InfoBytes, April 3, 2009

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Federal Issues

HUD Issues Mortgagee Letter to Clarify HECM for Purchase Program Requirements. On March 27, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2009-11 (the Letter) to clarify and compile HUD’s guidance on the Home Equity Conversion Mortgage (HECM) for Purchase program. The program permits seniors to purchase a new principal residence with HECM proceeds. The guidance reiterates that HECM mortgagors may only have one principal residence at any given time; in order to take advantage of the HECM for purchase program to obtain a new principal residence, the mortgagor must pay off their existing FHA-insured mortgage. Additionally, only properties where construction is completed are eligible for FHA insurance under the program, and a number of different property types, including cooperatives, boarding houses, and certain manufactured homes, are ineligible. The Letter also provides guidance on avoiding property flipping under the program, for appropriately managing repairs and set-asides, for determining the maximum claim amount under the program, and for ensuring only approved funding sources are used. For a copy of the Letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-11ml.doc. For a copy of the attachment to the Letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-11mlatt.doc.  

Federal Reserve Bank of New York Report Concludes No Adverse Pricing of ARMs. On April 2, the Federal Reserve Bank of New York issued a study entitled “Subprime Mortgage Pricing: The Impact of Race, Ethnicity, and Gender on the Cost of Borrowing.” The study examined the rates charged on 75,000 adjustable-rate mortgages originated in August 2005 using HMDA data in conjunction with mortgage pricing and risk variables. The study concluded that any statistically significant difference in the rates charged to minority borrowers over the period pointed to minority borrowers receiving slightly more favorable loan terms, and that there was no evidence of adverse pricing by race, ethnicity, or gender in either the initial rate or the reset margin. For a copy of the report, please see http://www.newyorkfed.org/research/staff_reports/sr368.pdf.  

FTC Chairman Recommends Expanding FTC’s Authority. On March 31, Federal Trade Commission (FTC) Chairman Jon Leibowitz testified before the Subcommittee on Financial Services and General Government of the U.S. House Committee on Appropriations regarding protecting consumers in financial services markets. In addition to outlining the FTC’s current efforts to provide consumer protection, Chairman Leibowitz outlined several ways to potentially enhance the FTC’s protection efforts. Chairman Leibowitz recommended that Congress provide more authority to the FTC to (i) employ notice and comment rulemaking authority to establish rules on unfair and deceptive practices under the FTC Act, (ii) obtain civil penalties for unfair or deceptive acts and practices, and (iii) bring suits to obtain civil penalties in federal court. Chairman Leibowitz also requested that Congress consider the FTC when determining how to modify federal oversight of consumer financial services and provide the FTC additional resources to increase its law enforcement activities and expand its research on the efficacy of mortgage disclosures. For a copy of the prepared statement, please see http://www.ftc.gov/os/2009/03/P064814financialservices.pdf.

FTC Settles Telemarketing Sales Rule Violation Charges. On April 1, the Federal Trade Commission (FTC) settled charges against a group of sellers and telemarketers that allegedly violated the FTC’s Telemarketing Sales Rule (TSR) and related federal law, as well as the Kentucky Consumer Protection Act. The complaint resulted from 2008’s “Operation Tele-PHONEY” enforcement sweep (reported in InfoBytes, May 23, 2008). According to the complaint, the defendants, among other things, misrepresented that they were calling from a major retailer or from the consumers’ credit card company, made confusing and deceptive sales pitches, and did not deliver promised goods and services. The telemarketers also allegedly harassed consumers who refused to participate in the call. Among other things, the settlement requires a $5 million performance bond before the settling defendants resume telemarketing or assist others in telemarketing, imposes a $15.7 million monetary judgment, requires restitution of approximately $1.3 million, and requires compliance with existing consumer protection and telemarketing laws. For a copy of the press release, please see http://www.ftc.gov/opa/2009/04/suretouch.shtm.

FASB Adjusts Mark-to-Market Accounting Rules. On April 2, the Financial Accounting Standards Board (FASB) considered and approved for a final draft two proposed FASB staff positions (FSP) relating to its “mark-to-market” accounting rules addressing inactive markets and distressed transactions (FSP FAS 157-e). The first FSP will effectively allow companies to use “significant” judgment to determine the prices of certain assets, including mortgage-backed securities. Specifically, the FSP will (i) allow for the “fair value” accounting of certain assets (e.g. mortgage-backed securities) located in inactive markets, (ii) provide guidance to determine when an “inactive” market exists, (iii) eliminate the proposed presumption that all transactions are distressed unless proven otherwise, (iv) provide examples of how to estimate fair value in an inactive market, and (v) require an entity to disclose any changes in valuation techniques resulting from the new FSP and, if practicable, quantify its effects. The FSP will be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 (with early adoption permitted for periods ending after March 15, 2009). Under the second measure, an entity would have more flexibility when valuing certain debt securities (e.g. mortgage-backed securities) that are “other-than-temporarily impaired” (OTTI) Specifically, if the entity intends to sell the debt security or it is more likely than not that it will have to sell before recovering its cost basis, the entire impairment would be recognized as OTTI. However, if the entity is not likely to have to sell the security before recovering its cost basis, only the portion of the impairment loss representing credit losses would be recognized in earnings as OTTI, with the balance recognized as a charge to other comprehensive income. Both FSPs will be applied prospectively and are effective for interim and annual periods ending after June 15, 2009 (with early adoption permitted for periods ending after March 15, 2009). For a copy of the summary of the guidance, please see http://www.fasb.org/action/sbd040209.shtml.

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State Issues

Virginia Implements SAFE Act Requirements, Tightens Restrictions on Mortgage Lenders and Brokers. On March 27, Virginia Governor Timothy M. Kaine signed a series of bills to carry out the requirements of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) and to tighten restrictions on mortgage lenders and mortgage brokers. To implement the SAFE Act, Virginia’s legislature enacted HB 2031, which requires mortgage loan originators to obtain a license from the State Corporation Commission through the Nationwide Mortgage Licensing System and Registry. The bill also establishes licensing procedures and criteria, including requirements for bonding, background checks, education, testing, continuing education, investigations, examinations, reporting, payment of annual fees, license suspension and revocation, and fines. Governor Kaine also signed three bills pertaining to mortgage lenders and mortgage brokers. HB 2030 repeals sections of the Code of Virginia that required mortgage lenders and brokers (i) to conduct background checks on certain employees and (ii) to ensure that their employees are properly trained in applicable state and federal mortgage lending laws and regulations. HB 1776 requires mortgage brokers to use “reasonable skill, care, and diligence” when securing a mortgage loan that will be in the best interests of the applicant, and creates a private right of action by borrowers for violations of this provision. Finally, HB 2262 prohibits mortgage brokers, lenders and originators from using any “deception, fraud, false pretense, false promise, or misrepresentation” in connection with a mortgage loan transaction. The bill also authorizes the Attorney General to enforce this provision by imposing civil penalties (up to $2,500 per violation) and restitution damages. Additionally, the bill removes the exemption for mortgage lenders from the Virginia Consumer Protection Act. All four bills are effective July 1, 2009; HB 2031’s loan originator licensing requirements do not take effect until July 1, 2010. For a copy of HB 2031, please see http://leg1.state.va.us/cgi-bin/legp504.exe?ses=091&typ=bil&val=HB2031. For a copy of HB 2030, please see http://leg1.state.va.us/cgi-bin/legp504.exe?ses=091&typ=bil&val=hb2030. For a copy of HB 1776, please see http://leg1.state.va.us/cgi-bin/legp504.exe?091+sum+HB1776. For a copy of HB 2291, please see http://leg1.state.va.us/cgi-bin/legp504.exe?091+sum+HB2291.  

North Carolina Regulator Issues Memo Regarding Loan Modifications. On March 31, the North Carolina Office of the Commissioner of Banks issued a memo to all licensees regarding loan modifications. The memo reminds licensees that, if a refinance is not available, licensees are generally prohibited from assisting borrowers in obtaining a loan modification for compensation or gain. North Carolina law excepts employees of licensed Mortgage Services or Mortgage Lenders servicing loans on behalf of the owner of those loans from this provision. The memo also reiterates that North Carolina law prohibits any attempt to collect advance fees for debt settlement or foreclosure assistance. For a copy of the memo, please see http://www.buckleysandler.com/NC_Memo_03_09.pdf.

Kentucky Law Expands Enforcement of Payday Lending Deferred Deposit Transactions. On March 25, Kentucky Governor Steve Beshear signed HB 444 to increase the power of the Executive Director of Financial Institutions and the Kentucky Department of Finance to enhance accountability and reduce fraud in the payday lending industry. The bill mandates the creation of both a state-administered database and individual databases created and maintained by each payday lender which will monitor real-time deferred deposit transactions. The law limits the number and amount of transactions licensees may engage in with individual customers to two transactions, with the face amount not to exceed $500. The bill also provides for (i) penalties (e.g. engaging in deferred deposit activity without a license results in a felony and a violation of the law results in a misdemeanor), (ii) the effect of license denial and revocation, and (iii) the enhanced authority of the Executive Director of Financial Institutions to enforce the law, adopt administrative regulations, and penalize violators. For a copy of the bill, please see http://www.lrc.ky.gov/record/09RS/HB444.htm.

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Courts

Minnesota Federal Court Dismisses Putative Class Action Against Lender. On March 31, the U.S. District Court for the District of Minnesota dismissed a putative state-wide class action involving claims of breach of contract, unlawful and deceptive trade practices, breach of fiduciary duties, and unjust enrichment against a residential mortgage lender. Weller v. Accredited Home Lenders, Inc., No. 08-2798 (D. Minn. March 31, 2009). In support of these claims, the plaintiffs alleged, among other things, that (i) the defendant failed to provide them with a statutory disclaimer indicating that they were not plaintiffs’ agent, (ii) the defendant failed to notify them that they qualified for a lower rate of interest than the rate they were charged, and (iii) the defendant was liable for the closing agent’s failure to provide certain disclosures. The court granted the defendant’s motion to dismiss. The court rejected the plaintiffs’ breach of fiduciary duty claim, holding that the failure to provide the “non-agency disclosure” required by Minnesota law “does not, on its own, make a residential mortgage originator a fiduciary as a matter of law.” The court also rejected the plaintiffs’ unlawful and deceptive trade practices (UDAP) claims, holding that the plaintiffs failed to plead alleged misrepresentations with the specificity required by F.R.C.P. Rule 9(b). Allowing plaintiffs 30 days to file an amended complaint to re-plead their UDAP claims, the court provided the plaintiffs with guidance on the types of allegations that would survive future dismissal. For example, to satisfy the Minnesota statute on which they relied, rather than merely allege that they were charged a higher rate of interest than they qualified for, the plaintiffs would have to allege that they were placed in a lower “investment grade,” and specify the grade in which they were placed and the grade they should have received. The court also reminded the plaintiffs that, if they were to successfully level claims against the defendant about the closing agent’s alleged failure to provide certain disclosures, they would have to allege with specificity how the closing agent was the defendant’s agent (such as by citing provisions of the Lender’s Instructions). BuckleySandler LLP represented defendant Accredited Home Lenders, Inc. in this action. For a copy of the opinion, please see http://www.buckleysandler.com/Weller_v_Accredited.pdf.

Washington Federal Court Holds HUD-1 Not a Contract; Depositing Retained Interest on Escrow Not a Settlement Service. On March 9, the U.S. District Court for the Western District of Washington dismissed several allegations of Real Estate Settlement Procedures Act (RESPA) violations, holding that the HUD-1 settlement statement is not a contract and that the practice of depositing retained interest on escrow is not a settlement service. Cornelius v. Fidelity Nat’l Title Co., No. C08-754MJP, 2009 WL 596585 (W.D. Wash. Mar. 9, 2009). In this putative class action, the plaintiffs alleged that they were charged improper fees at the settlement of the mortgage loan transactions in violation of the Real Estate Settlement Procedures Act (RESPA). Specifically, they alleged that (i) the defendants breached a contract with the plaintiffs because they did not disburse the money as described on the HUD-1 statement, (ii) the “reconveyance processing fee” was an improper duplicative fee that was retained by the defendant settlement agents instead of being paid to another party to perform services, and (iii) the “earnings credit” described in the escrow agreement was improperly retained interest (and not used to offset settlement costs). The court dismissed breach of contract claims based on the HUD-1 settlement statement, finding as a matter of law that the HUD-1 is not a contract, but merely a “representation that what is written is ‘a true and accurate statement;’ there is no representation that something will, or will not, happen in the future.” However, the court declined to dismiss the allegation that the reconveyance fee violated RESPA, rejecting the defendants’ argument that the reconveyance fee was not a settlement service (and therefore not subject to RESPA). Finally, the court held that the plaintiffs lacked standing to bring a RESPA case challenging the escrow company’s earnings credit relationship with its own bank, stating that the plaintiffs have no legal interest or right in the earnings credit, they could not allege an injury in fact. The court further held that even if the plaintiff’s had standing, the deposit of escrow funds in a bank is not a referral of business covered by RESPA. For a copy of the opinion, please see http://www.buckleysandler.com/Conelius_v_FNTC.pdf.

Illinois Federal Court Rules that Arbitration Clause Does Not Apply to FCRA Claim. On March 23, the U.S. District Court for the Northern District of Illinois held that an arbitration clause did not apply to a claim made under the Fair Credit Reporting Act (FCRA) because the dispute was outside of the scope of the clause. Thomas v. American General Finance, No. 08 C 3009, 2009 WL 781078 (N.D.Ill. Mar. 23, 2009). The case arose after the plaintiff sued the defendant for allegedly accessing his credit information without his consent or knowledge. The defendant moved to stay the proceedings and to compel arbitration, based on language contained in two prior loan agreements executed by the parties. Both loan agreements, which had been performed completely by both parties, contained language stating that covered claims included "any product or service offered to Lender’s customers with any assistance or involvement by Lender" and "any claim based on or arising under any federal, state, or local law, statute, regulation, ordinance, or rule." Additionally, the agreements provided that the "Arbitration Agreement applies even if [the] loan has been ... paid in full." The defendant argued that these clauses were written broadly enough to encompass the plaintiff’s FCRA dispute. The court disagreed with this argument on three grounds. First, the court found that the parties intended to limit the agreements’ arbitration provisions only to claims arising from the agreements because the parties agreed to new arbitration agreements with every new transaction. Next, the court cited controlling precedent, which held that, although arbitration agreements under expired or terminated contracts may apply to subsequent claims, the claims must still "arise out of or relate to" the subject matter of the arbitration clause. Applying this precedent, because the plaintiff’s FCRA claim was unrelated to the fully performed loan agreements, the arbitration clause did not apply. Finally, the court determined that if the arbitration clauses could be interpreted as standing free from the loan agreements, it could lead to absurd results, such as compelled arbitration of claims for intentional tort. To avoid this result, the court reasoned that the arbitration provisions must be read in relation to each other and cannot apply to disputes over future claims wholly unrelated to the underlying agreements. Concluding that the arbitration agreements did not apply to the FCRA claim, the court denied the motion to compel arbitration. For a copy of the opinion, please see http://www.buckleysandler.com/Thomas_v_American.pdf.

Wisconsin Federal Court Rules an Entity is Not a Credit Reporting Agency By Merely Obtaining and Forwarding Information. On March 19, the U.S. District Court for the Eastern District of Wisconsin held that merely obtaining and then forwarding consumer credit information is not enough to make an entity a credit reporting agency (CRA) under the Fair Credit Reporting Act (FCRA). Ori v. Fifth Third Bank, No. 08CV0432, 2009 WL 738867 (E.D. Wis. Mar. 19, 2009). The case arose after plaintiff alleged that defendant, an outside vendor for a bank, violated either § 1681a(f) or § 1681s-2(b) of FCRA by incorrectly transmitting information to various CRAs, causing the plaintiff’s mortgages to be labeled as delinquent. The court rejected both allegations. First, the court found that the defendant was a “furnisher” of credit information, not a “credit reporting agency,” because it neither “assembled” nor “evaluated” consumer information. The court reasoned that to “assemble” means "to bring together (as in a particular place or for particular purpose)" or "to fit together the parts of", and “evaluate” means "to determine or fix the value of." Next, the court rejected the plaintiff’s § 1681s-2(b) claim because the plaintiff failed to notify a CRA that he wished to dispute the information furnished by the defendant. As a result, the court granted the defendant’s motions to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/Ori_v_Fifth_Third.pdf.

Florida Federal Court Finds Defendant Did Not Willfully Violate FACTA. On March 19, the U.S. District Court for the Southern District of Florida held that a defendant merchant did not “willfully” violate the Fair and Accurate Credit Transaction Act (FACTA) by including a credit card expiration date on a receipt. Rosenthal v. Longchamp Coral Gables LLC, – F. Supp. 2d –, 2009 WL 748852 (S.D. Fla. Mar. 19, 2009). In Rosenthal, the plaintiff alleged that the defendant merchant violated FACTA by including the expiration date of her credit card on a printed receipt and filed suit, seeking actual damages, statutory damages, punitive damages, and injunctive relief. The court, reasoning from the U.S. Supreme Court’s “recklessness” standard from Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (U.S. 2007), held that the defendant did not act “willfully.” The court rejected a finding of willfulness based upon evidence that FACTA’s requirements were well-publicized in the media and were contained in the defendant’s credit card agreements. The court instead found persuasive the defendant’s argument that Congress recognized that many merchants believed that only truncating the credit card number would ensure compliance with the Credit and Debit Card Receipt Clarification Act. Further, the court agreed with the holding in Irvine v. 233 Skydeck, LLC, No. 08 C 4939, 2009 WL 347395 (N.D. Ill. Feb. 12, 2009) (reported in InfoBytes, Feb. 20, 2009) to find that FACTA is not unconstitutionally vague because “[a] reasonable jury can certainly determine the proper amount of damages within the statutory range” and that it does not violate due process merely because of the possibility of excessive statutory and punitive damages. As a result, the court granted the defendant’s motion to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/Rosenthal_v_Longchamp.pdf.

Virginia Bankruptcy Court Lacks Subject Matter Jurisdiction Over FDCPA Claim. On March 25, the U.S. Bankruptcy Court for the Western District of Virginia held that it lacks subject matter jurisdiction over a Fair Debt Collection Practices Act (FDCPA) claim. In re Harlan, Bankr. No. 08-50132, 2009 WL 762172 (Bankr. W.D. Va. Mar. 25, 2009). In this case, defendant EMC Mortgage Corporation (EMC) was granted relief from an automatic stay by the bankruptcy court so that it could initiate foreclosure proceedings on the borrowers, who had filed for bankruptcy protection. Pursuant to that order, EMC sent collection notices, and then a foreclosure notice, to the debtors. The debtors sued, alleging that the notices violated the FDCPA and the bankruptcy court’s discharge injunction order. EMC moved to dismiss, arguing that the notices merely exercised the defendants’ rights to foreclose on the debtors’ residence. The court granted the defendants’ motion to dismiss for lack of subject matter jurisdiction with regard to FDCPA claim, holding that the FDCPA claim did not “arise under” the Bankruptcy Code and was not “related to” the bankruptcy claim. The court, however, denied the defendants’ motion to dismiss regarding the discharge order, holding that such a claim “arises under” the Bankruptcy Code and sets forth a plausible entitlement to relief. The court also denied the defendants’ motion to dismiss for failure to state a claim, finding that the debtors demonstrated a plausible entitlement to relief based on the notices sent to them by the defendants. For a copy of the opinion, please email .

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Firm News

Jeff Naimon and Grant Mitchell will be speaking at the Annual RESPRO Conference on April 7. Mr. Naimon’s speech will cover the recent RESPA final rule. Mr. Mitchell will discuss RESPA-affiliated business arrangements.

Jon Jerison will be presenting at an audio conference on April 9, “The HELOC Balancing Act – Consumer Laws and Agency Guidance”. Please click here for additional details about this conference sponsored by AS Pratt.

Margo Tank will be speaking at the MBA Government Housing and Loan Production Conference in Washington, DC on April 28 on a panel titled “The Next Generation of Operations - What’s In It for Me?.”



Joe Kolar presented a speech on RESPA at the Old Republic National Title Insurance Company 2009 Annual Seminar in Columbus, Ohio on March 10.



Margo Tank spoke at the Mortgage Bankers Association Technology in Mortgage Banking Conference/ Expo on March 15 – 18 in Las Vegas, NV regarding e-Mortgage legal and risk management issues.

Andy Sandler spoke at the Securities Industry & Financial Markets Association’s Annual Seminar being held in Phoenix, Arizona on March 24 - 28.

Andy Sandler spoke in New York City on April 1 at the American Conference Institute’s Advanced Forum on Financial Institutions Insurance.

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Mortgages

HUD Issues Mortgagee Letter to Clarify HECM for Purchase Program Requirements. On March 27, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2009-11 (the Letter) to clarify and compile HUD’s guidance on the Home Equity Conversion Mortgage (HECM) for Purchase program. The program permits seniors to purchase a new principal residence with HECM proceeds. The guidance reiterates that HECM mortgagors may only have one principal residence at any given time; in order to take advantage of the HECM for purchase program to obtain a new principal residence, the mortgagor must pay off their existing FHA-insured mortgage. Additionally, only properties where construction is completed are eligible for FHA insurance under the program, and a number of different property types, including cooperatives, boarding houses, and certain manufactured homes, are ineligible. The Letter also provides guidance on avoiding property flipping under the program, for appropriately managing repairs and set-asides, for determining the maximum claim amount under the program, and for ensuring only approved funding sources are used. For a copy of the Letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-11ml.doc. For a copy of the attachment to the Letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-11mlatt.doc.  

Federal Reserve Bank of New York Report Concludes No Adverse Pricing of ARMs. On April 2, the Federal Reserve Bank of New York issued a study entitled “Subprime Mortgage Pricing: The Impact of Race, Ethnicity, and Gender on the Cost of Borrowing.” The study examined the rates charged on 75,000 adjustable-rate mortgages originated in August 2005 using HMDA data in conjunction with mortgage pricing and risk variables. The study concluded that any statistically significant difference in the rates charged to minority borrowers over the period pointed to minority borrowers receiving slightly more favorable loan terms, and that there was no evidence of adverse pricing by race, ethnicity, or gender in either the initial rate or the reset margin. For a copy of the report, please see http://www.newyorkfed.org/research/staff_reports/sr368.pdf.  

Virginia Implements SAFE Act Requirements, Tightens Restrictions on Mortgage Lenders and Brokers. On March 27, Virginia Governor Timothy M. Kaine signed a series of bills to carry out the requirements of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) and to tighten restrictions on mortgage lenders and mortgage brokers. To implement the SAFE Act, Virginia’s legislature enacted HB 2031, which requires mortgage loan originators to obtain a license from the State Corporation Commission through the Nationwide Mortgage Licensing System and Registry. The bill also establishes licensing procedures and criteria, including requirements for bonding, background checks, education, testing, continuing education, investigations, examinations, reporting, payment of annual fees, license suspension and revocation, and fines. Governor Kaine also signed three bills pertaining to mortgage lenders and mortgage brokers. HB 2030 repeals sections of the Code of Virginia that required mortgage lenders and brokers (i) to conduct background checks on certain employees and (ii) to ensure that their employees are properly trained in applicable state and federal mortgage lending laws and regulations. HB 1776 requires mortgage brokers to use “reasonable skill, care, and diligence” when securing a mortgage loan that will be in the best interests of the applicant, and creates a private right of action by borrowers for violations of this provision. Finally, HB 2262 prohibits mortgage brokers, lenders and originators from using any “deception, fraud, false pretense, false promise, or misrepresentation” in connection with a mortgage loan transaction. The bill also authorizes the Attorney General to enforce this provision by imposing civil penalties (up to $2,500 per violation) and restitution damages. Additionally, the bill removes the exemption for mortgage lenders from the Virginia Consumer Protection Act. All four bills are effective July 1, 2009; HB 2031’s loan originator licensing requirements do not take effect until July 1, 2010. For a copy of HB 2031, please see http://leg1.state.va.us/cgi-bin/legp504.exe?ses=091&typ=bil&val=HB2031. For a copy of HB 2030, please see http://leg1.state.va.us/cgi-bin/legp504.exe?ses=091&typ=bil&val=hb2030. For a copy of HB 1776, please see http://leg1.state.va.us/cgi-bin/legp504.exe?091+sum+HB1776. For a copy of HB 2291, please see http://leg1.state.va.us/cgi-bin/legp504.exe?091+sum+HB2291.  

North Carolina Regulator Issues Memo Regarding Loan Modifications. On March 31, the North Carolina Office of the Commissioner of Banks issued a memo to all licensees regarding loan modifications. The memo reminds licensees that, if a refinance is not available, licensees are generally prohibited from assisting borrowers in obtaining a loan modification for compensation or gain. North Carolina law excepts employees of licensed Mortgage Services or Mortgage Lenders servicing loans on behalf of the owner of those loans from this provision. The memo also reiterates that North Carolina law prohibits any attempt to collect advance fees for debt settlement or foreclosure assistance. For a copy of the memo, please see http://www.buckleysandler.com/NC_Memo_03_09.pdf.

Kentucky Law Expands Enforcement of Payday Lending Deferred Deposit Transactions. On March 25, Kentucky Governor Steve Beshear signed HB 444 to increase the power of the Executive Director of Financial Institutions and the Kentucky Department of Finance to enhance accountability and reduce fraud in the payday lending industry. The bill mandates the creation of both a state-administered database and individual databases created and maintained by each payday lender which will monitor real-time deferred deposit transactions. The law limits the number and amount of transactions licensees may engage in with individual customers to two transactions, with the face amount not to exceed $500. The bill also provides for (i) penalties (e.g. engaging in deferred deposit activity without a license results in a felony and a violation of the law results in a misdemeanor), (ii) the effect of license denial and revocation, and (iii) the enhanced authority of the Executive Director of Financial Institutions to enforce the law, adopt administrative regulations, and penalize violators. For a copy of the bill, please see http://www.lrc.ky.gov/record/09RS/HB444.htm.

Minnesota Federal Court Dismisses Putative Class Action Against Lender. On March 31, the U.S. District Court for the District of Minnesota dismissed a putative state-wide class action involving claims of breach of contract, unlawful and deceptive trade practices, breach of fiduciary duties, and unjust enrichment against a residential mortgage lender. Weller v. Accredited Home Lenders, Inc., No. 08-2798 (D. Minn. March 31, 2009). In support of these claims, the plaintiffs alleged, among other things, that (i) the defendant failed to provide them with a statutory disclaimer indicating that they were not plaintiffs’ agent, (ii) the defendant failed to notify them that they qualified for a lower rate of interest than the rate they were charged, and (iii) the defendant was liable for the closing agent’s failure to provide certain disclosures. The court granted the defendant’s motion to dismiss. The court rejected the plaintiffs’ breach of fiduciary duty claim, holding that the failure to provide the “non-agency disclosure” required by Minnesota law “does not, on its own, make a residential mortgage originator a fiduciary as a matter of law.” The court also rejected the plaintiffs’ unlawful and deceptive trade practices (UDAP) claims, holding that the plaintiffs failed to plead alleged misrepresentations with the specificity required by F.R.C.P. Rule 9(b). Allowing plaintiffs 30 days to file an amended complaint to re-plead their UDAP claims, the court provided the plaintiffs with guidance on the types of allegations that would survive future dismissal. For example, to satisfy the Minnesota statute on which they relied, rather than merely allege that they were charged a higher rate of interest than they qualified for, the plaintiffs would have to allege that they were placed in a lower “investment grade,” and specify the grade in which they were placed and the grade they should have received. The court also reminded the plaintiffs that, if they were to successfully level claims against the defendant about the closing agent’s alleged failure to provide certain disclosures, they would have to allege with specificity how the closing agent was the defendant’s agent (such as by citing provisions of the Lender’s Instructions). BuckleySandler LLP represented defendant Accredited Home Lenders, Inc. in this action. For a copy of the opinion, please see http://www.buckleysandler.com/Weller_v_Accredited.pdf.

Washington Federal Court Holds HUD-1 Not a Contract; Depositing Retained Interest on Escrow Not a Settlement Service. On March 9, the U.S. District Court for the Western District of Washington dismissed several allegations of Real Estate Settlement Procedures Act (RESPA) violations, holding that the HUD-1 settlement statement is not a contract and that the practice of depositing retained interest on escrow is not a settlement service. Cornelius v. Fidelity Nat’l Title Co., No. C08-754MJP, 2009 WL 596585 (W.D. Wash. Mar. 9, 2009). In this putative class action, the plaintiffs alleged that they were charged improper fees at the settlement of the mortgage loan transactions in violation of the Real Estate Settlement Procedures Act (RESPA). Specifically, they alleged that (i) the defendants breached a contract with the plaintiffs because they did not disburse the money as described on the HUD-1 statement, (ii) the “reconveyance processing fee” was an improper duplicative fee that was retained by the defendant settlement agents instead of being paid to another party to perform services, and (iii) the “earnings credit” described in the escrow agreement was improperly retained interest (and not used to offset settlement costs). The court dismissed breach of contract claims based on the HUD-1 settlement statement, finding as a matter of law that the HUD-1 is not a contract, but merely a “representation that what is written is ‘a true and accurate statement;’ there is no representation that something will, or will not, happen in the future.” However, the court declined to dismiss the allegation that the reconveyance fee violated RESPA, rejecting the defendants’ argument that the reconveyance fee was not a settlement service (and therefore not subject to RESPA). Finally, the court held that the plaintiffs lacked standing to bring a RESPA case challenging the escrow company’s earnings credit relationship with its own bank, stating that the plaintiffs have no legal interest or right in the earnings credit, they could not allege an injury in fact. The court further held that even if the plaintiff’s had standing, the deposit of escrow funds in a bank is not a referral of business covered by RESPA. For a copy of the opinion, please see http://www.buckleysandler.com/Conelius_v_FNTC.pdf.

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Consumer Finance

FTC Chairman Recommends Expanding FTC’s Authority. On March 31, Federal Trade Commission (FTC) Chairman Jon Leibowitz testified before the Subcommittee on Financial Services and General Government of the U.S. House Committee on Appropriations regarding protecting consumers in financial services markets. In addition to outlining the FTC’s current efforts to provide consumer protection, Chairman Leibowitz outlined several ways to potentially enhance the FTC’s protection efforts. Chairman Leibowitz recommended that Congress provide more authority to the FTC to (i) employ notice and comment rulemaking authority to establish rules on unfair and deceptive practices under the FTC Act, (ii) obtain civil penalties for unfair or deceptive acts and practices, and (iii) bring suits to obtain civil penalties in federal court. Chairman Leibowitz also requested that Congress consider the FTC when determining how to modify federal oversight of consumer financial services and provide the FTC additional resources to increase its law enforcement activities and expand its research on the efficacy of mortgage disclosures. For a copy of the prepared statement, please see http://www.ftc.gov/os/2009/03/P064814financialservices.pdf.

FTC Settles Telemarketing Sales Rule Violation Charges. On April 1, the Federal Trade Commission (FTC) settled charges against a group of sellers and telemarketers that allegedly violated the FTC’s Telemarketing Sales Rule (TSR) and related federal law, as well as the Kentucky Consumer Protection Act. The complaint resulted from 2008’s “Operation Tele-PHONEY” enforcement sweep (reported in InfoBytes, May 23, 2008). According to the complaint, the defendants, among other things, misrepresented that they were calling from a major retailer or from the consumers’ credit card company, made confusing and deceptive sales pitches, and did not deliver promised goods and services. The telemarketers also allegedly harassed consumers who refused to participate in the call. Among other things, the settlement requires a $5 million performance bond before the settling defendants resume telemarketing or assist others in telemarketing, imposes a $15.7 million monetary judgment, requires restitution of approximately $1.3 million, and requires compliance with existing consumer protection and telemarketing laws. For a copy of the press release, please see http://www.ftc.gov/opa/2009/04/suretouch.shtm.

Illinois Federal Court Rules that Arbitration Clause Does Not Apply to FCRA Claim. On March 23, the U.S. District Court for the Northern District of Illinois held that an arbitration clause did not apply to a claim made under the Fair Credit Reporting Act (FCRA) because the dispute was outside of the scope of the clause. Thomas v. American General Finance, No. 08 C 3009, 2009 WL 781078 (N.D.Ill. Mar. 23, 2009). The case arose after the plaintiff sued the defendant for allegedly accessing his credit information without his consent or knowledge. The defendant moved to stay the proceedings and to compel arbitration, based on language contained in two prior loan agreements executed by the parties. Both loan agreements, which had been performed completely by both parties, contained language stating that covered claims included "any product or service offered to Lender’s customers with any assistance or involvement by Lender" and "any claim based on or arising under any federal, state, or local law, statute, regulation, ordinance, or rule." Additionally, the agreements provided that the "Arbitration Agreement applies even if [the] loan has been ... paid in full." The defendant argued that these clauses were written broadly enough to encompass the plaintiff’s FCRA dispute. The court disagreed with this argument on three grounds. First, the court found that the parties intended to limit the agreements’ arbitration provisions only to claims arising from the agreements because the parties agreed to new arbitration agreements with every new transaction. Next, the court cited controlling precedent, which held that, although arbitration agreements under expired or terminated contracts may apply to subsequent claims, the claims must still "arise out of or relate to" the subject matter of the arbitration clause. Applying this precedent, because the plaintiff’s FCRA claim was unrelated to the fully performed loan agreements, the arbitration clause did not apply. Finally, the court determined that if the arbitration clauses could be interpreted as standing free from the loan agreements, it could lead to absurd results, such as compelled arbitration of claims for intentional tort. To avoid this result, the court reasoned that the arbitration provisions must be read in relation to each other and cannot apply to disputes over future claims wholly unrelated to the underlying agreements. Concluding that the arbitration agreements did not apply to the FCRA claim, the court denied the motion to compel arbitration. For a copy of the opinion, please see http://www.buckleysandler.com/Thomas_v_American.pdf.

Wisconsin Federal Court Rules an Entity is Not a Credit Reporting Agency By Merely Obtaining and Forwarding Information. On March 19, the U.S. District Court for the Eastern District of Wisconsin held that merely obtaining and then forwarding consumer credit information is not enough to make an entity a credit reporting agency (CRA) under the Fair Credit Reporting Act (FCRA). Ori v. Fifth Third Bank, No. 08CV0432, 2009 WL 738867 (E.D. Wis. Mar. 19, 2009). The case arose after plaintiff alleged that defendant, an outside vendor for a bank, violated either § 1681a(f) or § 1681s-2(b) of FCRA by incorrectly transmitting information to various CRAs, causing the plaintiff’s mortgages to be labeled as delinquent. The court rejected both allegations. First, the court found that the defendant was a “furnisher” of credit information, not a “credit reporting agency,” because it neither “assembled” nor “evaluated” consumer information. The court reasoned that to “assemble” means "to bring together (as in a particular place or for particular purpose)" or "to fit together the parts of", and “evaluate” means "to determine or fix the value of." Next, the court rejected the plaintiff’s § 1681s-2(b) claim because the plaintiff failed to notify a CRA that he wished to dispute the information furnished by the defendant. As a result, the court granted the defendant’s motions to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/Ori_v_Fifth_Third.pdf.

Florida Federal Court Finds Defendant Did Not Willfully Violate FACTA. On March 19, the U.S. District Court for the Southern District of Florida held that a defendant merchant did not “willfully” violate the Fair and Accurate Credit Transaction Act (FACTA) by including a credit card expiration date on a receipt. Rosenthal v. Longchamp Coral Gables LLC, – F. Supp. 2d –, 2009 WL 748852 (S.D. Fla. Mar. 19, 2009). In Rosenthal, the plaintiff alleged that the defendant merchant violated FACTA by including the expiration date of her credit card on a printed receipt and filed suit, seeking actual damages, statutory damages, punitive damages, and injunctive relief. The court, reasoning from the U.S. Supreme Court’s “recklessness” standard from Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (U.S. 2007), held that the defendant did not act “willfully.” The court rejected a finding of willfulness based upon evidence that FACTA’s requirements were well-publicized in the media and were contained in the defendant’s credit card agreements. The court instead found persuasive the defendant’s argument that Congress recognized that many merchants believed that only truncating the credit card number would ensure compliance with the Credit and Debit Card Receipt Clarification Act. Further, the court agreed with the holding in Irvine v. 233 Skydeck, LLC, No. 08 C 4939, 2009 WL 347395 (N.D. Ill. Feb. 12, 2009) (reported in InfoBytes, Feb. 20, 2009) to find that FACTA is not unconstitutionally vague because “[a] reasonable jury can certainly determine the proper amount of damages within the statutory range” and that it does not violate due process merely because of the possibility of excessive statutory and punitive damages. As a result, the court granted the defendant’s motion to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/Rosenthal_v_Longchamp.pdf.

Virginia Bankruptcy Court Lacks Subject Matter Jurisdiction Over FDCPA Claim. On March 25, the U.S. Bankruptcy Court for the Western District of Virginia held that it lacks subject matter jurisdiction over a Fair Debt Collection Practices Act (FDCPA) claim. In re Harlan, Bankr. No. 08-50132, 2009 WL 762172 (Bankr. W.D. Va. Mar. 25, 2009). In this case, defendant EMC Mortgage Corporation (EMC) was granted relief from an automatic stay by the bankruptcy court so that it could initiate foreclosure proceedings on the borrowers, who had filed for bankruptcy protection. Pursuant to that order, EMC sent collection notices, and then a foreclosure notice, to the debtors. The debtors sued, alleging that the notices violated the FDCPA and the bankruptcy court’s discharge injunction order. EMC moved to dismiss, arguing that the notices merely exercised the defendants’ rights to foreclose on the debtors’ residence. The court granted the defendants’ motion to dismiss for lack of subject matter jurisdiction with regard to FDCPA claim, holding that the FDCPA claim did not “arise under” the Bankruptcy Code and was not “related to” the bankruptcy claim. The court, however, denied the defendants’ motion to dismiss regarding the discharge order, holding that such a claim “arises under” the Bankruptcy Code and sets forth a plausible entitlement to relief. The court also denied the defendants’ motion to dismiss for failure to state a claim, finding that the debtors demonstrated a plausible entitlement to relief based on the notices sent to them by the defendants. For a copy of the opinion, please email .

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Securities

FASB Adjusts Mark-to-Market Accounting Rules. On April 2, the Financial Accounting Standards Board (FASB) considered and approved for a final draft two proposed FASB staff positions (FSP) relating to its “mark-to-market” accounting rules addressing inactive markets and distressed transactions (FSP FAS 157-e). The first FSP will effectively allow companies to use “significant” judgment to determine the prices of certain assets, including mortgage-backed securities. Specifically, the FSP will (i) allow for the “fair value” accounting of certain assets (e.g. mortgage-backed securities) located in inactive markets, (ii) provide guidance to determine when an “inactive” market exists, (iii) eliminate the proposed presumption that all transactions are distressed unless proven otherwise, (iv) provide examples of how to estimate fair value in an inactive market, and (v) require an entity to disclose any changes in valuation techniques resulting from the new FSP and, if practicable, quantify its effects. The FSP will be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 (with early adoption permitted for periods ending after March 15, 2009). Under the second measure, an entity would have more flexibility when valuing certain debt securities (e.g. mortgage-backed securities) that are “other-than-temporarily impaired” (OTTI) Specifically, if the entity intends to sell the debt security or it is more likely than not that it will have to sell before recovering its cost basis, the entire impairment would be recognized as OTTI. However, if the entity is not likely to have to sell the security before recovering its cost basis, only the portion of the impairment loss representing credit losses would be recognized in earnings as OTTI, with the balance recognized as a charge to other comprehensive income. Both FSPs will be applied prospectively and are effective for interim and annual periods ending after June 15, 2009 (with early adoption permitted for periods ending after March 15, 2009). For a copy of the summary of the guidance, please see http://www.fasb.org/action/sbd040209.shtml.

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Litigation

Minnesota Federal Court Dismisses Putative Class Action Against Lender. On March 31, the U.S. District Court for the District of Minnesota dismissed a putative state-wide class action involving claims of breach of contract, unlawful and deceptive trade practices, breach of fiduciary duties, and unjust enrichment against a residential mortgage lender. Weller v. Accredited Home Lenders, Inc., No. 08-2798 (D. Minn. March 31, 2009). In support of these claims, the plaintiffs alleged, among other things, that (i) the defendant failed to provide them with a statutory disclaimer indicating that they were not plaintiffs’ agent, (ii) the defendant failed to notify them that they qualified for a lower rate of interest than the rate they were charged, and (iii) the defendant was liable for the closing agent’s failure to provide certain disclosures. The court granted the defendant’s motion to dismiss. The court rejected the plaintiffs’ breach of fiduciary duty claim, holding that the failure to provide the “non-agency disclosure” required by Minnesota law “does not, on its own, make a residential mortgage originator a fiduciary as a matter of law.” The court also rejected the plaintiffs’ unlawful and deceptive trade practices (UDAP) claims, holding that the plaintiffs failed to plead alleged misrepresentations with the specificity required by F.R.C.P. Rule 9(b). Allowing plaintiffs 30 days to file an amended complaint to re-plead their UDAP claims, the court provided the plaintiffs with guidance on the types of allegations that would survive future dismissal. For example, to satisfy the Minnesota statute on which they relied, rather than merely allege that they were charged a higher rate of interest than they qualified for, the plaintiffs would have to allege that they were placed in a lower “investment grade,” and specify the grade in which they were placed and the grade they should have received. The court also reminded the plaintiffs that, if they were to successfully level claims against the defendant about the closing agent’s alleged failure to provide certain disclosures, they would have to allege with specificity how the closing agent was the defendant’s agent (such as by citing provisions of the Lender’s Instructions). BuckleySandler LLP represented defendant Accredited Home Lenders, Inc. in this action. For a copy of the opinion, please see http://www.buckleysandler.com/Weller_v_Accredited.pdf.

Washington Federal Court Holds HUD-1 Not a Contract; Depositing Retained Interest on Escrow Not a Settlement Service. On March 9, the U.S. District Court for the Western District of Washington dismissed several allegations of Real Estate Settlement Procedures Act (RESPA) violations, holding that the HUD-1 settlement statement is not a contract and that the practice of depositing retained interest on escrow is not a settlement service. Cornelius v. Fidelity Nat’l Title Co., No. C08-754MJP, 2009 WL 596585 (W.D. Wash. Mar. 9, 2009). In this putative class action, the plaintiffs alleged that they were charged improper fees at the settlement of the mortgage loan transactions in violation of the Real Estate Settlement Procedures Act (RESPA). Specifically, they alleged that (i) the defendants breached a contract with the plaintiffs because they did not disburse the money as described on the HUD-1 statement, (ii) the “reconveyance processing fee” was an improper duplicative fee that was retained by the defendant settlement agents instead of being paid to another party to perform services, and (iii) the “earnings credit” described in the escrow agreement was improperly retained interest (and not used to offset settlement costs). The court dismissed breach of contract claims based on the HUD-1 settlement statement, finding as a matter of law that the HUD-1 is not a contract, but merely a “representation that what is written is ‘a true and accurate statement;’ there is no representation that something will, or will not, happen in the future.” However, the court declined to dismiss the allegation that the reconveyance fee violated RESPA, rejecting the defendants’ argument that the reconveyance fee was not a settlement service (and therefore not subject to RESPA). Finally, the court held that the plaintiffs lacked standing to bring a RESPA case challenging the escrow company’s earnings credit relationship with its own bank, stating that the plaintiffs have no legal interest or right in the earnings credit, they could not allege an injury in fact. The court further held that even if the plaintiff’s had standing, the deposit of escrow funds in a bank is not a referral of business covered by RESPA. For a copy of the opinion, please see http://www.buckleysandler.com/Conelius_v_FNTC.pdf.

Illinois Federal Court Rules that Arbitration Clause Does Not Apply to FCRA Claim. On March 23, the U.S. District Court for the Northern District of Illinois held that an arbitration clause did not apply to a claim made under the Fair Credit Reporting Act (FCRA) because the dispute was outside of the scope of the clause. Thomas v. American General Finance, No. 08 C 3009, 2009 WL 781078 (N.D.Ill. Mar. 23, 2009). The case arose after the plaintiff sued the defendant for allegedly accessing his credit information without his consent or knowledge. The defendant moved to stay the proceedings and to compel arbitration, based on language contained in two prior loan agreements executed by the parties. Both loan agreements, which had been performed completely by both parties, contained language stating that covered claims included "any product or service offered to Lender’s customers with any assistance or involvement by Lender" and "any claim based on or arising under any federal, state, or local law, statute, regulation, ordinance, or rule." Additionally, the agreements provided that the "Arbitration Agreement applies even if [the] loan has been ... paid in full." The defendant argued that these clauses were written broadly enough to encompass the plaintiff’s FCRA dispute. The court disagreed with this argument on three grounds. First, the court found that the parties intended to limit the agreements’ arbitration provisions only to claims arising from the agreements because the parties agreed to new arbitration agreements with every new transaction. Next, the court cited controlling precedent, which held that, although arbitration agreements under expired or terminated contracts may apply to subsequent claims, the claims must still "arise out of or relate to" the subject matter of the arbitration clause. Applying this precedent, because the plaintiff’s FCRA claim was unrelated to the fully performed loan agreements, the arbitration clause did not apply. Finally, the court determined that if the arbitration clauses could be interpreted as standing free from the loan agreements, it could lead to absurd results, such as compelled arbitration of claims for intentional tort. To avoid this result, the court reasoned that the arbitration provisions must be read in relation to each other and cannot apply to disputes over future claims wholly unrelated to the underlying agreements. Concluding that the arbitration agreements did not apply to the FCRA claim, the court denied the motion to compel arbitration. For a copy of the opinion, please see http://www.buckleysandler.com/Thomas_v_American.pdf.

Wisconsin Federal Court Rules an Entity is Not a Credit Reporting Agency By Merely Obtaining and Forwarding Information. On March 19, the U.S. District Court for the Eastern District of Wisconsin held that merely obtaining and then forwarding consumer credit information is not enough to make an entity a credit reporting agency (CRA) under the Fair Credit Reporting Act (FCRA). Ori v. Fifth Third Bank, No. 08CV0432, 2009 WL 738867 (E.D. Wis. Mar. 19, 2009). The case arose after plaintiff alleged that defendant, an outside vendor for a bank, violated either § 1681a(f) or § 1681s-2(b) of FCRA by incorrectly transmitting information to various CRAs, causing the plaintiff’s mortgages to be labeled as delinquent. The court rejected both allegations. First, the court found that the defendant was a “furnisher” of credit information, not a “credit reporting agency,” because it neither “assembled” nor “evaluated” consumer information. The court reasoned that to “assemble” means "to bring together (as in a particular place or for particular purpose)" or "to fit together the parts of", and “evaluate” means "to determine or fix the value of." Next, the court rejected the plaintiff’s § 1681s-2(b) claim because the plaintiff failed to notify a CRA that he wished to dispute the information furnished by the defendant. As a result, the court granted the defendant’s motions to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/Ori_v_Fifth_Third.pdf.

Florida Federal Court Finds Defendant Did Not Willfully Violate FACTA. On March 19, the U.S. District Court for the Southern District of Florida held that a defendant merchant did not “willfully” violate the Fair and Accurate Credit Transaction Act (FACTA) by including a credit card expiration date on a receipt. Rosenthal v. Longchamp Coral Gables LLC, – F. Supp. 2d –, 2009 WL 748852 (S.D. Fla. Mar. 19, 2009). In Rosenthal, the plaintiff alleged that the defendant merchant violated FACTA by including the expiration date of her credit card on a printed receipt and filed suit, seeking actual damages, statutory damages, punitive damages, and injunctive relief. The court, reasoning from the U.S. Supreme Court’s “recklessness” standard from Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (U.S. 2007), held that the defendant did not act “willfully.” The court rejected a finding of willfulness based upon evidence that FACTA’s requirements were well-publicized in the media and were contained in the defendant’s credit card agreements. The court instead found persuasive the defendant’s argument that Congress recognized that many merchants believed that only truncating the credit card number would ensure compliance with the Credit and Debit Card Receipt Clarification Act. Further, the court agreed with the holding in Irvine v. 233 Skydeck, LLC, No. 08 C 4939, 2009 WL 347395 (N.D. Ill. Feb. 12, 2009) (reported in InfoBytes, Feb. 20, 2009) to find that FACTA is not unconstitutionally vague because “[a] reasonable jury can certainly determine the proper amount of damages within the statutory range” and that it does not violate due process merely because of the possibility of excessive statutory and punitive damages. As a result, the court granted the defendant’s motion to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/Rosenthal_v_Longchamp.pdf.

Virginia Bankruptcy Court Lacks Subject Matter Jurisdiction Over FDCPA Claim. On March 25, the U.S. Bankruptcy Court for the Western District of Virginia held that it lacks subject matter jurisdiction over a Fair Debt Collection Practices Act (FDCPA) claim. In re Harlan, Bankr. No. 08-50132, 2009 WL 762172 (Bankr. W.D. Va. Mar. 25, 2009). In this case, defendant EMC Mortgage Corporation (EMC) was granted relief from an automatic stay by the bankruptcy court so that it could initiate foreclosure proceedings on the borrowers, who had filed for bankruptcy protection. Pursuant to that order, EMC sent collection notices, and then a foreclosure notice, to the debtors. The debtors sued, alleging that the notices violated the FDCPA and the bankruptcy court’s discharge injunction order. EMC moved to dismiss, arguing that the notices merely exercised the defendants’ rights to foreclose on the debtors’ residence. The court granted the defendants’ motion to dismiss for lack of subject matter jurisdiction with regard to FDCPA claim, holding that the FDCPA claim did not “arise under” the Bankruptcy Code and was not “related to” the bankruptcy claim. The court, however, denied the defendants’ motion to dismiss regarding the discharge order, holding that such a claim “arises under” the Bankruptcy Code and sets forth a plausible entitlement to relief. The court also denied the defendants’ motion to dismiss for failure to state a claim, finding that the debtors demonstrated a plausible entitlement to relief based on the notices sent to them by the defendants. For a copy of the opinion, please email .

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Privacy/Data Security

Wisconsin Federal Court Rules an Entity is Not a Credit Reporting Agency By Merely Obtaining and Forwarding Information. On March 19, the U.S. District Court for the Eastern District of Wisconsin held that merely obtaining and then forwarding consumer credit information is not enough to make an entity a credit reporting agency (CRA) under the Fair Credit Reporting Act (FCRA). Ori v. Fifth Third Bank, No. 08CV0432, 2009 WL 738867 (E.D. Wis. Mar. 19, 2009). The case arose after plaintiff alleged that defendant, an outside vendor for a bank, violated either § 1681a(f) or § 1681s-2(b) of FCRA by incorrectly transmitting information to various CRAs, causing the plaintiff’s mortgages to be labeled as delinquent. The court rejected both allegations. First, the court found that the defendant was a “furnisher” of credit information, not a “credit reporting agency,” because it neither “assembled” nor “evaluated” consumer information. The court reasoned that to “assemble” means "to bring together (as in a particular place or for particular purpose)" or "to fit together the parts of", and “evaluate” means "to determine or fix the value of." Next, the court rejected the plaintiff’s § 1681s-2(b) claim because the plaintiff failed to notify a CRA that he wished to dispute the information furnished by the defendant. As a result, the court granted the defendant’s motions to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/Ori_v_Fifth_Third.pdf.

Florida Federal Court Finds Defendant Did Not Willfully Violate FACTA. On March 19, the U.S. District Court for the Southern District of Florida held that a defendant merchant did not “willfully” violate the Fair and Accurate Credit Transaction Act (FACTA) by including a credit card expiration date on a receipt. Rosenthal v. Longchamp Coral Gables LLC, – F. Supp. 2d –, 2009 WL 748852 (S.D. Fla. Mar. 19, 2009). In Rosenthal, the plaintiff alleged that the defendant merchant violated FACTA by including the expiration date of her credit card on a printed receipt and filed suit, seeking actual damages, statutory damages, punitive damages, and injunctive relief. The court, reasoning from the U.S. Supreme Court’s “recklessness” standard from Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (U.S. 2007), held that the defendant did not act “willfully.” The court rejected a finding of willfulness based upon evidence that FACTA’s requirements were well-publicized in the media and were contained in the defendant’s credit card agreements. The court instead found persuasive the defendant’s argument that Congress recognized that many merchants believed that only truncating the credit card number would ensure compliance with the Credit and Debit Card Receipt Clarification Act. Further, the court agreed with the holding in Irvine v. 233 Skydeck, LLC, No. 08 C 4939, 2009 WL 347395 (N.D. Ill. Feb. 12, 2009) (reported in InfoBytes, Feb. 20, 2009) to find that FACTA is not unconstitutionally vague because “[a] reasonable jury can certainly determine the proper amount of damages within the statutory range” and that it does not violate due process merely because of the possibility of excessive statutory and punitive damages. As a result, the court granted the defendant’s motion to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/Rosenthal_v_Longchamp.pdf.

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Credit Cards

Florida Federal Court Finds Defendant Did Not Willfully Violate FACTA. On March 19, the U.S. District Court for the Southern District of Florida held that a defendant merchant did not “willfully” violate the Fair and Accurate Credit Transaction Act (FACTA) by including a credit card expiration date on a receipt. Rosenthal v. Longchamp Coral Gables LLC, – F. Supp. 2d –, 2009 WL 748852 (S.D. Fla. Mar. 19, 2009). In Rosenthal, the plaintiff alleged that the defendant merchant violated FACTA by including the expiration date of her credit card on a printed receipt and filed suit, seeking actual damages, statutory damages, punitive damages, and injunctive relief. The court, reasoning from the U.S. Supreme Court’s “recklessness” standard from Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (U.S. 2007), held that the defendant did not act “willfully.” The court rejected a finding of willfulness based upon evidence that FACTA’s requirements were well-publicized in the media and were contained in the defendant’s credit card agreements. The court instead found persuasive the defendant’s argument that Congress recognized that many merchants believed that only truncating the credit card number would ensure compliance with the Credit and Debit Card Receipt Clarification Act. Further, the court agreed with the holding in Irvine v. 233 Skydeck, LLC, No. 08 C 4939, 2009 WL 347395 (N.D. Ill. Feb. 12, 2009) (reported in InfoBytes, Feb. 20, 2009) to find that FACTA is not unconstitutionally vague because “[a] reasonable jury can certainly determine the proper amount of damages within the statutory range” and that it does not violate due process merely because of the possibility of excessive statutory and punitive damages. As a result, the court granted the defendant’s motion to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/Rosenthal_v_Longchamp.pdf.

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