InfoBytes, April 25, 2008
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
House Financial Services Committee Passes Foreclosure Bill. On April 23, the House Financial Services Committee passed the Neighborhood Stabilization Act of 2008 (H.R. 5818), which would establish a $15 billion HUD loan and grant program for states to purchase and rehabilitate vacant, foreclosed homes for resale or rental (first reported in InfoBytes, April 18, 2008). 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. H.R. 5818 is expected to be considered by the full House in the coming weeks. For a copy of the bill, please see http://www.house.gov/apps/list/press/financialsvcs_dem/reo_bill_intro_5818.pdf.
House Financial Services Committee Passes Loan Modification Bill. On April 23, the House Financial Services Committee passed the Emergency Mortgage Loan Modification Act of 2008 (H.R. 5579). The bill would: (i) establish a standard for loan modifications or workout plans for pools of certain residential mortgage loans; (ii) create a duty for the servicers of such pooled loans to maximize recovery of proceeds for the benefit of all investors and holders of beneficial interests in the pooled loans, and not to any individual party or group of parties; (iii) deem the loan servicer to be acting on behalf of the securitization vehicle in the best interest of all such investors and holders if the servicer makes certain loss mitigation efforts for a loan in or facing payment default in the reasonable belief that such efforts will maximize the net present value to be realized over that which would be realized through foreclosure; and (iv) declare that, absent specific contractual provisions to the contrary, a servicer acting in a manner consistent with such duty shall not be liable to specified persons for entering into a qualified loan modification or workout plan for loss mitigation purposes. For a copy of the bill, please see http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.5579:.
OCC and Wachovia Reach Nearly $145 Million Settlement for Alleged Telemarketing Fraud. On April 24, Wachovia Bank agreed to a settlement with the Office of the Comptroller of the Currency (OCC) after an eighteen month investigation into the bank’s relationships with several telemarketers and third party payment processors. The OCC’s investigation concluded that the bank engaged in unsafe and unsound practices and unfair practices under the Federal Trade Commission Act during the course of its relationships with third party payment processors and telemarketers. The OCC alleged that telemarketers and payment processors for telemarketers who had account relationships with Wachovia would regularly deposit remotely created checks (RCCs) not authorized by consumers in their bank accounts. The OCC further alleged that Wachovia failed to (i) conduct suitable due diligence on the accounts, (ii) recognize the risks posed by telemarketer and payment processor accounts, (iii) monitor the rates of return on RCCs and respond to consumer complaints, and (iv) follow proper procedures for returned RCCs. The OCC estimates that total consumer restitution will be $125 million, and Wachovia has agreed to pay $8.9 million to further consumer education programs and $10 million in civil money penalties. The announcement of this settlement coincides with the OCC’s risk management guidance to national banks for due diligence, underwriting, and monitoring of entities that process payments for telemarketers and other merchant clients (see below). For a copy of the settlement agreement, please see http://www.occ.treas.gov/ftp/release/2008-48b.pdf.
OCC Issues New Guidance on Telemarketing Relationships. On April 24, the OCC issued risk management guidance to national banks for due diligence, underwriting, and monitoring of entities that process payments for telemarketers and other merchant clients. Pursuant to the guidance, banks must control risk in the accounts of payment processors through (i) due diligence and underwriting, and (ii) monitoring these high-risk accounts for high levels of unauthorized returns and for suspicious or unusual patterns of activity. Banks must implement a due diligence and underwriting policy that, among other things, requires an initial background check of the processor and its underlying merchants to support the validity of processors’ and merchants’ businesses, their creditworthiness, and business practices. Banks must also engage in fraud monitoring. These procedures are particularly important in cases in which telemarketing payment processors deposit remotely created checks (RCCs) in their accounts. To ensure effective risk management, banks that initiate transactions for processors should require the processor to provide information on their merchant clients such as the merchant’s name, principal business activity, and geographic location. Banks should verify directly, or through the processor, that the originator of the payment is operating a legitimate business. Finally, the guidance provides that banks are expected to comply with Bank Secrecy Act/Anti-Money Laundering (BSA/AML) policies and procedures to monitor and identify unusual activity. For a copy of this guidance, please see http://www.occ.treas.gov/ftp/bulletin/2008-12.html.
FinCen Proposes Amending Bank Secrecy Act Regulations. On April 23, the Financial Crimes Enforcement Network (FinCen) announced a proposed rule to amend exemption requirements for certain transactions that must be reported under the Bank Secrecy Act (BSA). Under the BSA, financial institutions must report transactions in currency in excess of $10,000, via Currency Transaction Reports. Exempt from this reporting requirement are (i) large reportable transactions in currency made by other depository institutions, governmental departments or agencies, those acting with governmental authority, or public companies and their subsidiaries listed in the regulations (Phase I), and (ii) reportable transactions in currency by eligible non-listed businesses or payroll customers (Phase II). The proposed regulation would no longer require financial institutions to: (i) to file exemption forms for, or to annually review, customers that are depository institutions, government agencies, or entities acting with governmental authority; (ii) biennially renew a designation of exempt person filing for otherwise eligible Phase II customers; or (iii) wait 12 months before designating otherwise eligible Phase II customers for exemption. Comments are due within 60 days. For a copy of the proposed rule, please see http://www.buckleykolar.com/documents/FinCEN31CFR103.pdf.
State Issues
Kentucky Governor Signs New Mortgage Lending Law. On April 24, the Kentucky Governor Steve Beshear signed H.B. 552, a comprehensive “emergency” bill, imposing new requirements on mortgage lenders and brokers (first reported in InfoBytes, April 18, 2008 ). The bill took effect immediately upon signing. The bill narrows licensing 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 approved lender exemption, lenders must, in addition to have funded at least twelve FHA loans in Kentucky in the previous year, also have held a mortgage loan company or mortgage loan broker license or registration or HUD approval for the previous five consecutive years. The bill also: (i) requires registration of mortgage loan originators and mortgage loan processors; (ii) requires 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) requires mortgage brokers to exercise “good faith and fair dealing” and act in the “best interest” of the borrower; (iv) prohibits origination of mortgage loans if “total net income” received (origination fees, discount points, administrative fees, yield spread premiums, but excluding interest and fees paid to unaffiliated third parties) by the mortgage lender or broker, and its affiliates, exceeds the greater of $2,000 or 4% of the total loan amount; (v) prohibits any person from “improperly influencing” real estate appraisals; (vi) prohibits 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) creates 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) lowers 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) requires 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 Fannie Mae automated underwriting system. Lastly, the bill creates the Kentucky Residential Mortgage Fraud Act which bans any fraud, failure to disburse funds, and material misstatements made to borrowers or regulators. For a copy of this bill, please see http://www.buckleykolar.com/documents/KYHB552.pdf.
Arizona Enacts Credit Freeze Law. On April 16, Arizona Governor Janet Napolitano signed S.B. 1185, which will allow consumers to place a security freeze on their credit information. Under the new law, if a consumer places a written request for a security freeze, the consumer reporting agency may not release the consumer’s credit report or credit score to a third party. Consumer reporting agencies must place all security freezes and provide written confirmation to the consumer no later than ten business days after receiving a written request from the consumer. The freeze is in effect until the consumer requests removal or a temporary lift. A temporary lift must be implemented within three business days after a written request, or fifteen minutes after a telephone or Internet request. A security freeze may also be lifted if there is a material misrepresentation of fact regarding the freeze. Third parties who request credit reports that are under a security freeze may treat the application for credit as incomplete. Consumer reporting agencies that are grossly negligent or act willfully and maliciously will be liable for actual damages and attorney’s fees. The law becomes effective on August 31, 2008. For a copy of this bill, please see http://www.azleg.gov/legtext/48leg/2r/bills/sb1185s.pdf.
Mississippi Amends Mortgage Consumer Protection Law. On April 7, Mississippi Governor Haley Barbour approved S.B. 2605, amending the Mississippi Mortgage Consumer Protection Law (MMCPL), Miss. Code Ann. §§ 81-18-1 et seq. Among other things, the bill: (i) clarifies the licensed location at which a licensed mortgage loan originator may work to explicitly include any licensed location in Mississippi of the licensed company for which he/she works; (ii) creates a de minimis exemption from the MMCPL for persons who enter into 12 or fewer residential mortgage loan transactions per calendar year on manufactured housing, owner-financings, or consumer loans secured by a mortgage (cumulatively); (iii) requires persons that acquire 10% or more of the voting shares of a licensed corporation or 10% or more of the ownership of any other licensed entity to first file an application with the Department of Banking and Consumer Finance; and (iv) 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.
Oregon Publishes Content for Inclusion in Foreclosure Notice. The Oregon Department of Consumer and Business Services has published emergency rules regarding the content of foreclosure notices. Oregon recently enacted H.B. 3630, which contains a foreclosure notice that must be provided to homeowners facing foreclosure. Under the bill, the Department of Consumer and Business Services was required to adopt contact information for inclusion in the form. The emergency rules set out the statewide contact telephone number for the Department, the telephone numbers and website address for the Oregon state bar’s lawyer referral service, and the website address for a directory of legal aid programs. For a copy of the rule, please see http://www.cbs.state.or.us/external/dfcs/rules_statutes/rulemaking/441-505-3045.pdf.
Minnesota Legislature Passes Legislation to Amend Mortgage Lending Definitions, Record Keeping Requirements. On April 23, the Minnesota legislature presented S.F. 3214 to the governor for his signature. This bill expands the definition of “residential mortgage loan” under the Residential Mortgage Originator and Servicer Licensing Act (the “Act”), removing the stipulation that a “residential mortgage loan” includes only loans “made primarily for personal, family, or household use.” If signed by the governor, this bill will expand the Act to include commercial loans secured by 1-4 family residential real estate. The bill also expands the definition of “residential real estate” to include non-owner-occupied property, and extends certain record-retention requirements from 26 to 60 months. For a copy of the text of the bill, please see https://www.revisor.leg.state.mn.us/bin/bldbill.php?bill=S3214.1.html&session=ls85.
Pending Legislation in Virginia Addresses Mortgage Lender and Broker Act and Foreclosure. Virginia legislators appear poised to enact two bills regarding mortgage lending and servicing. The first bill, H.B. 1487, would amend the Mortgage Lender and Broker Act in a number of ways. Some of the changes include (i) removing the requirement that mortgage loans subject to the Lender and Broker Act be owner-occupied, (ii) requiring criminal background checks for certain employees of a license applicant, (iii) requiring licensees to conduct background checks on certain employees, and (iv) requiring that licensees ensure that their employees are properly educated regarding state and federal mortgage lending laws and regulations. The second bill, S.B. 797, would require “high-risk” mortgage lenders or servicers to provide written notice of an intent to accelerate the loan balance. This notice must be sent 10 business days prior to sending a notice of acceleration. If borrowers, prior to acceleration, indicate that they wish to avoid foreclosure, the lender or servicer must give a 30-day forbearance period. Although both bills have cleared the legislature, neither bill had been sent to the governor as of April 25. For more information on these bills, see http://leg1.state.va.us/cgi-bin/legp504.exe?ses=081&typ=bil&val=hb1487 and http://leg1.state.va.us/cgi-bin/legp504.exe?ses=081&typ=bil&val=SB797.
Courts
Second Circuit Reinstates Antitrust Suit Against Credit Card Issuers in Mandatory Arbitration Case. On April 25, the U.S. Court of Appeals for the Second Circuit reinstated a potential class action suit against credit card issuing banks alleging that the banks violated federal antitrust laws by illegally colluding to force cardholders to accept mandatory arbitration clauses in their cardholder agreements. Ross v. Bank of America, N.A. (USA), et al., No. 06-4755-cv (2nd Cir. Apr. 25, 2008). In doing so, the court overturned a district court ruling that the plaintiff cardholders lacked standing under Article III of the U.S. Constitution because mandatory arbitration clauses had not been enforced against them. The Second Circuit held that the injuries to competition and the market alleged by the cardholders’ antitrust claim were sufficient to allege a “case or controversy” under Article III. However, the Second Circuit did not opine on the separate questions of whether the cardholders satisfied standing and injury tests under federal antitrust statutes sufficient to maintain their suit against the banks. These were among the questions remanded to the district court. For a copy of the opinion, please see http://www.ca2.uscourts.gov:8080/isysnative/RDpcT3BpbnNcT1BOXDA2LTQ3NTUtY3Zfb3BuLnBkZg==/06-4755-cv_opn.pdf#xml=http://www.ca2.uscourts.gov:8080/isysquery/irl8905/3/hilite.
Vague Allegation of Predatory Lending Does Not Defeat Foreclosure. A New York trial court rejected a borrower’s attempt to vacate the foreclosure sale of her property. Alliance Mtge. Banking Corp. v Dobkin, 2008 N.Y. Slip Op. 50793 (Supreme Court, Nassau County, March 28, 2008). In defense of the foreclosure proceeding, the borrower alleged that her lender engaged in “predatory lending” and violated the NY Banking Law. The court, while noting that the loan probably should not have been taken by the borrower, found that the borrower remained responsible for his obligation and that the foreclosure judgment should be upheld. The court found that the borrower failed to demonstrate that the lender engaged in any fraud in originating the loan, and that the loan was not subject to the high cost loan provisions of the NY Banking Law or HOEPA. According to the court, “absent the violation of some statute or other relevant legal principle the law does not permit judges to simply ignore payment obligations voluntarily taken on by mortgagors even if it should have been evident to both lender and borrower that the loan was likely beyond the borrower’s ability to repay.” For a copy of the opinion, please see http://www.nycourts.gov/reporter/3dseries/2008/2008_50793.htm.
Seventh Circuit Rules Mailing Was “Firm Offer of Credit.” In an appeal from the district court order, the plaintiff claimed that GMAC Mortgage Corporation (GMAC) violated the Fair Credit Reporting Act (FCRA) because its mailer did not contain a “firm offer of credit,” and the disclosure of the consumer’s statutory right to prevent access to her credit records in the future was not “conspicuous.” Murray v. GMAC Mortgage Corporation, 2008 WL 1781160, No. 07-2776 (7th Cir. April 18, 2008). In its order, the court stated that the appeal is controlled by Murray v. New Cingular Wireless Services, Inc., No. 06-2477 (7th Cir. April 16, 2008) (reported in InfoBytes, April 18, 2008). Using the standards established in New Cingular, the court determined that GMAC made a “firm offer of credit” in its mailing despite the omission of some material terms. Although it is conceivable that by reserving the right to change some terms, the offeror could choose not to offer credit to consumers who otherwise meet the criteria used for the screening, no evidence was offered that GMAC intended to use its power in that way. In ruling that GMAC made a “firm offer of credit,” the court stated: “As in New Cingular, the suit relies on the text of the offer rather than a course of practice.” Regarding the disclosure, the court affirmed the district court’s finding that statutory damages are unavailable because GMAC came close to meeting the FTC’s requirements (which were issued after GMAC sent the mailer) and did not act recklessly under the standards of New Cingular. For a copy of the opinion, please see http://www.buckleykolar.com/documents/MurrayvGMAC.pdf.
Court Denies Motion to Dismiss in FACTA Credit Card Expiration-Date Action. In Troy v. Home Run Inn, Inc., 2008 WL 1766526 (N.D. Ill. Apr. 14, 2008), the court denied Home Run Inn, Inc.’s motion to dismiss a claim alleging a willful violation of the prohibition added to the Fair Credit Reporting Act (FCRA) by the Fair and Accurate Credit Transactions Act of 2003 (FACTA) against printing a credit card’s expiration date on an electronic receipt. The court rejected Home Run Inn’s argument that the statute does not grant a private right of action for this violation, concluding that its position “is consistent with every district court to address the issue.” Accepting the allegations in the complaint as true for purposes of ruling on a motion to dismiss, the court held that the consumer had stated a claim for a willful violation of FCRA (giving rise to statutory damages of $100-$1000 per violation), given that three years has passed since the enactment of FACTA, which was widely publicized in retail circles and that major card issuers require compliance with the requirement via contract. Home Run Inn additionally attempted to argue that under the Supreme Court’s decision in Safeco Insurance Co. v. Burr (reported in InfoBytes Special Alert, June 4, 2007) a careless reading of the statute cannot constitute a willful violation of the law. The court, however, concluded that unlike the statutory text at issue in Safeco, the FACTA provision is unambiguous. The court also dismissed Home Run Inn’s arguments that statutory damages without actual injury violates due process and established principles of tort law. For a copy of the opinion, please see http://www.buckleykolar.com/documents/TroyvHomeRunInn.pdf.
Name At End of E-Mail Sufficient to Satisfy Statute of Frauds. The New York appellate court found that a series of e-mails constituted signed writings that memorialized the parties’ agreement to change the plaintiff’s responsibilities under an employment agreement. Stevens v. Publicis, S.A., 2008 NY Slip Op 02880 (N.Y. App. Div. Apr. 1, 2008). The court determined that the e-mails satisfied the Statute of Frauds because (i) the name at the end of the parties’ e-mails signified each author’s “intent to authenticate” the e-mail’s contents, and (ii) the defendant’s name at the end of the e-mail constituted a “signed writing” sufficient to satisfy the employment agreement’s requirement that any modification be signed by all parties. For a copy of this decision, see http://www.courts.state.ny.us/reporter/3dseries/2008/2008_02880.htm.
Negligence Claim Based on Alleged Increased Risk of Identity Theft Has Standing. On March 24, a U.S. District Court for the Northern District of California found that the plaintiff in the case had standing to bring a negligence claim against the defendant, Gap Inc., in connection with the theft of Gap’s computers, which possibly contained the plaintiff’s personal information. Ruiz v. Gap Inc., No. 07-5739 SC (N.D. Cal. Mar. 24, 2008). In this case, the plaintiff submitted an online application for employment with Gap that included disclosure of personal information, such as his social security number. The plaintiff filed suit against Gap for breach of the privacy of his personal information after learning that several Gap laptop computers containing personal information from over 800,000 job applicants were stolen. One element of Gap’s motion for summary judgment challenged the plaintiff’s standing because the plaintiff merely asserted that he is at an increased risk of identity theft and not that he has actually been a victim of identity theft. In denying Gap’s motion for summary judgment on the negligence claim, the court found that at this stage in the proceedings, the plaintiff had properly alleged that he suffered an “injury in fact” because he is at increased risk of identity theft. However, the court cautioned that “[s]hould it become apparent that Ruiz’s [the plaintiff] alleged injury is in fact too speculative or hypothetical, the Court will conclude, as it must, that Ruiz lacks standing.” For a copy of this decision, please see http://www.buckleykolar.com/documents/RuizvGap.pdf.
Federal Court Holds That Overdraft Feature Not “Credit” Subject to TILA. A federal district court in California recently granted summary judgment to Washington Mutual Bank (Washington Mutual) dismissing claims that its “overdraft protection-overdraft limit” feature (the overdraft feature) violated the Truth in Lending Act (TILA) and California state law. In re Washington Mutual Overdraft Protection Litigation, No. 03-2566 (C.D. Cal. Mar. 17, 2008). The plaintiff class claimed that the overdraft feature violated TILA provisions prohibiting the unsolicited issuance of credit cards and the offsetting of cardholder indebtedness without affirmative consent. The plaintiffs opened checking accounts with Washington Mutual and signed a deposit agreement that incorporated account disclosures and regulations. The account disclosures included a provision regarding an “overdraft limit” providing that Washington Mutual, in its sole discretion, could choose to pay checks, transfers and withdrawals against the depositor’s account in excess of the amount of funds in the account up to a specified limit (and charge a fee for doing so). Prior to the deposit agreements, Washington Mutual also provided an informational brochure that describes the overdraft protection feature, which did not include the “discretionary” language. Upon remand from the Ninth Circuit, the plaintiffs attempted to show that the promotional brochure created a credit agreement, or alternatively, that the regular and automatic payment function rendered the overdraft protection feature a “credit feature” subject to TILA.
The district court was unpersuaded by the plaintiffs’ arguments, and granted summary judgment in favor of Washington Mutual. On the question of whether an agreement existed to pay overdrafts, the court noted that the plain language of the disclosures that were part of the actual agreement signed by plaintiffs specified that Washington Mutual had complete discretion on whether to pay overdrafts, and therefore was not legally bound to do so. Even if the promotional brochures provided before the execution of the written agreement could be read to obligate Washington Mutual to pay the overdrafts, as a matter of law such promotional materials cannot be used to change the contrary meaning or terms of a signed agreement. Consequently, the court found that no written agreement existed to create an extension of credit obliging Washington Mutual to pay the overdrafts. On the second issue, the court found that the overdraft feature is not a credit feature. The court gave great deference to the position of the Federal Reserve Board (Board), who filed an amicus brief in the case. The Board stated that overdraft programs are not subject to TILA disclosures in the absence of a written agreement to pay overdrafts. The court cited to the fact that Board regulations specifically exclude overdraft features from those charges included as “finance charges” subject to TILA, and that the Board has twice considered whether to apply TILA to overdraft features and has declined to do so both times. Consequently, the court held that applying the overdraft feature to TILA is legally untenable in light of the Board’s considered determination “that non-written-agreement overdraft programs are not subject to TILA and Regulation Z, regardless of whether an entity’s payment of overdrafts is routine and automatic.” The court also granted Washington Mutual’s motion to dismiss the state law claims on the ground that the federal Office of Thrift Supervision occupies the entire field of regulating the deposit- and lending-related activities of federal savings associations, based on the federal Home Owner’s Loan Act, thus preempting all of the state law claims. For a copy of the decision, please see http://www.buckleykolar.com/documents/InreWashingtonMutualOverdraft.pdf.
Firm News
Andrea Lee Negroni, John Kromer, and Matthew Previn wrote an article entitled “Cleveland v. the Subprime Lending Industry” published in “The Subprime Crisis: a Thomson West Special Report.” The authors comment on the City of Cleveland’s lawsuit against 21 lenders and investment banks, which alleges that the defendants’ lending practices created a public nuisance that diminished property values and city tax collections.
Jon Jerison was a 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 reviewed current developments under the Fair Credit Reporting Act, how these developments affect institutions and how they can avoid penalties. For more information, please see http://www.aspratt.com/store/15D.php.
Joseph Kolar, Jeffrey Naimon, and 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. Mr. Kolar will be speaking on a panel entitled, “Conversations with Key Industry and Advocacy Leaders – Where Do We think the Regulatory Industry is Headed and How We Should Prepare.” Mr. Naimon’s speech is entitled, “The Rise and Fall (Hopefully) of the Disparate Impact Theory of Fair Lending Liability.” 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.
Bob 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.
Jerry 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.
Mortgages
House Financial Services Committee Passes Foreclosure Bill. On April 23, the House Financial Services Committee passed the Neighborhood Stabilization Act of 2008 (H.R. 5818), which would establish a $15 billion HUD loan and grant program for states to purchase and rehabilitate vacant, foreclosed homes for resale or rental (first reported in InfoBytes, April 18, 2008). 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. H.R. 5818 is expected to be considered by the full House in the coming weeks. For a copy of the bill, please see http://www.house.gov/apps/list/press/financialsvcs_dem/reo_bill_intro_5818.pdf.
House Financial Services Committee Passes Loan Modification Bill. On April 23, the House Financial Services Committee passed the Emergency Mortgage Loan Modification Act of 2008 (H.R. 5579). The bill would: (i) establish a standard for loan modifications or workout plans for pools of certain residential mortgage loans; (ii) create a duty for the servicers of such pooled loans to maximize recovery of proceeds for the benefit of all investors and holders of beneficial interests in the pooled loans, and not to any individual party or group of parties; (iii) deem the loan servicer to be acting on behalf of the securitization vehicle in the best interest of all such investors and holders if the servicer makes certain loss mitigation efforts for a loan in or facing payment default in the reasonable belief that such efforts will maximize the net present value to be realized over that which would be realized through foreclosure; and (iv) declare that, absent specific contractual provisions to the contrary, a servicer acting in a manner consistent with such duty shall not be liable to specified persons for entering into a qualified loan modification or workout plan for loss mitigation purposes. For a copy of the bill, please see http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.5579:.
Kentucky Governor Signs New Mortgage Lending Law. On April 24, the Kentucky Governor Steve Beshear signed H.B. 552, a comprehensive “emergency” bill, imposing new requirements on mortgage lenders and brokers (first reported in InfoBytes, April 18, 2008). The bill took effect immediately upon signing. The bill narrows licensing 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 approved lender exemption, lenders must, in addition to have funded at least twelve FHA loans in Kentucky in the previous year, also have held a mortgage loan company or mortgage loan broker license or registration or HUD approval for the previous five consecutive years. The bill also: (i) requires registration of mortgage loan originators and mortgage loan processors; (ii) requires 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) requires mortgage brokers to exercise “good faith and fair dealing” and act in the “best interest” of the borrower; (iv) prohibits origination of mortgage loans if “total net income” received (origination fees, discount points, administrative fees, yield spread premiums, but excluding interest and fees paid to unaffiliated third parties) by the mortgage lender or broker, and its affiliates, exceeds the greater of $2,000 or 4% of the total loan amount; (v) prohibits any person from “improperly influencing” real estate appraisals; (vi) prohibits 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) creates 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) lowers 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) requires 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 Fannie Mae automated underwriting system. Lastly, the bill creates the Kentucky Residential Mortgage Fraud Act which bans any fraud, failure to disburse funds, and material misstatements made to borrowers or regulators. For a copy of this bill, please see http://www.buckleykolar.com/documents/KYHB552.pdf.
Mississippi Amends Mortgage Consumer Protection Law. On April 7, Mississippi Governor Haley Barbour approved S.B. 2605, amending the Mississippi Mortgage Consumer Protection Law (MMCPL), Miss. Code Ann. §§ 81-18-1 et seq. Among other things, the bill: (i) clarifies the licensed location at which a licensed mortgage loan originator may work to explicitly include any licensed location in Mississippi of the licensed company for which he/she works; (ii) creates a de minimis exemption from the MMCPL for persons who enter into 12 or fewer residential mortgage loan transactions per calendar year on manufactured housing, owner-financings, or consumer loans secured by a mortgage (cumulatively); (iii) requires persons that acquire 10% or more of the voting shares of a licensed corporation or 10% or more of the ownership of any other licensed entity to first file an application with the Department of Banking and Consumer Finance; and (iv) 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.
Oregon Publishes Content for Inclusion in Foreclosure Notice. The Oregon Department of Consumer and Business Services has published emergency rules regarding the content of foreclosure notices. Oregon recently enacted H.B. 3630, which contains a foreclosure notice that must be provided to homeowners facing foreclosure. Under the bill, the Department of Consumer and Business Services was required to adopt contact information for inclusion in the form. The emergency rules set out the statewide contact telephone number for the Department, the telephone numbers and website address for the Oregon state bar’s lawyer referral service, and the website address for a directory of legal aid programs. For a copy of the rule, please see http://www.cbs.state.or.us/external/dfcs/rules_statutes/rulemaking/441-505-3045.pdf.
Minnesota Legislature Passes Legislation to Amend Mortgage Lending Definitions, Record Keeping Requirements. On April 23, the Minnesota legislature presented S.F. 3214 to the governor for his signature. This bill expands the definition of “residential mortgage loan” under the Residential Mortgage Originator and Servicer Licensing Act (the “Act”), removing the stipulation that a “residential mortgage loan” includes only loans “made primarily for personal, family, or household use.” If signed by the governor, this bill will expand the Act to include commercial loans secured by 1-4 family residential real estate. The bill also expands the definition of “residential real estate” to include non-owner-occupied property, and extends certain record-retention requirements from 26 to 60 months. For a copy of the text of the bill, please see https://www.revisor.leg.state.mn.us/bin/bldbill.php?bill=S3214.1.html&session=ls85.
Pending Legislation in Virginia Addresses Mortgage Lender and Broker Act and Foreclosure. Virginia legislators appear poised to enact two bills regarding mortgage lending and servicing. The first bill, H.B. 1487, would amend the Mortgage Lender and Broker Act in a number of ways. Some of the changes include (i) removing the requirement that mortgage loans subject to the Lender and Broker Act be owner-occupied, (ii) requiring criminal background checks for certain employees of a license applicant, (iii) requiring licensees to conduct background checks on certain employees, and (iv) requiring that licensees ensure that their employees are properly educated regarding state and federal mortgage lending laws and regulations. The second bill, S.B. 797, would require “high-risk” mortgage lenders or servicers to provide written notice of an intent to accelerate the loan balance. This notice must be sent 10 business days prior to sending a notice of acceleration. If borrowers, prior to acceleration, indicate that they wish to avoid foreclosure, the lender or servicer must give a 30-day forbearance period. Although both bills have cleared the legislature, neither bill had been sent to the governor as of April 25. For more information on these bills, see http://leg1.state.va.us/cgi-bin/legp504.exe?ses=081&typ=bil&val=hb1487 and http://leg1.state.va.us/cgi-bin/legp504.exe?ses=081&typ=bil&val=SB797.
Vague Allegation of Predatory Lending Does Not Defeat Foreclosure. A New York trial court rejected a borrower’s attempt to vacate the foreclosure sale of her property. Alliance Mtge. Banking Corp. v Dobkin, 2008 N.Y. Slip Op. 50793 (Supreme Court, Nassau County, March 28, 2008). In defense of the foreclosure proceeding, the borrower alleged that her lender engaged in “predatory lending” and violated the NY Banking Law. The court, while noting that the loan probably should not have been taken by the borrower, found that the borrower remained responsible for his obligation and that the foreclosure judgment should be upheld. The court found that the borrower failed to demonstrate that the lender engaged in any fraud in originating the loan, and that the loan was not subject to the high cost loan provisions of the NY Banking Law or HOEPA. According to the court, “absent the violation of some statute or other relevant legal principle the law does not permit judges to simply ignore payment obligations voluntarily taken on by mortgagors even if it should have been evident to both lender and borrower that the loan was likely beyond the borrower’s ability to repay.” For a copy of the opinion, please see http://www.nycourts.gov/reporter/3dseries/2008/2008_50793.htm.
Banking
OCC and Wachovia Reach Nearly $145 Million Settlement for Alleged Telemarketing Fraud. On April 24, Wachovia Bank agreed to a settlement with the Office of the Comptroller of the Currency (OCC) after an eighteen month investigation into the bank’s relationships with several telemarketers and third party payment processors. The OCC’s investigation concluded that the bank engaged in unsafe and unsound practices and unfair practices under the Federal Trade Commission Act during the course of its relationships with third party payment processors and telemarketers. The OCC alleged that telemarketers and payment processors for telemarketers who had account relationships with Wachovia would regularly deposit remotely created checks (RCCs) not authorized by consumers in their bank accounts. The OCC further alleged that Wachovia failed to (i) conduct suitable due diligence on the accounts, (ii) recognize the risks posed by telemarketer and payment processor accounts, (iii) monitor the rates of return on RCCs and respond to consumer complaints, and (iv) follow proper procedures for returned RCCs. The OCC estimates that total consumer restitution will be $125 million, and Wachovia has agreed to pay $8.9 million to further consumer education programs and $10 million in civil money penalties. The announcement of this settlement coincides with the OCC’s risk management guidance to national banks for due diligence, underwriting, and monitoring of entities that process payments for telemarketers and other merchant clients (see below). For a copy of the settlement agreement, please see http://www.occ.treas.gov/ftp/release/2008-48b.pdf.
OCC Issues New Guidance on Telemarketing Relationships. On April 24, the OCC issued risk management guidance to national banks for due diligence, underwriting, and monitoring of entities that process payments for telemarketers and other merchant clients. Pursuant to the guidance, banks must control risk in the accounts of payment processors through (i) due diligence and underwriting, and (ii) monitoring these high-risk accounts for high levels of unauthorized returns and for suspicious or unusual patterns of activity. Banks must implement a due diligence and underwriting policy that, among other things, requires an initial background check of the processor and its underlying merchants to support the validity of processors’ and merchants’ businesses, their creditworthiness, and business practices. Banks must also engage in fraud monitoring. These procedures are particularly important in cases in which telemarketing payment processors deposit remotely created checks (RCCs) in their accounts. To ensure effective risk management, banks that initiate transactions for processors should require the processor to provide information on their merchant clients such as the merchant’s name, principal business activity, and geographic location. Banks should verify directly, or through the processor, that the originator of the payment is operating a legitimate business. Finally, the guidance provides that banks are expected to comply with Bank Secrecy Act/Anti-Money Laundering (BSA/AML) policies and procedures to monitor and identify unusual activity. For a copy of this guidance, please see http://www.occ.treas.gov/ftp/bulletin/2008-12.html.
FinCen Proposes Amending Bank Secrecy Act Regulations. On April 23, the Financial Crimes Enforcement Network (FinCen) announced a proposed rule to amend exemption requirements for certain transactions that must be reported under the Bank Secrecy Act (BSA). Under the BSA, financial institutions must report transactions in currency in excess of $10,000, via Currency Transaction Reports. Exempt from this reporting requirement are (i) large reportable transactions in currency made by other depository institutions, governmental departments or agencies, those acting with governmental authority, or public companies and their subsidiaries listed in the regulations (Phase I), and (ii) reportable transactions in currency by eligible non-listed businesses or payroll customers (Phase II). The proposed regulation would no longer require financial institutions to: (i) to file exemption forms for, or to annually review, customers that are depository institutions, government agencies, or entities acting with governmental authority; (ii) biennially renew a designation of exempt person filing for otherwise eligible Phase II customers; or (iii) wait 12 months before designating otherwise eligible Phase II customers for exemption. Comments are due within 60 days. For a copy of the proposed rule, please see http://www.buckleykolar.com/documents/FinCEN31CFR103.pdf.
Federal Court Holds That Overdraft Feature Not “Credit” Subject to TILA. A federal district court in California recently granted summary judgment to Washington Mutual Bank (Washington Mutual) dismissing claims that its “overdraft protection-overdraft limit” feature (the overdraft feature) violated the Truth in Lending Act (TILA) and California state law. In re Washington Mutual Overdraft Protection Litigation, No. 03-2566 (C.D. Cal. Mar. 17, 2008). The plaintiff class claimed that the overdraft feature violated TILA provisions prohibiting the unsolicited issuance of credit cards and the offsetting of cardholder indebtedness without affirmative consent. The plaintiffs opened checking accounts with Washington Mutual and signed a deposit agreement that incorporated account disclosures and regulations. The account disclosures included a provision regarding an “overdraft limit” providing that Washington Mutual, in its sole discretion, could choose to pay checks, transfers and withdrawals against the depositor’s account in excess of the amount of funds in the account up to a specified limit (and charge a fee for doing so). Prior to the deposit agreements, Washington Mutual also provided an informational brochure that describes the overdraft protection feature, which did not include the “discretionary” language. Upon remand from the Ninth Circuit, the plaintiffs attempted to show that the promotional brochure created a credit agreement, or alternatively, that the regular and automatic payment function rendered the overdraft protection feature a “credit feature” subject to TILA.
The district court was unpersuaded by the plaintiffs’ arguments, and granted summary judgment in favor of Washington Mutual. On the question of whether an agreement existed to pay overdrafts, the court noted that the plain language of the disclosures that were part of the actual agreement signed by plaintiffs specified that Washington Mutual had complete discretion on whether to pay overdrafts, and therefore was not legally bound to do so. Even if the promotional brochures provided before the execution of the written agreement could be read to obligate Washington Mutual to pay the overdrafts, as a matter of law such promotional materials cannot be used to change the contrary meaning or terms of a signed agreement. Consequently, the court found that no written agreement existed to create an extension of credit obliging Washington Mutual to pay the overdrafts. On the second issue, the court found that the overdraft feature is not a credit feature. The court gave great deference to the position of the Federal Reserve Board (Board), who filed an amicus brief in the case. The Board stated that overdraft programs are not subject to TILA disclosures in the absence of a written agreement to pay overdrafts. The court cited to the fact that Board regulations specifically exclude overdraft features from those charges included as “finance charges” subject to TILA, and that the Board has twice considered whether to apply TILA to overdraft features and has declined to do so both times. Consequently, the court held that applying the overdraft feature to TILA is legally untenable in light of the Board’s considered determination “that non-written-agreement overdraft programs are not subject to TILA and Regulation Z, regardless of whether an entity’s payment of overdrafts is routine and automatic.” The court also granted Washington Mutual’s motion to dismiss the state law claims on the ground that the federal Office of Thrift Supervision occupies the entire field of regulating the deposit- and lending-related activities of federal savings associations, based on the federal Home Owner’s Loan Act, thus preempting all of the state law claims. For a copy of the decision, please see http://www.buckleykolar.com/documents/InreWashingtonMutualOverdraft.pdf.
Consumer Finance
Seventh Circuit Rules Mailing Was “Firm Offer of Credit.” In an appeal from the district court order, the plaintiff claimed that GMAC Mortgage Corporation (GMAC) violated the Fair Credit Reporting Act (FCRA) because its mailer did not contain a “firm offer of credit,” and the disclosure of the consumer’s statutory right to prevent access to her credit records in the future was not “conspicuous.” Murray v. GMAC Mortgage Corporation, 2008 WL 1781160, No. 07-2776 (7th Cir. April 18, 2008). In its order, the court stated that the appeal is controlled by Murray v. New Cingular Wireless Services, Inc., No. 06-2477 (7th Cir. April 16, 2008) (reported in InfoBytes, April 18, 2008). Using the standards established in New Cingular, the court determined that GMAC made a “firm offer of credit” in its mailing despite the omission of some material terms. Although it is conceivable that by reserving the right to change some terms, the offeror could choose not to offer credit to consumers who otherwise meet the criteria used for the screening, no evidence was offered that GMAC intended to use its power in that way. In ruling that GMAC made a “firm offer of credit,” the court stated: “As in New Cingular, the suit relies on the text of the offer rather than a course of practice.” Regarding the disclosure, the court affirmed the district court’s finding that statutory damages are unavailable because GMAC came close to meeting the FTC’s requirements (which were issued after GMAC sent the mailer) and did not act recklessly under the standards of New Cingular. For a copy of the opinion, please see http://www.buckleykolar.com/documents/MurrayvGMAC.pdf.
Court Denies Motion to Dismiss in FACTA Credit Card Expiration-Date Action. In Troy v. Home Run Inn, Inc., 2008 WL 1766526 (N.D. Ill. Apr. 14, 2008), the court denied Home Run Inn, Inc.’s motion to dismiss a claim alleging a willful violation of the prohibition added to the Fair Credit Reporting Act (FCRA) by the Fair and Accurate Credit Transactions Act of 2003 (FACTA) against printing a credit card’s expiration date on an electronic receipt. The court rejected Home Run Inn’s argument that the statute does not grant a private right of action for this violation, concluding that its position “is consistent with every district court to address the issue.” Accepting the allegations in the complaint as true for purposes of ruling on a motion to dismiss, the court held that the consumer had stated a claim for a willful violation of FCRA (giving rise to statutory damages of $100-$1000 per violation), given that three years has passed since the enactment of FACTA, which was widely publicized in retail circles and that major card issuers require compliance with the requirement via contract. Home Run Inn additionally attempted to argue that under the Supreme Court’s decision in Safeco Insurance Co. v. Burr (reported in InfoBytes Special Alert, June 4, 2007) a careless reading of the statute cannot constitute a willful violation of the law. The court, however, concluded that unlike the statutory text at issue in Safeco, the FACTA provision is unambiguous. The court also dismissed Home Run Inn’s arguments that statutory damages without actual injury violates due process and established principles of tort law. For a copy of the opinion, please see http://www.buckleykolar.com/documents/TroyvHomeRunInn.pdf.
Litigation
Second Circuit Reinstates Antitrust Suit Against Credit Card Issuers in Mandatory Arbitration Case. On April 25, the U.S. Court of Appeals for the Second Circuit reinstated a potential class action suit against credit card issuing banks alleging that the banks violated federal antitrust laws by illegally colluding to force cardholders to accept mandatory arbitration clauses in their cardholder agreements. Ross v. Bank of America, N.A. (USA), et al., No. 06-4755-cv (2nd Cir. Apr. 25, 2008). In doing so, the court overturned a district court ruling that the plaintiff cardholders lacked standing under Article III of the U.S. Constitution because mandatory arbitration clauses had not been enforced against them. The Second Circuit held that the injuries to competition and the market alleged by the cardholders’ antitrust claim were sufficient to allege a “case or controversy” under Article III. However, the Second Circuit did not opine on the separate questions of whether the cardholders satisfied standing and injury tests under federal antitrust statutes sufficient to maintain their suit against the banks. These were among the questions remanded to the district court. For a copy of the opinion, please see http://www.ca2.uscourts.gov:8080/isysnative/RDpcT3BpbnNcT1BOXDA2LTQ3NTUtY3Zfb3BuLnBkZg==/06-4755-cv_opn.pdf#xml=http://www.ca2.uscourts.gov:8080/isysquery/irl8905/3/hilite.
Vague Allegation of Predatory Lending Does Not Defeat Foreclosure. A New York trial court rejected a borrower’s attempt to vacate the foreclosure sale of her property. Alliance Mtge. Banking Corp. v Dobkin, 2008 N.Y. Slip Op. 50793 (Supreme Court, Nassau County, March 28, 2008). In defense of the foreclosure proceeding, the borrower alleged that her lender engaged in “predatory lending” and violated the NY Banking Law. The court, while noting that the loan probably should not have been taken by the borrower, found that the borrower remained responsible for his obligation and that the foreclosure judgment should be upheld. The court found that the borrower failed to demonstrate that the lender engaged in any fraud in originating the loan, and that the loan was not subject to the high cost loan provisions of the NY Banking Law or HOEPA. According to the court, “absent the violation of some statute or other relevant legal principle the law does not permit judges to simply ignore payment obligations voluntarily taken on by mortgagors even if it should have been evident to both lender and borrower that the loan was likely beyond the borrower’s ability to repay.” For a copy of the opinion, please see http://www.nycourts.gov/reporter/3dseries/2008/2008_50793.htm.
Seventh Circuit Rules Mailing Was “Firm Offer of Credit.” In an appeal from the district court order, the plaintiff claimed that GMAC Mortgage Corporation (GMAC) violated the Fair Credit Reporting Act (FCRA) because its mailer did not contain a “firm offer of credit,” and the disclosure of the consumer’s statutory right to prevent access to her credit records in the future was not “conspicuous.” Murray v. GMAC Mortgage Corporation, 2008 WL 1781160, No. 07-2776 (7th Cir. April 18, 2008). In its order, the court stated that the appeal is controlled by Murray v. New Cingular Wireless Services, Inc., No. 06-2477 (7th Cir. April 16, 2008) (reported in InfoBytes, April 18, 2008). Using the standards established in New Cingular, the court determined that GMAC made a “firm offer of credit” in its mailing despite the omission of some material terms. Although it is conceivable that by reserving the right to change some terms, the offeror could choose not to offer credit to consumers who otherwise meet the criteria used for the screening, no evidence was offered that GMAC intended to use its power in that way. In ruling that GMAC made a “firm offer of credit,” the court stated: “As in New Cingular, the suit relies on the text of the offer rather than a course of practice.” Regarding the disclosure, the court affirmed the district court’s finding that statutory damages are unavailable because GMAC came close to meeting the FTC’s requirements (which were issued after GMAC sent the mailer) and did not act recklessly under the standards of New Cingular. For a copy of the opinion, please see http://www.buckleykolar.com/documents/MurrayvGMAC.pdf.
Court Denies Motion to Dismiss in FACTA Credit Card Expiration-Date Action. In Troy v. Home Run Inn, Inc., 2008 WL 1766526 (N.D. Ill. Apr. 14, 2008), the court denied Home Run Inn, Inc.’s motion to dismiss a claim alleging a willful violation of the prohibition added to the Fair Credit Reporting Act (FCRA) by the Fair and Accurate Credit Transactions Act of 2003 (FACTA) against printing a credit card’s expiration date on an electronic receipt. The court rejected Home Run Inn’s argument that the statute does not grant a private right of action for this violation, concluding that its position “is consistent with every district court to address the issue.” Accepting the allegations in the complaint as true for purposes of ruling on a motion to dismiss, the court held that the consumer had stated a claim for a willful violation of FCRA (giving rise to statutory damages of $100-$1000 per violation), given that three years has passed since the enactment of FACTA, which was widely publicized in retail circles and that major card issuers require compliance with the requirement via contract. Home Run Inn additionally attempted to argue that under the Supreme Court’s decision in Safeco Insurance Co. v. Burr (reported in InfoBytes Special Alert, June 4, 2007) a careless reading of the statute cannot constitute a willful violation of the law. The court, however, concluded that unlike the statutory text at issue in Safeco, the FACTA provision is unambiguous. The court also dismissed Home Run Inn’s arguments that statutory damages without actual injury violates due process and established principles of tort law. For a copy of the opinion, please see http://www.buckleykolar.com/documents/TroyvHomeRunInn.pdf.
Name At End of E-Mail Sufficient to Satisfy Statute of Frauds. The New York appellate court found that a series of e-mails constituted signed writings that memorialized the parties’ agreement to change the plaintiff’s responsibilities under an employment agreement. Stevens v. Publicis, S.A., 2008 NY Slip Op 02880 (N.Y. App. Div. Apr. 1, 2008). The court determined that the e-mails satisfied the Statute of Frauds because (i) the name at the end of the parties’ e-mails signified each author’s “intent to authenticate” the e-mail’s contents, and (ii) the defendant’s name at the end of the e-mail constituted a “signed writing” sufficient to satisfy the employment agreement’s requirement that any modification be signed by all parties. For a copy of this decision, see http://www.courts.state.ny.us/reporter/3dseries/2008/2008_02880.htm.
Negligence Claim Based on Alleged Increased Risk of Identity Theft Has Standing. On March 24, a U.S. District Court for the Northern District of California found that the plaintiff in the case had standing to bring a negligence claim against the defendant, Gap Inc., in connection with the theft of Gap’s computers, which possibly contained the plaintiff’s personal information. Ruiz v. Gap Inc., No. 07-5739 SC (N.D. Cal. Mar. 24, 2008). In this case, the plaintiff submitted an online application for employment with Gap that included disclosure of personal information, such as his social security number. The plaintiff filed suit against Gap for breach of the privacy of his personal information after learning that several Gap laptop computers containing personal information from over 800,000 job applicants were stolen. One element of Gap’s motion for summary judgment challenged the plaintiff’s standing because the plaintiff merely asserted that he is at an increased risk of identity theft and not that he has actually been a victim of identity theft. In denying Gap’s motion for summary judgment on the negligence claim, the court found that at this stage in the proceedings, the plaintiff had properly alleged that he suffered an “injury in fact” because he is at increased risk of identity theft. However, the court cautioned that “[s]hould it become apparent that Ruiz’s [the plaintiff] alleged injury is in fact too speculative or hypothetical, the Court will conclude, as it must, that Ruiz lacks standing.” For a copy of this decision, please see http://www.buckleykolar.com/documents/RuizvGap.pdf.
Federal Court Holds That Overdraft Feature Not “Credit” Subject to TILA. A federal district court in California recently granted summary judgment to Washington Mutual Bank (Washington Mutual) dismissing claims that its “overdraft protection-overdraft limit” feature (the overdraft feature) violated the Truth in Lending Act (TILA) and California state law. In re Washington Mutual Overdraft Protection Litigation, No. 03-2566 (C.D. Cal. Mar. 17, 2008). The plaintiff class claimed that the overdraft feature violated TILA provisions prohibiting the unsolicited issuance of credit cards and the offsetting of cardholder indebtedness without affirmative consent. The plaintiffs opened checking accounts with Washington Mutual and signed a deposit agreement that incorporated account disclosures and regulations. The account disclosures included a provision regarding an “overdraft limit” providing that Washington Mutual, in its sole discretion, could choose to pay checks, transfers and withdrawals against the depositor’s account in excess of the amount of funds in the account up to a specified limit (and charge a fee for doing so). Prior to the deposit agreements, Washington Mutual also provided an informational brochure that describes the overdraft protection feature, which did not include the “discretionary” language. Upon remand from the Ninth Circuit, the plaintiffs attempted to show that the promotional brochure created a credit agreement, or alternatively, that the regular and automatic payment function rendered the overdraft protection feature a “credit feature” subject to TILA.
The district court was unpersuaded by the plaintiffs’ arguments, and granted summary judgment in favor of Washington Mutual. On the question of whether an agreement existed to pay overdrafts, the court noted that the plain language of the disclosures that were part of the actual agreement signed by plaintiffs specified that Washington Mutual had complete discretion on whether to pay overdrafts, and therefore was not legally bound to do so. Even if the promotional brochures provided before the execution of the written agreement could be read to obligate Washington Mutual to pay the overdrafts, as a matter of law such promotional materials cannot be used to change the contrary meaning or terms of a signed agreement. Consequently, the court found that no written agreement existed to create an extension of credit obliging Washington Mutual to pay the overdrafts. On the second issue, the court found that the overdraft feature is not a credit feature. The court gave great deference to the position of the Federal Reserve Board (Board), who filed an amicus brief in the case. The Board stated that overdraft programs are not subject to TILA disclosures in the absence of a written agreement to pay overdrafts. The court cited to the fact that Board regulations specifically exclude overdraft features from those charges included as “finance charges” subject to TILA, and that the Board has twice considered whether to apply TILA to overdraft features and has declined to do so both times. Consequently, the court held that applying the overdraft feature to TILA is legally untenable in light of the Board’s considered determination “that non-written-agreement overdraft programs are not subject to TILA and Regulation Z, regardless of whether an entity’s payment of overdrafts is routine and automatic.” The court also granted Washington Mutual’s motion to dismiss the state law claims on the ground that the federal Office of Thrift Supervision occupies the entire field of regulating the deposit- and lending-related activities of federal savings associations, based on the federal Home Owner’s Loan Act, thus preempting all of the state law claims. For a copy of the decision, please see http://www.buckleykolar.com/documents/InreWashingtonMutualOverdraft.pdf.
E-Financial Services
Arizona Enacts Credit Freeze Law. On April 16, Arizona Governor Janet Napolitano signed S.B. 1185, which will allow consumers to place a security freeze on their credit information. Under the new law, if a consumer places a written request for a security freeze, the consumer reporting agency may not release the consumer’s credit report or credit score to a third party. Consumer reporting agencies must place all security freezes and provide written confirmation to the consumer no later than ten business days after receiving a written request from the consumer. The freeze is in effect until the consumer requests removal or a temporary lift. A temporary lift must be implemented within three business days after a written request, or fifteen minutes after a telephone or Internet request. A security freeze may also be lifted if there is a material misrepresentation of fact regarding the freeze. Third parties who request credit reports that are under a security freeze may treat the application for credit as incomplete. Consumer reporting agencies that are grossly negligent or act willfully and maliciously will be liable for actual damages and attorney’s fees. The law becomes effective on August 31, 2008. For a copy of this bill, please see http://www.azleg.gov/legtext/48leg/2r/bills/sb1185s.pdf.
Second Circuit Reinstates Antitrust Suit Against Credit Card Issuers in Mandatory Arbitration Case. On April 25, the U.S. Court of Appeals for the Second Circuit reinstated a potential class action suit against credit card issuing banks alleging that the banks violated federal antitrust laws by illegally colluding to force cardholders to accept mandatory arbitration clauses in their cardholder agreements. Ross v. Bank of America, N.A. (USA), et al., No. 06-4755-cv (2nd Cir. Apr. 25, 2008). In doing so, the court overturned a district court ruling that the plaintiff cardholders lacked standing under Article III of the U.S. Constitution because mandatory arbitration clauses had not been enforced against them. The Second Circuit held that the injuries to competition and the market alleged by the cardholders’ antitrust claim were sufficient to allege a “case or controversy” under Article III. However, the Second Circuit did not opine on the separate questions of whether the cardholders satisfied standing and injury tests under federal antitrust statutes sufficient to maintain their suit against the banks. These were among the questions remanded to the district court. For a copy of the opinion, please see http://www.ca2.uscourts.gov:8080/isysnative/RDpcT3BpbnNcT1BOXDA2LTQ3NTUtY3Zfb3BuLnBkZg==/06-4755-cv_opn.pdf#xml=http://www.ca2.uscourts.gov:8080/isysquery/irl8905/3/hilite.
Name At End of E-Mail Sufficient to Satisfy Statute of Frauds. The New York appellate court found that a series of e-mails constituted signed writings that memorialized the parties’ agreement to change the plaintiff’s responsibilities under an employment agreement. Stevens v. Publicis, S.A., 2008 NY Slip Op 02880 (N.Y. App. Div. Apr. 1, 2008). The court determined that the e-mails satisfied the Statute of Frauds because (i) the name at the end of the parties’ e-mails signified each author’s “intent to authenticate” the e-mail’s contents, and (ii) the defendant’s name at the end of the e-mail constituted a “signed writing” sufficient to satisfy the employment agreement’s requirement that any modification be signed by all parties. For a copy of this decision, see http://www.courts.state.ny.us/reporter/3dseries/2008/2008_02880.htm.
Privacy/Data Security
Arizona Enacts Credit Freeze Law. On April 16, Arizona Governor Janet Napolitano signed S.B. 1185, which will allow consumers to place a security freeze on their credit information. Under the new law, if a consumer places a written request for a security freeze, the consumer reporting agency may not release the consumer’s credit report or credit score to a third party. Consumer reporting agencies must place all security freezes and provide written confirmation to the consumer no later than ten business days after receiving a written request from the consumer. The freeze is in effect until the consumer requests removal or a temporary lift. A temporary lift must be implemented within three business days after a written request, or fifteen minutes after a telephone or Internet request. A security freeze may also be lifted if there is a material misrepresentation of fact regarding the freeze. Third parties who request credit reports that are under a security freeze may treat the application for credit as incomplete. Consumer reporting agencies that are grossly negligent or act willfully and maliciously will be liable for actual damages and attorney’s fees. The law becomes effective on August 31, 2008. For a copy of this bill, please see http://www.azleg.gov/legtext/48leg/2r/bills/sb1185s.pdf.
Court Denies Motion to Dismiss in FACTA Credit Card Expiration-Date Action. In Troy v. Home Run Inn, Inc., 2008 WL 1766526 (N.D. Ill. Apr. 14, 2008), the court denied Home Run Inn, Inc.’s motion to dismiss a claim alleging a willful violation of the prohibition added to the Fair Credit Reporting Act (FCRA) by the Fair and Accurate Credit Transactions Act of 2003 (FACTA) against printing a credit card’s expiration date on an electronic receipt. The court rejected Home Run Inn’s argument that the statute does not grant a private right of action for this violation, concluding that its position “is consistent with every district court to address the issue.” Accepting the allegations in the complaint as true for purposes of ruling on a motion to dismiss, the court held that the consumer had stated a claim for a willful violation of FCRA (giving rise to statutory damages of $100-$1000 per violation), given that three years has passed since the enactment of FACTA, which was widely publicized in retail circles and that major card issuers require compliance with the requirement via contract. Home Run Inn additionally attempted to argue that under the Supreme Court’s decision in Safeco Insurance Co. v. Burr (reported in InfoBytes Special Alert, June 4, 2007) a careless reading of the statute cannot constitute a willful violation of the law. The court, however, concluded that unlike the statutory text at issue in Safeco, the FACTA provision is unambiguous. The court also dismissed Home Run Inn’s arguments that statutory damages without actual injury violates due process and established principles of tort law. For a copy of the opinion, please see http://www.buckleykolar.com/documents/TroyvHomeRunInn.pdf.
Negligence Claim Based on Alleged Increased Risk of Identity Theft Has Standing. On March 24, a U.S. District Court for the Northern District of California found that the plaintiff in the case had standing to bring a negligence claim against the defendant, Gap Inc., in connection with the theft of Gap’s computers, which possibly contained the plaintiff’s personal information. Ruiz v. Gap Inc., No. 07-5739 SC (N.D. Cal. Mar. 24, 2008). In this case, the plaintiff submitted an online application for employment with Gap that included disclosure of personal information, such as his social security number. The plaintiff filed suit against Gap for breach of the privacy of his personal information after learning that several Gap laptop computers containing personal information from over 800,000 job applicants were stolen. One element of Gap’s motion for summary judgment challenged the plaintiff’s standing because the plaintiff merely asserted that he is at an increased risk of identity theft and not that he has actually been a victim of identity theft. In denying Gap’s motion for summary judgment on the negligence claim, the court found that at this stage in the proceedings, the plaintiff had properly alleged that he suffered an “injury in fact” because he is at increased risk of identity theft. However, the court cautioned that “[s]hould it become apparent that Ruiz’s [the plaintiff] alleged injury is in fact too speculative or hypothetical, the Court will conclude, as it must, that Ruiz lacks standing.” For a copy of this decision, please see http://www.buckleykolar.com/documents/RuizvGap.pdf.
Credit Cards
Second Circuit Reinstates Antitrust Suit Against Credit Card Issuers in Mandatory Arbitration Case. On April 25, the U.S. Court of Appeals for the Second Circuit reinstated a potential class action suit against credit card issuing banks alleging that the banks violated federal antitrust laws by illegally colluding to force cardholders to accept mandatory arbitration clauses in their cardholder agreements. Ross v. Bank of America, N.A. (USA), et al., No. 06-4755-cv (2nd Cir. Apr. 25, 2008). In doing so, the court overturned a district court ruling that the plaintiff cardholders lacked standing under Article III of the U.S. Constitution because mandatory arbitration clauses had not been enforced against them. The Second Circuit held that the injuries to competition and the market alleged by the cardholders’ antitrust claim were sufficient to allege a “case or controversy” under Article III. However, the Second Circuit did not opine on the separate questions of whether the cardholders satisfied standing and injury tests under federal antitrust statutes sufficient to maintain their suit against the banks. These were among the questions remanded to the district court. For a copy of the opinion, please see http://www.ca2.uscourts.gov:8080/isysnative/RDpcT3BpbnNcT1BOXDA2LTQ3NTUtY3Zfb3BuLnBkZg==/06-4755-cv_opn.pdf#xml=http://www.ca2.uscourts.gov:8080/isysquery/irl8905/3/hilite.
Court Denies Motion to Dismiss in FACTA Credit Card Expiration-Date Action. In Troy v. Home Run Inn, Inc., 2008 WL 1766526 (N.D. Ill. Apr. 14, 2008), the court denied Home Run Inn, Inc.’s motion to dismiss a claim alleging a willful violation of the prohibition added to the Fair Credit Reporting Act (FCRA) by the Fair and Accurate Credit Transactions Act of 2003 (FACTA) against printing a credit card’s expiration date on an electronic receipt. The court rejected Home Run Inn’s argument that the statute does not grant a private right of action for this violation, concluding that its position “is consistent with every district court to address the issue.” Accepting the allegations in the complaint as true for purposes of ruling on a motion to dismiss, the court held that the consumer had stated a claim for a willful violation of FCRA (giving rise to statutory damages of $100-$1000 per violation), given that three years has passed since the enactment of FACTA, which was widely publicized in retail circles and that major card issuers require compliance with the requirement via contract. Home Run Inn additionally attempted to argue that under the Supreme Court’s decision in Safeco Insurance Co. v. Burr (reported in InfoBytes Special Alert, June 4, 2007) a careless reading of the statute cannot constitute a willful violation of the law. The court, however, concluded that unlike the statutory text at issue in Safeco, the FACTA provision is unambiguous. The court also dismissed Home Run Inn’s arguments that statutory damages without actual injury violates due process and established principles of tort law. For a copy of the opinion, please see http://www.buckleykolar.com/documents/TroyvHomeRunInn.pdf.