InfoBytes, August 8, 2008

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Federal Issues

House Financial Services Committee Members Urge Mortgage Industry to Hold Off on Foreclosures. On August 5, House Financial Services Committee (Committee) members Barney Frank, Maxine Waters, Mel Watt, and Brad Miller addressed a letter to the mortgage industry urging the forbearance of foreclosures for potentially eligible homeowners under the new FHA rescue program, the “Hope for Homeowners” refinance program, as set forth in the Housing and Economic Recovery Act (reported in InfoBytes, Aug. 1, 2008), until the program becomes effective on October 1, 2008.The letter further poses questions regarding industry policies and procedures to implement the Hope for Homeowners program. On September 17, 2008, the Committee will hold a follow-up hearing to gauge compliance with the program. For the Committee’s press release, containing a copy of the letter to the mortgage industry, please see http://www.house.gov/apps/list/press/financialsvcs_dem/press080508.shtml.

House Members Urge HUD Secretary to Withdraw RESPA Proposed Rule. According to reports, more than 230 members of the U.S. House of Representatives have signed and sent a letter to Department of Housing and Urban Development (HUD) Secretary Steven Preston urging him to withdraw HUD’s March 14, 2008 proposed rule involving the Real Estate Settlement Procedures Act (RESPA) (reported in InfoBytes, March 14, 2008). The letter, spearheaded by Congressman Rubén Hinojosa(D-TX) and Congresswoman Judy Biggert (R-IL), reportedly asks Secretary Preston to immediately commence a joint rulemaking process with the Federal Reserve Board to produce more simplified mortgage and real estate settlement cost disclosure forms and to discard any portion of the proposed rule not previously subject to public comment, specifically portions of the rule not directly involving RESPA disclosures. The letter also reportedly encourages Secretary Preston to ensure that any final proposal enjoys the consensus of industry and consumer groups and expresses concerns over the impact of the proposed rule upon small businesses and consumers.

House Financial Services Committee Reports Credit Card Protection Measure. On July 30, the House Committee on Financial Services (Committee) reported to the House of Representatives bill H.R. 5244, the Credit Cardholders’ Bill of Rights Act of 2008 (reported in InfoBytes, Apr. 18, 2008).The bill is substantively similar to the joint proposed rule by the Federal Reserve Board, Office of Thrift Supervision, and National Credit Union Administration regarding unfair and deceptive acts or practices (UDAP) (reported in InfoBytes, May 23, 2008), however, H.R. 5244 differs by adding proposed amendments to the Truth in Lending Act. The bill as reported retains, with modifications, provisions prohibiting double-cycle billing and allows a creditor, in instances where an outstanding balance has two or more different APRs, to allocate a larger share of a payment to the portion of the balance bearing the higher APR. The bill as reported further retains a provision granting consumers the option to opt-out of over-the-limit transactions when fees are imposed. The previous bill, as initially introduced, prohibited creditors from using any adverse information regarding a consumer as the basis for an APR increase on an existing balance and eliminated “any-time any-reason” changes in terms.However, the bill as reported removes the “any-time any-reason” provisions and grants three exceptions to the prohibition on increasing the APR on existing balances, involving, (i) changes in an index not under the creditor’s control, (ii) the expiration of a promotional rate, and (iii) a penalty rate increase if a payment is not received with 30 days after the due date. The bill as reported also requires a 45-day advance notice of a rate increase, however, the bill no longer grants a consumer the right to cancel a credit card and pay an outstanding balance at the existing APR upon being informed of a rate increase. The Committee’s amendments to the bill can be found at http://www.house.gov/apps/list/speech/financialsvcs_dem/mu073008.shtml.  The full text of the bill, as introduced on February 7, 2008, can be found at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h5244ih.txt.pdf.

E*Trade Settles With SEC Over Alleged AML Deficiencies. On July 30, E*Trade Clearing LLC and E*Trade Securities LLC (E*Trade) settled a Securities and Exchange Commission (SEC) enforcement action for $1 million regarding allegations that it failed to accurately document certain Customer Identification Program (CIP) practices and verify the identities of 65,442 of its customers, as required by the USA PATRIOT Act and SEC Rules. Although E*Trade’s procedures required verification of all accountholders in a joint account, the company did not verify the identities of secondary accountholders in newly opened joint accounts. While a retroactive vetting of the accounts showed that no accounts were improperly opened, the Order states that this was a “systemic” compliance failure. In addition to financial penalties, E*Trade consented to the issuance of an administrative cease and desist order for violations of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder, agreed to a censure, and agreed to retain a qualified compliance consultant to verify the adequacy of its CIP rule compliance program. For a copy of the SEC’s Order, please see http://www.sec.gov/litigation/admin/2008/34-58250.pdf.  For a copy of the SEC’s press release regarding the Order, please see http://www.sec.gov/news/press/2008/2008-156.htm.

DOJ Charges 11 in Theft of Over 40 Million Credit Card Numbers. On August 5, federal prosecutors brought charges against 11 individuals in what is believed to be the largest and most complex hacking and identity theft ring ever prosecuted by the Department of Justice (DOJ). The defendants, arrested in Europe and the United States, were charged with conspiracy, computer intrusion, fraud, and identity theft, among other crimes. The perpetrators allegedly hacked into the computer networks of several major retailers by “wardriving,” a method of using electronic equipment to scan for security holes in wireless networks, and then installing “sniffer” programs to capture over 40 million credit card numbers, passwords, and other account information. Once the data was downloaded, the perpetrators allegedly concealed the information in encrypted servers, then “cashed out” the data through a complex laundering scheme involving anonymous Internet-based currencies and foreign bank accounts. For a copy of the DOJ’s press release, please see http://www.usdoj.gov/opa/pr/2008/August/08-ag-689.html.

Federal Reserve Publishes Examination Procedures Regarding Servicemembers Consumer Credit Provisions. On July 31, the Federal Reserve Board (FRB) published a letter stating that the Task Force on Consumer Compliance of the Federal Financial Institutions Examination Counsel recently approved examination procedures for assessing compliance with 32 C.F.R. Part 232, “Limitations on Terms of Consumer Credit Extended to Service Members and Dependents” (as reported in bill form in InfoBytes, Aug. 31, 2007). The examination procedures include, (i) determining whether the creditor being examined offers or provides consumer credit covered by the federal regulations, (ii) determining the means by which the creditor complies with the regulations, (iii) determining the extent and adequacy of the training received by those responsible for ensuring compliance with the regulations, and (iv) determining whether the institution’s internal controls are sufficient to ensure compliance with the regulations. For a copy of the FRB’s letter, please see http://www.federalreserve.gov/boarddocs/caletters/2008/0804/caltr0804.htm. For a copy of the examination procedures, please see http://www.federalreserve.gov/boarddocs/caletters/2008/0804/08-04_attachment.pdf.

Four Marketers Settle FTC Charges. On August 1, four companies and their principals settled charges made by the Federal Trade Commission (FTC) arising under Section l3(b) of the Federal Trade Commission Act. The charges alleged that the defendants deceptively marketed a web-based service claiming to help consumers avoid bankruptcy and to get out of debt. The settlement prohibits the defendants from misrepresenting that users of their services will be able to pay off all debts at greatly reduced amounts and from misrepresenting any fact material to a consumer’s decision to purchase the program. The settlement further prohibits the defendants from failing to clearly, prominently, and contemporaneously disclose terms describing exactly how a specific consumer’s debt will be reduced. The settlement, among other items, also imposes a $7 million suspended judgment. For a copy of the “Stipulated Order and Judgment for Permanent Injunction,” please see http://www.ftc.gov/os/caselist/0723025/080805edgeorder.pdf.

Federal Reserve Adjusts Fee Based Trigger under TILA to $583. On August 5, the Federal Reserve Board announced its annual adjustment to the dollar amount of fees that trigger additional disclosure requirements under the Truth in Lending Act (TILA) for certain home mortgage loans. The new dollar amount, which is calculated on the annual percentage change reflected in the Consumer Price Index that was in effect on June 1, has been adjusted to $583 for 2009. This annual adjustment is effective January 1, 2009. For the full text of the notice, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20080805a1.pdf.

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State Issues

New York Governor Signs Mortgage Lending Reform Bill. On August 5, New York Governor David A. Paterson signed a mortgage lending reform bill targeting the subprime lending crisis by providing immediate relief to borrowers currently facing foreclosure, as well as strengthening New York banking laws to prevent similar occurrences in the future. The bill aims to provide immediate relief to borrowers facing foreclosure by, among other things, (i) requiring the lender to provide a pre-foreclosure notice 90 days before foreclosure proceedings may be initiated, (ii) requiring mandatory settlement conferences for foreclosure proceedings involving borrowers with certain subprime loans, (iii) requiring plaintiffs in a foreclosure action to make an affirmative allegation that they have standing to bring the foreclosure action, and (iv) addressing foreclosure rescue scams looking to take advantage of vulnerable borrowers. Further, the bill seeks to prevent a similar crisis in the future by establishing (i) strong consumer protections for subprime loans and minimum underwriting standards that protect borrowers, (ii) an “ability to pay” standard for making and arranging subprime loans, (iii) a general “duty of care” for mortgage brokers, (iv) a requirement for mortgage servicers to register with the New York State Banking Department, and (v) mortgage fraud as a classified crime under New York Penal Law. Most of the provisions are effective on September 1, 2008. However, the mortgage servicer registration provision is effective on July 1, 2009, and the provision concerning mandatory settlement conferences became effective on August 5, 2008. For a copy of the bill, please see http://assembly.state.ny.us/leg/?bn=S08143&sh=t .

Securities Regulators Announce Settlement with Citigroup, UBS in Auction Rate Securities Investigation; Merrill Lynch Announces Self-Imposed Resolution. On August 7, securities regulators announced a multi-billion dollar agreement with Citigroup Global Markets, Inc. and Citi Smith Barney (Citigroup) to settle allegations that Citigroup made misrepresentations in its marketing and sales of auction rate securities. Under the terms of the settlement, which are subject to finalization, review and approval by the Securities and Exchange Commission (SEC), Citigroup has agreed to buy back, no later than November 5, 2008, all illiquid auction rate securities from all Citigroup retail customers, charities, and small to mid-sized businesses. These customers, who number approximately 40,000 nationwide, have been unable to sell their securities, valued at more than $7 billion, since February 2008. Citigroup will also (i) fully reimburse all retail investors who sold their auction rate securities at a discount after the market failed, (ii) consent to a special, public arbitration process, which will be overseen by the Financial Industry Regulatory Authority (FINRA), to resolve claims of consequential damages suffered by retail investors unable to access their funds, and (iii) use its best efforts to liquidate, by the end of 2009, all of the approximately $12 billion worth of auction rate securities which the firm sold to retirement plans and other institutional investors. In addition, Citigroup will pay a $50 million civil penalty to the state of New York and a $50 million civil penalty to the North American Securities Administrators Association (NASAA).

On August 8, securities regulators announced an agreement with UBS Securities LLC and UBS Financial Services, Inc. (UBS) to settle allegations that UBS made misrepresentations in its marketing and sales of auction rate securities. UBS has agreed to buy back, no later than January 2, 2009, all illiquid auction rate securities from all UBS retail customers, charities, and small to mid-sized businesses. These customers, who number approximately 40,000 nationwide, have been unable to sell their securities, valued at $11 billion, since February 2008. The settlement requires UBS to accomplish the buybacks for retail customers with less than $1 million on deposit by October 31, 2008. UBS will also (i) fully reimburse all retail investors who sold their auction rate securities at a discount after the market failed, (ii) consent to a special, public arbitration process to resolve claims of consequential damages suffered by retail investors as a result of not being able to access their funds, and (iii) expeditiously provide liquidity solutions to all other institutional investors. In addition, UBS will pay a $75 million civil penalty to the state of New York and a $75 million civil penalty to the NASAA.

On August 7, Merrill Lynch announced that, effective January 15, 2009, and lasting until January 15, 2010, it will offer to buy at par auction rate securities sold to its retail clients. According to the Merrill Lynch press release, Merrill Lynch retail clients currently hold an estimated $12 billion in auction rate securities.

For a copy of the SEC press release regarding the Citigroup settlement, please see http://www.sec.gov/news/press/2008/2008-168.htm.  For a copy of the New York Attorney General’s press release regarding the UBS settlement, please see http://www.oag.state.ny.us/press/2008/aug/aug8a_08.html.  For a copy of the Merrill Lynch press release, please see http://www.ml.com/index.asp?id=7695_7696_8149_88278_104556_104651.

Montana Adopts Rules in Connection with the Residential Mortgage Lender Licensing Act. On July 31, the Montana Administrative Register published a “Notice of Adoption” that the Montana Department of Administration, Division of Banking and Financial Institutions adopted four rules implementing the Residential Mortgage Lender Licensing Act. The rules state that, (i) mortgage lender licensees must file a surety bond in the amount of $50,000 for a principal office and $5,000 for each branch office, (ii) branch locations are subject to branch office licensure, including the submission of a branch application and an amendment to the original application, (iii) loan originators must be licensed, and (iv) licensees are responsible for the acts and omissions of their agents. The rules are effective as of August 1, 2008. For the “Notice of Public Hearing on Proposed Adoption,” containing the rules as proposed, see http://doa.mt.gov/pdfs/2-59-401pro-arm.pdf.  For the “Notice of Adoption,” containing revisions to the proposed rules, please see http://doa.mt.gov/pdfs/2-59-401adp-arm.pdf.

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Courts

Massachusetts Supreme Judicial Court Requests Amicus Briefs in Fremont Case. On August 4, the Massachusetts Supreme Judicial Court posted an amicus announcement requesting amicus curiae briefs regarding a preliminary injunction granted against Fremont Investment & Loan (Fremont) on February 27, 2008 (reported in InfoBytes Special Alert, February 27, 2008). The preliminary injunction restrains Fremont from initiating or advancing foreclosure proceedings against “presumptively unfair” residential mortgage loans owned or serviced by Fremont in Massachusetts, as well as the assignation of such loans. Briefs may be filed with the Office of the Clerk for the Commonwealth of Massachusetts, and argument is set for October 2008. For the Massachusetts Supreme Judicial Court’s amicus announcement, please see http://www.mass.gov/courts/sjc/amicus/SJC-10258.html.

Alabama Federal Court Grants Summary Judgment in Favor of Closing Agency in RESPA § 8(b) Case. A federal district court has granted summary judgment in favor of a settlement services provider in a suit alleging a violation of section 8(b) of the Real Estate Settlement Procedures Act (RESPA). Edwards v. Accredited Home Lenders, Inc., No. 07-0160 (S.D. Ala. Jul. 29, 2008). The plaintiffs obtained a mortgage loan from Accredited Home Lenders, and Lender’s First Choice Agency (Lender’s First) was the settlement services provider. At closing, Lender’s First charged the plaintiffs $88 to record the mortgage. While the fee was disclosed on the HUD-1 settlement statement, the plaintiffs asserted that the fee charged was in excess of the services actually performed, in violation of section 8(b) of RESPA. At closing, Lender’s First charged an estimated recording fee of $88, but the actual recording service cost $75.50. Lender’s First held the charge in a non-interest-bearing escrow account, and, when it discovered the overcharge, it refunded the $12.50 to the borrowers. The court found that Lender’s First was not in violation of RESPA because, by holding the charge in the non-interest-bearing escrow account, it did not “accept” money without performing any services. Further, the court noted that, under Eleventh Circuit precedent, charging such a fee would not violate RESPA § 8(b) because it would be considered an “over-charge” rather than a fee “other than for services actually performed”. Buckley Kolar represents Accredited Home Lenders, Inc. in this case. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Edwards_v_Accredited.pdf.

Maine Magistrate Judge Finds GLBA Preempts Maine Insurance Code Waiting Period Statute. On August 1, a magistrate judge for the United States District Court for the District of Maine recommended that the court grant declaratory and injunctive relief to the plaintiff insurance company and banks, finding that the Gramm-Leach-Bliley Act of 1999, 15 U.S.C. § 6701 et seq. (GLBA), preempted a section of the Maine Insurance Code, 24-A M.R.S. § 2168-B (Waiting Period Statute). TD BankNorth Ins. Agency, Inc. v. Kofman, No. 07-170 (D. Me. Aug. 1, 2008). The Waiting Period Statute prohibits a national bank and its affiliated insurance company from targeting a loan applicant with an insurance solicitation while a loan application is pending and requires that such marketing be delayed until the lender documents its decision regarding the loan application. The magistrate judge concluded that, because the Waiting Period Statute prevented or significantly interfered with the plaintiffs’ ability to engage in insurance cross-marketing activity and was more burdensome than Congress’s restriction preserved in subsection (d)(2)(B) of the GLBA, the GLBA preempted the Waiting Period Statute. In addition, certain plaintiffs that were neither national banks nor affiliates of national banks, and thus were not protected by GLBA, also were deemed not subject to the Waiting Period Statute because of a provision of Maine law invalidating any Maine law or regulation that is “preempted or declared to be invalid pursuant to applicable federal law … with respect to financial institutions authorized to do business in [Maine].” For a copy of the opinion, please see http://www.buckleykolar.com/documents/TD_Banknorth_v_Kofman.pdf.

Utah Federal Court Finds Agreement and Modification Containing Arbitration Clause Not Unconscionable. In a recent decision, a Utah federal district court compelled arbitration in a dispute brought by the plaintiff, holding that an agreement and an online modification to that agreement, containing an arbitration clause, were not unconscionable. Margae, Inc. v. Clear Link Technologics, LLC, et al., No. 2:07-CV-916 (D. Ut. June 16, 2008). The plaintiff, Margae, Inc. (Margae), entered into oral and written agreements with the defendant regarding search engine optimization and affiliate marketing services. The defendant subsequently modified the written Partner Agreement, via an online posting, to contain an arbitration clause. Margae filed suit in North Carolina state court after alleging, in part, that the defendant prevented Margae from carrying out its search engine optimization work for the defendant, that the defendant refused to pay commissions to Margae, and that the defendant used Margae’s proprietary materials without compensation or acknowledgment. The defendant sought to compel arbitration of the dispute. Margae argued that the arbitration clause was unenforceable, stating, (i) Margae did not agree to the modification of the Partner Agreement, (ii) there was no consideration regarding the modification of the Partner Agreement, and (iii) the original Partner Agreement and the modification of the Partner Agreement were unconscionable. In response, the court held that, (i) Margae agreed to the modification of the Partner Agreement when it initially agreed to be bound to modifications to the agreement, (ii) there was consideration for the modification insofar as Margae provided services to the defendant for which the defendant paid Margae, and (iii) the agreements were not unconscionable because Margae is a sophisticated corporation that was not in an inferior bargaining position, and that nothing in the contract amounted to “overreaching or oppression.” The court also reasoned that the defendant’s ability to unilaterally modify the contract did not render the contract unconscionable because Margae was adequately put on notice, which was not unduly burdensome, to check for modifications posted online. Finally, the contract’s provision that the defendant, but not Margae, could pursue equitable remedies in arbitration proceedings did not render the contract unconscionable because Margae could seek equitable remedies elsewhere, and because a court could construe the agreement to avoid inequity. The court also held that some aspects of the dispute, regarding search engine optimization, were governed by an oral agreement, not by the Partner Agreement, and did not compel the arbitration of those claims. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Margae_v_Clear_Link.pdf.

Pennsylvania Federal Court Grants Final Approval to FACTA Class Action Settlement. On August 4, a federal district court denied a motion to vacate a class settlement arising under the Fair and Accurate Credit Transaction Act (FACTA), stating that the Credit and Debit Card Receipt Clarification Act of 2007 (Act) does not provide the grounds to retroactively rescind a class action settlement. Colella v. Univ.  of Pittsburgh, No. 2:08-cv-00129 (W.D. Pa. Aug. 4, 2008). The plaintiff consumer alleged that the defendant failed to truncate credit card expiration dates on receipts from 2005 to 2008. After the parties reached a settlement, the court granted preliminary approval of a class action settlement on May 12, 2008. The defendant then moved to vacate the settlement, claiming that the cause of action had been eliminated by the Act, which, on June 3, 2008, amended FACTA to exclude expiration dates from the truncation requirement. The court held the Act does not provide the grounds to rescind an otherwise binding class action settlement agreement, and the court granted final approval of the settlement. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Colella_v_U_of_P.pdf.

Pennsylvania Federal Court Compels Arbitration, Holds FCRA Claims Are Not Excluded. In a recent case, a Pennsylvania federal district court granted a defendant lender’s motion to compel arbitration, holding that the plaintiff could not prove Congress intended to exclude claims brought under the Fair Credit Reporting Act (FCRA) from arbitration. Cronin v. CitiFinancial Services, Inc., No. 08-1523, 2008 WL 2944869 (E.D. Pa. Jul. 25, 2008). CitiFinancial Services, Inc. (Citi) lent the plaintiff approximately $7,000. When Citi reported the loan to credit agencies, it reported the full accelerated balance of the loan, including interest, instead of the unpaid principal balance. The plaintiff claimed that, as a result, he was denied credit and suffered adverse action on several of his other credit accounts and sued, alleging violations of FCRA. Citi filed a motion to compel arbitration pursuant to the arbitration clause in the loan agreement. Plaintiff argued that the agreement was invalid because, among other things, the arbitration agreement does not apply to his FCRA claims because those claims were not contemplated at the time of contract formation and because arbitration conflicts with the goals of FCRA. The court rejected this argument, stating that the court applies a presumption of arbitrability which may be overcome only by a specific provision excluding a particular claim from arbitration. To the contrary, the court found that the provision included any claim related to a federal or state statute or regulation, which includes FCRA. The court also found that the plaintiff failed to show that Congress intended to preclude FCRA claims from arbitration, either through statutory text, legislative history, or inherent conflicts of law. In addition, the court rejected the plaintiff’s claims that the agreement was invalid because (i) it is a contract of adhesion, (ii) it lacked mutuality of obligation; (iii) the arbitration provision imposed unreasonable costs on him, and (iv) the arbitrators selected in the provision (the American Arbitration Association and the National Arbitration Forum) are not neutral. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Cronin_v_Citi.pdf.

Indiana Federal Court Grants Summary Judgment to Creditor in FCBA Case. On July 28, the U.S. District Court for the Southern District of Indiana granted a defendant creditor’s motion for summary judgment in a Fair Credit Billing Act (FCBA) case, holding that only timely notice by a consumer of a billing error will trigger a creditor’s obligations under the FCBA. Nguyen v. USAA Federal Savings Bank, No. 1:07-CV-0202, 2008 WL 2945616 (S.D. Ind. July 28, 2008). The plaintiff alleged that the defendant creditor violated the FCBA by failing to respond to her notice of billing error. Under the FCBA, a written notice from a consumer regarding a billing error must be received by the creditor no later than 60 days after the creditor transmitted the first periodic statement which reflects the alleged billing error. If such a notice of billing error is received by the creditor within 60 days, the FCBA requires the creditor to send written acknowledgment to the consumer within 30 days that the notice was received, and, not later than two complete billing cycles after receipt of the notice, to send a written explanation or clarification to the consumer after conducting an investigation. In this case, the defendant creditor failed to remove the plaintiff’s name from a joint account in September 2000. The first periodic statement that reflected the error was sent in October 2000. The plaintiff did not send the notice of billing error until January 2006, approximately five years after the defendant’s failure to remove her from the account. As such, the defendant creditor argued that the notice of billing error by the consumer was untimely and, as a result, did not trigger its obligation to respond or conduct any investigation. The court agreed, reasoning that the U.S. Code and the Code of Federal Regulations both clearly state that only timely notice of a billing error will trigger a creditor’s obligations under the FCBA. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Nguyen_v_USAA.

Texas Federal Court Denies Summary Judgment Motions in FDCPA Case. On July 21, a federal district court in Texas denied a defendant’s motion for summary judgment and a plaintiff’s cross-motion for summary judgment in a case arising under, in part, the Fair Debt Collection Practices Act (FDPCA), finding that the question of whether a debt is considered “commercial” or “consumer” must be determined by a jury. Hetherington v. Allied Intl. Credit Corp., et al., No. H-07-2104 (S.D. Tex. July 21, 2008). The plaintiff maintained a sole proprietorship bank account used for business and personal expenses. Subsequently, a bank returned a check, made for personal car repairs, drawn from the account. The plaintiff’s bank closed the account with a negative balance, and the debt was assigned to the defendant for collection. The plaintiff argued that the debt, for a personal car repair, and drawn from a bank account established for personal convenience, was a consumer transaction falling under the FDCPA. The defendant argued that the debt arose from an account established for business purposes, and the collection of the debt, thus, did not fall under the FDCPA. The court held that the determination of whether the debt was commercial or consumer was an issue for a jury, reasoning that the FDCPA defines “debt” as arising “primarily for personal family, or household purposes,” and that whether a debt is characterized as such must be examined by a jury in light of the “transaction as a whole.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/Hetherington_v_Allied.pdf.

Connecticut AG Sues Countrywide. On August 6, the Connecticut Attorney General filed suit against Countrywide Financial, citing violations of the Connecticut Unfair Trade Practices Act (CUTPA) and state banking laws. The suit is one of several recently brought by state Attorneys General against Countrywide. The Connecticut Attorney General complaint alleges that Countrywide pushed consumers into deceptive loan products and renegotiations, and charged homeowners unjustified legal fees. Specifically, the suit alleges, among other things, that Countrywide violated CUTPA and state banking laws by, (i) encouraging consumers to take out loans which the company knew or should have known were not affordable, (ii) improperly inflating consumers’ incomes to qualify them for loans they otherwise could not have received, (iii) providing loans with different and more expensive terms than consumers were initially promised, (iv) providing variable rate loans to consumers with the assurance they could refinance before interest rates reset, only to later refuse to do so, (v) imposing excessive and inaccurate legal fees on Connecticut consumers facing foreclosure to reinstate their loans, and (viii) requiring loan modifications and repayment plans that were unsustainable, unaffordable, or unsuitable. The suit seeks civil penalties of up to $100,000 per violation of state banking laws and up to $5,000 per violation of state consumer protection laws, restitution to consumers, and an injunction against the allegedly deceptive practices. For a copy of the complaint, please see http://www.ct.gov/ag/lib/ag/consumers/countrywidelawsuit.pdf.

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Firm News

Joe Kolar will be speaking on the impact of the recently enacted Housing and Economic Recovery Act of 2008 (HERA) at the Consumer Financial Services Committee’s section of the American Bar Association on August 10 in New York City.

Joe Kolar and Jeff Naimon will also be discussing the impact of HERA at a webinar sponsored by the American Financial Services Association on August 14 at 11:30 AM ET. For more information, see http://www.afsaonline.org/sitepages/meeting.cfm?meetingid=110.

Joe Kolar will also be speaking on compliance aspects of the recently finalized Truth in Lending Act rules at an audio conference sponsored by October Research on August 13 at 2 PM ET. For more information, see http://www.octoberradio.com/.

John Kromer will participate in the “Industry Issues” panel at the American Association of Residential Mortgage Regulators’ annual meeting in Minneapolis, Minnesota on August 19-22.

Jon Jerison will be the featured speaker on a Pratt audio conference entitled Between a Rock and a Hard Place: Managing HELOCs in the Current Environment on August 26 at 1PM ET. For more information, please see http://www.aspratt.com/store/06H.php.

Clint Rockwell, Kirk Jensen, Chris Witeck, and Severson & Werson partner Mark Lonergan made joint presentations at the Lenders One Member’s Conference in Chicago, IL on August 5. The presentations focused on recent developments in connection with RESPA, H.R. 3221, state licensing issues, litigation developments, and the proposed HOEPA rule.

Jon Jerison was the featured speaker on a Pratt audio conference entitled New Risk-Based Pricing Notice Rule: How FCRA Will Change on July 29. The conference explored key developments regarding the Fair Credit Reporting Act and analyzed how the new rule will affect lending and financial institutions. For more information, please see http://www.aspratt.com/store/50G.php.

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Miscellany

ITA Announces Certification Mark for U.S.-European Union Safe Harbor Framework. On July 31, the Commerce Department’s International Trade Administration (ITA) announced the development of a certification mark for use on corporate websites signifying self-certified compliance with the provisions of the U.S.-European Union Safe Harbor Framework. Participating U.S. companies must follow instructions developed by the ITA located at http://www.export.gov/safeharbor/Safe_Harbor_Instructions.asp.  For a copy of the announcement, please see http://www.export.gov/safeharbor/Safe_Harbor_Announcement.asp.

University of Michigan Study Surveys Security Flaws of Bank Web Sites. Recently, a University of Michigan study analyzed the security of 214 U.S. financial institution websites. The study, titled “Analyzing Websites for User-Visible Security Design Flaws,” used data from 2006 to assess five security design flaws, (i) forwarding users on a secure page to new page from a different domain without notifying the user, (ii) placing logins to a secure page on insecure pages, (iii) placing contact information or security advice on insecure pages, (iv) allowing users to use e-mail addresses and social security numbers as user names, and allowing users to select weak passwords, and (v) e-mailing personal information via insecure e-mail. The study found that 76% of the sites surveyed contained at least one of these design flaws and recommends web developers employ methods to better detect website secure usability design flaws. For a copy of the study, please see http://cups.cs.cmu.edu/soups/2008/proceedings/p117Falk.pdf.

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Mortgages

House Financial Services Committee Members Urge Mortgage Industry to Hold Off on Foreclosures. On August 5, House Financial Services Committee (Committee) members Barney Frank, Maxine Waters, Mel Watt, and Brad Miller addressed a letter to the mortgage industry urging the forbearance of foreclosures for potentially eligible homeowners under the new FHA rescue program, the “Hope for Homeowners” refinance program, as set forth in the Housing and Economic Recovery Act (reported in InfoBytes, Aug. 1, 2008), until the program becomes effective on October 1, 2008.The letter further poses questions regarding industry policies and procedures to implement the Hope for Homeowners program. On September 17, 2008, the Committee will hold a follow-up hearing to gauge compliance with the program. For the Committee’s press release, containing a copy of the letter to the mortgage industry, please see http://www.house.gov/apps/list/press/financialsvcs_dem/press080508.shtml.

House Members Urge HUD Secretary to Withdraw RESPA Proposed Rule. According to reports, more than 230 members of the U.S. House of Representatives have signed and sent a letter to Department of Housing and Urban Development (HUD) Secretary Steven Preston urging him to withdraw HUD’s March 14, 2008 proposed rule involving the Real Estate Settlement Procedures Act (RESPA) (reported in InfoBytes, March 14, 2008). The letter, spearheaded by Congressman Rubén Hinojosa(D-TX) and Congresswoman Judy Biggert (R-IL), reportedly asks Secretary Preston to immediately commence a joint rulemaking process with the Federal Reserve Board to produce more simplified mortgage and real estate settlement cost disclosure forms and to discard any portion of the proposed rule not previously subject to public comment, specifically portions of the rule not directly involving RESPA disclosures. The letter also reportedly encourages Secretary Preston to ensure that any final proposal enjoys the consensus of industry and consumer groups and expresses concerns over the impact of the proposed rule upon small businesses and consumers.

Federal Reserve Adjusts Fee Based Trigger under TILA to $583. On August 5, the Federal Reserve Board announced its annual adjustment to the dollar amount of fees that trigger additional disclosure requirements under the Truth in Lending Act (TILA) for certain home mortgage loans. The new dollar amount, which is calculated on the annual percentage change reflected in the Consumer Price Index that was in effect on June 1, has been adjusted to $583 for 2009. This annual adjustment is effective January 1, 2009. For the full text of the notice, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20080805a1.pdf.

New York Governor Signs Mortgage Lending Reform Bill. On August 5, New York Governor David A. Paterson signed a mortgage lending reform bill targeting the subprime lending crisis by providing immediate relief to borrowers currently facing foreclosure, as well as strengthening New York banking laws to prevent similar occurrences in the future. The bill aims to provide immediate relief to borrowers facing foreclosure by, among other things, (i) requiring the lender to provide a pre-foreclosure notice 90 days before foreclosure proceedings may be initiated, (ii) requiring mandatory settlement conferences for foreclosure proceedings involving borrowers with certain subprime loans, (iii) requiring plaintiffs in a foreclosure action to make an affirmative allegation that they have standing to bring the foreclosure action, and (iv) addressing foreclosure rescue scams looking to take advantage of vulnerable borrowers. Further, the bill seeks to prevent a similar crisis in the future by establishing (i) strong consumer protections for subprime loans and minimum underwriting standards that protect borrowers, (ii) an “ability to pay” standard for making and arranging subprime loans, (iii) a general “duty of care” for mortgage brokers, (iv) a requirement for mortgage servicers to register with the New York State Banking Department, and (v) mortgage fraud as a classified crime under New York Penal Law. Most of the provisions are effective on September 1, 2008. However, the mortgage servicer registration provision is effective on July 1, 2009, and the provision concerning mandatory settlement conferences became effective on August 5, 2008. For a copy of the bill, please see http://assembly.state.ny.us/leg/?bn=S08143&sh=t .

Montana Adopts Rules in Connection with the Residential Mortgage Lender Licensing Act. On July 31, the Montana Administrative Register published a “Notice of Adoption” that the Montana Department of Administration, Division of Banking and Financial Institutions adopted four rules implementing the Residential Mortgage Lender Licensing Act. The rules state that, (i) mortgage lender licensees must file a surety bond in the amount of $50,000 for a principal office and $5,000 for each branch office, (ii) branch locations are subject to branch office licensure, including the submission of a branch application and an amendment to the original application, (iii) loan originators must be licensed, and (iv) licensees are responsible for the acts and omissions of their agents. The rules are effective as of August 1, 2008. For the “Notice of Public Hearing on Proposed Adoption,” containing the rules as proposed, see http://doa.mt.gov/pdfs/2-59-401pro-arm.pdf.  For the “Notice of Adoption,” containing revisions to the proposed rules, please see http://doa.mt.gov/pdfs/2-59-401adp-arm.pdf.

Massachusetts Supreme Judicial Court Requests Amicus Briefs in Fremont Case. On August 4, the Massachusetts Supreme Judicial Court posted an amicus announcement requesting amicus curiae briefs regarding a preliminary injunction granted against Fremont Investment & Loan (Fremont) on February 27, 2008 (reported in InfoBytes Special Alert, February 27, 2008). The preliminary injunction restrains Fremont from initiating or advancing foreclosure proceedings against “presumptively unfair” residential mortgage loans owned or serviced by Fremont in Massachusetts, as well as the assignation of such loans. Briefs may be filed with the Office of the Clerk for the Commonwealth of Massachusetts, and argument is set for October 2008. For the Massachusetts Supreme Judicial Court’s amicus announcement, please see http://www.mass.gov/courts/sjc/amicus/SJC-10258.html.

Alabama Federal Court Grants Summary Judgment in Favor of Closing Agency in RESPA § 8(b) Case. A federal district court has granted summary judgment in favor of a settlement services provider in a suit alleging a violation of section 8(b) of the Real Estate Settlement Procedures Act (RESPA). Edwards v. Accredited Home Lenders, Inc., No. 07-0160 (S.D. Ala. Jul. 29, 2008). The plaintiffs obtained a mortgage loan from Accredited Home Lenders, and Lender’s First Choice Agency (Lender’s First) was the settlement services provider. At closing, Lender’s First charged the plaintiffs $88 to record the mortgage. While the fee was disclosed on the HUD-1 settlement statement, the plaintiffs asserted that the fee charged was in excess of the services actually performed, in violation of section 8(b) of RESPA. At closing, Lender’s First charged an estimated recording fee of $88, but the actual recording service cost $75.50. Lender’s First held the charge in a non-interest-bearing escrow account, and, when it discovered the overcharge, it refunded the $12.50 to the borrowers. The court found that Lender’s First was not in violation of RESPA because, by holding the charge in the non-interest-bearing escrow account, it did not “accept” money without performing any services. Further, the court noted that, under Eleventh Circuit precedent, charging such a fee would not violate RESPA § 8(b) because it would be considered an “over-charge” rather than a fee “other than for services actually performed”. Buckley Kolar represents Accredited Home Lenders, Inc. in this case. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Edwards_v_Accredited.pdf.

Connecticut AG Sues Countrywide. On August 6, the Connecticut Attorney General filed suit against Countrywide Financial, citing violations of the Connecticut Unfair Trade Practices Act (CUTPA) and state banking laws. The suit is one of several recently brought by state Attorneys General against Countrywide. The Connecticut Attorney General complaint alleges that Countrywide pushed consumers into deceptive loan products and renegotiations, and charged homeowners unjustified legal fees. Specifically, the suit alleges, among other things, that Countrywide violated CUTPA and state banking laws by, (i) encouraging consumers to take out loans which the company knew or should have known were not affordable, (ii) improperly inflating consumers’ incomes to qualify them for loans they otherwise could not have received, (iii) providing loans with different and more expensive terms than consumers were initially promised, (iv) providing variable rate loans to consumers with the assurance they could refinance before interest rates reset, only to later refuse to do so, (v) imposing excessive and inaccurate legal fees on Connecticut consumers facing foreclosure to reinstate their loans, and (viii) requiring loan modifications and repayment plans that were unsustainable, unaffordable, or unsuitable. The suit seeks civil penalties of up to $100,000 per violation of state banking laws and up to $5,000 per violation of state consumer protection laws, restitution to consumers, and an injunction against the allegedly deceptive practices. For a copy of the complaint, please see http://www.ct.gov/ag/lib/ag/consumers/countrywidelawsuit.pdf.

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Banking

Maine Magistrate Judge Finds GLBA Preempts Maine Insurance Code Waiting Period Statute. On August 1, a magistrate judge for the United States District Court for the District of Maine recommended that the court grant declaratory and injunctive relief to the plaintiff insurance company and banks, finding that the Gramm-Leach-Bliley Act of 1999, 15 U.S.C. § 6701 et seq. (GLBA), preempted a section of the Maine Insurance Code, 24-A M.R.S. § 2168-B (Waiting Period Statute). TD BankNorth Ins. Agency, Inc. v. Kofman, No. 07-170 (D. Me. Aug. 1, 2008). The Waiting Period Statute prohibits a national bank and its affiliated insurance company from targeting a loan applicant with an insurance solicitation while a loan application is pending and requires that such marketing be delayed until the lender documents its decision regarding the loan application. The magistrate judge concluded that, because the Waiting Period Statute prevented or significantly interfered with the plaintiffs’ ability to engage in insurance cross-marketing activity and was more burdensome than Congress’s restriction preserved in subsection (d)(2)(B) of the GLBA, the GLBA preempted the Waiting Period Statute. In addition, certain plaintiffs that were neither national banks nor affiliates of national banks, and thus were not protected by GLBA, also were deemed not subject to the Waiting Period Statute because of a provision of Maine law invalidating any Maine law or regulation that is “preempted or declared to be invalid pursuant to applicable federal law … with respect to financial institutions authorized to do business in [Maine].” For a copy of the opinion, please see http://www.buckleykolar.com/documents/TD_Banknorth_v_Kofman.pdf.

University of Michigan Study Surveys Security Flaws of Bank Web Sites. Recently, a University of Michigan study analyzed the security of 214 U.S. financial institution websites. The study, titled “Analyzing Websites for User-Visible Security Design Flaws,” used data from 2006 to assess five security design flaws, (i) forwarding users on a secure page to new page from a different domain without notifying the user, (ii) placing logins to a secure page on insecure pages, (iii) placing contact information or security advice on insecure pages, (iv) allowing users to use e-mail addresses and social security numbers as user names, and allowing users to select weak passwords, and (v) e-mailing personal information via insecure e-mail. The study found that 76% of the sites surveyed contained at least one of these design flaws and recommends web developers employ methods to better detect website secure usability design flaws. For a copy of the study, please see http://cups.cs.cmu.edu/soups/2008/proceedings/p117Falk.pdf.

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Consumer Finance

House Financial Services Committee Reports Credit Card Protection Measure. On July 30, the House Committee on Financial Services (Committee) reported to the House of Representatives bill H.R. 5244, the Credit Cardholders’ Bill of Rights Act of 2008 (reported in InfoBytes, Apr. 18, 2008).The bill is substantively similar to the joint proposed rule by the Federal Reserve Board, Office of Thrift Supervision, and National Credit Union Administration regarding unfair and deceptive acts or practices (UDAP) (reported in InfoBytes, May 23, 2008), however, H.R. 5244 differs by adding proposed amendments to the Truth in Lending Act. The bill as reported retains, with modifications, provisions prohibiting double-cycle billing and allows a creditor, in instances where an outstanding balance has two or more different APRs, to allocate a larger share of a payment to the portion of the balance bearing the higher APR. The bill as reported further retains a provision granting consumers the option to opt-out of over-the-limit transactions when fees are imposed. The previous bill, as initially introduced, prohibited creditors from using any adverse information regarding a consumer as the basis for an APR increase on an existing balance and eliminated “any-time any-reason” changes in terms.However, the bill as reported removes the “any-time any-reason” provisions and grants three exceptions to the prohibition on increasing the APR on existing balances, involving, (i) changes in an index not under the creditor’s control, (ii) the expiration of a promotional rate, and (iii) a penalty rate increase if a payment is not received with 30 days after the due date. The bill as reported also requires a 45-day advance notice of a rate increase, however, the bill no longer grants a consumer the right to cancel a credit card and pay an outstanding balance at the existing APR upon being informed of a rate increase. The Committee’s amendments to the bill can be found at http://www.house.gov/apps/list/speech/financialsvcs_dem/mu073008.shtml.  The full text of the bill, as introduced on February 7, 2008, can be found at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h5244ih.txt.pdf.

Federal Reserve Publishes Examination Procedures Regarding Servicemembers Consumer Credit Provisions. On July 31, the Federal Reserve Board (FRB) published a letter stating that the Task Force on Consumer Compliance of the Federal Financial Institutions Examination Counsel recently approved examination procedures for assessing compliance with 32 C.F.R. Part 232, “Limitations on Terms of Consumer Credit Extended to Service Members and Dependents” (as reported in bill form in InfoBytes, Aug. 31, 2007). The examination procedures include, (i) determining whether the creditor being examined offers or provides consumer credit covered by the federal regulations, (ii) determining the means by which the creditor complies with the regulations, (iii) determining the extent and adequacy of the training received by those responsible for ensuring compliance with the regulations, and (iv) determining whether the institution’s internal controls are sufficient to ensure compliance with the regulations. For a copy of the FRB’s letter, please see http://www.federalreserve.gov/boarddocs/caletters/2008/0804/caltr0804.htm.

For a copy of the examination procedures, please see http://www.federalreserve.gov/boarddocs/caletters/2008/0804/08-04_attachment.pdf.

Four Marketers Settle FTC Charges. On August 1, four companies and their principals settled charges made by the Federal Trade Commission (FTC) arising under Section l3(b) of the Federal Trade Commission Act. The charges alleged that the defendants deceptively marketed a web-based service claiming to help consumers avoid bankruptcy and to get out of debt. The settlement prohibits the defendants from misrepresenting that users of their services will be able to pay off all debts at greatly reduced amounts and from misrepresenting any fact material to a consumer’s decision to purchase the program. The settlement further prohibits the defendants from failing to clearly, prominently, and contemporaneously disclose terms describing exactly how a specific consumer’s debt will be reduced. The settlement, among other items, also imposes a $7 million suspended judgment. For a copy of the “Stipulated Order and Judgment for Permanent Injunction,” please see http://www.ftc.gov/os/caselist/0723025/080805edgeorder.pdf.

Pennsylvania Federal Court Grants Final Approval to FACTA Class Action Settlement. On August 4, a federal district court denied a motion to vacate a class settlement arising under the Fair and Accurate Credit Transaction Act (FACTA), stating that the Credit and Debit Card Receipt Clarification Act of 2007 (Act) does not provide the grounds to retroactively rescind a class action settlement. Colella v. Univ.  of Pittsburgh, No. 2:08-cv-00129 (W.D. Pa. Aug. 4, 2008). The plaintiff consumer alleged that the defendant failed to truncate credit card expiration dates on receipts from 2005 to 2008. After the parties reached a settlement, the court granted preliminary approval of a class action settlement on May 12, 2008. The defendant then moved to vacate the settlement, claiming that the cause of action had been eliminated by the Act, which, on June 3, 2008, amended FACTA to exclude expiration dates from the truncation requirement. The court held the Act does not provide the grounds to rescind an otherwise binding class action settlement agreement, and the court granted final approval of the settlement. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Colella_v_U_of_P.pdf.

Pennsylvania Federal Court Compels Arbitration, Holds FCRA Claims Are Not Excluded. In a recent case, a Pennsylvania federal district court granted a defendant lender’s motion to compel arbitration, holding that the plaintiff could not prove Congress intended to exclude claims brought under the Fair Credit Reporting Act (FCRA) from arbitration. Cronin v. CitiFinancial Services, Inc., No. 08-1523, 2008 WL 2944869 (E.D. Pa. Jul. 25, 2008). CitiFinancial Services, Inc. (Citi) lent the plaintiff approximately $7,000. When Citi reported the loan to credit agencies, it reported the full accelerated balance of the loan, including interest, instead of the unpaid principal balance. The plaintiff claimed that, as a result, he was denied credit and suffered adverse action on several of his other credit accounts and sued, alleging violations of FCRA. Citi filed a motion to compel arbitration pursuant to the arbitration clause in the loan agreement. Plaintiff argued that the agreement was invalid because, among other things, the arbitration agreement does not apply to his FCRA claims because those claims were not contemplated at the time of contract formation and because arbitration conflicts with the goals of FCRA. The court rejected this argument, stating that the court applies a presumption of arbitrability which may be overcome only by a specific provision excluding a particular claim from arbitration. To the contrary, the court found that the provision included any claim related to a federal or state statute or regulation, which includes FCRA. The court also found that the plaintiff failed to show that Congress intended to preclude FCRA claims from arbitration, either through statutory text, legislative history, or inherent conflicts of law. In addition, the court rejected the plaintiff’s claims that the agreement was invalid because (i) it is a contract of adhesion, (ii) it lacked mutuality of obligation; (iii) the arbitration provision imposed unreasonable costs on him, and (iv) the arbitrators selected in the provision (the American Arbitration Association and the National Arbitration Forum) are not neutral. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Cronin_v_Citi.pdf.

Indiana Federal Court Grants Summary Judgment to Creditor in FCBA Case. On July 28, the U.S. District Court for the Southern District of Indiana granted a defendant creditor’s motion for summary judgment in a Fair Credit Billing Act (FCBA) case, holding that only timely notice by a consumer of a billing error will trigger a creditor’s obligations under the FCBA. Nguyen v. USAA Federal Savings Bank, No. 1:07-CV-0202, 2008 WL 2945616 (S.D. Ind. July 28, 2008). The plaintiff alleged that the defendant creditor violated the FCBA by failing to respond to her notice of billing error. Under the FCBA, a written notice from a consumer regarding a billing error must be received by the creditor no later than 60 days after the creditor transmitted the first periodic statement which reflects the alleged billing error. If such a notice of billing error is received by the creditor within 60 days, the FCBA requires the creditor to send written acknowledgment to the consumer within 30 days that the notice was received, and, not later than two complete billing cycles after receipt of the notice, to send a written explanation or clarification to the consumer after conducting an investigation. In this case, the defendant creditor failed to remove the plaintiff’s name from a joint account in September 2000. The first periodic statement that reflected the error was sent in October 2000. The plaintiff did not send the notice of billing error until January 2006, approximately five years after the defendant’s failure to remove her from the account. As such, the defendant creditor argued that the notice of billing error by the consumer was untimely and, as a result, did not trigger its obligation to respond or conduct any investigation. The court agreed, reasoning that the U.S. Code and the Code of Federal Regulations both clearly state that only timely notice of a billing error will trigger a creditor’s obligations under the FCBA. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Nguyen_v_USAA.

Texas Federal Court Denies Summary Judgment Motions in FDCPA Case. On July 21, a federal district court in Texas denied a defendant’s motion for summary judgment and a plaintiff’s cross-motion for summary judgment in a case arising under, in part, the Fair Debt Collection Practices Act (FDPCA), finding that the question of whether a debt is considered “commercial” or “consumer” must be determined by a jury. Hetherington v. Allied Intl. Credit Corp., et al., No. H-07-2104 (S.D. Tex. July 21, 2008). The plaintiff maintained a sole proprietorship bank account used for business and personal expenses. Subsequently, a bank returned a check, made for personal car repairs, drawn from the account. The plaintiff’s bank closed the account with a negative balance, and the debt was assigned to the defendant for collection. The plaintiff argued that the debt, for a personal car repair, and drawn from a bank account established for personal convenience, was a consumer transaction falling under the FDCPA. The defendant argued that the debt arose from an account established for business purposes, and the collection of the debt, thus, did not fall under the FDCPA. The court held that the determination of whether the debt was commercial or consumer was an issue for a jury, reasoning that the FDCPA defines “debt” as arising “primarily for personal family, or household purposes,” and that whether a debt is characterized as such must be examined by a jury in light of the “transaction as a whole.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/Hetherington_v_Allied.pdf.

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Securities

E*Trade Settles With SEC Over Alleged AML Deficiencies. On July 30, E*Trade Clearing LLC and E*Trade Securities LLC (E*Trade) settled a Securities and Exchange Commission (SEC) enforcement action for $1 million regarding allegations that it failed to accurately document certain Customer Identification Program (CIP) practices and verify the identities of 65,442 of its customers, as required by the USA PATRIOT Act and SEC Rules. Although E*Trade’s procedures required verification of all accountholders in a joint account, the company did not verify the identities of secondary accountholders in newly opened joint accounts. While a retroactive vetting of the accounts showed that no accounts were improperly opened, the Order states that this was a “systemic” compliance failure. In addition to financial penalties, E*Trade consented to the issuance of an administrative cease and desist order for violations of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder, agreed to a censure, and agreed to retain a qualified compliance consultant to verify the adequacy of its CIP rule compliance program. For a copy of the SEC’s Order, please see http://www.sec.gov/litigation/admin/2008/34-58250.pdf.  For a copy of the SEC’s press release regarding the Order, please see http://www.sec.gov/news/press/2008/2008-156.htm.

Securities Regulators Announce Settlement with Citigroup, UBS in Auction Rate Securities Investigation; Merrill Lynch Announces Self-Imposed Resolution. On August 7, securities regulators announced a multi-billion dollar agreement with Citigroup Global Markets, Inc. and Citi Smith Barney (Citigroup) to settle allegations that Citigroup made misrepresentations in its marketing and sales of auction rate securities. Under the terms of the settlement, which are subject to finalization, review and approval by the Securities and Exchange Commission (SEC), Citigroup has agreed to buy back, no later than November 5, 2008, all illiquid auction rate securities from all Citigroup retail customers, charities, and small to mid-sized businesses. These customers, who number approximately 40,000 nationwide, have been unable to sell their securities, valued at more than $7 billion, since February 2008. Citigroup will also (i) fully reimburse all retail investors who sold their auction rate securities at a discount after the market failed, (ii) consent to a special, public arbitration process, which will be overseen by the Financial Industry Regulatory Authority (FINRA), to resolve claims of consequential damages suffered by retail investors unable to access their funds, and (iii) use its best efforts to liquidate, by the end of 2009, all of the approximately $12 billion worth of auction rate securities which the firm sold to retirement plans and other institutional investors. In addition, Citigroup will pay a $50 million civil penalty to the state of New York and a $50 million civil penalty to the North American Securities Administrators Association (NASAA).

On August 8, securities regulators announced an agreement with UBS Securities LLC and UBS Financial Services, Inc. (UBS) to settle allegations that UBS made misrepresentations in its marketing and sales of auction rate securities. UBS has agreed to buy back, no later than January 2, 2009, all illiquid auction rate securities from all UBS retail customers, charities, and small to mid-sized businesses. These customers, who number approximately 40,000 nationwide, have been unable to sell their securities, valued at $11 billion, since February 2008. The settlement requires UBS to accomplish the buybacks for retail customers with less than $1 million on deposit by October 31, 2008. UBS will also (i) fully reimburse all retail investors who sold their auction rate securities at a discount after the market failed, (ii) consent to a special, public arbitration process to resolve claims of consequential damages suffered by retail investors as a result of not being able to access their funds, and (iii) expeditiously provide liquidity solutions to all other institutional investors. In addition, UBS will pay a $75 million civil penalty to the state of New York and a $75 million civil penalty to the NASAA.

On August 7, Merrill Lynch announced that, effective January 15, 2009, and lasting until January 15, 2010, it will offer to buy at par auction rate securities sold to its retail clients. According to the Merrill Lynch press release, Merrill Lynch retail clients currently hold an estimated $12 billion in auction rate securities.

For a copy of the SEC press release regarding the Citigroup settlement, please see http://www.sec.gov/news/press/2008/2008-168.htm.  For a copy of the New York Attorney General’s press release regarding the UBS settlement, please see http://www.oag.state.ny.us/press/2008/aug/aug8a_08.html.  For a copy of the Merrill Lynch press release, please see http://www.ml.com/index.asp?id=7695_7696_8149_88278_104556_104651.

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Insurance

Maine Magistrate Judge Finds GLBA Preempts Maine Insurance Code Waiting Period Statute. On August 1, a magistrate judge for the United States District Court for the District of Maine recommended that the court grant declaratory and injunctive relief to the plaintiff insurance company and banks, finding that the Gramm-Leach-Bliley Act of 1999, 15 U.S.C. § 6701 et seq. (GLBA), preempted a section of the Maine Insurance Code, 24-A M.R.S. § 2168-B (Waiting Period Statute). TD BankNorth Ins. Agency, Inc. v. Kofman, No. 07-170 (D. Me. Aug. 1, 2008). The Waiting Period Statute prohibits a national bank and its affiliated insurance company from targeting a loan applicant with an insurance solicitation while a loan application is pending and requires that such marketing be delayed until the lender documents its decision regarding the loan application. The magistrate judge concluded that, because the Waiting Period Statute prevented or significantly interfered with the plaintiffs’ ability to engage in insurance cross-marketing activity and was more burdensome than Congress’s restriction preserved in subsection (d)(2)(B) of the GLBA, the GLBA preempted the Waiting Period Statute. In addition, certain plaintiffs that were neither national banks nor affiliates of national banks, and thus were not protected by GLBA, also were deemed not subject to the Waiting Period Statute because of a provision of Maine law invalidating any Maine law or regulation that is “preempted or declared to be invalid pursuant to applicable federal law … with respect to financial institutions authorized to do business in [Maine].” For a copy of the opinion, please see http://www.buckleykolar.com/documents/TD_Banknorth_v_Kofman.pdf.

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Litigation

Massachusetts Supreme Judicial Court Requests Amicus Briefs in Fremont Case. On August 4, the Massachusetts Supreme Judicial Court posted an amicus announcement requesting amicus curiae briefs regarding a preliminary injunction granted against Fremont Investment & Loan (Fremont) on February 27, 2008 (reported in InfoBytes Special Alert, February 27, 2008). The preliminary injunction restrains Fremont from initiating or advancing foreclosure proceedings against “presumptively unfair” residential mortgage loans owned or serviced by Fremont in Massachusetts, as well as the assignation of such loans. Briefs may be filed with the Office of the Clerk for the Commonwealth of Massachusetts, and argument is set for October 2008. For the Massachusetts Supreme Judicial Court’s amicus announcement, please see http://www.mass.gov/courts/sjc/amicus/SJC-10258.html.

Alabama Federal Court Grants Summary Judgment in Favor of Closing Agency in RESPA § 8(b) Case. A federal district court has granted summary judgment in favor of a settlement services provider in a suit alleging a violation of section 8(b) of the Real Estate Settlement Procedures Act (RESPA). Edwards v. Accredited Home Lenders, Inc., No. 07-0160 (S.D. Ala. Jul. 29, 2008). The plaintiffs obtained a mortgage loan from Accredited Home Lenders, and Lender’s First Choice Agency (Lender’s First) was the settlement services provider. At closing, Lender’s First charged the plaintiffs $88 to record the mortgage. While the fee was disclosed on the HUD-1 settlement statement, the plaintiffs asserted that the fee charged was in excess of the services actually performed, in violation of section 8(b) of RESPA. At closing, Lender’s First charged an estimated recording fee of $88, but the actual recording service cost $75.50. Lender’s First held the charge in a non-interest-bearing escrow account, and, when it discovered the overcharge, it refunded the $12.50 to the borrowers. The court found that Lender’s First was not in violation of RESPA because, by holding the charge in the non-interest-bearing escrow account, it did not “accept” money without performing any services. Further, the court noted that, under Eleventh Circuit precedent, charging such a fee would not violate RESPA § 8(b) because it would be considered an “over-charge” rather than a fee “other than for services actually performed”. Buckley Kolar represents Accredited Home Lenders, Inc. in this case. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Edwards_v_Accredited.pdf.

Maine Magistrate Judge Finds GLBA Preempts Maine Insurance Code Waiting Period Statute. On August 1, a magistrate judge for the United States District Court for the District of Maine recommended that the court grant declaratory and injunctive relief to the plaintiff insurance company and banks, finding that the Gramm-Leach-Bliley Act of 1999, 15 U.S.C. § 6701 et seq. (GLBA), preempted a section of the Maine Insurance Code, 24-A M.R.S. § 2168-B (Waiting Period Statute). TD BankNorth Ins. Agency, Inc. v. Kofman, No. 07-170 (D. Me. Aug. 1, 2008). The Waiting Period Statute prohibits a national bank and its affiliated insurance company from targeting a loan applicant with an insurance solicitation while a loan application is pending and requires that such marketing be delayed until the lender documents its decision regarding the loan application. The magistrate judge concluded that, because the Waiting Period Statute prevented or significantly interfered with the plaintiffs’ ability to engage in insurance cross-marketing activity and was more burdensome than Congress’s restriction preserved in subsection (d)(2)(B) of the GLBA, the GLBA preempted the Waiting Period Statute. In addition, certain plaintiffs that were neither national banks nor affiliates of national banks, and thus were not protected by GLBA, also were deemed not subject to the Waiting Period Statute because of a provision of Maine law invalidating any Maine law or regulation that is “preempted or declared to be invalid pursuant to applicable federal law … with respect to financial institutions authorized to do business in [Maine].” For a copy of the opinion, please see http://www.buckleykolar.com/documents/TD_Banknorth_v_Kofman.pdf.

Utah Federal Court Finds Agreement and Modification Containing Arbitration Clause Not Unconscionable. In a recent decision, a Utah federal district court compelled arbitration in a dispute brought by the plaintiff, holding that an agreement and an online modification to that agreement, containing an arbitration clause, were not unconscionable. Margae, Inc. v. Clear Link Technologics, LLC, et al., No. 2:07-CV-916 (D. Ut. June 16, 2008). The plaintiff, Margae, Inc. (Margae), entered into oral and written agreements with the defendant regarding search engine optimization and affiliate marketing services. The defendant subsequently modified the written Partner Agreement, via an online posting, to contain an arbitration clause. Margae filed suit in North Carolina state court after alleging, in part, that the defendant prevented Margae from carrying out its search engine optimization work for the defendant, that the defendant refused to pay commissions to Margae, and that the defendant used Margae’s proprietary materials without compensation or acknowledgment. The defendant sought to compel arbitration of the dispute. Margae argued that the arbitration clause was unenforceable, stating, (i) Margae did not agree to the modification of the Partner Agreement, (ii) there was no consideration regarding the modification of the Partner Agreement, and (iii) the original Partner Agreement and the modification of the Partner Agreement were unconscionable. In response, the court held that, (i) Margae agreed to the modification of the Partner Agreement when it initially agreed to be bound to modifications to the agreement, (ii) there was consideration for the modification insofar as Margae provided services to the defendant for which the defendant paid Margae, and (iii) the agreements were not unconscionable because Margae is a sophisticated corporation that was not in an inferior bargaining position, and that nothing in the contract amounted to “overreaching or oppression.” The court also reasoned that the defendant’s ability to unilaterally modify the contract did not render the contract unconscionable because Margae was adequately put on notice, which was not unduly burdensome, to check for modifications posted online. Finally, the contract’s provision that the defendant, but not Margae, could pursue equitable remedies in arbitration proceedings did not render the contract unconscionable because Margae could seek equitable remedies elsewhere, and because a court could construe the agreement to avoid inequity. The court also held that some aspects of the dispute, regarding search engine optimization, were governed by an oral agreement, not by the Partner Agreement, and did not compel the arbitration of those claims. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Margae_v_Clear_Link.pdf.

Pennsylvania Federal Court Grants Final Approval to FACTA Class Action Settlement. On August 4, a federal district court denied a motion to vacate a class settlement arising under the Fair and Accurate Credit Transaction Act (FACTA), stating that the Credit and Debit Card Receipt Clarification Act of 2007 (Act) does not provide the grounds to retroactively rescind a class action settlement. Colella v. Univ.  of Pittsburgh, No. 2:08-cv-00129 (W.D. Pa. Aug. 4, 2008). The plaintiff consumer alleged that the defendant failed to truncate credit card expiration dates on receipts from 2005 to 2008. After the parties reached a settlement, the court granted preliminary approval of a class action settlement on May 12, 2008. The defendant then moved to vacate the settlement, claiming that the cause of action had been eliminated by the Act, which, on June 3, 2008, amended FACTA to exclude expiration dates from the truncation requirement. The court held the Act does not provide the grounds to rescind an otherwise binding class action settlement agreement, and the court granted final approval of the settlement. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Colella_v_U_of_P.pdf.

Pennsylvania Federal Court Compels Arbitration, Holds FCRA Claims Are Not Excluded. In a recent case, a Pennsylvania federal district court granted a defendant lender’s motion to compel arbitration, holding that the plaintiff could not prove Congress intended to exclude claims brought under the Fair Credit Reporting Act (FCRA) from arbitration. Cronin v. CitiFinancial Services, Inc., No. 08-1523, 2008 WL 2944869 (E.D. Pa. Jul. 25, 2008). CitiFinancial Services, Inc. (Citi) lent the plaintiff approximately $7,000. When Citi reported the loan to credit agencies, it reported the full accelerated balance of the loan, including interest, instead of the unpaid principal balance. The plaintiff claimed that, as a result, he was denied credit and suffered adverse action on several of his other credit accounts and sued, alleging violations of FCRA. Citi filed a motion to compel arbitration pursuant to the arbitration clause in the loan agreement. Plaintiff argued that the agreement was invalid because, among other things, the arbitration agreement does not apply to his FCRA claims because those claims were not contemplated at the time of contract formation and because arbitration conflicts with the goals of FCRA. The court rejected this argument, stating that the court applies a presumption of arbitrability which may be overcome only by a specific provision excluding a particular claim from arbitration. To the contrary, the court found that the provision included any claim related to a federal or state statute or regulation, which includes FCRA. The court also found that the plaintiff failed to show that Congress intended to preclude FCRA claims from arbitration, either through statutory text, legislative history, or inherent conflicts of law. In addition, the court rejected the plaintiff’s claims that the agreement was invalid because (i) it is a contract of adhesion, (ii) it lacked mutuality of obligation; (iii) the arbitration provision imposed unreasonable costs on him, and (iv) the arbitrators selected in the provision (the American Arbitration Association and the National Arbitration Forum) are not neutral. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Cronin_v_Citi.pdf.

Indiana Federal Court Grants Summary Judgment to Creditor in FCBA Case. On July 28, the U.S. District Court for the Southern District of Indiana granted a defendant creditor’s motion for summary judgment in a Fair Credit Billing Act (FCBA) case, holding that only timely notice by a consumer of a billing error will trigger a creditor’s obligations under the FCBA. Nguyen v. USAA Federal Savings Bank, No. 1:07-CV-0202, 2008 WL 2945616 (S.D. Ind. July 28, 2008). The plaintiff alleged that the defendant creditor violated the FCBA by failing to respond to her notice of billing error. Under the FCBA, a written notice from a consumer regarding a billing error must be received by the creditor no later than 60 days after the creditor transmitted the first periodic statement which reflects the alleged billing error. If such a notice of billing error is received by the creditor within 60 days, the FCBA requires the creditor to send written acknowledgment to the consumer within 30 days that the notice was received, and, not later than two complete billing cycles after receipt of the notice, to send a written explanation or clarification to the consumer after conducting an investigation. In this case, the defendant creditor failed to remove the plaintiff’s name from a joint account in September 2000. The first periodic statement that reflected the error was sent in October 2000. The plaintiff did not send the notice of billing error until January 2006, approximately five years after the defendant’s failure to remove her from the account. As such, the defendant creditor argued that the notice of billing error by the consumer was untimely and, as a result, did not trigger its obligation to respond or conduct any investigation. The court agreed, reasoning that the U.S. Code and the Code of Federal Regulations both clearly state that only timely notice of a billing error will trigger a creditor’s obligations under the FCBA. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Nguyen_v_USAA.

Texas Federal Court Denies Summary Judgment Motions in FDCPA Case. On July 21, a federal district court in Texas denied a defendant’s motion for summary judgment and a plaintiff’s cross-motion for summary judgment in a case arising under, in part, the Fair Debt Collection Practices Act (FDPCA), finding that the question of whether a debt is considered “commercial” or “consumer” must be determined by a jury. Hetherington v. Allied Intl. Credit Corp., et al., No. H-07-2104 (S.D. Tex. July 21, 2008). The plaintiff maintained a sole proprietorship bank account used for business and personal expenses. Subsequently, a bank returned a check, made for personal car repairs, drawn from the account. The plaintiff’s bank closed the account with a negative balance, and the debt was assigned to the defendant for collection. The plaintiff argued that the debt, for a personal car repair, and drawn from a bank account established for personal convenience, was a consumer transaction falling under the FDCPA. The defendant argued that the debt arose from an account established for business purposes, and the collection of the debt, thus, did not fall under the FDCPA. The court held that the determination of whether the debt was commercial or consumer was an issue for a jury, reasoning that the FDCPA defines “debt” as arising “primarily for personal family, or household purposes,” and that whether a debt is characterized as such must be examined by a jury in light of the “transaction as a whole.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/Hetherington_v_Allied.pdf.

Connecticut AG Sues Countrywide. On August 6, the Connecticut Attorney General filed suit against Countrywide Financial, citing violations of the Connecticut Unfair Trade Practices Act (CUTPA) and state banking laws. The suit is one of several recently brought by state Attorneys General against Countrywide. The Connecticut Attorney General complaint alleges that Countrywide pushed consumers into deceptive loan products and renegotiations, and charged homeowners unjustified legal fees. Specifically, the suit alleges, among other things, that Countrywide violated CUTPA and state banking laws by, (i) encouraging consumers to take out loans which the company knew or should have known were not affordable, (ii) improperly inflating consumers’ incomes to qualify them for loans they otherwise could not have received, (iii) providing loans with different and more expensive terms than consumers were initially promised, (iv) providing variable rate loans to consumers with the assurance they could refinance before interest rates reset, only to later refuse to do so, (v) imposing excessive and inaccurate legal fees on Connecticut consumers facing foreclosure to reinstate their loans, and (viii) requiring loan modifications and repayment plans that were unsustainable, unaffordable, or unsuitable. The suit seeks civil penalties of up to $100,000 per violation of state banking laws and up to $5,000 per violation of state consumer protection laws, restitution to consumers, and an injunction against the allegedly deceptive practices. For a copy of the complaint, please see http://www.ct.gov/ag/lib/ag/consumers/countrywidelawsuit.pdf.

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E-Financial Services

DOJ Charges 11 in Theft of Over 40 Million Credit Card Numbers. On August 5, federal prosecutors brought charges against 11 individuals in what is believed to be the largest and most complex hacking and identity theft ring ever prosecuted by the Department of Justice (DOJ). The defendants, arrested in Europe and the United States, were charged with conspiracy, computer intrusion, fraud, and identity theft, among other crimes. The perpetrators allegedly hacked into the computer networks of several major retailers by “wardriving,” a method of using electronic equipment to scan for security holes in wireless networks, and then installing “sniffer” programs to capture over 40 million credit card numbers, passwords, and other account information. Once the data was downloaded, the perpetrators allegedly concealed the information in encrypted servers, then “cashed out” the data through a complex laundering scheme involving anonymous Internet-based currencies and foreign bank accounts. For a copy of the DOJ’s press release, please see http://www.usdoj.gov/opa/pr/2008/August/08-ag-689.html.

Utah Federal Court Finds Agreement and Modification Containing Arbitration Clause Not Unconscionable. In a recent decision, a Utah federal district court compelled arbitration in a dispute brought by the plaintiff, holding that an agreement and an online modification to that agreement, containing an arbitration clause, were not unconscionable. Margae, Inc. v. Clear Link Technologics, LLC, et al., No. 2:07-CV-916 (D. Ut. June 16, 2008). The plaintiff, Margae, Inc. (Margae), entered into oral and written agreements with the defendant regarding search engine optimization and affiliate marketing services. The defendant subsequently modified the written Partner Agreement, via an online posting, to contain an arbitration clause. Margae filed suit in North Carolina state court after alleging, in part, that the defendant prevented Margae from carrying out its search engine optimization work for the defendant, that the defendant refused to pay commissions to Margae, and that the defendant used Margae’s proprietary materials without compensation or acknowledgment. The defendant sought to compel arbitration of the dispute. Margae argued that the arbitration clause was unenforceable, stating, (i) Margae did not agree to the modification of the Partner Agreement, (ii) there was no consideration regarding the modification of the Partner Agreement, and (iii) the original Partner Agreement and the modification of the Partner Agreement were unconscionable. In response, the court held that, (i) Margae agreed to the modification of the Partner Agreement when it initially agreed to be bound to modifications to the agreement, (ii) there was consideration for the modification insofar as Margae provided services to the defendant for which the defendant paid Margae, and (iii) the agreements were not unconscionable because Margae is a sophisticated corporation that was not in an inferior bargaining position, and that nothing in the contract amounted to “overreaching or oppression.” The court also reasoned that the defendant’s ability to unilaterally modify the contract did not render the contract unconscionable because Margae was adequately put on notice, which was not unduly burdensome, to check for modifications posted online. Finally, the contract’s provision that the defendant, but not Margae, could pursue equitable remedies in arbitration proceedings did not render the contract unconscionable because Margae could seek equitable remedies elsewhere, and because a court could construe the agreement to avoid inequity. The court also held that some aspects of the dispute, regarding search engine optimization, were governed by an oral agreement, not by the Partner Agreement, and did not compel the arbitration of those claims. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Margae_v_Clear_Link.pdf.

ITA Announces Certification Mark for U.S.-European Union Safe Harbor Framework. On July 31, the Commerce Department’s International Trade Administration (ITA) announced the development of a certification mark for use on corporate websites signifying self-certified compliance with the provisions of the U.S.-European Union Safe Harbor Framework. Participating U.S. companies must follow instructions developed by the ITA located at http://www.export.gov/safeharbor/Safe_Harbor_Instructions.asp.  For a copy of the announcement, please see http://www.export.gov/safeharbor/Safe_Harbor_Announcement.asp.

University of Michigan Study Surveys Security Flaws of Bank Web Sites. Recently, a University of Michigan study analyzed the security of 214 U.S. financial institution websites. The study, titled “Analyzing Websites for User-Visible Security Design Flaws,” used data from 2006 to assess five security design flaws, (i) forwarding users on a secure page to new page from a different domain without notifying the user, (ii) placing logins to a secure page on insecure pages, (iii) placing contact information or security advice on insecure pages, (iv) allowing users to use e-mail addresses and social security numbers as user names, and allowing users to select weak passwords, and (v) e-mailing personal information via insecure e-mail. The study found that 76% of the sites surveyed contained at least one of these design flaws and recommends web developers employ methods to better detect website secure usability design flaws. For a copy of the study, please see http://cups.cs.cmu.edu/soups/2008/proceedings/p117Falk.pdf.

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Privacy/Data Security

DOJ Charges 11 in Theft of Over 40 Million Credit Card Numbers. On August 5, federal prosecutors brought charges against 11 individuals in what is believed to be the largest and most complex hacking and identity theft ring ever prosecuted by the Department of Justice (DOJ). The defendants, arrested in Europe and the United States, were charged with conspiracy, computer intrusion, fraud, and identity theft, among other crimes. The perpetrators allegedly hacked into the computer networks of several major retailers by “wardriving,” a method of using electronic equipment to scan for security holes in wireless networks, and then installing “sniffer” programs to capture over 40 million credit card numbers, passwords, and other account information. Once the data was downloaded, the perpetrators allegedly concealed the information in encrypted servers, then “cashed out” the data through a complex laundering scheme involving anonymous Internet-based currencies and foreign bank accounts. For a copy of the DOJ’s press release, please see http://www.usdoj.gov/opa/pr/2008/August/08-ag-689.html.

Pennsylvania Federal Court Grants Final Approval to FACTA Class Action Settlement. On August 4, a federal district court denied a motion to vacate a class settlement arising under the Fair and Accurate Credit Transaction Act (FACTA), stating that the Credit and Debit Card Receipt Clarification Act of 2007 (Act) does not provide the grounds to retroactively rescind a class action settlement. Colella v. Univ.  of Pittsburgh, No. 2:08-cv-00129 (W.D. Pa. Aug. 4, 2008). The plaintiff consumer alleged that the defendant failed to truncate credit card expiration dates on receipts from 2005 to 2008. After the parties reached a settlement, the court granted preliminary approval of a class action settlement on May 12, 2008. The defendant then moved to vacate the settlement, claiming that the cause of action had been eliminated by the Act, which, on June 3, 2008, amended FACTA to exclude expiration dates from the truncation requirement. The court held the Act does not provide the grounds to rescind an otherwise binding class action settlement agreement, and the court granted final approval of the settlement. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Colella_v_U_of_P.pdf.

Pennsylvania Federal Court Compels Arbitration, Holds FCRA Claims Are Not Excluded. In a recent case, a Pennsylvania federal district court granted a defendant lender’s motion to compel arbitration, holding that the plaintiff could not prove Congress intended to exclude claims brought under the Fair Credit Reporting Act (FCRA) from arbitration. Cronin v. CitiFinancial Services, Inc., No. 08-1523, 2008 WL 2944869 (E.D. Pa. Jul. 25, 2008). CitiFinancial Services, Inc. (Citi) lent the plaintiff approximately $7,000. When Citi reported the loan to credit agencies, it reported the full accelerated balance of the loan, including interest, instead of the unpaid principal balance. The plaintiff claimed that, as a result, he was denied credit and suffered adverse action on several of his other credit accounts and sued, alleging violations of FCRA. Citi filed a motion to compel arbitration pursuant to the arbitration clause in the loan agreement. Plaintiff argued that the agreement was invalid because, among other things, the arbitration agreement does not apply to his FCRA claims because those claims were not contemplated at the time of contract formation and because arbitration conflicts with the goals of FCRA. The court rejected this argument, stating that the court applies a presumption of arbitrability which may be overcome only by a specific provision excluding a particular claim from arbitration. To the contrary, the court found that the provision included any claim related to a federal or state statute or regulation, which includes FCRA. The court also found that the plaintiff failed to show that Congress intended to preclude FCRA claims from arbitration, either through statutory text, legislative history, or inherent conflicts of law. In addition, the court rejected the plaintiff’s claims that the agreement was invalid because (i) it is a contract of adhesion, (ii) it lacked mutuality of obligation; (iii) the arbitration provision imposed unreasonable costs on him, and (iv) the arbitrators selected in the provision (the American Arbitration Association and the National Arbitration Forum) are not neutral. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Cronin_v_Citi.pdf.

ITA Announces Certification Mark for U.S.-European Union Safe Harbor Framework. On July 31, the Commerce Department’s International Trade Administration (ITA) announced the development of a certification mark for use on corporate websites signifying self-certified compliance with the provisions of the U.S.-European Union Safe Harbor Framework. Participating U.S. companies must follow instructions developed by the ITA located at http://www.export.gov/safeharbor/Safe_Harbor_Instructions.asp.  For a copy of the announcement, please see http://www.export.gov/safeharbor/Safe_Harbor_Announcement.asp.

University of Michigan Study Surveys Security Flaws of Bank Web Sites. Recently, a University of Michigan study analyzed the security of 214 U.S. financial institution websites. The study, titled “Analyzing Websites for User-Visible Security Design Flaws,” used data from 2006 to assess five security design flaws, (i) forwarding users on a secure page to new page from a different domain without notifying the user, (ii) placing logins to a secure page on insecure pages, (iii) placing contact information or security advice on insecure pages, (iv) allowing users to use e-mail addresses and social security numbers as user names, and allowing users to select weak passwords, and (v) e-mailing personal information via insecure e-mail. The study found that 76% of the sites surveyed contained at least one of these design flaws and recommends web developers employ methods to better detect website secure usability design flaws. For a copy of the study, please see http://cups.cs.cmu.edu/soups/2008/proceedings/p117Falk.pdf.

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Credit Cards

Federal Reserve Publishes Examination Procedures Regarding Servicemembers Consumer Credit Provisions. On July 31, the Federal Reserve Board (FRB) published a letter stating that the Task Force on Consumer Compliance of the Federal Financial Institutions Examination Counsel recently approved examination procedures for assessing compliance with 32 C.F.R. Part 232, “Limitations on Terms of Consumer Credit Extended to Service Members and Dependents” (as reported in bill form in InfoBytes, Aug. 31, 2007). The examination procedures include, (i) determining whether the creditor being examined offers or provides consumer credit covered by the federal regulations, (ii) determining the means by which the creditor complies with the regulations, (iii) determining the extent and adequacy of the training received by those responsible for ensuring compliance with the regulations, and (iv) determining whether the institution’s internal controls are sufficient to ensure compliance with the regulations. For a copy of the FRB’s letter, please see http://www.federalreserve.gov/boarddocs/caletters/2008/0804/caltr0804.htm. For a copy of the examination procedures, please see http://www.federalreserve.gov/boarddocs/caletters/2008/0804/08-04_attachment.pdf.

DOJ Charges 11 in Theft of Over 40 Million Credit Card Numbers. On August 5, federal prosecutors brought charges against 11 individuals in what is believed to be the largest and most complex hacking and identity theft ring ever prosecuted by the Department of Justice (DOJ). The defendants, arrested in Europe and the United States, were charged with conspiracy, computer intrusion, fraud, and identity theft, among other crimes. The perpetrators allegedly hacked into the computer networks of several major retailers by “wardriving,” a method of using electronic equipment to scan for security holes in wireless networks, and then installing “sniffer” programs to capture over 40 million credit card numbers, passwords, and other account information. Once the data was downloaded, the perpetrators allegedly concealed the information in encrypted servers, then “cashed out” the data through a complex

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