CicillinevJewelFoodStores.pdf.

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Privacy/Data Security

Texas Launches “Closed Account Notification System.” The Texas Department of Banking recently launched the Closed Account Notification System (“CANS”) to implement the anti-identity theft provisions of H.B. 2002. H.B. 2002, authored by Rep. Helen Giddings, requires financial institutions operating in Texas to submit information, upon a customer’s request, concerning suspected compromised deposit accounts to CANS, a secure electronic notification system, which then alerts all major check verification companies to the potential fraudulent activity. In order to request the alert, a customer must: (i) provide to the bank either a copy of the incident or case number of the police report filed by the victim, (ii) sign a sworn statement confirming that the customer is a victim of identity theft, and (iii) sign a written authorization permitting the financial institution to submit the account information to CANS. This system is the first of its kind in the United States. For a copy of the Texas Department of Banking press release, please see http://www.banking.state.tx.us/cve/memo03-18-08.htm.

Court Holds that California Identity Theft Law Not Preempted by FCRA. A federal district court in California recently held that the Fair Credit Reporting Act (FCRA) does not preempt a California statute (Cal. Civ. Code §§ 1798.92 et seq.) that gives identity theft victims a private right of action against lenders attempting to collect fraudulent accounts. Pasternak v. Trans Union, No. C07-04980 MJJ, 2008 WL 928840 (N.D. Cal. Apr. 3, 2008). The plaintiff in the case alleged that an identity thief obtained a credit card in her name from Capital One Bank, and after the plaintiff notified Capital One of the identity theft, Capital One nevertheless brought a collection suit against her. According to the plaintiff, by wrongfully continuing its collection efforts, Capital One engaged in malicious prosecution and violated California’s identity theft law and FCRA. Capital One argued that FCRA’s provisions regulating the activities of credit information furnishers preempted the state identity theft law claim, but the court disagreed, concluding (among other things) that preemption did not extend to state regulation of the direct relationship between a consumer and a creditor. The court also found that the plaintiff’s malicious prosecution and FCRA claims were adequately pleaded. For a copy of the opinion, please see http://www.buckleykolar.com/documents/PasternakvTransUnion.pdf.

Court Grants Class Certification in FACTA Truncation Case. On March 31, the U.S. District Court for the Northern District of Illinois granted class certification to plaintiffs in a Fair and Accurate Credit Transactions Act (FACTA) truncation case under Rule 23 of the Federal Rules of Civil Procedure (FRCP). Cicilline v. Jewel Food Stores, Inc., 2008 WL 895682, No. 07-CV-2333 (N.D.Ill. March 31, 2008). This opinion is a companion to the summary judgment opinion reported in last week’s InfoBytes. See Cicilline v. Jewel Food Stores, Inc., 2008 WL 895677, No. 07-CV-2333 (N.D.Ill. March 31, 2008). Plaintiffs’ complaint alleges that Jewel Food Stores (Jewel) violated the FACTA, 15 U.S.C. § 1681c(g), by printing the expiration date on their credit card receipts. The court’s decision on the above-referenced summary judgment motion granted the plaintiffs’ motions for summary judgment on two of Jewel’s affirmative defenses. In a separate opinion, the court granted class certification to the plaintiffs, holding that the plaintiffs satisfied the prerequisites of FRCP Rule 23(a), which are numerosity of plaintiffs, commonality of the legal and factual questions, typicality of the claims or defenses of the representative parties to the claims or defenses of the class, and adequacy of the representation. The court then stated that plaintiffs must meet the requirements of FRCP Rule 23(b), which are predominance of common over individual questions, and superiority of class action over other available means of redress. On the issue of predominance, the court found that all the members of the class received receipts from Jewel that allegedly violated the FACTA truncation requirement, and that this issue outweighed any individual questions. On the issue of superiority, Jewel cited In re Rhone-Poulenc Rorer Inc., 51 F.3d 1293, 1298 (7th Cir. 1995), arguing that by certifying the class, the court would effectively push Jewel into a blackmail settlement because of the potentially large judgment that could be awarded. However, the court distinguished Rhode-Poulenc on the facts, stating that the Seventh Circuit “was dealing with a situation” where (i) evidence showed a great likelihood that the plaintiffs’ claims lacked legal merit and (ii) “individual suits were not ‘infeasible’ because the claim of each class member was not ‘tiny relative to the expense of litigation.’” Here, the court did not find evidence of a lack of merit in the plaintiffs’ claims and the individual damages would not be large enough to sustain individual actions. Therefore, the court granted the plaintiffs’ motion to certify the class. For a copy of the opinion, please see http://www.buckleykolar.com/documents/CicillinevJewelFoodStores.pdf.

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Credit Cards

House Subcommittee Holds Hearings on Credit Card Reform. On April 17, the U.S. House of Representatives Subcommittee on Financial Institutions and Consumer Credit of the Financial Services Committee held a hearing on credit card reform focusing on changes to assist average Americans, whom increasingly rely on credit cards to make ends meet. Critics charged that many credit card issuers have engaged in “unfair” practices and that regulators have done a poor job of policing credit card issuers and their pricing policies. More than half of the 15 witnesses that testified before the Subcommittee, including FDIC Vice Chairman Martin

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