InfoBytes, December 12, 2008
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Miscellany
- Mortgages
- Banking
- Consumer Finance
- Litigation
- Privacy/Data Security
- Credit Cards
Federal Issues
GAO Reports Increased Foreclosures and Uncertainty about Treasury’s TARP Progress. On December 4, the Government Accountability Office (GAO) presented two reports on the Troubled Asset Relief Program (TARP): one to the Subcommittee on Financial Services and General Government of the U.S. Senate’s Committee on Appropriations regarding the status of efforts to address default home mortgages; and one to various Congressional Committees regarding actions needed to better ensure integrity, accountability, and transparency. GAO reports a "dramatic increase" in defaulted and foreclosed mortgages between 2005 and the second quarter of 2008, with 4 in every 100 mortgages in default or foreclosure. The sub-prime and adjustable rate mortgage markets have suffered more significantly than other mortgage markets. Since 2005, foreclosures are up at least 10 percent in every state, and 23 states experiencing an increase of 100 percent or more. While admitting it is too soon to determine whether Treasury’s TARP programs are having their intended effect, GAO does make a number of suggestions across the two reports intended to improve programs that have been in effect since October, 2008. GAO suggests that Treasury, while implementing TARP, work with bank regulators to develop a system for determining and reporting on whether financial institutions benefiting from TARP have implemented policies consistent with the program. GAO also suggests Treasury hire sufficient personnel, who are trained and prepared to oversee TARP and continue to develop policies and procedures to ensure the effectiveness of the program. For a copy of the two reports, please see http://www.gao.gov/new.items/d09161.pdf and http://www.gao.gov/new.items/d09231t.pdf.
Fannie Mae to Allow Servicers to Modify Loans Before Default. On December 8, Fannie Mae announced new initiatives to allow servicers to modify loans more easily. For loans in existing servicer pools, Fannie has instructed servicers to provide foreclosure prevention assistance "as soon as a borrower demonstrates the need for help," even if the borrower is yet to default on payments, provided that the servicer reasonably foresees default. Fannie also announced a streamlined modification process in which borrowers simply agree to the modification and after a trial period, the loan is permanently modified. Fannie also introduced a new 2009 Single-Family Master Trust Agreement and servicer guidance that allow servicers to remove a loan from an MBS pool once the loan is one month delinquent for the purpose of a loan modification (current agreements do not allow for the removal of the loan until it is 120 days delinquent). More information is available at http://www.fanniemae.com/newsreleases/2008/4547.jhtml;jsessionid=IXSFXM5PTBCIBJ2FECISFGQ?p=Media&s=News+Releases.
FDIC Issues Publication on Higher Deposit Insurance Coverage. On December 4, the Federal Deposit Insurance Corporation (FDIC) issued a publication for consumers regarding the temporary increase in the basic insurance limit from $100,000 to $250,000. The publication of FDIC Consumer News entitled "Your New, Higher FDIC Insurance Coverage: How You Can Be Fully Protected" addresses the following topics: (i) the basic limit on federal deposit insurance coverage has been temporarily increased from at least $100,000 to at least $250,000 per depositor, (ii) the basic FDIC insurance limit will return to $100,000 on January 1, 2010, (iii) the FDIC has eased the rule governing "revocable trust accounts" that pass to named beneficiaries when the account owner dies to includeany person or charity as a beneficiary, and (iv) through year-end 2009, certain checking accounts at participating banks will be fully insured by the FDIC, no matter how much money is in them. For a copy of this publication, please see http://www.fdic.gov/consumers/consumer/news/cnfall08/.
OCC, Wachovia Reach Agreement to Reimburse Consumers Harmed by Telemarketers. On December 11, the Office of the Comptroller of the Currency (OCC) announced that it had reached an agreement with Wachovia Bank, N.A. directing the bank to issue checks to consumers that may have been harmed by payment processors for telemarketers that had account relationships with Wachovia. Telemarketers obtained bank account information over the phone by offering consumers a range of questionable products and services. With the account information obtained during the call, the telemarketer would direct the payment processor to create a remotely created check (RCC). The payment processor would then deposit the remotely created check into the processor’s account at Wachovia, and funds were then withdrawn from consumers’ accounts to make payment on the check and deposited into the processor’s account. A large percentage of these RCCs were returned to Wachovia by individuals, or their financial institutions, who said the checks were never authorized or that they had never received the products or services offered by the telemarketers. As a result of the agreement, Wachovia will issue checks totaling over $150 million to more than 740,000 consumers. For a copy of the press release, please see http://www.occ.gov/ftp/release/2008-143.htm.
FTC Settles Advance-Fee Telemarketer Misrepresentation Charges. On December 10, the Federal Trade Commission (FTC) announced that it had reached a settlement with a telemarketer regarding advance fee credit cards. Allegedly, the defendant Robert James Fischbach and his two companies, Integrity Financial Enterprises, LLC, also doing business as Infinite Financial and National Benefit Exchange; and National Benefit Exchange, Inc. used telemarketing to sell an advance fee "credit card" that they claimed could be used like a Visa or MasterCard, but which actually could be used only to buy products from the defendants’ web site or catalog. The defendants also allegedly misled consumers by failing to cancel or change their orders to avoid the debiting of the advance fee from their bank accounts at the consumers’ request, as promised. The settlement prohibits the defendant from making the misrepresentations alleged in the complaint, and more broadly from violating the FTC Act and Telemarketing Sales Rule. The order also imposes a monetary judgment of more than $2.4 million. For a copy of the press release, please see http://www2.ftc.gov/opa/2008/12/telephoney.shtm. For a copy of the settlement, please see http://www2.ftc.gov/os/caselist/0823120/081205integritygishbachstipfnl.pdf.
HUD Issues Clarification on HECM Mortgages. On December 5, the Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2008-38 clarifying a borrower’s recourse for repayment of home equity conversion mortgage (HECM) loan debt and termination of a HECM mortgage. The letter clarifies that a borrower may not pay off the loan balance of a HECM for the lesser of the mortgage balance or the appraised value of the property while retaining ownership of the home. The letter also outlines the most common circumstances regarding the termination of HECM mortgages. The letter states that if the mortgage is not due and payable, and the borrower desires to retain ownership of the property, the mortgage debt may be repaid in full at any time. Also, if the mortgage is due and payable and the borrower (or estate) desires to retain ownership of the property, the mortgage debt must be repaid in full. The letter further states that lenders may assist the borrower (or estate) in obtaining other financing to pay off the HECM loan in full whether or not the mortgage is due and payable the borrower may, at any time, sell the property for at least the lesser of the mortgage debt or the appraised value. If the mortgage is due and payable and the borrower (or estate) will not be retaining ownership of the property, the property may be sold for at least the lesser of the unpaid mortgage balance or 95% of appraised value. Also, in all circumstances where a mortgagee agrees to accept less than the full mortgage balance, the sale must be an arm’s length transaction. For a copy of the letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-38ml.doc.
OCC Publishes Report on Historic Tax Credit Program. On November 26, the Office of the Comptroller of the Currency (OCC) published a Community Developments Insights report that describes how banks participate in the Historic Tax Credit (HTC) program which is used to rehabilitate and restore certified historic properties. This report describes the HTC program with a particular focus on topics of interest to bankers new to the product. The report examines the primary risks and regulatory considerations associated with financing HTC projects as well as how Historic Tax Credits would be considered in a bank’s Community Reinvestment Act examination. The report also discusses how national banks may utilize these credits under their public welfare investment authority, which the Housing and Economic Recovery Act recently expanded to include a broader range of communities targeted for revitalization, FEMA-designated disaster areas, and rural underserved and distressed communities. For a copy of the full report, please see http://www.occ.gov/cdd/Insights-HTC.pdf.
State Issues
Delaware Adopts Mortgage Loan Originator Regulations. Recently, the Delaware Office of the State Bank Commissioner issued regulations implementing a law requiring mortgage loan originators to be licensed (reported in InfoBytes, Sep. 5, 2008). Among other things, the regulations provide that those mortgage loan originators employed by a licensed lender or mortgage loan broker prior to January 1, 2009 have until March 31, 2009 to submit a license application. Additionally, those individuals beginning employment as mortgage loan originators after January 1, 2009 may not conduct business as mortgage loan originators until they have submitted a license application. Once a license application has been submitted, an individual is free to operate as a mortgage loan originator on a provisional basis until the regulator has rendered a decision on the application. The regulations also set forth duties of originating entities that employ mortgage loan originators, as well as record keeping and notification requirements. Mortgage loan originators will be licensed through the Nationwide Mortgage Licensing System. The regulations became effective December 11, 2008. For a copy of the regulations, please see http://regulations.delaware.gov/AdminCode/title5/2401%20Mortgage%20Loan%20Originator%20Licensing.pdf.
Nebraska Attorney General Files Civil Suit Against Builder, Mortgage Broker, and Appraiser. On December 1, Nebraska Attorney General Jon Bruning, along with the Nebraska Department of Banking, filed suit in the District Court of Lancaster County, Nebraska against a Lincoln homebuilder, mortgage broker and two appraisers. Aspen Builders Inc., Lincoln Mortgage Inc. and two appraisers are charged with violating the Uniform Deceptive Trade Practices Act, the Nebraska Consumer Protection Act and committing civil conspiracy.In addition, Lincoln Mortgage is charged with violating the Nebraska Mortgage Bankers Registration and Licensing Act. These charges stem from allegations that these parties acted together to inflate home prices to obtain mortgages fraudulently for home buyers, thereby harming lenders by causing them to issue under-collateralized loans and homebuyers by leaving them with homes that had a market value lower than their purchase price. The complaint requests damages, including restitution, court costs and attorney fees. For the full text of the complaint, see http://www.journalstar.com/resources/newsroom/news/lawsuit.pdf.
Washington Advises Homeowners on Loan Modification Servicers. On December 4, the Washington Department of Financial Institutions (DFI) warned borrowers who are delinquent on their mortgage to verify that an entity offering to help them work with their lender to modify the terms of their home loan is licensed. The DFI received a number of inquiries regarding the legality of providing this service in this state. While the DFI made clear that there was nothing inherently illegal in the activity, it warned homeowners that those providing this service in Washington must be licensed as loan originators, mortgage brokers, or consumer loan companies and be overseen by the Department of Financial Institutions. Additionally, under applicable law, the loan modification provider associated with a mortgage broker has a fiduciary relationship with the borrower and must act in the borrower’s best interest. For a copy of the press release, please see http://dfi.wa.gov/consumers/news/2008/loan-modification.htm.
Ohio Attorney General Settles with New Century Financial Corporation. On November 25, Ohio Attorney General Nancy Rogers reached a final settlement agreement with New Century Financial Corporation and two of its subsidiaries. The settlement resolves allegations of loan origination misconduct initially filed in 2007 against the company and two of its subsidiaries for violations of the Ohio Consumer Sales Practices Act, the Ohio Mortgage Loan Act, and the Ohio Mortgage Broker Act. Earlier, an Ohio court issued a stipulated preliminary injunction. The injunction acted as a moratorium on New Century foreclosures in Ohio, thus giving the Attorney General’s office an opportunity to review the loans for evidence of alleged predatory practices. As a result of the review process, the state determined that 393 people should continue to receive protection against foreclosure. The agreement provides that New Century and its subsidiaries will be enjoined from engaging in mortgage lending or foreclosure activities in Ohio. In addition, the agreement provides for a settlement payment of $250,000, including attorneys’ fees. For a copy of the press release, please see http://www.ag.state.oh.us/press/08/11/pr081126.pdf.
Illinois Governor’s Mortgage Fraud Task Force Shuts Down Two Mortgage Companies. Illinois Governor Rod R. Blagojevich’s Mortgage Fraud Task Force (MFTF), with the assistance of the Illinois Department of Financial and Professional Regulation (IDFPR), has taken action to shut down two mortgage companies, revoke two loan officers’ registrations, and file charges against a licensed appraiser and unlicensed real estate agent.The mortgage fraud scheme was discovered after the IDFPR investigated a complaint from a renter who grew suspicious when asked to pay rent directly to an unknown individual because her apartment building was being converted to condominiums.Only weeks after receiving the renter’s complaint, the IDFPR and MFTF discovered that fraudulent loan applications brokered by Envision Lending Group or Gateway Mortgage Group were used to purchase multiple units in the building through the same real estate sales office.The IDFPR could not verify the information that was supplied in the underlying loan applications, which were handled by loan originators at Envision Lending Group and Gateway Mortgage Group. For the full text of the MFTF’s orders and complaints, please see http://www.idfpr.com/newsrls/11242008GovBlagojevichMortFraudTastForce.asp.
Courts
Seventh Circuit Affirms Collection Fee Charge is an FDCPA Violation. On December 7, the U.S. Court of Appeals for the Seventh Circuit held that a collection agency charged impermissible fees under the Fair Debt Collection Practices Act (FDCPA) and Wisconsin law. Seeger et al. v. AFNI, Inc., No. 07-4083 (7th Cir. Dec. 8, 2008). Plaintiffs were Cingular account holders whose delinquent debts were sold to AFNI a collection agency. AFNI sent debt collection letters to the plaintiffs, informing each one that he owed a debt and that Cingular was the original creditor. The district court held that this constituted an impermissible fee under the FDCPA and a violation of state law. The court affirmed the lower court’s decision that AFNI failed to show that under Wisconsin law a third-party purchaser of an account could recover its internal costs to recover the debt, and, if so, that the 15% fee it charged to the plaintiffs reflected AFNI’s actual costs. The district court also concluded that the fee was not permitted by the parties’ contract because Cingular itself could not charge a collection fee that was neither the result of a referral of an account, nor reimbursement of fees charged to it by a collection agency, nor as part of an incurred cost. The use of the word "referral" in the consumer contract implies the existence of a third party; Cingular was not "referring" accounts to itself. Despite review of the contract language by a compliance committee and American Creditor Association ("ACA"), the court held that those steps did not amount to reasonable procedures and the defendant could not invoke the bona fide error defense. For a copy of the opinion, please contact .
Louisiana Appellate Court Affirms Lower Court’s Definition of "Consumer" Under TILA. On November 25, the Louisiana Court of Appeal affirmed the trial court’s finding that, for purposes of the Truth in Lending Act (TILA), "consumer" is defined to mean a person to whom credit is offered or extended and does not include a non-debtor spouse. Zeno v. Colonial Mortgage and Loan Corp., No. 08-CA-246 (La. Ct. App. Nov. 25, 2008).In this case, a consumer plaintiff filed suit against the defendant lender for violation of TILA as amended by the Home Ownership and Equity Protection Act (HOEPA) and its implementing Regulation Z , as well as for violation of the Louisiana Consumer Protection Act, alleging that the defendant violated its legal obligations in various ways, including failing to give her the proper TILA notices within the requisite time period, and improperly imposing a prepayment penalty, among other items.The trial court rendered judgment in favor of the plaintiff, as to liability only, for violation of TILA as amended by HOEPA , finding that (i) the loan at issue was made to the plaintiff and secured by her property, (ii) the loan was a HOEPA loan, and (iii) the loan violated HOEPA because the plaintiff’s monthly debts exceeded fifty percent of her monthly gross income and the loan included a prepayment penalty.The issue before the Court of Appeal was whether a court may consider the income coming into a consumer’s household from a non-debtor spouse when making a determination concerning the ratio between the monthly income available to the consumer and the monthly indebtedness for which the consumer is obligated.Finding that, for purposes of TILA, "consumer" is defined to mean a person to whom credit is offered or extended, the Court of Appeal affirmed the trial court’s judgment in favor of the plaintiff because the defendant improperly included the income of the plaintiff’s non-debtor spouse in calculating the "consumer’s" debt-to-income ratio and, as a result, illegally included a prepayment penalty on the loan.For a copy of this opinion, please contact .
Illinois Federal Court Applies Class Action Tolling Doctrine in TILA Violation Case. On November 18, the U.S. District Court for the Northern District of Illinois held that, pursuant to the class action tolling doctrine, the plaintiffs’ Truth in Lending Act (TILA) and Regulation Z claims were not time barred despite being filed after the statute of limitations period had expired. Mason v. Long Beach Mortgage Co., No. 07-6545, 2008 U.S. Dist. LEXIS 94250 (N.D. Ill. Nov. 18, 2008). In this case, the plaintiffs alleged that the defendant violated TILA and Regulation Z by failing to disclose the security interest that was purportedly created in the plaintiffs’ personal property when they signed, along with other mortgage loan documents, the 1-4 Family Rider. The defendants moved to dismiss this claim on grounds that it was time barred by TILA’s one-year statute of limitations. While the plaintiffs conceded that the filing of their action occurred outside TILA’s normal statute of limitations, they argued that the commencement of a related class action lawsuit tolled the statute of limitations. At issue here was whether the plaintiffs would be denied tolling for their claim as a result of their decision to opt out of the class before, not after, the court’s ruling on the class certification. While the Seventh Circuit has not decided this issue, the court joined the Second, Ninth, and Tenth Circuits in holding that claims of putative class members who opt out of the class before a ruling on class certification are not denied tolling. The court reasoned that if the class action tolling doctrine applied only to those putative class members who opted out after the certification ruling, then those who could not afford to wait until the ruling was made might have their rights expire in the meantime, which would be unfair. For a copy of the opinion, please contact .
Michigan Federal Court Rules that Debt Collector’s Actions Toward Non-Parties Are Irrelevant for Damages under the FDCPA. On November 21, the U.S. District Court for the Western District of Michigan held that a debt collector’s actions toward non parties are irrelevant when determining whether a plaintiff is entitled to statutory damages under § 1692k of the Fait Debt Collection Practices Act (FDCPA). Richard v. Oak Tree Group, Inc., 2008 U.S. Dist. LEXIS 95002 (W.D. Mich. Nov. 21, 2008). In this case, the court found that the defendant, Oak Tree Group violated §§ 1692e and 1692f of the FDCPA while attempting to collect a debt from the plaintiffs, Donald and Sandra Richard. During the damages hearing, the Richards claimed statutory damages under § 1692k of the FDCPA. Section 1692k requires courts to consider three factors when determining whether to award statutory damages under the FDCPA: (i) the frequency and persistence of non-compliance, (ii) the nature of such non-compliance, and (iii) the extent to which the non-compliance was intentional. The Richards claimed that they were entitled to statutory damages under the § 1692k test because Oak Tree sent hundreds of letters to consumers that intentionally inflated the amount of debt that consumers owed. Oak Tree countered by arguing that the "frequency and persistence" prong of the § 1692k test relates only to letters sent to plaintiffs and that the court should not consider letters sent to non-parties. The court agreed with Oak Tree, because § 1692k(b)makes a distinction between individual and class actions. According to the court, in both actions, § 1692k requires courts to consider the "frequency and persistence of noncompliance by the debt collector." However, in class actions, the statute also requires courts to consider "the number of persons adversely affected." The court reasoned that if the phrase "number of persons adversely affected" was to have meaning, it must require an additional showing that is not required under the Act’s "frequency and persistence of noncompliance" language. Accordingly, the court concluded that the "frequency and persistence of noncompliance" prong of § 1692kcannot include a debt collector’s actions with respect to non-parties, because otherwise, the "number of persons adversely affected" language in that section would be superfluous. As a result, the court held that, since Oak Tree only violated the FDCPA one time with its letter to the Richards, the Richardswere only entitled to a $50 award of statutory damages. For a copy of the opinion please contact .
Plaintiffs Lack Standing to Argue That Arbitration Clause Is Unconscionable. The United States Court of Appeals for the Fourth Circuit recently held that consumer plaintiffs failed to demonstrate that they had standing to claim that an arbitration clause is unconscionable where the credit card company did not seek to invoke the terms of the arbitration clause. Jones v. Sears Roebuck and Co. et al., No. 07-1584, 2008 U.S. App. LEXIS 23202 (4th Cir. Nov. 10, 2008). In this case, the plaintiffs alleged, among other things, that the arbitration agreement included in their credit card agreements was unconscionable. The plaintiffs sought a declaration that the clauses were unconscionable and that they were entitled to damages under the West Virginia Consumer Credit and Protection Act. The district court dismissed these claims, holding that plaintiffs lacked standing. On appeal, a panel of the Fourth Circuit agreed, despite plaintiffs’ argument that the arbitration agreements "unlawfully bar participation in class actions, prevent access to the courts, and unconstitutionally deprive them of their right to a jury trial." The Fourth Circuit held that plaintiffs lacked standing because they failed "to show an actual or threatened injury" - an indispensible element of standing - by providing no evidence that any of the defendants invoked or threatened to invoke the arbitration provision in question. For a copy of this opinion, please contact .
Illinois Federal Court Holds FACTA Amendment Applies to Negligence-Based Claims. On November 25, a federal district court in Illinois dismissed a claim against Wal-Mart Stores Inc. alleging violation of the Fair and Accurate Transactions Act (FACTA). Harris v. Wal-Mart Stores Inc., No. 07 C 02561, 2008 WL 5085132 (N.D. Ill. Nov. 25, 2008). The plaintiff in the case claimed that Wal-Mart negligently violated FACTA by sending him a computer-generated receipt that displayed his credit card expiration date in connection with an online purchase. According to Wal-Mart, the suit was barred by the Credit and Debit Card Receipt Clarification Act, which amended FACTA to bar claims arising from the mere act of printing an expiration date on a receipt. The plaintiff argued that the amendment did not bar negligence-based claims, but the court disagreed, finding that "Congress expressed its clear intent to bar claims where no actual harm to credit or identity is sustained and, thus, the Clarification Act applies equally to negligence-based claims as it does to willful violations." The court, therefore, dismissed the complaint with leave to amend. For a copy of the opinion, please contact .
Factual Inaccuracy Required to Trigger Reinvestigation Claim under California Consumer Reporting Agencies Act. The U.S. District Court for the Northern District of California in Carvalho v. Equifax Information Services, 2008 WL 5102511 (N.D. Cal. Dec. 2, 2008) recently denied a Plaintiff’s motion to certify class in an action claiming the defendant credit reporting agencies failed to reinvestigate the Plaintiff’s disputed credit information in violation of the California Consumer Reporting Agencies Act (CCRAA) (Cal. Civ. Code § 1785.16). The Plaintiff signed an agreement with a medical service provider stating that if the Plaintiff’s medical bill was not covered by insurance within 90 days, the Plaintiff would become financially responsible for paying the bill. The bill was not paid by the insurance company and the Plaintiff did not pay for the bill either. The medical service provider sent the bill to a collection service that, after several collection attempts, ultimately reported the unpaid debt to the credit reporting agencies, Equifax, Experian and TransUnion (the "Agencies"). The Agencies added the negative information to the Plaintiff’s credit report. The Plaintiff then sent four letters to the Agencies disputing the accuracy of this information on her credit report-in essence claiming the insurance company did not properly pay the bill. Because the CCRAA is largely modeled after the federal Fair Credit Reporting Act ("FCRA"), the court looked to prior cases interpreting FCRA’s reinvestigation requirements to determine that the information reported to the Agencies must be inaccurate to give rise to a claim for failure to reinvestigate. In this case, the court concluded whether the Plaintiff is required to pay the bill turns on the construction of the agreement between the Plaintiff and the medical service provider and thus "presents ‘a legal issue that a credit agency is neither qualified nor obligated to resolve.’" The court determined there was no genuine dispute that the Plaintiff’s credit report was factually accurate and granted the Defendant’s motion for summary judgment. For a copy of this case, please email .
Firm News
Jeff Naimon and Grant Mitchell will be presenting a teleconference on the new RESPA Reform rule on December 17 at 3PM for the American Bankers Association, with Rod Alba.
Joe Kolar made a presentation with HUD officials in an online webinar sponsored by the Consumer Bankers Association discussing the RESPA rule on December 9.
Jonathan Jerison was a speaker for a "Compliance Tune-Up" presented by the Regulatory Risk Monitor on December 9. For more information, click here.
Clint Rockwell spoke on RESPA and Appraisals at the California Mortgage Bankers Association Conference in Anaheim, CA on December 8.
Joe Kolar spoke on the RESPA Rule LIVE Online Conference sponsored by the Mortgage Bankers Association on December 2.
Miscellany
Correction. As reported in last week’s edition of InfoBytes, the Federal Reserve Board has proposed amendments to Regulation Z (Reg Z). The item stated that the delivery of Truth-in-Lending Act disclosures would have to occur at least seven business days before consummation. In fact, the disclosures would be required to be delivered or placed in the mail no later than three days after the creditor receives the loan application, which must be at least seven days before consummation. The seven-day waiting period begins to run from the date the disclosures are mailed. For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2008/pdf/E8-29123.pdf.
Mortgages
Fannie Mae to Allow Servicers to Modify Loans Before Default. On December 8, Fannie Mae announced new initiatives to allow servicers to modify loans more easily. For loans in existing servicer pools, Fannie has instructed servicers to provide foreclosure prevention assistance "as soon as a borrower demonstrates the need for help," even if the borrower is yet to default on payments, provided that the servicer reasonably foresees default. Fannie also announced a streamlined modification process in which borrowers simply agree to the modification and after a trial period, the loan is permanently modified. Fannie also introduced a new 2009 Single-Family Master Trust Agreement and servicer guidance that allow servicers to remove a loan from an MBS pool once the loan is one month delinquent for the purpose of a loan modification (current agreements do not allow for the removal of the loan until it is 120 days delinquent). More information is available at http://www.fanniemae.com/newsreleases/2008/4547.jhtml;jsessionid=IXSFXM5PTBCIBJ2FECISFGQ?p=Media&s=News+Releases.
HUD Issues Clarification on HECM Mortgages. On December 5, the Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2008-38 clarifying a borrower’s recourse for repayment of home equity conversion mortgage (HECM) loan debt and termination of a HECM mortgage. The letter clarifies that a borrower may not pay off the loan balance of a HECM for the lesser of the mortgage balance or the appraised value of the property while retaining ownership of the home. The letter also outlines the most common circumstances regarding the termination of HECM mortgages. The letter states that if the mortgage is not due and payable, and the borrower desires to retain ownership of the property, the mortgage debt may be repaid in full at any time. Also, if the mortgage is due and payable and the borrower (or estate) desires to retain ownership of the property, the mortgage debt must be repaid in full. The letter further states that lenders may assist the borrower (or estate) in obtaining other financing to pay off the HECM loan in full whether or not the mortgage is due and payable the borrower may, at any time, sell the property for at least the lesser of the mortgage debt or the appraised value. If the mortgage is due and payable and the borrower (or estate) will not be retaining ownership of the property, the property may be sold for at least the lesser of the unpaid mortgage balance or 95% of appraised value. Also, in all circumstances where a mortgagee agrees to accept less than the full mortgage balance, the sale must be an arm’s length transaction. For a copy of the letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-38ml.doc.
Delaware Adopts Mortgage Loan Originator Regulations. Recently, the Delaware Office of the State Bank Commissioner issued regulations implementing a law requiring mortgage loan originators to be licensed (reported in InfoBytes, Sep. 5, 2008). Among other things, the regulations provide that those mortgage loan originators employed by a licensed lender or mortgage loan broker prior to January 1, 2009 have until March 31, 2009 to submit a license application. Additionally, those individuals beginning employment as mortgage loan originators after January 1, 2009 may not conduct business as mortgage loan originators until they have submitted a license application. Once a license application has been submitted, an individual is free to operate as a mortgage loan originator on a provisional basis until the regulator has rendered a decision on the application. The regulations also set forth duties of originating entities that employ mortgage loan originators, as well as record keeping and notification requirements. Mortgage loan originators will be licensed through the Nationwide Mortgage Licensing System. The regulations became effective December 11, 2008. For a copy of the regulations, please see http://regulations.delaware.gov/AdminCode/title5/2401%20Mortgage%20Loan%20Originator%20Licensing.pdf.
Nebraska Attorney General Files Civil Suit Against Builder, Mortgage Broker, and Appraiser. On December 1, Nebraska Attorney General Jon Bruning, along with the Nebraska Department of Banking, filed suit in the District Court of Lancaster County, Nebraska against a Lincoln homebuilder, mortgage broker and two appraisers. Aspen Builders Inc., Lincoln Mortgage Inc. and two appraisers are charged with violating the Uniform Deceptive Trade Practices Act, the Nebraska Consumer Protection Act and committing civil conspiracy.In addition, Lincoln Mortgage is charged with violating the Nebraska Mortgage Bankers Registration and Licensing Act. These charges stem from allegations that these parties acted together to inflate home prices to obtain mortgages fraudulently for home buyers, thereby harming lenders by causing them to issue under-collateralized loans and homebuyers by leaving them with homes that had a market value lower than their purchase price. The complaint requests damages, including restitution, court costs and attorney fees. For the full text of the complaint, see http://www.journalstar.com/resources/newsroom/news/lawsuit.pdf.
Washington Advises Homeowners on Loan Modification Servicers. On December 4, the Washington Department of Financial Institutions (DFI) warned borrowers who are delinquent on their mortgage to verify that an entity offering to help them work with their lender to modify the terms of their home loan is licensed. The DFI received a number of inquiries regarding the legality of providing this service in this state. While the DFI made clear that there was nothing inherently illegal in the activity, it warned homeowners that those providing this service in Washington must be licensed as loan originators, mortgage brokers, or consumer loan companies and be overseen by the Department of Financial Institutions. Additionally, under applicable law, the loan modification provider associated with a mortgage broker has a fiduciary relationship with the borrower and must act in the borrower’s best interest. For a copy of the press release, please see http://dfi.wa.gov/consumers/news/2008/loan-modification.htm.
Ohio Attorney General Settles with New Century Financial Corporation. On November 25, Ohio Attorney General Nancy Rogers reached a final settlement agreement with New Century Financial Corporation and two of its subsidiaries. The settlement resolves allegations of loan origination misconduct initially filed in 2007 against the company and two of its subsidiaries for violations of the Ohio Consumer Sales Practices Act, the Ohio Mortgage Loan Act, and the Ohio Mortgage Broker Act. Earlier, an Ohio court issued a stipulated preliminary injunction. The injunction acted as a moratorium on New Century foreclosures in Ohio, thus giving the Attorney General’s office an opportunity to review the loans for evidence of alleged predatory practices. As a result of the review process, the state determined that 393 people should continue to receive protection against foreclosure. The agreement provides that New Century and its subsidiaries will be enjoined from engaging in mortgage lending or foreclosure activities in Ohio. In addition, the agreement provides for a settlement payment of $250,000, including attorneys’ fees. For a copy of the press release, please see http://www.ag.state.oh.us/press/08/11/pr081126.pdf.
Illinois Governor’s Mortgage Fraud Task Force Shuts Down Two Mortgage Companies. Illinois Governor Rod R. Blagojevich’s Mortgage Fraud Task Force (MFTF), with the assistance of the Illinois Department of Financial and Professional Regulation (IDFPR), has taken action to shut down two mortgage companies, revoke two loan officers’ registrations, and file charges against a licensed appraiser and unlicensed real estate agent.The mortgage fraud scheme was discovered after the IDFPR investigated a complaint from a renter who grew suspicious when asked to pay rent directly to an unknown individual because her apartment building was being converted to condominiums.Only weeks after receiving the renter’s complaint, the IDFPR and MFTF discovered that fraudulent loan applications brokered by Envision Lending Group or Gateway Mortgage Group were used to purchase multiple units in the building through the same real estate sales office.The IDFPR could not verify the information that was supplied in the underlying loan applications, which were handled by loan originators at Envision Lending Group and Gateway Mortgage Group. For the full text of the MFTF’s orders and complaints, please see http://www.idfpr.com/newsrls/11242008GovBlagojevichMortFraudTastForce.asp.
Louisiana Appellate Court Affirms Lower Court’s Definition of "Consumer" Under TILA. On November 25, the Louisiana Court of Appeal affirmed the trial court’s finding that, for purposes of the Truth in Lending Act (TILA), "consumer" is defined to mean a person to whom credit is offered or extended and does not include a non-debtor spouse. Zeno v. Colonial Mortgage and Loan Corp., No. 08-CA-246 (La. Ct. App. Nov. 25, 2008).In this case, a consumer plaintiff filed suit against the defendant lender for violation of TILA as amended by the Home Ownership and Equity Protection Act (HOEPA) and its implementing Regulation Z , as well as for violation of the Louisiana Consumer Protection Act, alleging that the defendant violated its legal obligations in various ways, including failing to give her the proper TILA notices within the requisite time period, and improperly imposing a prepayment penalty, among other items.The trial court rendered judgment in favor of the plaintiff, as to liability only, for violation of TILA as amended by HOEPA , finding that (i) the loan at issue was made to the plaintiff and secured by her property, (ii) the loan was a HOEPA loan, and (iii) the loan violated HOEPA because the plaintiff’s monthly debts exceeded fifty percent of her monthly gross income and the loan included a prepayment penalty.The issue before the Court of Appeal was whether a court may consider the income coming into a consumer’s household from a non-debtor spouse when making a determination concerning the ratio between the monthly income available to the consumer and the monthly indebtedness for which the consumer is obligated.Finding that, for purposes of TILA, "consumer" is defined to mean a person to whom credit is offered or extended, the Court of Appeal affirmed the trial court’s judgment in favor of the plaintiff because the defendant improperly included the income of the plaintiff’s non-debtor spouse in calculating the "consumer’s" debt-to-income ratio and, as a result, illegally included a prepayment penalty on the loan.For a copy of this opinion, please contact .
Illinois Federal Court Applies Class Action Tolling Doctrine in TILA Violation Case. On November 18, the U.S. District Court for the Northern District of Illinois held that, pursuant to the class action tolling doctrine, the plaintiffs’ Truth in Lending Act (TILA) and Regulation Z claims were not time barred despite being filed after the statute of limitations period had expired. Mason v. Long Beach Mortgage Co., No. 07-6545, 2008 U.S. Dist. LEXIS 94250 (N.D. Ill. Nov. 18, 2008). In this case, the plaintiffs alleged that the defendant violated TILA and Regulation Z by failing to disclose the security interest that was purportedly created in the plaintiffs’ personal property when they signed, along with other mortgage loan documents, the 1-4 Family Rider. The defendants moved to dismiss this claim on grounds that it was time barred by TILA’s one-year statute of limitations. While the plaintiffs conceded that the filing of their action occurred outside TILA’s normal statute of limitations, they argued that the commencement of a related class action lawsuit tolled the statute of limitations. At issue here was whether the plaintiffs would be denied tolling for their claim as a result of their decision to opt out of the class before, not after, the court’s ruling on the class certification. While the Seventh Circuit has not decided this issue, the court joined the Second, Ninth, and Tenth Circuits in holding that claims of putative class members who opt out of the class before a ruling on class certification are not denied tolling. The court reasoned that if the class action tolling doctrine applied only to those putative class members who opted out after the certification ruling, then those who could not afford to wait until the ruling was made might have their rights expire in the meantime, which would be unfair. For a copy of the opinion, please contact .
Banking
GAO Reports Increased Foreclosures and Uncertainty about Treasury’s TARP Progress. On December 4, the Government Accountability Office (GAO) presented two reports on the Troubled Asset Relief Program (TARP): one to the Subcommittee on Financial Services and General Government of the U.S. Senate’s Committee on Appropriations regarding the status of efforts to address default home mortgages; and one to various Congressional Committees regarding actions needed to better ensure integrity, accountability, and transparency. GAO reports a "dramatic increase" in defaulted and foreclosed mortgages between 2005 and the second quarter of 2008, with 4 in every 100 mortgages in default or foreclosure. The sub-prime and adjustable rate mortgage markets have suffered more significantly than other mortgage markets. Since 2005, foreclosures are up at least 10 percent in every state, and 23 states experiencing an increase of 100 percent or more. While admitting it is too soon to determine whether Treasury’s TARP programs are having their intended effect, GAO does make a number of suggestions across the two reports intended to improve programs that have been in effect since October, 2008. GAO suggests that Treasury, while implementing TARP, work with bank regulators to develop a system for determining and reporting on whether financial institutions benefiting from TARP have implemented policies consistent with the program. GAO also suggests Treasury hire sufficient personnel, who are trained and prepared to oversee TARP and continue to develop policies and procedures to ensure the effectiveness of the program. For a copy of the two reports, please see http://www.gao.gov/new.items/d09161.pdf and http://www.gao.gov/new.items/d09231t.pdf.
FDIC Issues Publication on Higher Deposit Insurance Coverage. On December 4, the Federal Deposit Insurance Corporation (FDIC) issued a publication for consumers regarding the temporary increase in the basic insurance limit from $100,000 to $250,000. The publication of FDIC Consumer News entitled "Your New, Higher FDIC Insurance Coverage: How You Can Be Fully Protected" addresses the following topics: (i) the basic limit on federal deposit insurance coverage has been temporarily increased from at least $100,000 to at least $250,000 per depositor, (ii) the basic FDIC insurance limit will return to $100,000 on January 1, 2010, (iii) the FDIC has eased the rule governing "revocable trust accounts" that pass to named beneficiaries when the account owner dies to includeany person or charity as a beneficiary, and (iv) through year-end 2009, certain checking accounts at participating banks will be fully insured by the FDIC, no matter how much money is in them. For a copy of this publication, please see http://www.fdic.gov/consumers/consumer/news/cnfall08/.
OCC, Wachovia Reach Agreement to Reimburse Consumers Harmed by Telemarketers. On December 11, the Office of the Comptroller of the Currency (OCC) announced that it had reached an agreement with Wachovia Bank, N.A. (Wachovia) directing the bank to issue checks to consumers that may have been harmed by payment processors for telemarketers that had account relationships with Wachovia. Telemarketers obtained bank account information over the phone by offering consumers a range of questionable products and services. With the account information obtained during the call, the telemarketer would direct the payment processor to create a remotely created check (RCC). The payment processor would then deposit the remotely created check into the processor’s account at Wachovia, and funds were then withdrawn from consumers’ accounts to make payment on the check and deposited into the processor’s account. A large percentage of these RCCs were returned to Wachovia by individuals, or their financial institutions, who said the checks were never authorized or that they had never received the products or services offered by the telemarketers. As a result of the agreement, Wachovia will issue checks totaling over $150 million to more than 740,000 consumers. For a copy of the press release, please see http://www.occ.gov/ftp/release/2008-143.htm.
OCC Publishes Report on Historic Tax Credit Program. On November 26, the Office of the Comptroller of the Currency (OCC) published a Community Developments Insights report that describes how banks participate in the Historic Tax Credit (HTC) program which is used to rehabilitate and restore certified historic properties. This report describes the HTC program with a particular focus on topics of interest to bankers new to the product. The report examines the primary risks and regulatory considerations associated with financing HTC projects as well as how Historic Tax Credits would be considered in a bank’s Community Reinvestment Act examination. The report also discusses how national banks may utilize these credits under their public welfare investment authority, which the Housing and Economic Recovery Act recently expanded to include a broader range of communities targeted for revitalization, FEMA-designated disaster areas, and rural underserved and distressed communities. For a copy of the full report, please see http://www.occ.gov/cdd/Insights-HTC.pdf.
Consumer Finance
Seventh Circuit Affirms Collection Fee Charge is an FDCPA Violation. On December 7, the U.S. Court of Appeals for the Seventh Circuit held that a collection agency charged impermissible fees under the Fair Debt Collection Practices Act (FDCPA) and Wisconsin law. Seeger et al. v. AFNI, Inc., No. 07-4083 (7th Cir. Dec. 8, 2008). Plaintiffs were Cingular account holders whose delinquent debts were sold to AFNI a collection agency. AFNI sent debt collection letters to the plaintiffs, informing each one that he owed a debt and that Cingular was the original creditor. The district court held that this constituted an impermissible fee under the FDCPA and a violation of state law. The court affirmed the lower court’s decision that AFNI failed to show that under Wisconsin law a third-party purchaser of an account could recover its internal costs to recover the debt, and, if so, that the 15% fee it charged to the plaintiffs reflected AFNI’s actual costs. The district court also concluded that the fee was not permitted by the parties’ contract because Cingular itself could not charge a collection fee that was neither the result of a referral of an account, nor reimbursement of fees charged to it by a collection agency, nor as part of an incurred cost. The use of the word "referral" in the consumer contract implies the existence of a third party; Cingular was not "referring" accounts to itself. Despite review of the contract language by a compliance committee and American Creditor Association ("ACA"), the court held that those steps did not amount to reasonable procedures and the defendant could not invoke the bona fide error defense. For a copy of the opinion, please contact .
Michigan Federal Court Rules that Debt Collector’s Actions Toward Non-Parties Are Irrelevant for Damages under the FDCPA. On November 21, the U.S. District Court for the Western District of Michigan held that a debt collector’s actions toward non parties are irrelevant when determining whether a plaintiff is entitled to statutory damages under § 1692k of the Fait Debt Collection Practices Act (FDCPA). Richard v. Oak Tree Group, Inc., 2008 U.S. Dist. LEXIS 95002 (W.D. Mich. Nov. 21, 2008). In this case, the court found that the defendant, Oak Tree Group violated §§ 1692e and 1692f of the FDCPA while attempting to collect a debt from the plaintiffs, Donald and Sandra Richard. During the damages hearing, the Richards claimed statutory damages under § 1692k of the FDCPA. Section 1692k requires courts to consider three factors when determining whether to award statutory damages under the FDCPA: (i) the frequency and persistence of non-compliance, (ii) the nature of such non-compliance, and (iii) the extent to which the non-compliance was intentional. The Richards claimed that they were entitled to statutory damages under the § 1692k test because Oak Tree sent hundreds of letters to consumers that intentionally inflated the amount of debt that consumers owed. Oak Tree countered by arguing that the "frequency and persistence" prong of the § 1692k test relates only to letters sent to plaintiffs and that the court should not consider letters sent to non-parties. The court agreed with Oak Tree, because § 1692k(b)makes a distinction between individual and class actions. According to the court, in both actions, § 1692k requires courts to consider the "frequency and persistence of noncompliance by the debt collector." However, in class actions, the statute also requires courts to consider "the number of persons adversely affected." The court reasoned that if the phrase "number of persons adversely affected" was to have meaning, it must require an additional showing that is not required under the Act’s "frequency and persistence of noncompliance" language. Accordingly, the court concluded that the "frequency and persistence of noncompliance" prong of § 1692kcannot include a debt collector’s actions with respect to non-parties, because otherwise, the "number of persons adversely affected" language in that section would be superfluous. As a result, the court held that, since Oak Tree only violated the FDCPA one time with its letter to the Richards, the Richardswere only entitled to a $50 award of statutory damages. For a copy of the opinion please contact .
Plaintiffs Lack Standing to Argue That Arbitration Clause Is Unconscionable. The United States Court of Appeals for the Fourth Circuit recently held that consumer plaintiffs failed to demonstrate that they had standing to claim that an arbitration clause is unconscionable where the credit card company did not seek to invoke the terms of the arbitration clause. Jones v. Sears Roebuck and Co. et al., No. 07-1584, 2008 U.S. App. LEXIS 23202 (4th Cir. Nov. 10, 2008). In this case, the plaintiffs alleged, among other things, that the arbitration agreement included in their credit card agreements was unconscionable. The plaintiffs sought a declaration that the clauses were unconscionable and that they were entitled to damages under the West Virginia Consumer Credit and Protection Act. The district court dismissed these claims, holding that plaintiffs lacked standing. On appeal, a panel of the Fourth Circuit agreed, despite plaintiffs’ argument that the arbitration agreements "unlawfully bar participation in class actions, prevent access to the courts, and unconstitutionally deprive them of their right to a jury trial." The Fourth Circuit held that plaintiffs lacked standing because they failed "to show an actual or threatened injury" - an indispensible element of standing - by providing no evidence that any of the defendants invoked or threatened to invoke the arbitration provision in question. For a copy of this opinion, please contact .
Illinois Federal Court Holds FACTA Amendment Applies to Negligence-Based Claims. On November 25, a federal district court in Illinois dismissed a claim against Wal-Mart Stores Inc. alleging violation of the Fair and Accurate Transactions Act (FACTA). Harris v. Wal-Mart Stores Inc., No. 07 C 02561, 2008 WL 5085132 (N.D. Ill. Nov. 25, 2008). The plaintiff in the case claimed that Wal-Mart negligently violated FACTA by sending him a computer-generated receipt that displayed his credit card expiration date in connection with an online purchase. According to Wal-Mart, the suit was barred by the Credit and Debit Card Receipt Clarification Act, which amended FACTA to bar claims arising from the mere act of printing an expiration date on a receipt. The plaintiff argued that the amendment did not bar negligence-based claims, but the court disagreed, finding that "Congress expressed its clear intent to bar claims where no actual harm to credit or identity is sustained and, thus, the Clarification Act applies equally to negligence-based claims as it does to willful violations." The court, therefore, dismissed the complaint with leave to amend. For a copy of the opinion, please contact .
Factual Inaccuracy Required to Trigger Reinvestigation Claim under California Consumer Reporting Agencies Act. The U.S. District Court for the Northern District of California in Carvalho v. Equifax Information Services, 2008 WL 5102511 (N.D. Cal. Dec. 2, 2008) recently denied a Plaintiff’s motion to certify class in an action claiming the defendant credit reporting agencies failed to reinvestigate the Plaintiff’s disputed credit information in violation of the California Consumer Reporting Agencies Act (CCRAA) (Cal. Civ. Code § 1785.16). The Plaintiff signed an agreement with a medical service provider stating that if the Plaintiff’s medical bill was not covered by insurance within 90 days, the Plaintiff would become financially responsible for paying the bill. The bill was not paid by the insurance company and the Plaintiff did not pay for the bill either. The medical service provider sent the bill to a collection service that, after several collection attempts, ultimately reported the unpaid debt to the credit reporting agencies, Equifax, Experian and TransUnion (the "Agencies"). The Agencies added the negative information to the Plaintiff’s credit report. The Plaintiff then sent four letters to the Agencies disputing the accuracy of this information on her credit report-in essence claiming the insurance company did not properly pay the bill. Because the CCRAA is largely modeled after the federal Fair Credit Reporting Act ("FCRA"), the court looked to prior cases interpreting FCRA’s reinvestigation requirements to determine that the information reported to the Agencies must be inaccurate to give rise to a claim for failure to reinvestigate. In this case, the court concluded whether the Plaintiff is required to pay the bill turns on the construction of the agreement between the Plaintiff and the medical service provider and thus "presents ‘a legal issue that a credit agency is neither qualified nor obligated to resolve.’" The court determined there was no genuine dispute that the Plaintiff’s credit report was factually accurate and granted the Defendant’s motion for summary judgment. For a copy of this case, please email .
Litigation
Seventh Circuit Affirms Collection Fee Charge is an FDCPA Violation. On December 7, the U.S. Court of Appeals for the Seventh Circuit held that a collection agency charged impermissible fees under the Fair Debt Collection Practices Act (FDCPA) and Wisconsin law. Seeger et al. v. AFNI, Inc., No. 07-4083 (7th Cir. Dec. 8, 2008). Plaintiffs were Cingular account holders whose delinquent debts were sold to AFNI a collection agency. AFNI sent debt collection letters to the plaintiffs, informing each one that he owed a debt and that Cingular was the original creditor. The district court held that this constituted an impermissible fee under the FDCPA and a violation of state law. The court affirmed the lower court’s decision that AFNI failed to show that under Wisconsin law a third-party purchaser of an account could recover its internal costs to recover the debt, and, if so, that the 15% fee it charged to the plaintiffs reflected AFNI’s actual costs. The district court also concluded that the fee was not permitted by the parties’ contract because Cingular itself could not charge a collection fee that was neither the result of a referral of an account, nor reimbursement of fees charged to it by a collection agency, nor as part of an incurred cost. The use of the word "referral" in the consumer contract implies the existence of a third party; Cingular was not "referring" accounts to itself. Despite review of the contract language by a compliance committee and American Creditor Association ("ACA"), the court held that those steps did not amount to reasonable procedures and the defendant could not invoke the bona fide error defense. For a copy of the opinion, please contact .
Louisiana Appellate Court Affirms Lower Court’s Definition of "Consumer" Under TILA. On November 25, the Louisiana Court of Appeal affirmed the trial court’s finding that, for purposes of the Truth in Lending Act (TILA), "consumer" is defined to mean a person to whom credit is offered or extended and does not include a non-debtor spouse. Zeno v. Colonial Mortgage and Loan Corp., No. 08-CA-246 (La. Ct. App. Nov. 25, 2008).In this case, a consumer plaintiff filed suit against the defendant lender for violation of TILA as amended by the Home Ownership and Equity Protection Act (HOEPA) and its implementing Regulation Z , as well as for violation of the Louisiana Consumer Protection Act, alleging that the defendant violated its legal obligations in various ways, including failing to give her the proper TILA notices within the requisite time period, and improperly imposing a prepayment penalty, among other items.The trial court rendered judgment in favor of the plaintiff, as to liability only, for violation of TILA as amended by HOEPA , finding that (i) the loan at issue was made to the plaintiff and secured by her property, (ii) the loan was a HOEPA loan, and (iii) the loan violated HOEPA because the plaintiff’s monthly debts exceeded fifty percent of her monthly gross income and the loan included a prepayment penalty.The issue before the Court of Appeal was whether a court may consider the income coming into a consumer’s household from a non-debtor spouse when making a determination concerning the ratio between the monthly income available to the consumer and the monthly indebtedness for which the consumer is obligated.Finding that, for purposes of TILA, "consumer" is defined to mean a person to whom credit is offered or extended, the Court of Appeal affirmed the trial court’s judgment in favor of the plaintiff because the defendant improperly included the income of the plaintiff’s non-debtor spouse in calculating the "consumer’s" debt-to-income ratio and, as a result, illegally included a prepayment penalty on the loan.For a copy of this opinion, please contact .
Illinois Federal Court Applies Class Action Tolling Doctrine in TILA Violation Case. On November 18, the U.S. District Court for the Northern District of Illinois held that, pursuant to the class action tolling doctrine, the plaintiffs’ Truth in Lending Act (TILA) and Regulation Z claims were not time barred despite being filed after the statute of limitations period had expired. Mason v. Long Beach Mortgage Co., No. 07-6545, 2008 U.S. Dist. LEXIS 94250 (N.D. Ill. Nov. 18, 2008). In this case, the plaintiffs alleged that the defendant violated TILA and Regulation Z by failing to disclose the security interest that was purportedly created in the plaintiffs’ personal property when they signed, along with other mortgage loan documents, the 1-4 Family Rider. The defendants moved to dismiss this claim on grounds that it was time barred by TILA’s one-year statute of limitations. While the plaintiffs conceded that the filing of their action occurred outside TILA’s normal statute of limitations, they argued that the commencement of a related class action lawsuit tolled the statute of limitations. At issue here was whether the plaintiffs would be denied tolling for their claim as a result of their decision to opt out of the class before, not after, the court’s ruling on the class certification. While the Seventh Circuit has not decided this issue, the court joined the Second, Ninth, and Tenth Circuits in holding that claims of putative class members who opt out of the class before a ruling on class certification are not denied tolling. The court reasoned that if the class action tolling doctrine applied only to those putative class members who opted out after the certification ruling, then those who could not afford to wait until the ruling was made might have their rights expire in the meantime, which would be unfair. For a copy of the opinion, please contact .
Michigan Federal Court Rules that Debt Collector’s Actions Toward Non-Parties Are Irrelevant for Damages under the FDCPA. On November 21, the U.S. District Court for the Western District of Michigan held that a debt collector’s actions toward non parties are irrelevant when determining whether a plaintiff is entitled to statutory damages under § 1692k of the Fait Debt Collection Practices Act (FDCPA). Richard v. Oak Tree Group, Inc., 2008 U.S. Dist. LEXIS 95002 (W.D. Mich. Nov. 21, 2008). In this case, the court found that the defendant, Oak Tree Group violated §§ 1692e and 1692f of the FDCPA while attempting to collect a debt from the plaintiffs, Donald and Sandra Richard. During the damages hearing, the Richards claimed statutory damages under § 1692k of the FDCPA. Section 1692k requires courts to consider three factors when determining whether to award statutory damages under the FDCPA: (i) the frequency and persistence of non-compliance, (ii) the nature of such non-compliance, and (iii) the extent to which the non-compliance was intentional. The Richards claimed that they were entitled to statutory damages under the § 1692k test because Oak Tree sent hundreds of letters to consumers that intentionally inflated the amount of debt that consumers owed. Oak Tree countered by arguing that the "frequency and persistence" prong of the § 1692k test relates only to letters sent to plaintiffs and that the court should not consider letters sent to non-parties. The court agreed with Oak Tree, because § 1692k(b)makes a distinction between individual and class actions. According to the court, in both actions, § 1692k requires courts to consider the "frequency and persistence of noncompliance by the debt collector." However, in class actions, the statute also requires courts to consider "the number of persons adversely affected." The court reasoned that if the phrase "number of persons adversely affected" was to have meaning, it must require an additional showing that is not required under the Act’s "frequency and persistence of noncompliance" language. Accordingly, the court concluded that the "frequency and persistence of noncompliance" prong of § 1692kcannot include a debt collector’s actions with respect to non-parties, because otherwise, the "number of persons adversely affected" language in that section would be superfluous. As a result, the court held that, since Oak Tree only violated the FDCPA one time with its letter to the Richards, the Richardswere only entitled to a $50 award of statutory damages. For a copy of the opinion please contact .
Plaintiffs Lack Standing to Argue That Arbitration Clause Is Unconscionable. The United States Court of Appeals for the Fourth Circuit recently held that consumer plaintiffs failed to demonstrate that they had standing to claim that an arbitration clause is unconscionable where the credit card company did not seek to invoke the terms of the arbitration clause. Jones v. Sears Roebuck and Co. et al., No. 07-1584, 2008 U.S. App. LEXIS 23202 (4th Cir. Nov. 10, 2008). In this case, the plaintiffs alleged, among other things, that the arbitration agreement included in their credit card agreements was unconscionable. The plaintiffs sought a declaration that the clauses were unconscionable and that they were entitled to damages under the West Virginia Consumer Credit and Protection Act. The district court dismissed these claims, holding that plaintiffs lacked standing. On appeal, a panel of the Fourth Circuit agreed, despite plaintiffs’ argument that the arbitration agreements "unlawfully bar participation in class actions, prevent access to the courts, and unconstitutionally deprive them of their right to a jury trial." The Fourth Circuit held that plaintiffs lacked standing because they failed "to show an actual or threatened injury" - an indispensible element of standing - by providing no evidence that any of the defendants invoked or threatened to invoke the arbitration provision in question. For a copy of this opinion, please contact .
Illinois Federal Court Holds FACTA Amendment Applies to Negligence-Based Claims. On November 25, a federal district court in Illinois dismissed a claim against Wal-Mart Stores Inc. alleging violation of the Fair and Accurate Transactions Act (FACTA). Harris v. Wal-Mart Stores Inc., No. 07 C 02561, 2008 WL 5085132 (N.D. Ill. Nov. 25, 2008). The plaintiff in the case claimed that Wal-Mart negligently violated FACTA by sending him a computer-generated receipt that displayed his credit card expiration date in connection with an online purchase. According to Wal-Mart, the suit was barred by the Credit and Debit Card Receipt Clarification Act, which amended FACTA to bar claims arising from the mere act of printing an expiration date on a receipt. The plaintiff argued that the amendment did not bar negligence-based claims, but the court disagreed, finding that "Congress expressed its clear intent to bar claims where no actual harm to credit or identity is sustained and, thus, the Clarification Act applies equally to negligence-based claims as it does to willful violations." The court, therefore, dismissed the complaint with leave to amend. For a copy of the opinion, please contact .
Factual Inaccuracy Required to Trigger Reinvestigation Claim under California Consumer Reporting Agencies Act. The U.S. District Court for the Northern District of California in Carvalho v. Equifax Information Services, 2008 WL 5102511 (N.D. Cal. Dec. 2, 2008) recently denied a Plaintiff’s motion to certify class in an action claiming the defendant credit reporting agencies failed to reinvestigate the Plaintiff’s disputed credit information in violation of the California Consumer Reporting Agencies Act (CCRAA) (Cal. Civ. Code § 1785.16). The Plaintiff signed an agreement with a medical service provider stating that if the Plaintiff’s medical bill was not covered by insurance within 90 days, the Plaintiff would become financially responsible for paying the bill. The bill was not paid by the insurance company and the Plaintiff did not pay for the bill either. The medical service provider sent the bill to a collection service that, after several collection attempts, ultimately reported the unpaid debt to the credit reporting agencies, Equifax, Experian and TransUnion (the "Agencies"). The Agencies added the negative information to the Plaintiff’s credit report. The Plaintiff then sent four letters to the Agencies disputing the accuracy of this information on her credit report-in essence claiming the insurance company did not properly pay the bill. Because the CCRAA is largely modeled after the federal Fair Credit Reporting Act ("FCRA"), the court looked to prior cases interpreting FCRA’s reinvestigation requirements to determine that the information reported to the Agencies must be inaccurate to give rise to a claim for failure to reinvestigate. In this case, the court concluded whether the Plaintiff is required to pay the bill turns on the construction of the agreement between the Plaintiff and the medical service provider and thus "presents ‘a legal issue that a credit agency is neither qualified nor obligated to resolve.’" The court determined there was no genuine dispute that the Plaintiff’s credit report was factually accurate and granted the Defendant’s motion for summary judgment. For a copy of this case, please email .
Privacy/Data Security
OCC, Wachovia Reach Agreement to Reimburse Consumers Harmed by Telemarketers. On December 11, the Office of the Comptroller of the Currency (OCC) announced that it had reached an agreement with Wachovia Bank, N.A. (Wachovia) directing the bank to issue checks to consumers that may have been harmed by payment processors for telemarketers that had account relationships with Wachovia. Telemarketers obtained bank account information over the phone by offering consumers a range of questionable products and services. With the account information obtained during the call, the telemarketer would direct the payment processor to create a remotely created check (RCC). The payment processor would then deposit the remotely created check into the processor’s account at Wachovia, and funds were then withdrawn from consumers’ accounts to make payment on the check and deposited into the processor’s account. A large percentage of these RCCs were returned to Wachovia by individuals, or their financial institutions, who said the checks were never authorized or that they had never received the products or services offered by the telemarketers. As a result of the agreement, Wachovia will issue checks totaling over $150 million to more than 740,000 consumers. For a copy of the press release, please see http://www.occ.gov/ftp/release/2008-143.htm.
FTC Settles Advance-Fee Telemarketer Misrepresentation Charges. On December 10, the Federal Trade Commission (FTC) announced that it had reached a settlement with a telemarketer regarding advance fee credit cards. Allegedly, the defendant Robert James Fischbach and his two companies, Integrity Financial Enterprises, LLC, also doing business as Infinite Financial and National Benefit Exchange; and National Benefit Exchange, Inc. used telemarketing to sell an advance fee "credit card" that they claimed could be used like a Visa or MasterCard, but which actually could be used only to buy products from the defendants’ web site or catalog. The defendants also allegedly misled consumers by failing to cancel or change their orders to avoid the debiting of the advance fee from their bank accounts at the consumers’ request, as promised. The settlement prohibits the defendant from making the misrepresentations alleged in the complaint, and more broadly from violating the FTC Act and Telemarketing Sales Rule. The order also imposes a monetary judgment of more than $2.4 million. For a copy of the press release, please see http://www2.ftc.gov/opa/2008/12/telephoney.shtm. For a copy of the settlement, please see http://www2.ftc.gov/os/caselist/0823120/081205integritygishbachstipfnl.pdf.
Credit Cards
Plaintiffs Lack Standing to Argue That Arbitration Clause Is Unconscionable. The United States Court of Appeals for the Fourth Circuit recently held that consumer plaintiffs failed to demonstrate that they had standing to claim that an arbitration clause is unconscionable where the credit card company did not seek to invoke the terms of the arbitration clause. Jones v. Sears Roebuck and Co. et al., No. 07-1584, 2008 U.S. App. LEXIS 23202 (4th Cir. Nov. 10, 2008). In this case, the plaintiffs alleged, among other things, that the arbitration agreement included in their credit card agreements was unconscionable. The plaintiffs sought a declaration that the clauses were unconscionable and that they were entitled to damages under the West Virginia Consumer Credit and Protection Act. The district court dismissed these claims, holding that plaintiffs lacked standing. On appeal, a panel of the Fourth Circuit agreed, despite plaintiffs’ argument that the arbitration agreements "unlawfully bar participation in class actions, prevent access to the courts, and unconstitutionally deprive them of their right to a jury trial." The Fourth Circuit held that plaintiffs lacked standing because they failed "to show an actual or threatened injury" - an indispensible element of standing - by providing no evidence that any of the defendants invoked or threatened to invoke the arbitration provision in question. For a copy of this opinion, please contact .