InfoBytes, December 4, 2009
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Litigation
- Privacy/Data Security
- Credit Cards
Federal Issues
HUD Issues Mortgagee Letter Setting Forth FHA 2010 Loan Limits. On November 25, the U.S. Department of Housing and Urban Development (HUD) issued Mortgage Letter 2009-50 to notify approved mortgagees of the Federal Housing Administration’s (FHA) single-family loan limits for 2010. The limits apply to loans with credit approvals issued on or between January 1, 2010, and December 31, 2010, and that are insured under specified sections of the National Housing Act. For 2010, the national ceiling for FHA single-family loans in most areas of the country will be $729,750 and the national floor will continue to be $271,050. (Certain areas of Alaska, Hawaii, Guam, and the Virgin Islands have a loan limit above the national ceiling to account for higher construction costs.) The letter also identifies the areas where the loan limit is between the national ceiling and floor. Finally, the letter provides that the national loan limit for home equity conversion mortgages will remain at $625,500 through December 31, 2010. For a copy of the letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-50ml.pdf. For a copy of the attachments to the letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-50mla1.pdf and http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-50mla2.pdf.
Treasury, HUD Launch Mortgage Modification Conversion Drive. On November 30, the U.S. Department of Treasury (Treasury) and U.S. Department of Housing and Urban Development (HUD) launched the Mortgage Modification Conversion Drive, which is a nationwide campaign to assist borrowers convert trial modifications under the Home Affordable Modification Program (HAMP) to permanent modifications. Treasury and HUD have already taken steps to make the conversion from trial to permanent modification less burdensome (e.g., the period for trial modifications that started on or before September 1, 2009 was extended to give homeowners additional time to submit required information), and the conversion drive’s new tools and resources seek to further simplify the process. For example, the conversion drive will include (i) servicer accountability, which could include monetary penalties and sanctions against a servicer that fails to meet performance obligations under the Servicer Participation Agreement, (ii) web tools for borrowers, which include links to required documents and an income verification checklist to assist borrowers in easily requesting modification, and (iii) engagement of state, local and community stakeholders, which includes engaging staff in HUD’s 81 field offices to distribute outreach tools at a local level. For the full text of the press release, please see http://www.treas.gov/press/releases/tg421.htm.
HUD Secretary Outlines FHA Policy Proposals in Congressional Testimony. On December 2, Shaun Donovan, Secretary of Housing and Urban Development (HUD), testified before the House Committee on Financial Services to address several policy proposals for improving the financial performance of the Federal Housing Administration (FHA). Secretary Donovan testified that the FHA plans to improve enforcement of its lending policies. In this regard, the FHA intends to hold lenders responsible for loan losses by making them indemnify the FHA fund whenever loans are not underwritten to FHA standards. Additionally, the FHA intends to track lender performance through a Lender Scorecard that will summarize the performance of each lender that does business with FHA and will be available on the FHA website. In addition to these enforcement measures, the FHA also plans to tighten its underwriting standards. These measures would include (i) reducing the maximum permissible seller concession from 6% to 3%, (ii) raising minimum FICO scores for new FHA borrowers, and (iii) increasing the borrower’s up-front cash requirement. Additionally, the FHA is investigating whether it should increase mortgage insurance premiums. For a copy of Secretary Donovan’s testimony, please see http://portal.hud.gov/portal/page/portal/HUD/press/testimonies/2009-12-02.
HUD Proposes to Eliminate Loan Correspondent Approval Requirement, Increase Mortgagee Net Worth Requirement. On November 30, the U.S. Department of Housing and Urban Development (HUD) published in the Federal Register a proposed rule that would, among other things, eliminate the Federal Housing Administration (FHA) approval requirement for loan correspondents and increase the net worth required for approved mortgagees from $250,000 to (ultimately) $2.5 million (reported in InfoBytes Special Alert, Nov. 30, 2009). Under the proposed rule, FHA will only require approval for mortgagees—loan correspondents will no longer require FHA approval to participate in FHA programs. The proposed rule would not alter the approval process or status of investing mortgagees or governmental institutions. Next, the proposed rule would require sponsoring FHA-approved mortgagees to be responsible for any loan correspondent with which they work on FHA-insured loans, and to assume liability for all FHA-insured loans underwritten by and closed in their names. The sponsoring mortgagees will be responsible for ensuring that their loan correspondents meet “applicable requirements,” which include the enhanced eligibility requirements set forth in The Helping Families Save Their Homes Act. Although loan correspondents involved in FHA-insured loans would no longer be required to obtain FHA approval, HUD would collect such entities’ legal name and tax identification number. Finally, the proposed rule would (i) simplify and increase the net worth requirement for FHA-approved mortgagees from $250,000 to $2.5 million over a 3-year period, and (ii) extend the net worth requirement to investing mortgagees. Comments on the proposed rule are due by December 30, 2009. For a copy of the proposed rule, please see http://www.buckleysandler.com/LC_Net_Worth_FR_113009.pdf.
FHA Withdraws Approval of Mortgage Lender for Violations of HUD/FHA Origination, Underwriting Requirements. On November 30, the Federal Housing Administration (FHA) imposed civil money penalties of $512,500 and withdrew the FHA approval of Ideal Mortgage Bankers, Ltd. d/b/a Lend America and Lending Key, for alleged violations of FHA origination and underwriting requirements. Among other things, Lender America allegedly (i) approved loans that did not meet minimum FHA credit requirements, (ii) failed to provide required loan documentation, and (iii) submitted false certifications to HUD. Lend America has 30 days to challenge the withdrawal action and the imposition of civil money penalties. This latest FHA action comes in the wake of a suit by the U.S. Attorney for the Eastern District of New York alleging fraud by the mortgage lender (reported in InfoBytes, Oct. 23, 2009). The FHA’s action also triggered the company’s immediate default in the Government National Mortgage Association (Ginnie Mae) program. For a copy of HUD’s press release, please see http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2009/HUDNo.09-217.
OTS Issues Enforcement Policy Statement on Civil Money Penalties. On December 3, the Office of Thrift Supervision (OTS) issued Regulatory Bulletin 18-3b to set forth OTS policies governing the assessment of civil money penalties (CMPs). The bulletin describes (i) the statutory framework for CMPs under the general three-tier CMP statute in the Federal Deposit Insurance Act, as well as statutes specifically providing for CMPs, and (ii) the factors controlling their assessment. Further, the bulletin includes the general and reporting CMP matrix form that the OTS uses as guidance in determining whether to assess CMPs and in what amount. The general reporting matrix, which applies to Tier 1 and Tier 2 CMPs, includes the 13 assessment factors used by the banking agencies in their assessment decision. Finally, the policy discussions regarding the “Consideration and Assessment of CMPs” and “Procedure Regarding Determination Whether to Assess a CMP” (Parts III and Part V of the bulletin) are notable for their consideration of CMPs as part of the overall supervisory strategy of OTS. For a copy of the bulletin, please see http://files.ots.treas.gov/74096.pdf.
FinCEN Announces SAR Validations Implementation Update. The Financial Crimes Enforcement Network (FinCEN) recently announced that, on December 12, 2009, it will implement the second phase of its Bank Secrecy Act (BSA) E-Filing Suspicious Activity Report (SAR) Acknowledgements and Validation process. This phase of the process will (i) provide data quality checks, and (ii) provide E-Filers with information regarding the quality of SARs filed electronically. While there is no enrollment deadline for using the BSA E-Filing system, FinCEN “strongly encourages” filers to enroll in the system. For a copy of the announcement, please see http://www.fincen.gov/whatsnew/pdf/20091204.pdf.
FDIC Releases List of Orders, Administrative Enforcement Actions for October. On November 27, the Federal Deposit Insurance Corporation (FDIC) released a list of orders of administrative enforcement actions taken against banks and individuals for October 2009. The FDIC processed a total of 86 matters in October, including, among other things, (i) 40 cease and desist orders, (ii) seven removal and prohibition orders, and (iii) 24 civil money penalties. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09214.html.
FDIC Issues Letter Regarding ATM Fees. On November 27, the Federal Deposit Insurance Corporation (FDIC) issued a Financial Institution Letter to remind financial institutions which charge a fee for providing electronic fund transfer services or for a balance inquiry that such fees must be disclosed (i) on or at automated teller machines (ATMs), and (ii) on either the screen of the ATM machine or on a paper notice. The letter stresses that, pursuant to Regulation E, an ATM operator may impose such fees only if the consumer is provided these notices and the consumer subsequently continues with the transaction or inquiry. For a copy of the letter, please see http://www.fdic.gov/news/news/financial/2009/fil09066.pdf.
FDIC Continues Implementation of Interest Rate Restriction Rule. On December 4, the Federal Deposit Insurance Corporation (FDIC) published Financial Institution Letter 69-2009 to announce the process for determining whether an institution subject to interest-rate restrictions is operating in a high-rate area. Under a previously-issued rule by the FDIC (reported in InfoBytes, June 5, 2009), “less than well capitalized” financial institutions cannot offer interest rates that are “significantly higher” (i.e., up to 75 basis points higher) than the prevailing rate on deposits offered by other insured institutions. “National rate” is defined as "a simple average of rates paid by insured depository institutions and branches for which data are available" and is to be used as the “prevailing rate.” Institutions that believe they are operating in an area where rates paid on deposits are higher than the national rate may seek an FDIC determination that will allow them to use the local market to determine the prevailing rate. However, irrespective of the FDIC determination for operations in high rate areas, the national rate must be used to determine conformance for all deposits outside the market area. For a copy of the letter, please see http://www.fdic.gov/news/news/financial/2009/fil09069.pdf.
FTC Announces “Operation Stolen Hope” to Stop Mortgage Relief Scams. On November 24, the Federal Trade Commission (FTC) announced “Operation Stolen Hope,” which aims to halt fraudulent mortgage relief and modification schemes. Operation Stolen Hope involves an initial 118 actions by 26 federal and state agencies. The FTC also announced that it is bringing six new mortgage relief lawsuits. The six defendants in the FTC cases allegedly (i) charged large up-front fees, (ii) promised to reduce customers’ monthly mortgage payments, or (iii) either fraudulently stated high success rates or falsely indicated an affiliation with a government agency or consumers’ mortgage lenders or servicers. All six defendants are charged with violations of the FTC Act; certain defendants are also charged with violations of the Telemarketing Sales Rule or the Credit Repair Organizations Act. The FTC seeks (i) an injunction stopping the defendants from providing illegal mortgage relief and modification activities, and (ii) an order forcing the defendants to return all profits resulting from the allegedly deceptive practices. In five of the six new cases, courts have issued temporary restraining orders and have frozen defendants’ assets pending trial. The companies charged by the FTC are Crossland Credit Consulting Corp., Crowder Law Group, The Debt Advocacy Center, First Universal Lending, Kirkland Young, and Truman Foreclosure Assistance. For a copy of the press release, please see http://www.ftc.gov/opa/2009/11/stolenhope.shtm.
FTC Announces Senior Staff Changes. On November 30, Federal Trade Commission (FTC) Chairman Jon Leibowitz announced a number of staff changes within the FTC. Maneesha Mithal will be the new Associate Director and Mark Eichorn will be the new Assistant Director of the Division of Privacy and Identity Protection. Joel Winston will become the Associate Director of the Division of Financial Practices. For a copy of the press release announcing the changes, please see http://www.ftc.gov/opa/2009/11/seniorstaff.shtm.
Home Affordable Program Capital Final Rule to Become Effective December 21. On November 20, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision published in the Federal Register a final rule addressing the capital treatment of residential mortgage loans modified under the Making Home Affordable Program (HAMP) (the final rule was reported in InfoBytes, Nov. 13, 2009). Under the final rule, mortgage loans modified under HAMP will retain the risk weight assigned to the loan prior to the modification if the loan continues to meet other applicable prudential criteria. Mortgage loans whose HAMP modifications are in the trial period are subject to the same risk weight assessment treatment. The rule becomes effective December 21, 2009. For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2009/pdf/E9-27776.pdf.
State Issues
Illinois Governor Bars Consumer Installment Lenders form Facilitating Certain High-Cost Loans. On November 23, Illinois Governor Pat Quinn announced an order to bar consumer installment lenders from facilitating high-cost loans based on expected federal or state income tax refunds. However, currency exchange stores offering tax preparation services may offer such loans, subject to approval by the Illinois Department of Financial and Professional Regulation (IDFPR). In making its determination to approve such applications, the IDFPR will decide, as required by law, whether the proposed service is in the “best interest of the public.” For a copy of the press release, please see http://www.idfpr.com/newsrls/2009/11232009QuinnPredatoryRefundLoanCrackdown.asp.
Courts
First Circuit Holds Pre-Amendment TILA Does Not Require Notice Prior to Penalty Pricing. On November 25, the U.S. Court of Appeals for the First Circuit held that the Truth in Lending Act (TILA), as interpreted by the Federal Reserve Board’s (FRB) Regulation Z pre-2009 amendments, did not require a change-in-terms notice to be provided when a creditor increased a borrower’s annual percentage rate (APR) in the event of default. Shaner v. Chase Bank USA, N.A., No. 09-1157, 2009 WL 4068703 (1st Cir. Nov. 25, 2009). In Shaner, the plaintiff borrower sued the defendant bank on behalf of a putative Massachusetts class of credit card borrowers challenging the bank’s policy of applying, without prior notice, APR increases at the beginning of the month in which a default occurs pursuant to the bank‘s credit card agreement with borrowers. The borrower did not dispute that the card agreement authorized the bank to increase her APR without notice as of the start of the billing cycle. Instead, the borrower alleged that the bank violated, among other things, TILA, as interpreted by Regulation Z, by failing to provide notice of a rate increase on or before the effective date of the increase. The bank moved to dismiss, and the district court granted the motion (reported in InfoBytes, Aug. 16, 2008), concluding that the FRB’s TILA regulations did not require the bank to provide advance notice when it made end-of-month adjustments apply from the start of the month where the agreement so permitted. On appeal, recognizing that TILA – prior to the 2009 revision – did not prohibit the bank from adjusting the APR as it did in this case, the First Circuit looked to the FRB pre-amendment regulations to determine whether notice is required for a rate increase under these circumstances. Noting ambiguity in the FRB’s regulations and a split in authority between the Seventh and Ninth Circuits, the court solicited and received an amicus brief by the FRB. The FRB’s brief confirmed that “at the time of the transactions at issue in this case, Regulation Z did not require a change-in-terms notice to be provided when a creditor increased a rate to a figure at or below the maximum allowed by the contract in the event of default.” The First Circuit found the FRB’s position to be controlling because it was not “plainly erroneous,” and therefore affirmed the decision of the district court in favor of the bank. For a copy of the opinion, please see http://www.ca1.uscourts.gov/pdf.opinions/09-1157P-01A.pdf.
First Circuit Upholds Dismissal of HELOC Termination Suit. On November 25, the U.S. Court of Appeals for the First Circuit upheld the dismissal of a putative class-action suit alleging that a defendant bank impermissibly terminated plaintiff borrowers’ home equity line of credit (HELOC) by disregarding a grace period for late payments. Cunningham v. Nat’l City Bank, No. 09-1255, 2009 WL 4068791 (1st Cir. Nov. 25, 2009). In Cunningham, the borrowers obtained a $100,000 HELOC from the defendant bank in 2004. In February 2008, the borrowers did not make any payment by the payment due date, although they made a payment within ten days of the payment due date. The bank informed the borrowers that their account was past due and that their withdrawal privileges were being terminated, citing language in the HELOC agreement that required timely payment. The borrowers, in a putative class action suit, sued for breach of contract and for violations of the Massachusetts deceptive business practices law and for violations of the Truth in Lending Act (TILA). Specifically, the borrowers alleged that the HELOC agreement provided a ten-day grace period for late payments because the agreement provided that a late fee would be applied if a payment was received more than ten days after the due date. The district court dismissed the claims (reported in InfoBytes, Jan. 23, 2009), finding that that the agreement was “unambiguous" and that the late fee provision merely contemplated fees that the lender could assess following a late payment if the lender did not chose to terminate the HELOC. The First Circuit affirmed the dismissal, likewise finding that the “unambiguous terms of the Agreement permitted [the bank] to terminate the HELOC.” For a copy of the opinion, please see http://www.ca1.uscourts.gov/pdf.opinions/09-1255P-01A.pdf.
New York State Court Voids Mortgage Loan Based on Unconscionable Actions By Lender. On November 19, Judge Spinner of the New York Supreme Court, Suffolk County, ordered Indymac Bank F.S.B. (Indymac) to cancel and void a borrower’s note and discharge the mortgage securing the note, citing the “inequitable, unconscionable, vexatious and opprobrious” behavior of the bank. Indymac Bank F.S.B. v. Yano-Horoski, No. 2005-17926, 2009 WL 385879 (N.Y.Sup.Ct. Nov. 19, 2009). The case was brought by the plaintiff bank to foreclose on the borrower’s mortgage (which had an original principal amount of $292,500, and for which the bank argued that the total amount due was in excess of $525,000). In rendering its decision, the court noted that the bank (i) refused to cooperate with the court in its attempts to convene a settlement conference, (ii) did not demonstrate a good faith intention to attempt to mediate or settle its claim with the borrower, and (iii) refused to consider any modification of the loan despite various attempts at loan modification by the borrower and her family members. The court also indicated that the amount claimed by the bank to be owed far exceeded the amount documented by the bank. The court stated that it was “constrained, solely as a result of Plaintiff’s affirmative acts, to conclude that Plaintiff’s conduct is wholly unsupportable at law or in equity.” Therefore, the court dismissed the foreclosure action and ordered the bank to cancel the note, release and discharge the mortgage and refrain from attempting to enforce the note and mortgage. For a copy of the opinion, please see http://www.buckleysandler.com/Indymac_v_Yano-Horoski.pdf.
New York Federal Court Rejects Bank’s Preemption Claim in Employment Dispute. On November 25, the U.S. District Court for the Southern District of New York rejected a plaintiff national bank’s request for a preliminary injunction enjoining the New York City Commission on Human Rights (NYCCHR) from enforcing a provision of the New York City Administrative Code (Code) that prohibits employment discrimination based on an applicant’s arrest record. HSBC Bank USA, N.A. v. New York City Comm’n on Human Rights, No. 09 Civ. 8906, 2009 WL 4163498 (S.D. N.Y. Nov. 25, 2009). In this case, the national bank had rescinded a job offer to an applicant who sought a mortgage consultant position after a background check revealed an arrest. The NYCCHR filed an action to enforce the Code’s prohibition of employment discrimination based on an applicant’s arrest record. In this action, the bank sought a preliminary injunction against the NYCCHR, arguing that the Code conflicts with the National Bank Act (NBA) and Federal Deposit Insurance Act (FDIA), and is therefore preempted by these federal statutes. NYCCHR cross-moved to dismiss the national bank’s complaint, arguing that the court should abstain from interfering with an ongoing state proceeding. Citing the U.S. Supreme Court’s abstention doctrine from Younger v. Harris, the court found that it was barred from interfering with the ongoing administrative action and that there were several factual matters regarding the applicability of the federal laws that needed to be decided. On this basis, the court denied the bank’s request for injunctive relief and dismissed the complaint. For a copy of this decision, please see http://www.buckleysandler.com/HSBC_v_NYC_Com.pdf.
Florida Federal Court Holds that the SCRA Is Not a Strict Liability Statute. On November 19, the U.S. District Court for the Middle District of Florida held that the Servicemembers Civil Relief Act (SCRA) is not a strict liability statute, and that timely correction or other compensation to a service member for interest charged in excess of that permitted by the SCRA is not a violation of the SCRA. Frazier v. HSBC Mortg. Servs., Inc., Case No. 8:08-cv-02396-T-24, 2009 WL 4015574 (M.D. Fla. Nov. 19, 2009). In Frazier, the plaintiff service member sued the defendant creditor for, among others, allegedly violating an SCRA provision that prohibits an entity from charging a service member on military duty interest in excess of 6 percent per year on any obligation or liability that the service member incurred before entering military service. In this case, the borrower was ordered to report for active duty on July 20, 2006. Although it was disputed when the creditor received the borrower’s orders, the creditor adjusted the interest rate in the borrower’s October 2006 statement and thereafter. As an initial matter, the court found that the borrower has an implicit private cause of action under the relevant provision of the SCRA because (i) the borrower is a member of the class that Congress intended to benefit, (ii) the legislative history of the SCRA indicates that Congress intended to create a private right of action, (iii) a private cause of action is consistent with the purpose of the SCRA—to ensure that service members during their military service enjoy a 6 percent cap on interest on loans incurred before service, and (iv) the cause of action under the SCRA is not one traditionally relegated to state law because state law does not govern the rights of members of the U.S. military. Nevertheless, the court held that the borrower could not offer sufficient proof to create a triable issue that the creditor violated the SCRA. The court noted that, within approximately two months of receiving notification from the borrower that she was called to duty, the creditor complied with the SCRA by forgiving the interest charge in excess of 6 percent and by retroactively correcting the interest rate on the borrower’s account. The court rejected the borrower’s argument that the SCRA operates as a strict liability statute, finding that neither the text of the statue, nor case law, supported this characterization. As such, the court entered summary judgment for the creditor. For a copy of the opinion, please see http://www.buckleysandler.com/Frazier_v_HSBC.pdf.
New Jersey Federal Court Holds Companies Providing Public Record Information to Consumer Reporting Agencies Not Liable Under FCRA for Reporting Inaccuracies. On November 23, the U.S. District Court for the District of New Jersey held that companies that collect and communicate public records to credit reporting agencies (CRA) are not CRAs subject to the requirements for CRAs under the Fair Credit Reporting Act (FCRA). Knechtel v. Choicepoint Inc., Civil No. 08-5018, 2009 WL 4123275 (D. N.J. Nov. 23, 2009). In Knechtel, a consumer attempted to correct negative information on his credit report that was allegedly incorrectly reported by the defendants, companies that collect and communicate public records (e.g., bankruptcies, judgments, and tax liens) to CRAs. The consumer subsequently filed suit against the defendants, alleging state law claims of defamation, negligence, and invasion of privacy/false light, as well as a claim under FCRA. Dismissing the consumer’s FCRA claim, the court held that, because the defendants are mere conduits of information that (i) do not “assemble or evaluate” information on consumers, and (ii) do not “produce” consumer credit reports, the defendants are not CRAs subject to the requirements for CRAs under FCRA. The court, however, denied the defendants’ motion to dismiss claims for defamation and false light. For a copy of the opinion, please see http://www.buckleysandler.com/Knechtel_v_Choicepoint.pdf.
Firm News
Jerry Buckley, Ben Klubes, Andrew Sandler, and Jonice Gray Tucker were recently included in the Washingtonian magazine’s annual lawyer’s 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.
Clint Rockwell will be speaking at the CMBA’s Legislative, Regulatory, Quality Assurance & Compliance Conference on December 7 in Huntington Beach, CA regarding Federal Developments.
Jerry Buckley participated in the 3rd Annual Leading Law Firm’s Conference in New York City on November 13.
Margo Tank spoke at the NCHELP Fall Training Conference in St. Pete Beach, Florida on November 16. She discussed electronic student lending platforms in compliance with ESIGN and the UETA.
Jonathan Cannon spoke at the New Jersey Bankers Association’s Mortgage Lending Conference on December 3 regarding RESPA and TILA Regulatory Changes.
Mortgages
HUD Issues Mortgagee Letter Setting Forth FHA 2010 Loan Limits. On November 25, the U.S. Department of Housing and Urban Development (HUD) issued Mortgage Letter 2009-50 to notify approved mortgagees of the Federal Housing Administration’s (FHA) single-family loan limits for 2010. The limits apply to loans with credit approvals issued on or between January 1, 2010, and December 31, 2010, and that are insured under specified sections of the National Housing Act. For 2010, the national ceiling for FHA single-family loans in most areas of the country will be $729,750 and the national floor will continue to be $271,050. (Certain areas of Alaska, Hawaii, Guam, and the Virgin Islands have a loan limit above the national ceiling to account for higher construction costs.) The letter also identifies the areas where the loan limit is between the national ceiling and floor. Finally, the letter provides that the national loan limit for home equity conversion mortgages will remain at $625,500 through December 31, 2010. For a copy of the letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-50ml.pdf. For a copy of the attachments to the letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-50mla1.pdf and http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-50mla2.pdf.
Treasury, HUD Launch Mortgage Modification Conversion Drive. On November 30, the U.S. Department of Treasury (Treasury) and U.S. Department of Housing and Urban Development (HUD) launched the Mortgage Modification Conversion Drive, which is a nationwide campaign to assist borrowers convert trial modifications under the Home Affordable Modification Program (HAMP) to permanent modifications. Treasury and HUD have already taken steps to make the conversion from trial to permanent modification less burdensome (e.g., the period for trial modifications that started on or before September 1, 2009 was extended to give homeowners additional time to submit required information), and the conversion drive’s new tools and resources seek to further simplify the process. For example, the conversion drive will include (i) servicer accountability, which could include monetary penalties and sanctions against a servicer that fails to meet performance obligations under the Servicer Participation Agreement, (ii) web tools for borrowers, which include links to required documents and an income verification checklist to assist borrowers in easily requesting modification, and (iii) engagement of state, local and community stakeholders, which includes engaging staff in HUD’s 81 field offices to distribute outreach tools at a local level. For the full text of the press release, please see http://www.treas.gov/press/releases/tg421.htm.
HUD Secretary Outlines FHA Policy Proposals in Congressional Testimony. On December 2, Shaun Donovan, Secretary of Housing and Urban Development (HUD), testified before the House Committee on Financial Services to address several policy proposals for improving the financial performance of the Federal Housing Administration (FHA). Secretary Donovan testified that the FHA plans to improve enforcement of its lending policies. In this regard, the FHA intends to hold lenders responsible for loan losses by making them indemnify the FHA fund whenever loans are not underwritten to FHA standards. Additionally, the FHA intends to track lender performance through a Lender Scorecard that will summarize the performance of each lender that does business with FHA and will be available on the FHA website. In addition to these enforcement measures, the FHA also plans to tighten its underwriting standards. These measures would include (i) reducing the maximum permissible seller concession from 6% to 3%, (ii) raising minimum FICO scores for new FHA borrowers, and (iii) increasing the borrower’s up-front cash requirement. Additionally, the FHA is investigating whether it should increase mortgage insurance premiums. For a copy of Secretary Donovan’s testimony, please see http://portal.hud.gov/portal/page/portal/HUD/press/testimonies/2009-12-02.
HUD Proposes to Eliminate Loan Correspondent Approval Requirement, Increase Mortgagee Net Worth Requirement. On November 30, the U.S. Department of Housing and Urban Development (HUD) published in the Federal Register a proposed rule that would, among other things, eliminate the Federal Housing Administration (FHA) approval requirement for loan correspondents and increase the net worth required for approved mortgagees from $250,000 to (ultimately) $2.5 million (reported in InfoBytes Special Alert, Nov. 30, 2009). Under the proposed rule, FHA will only require approval for mortgagees—loan correspondents will no longer require FHA approval to participate in FHA programs. The proposed rule would not alter the approval process or status of investing mortgagees or governmental institutions. Next, the proposed rule would require sponsoring FHA-approved mortgagees to be responsible for any loan correspondent with which they work on FHA-insured loans, and to assume liability for all FHA-insured loans underwritten by and closed in their names. The sponsoring mortgagees will be responsible for ensuring that their loan correspondents meet “applicable requirements,” which include the enhanced eligibility requirements set forth in The Helping Families Save Their Homes Act. Although loan correspondents involved in FHA-insured loans would no longer be required to obtain FHA approval, HUD would collect such entities’ legal name and tax identification number. Finally, the proposed rule would (i) simplify and increase the net worth requirement for FHA-approved mortgagees from $250,000 to $2.5 million over a 3-year period, and (ii) extend the net worth requirement to investing mortgagees. Comments on the proposed rule are due by December 30, 2009. For a copy of the proposed rule, please see http://www.buckleysandler.com/LC_Net_Worth_FR_113009.pdf.
FHA Withdraws Approval of Mortgage Lender for Violations of HUD/FHA Origination, Underwriting Requirements. On November 30, the Federal Housing Administration (FHA) imposed civil money penalties of $512,500 and withdrew the FHA approval of Ideal Mortgage Bankers, Ltd. d/b/a Lend America and Lending Key, for alleged violations of FHA origination and underwriting requirements. Among other things, Lender America allegedly (i) approved loans that did not meet minimum FHA credit requirements, (ii) failed to provide required loan documentation, and (iii) submitted false certifications to HUD. Lend America has 30 days to challenge the withdrawal action and the imposition of civil money penalties. This latest FHA action comes in the wake of a suit by the U.S. Attorney for the Eastern District of New York alleging fraud by the mortgage lender (reported in InfoBytes, Oct. 23, 2009). The FHA’s action also triggered the company’s immediate default in the Government National Mortgage Association (Ginnie Mae) program. For a copy of HUD’s press release, please see http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2009/HUDNo.09-217.
FTC Announces “Operation Stolen Hope” to Stop Mortgage Relief Scams. On November 24, the Federal Trade Commission (FTC) announced “Operation Stolen Hope,” which aims to halt fraudulent mortgage relief and modification schemes. Operation Stolen Hope involves an initial 118 actions by 26 federal and state agencies. The FTC also announced that it is bringing six new mortgage relief lawsuits. The six defendants in the FTC cases allegedly (i) charged large up-front fees, (ii) promised to reduce customers’ monthly mortgage payments, or (iii) either fraudulently stated high success rates or falsely indicated an affiliation with a government agency or consumers’ mortgage lenders or servicers. All six defendants are charged with violations of the FTC Act; certain defendants are also charged with violations of the Telemarketing Sales Rule or the Credit Repair Organizations Act. The FTC seeks (i) an injunction stopping the defendants from providing illegal mortgage relief and modification activities, and (ii) an order forcing the defendants to return all profits resulting from the allegedly deceptive practices. In five of the six new cases, courts have issued temporary restraining orders and have frozen defendants’ assets pending trial. The companies charged by the FTC are Crossland Credit Consulting Corp., Crowder Law Group, The Debt Advocacy Center, First Universal Lending, Kirkland Young, and Truman Foreclosure Assistance. For a copy of the press release, please see http://www.ftc.gov/opa/2009/11/stolenhope.shtm.
Home Affordable Program Capital Final Rule to Become Effective December 21. On November 20, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision published in the Federal Register a final rule addressing the capital treatment of residential mortgage loans modified under the Making Home Affordable Program (HAMP) (the final rule was reported in InfoBytes, Nov. 13, 2009). Under the final rule, mortgage loans modified under HAMP will retain the risk weight assigned to the loan prior to the modification if the loan continues to meet other applicable prudential criteria. Mortgage loans whose HAMP modifications are in the trial period are subject to the same risk weight assessment treatment. The rule becomes effective December 21, 2009. For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2009/pdf/E9-27776.pdf.
New York State Court Voids Mortgage Loan Based on Unconscionable Actions By Lender. On November 19, Judge Spinner of the New York Supreme Court, Suffolk County, ordered Indymac Bank F.S.B. (Indymac) to cancel and void a borrower’s note and discharge the mortgage securing the note, citing the “inequitable, unconscionable, vexatious and opprobrious” behavior of the bank. Indymac Bank F.S.B. v. Yano-Horoski, No. 2005-17926, 2009 WL 385879 (N.Y.Sup.Ct. Nov. 19, 2009). The case was brought by the plaintiff bank to foreclose on the borrower’s mortgage (which had an original principal amount of $292,500, and for which the bank argued that the total amount due was in excess of $525,000). In rendering its decision, the court noted that the bank (i) refused to cooperate with the court in its attempts to convene a settlement conference, (ii) did not demonstrate a good faith intention to attempt to mediate or settle its claim with the borrower, and (iii) refused to consider any modification of the loan despite various attempts at loan modification by the borrower and her family members. The court also indicated that the amount claimed by the bank to be owed far exceeded the amount documented by the bank. The court stated that it was “constrained, solely as a result of Plaintiff’s affirmative acts, to conclude that Plaintiff’s conduct is wholly unsupportable at law or in equity.” Therefore, the court dismissed the foreclosure action and ordered the bank to cancel the note, release and discharge the mortgage and refrain from attempting to enforce the note and mortgage. For a copy of the opinion, please see http://www.buckleysandler.com/Indymac_v_Yano-Horoski.pdf.
New York Federal Court Rejects Bank’s Preemption Claim in Employment Dispute. On November 25, the U.S. District Court for the Southern District of New York rejected a plaintiff national bank’s request for a preliminary injunction enjoining the New York City Commission on Human Rights (NYCCHR) from enforcing a provision of the New York City Administrative Code (Code) that prohibits employment discrimination based on an applicant’s arrest record. HSBC Bank USA, N.A. v. New York City Comm’n on Human Rights, No. 09 Civ. 8906, 2009 WL 4163498 (S.D. N.Y. Nov. 25, 2009). In this case, the national bank had rescinded a job offer to an applicant who sought a mortgage consultant position after a background check revealed an arrest. The NYCCHR filed an action to enforce the Code’s prohibition of employment discrimination based on an applicant’s arrest record. In this action, the bank sought a preliminary injunction against the NYCCHR, arguing that the Code conflicts with the National Bank Act (NBA) and Federal Deposit Insurance Act (FDIA), and is therefore preempted by these federal statutes. NYCCHR cross-moved to dismiss the national bank’s complaint, arguing that the court should abstain from interfering with an ongoing state proceeding. Citing the U.S. Supreme Court’s abstention doctrine from Younger v. Harris, the court found that it was barred from interfering with the ongoing administrative action and that there were several factual matters regarding the applicability of the federal laws that needed to be decided. On this basis, the court denied the bank’s request for injunctive relief and dismissed the complaint. For a copy of this decision, please see http://www.buckleysandler.com/HSBC_v_NYC_Com.pdf.
Banking
OTS Issues Enforcement Policy Statement on Civil Money Penalties. On December 3, the Office of Thrift Supervision (OTS) issued Regulatory Bulletin 18-3b to set forth OTS policies governing the assessment of civil money penalties (CMPs). The bulletin describes (i) the statutory framework for CMPs under the general three-tier CMP statute in the Federal Deposit Insurance Act, as well as statutes specifically providing for CMPs, and (ii) the factors controlling their assessment. Further, the bulletin includes the general and reporting CMP matrix form that the OTS uses as guidance in determining whether to assess CMPs and in what amount. The general reporting matrix, which applies to Tier 1 and Tier 2 CMPs, includes the 13 assessment factors used by the banking agencies in their assessment decision. Finally, the policy discussions regarding the “Consideration and Assessment of CMPs” and “Procedure Regarding Determination Whether to Assess a CMP” (Parts III and Part V of the bulletin) are notable for their consideration of CMPs as part of the overall supervisory strategy of OTS. For a copy of the bulletin, please see http://files.ots.treas.gov/74096.pdf.
FinCEN Announces SAR Validations Implementation Update. The Financial Crimes Enforcement Network (FinCEN) recently announced that, on December 12, 2009, it will implement the second phase of its Bank Secrecy Act (BSA) E-Filing Suspicious Activity Report (SAR) Acknowledgements and Validation process. This phase of the process will (i) provide data quality checks, and (ii) provide E-Filers with information regarding the quality of SARs filed electronically. While there is no enrollment deadline for using the BSA E-Filing system, FinCEN “strongly encourages” filers to enroll in the system. For a copy of the announcement, please see http://www.fincen.gov/whatsnew/pdf/20091204.pdf.
FDIC Releases List of Orders, Administrative Enforcement Actions for October. On November 27, the Federal Deposit Insurance Corporation (FDIC) released a list of orders of administrative enforcement actions taken against banks and individuals for October 2009. The FDIC processed a total of 86 matters in October, including, among other things, (i) 40 cease and desist orders, (ii) seven removal and prohibition orders, and (iii) 24 civil money penalties. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09214.html.
FDIC Issues Letter Regarding ATM Fees. On November 27, the Federal Deposit Insurance Corporation (FDIC) issued a Financial Institution Letter to remind financial institutions which charge a fee for providing electronic fund transfer services or for a balance inquiry that such fees must be disclosed (i) on or at automated teller machines (ATMs), and (ii) on either the screen of the ATM machine or on a paper notice. The letter stresses that, pursuant to Regulation E, an ATM operator may impose such fees only if the consumer is provided these notices and the consumer subsequently continues with the transaction or inquiry. For a copy of the letter, please see http://www.fdic.gov/news/news/financial/2009/fil09066.pdf.
FDIC Continues Implementation of Interest Rate Restriction Rule. On December 4, the Federal Deposit Insurance Corporation (FDIC) published Financial Institution Letter 69-2009 to announce the process for determining whether an institution subject to interest-rate restrictions is operating in a high-rate area. Under a previously-issued rule by the FDIC (reported in InfoBytes, June 5, 2009), “less than well capitalized” financial institutions cannot offer interest rates that are “significantly higher” (i.e., up to 75 basis points higher) than the prevailing rate on deposits offered by other insured institutions. “National rate” is defined as "a simple average of rates paid by insured depository institutions and branches for which data are available" and is to be used as the “prevailing rate.” Institutions that believe they are operating in an area where rates paid on deposits are higher than the national rate may seek an FDIC determination that will allow them to use the local market to determine the prevailing rate. However, irrespective of the FDIC determination for operations in high rate areas, the national rate must be used to determine conformance for all deposits outside the market area. For a copy of the letter, please see http://www.fdic.gov/news/news/financial/2009/fil09069.pdf.
New York Federal Court Rejects Bank’s Preemption Claim in Employment Dispute. On November 25, the U.S. District Court for the Southern District of New York rejected a plaintiff national bank’s request for a preliminary injunction enjoining the New York City Commission on Human Rights (NYCCHR) from enforcing a provision of the New York City Administrative Code (Code) that prohibits employment discrimination based on an applicant’s arrest record. HSBC Bank USA, N.A. v. New York City Comm’n on Human Rights, No. 09 Civ. 8906, 2009 WL 4163498 (S.D. N.Y. Nov. 25, 2009). In this case, the national bank had rescinded a job offer to an applicant who sought a mortgage consultant position after a background check revealed an arrest. The NYCCHR filed an action to enforce the Code’s prohibition of employment discrimination based on an applicant’s arrest record. In this action, the bank sought a preliminary injunction against the NYCCHR, arguing that the Code conflicts with the National Bank Act (NBA) and Federal Deposit Insurance Act (FDIA), and is therefore preempted by these federal statutes. NYCCHR cross-moved to dismiss the national bank’s complaint, arguing that the court should abstain from interfering with an ongoing state proceeding. Citing the U.S. Supreme Court’s abstention doctrine from Younger v. Harris, the court found that it was barred from interfering with the ongoing administrative action and that there were several factual matters regarding the applicability of the federal laws that needed to be decided. On this basis, the court denied the bank’s request for injunctive relief and dismissed the complaint. For a copy of this decision, please see http://www.buckleysandler.com/HSBC_v_NYC_Com.pdf.
Consumer Finance
FTC Announces “Operation Stolen Hope” to Stop Mortgage Relief Scams. On November 24, the Federal Trade Commission (FTC) announced “Operation Stolen Hope,” which aims to halt fraudulent mortgage relief and modification schemes. Operation Stolen Hope involves an initial 118 actions by 26 federal and state agencies. The FTC also announced that it is bringing six new mortgage relief lawsuits. The six defendants in the FTC cases allegedly (i) charged large up-front fees, (ii) promised to reduce customers’ monthly mortgage payments, or (iii) either fraudulently stated high success rates or falsely indicated an affiliation with a government agency or consumers’ mortgage lenders or servicers. All six defendants are charged with violations of the FTC Act; certain defendants are also charged with violations of the Telemarketing Sales Rule or the Credit Repair Organizations Act. The FTC seeks (i) an injunction stopping the defendants from providing illegal mortgage relief and modification activities, and (ii) an order forcing the defendants to return all profits resulting from the allegedly deceptive practices. In five of the six new cases, courts have issued temporary restraining orders and have frozen defendants’ assets pending trial. The companies charged by the FTC are Crossland Credit Consulting Corp., Crowder Law Group, The Debt Advocacy Center, First Universal Lending, Kirkland Young, and Truman Foreclosure Assistance. For a copy of the press release, please see http://www.ftc.gov/opa/2009/11/stolenhope.shtm.
FTC Announces Senior Staff Changes. On November 30, Federal Trade Commission (FTC) Chairman Jon Leibowitz announced a number of staff changes within the FTC. Maneesha Mithal will be the new Associate Director and Mark Eichorn will be the new Assistant Director of the Division of Privacy and Identity Protection. Joel Winston will become the Associate Director of the Division of Financial Practices. For a copy of the press release announcing the changes, please see http://www.ftc.gov/opa/2009/11/seniorstaff.shtm.
Illinois Governor Bars Consumer Installment Lenders form Facilitating Certain High-Cost Loans. On November 23, Illinois Governor Pat Quinn announced an order to bar consumer installment lenders from facilitating high-cost loans based on expected federal or state income tax refunds. However, currency exchange stores offering tax preparation services may offer such loans, subject to approval by the Illinois Department of Financial and Professional Regulation (IDFPR). In making its determination to approve such applications, the IDFPR will decide, as required by law, whether the proposed service is in the “best interest of the public.” For a copy of the press release, please see http://www.idfpr.com/newsrls/2009/11232009QuinnPredatoryRefundLoanCrackdown.asp.
First Circuit Holds Pre-Amendment TILA Does Not Require Notice Prior to Penalty Pricing. On November 25, the U.S. Court of Appeals for the First Circuit held that the Truth in Lending Act (TILA), as interpreted by the Federal Reserve Board’s (FRB) Regulation Z pre-2009 amendments, did not require a change-in-terms notice to be provided when a creditor increased a borrower’s annual percentage rate (APR) in the event of default. Shaner v. Chase Bank USA, N.A., No. 09-1157, 2009 WL 4068703 (1st Cir. Nov. 25, 2009). In Shaner, the plaintiff borrower sued the defendant bank on behalf of a putative Massachusetts class of credit card borrowers challenging the bank’s policy of applying, without prior notice, APR increases at the beginning of the month in which a default occurs pursuant to the bank‘s credit card agreement with borrowers. The borrower did not dispute that the card agreement authorized the bank to increase her APR without notice as of the start of the billing cycle. Instead, the borrower alleged that the bank violated, among other things, TILA, as interpreted by Regulation Z, by failing to provide notice of a rate increase on or before the effective date of the increase. The bank moved to dismiss, and the district court granted the motion (reported in InfoBytes, Aug. 16, 2008), concluding that the FRB’s TILA regulations did not require the bank to provide advance notice when it made end-of-month adjustments apply from the start of the month where the agreement so permitted. On appeal, recognizing that TILA – prior to the 2009 revision – did not prohibit the bank from adjusting the APR as it did in this case, the First Circuit looked to the FRB pre-amendment regulations to determine whether notice is required for a rate increase under these circumstances. Noting ambiguity in the FRB’s regulations and a split in authority between the Seventh and Ninth Circuits, the court solicited and received an amicus brief by the FRB. The FRB’s brief confirmed that “at the time of the transactions at issue in this case, Regulation Z did not require a change-in-terms notice to be provided when a creditor increased a rate to a figure at or below the maximum allowed by the contract in the event of default.” The First Circuit found the FRB’s position to be controlling because it was not “plainly erroneous,” and therefore affirmed the decision of the district court in favor of the bank. For a copy of the opinion, please see http://www.ca1.uscourts.gov/pdf.opinions/09-1157P-01A.pdf.
First Circuit Upholds Dismissal of HELOC Termination Suit. On November 25, the U.S. Court of Appeals for the First Circuit upheld the dismissal of a putative class-action suit alleging that a defendant bank impermissibly terminated plaintiff borrowers’ home equity line of credit (HELOC) by disregarding a grace period for late payments. Cunningham v. Nat’l City Bank, No. 09-1255, 2009 WL 4068791 (1st Cir. Nov. 25, 2009). In Cunningham, the borrowers obtained a $100,000 HELOC from the defendant bank in 2004. In February 2008, the borrowers did not make any payment by the payment due date, although they made a payment within ten days of the payment due date. The bank informed the borrowers that their account was past due and that their withdrawal privileges were being terminated, citing language in the HELOC agreement that required timely payment. The borrowers, in a putative class action suit, sued for breach of contract and for violations of the Massachusetts deceptive business practices law and for violations of the Truth in Lending Act (TILA). Specifically, the borrowers alleged that the HELOC agreement provided a ten-day grace period for late payments because the agreement provided that a late fee would be applied if a payment was received more than ten days after the due date. The district court dismissed the claims (reported in InfoBytes, Jan. 23, 2009), finding that that the agreement was “unambiguous" and that the late fee provision merely contemplated fees that the lender could assess following a late payment if the lender did not chose to terminate the HELOC. The First Circuit affirmed the dismissal, likewise finding that the “unambiguous terms of the Agreement permitted [the bank] to terminate the HELOC.” For a copy of the opinion, please see http://www.ca1.uscourts.gov/pdf.opinions/09-1255P-01A.pdf.
Florida Federal Court Holds that the SCRA Is Not a Strict Liability Statute. On November 19, the U.S. District Court for the Middle District of Florida held that the Servicemembers Civil Relief Act (SCRA) is not a strict liability statute, and that timely correction or other compensation to a service member for interest charged in excess of that permitted by the SCRA is not a violation of the SCRA. Frazier v. HSBC Mortg. Servs., Inc., Case No. 8:08-cv-02396-T-24, 2009 WL 4015574 (M.D. Fla. Nov. 19, 2009). In Frazier, the plaintiff service member sued the defendant creditor for, among others, allegedly violating an SCRA provision that prohibits an entity from charging a service member on military duty interest in excess of 6 percent per year on any obligation or liability that the service member incurred before entering military service. In this case, the borrower was ordered to report for active duty on July 20, 2006. Although it was disputed when the creditor received the borrower’s orders, the creditor adjusted the interest rate in the borrower’s October 2006 statement and thereafter. As an initial matter, the court found that the borrower has an implicit private cause of action under the relevant provision of the SCRA because (i) the borrower is a member of the class that Congress intended to benefit, (ii) the legislative history of the SCRA indicates that Congress intended to create a private right of action, (iii) a private cause of action is consistent with the purpose of the SCRA—to ensure that service members during their military service enjoy a 6 percent cap on interest on loans incurred before service, and (iv) the cause of action under the SCRA is not one traditionally relegated to state law because state law does not govern the rights of members of the U.S. military. Nevertheless, the court held that the borrower could not offer sufficient proof to create a triable issue that the creditor violated the SCRA. The court noted that, within approximately two months of receiving notification from the borrower that she was called to duty, the creditor complied with the SCRA by forgiving the interest charge in excess of 6 percent and by retroactively correcting the interest rate on the borrower’s account. The court rejected the borrower’s argument that the SCRA operates as a strict liability statute, finding that neither the text of the statue, nor case law, supported this characterization. As such, the court entered summary judgment for the creditor. For a copy of the opinion, please see http://www.buckleysandler.com/Frazier_v_HSBC.pdf.
Litigation
First Circuit Holds Pre-Amendment TILA Does Not Require Notice Prior to Penalty Pricing. On November 25, the U.S. Court of Appeals for the First Circuit held that the Truth in Lending Act (TILA), as interpreted by the Federal Reserve Board’s (FRB) Regulation Z pre-2009 amendments, did not require a change-in-terms notice to be provided when a creditor increased a borrower’s annual percentage rate (APR) in the event of default. Shaner v. Chase Bank USA, N.A., No. 09-1157, 2009 WL 4068703 (1st Cir. Nov. 25, 2009). In Shaner, the plaintiff borrower sued the defendant bank on behalf of a putative Massachusetts class of credit card borrowers challenging the bank’s policy of applying, without prior notice, APR increases at the beginning of the month in which a default occurs pursuant to the bank‘s credit card agreement with borrowers. The borrower did not dispute that the card agreement authorized the bank to increase her APR without notice as of the start of the billing cycle. Instead, the borrower alleged that the bank violated, among other things, TILA, as interpreted by Regulation Z, by failing to provide notice of a rate increase on or before the effective date of the increase. The bank moved to dismiss, and the district court granted the motion (reported in InfoBytes, Aug. 16, 2008), concluding that the FRB’s TILA regulations did not require the bank to provide advance notice when it made end-of-month adjustments apply from the start of the month where the agreement so permitted. On appeal, recognizing that TILA – prior to the 2009 revision – did not prohibit the bank from adjusting the APR as it did in this case, the First Circuit looked to the FRB pre-amendment regulations to determine whether notice is required for a rate increase under these circumstances. Noting ambiguity in the FRB’s regulations and a split in authority between the Seventh and Ninth Circuits, the court solicited and received an amicus brief by the FRB. The FRB’s brief confirmed that “at the time of the transactions at issue in this case, Regulation Z did not require a change-in-terms notice to be provided when a creditor increased a rate to a figure at or below the maximum allowed by the contract in the event of default.” The First Circuit found the FRB’s position to be controlling because it was not “plainly erroneous,” and therefore affirmed the decision of the district court in favor of the bank. For a copy of the opinion, please see http://www.ca1.uscourts.gov/pdf.opinions/09-1157P-01A.pdf.
First Circuit Upholds Dismissal of HELOC Termination Suit. On November 25, the U.S. Court of Appeals for the First Circuit upheld the dismissal of a putative class-action suit alleging that a defendant bank impermissibly terminated plaintiff borrowers’ home equity line of credit (HELOC) by disregarding a grace period for late payments. Cunningham v. Nat’l City Bank, No. 09-1255, 2009 WL 4068791 (1st Cir. Nov. 25, 2009). In Cunningham, the borrowers obtained a $100,000 HELOC from the defendant bank in 2004. In February 2008, the borrowers did not make any payment by the payment due date, although they made a payment within ten days of the payment due date. The bank informed the borrowers that their account was past due and that their withdrawal privileges were being terminated, citing language in the HELOC agreement that required timely payment. The borrowers, in a putative class action suit, sued for breach of contract and for violations of the Massachusetts deceptive business practices law and for violations of the Truth in Lending Act (TILA). Specifically, the borrowers alleged that the HELOC agreement provided a ten-day grace period for late payments because the agreement provided that a late fee would be applied if a payment was received more than ten days after the due date. The district court dismissed the claims (reported in InfoBytes, Jan. 23, 2009), finding that that the agreement was “unambiguous" and that the late fee provision merely contemplated fees that the lender could assess following a late payment if the lender did not chose to terminate the HELOC. The First Circuit affirmed the dismissal, likewise finding that the “unambiguous terms of the Agreement permitted [the bank] to terminate the HELOC.” For a copy of the opinion, please see http://www.ca1.uscourts.gov/pdf.opinions/09-1255P-01A.pdf.
New York State Court Voids Mortgage Loan Based on Unconscionable Actions By Lender. On November 19, Judge Spinner of the New York Supreme Court, Suffolk County, ordered Indymac Bank F.S.B. (Indymac) to cancel and void a borrower’s note and discharge the mortgage securing the note, citing the “inequitable, unconscionable, vexatious and opprobrious” behavior of the bank. Indymac Bank F.S.B. v. Yano-Horoski, No. 2005-17926, 2009 WL 385879 (N.Y.Sup.Ct. Nov. 19, 2009). The case was brought by the plaintiff bank to foreclose on the borrower’s mortgage (which had an original principal amount of $292,500, and for which the bank argued that the total amount due was in excess of $525,000). In rendering its decision, the court noted that the bank (i) refused to cooperate with the court in its attempts to convene a settlement conference, (ii) did not demonstrate a good faith intention to attempt to mediate or settle its claim with the borrower, and (iii) refused to consider any modification of the loan despite various attempts at loan modification by the borrower and her family members. The court also indicated that the amount claimed by the bank to be owed far exceeded the amount documented by the bank. The court stated that it was “constrained, solely as a result of Plaintiff’s affirmative acts, to conclude that Plaintiff’s conduct is wholly unsupportable at law or in equity.” Therefore, the court dismissed the foreclosure action and ordered the bank to cancel the note, release and discharge the mortgage and refrain from attempting to enforce the note and mortgage. For a copy of the opinion, please see http://www.buckleysandler.com/Indymac_v_Yano-Horoski.pdf.
New York Federal Court Rejects Bank’s Preemption Claim in Employment Dispute. On November 25, the U.S. District Court for the Southern District of New York rejected a plaintiff national bank’s request for a preliminary injunction enjoining the New York City Commission on Human Rights (NYCCHR) from enforcing a provision of the New York City Administrative Code (Code) that prohibits employment discrimination based on an applicant’s arrest record. HSBC Bank USA, N.A. v. New York City Comm’n on Human Rights, No. 09 Civ. 8906, 2009 WL 4163498 (S.D. N.Y. Nov. 25, 2009). In this case, the national bank had rescinded a job offer to an applicant who sought a mortgage consultant position after a background check revealed an arrest. The NYCCHR filed an action to enforce the Code’s prohibition of employment discrimination based on an applicant’s arrest record. In this action, the bank sought a preliminary injunction against the NYCCHR, arguing that the Code conflicts with the National Bank Act (NBA) and Federal Deposit Insurance Act (FDIA), and is therefore preempted by these federal statutes. NYCCHR cross-moved to dismiss the national bank’s complaint, arguing that the court should abstain from interfering with an ongoing state proceeding. Citing the U.S. Supreme Court’s abstention doctrine from Younger v. Harris, the court found that it was barred from interfering with the ongoing administrative action and that there were several factual matters regarding the applicability of the federal laws that needed to be decided. On this basis, the court denied the bank’s request for injunctive relief and dismissed the complaint. For a copy of this decision, please see http://www.buckleysandler.com/HSBC_v_NYC_Com.pdf.
Florida Federal Court Holds that the SCRA Is Not a Strict Liability Statute. On November 19, the U.S. District Court for the Middle District of Florida held that the Servicemembers Civil Relief Act (SCRA) is not a strict liability statute, and that timely correction or other compensation to a service member for interest charged in excess of that permitted by the SCRA is not a violation of the SCRA. Frazier v. HSBC Mortg. Servs., Inc., Case No. 8:08-cv-02396-T-24, 2009 WL 4015574 (M.D. Fla. Nov. 19, 2009). In Frazier, the plaintiff service member sued the defendant creditor for, among others, allegedly violating an SCRA provision that prohibits an entity from charging a service member on military duty interest in excess of 6 percent per year on any obligation or liability that the service member incurred before entering military service. In this case, the borrower was ordered to report for active duty on July 20, 2006. Although it was disputed when the creditor received the borrower’s orders, the creditor adjusted the interest rate in the borrower’s October 2006 statement and thereafter. As an initial matter, the court found that the borrower has an implicit private cause of action under the relevant provision of the SCRA because (i) the borrower is a member of the class that Congress intended to benefit, (ii) the legislative history of the SCRA indicates that Congress intended to create a private right of action, (iii) a private cause of action is consistent with the purpose of the SCRA—to ensure that service members during their military service enjoy a 6 percent cap on interest on loans incurred before service, and (iv) the cause of action under the SCRA is not one traditionally relegated to state law because state law does not govern the rights of members of the U.S. military. Nevertheless, the court held that the borrower could not offer sufficient proof to create a triable issue that the creditor violated the SCRA. The court noted that, within approximately two months of receiving notification from the borrower that she was called to duty, the creditor complied with the SCRA by forgiving the interest charge in excess of 6 percent and by retroactively correcting the interest rate on the borrower’s account. The court rejected the borrower’s argument that the SCRA operates as a strict liability statute, finding that neither the text of the statue, nor case law, supported this characterization. As such, the court entered summary judgment for the creditor. For a copy of the opinion, please see http://www.buckleysandler.com/Frazier_v_HSBC.pdf.
New Jersey Federal Court Holds Companies Providing Public Record Information to Consumer Reporting Agencies Not Liable Under FCRA for Reporting Inaccuracies. On November 23, the U.S. District Court for the District of New Jersey held that companies that collect and communicate public records to credit reporting agencies (CRA) are not CRAs subject to the requirements for CRAs under the Fair Credit Reporting Act (FCRA). Knechtel v. Choicepoint Inc., Civil No. 08-5018, 2009 WL 4123275 (D. N.J. Nov. 23, 2009). In Knechtel, a consumer attempted to correct negative information on his credit report that was allegedly incorrectly reported by the defendants, companies that collect and communicate public records (e.g., bankruptcies, judgments, and tax liens) to CRAs. The consumer subsequently filed suit against the defendants, alleging state law claims of defamation, negligence, and invasion of privacy/false light, as well as a claim under FCRA. Dismissing the consumer’s FCRA claim, the court held that, because the defendants are mere conduits of information that (i) do not “assemble or evaluate” information on consumers, and (ii) do not “produce” consumer credit reports, the defendants are not CRAs subject to the requirements for CRAs under FCRA. The court, however, denied the defendants’ motion to dismiss claims for defamation and false light. For a copy of the opinion, please see http://www.buckleysandler.com/Knechtel_v_Choicepoint.pdf.
Privacy/Data Security
New Jersey Federal Court Holds Companies Providing Public Record Information to Consumer Reporting Agencies Not Liable Under FCRA for Reporting Inaccuracies. On November 23, the U.S. District Court for the District of New Jersey held that companies that collect and communicate public records to credit reporting agencies (CRA) are not CRAs subject to the requirements for CRAs under the Fair Credit Reporting Act (FCRA). Knechtel v. Choicepoint Inc., Civil No. 08-5018, 2009 WL 4123275 (D. N.J. Nov. 23, 2009). In Knechtel, a consumer attempted to correct negative information on his credit report that was allegedly incorrectly reported by the defendants, companies that collect and communicate public records (e.g., bankruptcies, judgments, and tax liens) to CRAs. The consumer subsequently filed suit against the defendants, alleging state law claims of defamation, negligence, and invasion of privacy/false light, as well as a claim under FCRA. Dismissing the consumer’s FCRA claim, the court held that, because the defendants are mere conduits of information that (i) do not “assemble or evaluate” information on consumers, and (ii) do not “produce” consumer credit reports, the defendants are not CRAs subject to the requirements for CRAs under FCRA. The court, however, denied the defendants’ motion to dismiss claims for defamation and false light. For a copy of the opinion, please see http://www.buckleysandler.com/Knechtel_v_Choicepoint.pdf.
Credit Cards
First Circuit Holds Pre-Amendment TILA Does Not Require Notice Prior to Penalty Pricing. On November 25, the U.S. Court of Appeals for the First Circuit held that the Truth in Lending Act (TILA), as interpreted by the Federal Reserve Board’s (FRB) Regulation Z pre-2009 amendments, did not require a change-in-terms notice to be provided when a creditor increased a borrower’s annual percentage rate (APR) in the event of default. Shaner v. Chase Bank USA, N.A., No. 09-1157, 2009 WL 4068703 (1st Cir. Nov. 25, 2009). In Shaner, the plaintiff borrower sued the defendant bank on behalf of a putative Massachusetts class of credit card borrowers challenging the bank’s policy of applying, without prior notice, APR increases at the beginning of the month in which a default occurs pursuant to the bank‘s credit card agreement with borrowers. The borrower did not dispute that the card agreement authorized the bank to increase her APR without notice as of the start of the billing cycle. Instead, the borrower alleged that the bank violated, among other things, TILA, as interpreted by Regulation Z, by failing to provide notice of a rate increase on or before the effective date of the increase. The bank moved to dismiss, and the district court granted the motion (reported in InfoBytes, Aug. 16, 2008), concluding that the FRB’s TILA regulations did not require the bank to provide advance notice when it made end-of-month adjustments apply from the start of the month where the agreement so permitted. On appeal, recognizing that TILA – prior to the 2009 revision – did not prohibit the bank from adjusting the APR as it did in this case, the First Circuit looked to the FRB pre-amendment regulations to determine whether notice is required for a rate increase under these circumstances. Noting ambiguity in the FRB’s regulations and a split in authority between the Seventh and Ninth Circuits, the court solicited and received an amicus brief by the FRB. The FRB’s brief confirmed that “at the time of the transactions at issue in this case, Regulation Z did not require a change-in-terms notice to be provided when a creditor increased a rate to a figure at or below the maximum allowed by the contract in the event of default.” The First Circuit found the FRB’s position to be controlling because it was not “plainly erroneous,” and therefore affirmed the decision of the district court in favor of the bank. For a copy of the opinion, please see http://www.ca1.uscourts.gov/pdf.opinions/09-1157P-01A.pdf.