InfoBytes, August 21, 2009
Sign up for weekly updates
RSS feed
Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Insurance
- Litigation
- Privacy/Data Security
Federal Issues
HUD Revises FAQs on Revised RESPA Rule. On August 19, the U.S. Department of Housing and Urban Development (HUD) revised its “Frequently Asked Questions” regarding its 2008 amendments to Regulation X, the Real Estate Settlement Procedures Act’s (RESPA) implementing regulation. The guidance addresses various aspects of the revised RESPA rule, including the delivery of a written list of settlement service providers to consumers, the changed circumstances re-delivery rule, the completion of the GFE and HUD-1/1A, and the electronic delivery of required disclosures. For a copy of the revised FAQs, please see http://www.hud.gov/offices/hsg/ramh/res/faqfinalrev4.pdf.
Fed, Treasury Extend TALF. On August 17, the Federal Reserve Board and the U.S. Department of the Treasury announced that the Term Asset-Backed Securities Loan Facility (TALF) will be extended beyond December 31, 2009. The agencies approved extending TALF loans against newly issued asset-backed securities and legacy commercial mortgage-backed securities (CMBS) through March 31, 2010. The agencies also approved TALF lending against newly issued CMBS through June 30, 2010. Finally, the agencies indicated that they do not anticipate allowing new types of collateral to be eligible for the TALF. For a copy of the press release, please see http://www.federalreserve.gov/newsevents/press/monetary/20090817a.htm.
Mortgage Lender Settles with FTC for Failure to Send Opt-Out Notices with Credit Offers. On August 18, Metropolitan Home Mortgage, Inc. settled Federal Trade Commission (FTC) allegations that the mortgage lender sent prescreened offers of credit to consumers without properly informing them of their right to opt out of receiving such offers in the future. The lender was charged with violating the Fair Credit Reporting Act (FCRA) and the FTC’s Prescreen Rule, both of which require companies to provide customers with notices regarding the customer’s right to not receive such offers of credit or insurance and to provide these notices in a font size that is easy to read and in language that is easy to understand. Under the settlement, the lender, among other things, will (i) pay a $20,000 civil penalty, and (ii) allow the FTC to monitor its recording-keeping to ensure compliance with the order. For a copy of the press release, please see http://www.ftc.gov/opa/2009/08/wholesale.shtm.
FTC Increases Do Not Call Registry Access Fees. On August 18, the Federal Trade Commission (FTC) announced revisions to the fees paid by telemarketers accessing phone numbers on the National Do Not Call Registry. For fiscal year 2010, telemarketers will pay $55 (a $1 increase) for access to registry phone numbers in a single area code, or $27 per area code of data during the second six months of an entity’s annual subscription period. The maximum amount that would be charged to any single entity for accessing all area codes nationwide is increased to $15,058. The FTC will begin assessing the new fees on October 1, 2009. For a copy of the final rule, please see http://ftc.gov/os/2009/08/P034305frnotice.pdf.
FTC Reaches Settlement with Debit Card Company. On August 20, the Federal Trade Commission (FTC) reached a settlement with a debit card company that issued debit cards to consumers without the consumers’ knowledge. According to the FTC, the company issued the debit cards under a referral arrangement with the consumers’ online payday lender. Under the settlement, the company and its principals, among other things, (i) are barred from charging consumers without first disclosing the specific billing information to be used, the amount to be paid, the method for assessing the payment, the entity on whose behalf the payment will be assessed, and all material terms and conditions, (ii) must require consumers to affirmatively authorize a transaction, (iii) must take “reasonable” steps in marketing products or services to ensure that marketing affiliates ensure compliance with the order, and (iv) must pay a $5.5 million suspended judgment. The FTC has also filed a suit against the online payday lender alleging deceptive marketing practices. For a copy of the press release, please see http://www.ftc.gov/opa/2009/08/everprivate.shtm. For a copy of the settlement, please see http://www.ftc.gov/os/caselist/0723241/090820vwstippi.pdf.
Fed Announces New Schedule of Collateral Margins for Depository Institutions. On August 19, the Federal Reserve Board (Fed) announced a new schedule of margins applicable for collateral pledged by depository institutions to secure discount window and Term Auction Facility loans for payment system risk purposes. According to the Fed, the new margins reflect improvements to better account for differences in risk characteristics among various types of collateral. The changes become effective October 19, 2009. For further information, please see http://www.frbdiscountwindow.org/20090819margins_announcement.cfm?hdrID=21. For a copy of the press release, please see http://www.federalreserve.gov/newsevents/press/monetary/20090819a.htm.
FinCEN Issues Fact Sheet Regarding Suspected Money Laundering, Terrorism. On August 11, the Financial Crimes Enforcement Network (FinCEN) issued a fact sheet addressing Section 314(a) of the USA PATRIOT Act, which requires the adoption of regulations to encourage regulatory authorities and law enforcement authorities to share information with financial institutions pertaining to suspected money laundering or suspected involvement with terrorism. The fact sheet provides (i) an overview of FinCEN’s regulations regarding the requirement, (ii) FinCEN’s process pertaining to the requirement, (iii) the criteria for money laundering requests, (iv) the results of the requests, and (v) feedback from law enforcement regarding the requests. For a copy of the fact sheet, please see http://www.fincen.gov/statutes_regs/patriot/pdf/314afactsheet.pdf.
FTC Requires Health Record Vendors to Notify Consumers of Health Information Breaches. On August 17, the Federal Trade Commission (FTC) issued a final rule requiring web-based health care information venders and third party applications that manage personal health records to notify consumers and the media when the security of individually identifiable health information has been breached. The rule is in response to the American Recovery and Reinvestment Act of 2009, which recognizes that web-based entities collect and store private information and provides that such entities should be regulated by the FTC. Under the rule, a breach of security includes misuse of records by employees, theft or loss of computer equipment, infiltration by a network hacker, or any situation in which a person’s private medical information is accessed without that person’s consent. In the event of a breach, an affected customer must be contacted “without unreasonable delay,” and the media must be contacted when 500 or more customers’ records have been breached. The rule does not apply to Health Insurance Portability and Accountability Act (HIPAA) covered entities; however, the FTC and the U.S. Department of Health and Human Services (HHS) will work together to harmonize the two rules. To this end, in the future, the FTC will publish a report in conjunction with the HHS regarding privacy, security, and breach notification requirements. The rule becomes effective 30 days after publication in the Federal Register, and full compliance is required by 180 days after publication in the Federal Register. For a copy of the rule, please see http://www.ftc.gov/os/2009/08/R911002hbn.pdf.
State Issues
Additional States Pass SAFE Act Legislation. North Carolina and Pennsylvania recently joined the list of states that have enacted legislation to effect the requirements of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act). North Carolina HB 1523 and Pennsylvania HB 1654 require mortgage loan originators to, among other things, register with the Nationwide Mortgage Licensing System (NMLS), complete pre-license testing and education, submit to fingerprinting for the purpose of a criminal history background check, and pass a qualified written exam developed by the NMLS. North Carolina HB 1523 became effective July 31, 2009, with mortgage loan originator licensure required by July 31, 2010 (for “exclusive mortgage brokers”) or by December 31, 2009 (for “limited loan officers”). Pennsylvania HB 1654 became effective immediately. Individuals not currently licensed as mortgage originators must file an application for a mortgage originator license by October 4, 2009 (60 days after the effective date). Mortgage originators previously licensed must complete the required education and testing requirements by December 31, 2009. For a copy of North Carolina HB 1523, please see http://www.ncga.state.nc.us/Sessions/2009/Bills/House/PDF/H1523v6.pdf. For a copy of Pennsylvania HB 1654, please see http://www.buckleysandler.com/PA_HB_1654.pdf.
Massachusetts Regulator Revises Personal Information Protection Regulations. On August 17, the Massachusetts Office of Consumer Affairs and Business Regulation (OCABR) announced adjustments to security standards to be met by those who own or license personal information of consumers. The revised regulations clarify that entities subject to the regulations must develop a security program with safeguards that are appropriate to (i) the size, scope and type of business handling the information, (ii) the amount of resources available to the business, (iii) the amount of stored data, and (iv) the need for security and confidentiality of both consumer and employee information. The revised regulations become effective March 1, 2010. For a copy of the press release, please see http://www.buckleysandler.com/Mass_OCABR_081709.pdf. For a copy of the revised regulations, please see http://www.mass.gov/Eoca/docs/idtheft/201CMR1700reg.pdf.
New York Attorney General Sues Foreclosure Rescue Company. On August 13, Attorney General Andrew M. Cuomo announced a lawsuit against American Modification Agency, Inc. and its owner in connection with the company’s mortgage foreclosure rescue service business. The complaint alleges that the defendants (i) failed to obtain loan modifications for a vast majority of its customers, (ii) illegally charged customers up-front fees, (iii) grossly exaggerated its success rate, made false promises about its ability to save customers’ homes, underestimated the amount of time it takes to achieve a loan modification, and misrepresented that the company is a law office and that attorneys work on customers’ files, (iv) made false guarantees of “100%” customer service, (v) made false and misleading advertising statements, (vi) failed to include required legal disclosures in customer contracts, (vii) provided detrimental advice to customers (e.g., recommended that customers stop making monthly mortgage payments, ignore lender communications, and avoid consulting with non-profit housing counseling agencies), and (viii) failed to provide Spanish-speaking consumers Spanish-language contracts when required by law. Attorney General Cuomo previously announced his intention to sue the defendants on June 9 (reported in InfoBytes, June 12, 2009). For a copy of the press release, please see http://www.oag.state.ny.us/media_center/2009/aug/aug13b_09.html.
Massachusetts Regulator Issues Cease-Activity Directives to Payday Lenders. On August 18, the Massachusetts Division of Banks (the Division) announced that it has issued cease-activity directives to 95 companies allegedly making illegal payday loans to Massachusetts consumers. According to the Division, many of the companies it identified were charging annual percentage rates averaging over 500% and fees averaging $40-60, in violation of the Massachusetts small-loan licensing law. For a copy of the press release, please see http://www.buckleysandler.com/Mass-DOB_081809.pdf.
New Hampshire Enacts Bills Relating to Health Data Privacy. On August 7, New Hampshire Governor John Lynch signed into law H.B. 542, which primarily addresses health privacy issues. The new law (i) authorizes health care providers to disclose an individual’s protected health information to health information exchanges, and (ii) allows individuals to opt out of sharing their protected health care information through health information exchanges. The operative provisions of the new law become effective January 1, 2010. For a copy of H.B. 542, please see http://www.gencourt.state.nh.us/legislation/2009/HB0542.html.
Courts
New York Federal Court Finds No Subject Matter Federal Jurisdiction in Countrywide Mortgage-Backed Securities Case. On August 14, the U.S. District Court for the Southern District of New York held that a putative class action filed by mortgage-backed securities investors against Countrywide Financial Corporation and related entities (Countrywide) is not within federal subject matter jurisdiction. Greenwich Fin. Servs. Distressed Mortg. Fund 3, LLC v. Countrywide Fin. Corp., No. 08 Civ. 11343, 2009 WL 2499149 (S.D.N.Y. Aug. 14, 2009). In this case, investors filed suit against Countrywide in December 2008 after the company agreed to modify thousands of loans in a settlement with several state attorneys general. Such loan modifications typically reduce the amount of interest and fees paid to investors over the life of the loans. Accordingly, most pooling and servicing agreements for mortgage-backed securities contain provisions that restrict a servicer’s ability to modify loans. The investors are not contesting Countrywide’s authority to modify the mortgage loans, but claim instead that Countrywide breached its contractual obligation to repurchase modified loans. In the pending litigation, Bank of America, which took over the servicing of Countrywide’s loans upon acquiring the company in 2008, argued that the “safe harbor” provision of the Helping Families Save Their Home Act of 2009 (the Home Act) overrides any such contractual obligations by protecting mortgage loan servicers from liability to investors for lost revenue caused by loan modifications. The investors filed the underlying action in the New York State Supreme Court. Bank of America sought to remove the suit to federal court, and the investors moved to remand shortly thereafter. Bank of America argued that federal jurisdiction was appropriate, among other things, because the Truth in Lending Act, as amended by the Housing and Economic Recovery Act of 2008 (HERA) and the Home Act, is a necessary element of the investors’ claim. The court rejected this argument, finding that (i) there is no necessary federal element to the investors’ claim and (ii) there is no legislative intent behind HERA or the Home Act to confer federal jurisdiction in such a case. The court also found that the Class Action Fairness Act of 2005 (CAFA) did not allow for federal jurisdiction because the claim fell under a CAFA exception for cases that solely involve a claim that “relates to the rights, duties, and obligations relating to or created by or pursuant to any security.” As a result, the court determined that the breach of contract claim properly resided in state court jurisdiction. The court did not address the question of whether the Home Act’s safe harbor immunizes Countrywide from the lawsuit. For a copy of the opinion, please see http://www.buckleysandler.com/Greenwich_v_Countrywide_081809.pdf.
New York County Settles False Claims Act Case. On August 10, the U.S. District Court for the Southern District of New York approved a $62.5 million settlement agreement in a case alleging violations of the False Claims Act by a New York county. U.S. ex rel. Anti-Discrimination Center v. Westchester County, No. 06 Civ. 2860 (S.D.N.Y. Aug. 10, 2009). This qui tam case involved allegations that Westchester County, New York (the County) violated the False Claims Act by certifying falsely that it was in compliance with provisions of the Housing and Community Development Act in order to receive federal funds for housing and community development over the course of six years. Receipt of these funds was conditioned on certification by the County that it would meet a variety of fair housing obligations, including that it would affirmatively further fair housing (AFFH). To AFFH, the County was statutorily required to (i) analyze impediments to fair housing choices, (ii) take appropriate actions to overcome the effects of any impediments, and (iii) maintain records reflecting its analysis and actions. The Anti-Discrimination Center of Metro New York (ADC) alleged that the County had failed to meet all three requirements. The court previously awarded partial summary judgment for ADC (2009 WL 455269 (S.D.N.Y. Feb. 24, 2009)), holding that the County had made certain express and implied material false certifications because the analyses and actions it was required to undertake did not adequately consider or record race-based impediments to fair housing. The U.S. Department of Justice intervened in the case to assist settlement negotiations shortly following that decision. The County denied the allegations and any liability in the settlement, the terms of which require the County to spend $51.6 million to develop at least 750 affordable housing units in municipalities with small African-American and Latino populations. The remainder of the settlement amount reflects the payment of $8.4 million to the United States and $2.5 million in attorneys’ fees. For a copy of the settlement agreement, please see http://www.buckleysandler.com/Anti_Discrimination_Center.pdf.
Louisiana Federal Court Dismisses RESPA Violation Claim in Absence of Fee-Splitting Arrangement. On August 10, the U.S. District Court for the Eastern District of Louisiana declined to hold a lender and a title insurance and settlement services provider liable for violating Section 8(b) of the Real Estate Settlement Procedures Act (RESPA) after finding that the defendants did not actually split any of the settlement service fees contested by the plaintiff borrowers. Freeman v. Quicken Loans, Inc., No. 08-1626, 2009 WL 2448033 (E.D. La. Aug. 10, 2009). In Freeman, the borrowers alleged that the defendants violated RESPA and Louisiana law by, among other things, (i) charging a loan discount fee, but failing to provide a corresponding interest rate reduction, and (ii) charging an appraisal fee that was improperly split between the defendants. In granting summary judgment in favor of the defendants, the court agreed with defendants that the borrowers’ RESPA claims failed as a matter of law because the defendants provided evidence that they did not split or otherwise share the contested loan discount and appraisal fees—instead, the lender received and retained the loan discount fee, and the title insurance and settlement services provider received and retained the appraisal fee. According to the court, Section 8(b) of RESPA unambiguously requires “an allegation that the challenged fees have been split in some fashion.” The court’s decision stands at odds with decisions from the Second and Eleventh Circuits holding that a single service provider can violate Section 8(b) of RESPA (but is in line with decisions from the Fourth, Seventh, and Eighth Circuits). Regarding the borrowers’ state law breach of contract and quasi-contract claims, the court found that the invalidity of the plaintiffs’ claims under Section 8(b) of RESPA required that their state law claims be similarly dismissed. For a copy of the opinion, please see http://www.buckleysandler.com/Freeman_v_Quicken_Loans.pdf.
Eleventh Circuit Holds Home Foreclosure Not Debt Collection Under FDCPA. On August 14, the U.S. Court of Appeals for the Eleventh Circuit held that foreclosing on a home is not “debt collection” as contemplated by the Fair Debt Collection Practices Act (FDCPA). Warren v. Countrywide Home Loans, Inc., No. 08-16171, 2009 WL 2477764 (11th Cir. Aug. 14, 2009). In Warren, the defendant lender initiated foreclosure proceedings on the plaintiff borrower. In response, the borrower alleged, among other things, that the lender violated the FDCPA by failing to respond to his request for verification of his debt before the lender proceeded with the foreclosure sale of the home. The court of appeals rejected the borrower’s argument and followed the persuasive precedent of the Sixth Circuit and several district court decisions to hold that foreclosing on a home is not “debt collection” as contemplated by the FDCPA. The court reasoned that if a person enforcing a security interest is not a “debt collector” under the FDCPA, it likewise is reasonable to conclude that enforcement of a security interest through the foreclosure process is not debt collection for purposes of the FDCPA. For a copy of the opinion, please see http://www.ca11.uscourts.gov/unpub/ops/200816171.pdf.
Seventh Circuit Holds Extrinsic Evidence of Deception Not Required for FDCPA Claim. On August 17, the U.S. Court of Appeals for the Seventh Circuit held that the Fair Debt Collection Practices Act (FDCPA) does not require plaintiffs to provide extrinsic evidence showing that an unsophisticated debtor would consider a particular statement as having been sent in connection with an attempt to collect a debt, or to show that an unsophisticated debtor would be deceived by the statement where the statement was clearly a threat to take action not allowed by the FDCPA. Ruth v. Triumph Partnerships, No. 08-3458, 2009 WL 2487092 (7th Cir. Aug. 17, 2009). In this case, the defendant, a purchaser of the plaintiff’s debt, sent a privacy notice to the debtor. The notice stated that the purchaser would share the debtor’s information “to the extent permitted by law,” and the debtor included it in an envelope with the notification of assignment of the debt. The debtor sued on behalf of a putative class, alleging that the notice was a false statement in connection with the collection of a debt in violation of the FDCPA. The purchaser argued that the statement was intended to comply with the Gramm-Leach-Bliley Act and, furthermore, complied with the FDCPA. After certifying a class of similarly situated borrowers, the district court granted summary judgment to purchaser because of the debtor’s failure to provide extrinsic evidence that an unsophisticated debtor would view the privacy notice as a communication in connection with the collection of a debt or would interpret the notice as a threat to take illegal action. On appeal, the Seventh Circuit reversed. First, the Seventh Circuit held that the FDCPA does not require a plaintiff to produce extrinsic evidence to show that an unsophisticated debtor would view the notice as having been sent “in connection with” an attempt to collect a debt. According to the court, “whether a communication was sent ‘in connection with’ an attempt to collect a debt is a question of objective fact, to be proven like any other fact.” In the instant case, “any reasonable trier of fact would conclude that the notice was sent in connection with an attempt to collect a debt” because, among other facts, the notice was sent in the same envelope as a collection letter. Second, the Seventh Circuit held that the debtor in this case was not required to produce extrinsic evidence showing that an unsophisticated consumer would be deceived or misled by the statement in the notice itself – that the purchaser would share the debtor’s information “to the extent permitted by law.” In reaching this decision, the court identified three distinct categories of FDCPA cases alleging deceptive or misleading statements. The court held that the instant case fell into one such category, reasoning that “the only reasonable conclusion that an unsophisticated consumer–or, indeed, any consumer–could reach is that the defendants were claiming a legal right to disclose the nonpublic information about the debtor that they had obtained as a consequence of attempting to collect the debt, and were threatening to do so unless the debtor affirmatively ‘opted out.’” As a result, the debtor was not required to produce extrinsic evidence of deception. In arriving at its decision, the court of appeals refused to decide whether the purchaser’s legal error regarding the statement qualified as a “bona fide error” for purposes of the FDCPA. For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=08-3458_002.pdf.
California Federal Court Dismisses TILA Claim Under “Recoupment or Setoff” Theory. On July 13, the U.S. District Court for the Southern District of California held that the theory of “recoupment or setoff” regarding a Truth in Lending Act (TILA) claim is not available to borrowers in response to a non-judicial foreclosure action. Ortiz v. Accredited Home Lenders, Inc., No. 09 CV 0461, 2009 WL 2058784 (S.D. Cal. July 13, 2009). In Ortiz, the plaintiff borrowers alleged that defendant lenders failed to disclose material loan terms - including applicable finance charges, interest rate, and total payments – in connection with a mortgage and subsequently initiated non-judicial foreclosure proceedings in an attempt to collect the mortgage debt. The borrowers filed suit and sought, among other things, the rescission of the loan and damages. With respect to the claim for damages, to avoid a statute of limitations problem, the borrowers alleged damages under the theory of “recoupment or setoff.” In assessing whether the theory of recoupment or setoff was available to the borrowers, the court first found that the borrowers’ TILA claim was sufficiently related to the underlying mortgage debt to qualify as a recoupment. Noting a circuit split, the court explained that the borrowers’ default and the lenders’ non-judicial attempts to foreclose on the property representing the security interest for the underlying loan flowed from the same contractual transaction. Nevertheless, the court found that the borrowers were not asserting their claims as a “defense” in an “action to collect a debt” because non-judicial foreclosures are not “actions” contemplated by TILA. The court recognized that the lender’s choice of remedy under California law effectively denied the borrowers of the opportunity to assert a recoupment defense, but “TILA contemplates such restrictions by allowing recoupment only to the extent allowed under state law.” The court also found that the borrowers failed to recite a claim for rescission (because such claim was precluded by the 3-year statutes of limitations and “residential mortgage transactions” are excluded from the right of rescission) and dismissed related state law claims. On August 13, the same court followed Ortiz to hold that a non-judicial foreclosure does not constitute an “action to collect a debt” under TILA. Horton v. California Credit Corp. Retirement Plan, No. 09-cv274, 2009 WL 2488031 (S.D. Cal. Aug. 13, 2009). For a copy of the Ortiz opinion, please see http://www.buckleysandler.com/Ortiz_v_Accredited.pdf. For a copy of the Horton opinion, please see http://www.buckleysandler.com/Horton_v_California_Credit.pdf.
Maryland Federal Court Grants Summary Judgment in Favor of Lender in TILA Rescission Suit. On July 28, the U.S. District Court for the District of Maryland held that a plaintiff borrower was not entitled to statutory damages or to rescind the mortgage loan transactions under the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA). Barrett v. American Partners Bank, No. AW-08-0319, 2009 WL 2366282 (D. Md. July 28, 2009). In this case, the plaintiff purchased a property and obtained two purchase money loans from the defendant lender: one secured by the property she purchased and the other secured by another property she already owned. After a year, the borrower informed the defendant that she was exercising her right to rescind the two loans on grounds that the lender failed to provide disclosures required under TILA and RESPA. The lender refused to rescind the loans, and the borrower sued. The court granted summary judgment in favor of the lender. The court noted that, in the case of the loan secured by the subject property, the loan was used to finance the purchase of the property and was therefore not subject to TILA’s rescission rights. With respect to the loan secured by the borrower’s other property, the court noted that the loan may be subject to TILA’s rescission right, even though the purpose of the loan was to finance the purchase of another property. However, because the borrower had previously sold that property, the borrower’s right to rescind the transaction had been cut off, even if an extended rescission period were warranted. The court also noted that the borrower’s claims for damages under TILA were time-barred. The court also granted summary judgment on the borrower’s RESPA claims, holding that RESPA does not provide for rescission, RESPA does not provide a private right of action for claims related to a failure to deliver a good faith estimate, and that claims related to payments of alleged kickbacks and unearned fees were time barred. For a copy of the opinion, please see http://www.buckleysandler.com/Barrett_v_American_Partners.pdf.
Alabama Federal Court Holds FCRA Preempts State Law Claims for Injunctive Relief. On August 14, the U.S. District Court for the Middle District of Alabama held that the Fair Credit Reporting Act (FCRA) preempts state common law claims for injunctive relief to the extent that those claims are inconsistent with FCRA. Hamilton v. DirecTV, Inc., No. 2:09cv357-WHA, 2009 WL 2487052 (M.D. Ala. Aug. 14, 2009). The case arose after the consumer plaintiff disputed allegedly fictitious accounts established in her name by DirecTV with several credit reporting agencies (CRAs). The CRAs deleted all but one account; one of the CRAs subsequently agreed to delete the remaining account but at an unknown time later reinserted the record in her credit report. The consumer brought both FCRA and state law defamation claims against DirectTV and the CRAs. As part of her state law defamation claim, the plaintiff sought to enjoin the defendants from communicating to any other person that she owed a debt. The CRAs argued that such relief is unavailable to private individuals under FCRA and moved to dismiss her claim for injunctive relief. The court agreed with the CRAs, finding that FCRA vests the right to seek injunctive relief exclusively with the Federal Trade Commission and that allowing a private litigant access to such relief via a state law would conflict with FCRA. As a result, the court held that FCRA preempts any state law claim for injunctive relief to the extent that such claim is inconsistent with the FCRA. Finding the consumer’s claim preempted, the court granted the CRAs’ motion to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/Hamilton_v_DirecTV.pdf.
Firm News
Margo Tank will be giving an audio conference entitled “Building Effective Electronic Records and Electronic Records Management Systems: Navigating the Legal Traps” on September 10. For more information, please see http://www.alexinformation.com/store/10700909.php.
Chris Witeck will be giving a presentation at the MBA Reverse Mortgage Conference in San Diego on September 10 entitled “The HECM Challenge,” as well as moderating the “Secondary Market Update” panel on September 11. He will also be speaking on the Secondary Market panel at the MBA Regulatory Compliance Conference in Washington D.C. on September 16.
Andrew Sandler presented at the American Bar Association’s Annual Meeting in Chicago on August 1. The title of his presentation was “Subprime Redux: Recent Developments in Subprime Enforcement and Litigation.”
Jonice Gray Tucker and Kirk Jensen spoke at the ABA’s Annual Conference on August 2 in Chicago.
Joe Kolar, Benjamin Klubes, Colgate Selden and Jonathan Cannon all spoke at the Lenders One Conference on August 3 and 4.
Jonathan Jerison was a featured speaker for the A.S. Pratt Audio Conference Series “Privacy Implications of Loss-Mitigation/FCRA” on August 6. For more information, please see http://www.aspratt.com/store/11300809.php.
Jonice Gray Tucker gave a presentation entitled “Trends in Enforcement Actions Against Mortgage Servicers and Recommended Best Practices” at the CMBA’s Loan Servicing Conference on August 10 in Las Vegas.
John Kromer spoke on a panel addressing “The Changing Standards in the Regulation of the Mortgage Industry” at the American Association of Residential Mortgage Regulator’s annual conference in Savannah, GA on August 12.
Mortgages
HUD Revises FAQs on Revised RESPA Rule. On August 19, the U.S. Department of Housing and Urban Development (HUD) revised its “Frequently Asked Questions” regarding its 2008 amendments to Regulation X, the Real Estate Settlement Procedures Act’s (RESPA) implementing regulation. The guidance addresses various aspects of the revised RESPA rule, including the delivery of a written list of settlement service providers to consumers, the changed circumstances re-delivery rule, the completion of the GFE and HUD-1/1A, and the electronic delivery of required disclosures. For a copy of the revised FAQs, please see http://www.hud.gov/offices/hsg/ramh/res/faqfinalrev4.pdf.
Mortgage Lender Settles with FTC for Failure to Send Opt-Out Notices with Credit Offers. On August 18, Metropolitan Home Mortgage, Inc. settled Federal Trade Commission (FTC) allegations that the mortgage lender sent prescreened offers of credit to consumers without properly informing them of their right to opt out of receiving such offers in the future. The lender was charged with violating the Fair Credit Reporting Act (FCRA) and the FTC’s Prescreen Rule, both of which require companies to provide customers with notices regarding the customer’s right to not receive such offers of credit or insurance and to provide these notices in a font size that is easy to read and in language that is easy to understand. Under the settlement, the lender, among other things, will (i) pay a $20,000 civil penalty, and (ii) allow the FTC to monitor its recording-keeping to ensure compliance with the order. For a copy of the press release, please see http://www.ftc.gov/opa/2009/08/wholesale.shtm.
Additional States Pass SAFE Act Legislation. North Carolina and Pennsylvania recently joined the list of states that have enacted legislation to effect the requirements of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act). North Carolina HB 1523 and Pennsylvania HB 1654 require mortgage loan originators to, among other things, register with the Nationwide Mortgage Licensing System (NMLS), complete pre-license testing and education, submit to fingerprinting for the purpose of a criminal history background check, and pass a qualified written exam developed by the NMLS. North Carolina HB 1523 became effective July 31, 2009, with mortgage loan originator licensure required by July 31, 2010 (for “exclusive mortgage brokers”) or by December 31, 2009 (for “limited loan officers”). Pennsylvania HB 1654 became effective immediately. Individuals not currently licensed as mortgage originators must file an application for a mortgage originator license by October 4, 2009 (60 days after the effective date). Mortgage originators previously licensed must complete the required education and testing requirements by December 31, 2009. For a copy of North Carolina HB 1523, please see http://www.ncga.state.nc.us/Sessions/2009/Bills/House/PDF/H1523v6.pdf. For a copy of Pennsylvania HB 1654, please see http://www.buckleysandler.com/PA_HB_1654.pdf.
New York Attorney General Sues Foreclosure Rescue Company. On August 13, Attorney General Andrew M. Cuomo announced a lawsuit against American Modification Agency, Inc. and its owner in connection with the company’s mortgage foreclosure rescue service business. The complaint alleges that the defendants (i) failed to obtain loan modifications for a vast majority of its customers, (ii) illegally charged customers up-front fees, (iii) grossly exaggerated its success rate, made false promises about its ability to save customers’ homes, underestimated the amount of time it takes to achieve a loan modification, and misrepresented that the company is a law office and that attorneys work on customers’ files, (iv) made false guarantees of “100%” customer service, (v) made false and misleading advertising statements, (vi) failed to include required legal disclosures in customer contracts, (vii) provided detrimental advice to customers (e.g., recommended that customers stop making monthly mortgage payments, ignore lender communications, and avoid consulting with non-profit housing counseling agencies), and (viii) failed to provide Spanish-speaking consumers Spanish-language contracts when required by law. Attorney General Cuomo previously announced his intention to sue the defendants on June 9 (reported in InfoBytes, June 12, 2009). For a copy of the press release, please see http://www.oag.state.ny.us/media_center/2009/aug/aug13b_09.html.
New York Federal Court Finds No Subject Matter Federal Jurisdiction in Countrywide Mortgage-Backed Securities Case. On August 14, the U.S. District Court for the Southern District of New York held that a putative class action filed by mortgage-backed securities investors against Countrywide Financial Corporation and related entities (Countrywide) is not within federal subject matter jurisdiction. Greenwich Fin. Servs. Distressed Mortg. Fund 3, LLC v. Countrywide Fin. Corp., No. 08 Civ. 11343, 2009 WL 2499149 (S.D.N.Y. Aug. 14, 2009). In this case, investors filed suit against Countrywide in December 2008 after the company agreed to modify thousands of loans in a settlement with several state attorneys general. Such loan modifications typically reduce the amount of interest and fees paid to investors over the life of the loans. Accordingly, most pooling and servicing agreements for mortgage-backed securities contain provisions that restrict a servicer’s ability to modify loans. The investors are not contesting Countrywide’s authority to modify the mortgage loans, but claim instead that Countrywide breached its contractual obligation to repurchase modified loans. In the pending litigation, Bank of America, which took over the servicing of Countrywide’s loans upon acquiring the company in 2008, argued that the “safe harbor” provision of the Helping Families Save Their Home Act of 2009 (the Home Act) overrides any such contractual obligations by protecting mortgage loan servicers from liability to investors for lost revenue caused by loan modifications. The investors filed the underlying action in the New York State Supreme Court. Bank of America sought to remove the suit to federal court, and the investors moved to remand shortly thereafter. Bank of America argued that federal jurisdiction was appropriate, among other things, because the Truth in Lending Act, as amended by the Housing and Economic Recovery Act of 2008 (HERA) and the Home Act, is a necessary element of the investors’ claim. The court rejected this argument, finding that (i) there is no necessary federal element to the investors’ claim and (ii) there is no legislative intent behind HERA or the Home Act to confer federal jurisdiction in such a case. The court also found that the Class Action Fairness Act of 2005 (CAFA) did not allow for federal jurisdiction because the claim fell under a CAFA exception for cases that solely involve a claim that “relates to the rights, duties, and obligations relating to or created by or pursuant to any security.” As a result, the court determined that the breach of contract claim properly resided in state court jurisdiction. The court did not address the question of whether the Home Act’s safe harbor immunizes Countrywide from the lawsuit. For a copy of the opinion, please see http://www.buckleysandler.com/Greenwich_v_Countrywide_081809.pdf.
New York County Settles False Claims Act Case. On August 10, the U.S. District Court for the Southern District of New York approved a $62.5 million settlement agreement in a case alleging violations of the False Claims Act by a New York county. U.S. ex rel. Anti-Discrimination Center v. Westchester County, No. 06 Civ. 2860 (S.D.N.Y. Aug. 10, 2009). This qui tam case involved allegations that Westchester County, New York (the County) violated the False Claims Act by certifying falsely that it was in compliance with provisions of the Housing and Community Development Act in order to receive federal funds for housing and community development over the course of six years. Receipt of these funds was conditioned on certification by the County that it would meet a variety of fair housing obligations, including that it would affirmatively further fair housing (AFFH). To AFFH, the County was statutorily required to (i) analyze impediments to fair housing choices, (ii) take appropriate actions to overcome the effects of any impediments, and (iii) maintain records reflecting its analysis and actions. The Anti-Discrimination Center of Metro New York (ADC) alleged that the County had failed to meet all three requirements. The court previously awarded partial summary judgment for ADC (2009 WL 455269 (S.D.N.Y. Feb. 24, 2009)), holding that the County had made certain express and implied material false certifications because the analyses and actions it was required to undertake did not adequately consider or record race-based impediments to fair housing. The U.S. Department of Justice intervened in the case to assist settlement negotiations shortly following that decision. The County denied the allegations and any liability in the settlement, the terms of which require the County to spend $51.6 million to develop at least 750 affordable housing units in municipalities with small African-American and Latino populations. The remainder of the settlement amount reflects the payment of $8.4 million to the United States and $2.5 million in attorneys’ fees. For a copy of the settlement agreement, please see http://www.buckleysandler.com/Anti_Discrimination_Center.pdf.
Louisiana Federal Court Dismisses RESPA Violation Claim in Absence of Fee-Splitting Arrangement. On August 10, the U.S. District Court for the Eastern District of Louisiana declined to hold a lender and a title insurance and settlement services provider liable for violating Section 8(b) of the Real Estate Settlement Procedures Act (RESPA) after finding that the defendants did not actually split any of the settlement service fees contested by the plaintiff borrowers. Freeman v. Quicken Loans, Inc., No. 08-1626, 2009 WL 2448033 (E.D. La. Aug. 10, 2009). In Freeman, the borrowers alleged that the defendants violated RESPA and Louisiana law by, among other things, (i) charging a loan discount fee, but failing to provide a corresponding interest rate reduction, and (ii) charging an appraisal fee that was improperly split between the defendants. In granting summary judgment in favor of the defendants, the court agreed with defendants that the borrowers’ RESPA claims failed as a matter of law because the defendants provided evidence that they did not split or otherwise share the contested loan discount and appraisal fees—instead, the lender received and retained the loan discount fee, and the title insurance and settlement services provider received and retained the appraisal fee. According to the court, Section 8(b) of RESPA unambiguously requires “an allegation that the challenged fees have been split in some fashion.” The court’s decision stands at odds with decisions from the Second and Eleventh Circuits holding that a single service provider can violate Section 8(b) of RESPA (but is in line with decisions from the Fourth, Seventh, and Eighth Circuits). Regarding the borrowers’ state law breach of contract and quasi-contract claims, the court found that the invalidity of the plaintiffs’ claims under Section 8(b) of RESPA required that their state law claims be similarly dismissed. For a copy of the opinion, please see http://www.buckleysandler.com/Freeman_v_Quicken_Loans.pdf.
Eleventh Circuit Holds Home Foreclosure Not Debt Collection Under FDCPA. On August 14, the U.S. Court of Appeals for the Eleventh Circuit held that foreclosing on a home is not “debt collection” as contemplated by the Fair Debt Collection Practices Act (FDCPA). Warren v. Countrywide Home Loans, Inc., No. 08-16171, 2009 WL 2477764 (11th Cir. Aug. 14, 2009). In Warren, the defendant lender initiated foreclosure proceedings on the plaintiff borrower. In response, the borrower alleged, among other things, that the lender violated the FDCPA by failing to respond to his request for verification of his debt before the lender proceeded with the foreclosure sale of the home. The court of appeals rejected the borrower’s argument and followed the persuasive precedent of the Sixth Circuit and several district court decisions to hold that foreclosing on a home is not “debt collection” as contemplated by the FDCPA. The court reasoned that if a person enforcing a security interest is not a “debt collector” under the FDCPA, it likewise is reasonable to conclude that enforcement of a security interest through the foreclosure process is not debt collection for purposes of the FDCPA. For a copy of the opinion, please see http://www.ca11.uscourts.gov/unpub/ops/200816171.pdf.
California Federal Court Dismisses TILA Claim Under “Recoupment or Setoff” Theory. On July 13, the U.S. District Court for the Southern District of California held that the theory of “recoupment or setoff” regarding a Truth in Lending Act (TILA) claim is not available to borrowers in response to a non-judicial foreclosure action. Ortiz v. Accredited Home Lenders, Inc., No. 09 CV 0461, 2009 WL 2058784 (S.D. Cal. July 13, 2009). In Ortiz, the plaintiff borrowers alleged that defendant lenders failed to disclose material loan terms - including applicable finance charges, interest rate, and total payments – in connection with a mortgage and subsequently initiated non-judicial foreclosure proceedings in an attempt to collect the mortgage debt. The borrowers filed suit and sought, among other things, the rescission of the loan and damages. With respect to the claim for damages, to avoid a statute of limitations problem, the borrowers alleged damages under the theory of “recoupment or setoff.” In assessing whether the theory of recoupment or setoff was available to the borrowers, the court first found that the borrowers’ TILA claim was sufficiently related to the underlying mortgage debt to qualify as a recoupment. Noting a circuit split, the court explained that the borrowers’ default and the lenders’ non-judicial attempts to foreclose on the property representing the security interest for the underlying loan flowed from the same contractual transaction. Nevertheless, the court found that the borrowers were not asserting their claims as a “defense” in an “action to collect a debt” because non-judicial foreclosures are not “actions” contemplated by TILA. The court recognized that the lender’s choice of remedy under California law effectively denied the borrowers of the opportunity to assert a recoupment defense, but “TILA contemplates such restrictions by allowing recoupment only to the extent allowed under state law.” The court also found that the borrowers failed to recite a claim for rescission (because such claim was precluded by the 3-year statutes of limitations and “residential mortgage transactions” are excluded from the right of rescission) and dismissed related state law claims. On August 13, the same court followed Ortiz to hold that a non-judicial foreclosure does not constitute an “action to collect a debt” under TILA. Horton v. California Credit Corp. Retirement Plan, No. 09-cv274, 2009 WL 2488031 (S.D. Cal. Aug. 13, 2009). For a copy of the Ortiz opinion, please see http://www.buckleysandler.com/Ortiz_v_Accredited.pdf. For a copy of the Horton opinion, please see http://www.buckleysandler.com/Horton_v_California_Credit.pdf.
Maryland Federal Court Grants Summary Judgment in Favor of Lender in TILA Rescission Suit. On July 28, the U.S. District Court for the District of Maryland held that a plaintiff borrower was not entitled to statutory damages or to rescind the mortgage loan transactions under the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA). Barrett v. American Partners Bank, No. AW-08-0319, 2009 WL 2366282 (D. Md. July 28, 2009). In this case, the plaintiff purchased a property and obtained two purchase money loans from the defendant lender: one secured by the property she purchased and the other secured by another property she already owned. After a year, the borrower informed the defendant that she was exercising her right to rescind the two loans on grounds that the lender failed to provide disclosures required under TILA and RESPA. The lender refused to rescind the loans, and the borrower sued. The court granted summary judgment in favor of the lender. The court noted that, in the case of the loan secured by the subject property, the loan was used to finance the purchase of the property and was therefore not subject to TILA’s rescission rights. With respect to the loan secured by the borrower’s other property, the court noted that the loan may be subject to TILA’s rescission right, even though the purpose of the loan was to finance the purchase of another property. However, because the borrower had previously sold that property, the borrower’s right to rescind the transaction had been cut off, even if an extended rescission period were warranted. The court also noted that the borrower’s claims for damages under TILA were time-barred. The court also granted summary judgment on the borrower’s RESPA claims, holding that RESPA does not provide for rescission, RESPA does not provide a private right of action for claims related to a failure to deliver a good faith estimate, and that claims related to payments of alleged kickbacks and unearned fees were time barred. For a copy of the opinion, please see http://www.buckleysandler.com/Barrett_v_American_Partners.pdf.
Banking
Fed, Treasury Extend TALF. On August 17, the Federal Reserve Board and the U.S. Department of the Treasury announced that the Term Asset-Backed Securities Loan Facility (TALF) will be extended beyond December 31, 2009. The agencies approved extending TALF loans against newly issued asset-backed securities and legacy commercial mortgage-backed securities (CMBS) through March 31, 2010. The agencies also approved TALF lending against newly issued CMBS through June 30, 2010. Finally, the agencies indicated that they do not anticipate allowing new types of collateral to be eligible for the TALF. For a copy of the press release, please see http://www.federalreserve.gov/newsevents/press/monetary/20090817a.htm.
Fed Announces New Schedule of Collateral Margins for Depository Institutions. On August 19, the Federal Reserve Board (Fed) announced a new schedule of margins applicable for collateral pledged by depository institutions to secure discount window and Term Auction Facility loans for payment system risk purposes. According to the Fed, the new margins reflect improvements to better account for differences in risk characteristics among various types of collateral. The changes become effective October 19, 2009. For further information, please see http://www.frbdiscountwindow.org/20090819margins_announcement.cfm?hdrID=21. For a copy of the press release, please see http://www.federalreserve.gov/newsevents/press/monetary/20090819a.htm.
FinCEN Issues Fact Sheet Regarding Suspected Money Laundering, Terrorism. On August 11, the Financial Crimes Enforcement Network (FinCEN) issued a fact sheet addressing Section 314(a) of the USA PATRIOT Act, which requires the adoption of regulations to encourage regulatory authorities and law enforcement authorities to share information with financial institutions pertaining to suspected money laundering or suspected involvement with terrorism. The fact sheet provides (i) an overview of FinCEN’s regulations regarding the requirement, (ii) FinCEN’s process pertaining to the requirement, (iii) the criteria for money laundering requests, (iv) the results of the requests, and (v) feedback from law enforcement regarding the requests. For a copy of the fact sheet, please see http://www.fincen.gov/statutes_regs/patriot/pdf/314afactsheet.pdf.
Consumer Finance
Mortgage Lender Settles with FTC for Failure to Send Opt-Out Notices with Credit Offers. On August 18, Metropolitan Home Mortgage, Inc. settled Federal Trade Commission (FTC) allegations that the mortgage lender sent prescreened offers of credit to consumers without properly informing them of their right to opt out of receiving such offers in the future. The lender was charged with violating the Fair Credit Reporting Act (FCRA) and the FTC’s Prescreen Rule, both of which require companies to provide customers with notices regarding the customer’s right to not receive such offers of credit or insurance and to provide these notices in a font size that is easy to read and in language that is easy to understand. Under the settlement, the lender, among other things, will (i) pay a $20,000 civil penalty, and (ii) allow the FTC to monitor its recording-keeping to ensure compliance with the order. For a copy of the press release, please see http://www.ftc.gov/opa/2009/08/wholesale.shtm.
FTC Reaches Settlement with Debit Card Company. On August 20, the Federal Trade Commission (FTC) reached a settlement with a debit card company that issued debit cards to consumers without the consumers’ knowledge. According to the FTC, the company issued the debit cards under a referral arrangement with the consumers’ online payday lender. Under the settlement, the company and its principals, among other things, (i) are barred from charging consumers without first disclosing the specific billing information to be used, the amount to be paid, the method for assessing the payment, the entity on whose behalf the payment will be assessed, and all material terms and conditions, (ii) must require consumers to affirmatively authorize a transaction, (iii) must take “reasonable” steps in marketing products or services to ensure that marketing affiliates ensure compliance with the order, and (iv) must pay a $5.5 million suspended judgment. The FTC has also filed a suit against the online payday lender alleging deceptive marketing practices. For a copy of the press release, please see http://www.ftc.gov/opa/2009/08/everprivate.shtm. For a copy of the settlement, please see http://www.ftc.gov/os/caselist/0723241/090820vwstippi.pdf.
Massachusetts Regulator Issues Cease-Activity Directives to Payday Lenders. On August 18, the Massachusetts Division of Banks (the Division) announced that it has issued cease-activity directives to 95 companies allegedly making illegal payday loans to Massachusetts consumers. According to the Division, many of the companies it identified were charging annual percentage rates averaging over 500% and fees averaging $40-60, in violation of the Massachusetts small-loan licensing law. For a copy of the press release, please see http://www.buckleysandler.com/Mass-DOB_081809.pdf.
Seventh Circuit Holds Extrinsic Evidence of Deception Not Required for FDCPA Claim. On August 17, the U.S. Court of Appeals for the Seventh Circuit held that the Fair Debt Collection Practices Act (FDCPA) does not require plaintiffs to provide extrinsic evidence showing that an unsophisticated debtor would consider a particular statement as having been sent in connection with an attempt to collect a debt, or to show that an unsophisticated debtor would be deceived by the statement where the statement was clearly a threat to take action not allowed by the FDCPA. Ruth v. Triumph Partnerships, No. 08-3458, 2009 WL 2487092 (7th Cir. Aug. 17, 2009). In this case, the defendant, a purchaser of the plaintiff’s debt, sent a privacy notice to the debtor. The notice stated that the purchaser would share the debtor’s information “to the extent permitted by law,” and the debtor included it in an envelope with the notification of assignment of the debt. The debtor sued on behalf of a putative class, alleging that the notice was a false statement in connection with the collection of a debt in violation of the FDCPA. The purchaser argued that the statement was intended to comply with the Gramm-Leach-Bliley Act and, furthermore, complied with the FDCPA. After certifying a class of similarly situated borrowers, the district court granted summary judgment to purchaser because of the debtor’s failure to provide extrinsic evidence that an unsophisticated debtor would view the privacy notice as a communication in connection with the collection of a debt or would interpret the notice as a threat to take illegal action. On appeal, the Seventh Circuit reversed. First, the Seventh Circuit held that the FDCPA does not require a plaintiff to produce extrinsic evidence to show that an unsophisticated debtor would view the notice as having been sent “in connection with” an attempt to collect a debt. According to the court, “whether a communication was sent ‘in connection with’ an attempt to collect a debt is a question of objective fact, to be proven like any other fact.” In the instant case, “any reasonable trier of fact would conclude that the notice was sent in connection with an attempt to collect a debt” because, among other facts, the notice was sent in the same envelope as a collection letter. Second, the Seventh Circuit held that the debtor in this case was not required to produce extrinsic evidence showing that an unsophisticated consumer would be deceived or misled by the statement in the notice itself – that the purchaser would share the debtor’s information “to the extent permitted by law.” In reaching this decision, the court identified three distinct categories of FDCPA cases alleging deceptive or misleading statements. The court held that the instant case fell into one such category, reasoning that “the only reasonable conclusion that an unsophisticated consumer–or, indeed, any consumer–could reach is that the defendants were claiming a legal right to disclose the nonpublic information about the debtor that they had obtained as a consequence of attempting to collect the debt, and were threatening to do so unless the debtor affirmatively ‘opted out.’” As a result, the debtor was not required to produce extrinsic evidence of deception. In arriving at its decision, the court of appeals refused to decide whether the purchaser’s legal error regarding the statement qualified as a “bona fide error” for purposes of the FDCPA. For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=08-3458_002.pdf.
Alabama Federal Court Holds FCRA Preempts State Law Claims for Injunctive Relief. On August 14, the U.S. District Court for the Middle District of Alabama held that the Fair Credit Reporting Act (FCRA) preempts state common law claims for injunctive relief to the extent that those claims are inconsistent with FCRA. Hamilton v. DirecTV, Inc., No. 2:09cv357-WHA, 2009 WL 2487052 (M.D. Ala. Aug. 14, 2009). The case arose after the consumer plaintiff disputed allegedly fictitious accounts established in her name by DirecTV with several credit reporting agencies (CRAs). The CRAs deleted all but one account; one of the CRAs subsequently agreed to delete the remaining account but at an unknown time later reinserted the record in her credit report. The consumer brought both FCRA and state law defamation claims against DirectTV and the CRAs. As part of her state law defamation claim, the plaintiff sought to enjoin the defendants from communicating to any other person that she owed a debt. The CRAs argued that such relief is unavailable to private individuals under FCRA and moved to dismiss her claim for injunctive relief. The court agreed with the CRAs, finding that FCRA vests the right to seek injunctive relief exclusively with the Federal Trade Commission and that allowing a private litigant access to such relief via a state law would conflict with FCRA. As a result, the court held that FCRA preempts any state law claim for injunctive relief to the extent that such claim is inconsistent with the FCRA. Finding the consumer’s claim preempted, the court granted the CRAs’ motion to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/Hamilton_v_DirecTV.pdf.
Insurance
Louisiana Federal Court Dismisses RESPA Violation Claim in Absence of Fee-Splitting Arrangement. On August 10, the U.S. District Court for the Eastern District of Louisiana declined to hold a lender and a title insurance and settlement services provider liable for violating Section 8(b) of the Real Estate Settlement Procedures Act (RESPA) after finding that the defendants did not actually split any of the settlement service fees contested by the plaintiff borrowers. Freeman v. Quicken Loans, Inc., No. 08-1626, 2009 WL 2448033 (E.D. La. Aug. 10, 2009). In Freeman, the borrowers alleged that the defendants violated RESPA and Louisiana law by, among other things, (i) charging a loan discount fee, but failing to provide a corresponding interest rate reduction, and (ii) charging an appraisal fee that was improperly split between the defendants. In granting summary judgment in favor of the defendants, the court agreed with defendants that the borrowers’ RESPA claims failed as a matter of law because the defendants provided evidence that they did not split or otherwise share the contested loan discount and appraisal fees—instead, the lender received and retained the loan discount fee, and the title insurance and settlement services provider received and retained the appraisal fee. According to the court, Section 8(b) of RESPA unambiguously requires “an allegation that the challenged fees have been split in some fashion.” The court’s decision stands at odds with decisions from the Second and Eleventh Circuits holding that a single service provider can violate Section 8(b) of RESPA (but is in line with decisions from the Fourth, Seventh, and Eighth Circuits). Regarding the borrowers’ state law breach of contract and quasi-contract claims, the court found that the invalidity of the plaintiffs’ claims under Section 8(b) of RESPA required that their state law claims be similarly dismissed. For a copy of the opinion, please see http://www.buckleysandler.com/Freeman_v_Quicken_Loans.pdf.
Litigation
New York Federal Court Finds No Subject Matter Federal Jurisdiction in Countrywide Mortgage-Backed Securities Case. On August 14, the U.S. District Court for the Southern District of New York held that a putative class action filed by mortgage-backed securities investors against Countrywide Financial Corporation and related entities (Countrywide) is not within federal subject matter jurisdiction. Greenwich Fin. Servs. Distressed Mortg. Fund 3, LLC v. Countrywide Fin. Corp., No. 08 Civ. 11343, 2009 WL 2499149 (S.D.N.Y. Aug. 14, 2009). In this case, investors filed suit against Countrywide in December 2008 after the company agreed to modify thousands of loans in a settlement with several state attorneys general. Such loan modifications typically reduce the amount of interest and fees paid to investors over the life of the loans. Accordingly, most pooling and servicing agreements for mortgage-backed securities contain provisions that restrict a servicer’s ability to modify loans. The investors are not contesting Countrywide’s authority to modify the mortgage loans, but claim instead that Countrywide breached its contractual obligation to repurchase modified loans. In the pending litigation, Bank of America, which took over the servicing of Countrywide’s loans upon acquiring the company in 2008, argued that the “safe harbor” provision of the Helping Families Save Their Home Act of 2009 (the Home Act) overrides any such contractual obligations by protecting mortgage loan servicers from liability to investors for lost revenue caused by loan modifications. The investors filed the underlying action in the New York State Supreme Court. Bank of America sought to remove the suit to federal court, and the investors moved to remand shortly thereafter. Bank of America argued that federal jurisdiction was appropriate, among other things, because the Truth in Lending Act, as amended by the Housing and Economic Recovery Act of 2008 (HERA) and the Home Act, is a necessary element of the investors’ claim. The court rejected this argument, finding that (i) there is no necessary federal element to the investors’ claim and (ii) there is no legislative intent behind HERA or the Home Act to confer federal jurisdiction in such a case. The court also found that the Class Action Fairness Act of 2005 (CAFA) did not allow for federal jurisdiction because the claim fell under a CAFA exception for cases that solely involve a claim that “relates to the rights, duties, and obligations relating to or created by or pursuant to any security.” As a result, the court determined that the breach of contract claim properly resided in state court jurisdiction. The court did not address the question of whether the Home Act’s safe harbor immunizes Countrywide from the lawsuit. For a copy of the opinion, please see http://www.buckleysandler.com/Greenwich_v_Countrywide_081809.pdf.
New York County Settles False Claims Act Case. On August 10, the U.S. District Court for the Southern District of New York approved a $62.5 million settlement agreement in a case alleging violations of the False Claims Act by a New York county. U.S. ex rel. Anti-Discrimination Center v. Westchester County, No. 06 Civ. 2860 (S.D.N.Y. Aug. 10, 2009). This qui tam case involved allegations that Westchester County, New York (the County) violated the False Claims Act by certifying falsely that it was in compliance with provisions of the Housing and Community Development Act in order to receive federal funds for housing and community development over the course of six years. Receipt of these funds was conditioned on certification by the County that it would meet a variety of fair housing obligations, including that it would affirmatively further fair housing (AFFH). To AFFH, the County was statutorily required to (i) analyze impediments to fair housing choices, (ii) take appropriate actions to overcome the effects of any impediments, and (iii) maintain records reflecting its analysis and actions. The Anti-Discrimination Center of Metro New York (ADC) alleged that the County had failed to meet all three requirements. The court previously awarded partial summary judgment for ADC (2009 WL 455269 (S.D.N.Y. Feb. 24, 2009)), holding that the County had made certain express and implied material false certifications because the analyses and actions it was required to undertake did not adequately consider or record race-based impediments to fair housing. The U.S. Department of Justice intervened in the case to assist settlement negotiations shortly following that decision. The County denied the allegations and any liability in the settlement, the terms of which require the County to spend $51.6 million to develop at least 750 affordable housing units in municipalities with small African-American and Latino populations. T he remainder of the settlement amount reflects the payment of $8.4 million to the United States and $2.5 million in attorneys’ fees. For a copy of the settlement agreement, please see http://www.buckleysandler.com/Anti_Discrimination_Center.pdf.
Louisiana Federal Court Dismisses RESPA Violation Claim in Absence of Fee-Splitting Arrangement. On August 10, the U.S. District Court for the Eastern District of Louisiana declined to hold a lender and a title insurance and settlement services provider liable for violating Section 8(b) of the Real Estate Settlement Procedures Act (RESPA) after finding that the defendants did not actually split any of the settlement service fees contested by the plaintiff borrowers. Freeman v. Quicken Loans, Inc., No. 08-1626, 2009 WL 2448033 (E.D. La. Aug. 10, 2009). In Freeman, the borrowers alleged that the defendants violated RESPA and Louisiana law by, among other things, (i) charging a loan discount fee, but failing to provide a corresponding interest rate reduction, and (ii) charging an appraisal fee that was improperly split between the defendants. In granting summary judgment in favor of the defendants, the court agreed with defendants that the borrowers’ RESPA claims failed as a matter of law because the defendants provided evidence that they did not split or otherwise share the contested loan discount and appraisal fees—instead, the lender received and retained the loan discount fee, and the title insurance and settlement services provider received and retained the appraisal fee. According to the court, Section 8(b) of RESPA unambiguously requires “an allegation that the challenged fees have been split in some fashion.” The court’s decision stands at odds with decisions from the Second and Eleventh Circuits holding that a single service provider can violate Section 8(b) of RESPA (but is in line with decisions from the Fourth, Seventh, and Eighth Circuits). Regarding the borrowers’ state law breach of contract and quasi-contract claims, the court found that the invalidity of the plaintiffs’ claims under Section 8(b) of RESPA required that their state law claims be similarly dismissed. For a copy of the opinion, please see http://www.buckleysandler.com/Freeman_v_Quicken_Loans.pdf.
Eleventh Circuit Holds Home Foreclosure Not Debt Collection Under FDCPA. On August 14, the U.S. Court of Appeals for the Eleventh Circuit held that foreclosing on a home is not “debt collection” as contemplated by the Fair Debt Collection Practices Act (FDCPA). Warren v. Countrywide Home Loans, Inc., No. 08-16171, 2009 WL 2477764 (11th Cir. Aug. 14, 2009). In Warren, the defendant lender initiated foreclosure proceedings on the plaintiff borrower. In response, the borrower alleged, among other things, that the lender violated the FDCPA by failing to respond to his request for verification of his debt before the lender proceeded with the foreclosure sale of the home. The court of appeals rejected the borrower’s argument and followed the persuasive precedent of the Sixth Circuit and several district court decisions to hold that foreclosing on a home is not “debt collection” as contemplated by the FDCPA. The court reasoned that if a person enforcing a security interest is not a “debt collector” under the FDCPA, it likewise is reasonable to conclude that enforcement of a security interest through the foreclosure process is not debt collection for purposes of the FDCPA. For a copy of the opinion, please see http://www.ca11.uscourts.gov/unpub/ops/200816171.pdf.
Seventh Circuit Holds Extrinsic Evidence of Deception Not Required for FDCPA Claim. On August 17, the U.S. Court of Appeals for the Seventh Circuit held that the Fair Debt Collection Practices Act (FDCPA) does not require plaintiffs to provide extrinsic evidence showing that an unsophisticated debtor would consider a particular statement as having been sent in connection with an attempt to collect a debt, or to show that an unsophisticated debtor would be deceived by the statement where the statement was clearly a threat to take action not allowed by the FDCPA. Ruth v. Triumph Partnerships, No. 08-3458, 2009 WL 2487092 (7th Cir. Aug. 17, 2009). In this case, the defendant, a purchaser of the plaintiff’s debt, sent a privacy notice to the debtor. The notice stated that the purchaser would share the debtor’s information “to the extent permitted by law,” and the debtor included it in an envelope with the notification of assignment of the debt. The debtor sued on behalf of a putative class, alleging that the notice was a false statement in connection with the collection of a debt in violation of the FDCPA. The purchaser argued that the statement was intended to comply with the Gramm-Leach-Bliley Act and, furthermore, complied with the FDCPA. After certifying a class of similarly situated borrowers, the district court granted summary judgment to purchaser because of the debtor’s failure to provide extrinsic evidence that an unsophisticated debtor would view the privacy notice as a communication in connection with the collection of a debt or would interpret the notice as a threat to take illegal action. On appeal, the Seventh Circuit reversed. First, the Seventh Circuit held that the FDCPA does not require a plaintiff to produce extrinsic evidence to show that an unsophisticated debtor would view the notice as having been sent “in connection with” an attempt to collect a debt. According to the court, “whether a communication was sent ‘in connection with’ an attempt to collect a debt is a question of objective fact, to be proven like any other fact.” In the instant case, “any reasonable trier of fact would conclude that the notice was sent in connection with an attempt to collect a debt” because, among other facts, the notice was sent in the same envelope as a collection letter. Second, the Seventh Circuit held that the debtor in this case was not required to produce extrinsic evidence showing that an unsophisticated consumer would be deceived or misled by the statement in the notice itself – that the purchaser would share the debtor’s information “to the extent permitted by law.” In reaching this decision, the court identified three distinct categories of FDCPA cases alleging deceptive or misleading statements. The court held that the instant case fell into one such category, reasoning that “the only reasonable conclusion that an unsophisticated consumer–or, indeed, any consumer–could reach is that the defendants were claiming a legal right to disclose the nonpublic information about the debtor that they had obtained as a consequence of attempting to collect the debt, and were threatening to do so unless the debtor affirmatively ‘opted out.’” As a result, the debtor was not required to produce extrinsic evidence of deception. In arriving at its decision, the court of appeals refused to decide whether the purchaser’s legal error regarding the statement qualified as a “bona fide error” for purposes of the FDCPA. For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=08-3458_002.pdf.
California Federal Court Dismisses TILA Claim Under “Recoupment or Setoff” Theory. On July 13, the U.S. District Court for the Southern District of California held that the theory of “recoupment or setoff” regarding a Truth in Lending Act (TILA) claim is not available to borrowers in response to a non-judicial foreclosure action. Ortiz v. Accredited Home Lenders, Inc., No. 09 CV 0461, 2009 WL 2058784 (S.D. Cal. July 13, 2009). In Ortiz, the plaintiff borrowers alleged that defendant lenders failed to disclose material loan terms - including applicable finance charges, interest rate, and total payments – in connection with a mortgage and subsequently initiated non-judicial foreclosure proceedings in an attempt to collect the mortgage debt. The borrowers filed suit and sought, among other things, the rescission of the loan and damages. With respect to the claim for damages, to avoid a statute of limitations problem, the borrowers alleged damages under the theory of “recoupment or setoff.” In assessing whether the theory of recoupment or setoff was available to the borrowers, the court first found that the borrowers’ TILA claim was sufficiently related to the underlying mortgage debt to qualify as a recoupment. Noting a circuit split, the court explained that the borrowers’ default and the lenders’ non-judicial attempts to foreclose on the property representing the security interest for the underlying loan flowed from the same contractual transaction. Nevertheless, the court found that the borrowers were not asserting their claims as a “defense” in an “action to collect a debt” because non-judicial foreclosures are not “actions” contemplated by TILA. The court recognized that the lender’s choice of remedy under California law effectively denied the borrowers of the opportunity to assert a recoupment defense, but “TILA contemplates such restrictions by allowing recoupment only to the extent allowed under state law.” The court also found that the borrowers failed to recite a claim for rescission (because such claim was precluded by the 3-year statutes of limitations and “residential mortgage transactions” are excluded from the right of rescission) and dismissed related state law claims. On August 13, the same court followed Ortiz to hold that a non-judicial foreclosure does not constitute an “action to collect a debt” under TILA. Horton v. California Credit Corp. Retirement Plan, No. 09-cv274, 2009 WL 2488031 (S.D. Cal. Aug. 13, 2009). For a copy of the Ortiz opinion, please see http://www.buckleysandler.com/Ortiz_v_Accredited.pdf. For a copy of the Horton opinion, please see http://www.buckleysandler.com/Horton_v_California_Credit.pdf.
Maryland Federal Court Grants Summary Judgment in Favor of Lender in TILA Rescission Suit. On July 28, the U.S. District Court for the District of Maryland held that a plaintiff borrower was not entitled to statutory damages or to rescind the mortgage loan transactions under the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA). Barrett v. American Partners Bank, No. AW-08-0319, 2009 WL 2366282 (D. Md. July 28, 2009). In this case, the plaintiff purchased a property and obtained two purchase money loans from the defendant lender: one secured by the property she purchased and the other secured by another property she already owned. After a year, the borrower informed the defendant that she was exercising her right to rescind the two loans on grounds that the lender failed to provide disclosures required under TILA and RESPA. The lender refused to rescind the loans, and the borrower sued. The court granted summary judgment in favor of the lender. The court noted that, in the case of the loan secured by the subject property, the loan was used to finance the purchase of the property and was therefore not subject to TILA’s rescission rights. With respect to the loan secured by the borrower’s other property, the court noted that the loan may be subject to TILA’s rescission right, even though the purpose of the loan was to finance the purchase of another property. However, because the borrower had previously sold that property, the borrower’s right to rescind the transaction had been cut off, even if an extended rescission period were warranted. The court also noted that the borrower’s claims for damages under TILA were time-barred. The court also granted summary judgment on the borrower’s RESPA claims, holding that RESPA does not provide for rescission, RESPA does not provide a private right of action for claims related to a failure to deliver a good faith estimate, and that claims related to payments of alleged kickbacks and unearned fees were time barred. For a copy of the opinion, please see http://www.buckleysandler.com/Barrett_v_American_Partners.pdf.
Alabama Federal Court Holds FCRA Preempts State Law Claims for Injunctive Relief. On August 14, the U.S. District Court for the Middle District of Alabama held that the Fair Credit Reporting Act (FCRA) preempts state common law claims for injunctive relief to the extent that those claims are inconsistent with FCRA. Hamilton v. DirecTV, Inc., No. 2:09cv357-WHA, 2009 WL 2487052 (M.D. Ala. Aug. 14, 2009). The case arose after the consumer plaintiff disputed allegedly fictitious accounts established in her name by DirecTV with several credit reporting agencies (CRAs). The CRAs deleted all but one account; one of the CRAs subsequently agreed to delete the remaining account but at an unknown time later reinserted the record in her credit report. The consumer brought both FCRA and state law defamation claims against DirectTV and the CRAs. As part of her state law defamation claim, the plaintiff sought to enjoin the defendants from communicating to any other person that she owed a debt. The CRAs argued that such relief is unavailable to private individuals under FCRA and moved to dismiss her claim for injunctive relief. The court agreed with the CRAs, finding that FCRA vests the right to seek injunctive relief exclusively with the Federal Trade Commission and that allowing a private litigant access to such relief via a state law would conflict with FCRA. As a result, the court held that FCRA preempts any state law claim for injunctive relief to the extent that such claim is inconsistent with the FCRA. Finding the consumer’s claim preempted, the court granted the CRAs’ motion to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/Hamilton_v_DirecTV.pdf.
Privacy/Data Security
Mortgage Lender Settles with FTC for Failure to Send Opt-Out Notices with Credit Offers. On August 18, Metropolitan Home Mortgage, Inc. settled Federal Trade Commission (FTC) allegations that the mortgage lender sent prescreened offers of credit to consumers without properly informing them of their right to opt out of receiving such offers in the future. The lender was charged with violating the Fair Credit Reporting Act (FCRA) and the FTC’s Prescreen Rule, both of which require companies to provide customers with notices regarding the customer’s right to not receive such offers of credit or insurance and to provide these notices in a font size that is easy to read and in language that is easy to understand. Under the settlement, the lender, among other things, will (i) pay a $20,000 civil penalty, and (ii) allow the FTC to monitor its recording-keeping to ensure compliance with the order. For a copy of the press release, please see http://www.ftc.gov/opa/2009/08/wholesale.shtm.
FTC Increases Do Not Call Registry Access Fees. On August 18, the Federal Trade Commission (FTC) announced revisions to the fees paid by telemarketers accessing phone numbers on the National Do Not Call Registry. For fiscal year 2010, telemarketers will pay $55 (a $1 increase) for access to registry phone numbers in a single area code, or $27 per area code of data during the second six months of an entity’s annual subscription period. The maximum amount that would be charged to any single entity for accessing all area codes nationwide is increased to $15,058. The FTC will begin assessing the new fees on October 1, 2009. For a copy of the final rule, please see http://ftc.gov/os/2009/08/P034305frnotice.pdf.
FTC Requires Health Record Vendors to Notify Consumers of Health Information Breaches. On August 17, the Federal Trade Commission (FTC) issued a final rule requiring web-based health care information venders and third party applications that manage personal health records to notify consumers and the media when the security of individually identifiable health information has been breached. The rule is in response to the American Recovery and Reinvestment Act of 2009, which recognizes that web-based entities collect and store private information and provides that such entities should be regulated by the FTC. Under the rule, a breach of security includes misuse of records by employees, theft or loss of computer equipment, infiltration by a network hacker, or any situation in which a person’s private medical information is accessed without that person’s consent. In the event of a breach, an affected customer must be contacted “without unreasonable delay,” and the media must be contacted when 500 or more customers’ records have been breached. The rule does not apply to Health Insurance Portability and Accountability Act (HIPAA) covered entities; however, the FTC and the U.S. Department of Health and Human Services (HHS) will work together to harmonize the two rules. To this end, in the future, the FTC will publish a report in conjunction with the HHS regarding privacy, security, and breach notification requirements. The rule becomes effective 30 days after publication in the Federal Register, and full compliance is required by 180 days after publication in the Federal Register. For a copy of the rule, please see http://www.ftc.gov/os/2009/08/R911002hbn.pdf.
Massachusetts Regulator Revises Personal Information Protection Regulations. On August 17, the Massachusetts Office of Consumer Affairs and Business Regulation (OCABR) announced adjustments to security standards to be met by those who own or license personal information of consumers. The revised regulations clarify that entities subject to the regulations must develop a security program with safeguards that are appropriate to (i) the size, scope and type of business handling the information, (ii) the amount of resources available to the business, (iii) the amount of stored data, and (iv) the need for security and confidentiality of both consumer and employee information. The revised regulations become effective March 1, 2010. For a copy of the press release, please see http://www.buckleysandler.com/Mass_OCABR_081709.pdf. For a copy of the revised regulations, please see http://www.mass.gov/Eoca/docs/idtheft/201CMR1700reg.pdf.
New Hampshire Enacts Bills Relating to Health Data Privacy. On August 7, New Hampshire Governor John Lynch signed into law H.B. 542, which primarily addresses health privacy issues. The new law (i) authorizes health care providers to disclose an individual’s protected health information to health information exchanges, and (ii) allows individuals to opt out of sharing their protected health care information through health information exchanges. The operative provisions of the new law become effective January 1, 2010. For a copy of H.B. 542, please see http://www.gencourt.state.nh.us/legislation/2009/HB0542.html.
Alabama Federal Court Holds FCRA Preempts State Law Claims for Injunctive Relief. On August 14, the U.S. District Court for the Middle District of Alabama held that the Fair Credit Reporting Act (FCRA) preempts state common law claims for injunctive relief to the extent that those claims are inconsistent with FCRA. Hamilton v. DirecTV, Inc., No. 2:09cv357-WHA, 2009 WL 2487052 (M.D. Ala. Aug. 14, 2009). The case arose after the consumer plaintiff disputed allegedly fictitious accounts established in her name by DirecTV with several credit reporting agencies (CRAs). The CRAs deleted all but one account; one of the CRAs subsequently agreed to delete the remaining account but at an unknown time later reinserted the record in her credit report. The consumer brought both FCRA and state law defamation claims against DirectTV and the CRAs. As part of her state law defamation claim, the plaintiff sought to enjoin the defendants from communicating to any other person that she owed a debt. The CRAs argued that such relief is unavailable to private individuals under FCRA and moved to dismiss her claim for injunctive relief. The court agreed with the CRAs, finding that FCRA vests the right to seek injunctive relief exclusively with the Federal Trade Commission and that allowing a private litigant access to such relief via a state law would conflict with FCRA. As a result, the court held that FCRA preempts any state law claim for injunctive relief to the extent that such claim is inconsistent with the FCRA. Finding the consumer’s claim preempted, the court granted the CRAs’ motion to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/Hamilton_v_DirecTV.pdf.