InfoBytes, December 11, 2009
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Miscellany
- Mortgages
- Banking
- Consumer Finance
- Insurance
- Litigation
- Privacy/Data Security
- Credit Cards
Federal Issues
House Passes Financial Overhaul Bill in Close Vote. On December 11, the U.S. House of Representatives passed (223-202) H.R. 4173, the “Wall Street Reform and Consumer Protection Act,” a bill that would comprehensively reform regulation of the financial services industry. As passed, the bill combines the various pieces of legislation that were considered and passed out of the House Financial Services Committee and the House Energy and Commerce Committee this fall. The legislation includes significant reforms to monitor systemic risk, improve stability of the financial markets, establish and administer a new agency, the Consumer Financial Protection Agency, that will be responsible for regulation and enforcement of consumer protection laws, and reform laws governing capital markets and credit reporting agencies. During consideration of the bill in the House, several new amendments were approved, including new language that strengthens federal preemption of state laws for national banks and their operating subsidiaries, as compared to the original legislation reported out of the House Financial Services Committee. Further, the House voted against an amendment that would have permitted bankruptcy judges to modify (“cramdown”) mortgages during Chapter 13 bankruptcy proceedings. An in-depth review of the bill will be provided in a forthcoming BuckleySandler Regulatory Restructuring Report. For more information about the bill, please see http://www.house.gov/apps/list/press/financialsvcs_dem/presscfpa_121109.shtml.
HUD Proposes SAFE Act Minimum Standards. On December 10, the U.S. Department of Housing and Urban Development (HUD) released its proposal setting forth minimum standards for state laws that effect the requirements of the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act). The proposal seeks to clarify and interpret ambiguous or undefined terms contained in the SAFE Act, such as “engage in the business of a loan originator,” “take an application,” and “offering or negotiating.” In addition, HUD has proposed procedures for determining state compliance with the SAFE Act licensing and registration system and detailed how it will respond if HUD finds that a state has failed to comply. The proposal also includes minimum requirements for administering the Nationwide Mortgage Licensing System and Registry and details HUD enforcement authority in the event it is required to operate a back-up state licensing system. The proposal is subject to a 60-day comment period following publication in the Federal Register. For a copy of the proposal, please see http://www.buckleysandler.com/SAFE_PR_1209.pdf.
OTS Issues Letter Regarding Correction to Credit CARD Act. On December 9, the Office of Thrift Supervision (OTS) issued a letter to notify OTS-regulated institutions that, under a November 6, 2009 technical correction to the Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act, the requirement that a creditor may not treat a payment as late for any purpose unless the creditor has adopted reasonable procedures designed to ensure that each periodic statement is mailed or delivered to the consumer at least 21 days before the payment due date applies only to credit card accounts. Prior to the change, the provision applied to all open-end credit accounts, including home equity lines of credit. The letter reminds creditors that this change does not affect current requirements for open-end credit accounts, including (i) requiring creditors that provide a grace period permitting consumers to repay an open end loan without incurring a finance charge for a period of time after payment is due to provide such a grace period for at least 21 days, and (ii) requiring creditors to transmit periodic statements to consumers at least 21 days before a payment is due. For a copy of the letter, please see http://files.ots.treas.gov/25328.pdf.
FHA Suspends Mortgage Broker for Allegedly Overcharging Borrowers. On December 7, the Federal Housing Administration (FHA) announced that it is suspending Equitable Trust Mortgage (ETM), a Baltimore-based broker, for allegedly charging borrowers unauthorized broker and loan origination fees. The suspension prevents ETM from originating and underwriting new FHA-insured mortgages. Under its current rules, the FHA caps the total amount of fees on a loan to 1% of the mortgage amount. The FHA claims that ETM violated this restriction by charging 37 borrowers both a broker fee and a 1% origination fee. Additionally, the U.S. Department of Housing and Urban Development (HUD) conducted an investigation through its Mortgagee Review Board (MRB). This investigation uncovered that a substantially greater percentage of minority borrowers (68%) were charged these unauthorized fees and that in nearly 57% of cases ETM improperly disclosed its loan origination fees and yield spread premiums on the borrower’s Good Faith Estimate (GFE). The MRB also found that ETM’s default rate greatly exceeded the national average. As a result of these findings, the FHA suspended EMT’s brokering authority for a minimum of six months and HUD’s Office of Inspector General has launched a subsequent investigation into ETM’s lending practices. ETM may appeal its suspension by submitting a written request for a hearing before an Administrative Law Judge within 30 days. For a copy of HUD’s press release regarding the matter, please see http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2009/HUDNo.09-226.
FHA Adopts Dual Purpose Appraisal Form. On December 7, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2009-51 to announce the Federal Housing Administration’s (FHA’s) adoption of the Appraisal Update and/or Completion Report (Fannie Mae Form 1004D/Freddie Mac Form 442/March 2005). The new form serves a dual purpose. Part A of the form allows an FHA appraiser to extend (i) the expiration date on his/her original appraisal report when a lender opts not to order a new report, and (ii) the validity period of an existing appraisal for new construction that is incomplete. Part B of the form allows any FHA-approved appraiser to report the completion of a repair and/or the satisfaction of requirements and conditions noted in an original appraisal report referenced in the header of the Summary Appraisal Update and/or Completion Report. The new form goes into effect for all case number assignments beginning January 1, 2010. For a copy of Mortgagee Letter 2009-51, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-51ml.pdf.
DOJ Settles False Claims Act Charge Against Mortgage Underwriter. On December 10, the U.S. Department of Justice (DOJ) settled mortgage fraud allegations with a New York-based mortgage underwriter, Robert Corp, who allegedly violated the federal False Claims Act. The DOJ filed suit in May 2008, alleging that the underwriter made false statements to the U.S. Department of Housing and Urban Development (HUD) on an application for government insurance of a mortgage loan used to refinance the existing debt of Brylin Hospitals. According to the DOJ, HUD was required to pay more in mortgage insurance claims because the underwriter inflated the value of the existing debt to obtain a larger refinance loan. Under the settlement, the underwriter will pay the United States $679,000. For a copy of the press release, please see http://www.justice.gov/opa/pr/2009/December/09-civ-1317.html.
Fed Issues Guidance on Applicability of Adverse Action Notices to Loan Modification Requests. On December 4, the Federal Reserve Board issued guidance that concludes that, under certain circumstances, adverse action notices under Regulation B (the Equal Credit Opportunity Act) are required for mortgage loan modifications, including under the federal Making Home Affordable Modification Program (HAMP). The letter provides a four-part analysis to determine if there is (i) an “extension of credit,” (ii) an “application,” (iii) an “adverse action” on the application, and (iv) a borrower delinquency or default on the loan. Using a hypothetical HAMP modification, the letter concludes that (i) the extension of the right to defer payment qualifies as an “extension of credit,” (ii) where a borrower submits “sufficient information” for the servicer to evaluate the borrower for a modification, it constitutes an “application” for an extension of credit, (iii) if a servicer evaluates a borrower’s information according to HAMP’s guidelines and declines the request, then the servicer has taken an adverse action, and (iv) adverse action notices are required for borrowers whose mortgage loan is not currently delinquent or in default. Consequently, under this guidance, servicers (including HAMP servicers) must provide adverse action notices to borrowers who are not yet delinquent or in default, and who submit sufficient information to evaluate for a modification, but who are not approved for a modification. For a copy of the letter, please see http://www.federalreserve.gov/boarddocs/caletters/2009/0913/caltr0913.htm.
FTC Halts Telemarketers Hawking Interest-Rate Reduction Program. On December 8, the Federal Trade Commission (FTC) unanimously voted to bring complaints against three companies that allegedly violated the FTC Do Not Call Registry by making “robocalls” to sell what the FTC claims were worthless credit-card interest-rate reduction programs for up-front fees of as much as $1,495. The lawsuits allege, among other things, that the companies (i) made deceptive sales pitches, (ii) called consumers whose numbers appeared on the Do Not Call Registry, (ii) masked their caller ID information, (iv) failed to identify themselves, (v) failed to identify the purpose of the call and the nature of the goods or services being sold, and (vi) failed to make required disclosures. In each case, at the FTC’s request, the court has issued an order temporarily halting the robocalls pending trial. For a copy of the press release, please see http://www.ftc.gov/opa/2009/12/robocall.shtm. For a copy of the complaints, please see http://www.ftc.gov/os/caselist/0923183/091208dynamiccmpt.pdf, http://www.ftc.gov/os/caselist/0923190/091208jpmcmpt.pdf, and http://www.ftc.gov/os/caselist/0923118/091208ertcmpt.PDF.
State Issues
Florida Law Requires Loan Mod Companies to Obtain License. On December 7, the Florida Office of Financial Regulations issued a reminder that, as of January 1, 2010, individuals and companies providing loan modification services to Florida borrowers must maintain an active Florida mortgage lender, mortgage broker or correspondent mortgage lender license. The requirement is part of a law signed by Florida Governor Charlie Crist on June 29, 2009 that also provided for the licensing of mortgage loan originators under the Nationwide Mortgage Licensing System, as required under the federal Secure and Fair Enforcement for Mortgage Licensing Act (reported in InfoBytes, July 3, 2009). Under the new law, loan modification service providers remain prohibited from charging up-front fees for loan modification services. The law also subjects unlicensed persons or entities that provide loan modification services to Florida borrowers to criminal penalties. For a copy of the press release, please see http://www.flofr.com/PressReleases/ViewMediaRelease.asp?ID=3356; for a copy of the bill, please see http://www.flsenate.gov/data/session/2009/Senate/bills/billtext/pdf/s2226.pdf.
U.S. Attorney Indicts Mortgage Lender for $14.6 Million Mortgage Fraud Scheme in Pennsylvania. On December 8, the U.S. Attorney for the Eastern District of Pennsylvania announced an indictment against the three owners of Axxium Mortgage, Inc., and their attorneys, for allegedly making at least 35 fraudulent mortgage loans in the state of Pennsylvania. According to the indictment, the defendants (i) targeted financially-distressed homeowners facing foreclosure, (ii) falsely promised them help in saving their homes, (iii) engaged in real estate transactions with straw purchasers, and (iv) obtained dozens of fraudulent mortgages. The defendants allegedly obtained the new mortgage loans by submitting false documents to mortgage lenders and lying about the straw purchaser’s financial information. In some instances, bankruptcy proceedings were fraudulently started by defendants on behalf of distressed homeowners to delay foreclosure while the straw purchaser’s paperwork was completed. The Federal Bureau of Investigations has charged the defendants with conspiracy to commit mail and wire fraud, mail and wire fraud, and conspiracy to commit money laundering; one of the defendants is additionally charged with bankruptcy fraud. For a copy of the press release, please see http://www.banking.state.pa.us/banking/lib/banking/12-809_axxium_indictment_u.s._atty_news_rls.pdf.
Courts
Eleventh Circuit Finds No RESPA Violation for Lender’s Yield Spread Premium Payment to Broker. On December 4, the U.S. Court of Appeals for the Eleventh Circuit held that a lender did not violate the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA) by paying a yield spread premium to a broker, where the lender received value from the broker’s services and where no evidence was presented that the total compensation paid to the broker was unreasonably high for the services performed. Sutton v. Countrywide Home Loans, Inc., No. 09-11149, 2009 WL 4458526 (11th Cir. Dec. 4, 2009). In Sutton, the plaintiff borrower alleged that the broker who arranged his refinance loan committed certain “wrongful, fraudulent, and predatory” acts in arranging the loan, such as over-reporting his monthly salary. In finding that the defendant lender’s payment of a yield spread premium to this broker did not violate RESPA, the court rejected the borrower’s argument that the services performed by the broker were not actual services because they were part of a scheme to place the plaintiff in an unsuitable loan. The court similarly rejected the borrower’s argument that the total compensation paid to the broker was unreasonable in light of the fact that the services performed by the broker ultimately left the plaintiff with an unsuitable loan. According to the court, RESPA’s anti-kickback provisions prohibit lenders from compensating brokers for referrals; they are not designed for evaluating globally whether a broker has provided “fair, honest, and competent service to a borrower.” For a copy of the opinion, please see http://www.ca11.uscourts.gov/unpub/ops/200911149.pdf.
California State Court Holds Banks May Obtain Alternate Forms of Identification in Lieu of Social Security Numbers from Foreign Nationals to Open a Promotional Credit Card Account. On December 8, the Third Appellate District of the Court of Appeal of California held that a bank may obtain alternate forms of identification in lieu of a Social Security Number (SSN) from foreign nationals to open certain credit card accounts. Howe v. Bank of America, N.A., No. G04669, 2009 WL 4598094 (Cal. App. Ct. Dec. 8, 2009). In Howe, the plaintiffs’ putative class action against Bank of America, Mexicana Airlines and Visa International Service Association (collectively, Bank of America) alleged discrimination under the California Unruh Civil Rights Act (UCRA) for requiring U.S. citizens to provide an SSN to open a promotional credit card account, but allowing foreign nationals to open the same type of account with alternate forms of identification (e.g., a passport, nonresident alien Border Crossing Card, nonimmigrant Visa and Border Crossing Card, or a Mexican Matricula Card). The court explained that the UCRA “does not entirely prohibit businesses from drawing distinctions on the basis of the protected classifications or personal characteristics; rather, ‘[t]he objective of the Act is to prohibit businesses from engaging in unreasonable, arbitrary or invidious discrimination.’” The court determined that Bank of America did not act arbitrarily under its minimum identification policy because it was complying with the requirements promulgated under the USA Patriot Act that expressly require institutions to obtain SSNs from U.S. citizens, but not from foreign nationals. The court also noted that, although the Patriot Act regulation establishes only minimum standards, the bank would have exposed itself to a discrimination lawsuit if it had extended the minimum identification requirements to require an SSN from foreign nationals. Lastly, the court concluded that “[b]ecause Bank of America’s credit card program merely applied federally imposed minimum identification standards to all applicants for its accounts, whether U.S. citizens or foreign nationals, we conclude that practice bore a reasonable relationship to Bank of America’s commercial objectives and was consequently valid on its face.” For a copy of the opinion, please see http://www.buckleysandler.com/Howe_v_BoA.pdf.
Indiana Federal Court Holds Servicer’s Work-Out Letters Not Debt Collection Demands. On November 20, the U.S. District Court for the Northern District of Indiana held that a mortgage servicer’s work-out letters to delinquent borrowers were not “in connection with the collection of any debt” under the federal Fair Debt Collection Practices Act (FDCPA). Gillespie v. Chase Home Finance, LLC, No. 3:09-CV-1912009, WL 4061428 (N.D. Ind. Nov. 20, 2009). In Gillespie, the borrowers – who had filed suit to rescind their mortgages and were represented by counsel – sued their mortgage servicer for violating the FDCPA after the servicer sent them letters regarding the availability of loan work-out options. The servicer argued that the letters did not demand payment and therefore were not “in connection with the collection of any debt.” The court agreed with the servicer, finding that the letters “were in the nature of providing information as opposed to being in the nature of a debt collection demand.” The borrowers argued that the Federal Trade Commission’s March 18, 2008 FDCPA advisory opinion requires communications informing debtors of work-out options to comply with the FDCPA, but the court found that the opinion “did not purport to address when a communication is in connection with the collection of any debt.” The court also concluded that the servicer’s inclusion of an FDCPA “Miranda” notice in one of the letters “did not alter the nature of the communication or the information provided in the letter.” For a copy of the opinion, please see http://www.buckleysandler.com/Gillespie_v_CHF.pdf.
California State Court Holds Payoff of Preexisting Debt, Prepayment Penalties Properly Excluded from HOEPA Finance Charge Calculation. On November 30, the Third Appellate District of the Court of Appeal of California held that a plaintiff borrower’s loan was not subject to the Home Ownership and Equity Protection Act of 1994 (HOEPA) because the payoff amount of a preexisting consumer debt and prepayment penalties incurred from the previous mortgage loan were properly excluded from the finance charge calculation. Holbert v. Fremont Investment & Loan, No. C058026, 2009 WL 4219511 (Cal. App. Ct. Nov. 30, 2009). In Holbert, the borrower sued her lender alleging, among other things, that the lender did not comply with HOEPA’s special disclosure requirements. The trial court dismissed the HOEPA claim, as well as other claims that were based on underlying violations of HOEPA, finding that the loan was not subject to HOEPA. The borrower appealed, arguing that the loan was subject to HOEPA because (i) the payoff of a separate consumer loan with the proceeds of her refinance loan, (ii) the prepayment penalty she incurred in refinancing her previous mortgage loan, and (iii) the notary fees should have been considered finance charges associated with the new loan that, when added to the other finance charges, would bring the total finance charges above the 8 percent HOEPA threshold. The appeals court affirmed the trial court. Regarding the payoff of a previous consumer loan, the appellate court held that “the payoff of a preexisting debt, whether secured or unsecured, is not the creation of a new financial obligation.” Thus, the payoff of the preexisting consumer debt from proceeds of the refinance loan was merely replacing indebtedness by an indebtedness of equal value to a new lender, and therefore was properly excluded from the finance charge. With respect to the prepayment penalty, the appellate court held that such a charge was properly excluded from the finance charge because it was not a charge associated with the refinance, but rather associated with the prior loan and was required to be disclosed to plaintiff by the prior lender. Finally, with respect to the notary fees, the court noted that Truth in Lending regulations exclude such fees from the finance charge when they are reasonable and not paid to an affiliate of the lender, but found that even if the notary fees were included, the finance charge would not exceed HOEPA’s 8 percent threshold. For a copy of the opinion, please see http://www.buckleysandler.com/Holbert_v_Fremont.pdf.
Massachusetts Federal Court Holds FCRA Does Not Preempt Massachusetts Inaccurate Reporting Claim. On December 1, the U.S. District Court for the District of Massachusetts denied a furnisher’s motion to dismiss claims of inaccurate credit reporting brought under Massachusetts state laws that allow claims against furnishers of credit information that fail to follow reasonable procedures to ensure that information given to consumer reporting agencies is accurate. Catanzaro v. Experian Information Solutions, Inc., Civil Action 09-105550, 2009 WL 4363207 (D. Mass. Dec. 1, 2009). The consumer claimed that the defendants – furnishers of credit information a consumer reporting agency – violated the Fair Credit Reporting Act (FCRA) and Massachusetts state law in connection with furnishing and reporting allegedly incorrect credit report information. In rejecting the furnisher’s argument that FCRA preempted the state law claims, the court noted that the Massachusetts requirement to follow reasonable procedures to provide information to a consumer reporting agency that is accurate and complete, M.G.L. c. 93, § 54A(a), is one of two state statutory provisions that is expressly excluded from FCRA’s preemption provision. Although the Massachusetts provision allowing a private right of action, M.G.L. c. 93, § 54A(g), is not mentioned in the FCRA carve-out from preemption, the court held that § 54A(g) is similarly not preempted by the FCRA, as it is “simply a mechanism allowing private litigants to enforce a state standard for credit reporting that Congress deliberately chose not to preempt.” The court held, however, that the consumer’s additional state law claims were in fact preempted by the FCRA, and granted defendants’ motion to dismiss those claims. For a copy of the opinion, please see http://www.buckleysandler.com/Catanzaro_v_Experian.pdf.
D.C. Federal Court Releases Opinion Holding Attorneys Are Not Creditors Under FTC’s Red Flag Rule. On December 1, the U.S. District Court for the District of Columbia issued an opinion explaining its October 29, 2009 Bench Order that the Federal Trade Commission (FTC) overstepped its statutory authority when it attempted to apply its Red Flags Rule (the Rule) to attorneys. American Bar Ass’n v. Federal Trade Commission, No. 09-cv-01636, 2009 WL 4289505 (D.D.C. Dec. 1, 2009). The court declined to afford the Rule Chevron deference because “[g]iven the plain-meaning and statutorily assigned definitions of the terms interpreted by the [FTC], the aim of the legislation, and the ill-adapted application of these terms to the legal profession,” Congress did not intend to include lawyers under the definition of “creditor.” The court held that applying the Rule to attorneys is not a “permissible” interpretation because (i) the FTC’s definition of “creditor” is not supported by the plain language of the Equal Credit Opportunity Act and the Fair and Accurate Credit Transactions Act (and applicable case law), and (ii) attorneys did not receive sufficient notice, as required by the Administrative Procedures Act, because the FTC failed to establish that identity theft is a problem in the attorney-client context. For a copy of the opinion, please see http://www.buckleysandler.com/ABA_v_FTC_120109.pdf.
Firm News
Andrew Sandler has been selected to receive a Good Apple Award at the Louisiana Appleseed’s Good Apple Gala for his vision aimed at expanding access to financial institutions for Latino immigrants and his leadership in bringing together Louisiana banks and Federal banking regulators to discuss barriers to access and solutions.
Louisiana Appleseed is part of a nationwide nonprofit organization that uncovers and corrects injustices and barriers to opportunity through legal, legislative and market-based structural reform. Working with its extensive pro bono network, Louisiana Appleseed identifies, researches, and analyzes social injustices in order to make specific recommendations and advocate for effective solutions to deep-seated structural problems.
The Gala will be held Thursday, January 21, 2010 at Basin St. Station in New Orleans.
For more information about Louisiana Appleseed, please visit their website - http://louisiana.appleseednetwork.org/.
Jerry Buckley, Ben Klubes, Andrew Sandler, and Jonice Gray Tucker were recently included in the Washingtonian magazine’s annual lawyers’ edition. Jonice Gray Tucker is featured in an article about making partner. Jerry Buckley, Ben Klubes, and Andrew Sandler are recognized as top financial services lawyers in Washington, DC. BuckleySandler LLP is the only firm to have more than two lawyers included in the Washingtonian’s list of top financial services lawyers.
Jonathan Cannon spoke at the New Jersey Bankers Association’s Mortgage Lending Conference on December 3 regarding RESPA and TILA Regulatory Changes.
Clint Rockwell spoke at the CMBA’s Legislative, Regulatory, Quality Assurance & Compliance Conference on December 7 in Huntington Beach, CA regarding Federal Developments.
Miscellany
HUD Hosts Final Live Online Presentation for RESPA Rule Fully Taking Effect January 1. On December 16 at 1PM ET, the U.S. Department of Housing and Urban Development (HUD) will host the final in a series of its live online presentations to discuss new regulatory requirements under the Real Estate Settlement Procedures Act (RESPA) that are set to become fully effective on January 1, 2010. HUD has made available several links regarding the new RESPA regulatory requirements:
• For an archived webcast of a previous presentation from the series, please see http://www.hud.gov/webcasts/archives/;
• For a copy of HUD’s presentation regarding the new requirements, please see http://www.hud.gov/offices/hsg/ramh/res/respaplaineng120709.ppt;
• For a copy of the Frequently Asked Questions regarding the requirements, please see http://www.hud.gov/utilities/intercept.cfm?/offices/hsg/ramh/res/resparulefaqs.pdf; and
• For a copy of the press release announcing the online presentation, http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2009/HUDNo.09-218.
Mortgages
House Passes Financial Overhaul Bill in Close Vote. On December 11, the U.S. House of Representatives passed (223-202) H.R. 4173, the “Wall Street Reform and Consumer Protection Act,” a bill that would comprehensively reform regulation of the financial services industry. As passed, the bill combines the various pieces of legislation that were considered and passed out of the House Financial Services Committee and the House Energy and Commerce Committee this fall. The legislation includes significant reforms to monitor systemic risk, improve stability of the financial markets, establish and administer a new agency, the Consumer Financial Protection Agency, that will be responsible for regulation and enforcement of consumer protection laws, and reform laws governing capital markets and credit reporting agencies. During consideration of the bill in the House, several new amendments were approved, including new language that strengthens federal preemption of state laws for national banks and their operating subsidiaries, as compared to the original legislation reported out of the House Financial Services Committee. Further, the House voted against an amendment that would have permitted bankruptcy judges to modify (“cramdown”) mortgages during Chapter 13 bankruptcy proceedings. An in-depth review of the bill will be provided in a forthcoming BuckleySandler Regulatory Restructuring Report. For more information about the bill, please see http://www.house.gov/apps/list/press/financialsvcs_dem/presscfpa_121109.shtml.
HUD Proposes SAFE Act Minimum Standards. On December 10, the U.S. Department of Housing and Urban Development (HUD) released its proposal setting forth minimum standards for state laws that effect the requirements of the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act). The proposal seeks to clarify and interpret ambiguous or undefined terms contained in the SAFE Act, such as “engage in the business of a loan originator,” “take an application,” and “offering or negotiating.” In addition, HUD has proposed procedures for determining state compliance with the SAFE Act licensing and registration system and detailed how it will respond if HUD finds that a state has failed to comply. The proposal also includes minimum requirements for administering the Nationwide Mortgage Licensing System and Registry and details HUD enforcement authority in the event it is required to operate a back-up state licensing system. The proposal is subject to a 60-day comment period following publication in the Federal Register. For a copy of the proposal, please see http://www.buckleysandler.com/SAFE_PR_1209.pdf.
FHA Suspends Mortgage Broker for Allegedly Overcharging Borrowers. On December 7, the Federal Housing Administration (FHA) announced that it is suspending Equitable Trust Mortgage (ETM), a Baltimore-based broker, for allegedly charging borrowers unauthorized broker and loan origination fees. The suspension prevents ETM from originating and underwriting new FHA-insured mortgages. Under its current rules, the FHA caps the total amount of fees on a loan to 1% of the mortgage amount. The FHA claims that ETM violated this restriction by charging 37 borrowers both a broker fee and a 1% origination fee. Additionally, the U.S. Department of Housing and Urban Development (HUD) conducted an investigation through its Mortgagee Review Board (MRB). This investigation uncovered that a substantially greater percentage of minority borrowers (68%) were charged these unauthorized fees and that in nearly 57% of cases ETM improperly disclosed its loan origination fees and yield spread premiums on the borrower’s Good Faith Estimate (GFE). The MRB also found that ETM’s default rate greatly exceeded the national average. As a result of these findings, the FHA suspended EMT’s brokering authority for a minimum of six months and HUD’s Office of Inspector General has launched a subsequent investigation into ETM’s lending practices. ETM may appeal its suspension by submitting a written request for a hearing before an Administrative Law Judge within 30 days. For a copy of HUD’s press release regarding the matter, please see http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2009/HUDNo.09-226.
FHA Adopts Dual Purpose Appraisal Form. On December 7, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2009-51 to announce the Federal Housing Administration’s (FHA’s) adoption of the Appraisal Update and/or Completion Report (Fannie Mae Form 1004D/Freddie Mac Form 442/March 2005). The new form serves a dual purpose. Part A of the form allows an FHA appraiser to extend (i) the expiration date on his/her original appraisal report when a lender opts not to order a new report, and (ii) the validity period of an existing appraisal for new construction that is incomplete. Part B of the form allows any FHA-approved appraiser to report the completion of a repair and/or the satisfaction of requirements and conditions noted in an original appraisal report referenced in the header of the Summary Appraisal Update and/or Completion Report. The new form goes into effect for all case number assignments beginning January 1, 2010. For a copy of Mortgagee Letter 2009-51, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-51ml.pdf.
DOJ Settles False Claims Act Charge Against Mortgage Underwriter. On December 10, the U.S. Department of Justice (DOJ) settled mortgage fraud allegations with a New York-based mortgage underwriter, Robert Corp, who allegedly violated the federal False Claims Act. The DOJ filed suit in May 2008, alleging that the underwriter made false statements to the U.S. Department of Housing and Urban Development (HUD) on an application for government insurance of a mortgage loan used to refinance the existing debt of Brylin Hospitals. According to the DOJ, HUD was required to pay more in mortgage insurance claims because the underwriter inflated the value of the existing debt to obtain a larger refinance loan. Under the settlement, the underwriter will pay the United States $679,000. For a copy of the press release, please see http://www.justice.gov/opa/pr/2009/December/09-civ-1317.html.
Fed Issues Guidance on Applicability of Adverse Action Notices to Loan Modification Requests. On December 4, the Federal Reserve Board issued guidance that concludes that, under certain circumstances, adverse action notices under Regulation B (the Equal Credit Opportunity Act) are required for mortgage loan modifications, including under the federal Making Home Affordable Modification Program (HAMP). The letter provides a four-part analysis to determine if there is (i) an “extension of credit,” (ii) an “application,” (iii) an “adverse action” on the application, and (iv) a borrower delinquency or default on the loan. Using a hypothetical HAMP modification, the letter concludes that (i) the extension of the right to defer payment qualifies as an “extension of credit,” (ii) where a borrower submits “sufficient information” for the servicer to evaluate the borrower for a modification, it constitutes an “application” for an extension of credit, (iii) if a servicer evaluates a borrower’s information according to HAMP’s guidelines and declines the request, then the servicer has taken an adverse action, and (iv) adverse action notices are required for borrowers whose mortgage loan is not currently delinquent or in default. Consequently, under this guidance, servicers (including HAMP servicers) must provide adverse action notices to borrowers who are not yet delinquent or in default, and who submit sufficient information to evaluate for a modification, but who are not approved for a modification. For a copy of the letter, please see http://www.federalreserve.gov/boarddocs/caletters/2009/0913/caltr0913.htm.
Florida Law Requires Loan Mod Companies to Obtain License. On December 7, the Florida Office of Financial Regulations issued a reminder that, as of January 1, 2010, individuals and companies providing loan modification services to Florida borrowers must maintain an active Florida mortgage lender, mortgage broker or correspondent mortgage lender license. The requirement is part of a law signed by Florida Governor Charlie Crist on June 29, 2009 that also provided for the licensing of mortgage loan originators under the Nationwide Mortgage Licensing System, as required under the federal Secure and Fair Enforcement for Mortgage Licensing Act (reported in InfoBytes, July 3, 2009). Under the new law, loan modification service providers remain prohibited from charging up-front fees for loan modification services. The law also subjects unlicensed persons or entities that provide loan modification services to Florida borrowers to criminal penalties. For a copy of the press release, please see http://www.flofr.com/PressReleases/ViewMediaRelease.asp?ID=3356; for a copy of the bill, please see http://www.flsenate.gov/data/session/2009/Senate/bills/billtext/pdf/s2226.pdf.
U.S. Attorney Indicts Mortgage Lender for $14.6 Million Mortgage Fraud Scheme in Pennsylvania. On December 8, the U.S. Attorney for the Eastern District of Pennsylvania announced an indictment against the three owners of Axxium Mortgage, Inc., and their attorneys, for allegedly making at least 35 fraudulent mortgage loans in the state of Pennsylvania. According to the indictment, the defendants (i) targeted financially-distressed homeowners facing foreclosure, (ii) falsely promised them help in saving their homes, (iii) engaged in real estate transactions with straw purchasers, and (iv) obtained dozens of fraudulent mortgages. The defendants allegedly obtained the new mortgage loans by submitting false documents to mortgage lenders and lying about the straw purchaser’s financial information. In some instances, bankruptcy proceedings were fraudulently started by defendants on behalf of distressed homeowners to delay foreclosure while the straw purchaser’s paperwork was completed. The Federal Bureau of Investigations has charged the defendants with conspiracy to commit mail and wire fraud, mail and wire fraud, and conspiracy to commit money laundering; one of the defendants is additionally charged with bankruptcy fraud. For a copy of the press release, please see http://www.banking.state.pa.us/banking/lib/banking/12-809_axxium_indictment_u.s._atty_news_rls.pdf.
Eleventh Circuit Finds No RESPA Violation for Lender’s Yield Spread Premium Payment to Broker. On December 4, the U.S. Court of Appeals for the Eleventh Circuit held that a lender did not violate the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA) by paying a yield spread premium to a broker, where the lender received value from the broker’s services and where no evidence was presented that the total compensation paid to the broker was unreasonably high for the services performed. Sutton v. Countrywide Home Loans, Inc., No. 09-11149, 2009 WL 4458526 (11th Cir. Dec. 4, 2009). In Sutton, the plaintiff borrower alleged that the broker who arranged his refinance loan committed certain “wrongful, fraudulent, and predatory” acts in arranging the loan, such as over-reporting his monthly salary. In finding that the defendant lender’s payment of a yield spread premium to this broker did not violate RESPA, the court rejected the borrower’s argument that the services performed by the broker were not actual services because they were part of a scheme to place the plaintiff in an unsuitable loan. The court similarly rejected the borrower’s argument that the total compensation paid to the broker was unreasonable in light of the fact that the services performed by the broker ultimately left the plaintiff with an unsuitable loan. According to the court, RESPA’s anti-kickback provisions prohibit lenders from compensating brokers for referrals; they are not designed for evaluating globally whether a broker has provided “fair, honest, and competent service to a borrower.” For a copy of the opinion, please see http://www.ca11.uscourts.gov/unpub/ops/200911149.pdf.
California State Court Holds Payoff of Preexisting Debt, Prepayment Penalties Properly Excluded from HOEPA Finance Charge Calculation. On November 30, the Third Appellate District of the Court of Appeal of California held that a plaintiff borrower’s loan was not subject to the Home Ownership and Equity Protection Act of 1994 (HOEPA) because the payoff amount of a preexisting consumer debt and prepayment penalties incurred from the previous mortgage loan were properly excluded from the finance charge calculation. Holbert v. Fremont Investment & Loan, No. C058026, 2009 WL 4219511 (Cal. App. Ct. Nov. 30, 2009). In Holbert, the borrower sued her lender alleging, among other things, that the lender did not comply with HOEPA’s special disclosure requirements. The trial court dismissed the HOEPA claim, as well as other claims that were based on underlying violations of HOEPA, finding that the loan was not subject to HOEPA. The borrower appealed, arguing that the loan was subject to HOEPA because (i) the payoff of a separate consumer loan with the proceeds of her refinance loan, (ii) the prepayment penalty she incurred in refinancing her previous mortgage loan, and (iii) the notary fees should have been considered finance charges associated with the new loan that, when added to the other finance charges, would bring the total finance charges above the 8 percent HOEPA threshold. The appeals court affirmed the trial court. Regarding the payoff of a previous consumer loan, the appellate court held that “the payoff of a preexisting debt, whether secured or unsecured, is not the creation of a new financial obligation.” Thus, the payoff of the preexisting consumer debt from proceeds of the refinance loan was merely replacing indebtedness by an indebtedness of equal value to a new lender, and therefore was properly excluded from the finance charge. With respect to the prepayment penalty, the appellate court held that such a charge was properly excluded from the finance charge because it was not a charge associated with the refinance, but rather associated with the prior loan and was required to be disclosed to plaintiff by the prior lender. Finally, with respect to the notary fees, the court noted that Truth in Lending regulations exclude such fees from the finance charge when they are reasonable and not paid to an affiliate of the lender, but found that even if the notary fees were included, the finance charge would not exceed HOEPA’s 8 percent threshold. For a copy of the opinion, please see http://www.buckleysandler.com/Holbert_v_Fremont.pdf.
Indiana Federal Court Holds Servicer’s Work-Out Letters Not Debt Collection Demands. On November 20, the U.S. District Court for the Northern District of Indiana held that a mortgage servicer’s work-out letters to delinquent borrowers were not “in connection with the collection of any debt” under the federal Fair Debt Collection Practices Act (FDCPA). Gillespie v. Chase Home Finance, LLC, No. 3:09-CV-1912009, WL 4061428 (N.D. Ind. Nov. 20, 2009). In Gillespie, the borrowers – who had filed suit to rescind their mortgages and were represented by counsel – sued their mortgage servicer for violating the FDCPA after the servicer sent them letters regarding the availability of loan work-out options. The servicer argued that the letters did not demand payment and therefore were not “in connection with the collection of any debt.” The court agreed with the servicer, finding that the letters “were in the nature of providing information as opposed to being in the nature of a debt collection demand.” The borrowers argued that the Federal Trade Commission’s March 18, 2008 FDCPA advisory opinion requires communications informing debtors of work-out options to comply with the FDCPA, but the court found that the opinion “did not purport to address when a communication is in connection with the collection of any debt.” The court also concluded that the servicer’s inclusion of an FDCPA “Miranda” notice in one of the letters “did not alter the nature of the communication or the information provided in the letter.” For a copy of the opinion, please see http://www.buckleysandler.com/Gillespie_v_CHF.pdf.
Banking
House Passes Financial Overhaul Bill in Close Vote. On December 11, the U.S. House of Representatives passed (223-202) H.R. 4173, the “Wall Street Reform and Consumer Protection Act,” a bill that would comprehensively reform regulation of the financial services industry. As passed, the bill combines the various pieces of legislation that were considered and passed out of the House Financial Services Committee and the House Energy and Commerce Committee this fall. The legislation includes significant reforms to monitor systemic risk, improve stability of the financial markets, establish and administer a new agency, the Consumer Financial Protection Agency, that will be responsible for regulation and enforcement of consumer protection laws, and reform laws governing capital markets and credit reporting agencies. During consideration of the bill in the House, several new amendments were approved, including new language that strengthens federal preemption of state laws for national banks and their operating subsidiaries, as compared to the original legislation reported out of the House Financial Services Committee. Further, the House voted against an amendment that would have permitted bankruptcy judges to modify (“cramdown”) mortgages during Chapter 13 bankruptcy proceedings. An in-depth review of the bill will be provided in a forthcoming BuckleySandler Regulatory Restructuring Report. For more information about the bill, please see http://www.house.gov/apps/list/press/financialsvcs_dem/presscfpa_121109.shtml.
AABD Recommends Fed Withdraw Proposed Guidance on Bank Incentive Compensation. On November 27, the American Association of Bank Directors (AABD) submitted a comment letter on proposed guidance issued by the Federal Reserve Board (Fed) concerning incentive compensation policies at banking organizations, recommending that the Fed withdraw the proposed guidance. The Fed proposal, issued in October, seeks to ensure that bank incentive compensation policies do not encourage excessive risk-taking and are consistent with organizational safety and soundness. The Fed is proposing two supervisory initiatives dependent on institution size and complexity. For large, complex banking organizations, the Fed would review each firm’s policies and practices to determine their consistency with the principles for risk-appropriate incentive compensation set forth in the proposal. For smaller institutions, the Fed would include a review of compensation practices as part of the regular, risk-focused examination process. The guidance – applicable to all Fed-supervised banking organizations - would apply to incentive compensation arrangements for (i) senior executives and others responsible for oversight of firm-wide activities or material business lines, (ii) individual employees, including non-executive employees, whose activities may expose the firm to material amounts of risk, and (iii) groups of employees who are subject to the same or similar incentive compensation arrangements and who, in the aggregate, may expose the firm to material amounts of risk, even if no individual employee is likely to expose the firm to material risk. The AABD letter makes several specific comments on the proposal, including that (i) it does not provide any concrete and detailed examples of how incentive compensation arrangements caused banks to engage in unsafe or unsound banking practices, (ii) robust risk-management systems will not allow risks to be undertaken that are excessive regardless of the incentive pay arrangements that might be in place—that should be the focus of the Fed, not business judgments of boards of directors on how to attract, retain, and motivate qualified personnel, and (iii) the Fed’s capacity to oversee and make enforcement judgments over incentive compensation arrangements is questionable. The AABD letter concludes that, absent a demonstration by the Fed that incentive compensation arrangements were responsible for undermining institutions’ risk management systems, thereby causing unsafe or unsound banking practices, the Fed should withdraw the proposed guidance and not issue a final guidance. For a copy of the AABD comment letter, please see http://www.buckleysandler.com/documents/AABD_Fed_Compensation_Comment_112709.pdf.
OTS Issues Letter Regarding Correction to Credit CARD Act. On December 9, the Office of Thrift Supervision (OTS) issued a letter to notify OTS-regulated institutions that, under a November 6, 2009 technical correction to the Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act, the requirement that a creditor may not treat a payment as late for any purpose unless the creditor has adopted reasonable procedures designed to ensure that each periodic statement is mailed or delivered to the consumer at least 21 days before the payment due date applies only to credit card accounts. Prior to the change, the provision applied to all open-end credit accounts, including home equity lines of credit. The letter reminds creditors that this change does not affect current requirements for open-end credit accounts, including (i) requiring creditors that provide a grace period permitting consumers to repay an open end loan without incurring a finance charge for a period of time after payment is due to provide such a grace period for at least 21 days, and (ii) requiring creditors to transmit periodic statements to consumers at least 21 days before a payment is due. For a copy of the letter, please see http://files.ots.treas.gov/25328.pdf.
California State Court Holds Banks May Obtain Alternate Forms of Identification in Lieu of Social Security Numbers from Foreign Nationals to Open a Promotional Credit Card Account. On December 8, the Third Appellate District of the Court of Appeal of California held that a bank may obtain alternate forms of identification in lieu of a Social Security Number (SSN) from foreign nationals to open certain credit card accounts. Howe v. Bank of America, N.A., No. G04669, 2009 WL 4598094 (Cal. App. Ct. Dec. 8, 2009). In Howe, the plaintiffs’ putative class action against Bank of America, Mexicana Airlines and Visa International Service Association (collectively, Bank of America) alleged discrimination under the California Unruh Civil Rights Act (UCRA) for requiring U.S. citizens to provide an SSN to open a promotional credit card account, but allowing foreign nationals to open the same type of account with alternate forms of identification (e.g., a passport, nonresident alien Border Crossing Card, nonimmigrant Visa and Border Crossing Card, or a Mexican Matricula Card). The court explained that the UCRA “does not entirely prohibit businesses from drawing distinctions on the basis of the protected classifications or personal characteristics; rather, ‘[t]he objective of the Act is to prohibit businesses from engaging in unreasonable, arbitrary or invidious discrimination.’” The court determined that Bank of America did not act arbitrarily under its minimum identification policy because it was complying with the requirements promulgated under the USA Patriot Act that expressly require institutions to obtain SSNs from U.S. citizens, but not from foreign nationals. The court also noted that, although the Patriot Act regulation establishes only minimum standards, the bank would have exposed itself to a discrimination lawsuit if it had extended the minimum identification requirements to require an SSN from foreign nationals. Lastly, the court concluded that “[b]ecause Bank of America’s credit card program merely applied federally imposed minimum identification standards to all applicants for its accounts, whether U.S. citizens or foreign nationals, we conclude that practice bore a reasonable relationship to Bank of America’s commercial objectives and was consequently valid on its face.” For a copy of the opinion, please see http://www.buckleysandler.com/Howe_v_BoA.pdf.
Consumer Finance
FTC Halts Telemarketers Hawking Interest-Rate Reduction Program. On December 8, the Federal Trade Commission (FTC) unanimously voted to bring complaints against three companies that allegedly violated the FTC Do Not Call Registry by making “robocalls” to sell what the FTC claims were worthless credit-card interest-rate reduction programs for up-front fees of as much as $1,495. The lawsuits allege, among other things, that the companies (i) made deceptive sales pitches, (ii) called consumers whose numbers appeared on the Do Not Call Registry, (ii) masked their caller ID information, (iv) failed to identify themselves, (v) failed to identify the purpose of the call and the nature of the goods or services being sold, and (vi) failed to make required disclosures. In each case, at the FTC’s request, the court has issued an order temporarily halting the robocalls pending trial. For a copy of the press release, please see http://www.ftc.gov/opa/2009/12/robocall.shtm. For a copy of the complaints, please see http://www.ftc.gov/os/caselist/0923183/091208dynamiccmpt.pdf, http://www.ftc.gov/os/caselist/0923190/091208jpmcmpt.pdf, and http://www.ftc.gov/os/caselist/0923118/091208ertcmpt.PDF.
Indiana Federal Court Holds Servicer’s Work-Out Letters Not Debt Collection Demands. On November 20, the U.S. District Court for the Northern District of Indiana held that a mortgage servicer’s work-out letters to delinquent borrowers were not “in connection with the collection of any debt” under the federal Fair Debt Collection Practices Act (FDCPA). Gillespie v. Chase Home Finance, LLC, No. 3:09-CV-1912009, WL 4061428 (N.D. Ind. Nov. 20, 2009). In Gillespie, the borrowers – who had filed suit to rescind their mortgages and were represented by counsel – sued their mortgage servicer for violating the FDCPA after the servicer sent them letters regarding the availability of loan work-out options. The servicer argued that the letters did not demand payment and therefore were not “in connection with the collection of any debt.” The court agreed with the servicer, finding that the letters “were in the nature of providing information as opposed to being in the nature of a debt collection demand.” The borrowers argued that the Federal Trade Commission’s March 18, 2008 FDCPA advisory opinion requires communications informing debtors of work-out options to comply with the FDCPA, but the court found that the opinion “did not purport to address when a communication is in connection with the collection of any debt.” The court also concluded that the servicer’s inclusion of an FDCPA “Miranda” notice in one of the letters “did not alter the nature of the communication or the information provided in the letter.” For a copy of the opinion, please see http://www.buckleysandler.com/Gillespie_v_CHF.pdf.
Massachusetts Federal Court Holds FCRA Does Not Preempt Massachusetts Inaccurate Reporting Claim. On December 1, the U.S. District Court for the District of Massachusetts denied a furnisher’s motion to dismiss claims of inaccurate credit reporting brought under Massachusetts state laws that allow claims against furnishers of credit information that fail to follow reasonable procedures to ensure that information given to consumer reporting agencies is accurate. Catanzaro v. Experian Information Solutions, Inc., Civil Action 09-105550, 2009 WL 4363207 (D. Mass. Dec. 1, 2009). The consumer claimed that the defendants – furnishers of credit information a consumer reporting agency – violated the Fair Credit Reporting Act (FCRA) and Massachusetts state law in connection with furnishing and reporting allegedly incorrect credit report information. In rejecting the furnisher’s argument that FCRA preempted the state law claims, the court noted that the Massachusetts requirement to follow reasonable procedures to provide information to a consumer reporting agency that is accurate and complete, M.G.L. c. 93, § 54A(a), is one of two state statutory provisions that is expressly excluded from FCRA’s preemption provision. Although the Massachusetts provision allowing a private right of action, M.G.L. c. 93, § 54A(g), is not mentioned in the FCRA carve-out from preemption, the court held that § 54A(g) is similarly not preempted by the FCRA, as it is “simply a mechanism allowing private litigants to enforce a state standard for credit reporting that Congress deliberately chose not to preempt.” The court held, however, that the consumer’s additional state law claims were in fact preempted by the FCRA, and granted defendants’ motion to dismiss those claims. For a copy of the opinion, please see http://www.buckleysandler.com/Catanzaro_v_Experian.pdf.
D.C. Federal Court Releases Opinion Holding Attorneys Are Not Creditors Under FTC’s Red Flag Rule. On December 1, the U.S. District Court for the District of Columbia issued an opinion explaining its October 29, 2009 Bench Order that the Federal Trade Commission (FTC) overstepped its statutory authority when it attempted to apply its Red Flags Rule (the Rule) to attorneys. American Bar Ass’n v. Federal Trade Commission, No. 09-cv-01636, 2009 WL 4289505 (D.D.C. Dec. 1, 2009). The court declined to afford the Rule Chevron deference because “[g]iven the plain-meaning and statutorily assigned definitions of the terms interpreted by the [FTC], the aim of the legislation, and the ill-adapted application of these terms to the legal profession,” Congress did not intend to include lawyers under the definition of “creditor.” The court held that applying the Rule to attorneys is not a “permissible” interpretation because (i) the FTC’s definition of “creditor” is not supported by the plain language of the Equal Credit Opportunity Act and the Fair and Accurate Credit Transactions Act (and applicable case law), and (ii) attorneys did not receive sufficient notice, as required by the Administrative Procedures Act, because the FTC failed to establish that identity theft is a problem in the attorney-client context. For a copy of the opinion, please see http://www.buckleysandler.com/ABA_v_FTC_120109.pdf.
Insurance
HUD Hosts Final Live Online Presentation for RESPA Rule Fully Taking Effect January 1. On December 16 at 1PM ET, the U.S. Department of Housing and Urban Development (HUD) will host the final in a series of its live online presentations to discuss new regulatory requirements under the Real Estate Settlement Procedures Act (RESPA) that are set to become fully effective on January 1, 2010. HUD has made available several links regarding the new RESPA regulatory requirements:
• For an archived webcast of a previous presentation from the series, please see http://www.hud.gov/webcasts/archives/;
• For a copy of HUD’s presentation regarding the new requirements, please see http://www.hud.gov/offices/hsg/ramh/res/respaplaineng120709.ppt;
• For a copy of the Frequently Asked Questions regarding the requirements, please see http://www.hud.gov/utilities/intercept.cfm?/offices/hsg/ramh/res/resparulefaqs.pdf; and
• For a copy of the press release announcing the online presentation, http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2009/HUDNo.09-218.
Litigation
Eleventh Circuit Finds No RESPA Violation for Lender’s Yield Spread Premium Payment to Broker. On December 4, the U.S. Court of Appeals for the Eleventh Circuit held that a lender did not violate the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA) by paying a yield spread premium to a broker, where the lender received value from the broker’s services and where no evidence was presented that the total compensation paid to the broker was unreasonably high for the services performed. Sutton v. Countrywide Home Loans, Inc., No. 09-11149, 2009 WL 4458526 (11th Cir. Dec. 4, 2009). In Sutton, the plaintiff borrower alleged that the broker who arranged his refinance loan committed certain “wrongful, fraudulent, and predatory” acts in arranging the loan, such as over-reporting his monthly salary. In finding that the defendant lender’s payment of a yield spread premium to this broker did not violate RESPA, the court rejected the borrower’s argument that the services performed by the broker were not actual services because they were part of a scheme to place the plaintiff in an unsuitable loan. The court similarly rejected the borrower’s argument that the total compensation paid to the broker was unreasonable in light of the fact that the services performed by the broker ultimately left the plaintiff with an unsuitable loan. According to the court, RESPA’s anti-kickback provisions prohibit lenders from compensating brokers for referrals; they are not designed for evaluating globally whether a broker has provided “fair, honest, and competent service to a borrower.” For a copy of the opinion, please see http://www.ca11.uscourts.gov/unpub/ops/200911149.pdf.
California State Court Holds Banks May Obtain Alternate Forms of Identification in Lieu of Social Security Numbers from Foreign Nationals to Open a Promotional Credit Card Account. On December 8, the Third Appellate District of the Court of Appeal of California held that a bank may obtain alternate forms of identification in lieu of a Social Security Number (SSN) from foreign nationals to open certain credit card accounts. Howe v. Bank of America, N.A., No. G04669, 2009 WL 4598094 (Cal. App. Ct. Dec. 8, 2009). In Howe, the plaintiffs’ putative class action against Bank of America, Mexicana Airlines and Visa International Service Association (collectively, Bank of America) alleged discrimination under the California Unruh Civil Rights Act (UCRA) for requiring U.S. citizens to provide an SSN to open a promotional credit card account, but allowing foreign nationals to open the same type of account with alternate forms of identification (e.g., a passport, nonresident alien Border Crossing Card, nonimmigrant Visa and Border Crossing Card, or a Mexican Matricula Card). The court explained that the UCRA “does not entirely prohibit businesses from drawing distinctions on the basis of the protected classifications or personal characteristics; rather, ‘[t]he objective of the Act is to prohibit businesses from engaging in unreasonable, arbitrary or invidious discrimination.’” The court determined that Bank of America did not act arbitrarily under its minimum identification policy because it was complying with the requirements promulgated under the USA Patriot Act that expressly require institutions to obtain SSNs from U.S. citizens, but not from foreign nationals. The court also noted that, although the Patriot Act regulation establishes only minimum standards, the bank would have exposed itself to a discrimination lawsuit if it had extended the minimum identification requirements to require an SSN from foreign nationals. Lastly, the court concluded that “[b]ecause Bank of America’s credit card program merely applied federally imposed minimum identification standards to all applicants for its accounts, whether U.S. citizens or foreign nationals, we conclude that practice bore a reasonable relationship to Bank of America’s commercial objectives and was consequently valid on its face.” For a copy of the opinion, please see http://www.buckleysandler.com/Howe_v_BoA.pdf.
Indiana Federal Court Holds Servicer’s Work-Out Letters Not Debt Collection Demands. On November 20, the U.S. District Court for the Northern District of Indiana held that a mortgage servicer’s work-out letters to delinquent borrowers were not “in connection with the collection of any debt” under the federal Fair Debt Collection Practices Act (FDCPA). Gillespie v. Chase Home Finance, LLC, No. 3:09-CV-1912009, WL 4061428 (N.D. Ind. Nov. 20, 2009). In Gillespie, the borrowers – who had filed suit to rescind their mortgages and were represented by counsel – sued their mortgage servicer for violating the FDCPA after the servicer sent them letters regarding the availability of loan work-out options. The servicer argued that the letters did not demand payment and therefore were not “in connection with the collection of any debt.” The court agreed with the servicer, finding that the letters “were in the nature of providing information as opposed to being in the nature of a debt collection demand.” The borrowers argued that the Federal Trade Commission’s March 18, 2008 FDCPA advisory opinion requires communications informing debtors of work-out options to comply with the FDCPA, but the court found that the opinion “did not purport to address when a communication is in connection with the collection of any debt.” The court also concluded that the servicer’s inclusion of an FDCPA “Miranda” notice in one of the letters “did not alter the nature of the communication or the information provided in the letter.” For a copy of the opinion, please see http://www.buckleysandler.com/Gillespie_v_CHF.pdf.
California State Court Holds Payoff of Preexisting Debt, Prepayment Penalties Properly Excluded from HOEPA Finance Charge Calculation. On November 30, the Third Appellate District of the Court of Appeal of California held that a plaintiff borrower’s loan was not subject to the Home Ownership and Equity Protection Act of 1994 (HOEPA) because the payoff amount of a preexisting consumer debt and prepayment penalties incurred from the previous mortgage loan were properly excluded from the finance charge calculation. Holbert v. Fremont Investment & Loan, No. C058026, 2009 WL 4219511 (Cal. App. Ct. Nov. 30, 2009). In Holbert, the borrower sued her lender alleging, among other things, that the lender did not comply with HOEPA’s special disclosure requirements. The trial court dismissed the HOEPA claim, as well as other claims that were based on underlying violations of HOEPA, finding that the loan was not subject to HOEPA. The borrower appealed, arguing that the loan was subject to HOEPA because (i) the payoff of a separate consumer loan with the proceeds of her refinance loan, (ii) the prepayment penalty she incurred in refinancing her previous mortgage loan, and (iii) the notary fees should have been considered finance charges associated with the new loan that, when added to the other finance charges, would bring the total finance charges above the 8 percent HOEPA threshold. The appeals court affirmed the trial court. Regarding the payoff of a previous consumer loan, the appellate court held that “the payoff of a preexisting debt, whether secured or unsecured, is not the creation of a new financial obligation.” Thus, the payoff of the preexisting consumer debt from proceeds of the refinance loan was merely replacing indebtedness by an indebtedness of equal value to a new lender, and therefore was properly excluded from the finance charge. With respect to the prepayment penalty, the appellate court held that such a charge was properly excluded from the finance charge because it was not a charge associated with the refinance, but rather associated with the prior loan and was required to be disclosed to plaintiff by the prior lender. Finally, with respect to the notary fees, the court noted that Truth in Lending regulations exclude such fees from the finance charge when they are reasonable and not paid to an affiliate of the lender, but found that even if the notary fees were included, the finance charge would not exceed HOEPA’s 8 percent threshold. For a copy of the opinion, please see http://www.buckleysandler.com/Holbert_v_Fremont.pdf.
Massachusetts Federal Court Holds FCRA Does Not Preempt Massachusetts Inaccurate Reporting Claim. On December 1, the U.S. District Court for the District of Massachusetts denied a furnisher’s motion to dismiss claims of inaccurate credit reporting brought under Massachusetts state laws that allow claims against furnishers of credit information that fail to follow reasonable procedures to ensure that information given to consumer reporting agencies is accurate. Catanzaro v. Experian Information Solutions, Inc., Civil Action 09-105550, 2009 WL 4363207 (D. Mass. Dec. 1, 2009). The consumer claimed that the defendants – furnishers of credit information a consumer reporting agency – violated the Fair Credit Reporting Act (FCRA) and Massachusetts state law in connection with furnishing and reporting allegedly incorrect credit report information. In rejecting the furnisher’s argument that FCRA preempted the state law claims, the court noted that the Massachusetts requirement to follow reasonable procedures to provide information to a consumer reporting agency that is accurate and complete, M.G.L. c. 93, § 54A(a), is one of two state statutory provisions that is expressly excluded from FCRA’s preemption provision. Although the Massachusetts provision allowing a private right of action, M.G.L. c. 93, § 54A(g), is not mentioned in the FCRA carve-out from preemption, the court held that § 54A(g) is similarly not preempted by the FCRA, as it is “simply a mechanism allowing private litigants to enforce a state standard for credit reporting that Congress deliberately chose not to preempt.” The court held, however, that the consumer’s additional state law claims were in fact preempted by the FCRA, and granted defendants’ motion to dismiss those claims. For a copy of the opinion, please see http://www.buckleysandler.com/Catanzaro_v_Experian.pdf.
D.C. Federal Court Releases Opinion Holding Attorneys Are Not Creditors Under FTC’s Red Flag Rule. On December 1, the U.S. District Court for the District of Columbia issued an opinion explaining its October 29, 2009 Bench Order that the Federal Trade Commission (FTC) overstepped its statutory authority when it attempted to apply its Red Flags Rule (the Rule) to attorneys. American Bar Ass’n v. Federal Trade Commission, No. 09-cv-01636, 2009 WL 4289505 (D.D.C. Dec. 1, 2009). The court declined to afford the Rule Chevron deference because “[g]iven the plain-meaning and statutorily assigned definitions of the terms interpreted by the [FTC], the aim of the legislation, and the ill-adapted application of these terms to the legal profession,” Congress did not intend to include lawyers under the definition of “creditor.” The court held that applying the Rule to attorneys is not a “permissible” interpretation because (i) the FTC’s definition of “creditor” is not supported by the plain language of the Equal Credit Opportunity Act and the Fair and Accurate Credit Transactions Act (and applicable case law), and (ii) attorneys did not receive sufficient notice, as required by the Administrative Procedures Act, because the FTC failed to establish that identity theft is a problem in the attorney-client context. For a copy of the opinion, please see http://www.buckleysandler.com/ABA_v_FTC_120109.pdf.
Privacy/Data Security
Massachusetts Federal Court Holds FCRA Does Not Preempt Massachusetts Inaccurate Reporting Claim. On December 1, the U.S. District Court for the District of Massachusetts denied a furnisher’s motion to dismiss claims of inaccurate credit reporting brought under Massachusetts state laws that allow claims against furnishers of credit information that fail to follow reasonable procedures to ensure that information given to consumer reporting agencies is accurate. Catanzaro v. Experian Information Solutions, Inc., Civil Action 09-105550, 2009 WL 4363207 (D. Mass. Dec. 1, 2009). The consumer claimed that the defendants – furnishers of credit information a consumer reporting agency – violated the Fair Credit Reporting Act (FCRA) and Massachusetts state law in connection with furnishing and reporting allegedly incorrect credit report information. In rejecting the furnisher’s argument that FCRA preempted the state law claims, the court noted that the Massachusetts requirement to follow reasonable procedures to provide information to a consumer reporting agency that is accurate and complete, M.G.L. c. 93, § 54A(a), is one of two state statutory provisions that is expressly excluded from FCRA’s preemption provision. Although the Massachusetts provision allowing a private right of action, M.G.L. c. 93, § 54A(g), is not mentioned in the FCRA carve-out from preemption, the court held that § 54A(g) is similarly not preempted by the FCRA, as it is “simply a mechanism allowing private litigants to enforce a state standard for credit reporting that Congress deliberately chose not to preempt.” The court held, however, that the consumer’s additional state law claims were in fact preempted by the FCRA, and granted defendants’ motion to dismiss those claims. For a copy of the opinion, please see http://www.buckleysandler.com/Catanzaro_v_Experian.pdf.
D.C. Federal Court Releases Opinion Holding Attorneys Are Not Creditors Under FTC’s Red Flag Rule. On December 1, the U.S. District Court for the District of Columbia issued an opinion explaining its October 29, 2009 Bench Order that the Federal Trade Commission (FTC) overstepped its statutory authority when it attempted to apply its Red Flags Rule (the Rule) to attorneys. American Bar Ass’n v. Federal Trade Commission, No. 09-cv-01636, 2009 WL 4289505 (D.D.C. Dec. 1, 2009). The court declined to afford the Rule Chevron deference because “[g]iven the plain-meaning and statutorily assigned definitions of the terms interpreted by the [FTC], the aim of the legislation, and the ill-adapted application of these terms to the legal profession,” Congress did not intend to include lawyers under the definition of “creditor.” The court held that applying the Rule to attorneys is not a “permissible” interpretation because (i) the FTC’s definition of “creditor” is not supported by the plain language of the Equal Credit Opportunity Act and the Fair and Accurate Credit Transactions Act (and applicable case law), and (ii) attorneys did not receive sufficient notice, as required by the Administrative Procedures Act, because the FTC failed to establish that identity theft is a problem in the attorney-client context. For a copy of the opinion, please see http://www.buckleysandler.com/ABA_v_FTC_120109.pdf.
Credit Cards
OTS Issues Letter Regarding Correction to Credit CARD Act. On December 9, the Office of Thrift Supervision (OTS) issued a letter to notify OTS-regulated institutions that, under a November 6, 2009 technical correction to the Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act, the requirement that a creditor may not treat a payment as late for any purpose unless the creditor has adopted reasonable procedures designed to ensure that each periodic statement is mailed or delivered to the consumer at least 21 days before the payment due date applies only to credit card accounts. Prior to the change, the provision applied to all open-end credit accounts, including home equity lines of credit. The letter reminds creditors that this change does not affect current requirements for open-end credit accounts, including (i) requiring creditors that provide a grace period permitting consumers to repay an open end loan without incurring a finance charge for a period of time after payment is due to provide such a grace period for at least 21 days, and (ii) requiring creditors to transmit periodic statements to consumers at least 21 days before a payment is due. For a copy of the letter, please see http://files.ots.treas.gov/25328.pdf.