InfoBytes August 28, 2009
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Insurance
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
Fed Publishes Proposed Rules on Home-Secured Credit; Comments Due by December 24. On August 26, the Federal Reserve Board (Fed) published in the Federal Register its proposed rules that would amend Regulation Z by, among other things, modifying the disclosures provided to consumers in (i) closed-end mortgage and (ii) home equity line of credit (HELOC) transactions. The proposed rules would also significantly expand the scope of Regulation Z by effectively banning yield spread premiums and heavily regulating compensation paid to loan officers of mortgage brokers and lenders. The proposed rule for closed-end mortgage transactions recommends changing the disclosures provided to borrowers at and after application and before and after consummation. The proposed rule for HELOCs recommends changing the disclosures provided to borrowers at application and account opening, as well as in periodic statements and change-in-terms notices. Comments on the proposed rules are due by December 24, 2009. For an in-depth summary of the proposed rules, please see InfoBytes, July 24, 2009. For a copy of the proposed rules, please see http://edocket.access.gpo.gov/2009/pdf/E9-18119.pdf and http://edocket.access.gpo.gov/2009/pdf/E9-18121.pdf.
HUD Revises FAQs on Revised RESPA Rule. On August 28, 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. For a copy of the revised FAQs, please see http://www.hud.gov/offices/hsg/ramh/res/faqfinalrev4.pdf.
FDIC Reduces Capital Requirements for Private Equity to Invest in Failed Banks. On August 26, the Federal Deposit Insurance Corporation (FDIC) Board adopted a final Statement of Policy on the Acquisition of Failed Insured Depository Institutions (the Statement), which addresses the regulation of private investors in failed insured depository institutions. Notably, the Statement reduces the minimum Tier 1 capital to asset ratio required for private investors to invest in failed depository institutions to 10% for the first 3 years. The Statement applies only to private investors in a company proposing to assume deposit liabilities for failed insured depository institutions and to applicants for insurance for de novo charters issued in connection with the resolution of failed insured depository institutions. The Statement does not apply to de minimis investors, or those 5 percent or less of the total voting power of an acquired institution, nor does it apply to investors in partnerships or similar ventures with bank or thrift holding companies. The Statement further establishes policies for covered investors involving cross support, transactions with affiliates, secrecy law jurisdictions, continuity of ownership, prohibited structures (such as silos), special owner bid limitations, and disclosures. For a copy of the Statement, please see http://www.fdic.gov/news/board/Aug26no2.pdf.
FDIC Extends Transaction Account Guarantee Program for Six Months. On August 27, the Federal Deposit Insurance Corporation (FDIC) adopted a final rule extending the Transaction Account Guarantee (TAG) portion of the Temporary Liquidity Guarantee Program for an additional six months (through June 30, 2010). If an institution wishes to opt out of the TAG extension, it must send an email to the FDIC conveying its intent to opt out of the program on or before November 2, 2009. The email must identify the institution, as well as contain (i) a statement that the institution is opting out of the TAG program effective January 1, 2010, and (ii) confirmation that, no later than November 16, 2009, the institution will post a prominent notice in its main office, domestic branches, and on its website clearly indicating that, after December 31, 2009, funds held in noninterest-bearing transaction accounts will no longer be guaranteed in full under the TAG program, but will continue to be insured up to $250,000 under the FDIC’s general deposit insurance rules. For institutions electing to remain in the TAG program throughout the extension period, the FDIC will continue to charge an annual assessment rate between 15 and 25 basis points, depending on an institution’s assigned Risk Category. For a copy of the final rule, please see http://www.fdic.gov/news/news/financial/2009/fil09048.pdf.
FTC Rule Requiring Authorization for Telemarketing “Robocalls” Becomes Effective September 1. On August 27, the Federal Trade Commission (FTC) issued a statement reminding telemarketers that amendments to the Telemarketing Sales Rule (TSR) become effective September 1, 2009 (the final rule amending the TSR was reported in InfoBytes, Aug. 22, 2008). According to the FTC, the rule, which requires a consumer’s written authorization for telemarketers to transmit prerecorded sales and service messages (so-called “robocalls”), does not apply (i) to banks, (ii) to prerecorded messages by certain debt collectors, or (iii) to purely “informational” prerecorded messages (e.g., a common carrier notifying a customer regarding the cancellation of a flight). Additionally, the FTC reiterated that the rule requires telemarketers to obtain a consumer’s written authorization to receive robocalls even if the consumer has a prior business relationship with a telemarketer. Finally, under the rule, telemarketers may obtain a consumer’s authorization in any manner permitted by the Electronic Signatures in Global and National Commerce Act. For a copy of the press release, please see http://www.ftc.gov/opa/2009/08/robocalls.shtm. For a copy of the Federal Register notice, please see http://www.ftc.gov/os/fedreg/2008/august/080829tsr.pdf.
OCC Issues Bulletin Regarding CCARD. On August 26, the Office of the Comptroller of the Currency (OCC) issued an OCC Bulletin regarding interim rules implementing certain provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CCARD) that became effective August 20, 2009. Under the interim rules issued by the Federal Reserve Board (Fed) (reported in InfoBytes, July 17, 2009), creditors must give 45-days notice to a consumer if the creditor will (i) “significantly” change the terms of the account (e.g., increase the Annual Percentage Rate, change certain fees, or change the grace period), (ii) increase the required minimum periodic payment, or (iii) increase a rate due to delinquency or default as a penalty. This notice must inform the consumer of the right to cancel the account before such a change becomes effective. The OCC’s bulletin warns against potential consumer confusion and bank reputational risk resulting from the fact that Fed’s interim final rules do not require that advance notices to disclose to consumers that their ability to reject changes is limited and does not apply to “transactions” that occur more than 14 days after provision of the 45-day notice. As a result, pending clarification of the requirement, the OCC suggests that OCC-regulated national banks should, when applicable, include language in the 45-day advance notice to alert a consumer to the potential application of a changed term or increased rate on transactions that occur more than 14 days after the notice is provided, regardless of whether the consumer rejects the changes. The bulletin also reminds national banks that the rules require creditors to provide periodic statements for open-end credit accounts at least 21 days before (i) the payment due date, and (ii) the date on which any grace period expires. Finally, the bulletin notes that, while the interim rules became effective August 20, 2009, comments regarding the interim rules may be submitted until September 21, 2009. For a copy of the bulletin, please see http://www.occ.gov/ftp/bulletin/2009-29.html. For a copy of the interim final rules, please see http://www.occ.gov/fr/fedregister/74fr36077.pdf.
Federal Banking and Thrift Regulatory Agencies Seek Comment on Accounting Standards for Off-Balance Sheet Securitized Assets. On August 26, the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and the Office of Thrift Supervision issued a joint release seeking comment on a proposal to better align capital requirements with the actual risk posed by certain exposures (e.g., asset-backed commercial paper conduits, credit card and home equity line of credit, securitizations, mortgage loan securitizations, etc.) and seeks information on the effect of regulatory capital resulting from the implementation of the Financial Accounting Standards Board’s Statements of Financial Accounting Standards Nos. 166 and 167, addressing how financial institutions deal with certain off-balance sheet items such as securitized assets. Specifically, the proposal seeks to (i) modify general and advanced risk-based capital adequacy frameworks to eliminate the exclusion of certain consolidated asset-backed commercial paper programs from risk-weighted assets, and (ii) reserve authority for the above agencies in such adequacy frameworks to require banking organizations to treat unconsolidated entities as consolidated entities for risk-based capital purposes. Comments are due within 30 days after publication in the Federal Register. For a copy of the proposal, please see http://www.fdic.gov/news/board/aug26no6.pdf.
FDIC Issues Special Alert Regarding Fraudulent EFT Transactions. On August 26, the Federal Deposit Insurance Corporation (FDIC) alerted financial institutions to increased reports of fraudulent electronic funds transfer (EFT) transactions resulting from compromised login credentials. The special alert is specifically directed towards financial institutions that provide web-based payment origination services, such as automated clearing house and wire transfers, for business customers. According to the FDIC, the login credentials of certain customers may have been compromised by malicious software that obtained the login credentials to initiate fraudulent transfers and access the accounts. The special alert also provides guidance to financial institutions and technology service providers for additional information on authentication and information security for high-risk transactions. For a copy of the alert, please see http://www.fdic.gov/news/news/SpecialAlert/2009/sa09147.html.
FTC Settles Allegations Against Mortgage Foreclosure Rescue Company. On August 24, the Federal Trade Commission (FTC) announced a settlement with Stephanie Dietschy, Daren Dietschy, and United Home Savers, LLC (collectively, United Home) regarding allegations that United Home falsely promised to halt and reverse foreclosures for homeowners in violation of the FTC Act. According to the FTC, United Home charged clients facing foreclosure $1,200 and promised to fully refund the money if United Home was unable to save the client’s home foreclosure. Under the settlement, United Homes is (i) required to pay a $4.1 million fine, which will be suspended when client fees totaling $21,694 are returned, (ii) barred from selling information they obtained about clients, (iii) barred from misrepresenting information to future clients about the likelihood of reversing or stopping foreclosure, their past success with foreclosure rescue efforts, the number of satisfied customers and customer complaints, the terms of any refund or guarantee, and their rating by the Better Business Bureau, and (iv) ordered to consent to record-keeping and reporting provisions to allow the FTC to monitor compliance with the settlement. For a copy of the settlement, please see http://www.ftc.gov/os/caselist/0723251/090824unitedhomestippi.pdf. For a copy of the press release, please see http://www.ftc.gov/opa/2009/08/homesavers.shtm.
“Operation Tele-PHONEY” Companies Agree to Stop Fraudulent, Illegal Telemarketing Practices. On August 19, four of thirteen telemarketing companies sued by the Federal Trade Commission (FTC) as a result of a law enforcement sweep, Operation Tele-PHONEY, agreed to settle the FTC’s charges and are barred under court order from engaging in any further illegal activities. Defendants responsible for the telemarketing operations were charged with making false claims about their products, charging customers for products they never ordered, or harassing customers with unwanted phone calls. The settlements included a settlement with Steven Breitling/ICS Financial Firm, a company that allegedly collected a $75 consulting fee from customers by guaranteeing eligibility for a $2,000-$5,000 loan. The four settlements contain judgments totaling more than $27.6 million. For a copy of the press release, please see http://www.ftc.gov/opa/2009/08/telephony.shtm.
State Issues
California Court Enjoins Lender From Continuing Allegedly Predatory Lending Practices. On August 24, CashCall, Inc. - an Anaheim, California based lender that makes small, unsecured cash loans to consumers at high interest rates - consented to the entry of a final judgment and permanent injunction in connection with allegations by the California Attorney General regarding its lending and collection activities. According to the complaint, CashCall allegedly misled customers with deceptive television, radio and online advertising, in violation of California Business and Professions Code Section 17500. For example, while CashCall’s advertisements suggested that low interest rate loans were available to all borrowers, the advertised rates were only offered to some borrowers. The complaint further alleged that CashCall used illegal and abusive debt collection practices (e.g., making excessive and verbally abusive telephone calls at all hours of the day and night and/or threatening to initiate law enforcement and wage garnishment proceedings against borrowers without any basis for doing so) in violation of California Business and Professions Code Section 17200. The court order requires CashCall to (i) cease making excessive and verbally abusive telephone calls, (ii) pay $1 million in civil penalties and expenses related to the investigation and resolution of the case, (iii) train its employees within 30 days, and not fewer than four times per year thereafter, to ensure compliance with the judgment, (iv) terminate any officer, director or employee who violates the terms of the judgment, (v) record all telephone calls made to, or received from, prospective and current borrowers, and (vi) maintain a detailed log of all consumer complaints. The judgment became binding and effective August 24, 2009. For a copy of the press release, please see http://ag.ca.gov/newsalerts/release.php?id=1788. For a copy of the complaint, please see http://ag.ca.gov/cms_attachments/press/pdfs/n1788_cashcallcomplaint.pdf. For a copy of the final judgment, please see http://ag.ca.gov/cms_attachments/press/pdfs/n1788_cashcallfinaljudgment.pdf.
Courts
Illinois Federal Court Holds Credit Card Processing Machine Provider Not Liable for Contribution in FACTA Violation Case. On August 19, the U.S. District Court for the Northern District of Illinois held that a defendant merchant alleged to be in violation of the Fair and Accurate Credit Transactions Act (FACTA) had no right to contribution from the company that supplied the merchant with its credit card processing machine. Shurland v. Bacci Café & Pizzeria on Ogden Inc., No. 08 CV 2259, 2009 WL 2567913 (N.D. Ill. Aug. 19, 2009). In Shurland, the plaintiff consumer alleged that the defendant violated FACTA by issuing a receipt to the plaintiff that displayed the consumer’s entire credit card number, as well as the expiration date of the consumer’s credit card. In response, the merchant filed a third-party complaint against the company that supplied the merchant with its credit card machine, arguing that the remedy of contribution was appropriate because the parties had entered into an agreement prior to litigation to share any liability for violations of federal law and/or industry standards. In granting the third-party defendant’s motion to dismiss, the court determined that there was a lack of evidence that the parties contemplated such an arrangement and, even if the written and oral contracts between the parties could be construed to include such an arrangement, the tort remedy of contribution was inapposite. Instead, according to the court, the merchant had “at most stated claims for breach of contract and breach of oral contract.” The court, however, denied the merchant’s motion for summary judgment, disagreeing with the merchant’s argument that there was no evidence it was on notice of FACTA’s truncation requirements. The court found instead that there was a reasonable inference that the merchant knew of and disregarded such requirements, and thus potentially willfully violated FACTA. The court also granted the consumer’s motion for class certification, finding that all of the requirements for certification under Federal Rule of Civil Procedure 23(a) and 23(b) had been met. For a copy of the opinion, please see http://www.buckleysandler.com/Shurland_v_Bacci.pdf.
Washington Federal Court Holds Defendant Must Prove It Conducted “Reasonable Investigation” Under FCRA to Prevail on Motion for Summary Judgment. On August 17, the U.S. District Court for the Eastern District of Washington held that a furnisher of information to consumer reporting agencies (CRAs) moving for summary judgment bears the burden under the Fair Credit Reporting Act (FCRA) of establishing that it conducted a “reasonable investigation” of the plaintiff’s claim that inaccurate information was provided to the CRAs. Gaughen v. Sears Roebuck & Co., No. CV-08-26, 2009 WL 2595546 (E.D. Wash. Aug. 17, 2009). In Gaughen, the plaintiff consumer purchased, but subsequently returned, several items from the defendant merchant using the merchant’s store credit card. However, the consumer’s account with the defendant credit card company did not reflect the refund for the return and indicated an outstanding amount on the card. The consumer subsequently disputed the allegedly incorrect information with several CRAs, and at least two of the CRAs in turn disputed the information with the credit card company. Pursuant to the credit card company affirming the accuracy of the information, the consumer filed suit, alleging violations of FCRA, the Fair Credit Billing Act, and the Washington Consumer Protection Act. Regarding the FCRA claim, the court found that the defendants had not provided any evidence of the investigations they conducted in response to the notices received from the CRAs regarding the dispute. Citing Nissan Fire & Marine Ins. Co., Ltd. v. Fritz Companies, Inc., 210 F.3d 1099 (9th Cir. 2005), the court held that, in the absence of evidence that the defendants conducted a reasonable investigation, a consumer has no duty to produce evidence supporting his FCRA claim. The court further held that the defendants had not satisfied their initial burden of production with respect to any of the consumer’s claims, and, accordingly, denied defendants’ motion for summary judgment. For a copy of the opinion, please see http://www.buckleysandler.com/Gaughen_v_Sears.pdf.
Kansas Federal Court Finds Electronic Arbitration Agreement Insufficient to Bind Employee. On August 17, the U.S. District Court for the District of Kansas held that an employee does not consent to an electronic arbitration agreement simply by continuing her employment unless the agreement unambiguously states that acceptance of the agreement is a condition of employment. Kerr v. Dillard Store Servs., Inc., No. 07-2604, 2009 WL 252558 (D.Kan. Aug. 17, 2009). At issue in this case was a ruling by the court that the defendant merchant, Dillard Store Services, Inc. (Dillard’s), failed to prove that an employee executed an arbitration agreement, which it provided electronically. Dillard’s filed motions (i) to amend certain findings of fact that the related to acceptance of the agreement; and (ii) to make an additional conclusion of law that the arbitration agreement was enforceable without plaintiff’s signature because the agreement was a condition of her employment. On the first motion, the court upheld all three challenged findings of fact, holding that (i) the evidence showed that the employee’s password could be reset by her supervisors (and therefore they could have clicked “accept” on the electronic agreement without her knowledge), (ii) even if the employee clicked the “accept” button, it could have been done by mistake regardless of whether the employee had to log in using her social security number and password, and (iii) there was no evidence that the employee accessed and knowingly executed the agreement during a monitored tutorial. On the second motion, the court held that, because Dillard’s could not show actual execution of the agreement, and because the language of the agreement did sufficiently specify that continued employment itself constitutes an agreement to arbitrate, the employee cannot be bound by the arbitration agreement. For a copy of the opinion, please see http://www.buckleysandler.com/Kerr_v_Dillard.pdf.
Ohio Federal Court Holds No Bad Faith by Defendants Who Failed to Maintain Links and Images Imbedded in Email Evidence. On July 29, the U.S. District Court for the Southern District of Ohio held that there was no bad faith by defendants who failed to maintain electronic copies of web links and images imbedded in emails produced as evidence because the plaintiff failed to explain the significance of the web links and images and because the defendants adequately maintained print-outs of the emails. Ferron v. Echostar Satellite, LLC, No. 2:06-CV-453, 2009 WL 2370623 (S.D. Ohio July 30, 2009). The case arose after the plaintiff alleged that the defendants had transmitted email messages with advertisements violating Ohio law; embedded in these emails were web links and images. According to the plaintiff, the web links and images had been fully visible at the time of production, but, subsequently, became inoperative. As a result, the plaintiff sought sanctions against the defendants and their counsel, arguing that the defendants had an affirmative duty to preserve and maintain the links and images electronically. The court disagreed, holding that the plaintiff failed to establish that the defendants had a duty to maintain the records because he had failed to explain what was contained in the electronic emails and exactly how it supported his claims. Since the defendants had no duty to maintain the emails electronically, the court could not find any evidence that the defendants had acted in bad faith because they had adequately maintained paper copies of the emails. As a result, the court denied the plaintiff’s motion for sanctions. For a copy of the opinion, please see http://www.buckleysandler.com/Ferron_v_Echostar.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 also 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 in Washington, D.C.
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 California Mortgage Bankers Association’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
Fed Publishes Proposed Rules on Home-Secured Credit; Comments Due by December 24. On August 26, the Federal Reserve Board (Fed) published in the Federal Register its proposed rules that would amend Regulation Z by, among other things, modifying the disclosures provided to consumers in (i) closed-end mortgage and (ii) home equity line of credit (HELOC) transactions. The proposed rules would also significantly expand the scope of Regulation Z by effectively banning yield spread premiums and heavily regulating compensation paid to loan officers of mortgage brokers and lenders. The proposed rule for closed-end mortgage transactions recommends changing the disclosures provided to borrowers at and after application and before and after consummation. The proposed rule for HELOCs recommends changing the disclosures provided to borrowers at application and account opening, as well as in periodic statements and change-in-terms notices. Comments on the proposed rules are due by December 24, 2009. For an in-depth summary of the proposed rules, please see InfoBytes, July 24, 2009. For a copy of the proposed rules, please see http://edocket.access.gpo.gov/2009/pdf/E9-18119.pdf and http://edocket.access.gpo.gov/2009/pdf/E9-18121.pdf.
HUD Revises FAQs on Revised RESPA Rule. On August 28, 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. For a copy of the revised FAQs, please see http://www.hud.gov/offices/hsg/ramh/res/faqfinalrev4.pdf.
FTC Settles Allegations Against Mortgage Foreclosure Rescue Company. On August 24, the Federal Trade Commission (FTC) announced a settlement with Stephanie Dietschy, Daren Dietschy, and United Home Savers, LLC (collectively, United Home) regarding allegations that United Home falsely promised to halt and reverse foreclosures for homeowners in violation of the FTC Act. According to the FTC, United Home charged clients facing foreclosure $1,200 and promised to fully refund the money if United Home was unable to save the client’s home foreclosure. Under the settlement, United Homes is (i) required to pay a $4.1 million fine, which will be suspended when client fees totaling $21,694 are returned, (ii) barred from selling information they obtained about clients, (iii) barred from misrepresenting information to future clients about the likelihood of reversing or stopping foreclosure, their past success with foreclosure rescue efforts, the number of satisfied customers and customer complaints, the terms of any refund or guarantee, and their rating by the Better Business Bureau, and (iv) ordered to consent to record-keeping and reporting provisions to allow the FTC to monitor compliance with the settlement. For a copy of the settlement, please see http://www.ftc.gov/os/caselist/0723251/090824unitedhomestippi.pdf. For a copy of the press release, please see http://www.ftc.gov/opa/2009/08/homesavers.shtm.
Banking
FDIC Reduces Capital Requirements for Private Equity to Invest in Failed Banks. On August 26, the Federal Deposit Insurance Corporation (FDIC) Board adopted a final Statement of Policy on the Acquisition of Failed Insured Depository Institutions (the Statement), which addresses the regulation of private investors in failed insured depository institutions. Notably, the Statement reduces the minimum Tier 1 capital to asset ratio required for private investors to invest in failed depository institutions to 10% for the first 3 years. The Statement applies only to private investors in a company proposing to assume deposit liabilities for failed insured depository institutions and to applicants for insurance for de novo charters issued in connection with the resolution of failed insured depository institutions. The Statement does not apply to de minimis investors, or those 5 percent or less of the total voting power of an acquired institution, nor does it apply to investors in partnerships or similar ventures with bank or thrift holding companies. The Statement further establishes policies for covered investors involving cross support, transactions with affiliates, secrecy law jurisdictions, continuity of ownership, prohibited structures (such as silos), special owner bid limitations, and disclosures. For a copy of the Statement, please see http://www.fdic.gov/news/board/Aug26no2.pdf.
FDIC Extends Transaction Account Guarantee Program for Six Months. On August 27, the Federal Deposit Insurance Corporation (FDIC) adopted a final rule extending the Transaction Account Guarantee (TAG) portion of the Temporary Liquidity Guarantee Program for an additional six months (through June 30, 2010). If an institution wishes to opt out of the TAG extension, it must send an email to the FDIC conveying its intent to opt out of the program on or before November 2, 2009. The email must identify the institution, as well as contain (i) a statement that the institution is opting out of the TAG program effective January 1, 2010, and (ii) confirmation that, no later than November 16, 2009, the institution will post a prominent notice in its main office, domestic branches, and on its website clearly indicating that, after December 31, 2009, funds held in noninterest-bearing transaction accounts will no longer be guaranteed in full under the TAG program, but will continue to be insured up to $250,000 under the FDIC’s general deposit insurance rules. For institutions electing to remain in the TAG program throughout the extension period, the FDIC will continue to charge an annual assessment rate between 15 and 25 basis points, depending on an institution’s assigned Risk Category. For a copy of the final rule, please see http://www.fdic.gov/news/news/financial/2009/fil09048.pdf.
Federal Banking and Thrift Regulatory Agencies Seek Comment on Accounting Standards for Off-Balance Sheet Securitized Assets. On August 26, the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and the Office of Thrift Supervision issued a joint release seeking comment on a proposal to better align capital requirements with the actual risk posed by certain exposures (e.g., asset-backed commercial paper conduits, credit card and home equity line of credit, securitizations, mortgage loan securitizations, etc.) and seeks information on the effect of regulatory capital resulting from the implementation of the Financial Accounting Standards Board’s Statements of Financial Accounting Standards Nos. 166 and 167, addressing how financial institutions deal with certain off-balance sheet items such as securitized assets. Specifically, the proposal seeks to (i) modify general and advanced risk-based capital adequacy frameworks to eliminate the exclusion of certain consolidated asset-backed commercial paper programs from risk-weighted assets, and (ii) reserve authority for the above agencies in such adequacy frameworks to require banking organizations to treat unconsolidated entities as consolidated entities for risk-based capital purposes. Comments are due within 30 days after publication in the Federal Register. For a copy of the proposal, please see http://www.fdic.gov/news/board/aug26no6.pdf.
FDIC Issues Special Alert Regarding Fraudulent EFT Transactions. On August 26, the Federal Deposit Insurance Corporation (FDIC) alerted financial institutions to increased reports of fraudulent electronic funds transfer (EFT) transactions resulting from compromised login credentials. The special alert is specifically directed towards financial institutions that provide web-based payment origination services, such as automated clearing house and wire transfers, for business customers. According to the FDIC, the login credentials of certain customers may have been compromised by malicious software that obtained the login credentials to initiate fraudulent transfers and access the accounts. The special alert also provides guidance to financial institutions and technology service providers for additional information on authentication and information security for high-risk transactions. For a copy of the alert, please see http://www.fdic.gov/news/news/SpecialAlert/2009/sa09147.html.
Consumer Finance
Fed Publishes Proposed Rules on Home-Secured Credit; Comments Due by December 24. On August 26, the Federal Reserve Board (Fed) published in the Federal Register its proposed rules that would amend Regulation Z by, among other things, modifying the disclosures provided to consumers in (i) closed-end mortgage and (ii) home equity line of credit (HELOC) transactions. The proposed rules would also significantly expand the scope of Regulation Z by effectively banning yield spread premiums and heavily regulating compensation paid to loan officers of mortgage brokers and lenders. The proposed rule for closed-end mortgage transactions recommends changing the disclosures provided to borrowers at and after application and before and after consummation. The proposed rule for HELOCs recommends changing the disclosures provided to borrowers at application and account opening, as well as in periodic statements and change-in-terms notices. Comments on the proposed rules are due by December 24, 2009. For an in-depth summary of the proposed rules, please see InfoBytes, July 24, 2009. For a copy of the proposed rules, please see http://edocket.access.gpo.gov/2009/pdf/E9-18119.pdf and http://edocket.access.gpo.gov/2009/pdf/E9-18121.pdf.
“Operation Tele-PHONEY” Companies Agree to Stop Fraudulent, Illegal Telemarketing Practices. On August 19, four of thirteen telemarketing companies sued by the Federal Trade Commission (FTC) as a result of a law enforcement sweep, Operation Tele-PHONEY, agreed to settle the FTC’s charges and are barred under court order from engaging in any further illegal activities. Defendants responsible for the telemarketing operations were charged with making false claims about their products, charging customers for products they never ordered, or harassing customers with unwanted phone calls. The settlements included a settlement with Steven Breitling/ICS Financial Firm, a company that allegedly collected a $75 consulting fee from customers by guaranteeing eligibility for a $2,000-$5,000 loan. The four settlements contain judgments totaling more than $27.6 million. For a copy of the press release, please see http://www.ftc.gov/opa/2009/08/telephony.shtm.
California Court Enjoins Lender From Continuing Allegedly Predatory Lending Practices. On August 24, CashCall, Inc. - an Anaheim, California based lender that makes small, unsecured cash loans to consumers at high interest rates - consented to the entry of a final judgment and permanent injunction in connection with allegations by the California Attorney General regarding its lending and collection activities. According to the complaint, CashCall allegedly misled customers with deceptive television, radio and online advertising, in violation of California Business and Professions Code Section 17500. For example, while CashCall’s advertisements suggested that low interest rate loans were available to all borrowers, the advertised rates were only offered to some borrowers. The complaint further alleged that CashCall used illegal and abusive debt collection practices (e.g., making excessive and verbally abusive telephone calls at all hours of the day and night and/or threatening to initiate law enforcement and wage garnishment proceedings against borrowers without any basis for doing so) in violation of California Business and Professions Code Section 17200. The court order requires CashCall to (i) cease making excessive and verbally abusive telephone calls, (ii) pay $1 million in civil penalties and expenses related to the investigation and resolution of the case, (iii) train its employees within 30 days, and not fewer than four times per year thereafter, to ensure compliance with the judgment, (iv) terminate any officer, director or employee who violates the terms of the judgment, (v) record all telephone calls made to, or received from, prospective and current borrowers, and (vi) maintain a detailed log of all consumer complaints. The judgment became binding and effective August 24, 2009. For a copy of the press release, please see http://ag.ca.gov/newsalerts/release.php?id=1788. For a copy of the complaint, please see http://ag.ca.gov/cms_attachments/press/pdfs/n1788_cashcallcomplaint.pdf. For a copy of the final judgment, please see http://ag.ca.gov/cms_attachments/press/pdfs/n1788_cashcallfinaljudgment.pdf.
Insurance
HUD Revises FAQs on Revised RESPA Rule. On August 28, 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. For a copy of the revised FAQs, please see http://www.hud.gov/offices/hsg/ramh/res/faqfinalrev4.pdf.
Litigation
Illinois Federal Court Holds Credit Card Processing Machine Provider Not Liable for Contribution in FACTA Violation Case. On August 19, the U.S. District Court for the Northern District of Illinois held that a defendant merchant alleged to be in violation of the Fair and Accurate Credit Transactions Act (FACTA) had no right to contribution from the company that supplied the merchant with its credit card processing machine. Shurland v. Bacci Café & Pizzeria on Ogden Inc., No. 08 CV 2259, 2009 WL 2567913 (N.D. Ill. Aug. 19, 2009). In Shurland, the plaintiff consumer alleged that the defendant violated FACTA by issuing a receipt to the plaintiff that displayed the consumer’s entire credit card number, as well as the expiration date of the consumer’s credit card. In response, the merchant filed a third-party complaint against the company that supplied the merchant with its credit card machine, arguing that the remedy of contribution was appropriate because the parties had entered into an agreement prior to litigation to share any liability for violations of federal law and/or industry standards. In granting the third-party defendant’s motion to dismiss, the court determined that there was a lack of evidence that the parties contemplated such an arrangement and, even if the written and oral contracts between the parties could be construed to include such an arrangement, the tort remedy of contribution was inapposite. Instead, according to the court, the merchant had “at most stated claims for breach of contract and breach of oral contract.” The court, however, denied the merchant’s motion for summary judgment, disagreeing with the merchant’s argument that there was no evidence it was on notice of FACTA’s truncation requirements. The court found instead that there was a reasonable inference that the merchant knew of and disregarded such requirements, and thus potentially willfully violated FACTA. The court also granted the consumer’s motion for class certification, finding that all of the requirements for certification under Federal Rule of Civil Procedure 23(a) and 23(b) had been met. For a copy of the opinion, please see http://www.buckleysandler.com/Shurland_v_Bacci.pdf.
Washington Federal Court Holds Defendant Must Prove It Conducted “Reasonable Investigation” Under FCRA to Prevail on Motion for Summary Judgment. On August 17, the U.S. District Court for the Eastern District of Washington held that a furnisher of information to consumer reporting agencies (CRAs) moving for summary judgment bears the burden under the Fair Credit Reporting Act (FCRA) of establishing that it conducted a “reasonable investigation” of the plaintiff’s claim that inaccurate information was provided to the CRAs. Gaughen v. Sears Roebuck & Co., No. CV-08-26, 2009 WL 2595546 (E.D. Wash. Aug. 17, 2009). In Gaughen, the plaintiff consumer purchased, but subsequently returned, several items from the defendant merchant using the merchant’s store credit card. However, the consumer’s account with the defendant credit card company did not reflect the refund for the return and indicated an outstanding amount on the card. The consumer subsequently disputed the allegedly incorrect information with several CRAs, and at least two of the CRAs in turn disputed the information with the credit card company. Pursuant to the credit card company affirming the accuracy of the information, the consumer filed suit, alleging violations of FCRA, the Fair Credit Billing Act, and the Washington Consumer Protection Act. Regarding the FCRA claim, the court found that the defendants had not provided any evidence of the investigations they conducted in response to the notices received from the CRAs regarding the dispute. Citing Nissan Fire & Marine Ins. Co., Ltd. v. Fritz Companies, Inc., 210 F.3d 1099 (9th Cir. 2005), the court held that, in the absence of evidence that the defendants conducted a reasonable investigation, a consumer has no duty to produce evidence supporting his FCRA claim. The court further held that the defendants had not satisfied their initial burden of production with respect to any of the consumer’s claims, and, accordingly, denied defendants’ motion for summary judgment. For a copy of the opinion, please see http://www.buckleysandler.com/Gaughen_v_Sears.pdf.
Kansas Federal Court Finds Electronic Arbitration Agreement Insufficient to Bind Employee. On August 17, the U.S. District Court for the District of Kansas held that an employee does not consent to an electronic arbitration agreement simply by continuing her employment unless the agreement unambiguously states that acceptance of the agreement is a condition of employment. Kerr v. Dillard Store Servs., Inc., No. 07-2604, 2009 WL 252558 (D.Kan. Aug. 17, 2009). At issue in this case was a ruling by the court that the defendant merchant, Dillard Store Services, Inc. (Dillard’s), failed to prove that an employee executed an arbitration agreement, which it provided electronically. Dillard’s filed motions (i) to amend certain findings of fact that the related to acceptance of the agreement; and (ii) to make an additional conclusion of law that the arbitration agreement was enforceable without plaintiff’s signature because the agreement was a condition of her employment. On the first motion, the court upheld all three challenged findings of fact, holding that (i) the evidence showed that the employee’s password could be reset by her supervisors (and therefore they could have clicked “accept” on the electronic agreement without her knowledge), (ii) even if the employee clicked the “accept” button, it could have been done by mistake regardless of whether the employee had to log in using her social security number and password, and (iii) there was no evidence that the employee accessed and knowingly executed the agreement during a monitored tutorial. On the second motion, the court held that, because Dillard’s could not show actual execution of the agreement, and because the language of the agreement did sufficiently specify that continued employment itself constitutes an agreement to arbitrate, the employee cannot be bound by the arbitration agreement. For a copy of the opinion, please see http://www.buckleysandler.com/Kerr_v_Dillard.pdf.
Ohio Federal Court Holds No Bad Faith by Defendants Who Failed to Maintain Links and Images Imbedded in Email Evidence. On July 29, the U.S. District Court for the Southern District of Ohio held that there was no bad faith by defendants who failed to maintain electronic copies of web links and images imbedded in emails produced as evidence because the plaintiff failed to explain the significance of the web links and images and because the defendants adequately maintained print-outs of the emails. Ferron v. Echostar Satellite, LLC, No. 2:06-CV-453, 2009 WL 2370623 (S.D. Ohio July 30, 2009). The case arose after the plaintiff alleged that the defendants had transmitted email messages with advertisements violating Ohio law; embedded in these emails were web links and images. According to the plaintiff, the web links and images had been fully visible at the time of production, but, subsequently, became inoperative. As a result, the plaintiff sought sanctions against the defendants and their counsel, arguing that the defendants had an affirmative duty to preserve and maintain the links and images electronically. The court disagreed, holding that the plaintiff failed to establish that the defendants had a duty to maintain the records because he had failed to explain what was contained in the electronic emails and exactly how it supported his claims. Since the defendants had no duty to maintain the emails electronically, the court could not find any evidence that the defendants had acted in bad faith because they had adequately maintained paper copies of the emails. As a result, the court denied the plaintiff’s motion for sanctions. For a copy of the opinion, please see http://www.buckleysandler.com/Ferron_v_Echostar.pdf.
E-Financial Services
FTC Rule Requiring Authorization for Telemarketing “Robocalls” Becomes Effective September 1. On August 27, the Federal Trade Commission (FTC) issued a statement reminding telemarketers that amendments to the Telemarketing Sales Rule (TSR) become effective September 1, 2009 (the final rule amending the TSR was reported in InfoBytes, Aug. 22, 2008). According to the FTC, the rule, which requires a consumer’s written authorization for telemarketers to transmit prerecorded sales and service messages (so-called “robocalls”), does not apply (i) to banks, (ii) to prerecorded messages by certain debt collectors, or (iii) to purely “informational” prerecorded messages (e.g., a common carrier notifying a customer regarding the cancellation of a flight). Additionally, the FTC reiterated that the rule requires telemarketers to obtain a consumer’s written authorization to receive robocalls even if the consumer has a prior business relationship with a telemarketer. Finally, under the rule, telemarketers may obtain a consumer’s authorization in any manner permitted by the Electronic Signatures in Global and National Commerce Act. For a copy of the press release, please see http://www.ftc.gov/opa/2009/08/robocalls.shtm. For a copy of the Federal Register notice, please see http://www.ftc.gov/os/fedreg/2008/august/080829tsr.pdf.
Kansas Federal Court Finds Electronic Arbitration Agreement Insufficient to Bind Employee. On August 17, the U.S. District Court for the District of Kansas held that an employee does not consent to an electronic arbitration agreement simply by continuing her employment unless the agreement unambiguously states that acceptance of the agreement is a condition of employment. Kerr v. Dillard Store Servs., Inc., No. 07-2604, 2009 WL 252558 (D.Kan. Aug. 17, 2009). At issue in this case was a ruling by the court that the defendant merchant, Dillard Store Services, Inc. (Dillard’s), failed to prove that an employee executed an arbitration agreement, which it provided electronically. Dillard’s filed motions (i) to amend certain findings of fact that the related to acceptance of the agreement; and (ii) to make an additional conclusion of law that the arbitration agreement was enforceable without plaintiff’s signature because the agreement was a condition of her employment. On the first motion, the court upheld all three challenged findings of fact, holding that (i) the evidence showed that the employee’s password could be reset by her supervisors (and therefore they could have clicked “accept” on the electronic agreement without her knowledge), (ii) even if the employee clicked the “accept” button, it could have been done by mistake regardless of whether the employee had to log in using her social security number and password, and (iii) there was no evidence that the employee accessed and knowingly executed the agreement during a monitored tutorial. On the second motion, the court held that, because Dillard’s could not show actual execution of the agreement, and because the language of the agreement did sufficiently specify that continued employment itself constitutes an agreement to arbitrate, the employee cannot be bound by the arbitration agreement. For a copy of the opinion, please see http://www.buckleysandler.com/Kerr_v_Dillard.pdf.
Ohio Federal Court Holds No Bad Faith by Defendants Who Failed to Maintain Links and Images Imbedded in Email Evidence. On July 29, the U.S. District Court for the Southern District of Ohio held that there was no bad faith by defendants who failed to maintain electronic copies of web links and images imbedded in emails produced as evidence because the plaintiff failed to explain the significance of the web links and images and because the defendants adequately maintained print-outs of the emails. Ferron v. Echostar Satellite, LLC, No. 2:06-CV-453, 2009 WL 2370623 (S.D. Ohio July 30, 2009). The case arose after the plaintiff alleged that the defendants had transmitted email messages with advertisements violating Ohio law; embedded in these emails were web links and images. According to the plaintiff, the web links and images had been fully visible at the time of production, but, subsequently, became inoperative. As a result, the plaintiff sought sanctions against the defendants and their counsel, arguing that the defendants had an affirmative duty to preserve and maintain the links and images electronically. The court disagreed, holding that the plaintiff failed to establish that the defendants had a duty to maintain the records because he had failed to explain what was contained in the electronic emails and exactly how it supported his claims. Since the defendants had no duty to maintain the emails electronically, the court could not find any evidence that the defendants had acted in bad faith because they had adequately maintained paper copies of the emails. As a result, the court denied the plaintiff’s motion for sanctions. For a copy of the opinion, please see http://www.buckleysandler.com/Ferron_v_Echostar.pdf.
Privacy/Data Security
FTC Rule Requiring Authorization for Telemarketing “Robocalls” Becomes Effective September 1. On August 27, the Federal Trade Commission (FTC) issued a statement reminding telemarketers that amendments to the Telemarketing Sales Rule (TSR) become effective September 1, 2009 (the final rule amending the TSR was reported in InfoBytes, Aug. 22, 2008). According to the FTC, the rule, which requires a consumer’s written authorization for telemarketers to transmit prerecorded sales and service messages (so-called “robocalls”), does not apply (i) to banks, (ii) to prerecorded messages by certain debt collectors, or (iii) to purely “informational” prerecorded messages (e.g., a common carrier notifying a customer regarding the cancellation of a flight). Additionally, the FTC reiterated that the rule requires telemarketers to obtain a consumer’s written authorization to receive robocalls even if the consumer has a prior business relationship with a telemarketer. Finally, under the rule, telemarketers may obtain a consumer’s authorization in any manner permitted by the Electronic Signatures in Global and National Commerce Act. For a copy of the press release, please see http://www.ftc.gov/opa/2009/08/robocalls.shtm. For a copy of the Federal Register notice, please see http://www.ftc.gov/os/fedreg/2008/august/080829tsr.pdf.
Illinois Federal Court Holds Credit Card Processing Machine Provider Not Liable for Contribution in FACTA Violation Case. On August 19, the U.S. District Court for the Northern District of Illinois held that a defendant merchant alleged to be in violation of the Fair and Accurate Credit Transactions Act (FACTA) had no right to contribution from the company that supplied the merchant with its credit card processing machine. Shurland v. Bacci Café & Pizzeria on Ogden Inc., No. 08 CV 2259, 2009 WL 2567913 (N.D. Ill. Aug. 19, 2009). In Shurland, the plaintiff consumer alleged that the defendant violated FACTA by issuing a receipt to the plaintiff that displayed the consumer’s entire credit card number, as well as the expiration date of the consumer’s credit card. In response, the merchant filed a third-party complaint against the company that supplied the merchant with its credit card machine, arguing that the remedy of contribution was appropriate because the parties had entered into an agreement prior to litigation to share any liability for violations of federal law and/or industry standards. In granting the third-party defendant’s motion to dismiss, the court determined that there was a lack of evidence that the parties contemplated such an arrangement and, even if the written and oral contracts between the parties could be construed to include such an arrangement, the tort remedy of contribution was inapposite. Instead, according to the court, the merchant had “at most stated claims for breach of contract and breach of oral contract.” The court, however, denied the merchant’s motion for summary judgment, disagreeing with the merchant’s argument that there was no evidence it was on notice of FACTA’s truncation requirements. The court found instead that there was a reasonable inference that the merchant knew of and disregarded such requirements, and thus potentially willfully violated FACTA. The court also granted the consumer’s motion for class certification, finding that all of the requirements for certification under Federal Rule of Civil Procedure 23(a) and 23(b) had been met. For a copy of the opinion, please see http://www.buckleysandler.com/Shurland_v_Bacci.pdf.
Washington Federal Court Holds Defendant Must Prove It Conducted “Reasonable Investigation” Under FCRA to Prevail on Motion for Summary Judgment. On August 17, the U.S. District Court for the Eastern District of Washington held that a furnisher of information to consumer reporting agencies (CRAs) moving for summary judgment bears the burden under the Fair Credit Reporting Act (FCRA) of establishing that it conducted a “reasonable investigation” of the plaintiff’s claim that inaccurate information was provided to the CRAs. Gaughen v. Sears Roebuck & Co., No. CV-08-26, 2009 WL 2595546 (E.D. Wash. Aug. 17, 2009). In Gaughen, the plaintiff consumer purchased, but subsequently returned, several items from the defendant merchant using the merchant’s store credit card. However, the consumer’s account with the defendant credit card company did not reflect the refund for the return and indicated an outstanding amount on the card. The consumer subsequently disputed the allegedly incorrect information with several CRAs, and at least two of the CRAs in turn disputed the information with the credit card company. Pursuant to the credit card company affirming the accuracy of the information, the consumer filed suit, alleging violations of FCRA, the Fair Credit Billing Act, and the Washington Consumer Protection Act. Regarding the FCRA claim, the court found that the defendants had not provided any evidence of the investigations they conducted in response to the notices received from the CRAs regarding the dispute. Citing Nissan Fire & Marine Ins. Co., Ltd. v. Fritz Companies, Inc., 210 F.3d 1099 (9th Cir. 2005), the court held that, in the absence of evidence that the defendants conducted a reasonable investigation, a consumer has no duty to produce evidence supporting his FCRA claim. The court further held that the defendants had not satisfied their initial burden of production with respect to any of the consumer’s claims, and, accordingly, denied defendants’ motion for summary judgment. For a copy of the opinion, please see http://www.buckleysandler.com/Gaughen_v_Sears.pdf.
Credit Cards
Illinois Federal Court Holds Credit Card Processing Machine Provider Not Liable for Contribution in FACTA Violation Case. On August 19, the U.S. District Court for the Northern District of Illinois held that a defendant merchant alleged to be in violation of the Fair and Accurate Credit Transactions Act (FACTA) had no right to contribution from the company that supplied the merchant with its credit card processing machine. Shurland v. Bacci Café & Pizzeria on Ogden Inc., No. 08 CV 2259, 2009 WL 2567913 (N.D. Ill. Aug. 19, 2009). In Shurland, the plaintiff consumer alleged that the defendant violated FACTA by issuing a receipt to the plaintiff that displayed the consumer’s entire credit card number, as well as the expiration date of the consumer’s credit card. In response, the merchant filed a third-party complaint against the company that supplied the merchant with its credit card machine, arguing that the remedy of contribution was appropriate because the parties had entered into an agreement prior to litigation to share any liability for violations of federal law and/or industry standards. In granting the third-party defendant’s motion to dismiss, the court determined that there was a lack of evidence that the parties contemplated such an arrangement and, even if the written and oral contracts between the parties could be construed to include such an arrangement, the tort remedy of contribution was inapposite. Instead, according to the court, the merchant had “at most stated claims for breach of contract and breach of oral contract.” The court, however, denied the merchant’s motion for summary judgment, disagreeing with the merchant’s argument that there was no evidence it was on notice of FACTA’s truncation requirements. The court found instead that there was a reasonable inference that the merchant knew of and disregarded such requirements, and thus potentially willfully violated FACTA. The court also granted the consumer’s motion for class certification, finding that all of the requirements for certification under Federal Rule of Civil Procedure 23(a) and 23(b) had been met. For a copy of the opinion, please see http://www.buckleysandler.com/Shurland_v_Bacci.pdf.