InfoBytes, December 5, 2008
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Litigation
- Privacy/Data Security
Federal Issues
Treasury Announces Systemically Significant Failing Institutions Program. The U.S. Department of the Treasury (Treasury) recently released guidelines for its Systemically Significant Failing Institutions (SSFI) Program. Participation in the SSFI Program will be considered on a case-by-case basis pursuant to the Emergency Economic Stabilization Act of 2008. Inter alia, the Treasury will consider (i) the extent to which the failure of an institution could threaten the viability of its creditors and counterparties because of their direct exposures to the institution, (ii) the number and size of financial institutions that are seen by investors or counterparties as similarly situated to the failing institution, or that would otherwise be likely to experience indirect negative effects from the failure of the institution, (iii) whether the institution is sufficiently important to the nation’s financial and economic system that a disorderly failure would, with a high probability, cause certain major disruptions to the financial system, and/or (iv) the extent and probability of the institution’s ability to access alternative sources of capital and liquidity. When making its determination, the Treasury will consider information from a variety of sources, including, if applicable, recommendations from an institution’s primary regulator. The Treasury may invest in any financial instrument of an institution, including debt, equity, or warrants, determined to be a troubled asset. The Treasury will require any institution participating in the SSFI Program to provide the Treasury with warrants or alternative consideration, as it determines to be necessary. Institutions must also comply with the Treasury’s limitations on executive compensation, and the Treasury may impose additional corporate governance limitations, including restrictions on an institution’s expenditures or bonus payments. For more information regarding the SSFI Program, please see http://www.treas.gov/initiatives/eesa/program-descriptions/ssfip.shtml.
FDIC Will Allow Entities Without a Bank Charter to Bid for Failing Depository Institutions. On November 26, the Federal Deposit Insurance Corporation (FDIC) announced that it will allow entities without a bank charter to participate in the bidder qualification process for the deposits and assets of failing depository institutions (reported in InfoBytes Special Alert, Dec. 2, 2008). The FDIC will require (i) a business plan compliant with the Community Reinvestment Act, (ii) readily available capital, and (iii) an identified management team subject to financial and biographical review. The FDIC will consider abbreviated information submissions and applications, and may issue conditional approval for deposit insurance, in order to qualify such entities. Entities wishing to participate must have conditional approval for a bank charter and meet the bid criteria established by the FDIC. In some cases, such entities must also obtain conditional approval to establish a bank or thrift holding company. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2008/pr08127.html. For additional information, please contact Bob Serino of Buckley Kolar at 202-349-8053, or via email at .
Fed Seeks Comment Regarding Amendments to Regulation Z. On December 5, the Federal Reserve Board proposed for public comment changes affecting the disclosure requirements for mortgage loans under Regulation Z. The revisions would implement the Mortgage Disclosure Improvement Act of 2008 (MDIA), as amended by the Emergency Economic Stabilization Act of 2008. Under the proposed amendments, (i) creditors would be required to deliver early Truth in Lending Act disclosures, or place them in the mail, no later than three business days after receiving a consumer’s application for any dwelling-secured closed-end loan (the delivery of which would have to occur at least seven business days before consummation), (ii) if the annual percentage rate provided in the early disclosures changed beyond a stated tolerance, creditors would be required to provide corrected disclosures, to be received by the consumer at least three business days before consummation, and (ii) consumers would be allowed to expedite consummation to meet a bona fide personal financial emergency. If adopted, the proposed rules would become effective on July 30, 2009. The public comment period ends January 23, 2009. For a copy of the Federal Register notice, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20081205a1.pdf. All public comments will be made available at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
FinCEN Final Rule Simplifies CTR Reporting Exemptions. On December 4, the Financial Crimes Enforcement Network (FinCEN) finalized a rule simplifying certain requirements for depository institutions to exempt various eligible customers from currency transaction reports (CTRs). The Bank Secrecy Act and subsequent amendments allow depository institutions to exempt certain categories of customers from the CTR filing requirements. The final rule, inter alia, (i) removes the requirement that depository institutions file an initial designation of exemption form and conduct an annual review of eligibility, (ii) reduces the length of time a non-listed business or payroll customer must maintain a transaction account before becoming eligible for an exemption to two months, and permits an exemption for customers with a “legitimate business purpose” for conducting “frequent” large cash transactions, (iii) redefines the term “frequently” to mean eight or more large cash transactions per year, (iv) removes the requirement that institutions biennially file a designation of exempt person form for non-listed and payroll customers, and (v) removes the requirement that institutions report a change in control of a non-listed or payroll customer. To review the press release and the final rule, please see http://www.fincen.gov/news_room/nr/pdf/20081204.pdf.
FDIC Releases Findings of Study Regarding Bank Overdraft Programs. The Federal Deposit Insurance Corporation (FDIC) recently published findings from a two-part study, initiated in 2006, to gather empirical data on the types, characteristics, and use of overdraft programs operated by FDIC-supervised banks. The study was undertaken in response to the recent rapid growth in the use of automated overdraft programs, defined as programs in which the bank honors a customer’s overdraft obligations using standardized procedures to determine whether the nonsufficient fund (NSF) transaction qualifies for overdraft coverage. Data and information for the FDIC’s study were gathered through a survey of a sample of banks that represented 1,171 FDIC-supervised institutions, and a separate data request of customer account and transaction level data from a smaller set of 39 institutions. The study was designed to obtain information related to overdraft programs, including (i) characteristics, features, and fees of overdraft programs, (ii) transaction-processing policies, (iii) marketing and disclosure practices, (iv) internal controls and monitoring practices, (v) the role of vendors and third parties in overdraft program implementation, and (vi) NSF-related fee income and growth. The customer account and transaction-level data collection was designed to gather information on the provision of overdraft services on customer accounts, the occurrence of NSF activity covered under automated overdraft programs, and the characteristics of customer accounts that tend to incur the highest volume of overdraft fees. For a copy of the findings, please see http://www.fdic.gov/bank/analytical/overdraft/FDIC138_Report_FinalTOC.pdf.
Fed Extends Period for Liquidity Facilities. On December 2, the Federal Reserve Board announced the extension of three liquidity facilities – the Primary Dealer Credit Facility, the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility, and the Term Securities Lending Facility – from January 30, 2009 to April 30, 2009. For a copy of the press release, please see http://www.federalreserve.gov/newsevents/press/monetary/20081202b.htm.
State Issues
New Jersey Regulator Adjusts “High Cost Home Loan” Amount. On December 3, the New Jersey Department of Banking and Insurance issued a bulletin (Bulletin 08-25) regarding the New Jersey Home Ownership Security Act of 2002 (Act). The bulletin announces an increase in the maximum principal amount, subject to the other triggering provisions, that may result in a loan being deemed a “high cost home loan” under the Act to $428,615.60. The new amount applies to loans closed on or after January 1, 2009. For a copy of the bulletin, please see http://www.state.nj.us/dobi/bulletins/blt08_25.pdf.
Indiana Mortgage Task Force Issues Recommendations. On November 1, Indiana’s Mortgage Lending and Fraud Prevention Task Force issued a legislative report recommending (i) the passage of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 to prevent preemption by Article V of the Housing and Economic Recovery Act of 2008, (ii) new requirements for books and records loan brokers, (iii) an increase in criminal penalties for certain violations of the Indiana Loan Broker Act, and (iv) the implementation of a “suitability requirement” regarding the ability to repay a loan, as determined at the time of the transaction. The report also includes a summary of enforcement actions taken by the state from January 1, 2008 to October 16, 2008, and describes challenges faced by the task force. For a copy of the report, please see http://www.in.gov/dfi/Task_Force_Final_11_1_08.pdf.
South Carolina Regulator Releases Information on Certain Creditors. On December 3, the South Carolina Department of Consumer Affairs announced it will publish an online listing that provides information on all creditors that have filed maximum rate schedules with interest rates above 18%. The South Carolina Consumer Protection Code requires certain creditors charging interest rates greater than 18% per year to file those rates. For a copy of the press release, please see http://www.scconsumer.gov/press_releases/2008/08107.pdf.
Courts
Massachusetts Federal Court Rejects Lender’s Motion to Dismiss TILA Rescission Case. On November 14, the U.S. District Court for the District of Massachusetts rejected a lender’s motion to dismiss a case in which the plaintiff borrowers claimed a right to a three-year period to rescind their mortgage loan transaction due to incomplete notices of the right to cancel. Reynolds v. E-Loan, Inc., No. 07-cv-11862, 2008 WL 4939320 (D. Mass. Nov. 14, 2008). In Reynolds, the defendant lenders provided the borrowers with rescission notices at closing, but the dates for the opening of the account and for the expiration of the rescission period were allegedly left blank, in violation of the Truth in Lending Act (TILA) and its implementing Regulation Z. The plaintiffs claimed that, because they were provided defective notices, their rescission period extended beyond the standard three days. The lender, however, produced complete, signed copies of the notices. The court noted that there is a “clear factual dispute” as to which documents accurately depict the notices the borrowers received at closing and that courts in the First Circuit do not adhere to a “hypertechnicality” standard with respect to alleged violations of TILA. The court further noted that the notices produced by the borrowers were “insufficiently ‘clear and conspicuous’ to satisfy Regulation Z because the average consumer could not readily calculate the rescission expiration date.” Therefore, the court denied the defendant’s motion to dismiss. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Reynolds_v_E_Loan.pdf.
Alabama Bankruptcy Court Holds Exclusion of GAP Insurance Premium from Finance Charge Permissible Under TILA, Regulation Z. On November 4, the Bankruptcy Court for the Northern District of Alabama held that guaranteed asset insurance protection (GAP) insurance can be excluded from the finance charge under the Truth in Lending Act (TILA) and Regulation Z. Jones v. Regional Acceptance Corp., No. 08-40069, 2008 WL 4830538 (Bankr. N.D. Ala. Nov. 4, 2008). This bankruptcy proceeding arose when one of the plaintiffs purchased an automobile, for which the plaintiff signed a three-party Retail Installment Contract and Security Agreement (RISCA). The premium for the GAP insurance was disclosed on the face of the RICSA as a line item under the “Itemization of Amount Financed” in the Truth in Lending (TIL) disclosures section. This plaintiff also signed a separate GAP Insurance application. In the bankruptcy proceeding, the plaintiffs argued that that the GAP insurance premium should have been disclosed as a finance charge on the TIL disclosure. The court, citing Jones v. General Motors Acceptance Corp. (In re Jones), 2007 Bankr. LEXIS 2049 (Bankr. N.D. Ala. June 13, 2007), found that the premiums for the GAP Insurance could be excluded from the finance charge under Regulation Z because the GAP application clearly and conspicuously disclosed that the purchase of GAP Insurance is not required, nor is a condition of the extension of credit. The application also disclosed the premium, the effective date and the expiration date of coverage. However, TILA disclosures must be made before a credit transaction is consummated, and evidence showed that the plaintiff did not sign the GAP application until after the transaction. Notwithstanding, the court granted the defendant’s motion for summary judgment because the plaintiffs’ claims were time-barred by TILA’s one year statute of limitations. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Jones_v_Regional.pdf.
Texas Federal Court Stipulated Dismissal of Harris Fee-Splitting Lawsuit. On December 3, there was a stipulated dismissal in the U.S. District Court for the Southern District of Texas of a case filed against Fidelity National Information Services, Inc. (Fidelity) in which the plaintiffs alleged that Fidelity violated certain provisions of the United States Bankruptcy Code, Federal Rules of Bankruptcy Procedure, and state law by engaging in unauthorized fee-splitting with lawyers. Harris v. Fidelity Nat’l Info. Servs., 4:08-cv-01243 (S.D. Tex. Dec. 3, 2008). In this suit, the plaintiffs alleged that Fidelity, a default servicer, received an undisclosed “kickback” of attorney fees in exchange for the referral of business to various law firms. The plaintiffs, debtors in a Chapter 13 bankruptcy case, argued that this practice, inter alia, violated the automatic stay under 11 U.S.C. § 362(a)(3), as well as Federal Rule of Bankruptcy Procedure 2016(a), which requires entities seeking compensation or reimbursement from the bankruptcy estate to disclose agreements regarding the sharing of compensation received for services rendered. Fidelity responded that § 362(a)(3) and Rule 2016(a) are limited to creditors seeking compensation from “property of the estate” and that fees paid from attorneys to Fidelity are not “property of the estate.” On February 22, 2008, Fidelity filed a motion to dismiss with the U.S. Bankruptcy Court for the Southern District of Texas, Houston Division. That court dismissed several counts of the plaintiff’s complaint, and the remaining claims were subsequently removed to the District Court. Fidelity then submitted a motion to reconsider with the District Court, arguing that the Bankruptcy Court erred in denying its motion to dismiss the remaining claims. The parties subsequently entered into a stipulation to dismiss the remaining claims pursuant to Rule 41(a)(1)(A)(ii). Under the terms of the stipulation, the case was dismissed with prejudice. For a copy of the Final Dismissal, please see http://www.buckleykolar.com/documents/Harris_Dismissal.pdf.
Florida Federal Court Holds FACTA Statutory Damages Constitutional; Disagrees with Grimes Holding. On December 2, the U.S. District Court for the Southern District of Florida rejected an attempt to dismiss a Fair and Accurate Credit Transactions Act (FACTA) claim on the grounds that FACTA’s statutory damages provision is unconstitutional. Turner v. Creative Hospitality Ventures, Inc., No. 08-61040-CIV, 2008 WL 5062689 (S.D. Fla. Dec. 2, 2008). The plaintiff in Turner sought statutory damages for an alleged willful violation of FACTA §1681(n)(a)(1), claiming that the defendant included the expiration date of the plaintiff’s credit card on a purchase receipt. The defendant argued that FACTA’s statutory damages window – “not less than $100 and not more than $1,000” – is unconstitutionally vague, because it does not instruct a jury on the proper manner of determining a damage award, and violates due process, because it punishes the same conduct twice. This argument was based on the decision in Grimes v. Rave Motion Pictures Birmingham, No. 07-AR-1397, 2008 WL 2338131 (N.D. Ala. May 28, 2008), which struck down §1681(n)(a)(1) as unconstitutional (reported in the InfoBytes, June 13, 2008). The Turner Court respectfully disagreed with the defendant and the holding in Grimes, holding that §1681(n)(a)(1) was neither vague nor violative of due process. With respect to the vagueness argument, the court reasoned that a jury “will be able to affix the proper amount of damages” based on the evidence presented. With respect to the due process argument, the court held that “the mere possibility of punitive damages [does not] violate[] any due process right.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/Turner_v_Creative.pdf.
Fifth Circuit Holds Discovery Rule Does Not Apply to ECOA. On November 26, the U.S. Court of Appeals for the Fifth Circuit held that the discovery rule does not extend the two year statute of limitations for Equal Credit Opportunity Act (ECOA) claims. Archer v. Nissan Motor Acceptance Corp., No. 07-60812, 2008 WL 5005207 (5th Cir. Nov. 26, 2008). In Archer, the plaintiffs, five African American car buyers, received dealer financing from their Nissan dealerships. The dealers then sold these loans to the defendant at a “buy rate.” The dealer was free to add a markup to the “buy rate” to arrive at the retail rate. Plaintiffs allege that this markup resulted in increased rates to African Americans, as compared with similarly situated white customers, and that the defendant violated the ECOA by subsequently purchasing these loans. Analogizing from cases interpreting the Employee Retirement Income Security Act, the court stated that the ECOA sets clear outside limits, measured from the date of the violation itself, within which suit must be filed. The court held that federal courts may not extend the limitations period beyond, in the case of the ECOA, "two years from the date of the occurrence of the violation." The court also rejected as time barred claims brought under Mississippi state law. For a copy of the opinion, please see http://www.ca5.uscourts.gov/opinions%5Cpub%5C07/07-60812-CV0.wpd.pdf.
California Federal Court Finds No TILA Violation Where Lender Provided Two TILA Disclosures. On November 21, the U.S. District Court for the Eastern District of California granted summary judgment to a defendant assignee of a home loan and a defendant foreclosure agent. The plaintiffs in the case sought to forestall non-judicial foreclosure on their home, arguing that the mortgage taken out to fund the purchase of the residence violated the Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA). Lynch v. RKS Mortgage, Inc., No. 2:08-cv-01513, 2008 WL 5061616 (E.D. Cal. Nov. 21, 2008). Before taking out their loan in January 2007, the plaintiffs received two TILA disclosures – a December 2006 disclosure and a January 2007 disclosure – for two separate loan proposals. Despite receiving the January 2007 disclosure two days before they signed the loan documents, the plaintiffs alleged that they were confused by the differences between the earlier December 2006 disclosure and the loan that they ultimately selected after receiving the second January 2007 disclosure. The plaintiffs sought damages under TILA for the alleged failure to provide consistent loan disclosures and for failing to rescind their loan upon demand. The court rejected this claim, finding that there was “no reasonable dispute” that the plaintiffs’ loan was in accordance with the second disclosure. Thus, there was no misrepresentation, or failure to provide “clear and conspicuous” disclosures, in violation of TILA. The court opined that, if the plaintiffs’ argument that the discrepancy between the two disclosures alone constituted a TILA violation, this would prevent a lender from ever offering a different loan proposal because the difference between a subsequent proposal and its predecessor might be deemed “confusing” to the average consumer. In addition, the court found that the TILA claim was time barred, and that the claim could not be brought against a subsequent assignee of the loan because the alleged TILA violation would not have been apparent on the face of the Disclosure Statement the assignee received. Moreover, the court found that the plaintiffs’ HOEPA claim failed because (i) the complaint failed to allege any particular facts showing that the percentage threshold for HOEPA protection was actually crossed, (ii) the loan documents showed that the threshold was not crossed, and (iii) the claim was time barred. The court further found that, because the loan documents complied with both TILA and HOEPA, there was no basis for extending the right of rescission to three years as the plaintiffs claimed, and that the plaintiffs had no right to injunctive relief. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Lynch_v_RKS.pdf.
Florida Federal Court Determines Certain FACTA Provisions Do Not Apply to Merchant Copies of Receipts. On November 18, the U.S. District Court for the Southern District of Florida ruled that § 1681c(g) of the Fair and Accurate Credit Transactions Act (FACTA) does not cover merchant copies of receipts because merchant receipts are not “provided to the cardholder.” Turner v. Matador Argentinian Steakhouse Corp., No. 08-60968, 2008 WL 4935445 (S.D. Fla. Nov. 18, 2008). In Turner, the consumer plaintiff accused the defendant of violating § 1681c(g) of FACTA by providing a printed credit card receipt containing more than the last five digits and the expiration date of the credit card. The defendant argued that it did not violate FACTA because the plaintiff’s claim was based on a “merchant copy” of his credit card receipt and, therefore, the receipt was never provided to him as required by the statute. The court agreed; citing precedent from both the Third and Eleventh Circuits, the court reasoned that, under FACTA, “provide” means “to furnish or supply.” Therefore, the plain language of FACTA is unambiguous, and a merchant copy of a receipt, even though given to the cardholder, is never “provided to the cardholder” because it must be returned to the merchant. Consequently, the court dismissed the plaintiff’s claim. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Turner_v_Matador.pdf.
Florida Federal Court Rules Voicemail Messages Left by Debt Collector May Violate FDCPA. On October 31, the U.S. Federal Court for the Southern District of Florida held that an allegation that a debt collector left voicemail messages that were overheard by third parties is a cognizable claim under the Fair Debt Collection Practices Act (FDCPA). Berg v. Merchs. Ass’n Collection Div., No. 08-60660, 2008 WL 4936432 (S.D. Fla. Oct. 31, 2008). In Berg, the defendant left pre-recorded messages on the plaintiff’s voicemail seeking to collect a debt. The plaintiff alleged that these messages violated § 1692c(b) of the FDCPA because unauthorized third parties overheard the messages. In response, the defendant raised three arguments. First, it asserted that the plain language of § 1692c(b) does not prohibit debt collectors from leaving voice mail messages for a debtor. Second, it argued that interpreting Berg’s claim as a violation of the FDCPA would render the statute unconstitutional. Finally, it asserted the “bona fide error” defense under the FDCPA. The court rejected all three arguments. First, the court disagreed that the plain language of § 1692c(b) excluded the types of messages left by the defendant because they fell within the statute’s definition of “communications.” Furthermore, the FDCPA states that "prior consent of the consumer" must be "given directly to the debt collector" before the debt collector may communicate with third parties. In addition, the court cited Federal Trade Commission commentary which states that "[a] debt collector does not violate this provision when an eavesdropper overhears a conversation with the consumer, unless the debt collector has reason to anticipate the conversation will be overheard." Therefore, although the defendant did not directly contact third parties concerning the plaintiff’s debt, it arguably had reason to know that third parties might overhear the message. The court also rejected the defendant’s second argument, reasoning that the FDCPA is not unconstitutional because the FDCPA’s restrictions receive intermediate scrutiny by the courts and that the legislation was narrowly tailored to serve a significant government interest. Finally, the court found that a bona fide error defense cannot be substantiated based upon the pleadings and requires the presentation of triable facts. Consequently, the court denied the defendant’s motion for summary judgment. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Berg_v_Merchants.pdf.
New Jersey Federal Court Allows FCRA Claim to Proceed. On November 20, the U.S. District Court for the District of New Jersey denied in part and granted in part a credit furnisher’s motion to dismiss a consumer’s complaint arising under the Fair Credit Reporting Act (FCRA). Martinez v. Granite State Management and Resources, No. 08-2769, 2008 WL 5046792 (D. N.J. Nov. 20, 2008). The consumer plaintiff alleged that the defendant failed to notify credit reporting agencies that the plaintiff’s debt was disputed, in violation of FCRA. The court dismissed this claim, reasoning that § 1681s-2(a)(3) does not permit a private right of action. The court, however, did not dismiss the plaintiff’s claim under § 1681s-2(b). The court reasoned that discovery is generally necessary to evaluate the strength of such a claim. In this case, the plaintiff (i) provided the type of debt, (ii) gave an indication of the other party signed to the obligation, and (iii) indicated throughout her pleading that a substantial paper trail exists that would serve to clarify the issues in the case following discovery. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Martinez_v_Granite.pdf.
New York Federal Court Rules on CRA’s Duty to Reinvestigate Under FCRA. On November 19, the U.S. District Court for the Southern District of New York granted in part and denied in part a motion for summary judgment filed by Experian Information Solutions, Inc. (Experian) and granted a motion for summary judgment filed by HSBC Mortgage Services, Inc. (HSBC) in a case involving allegations that both Experian and HSBC violated the Fair Credit Reporting Act (FCRA). Gorman v. Experian Info. Solutions, No. 07 CV 1846, 2008 WL 4934047 (S.D.N.Y. Nov. 19, 2008). In Gorman, the plaintiff disputed entries on his Experian credit report regarding mortgage loans that he had obtained from HSBC’s predecessor four years earlier – but that he had closed after he was unable to make payments. Experian, after confirming the status of the loans with HSBC, then issued a report that did not reflect the correct closed date of the loans. The plaintiff alleged that the inaccurate information on his credit report caused three different mortgage companies to deny him mortgage loans. In ruling on Experian’s motion for summary judgment, the court opined that Experian may have failed to follow reasonable procedures to verify that the plaintiff’s credit report was accurate, as required under FCRA. The court pointed out that Experian did not confirm the information provided by the plaintiff and, instead, solely relied on the information that it received from HSBC. In this regard, the court extended the holding of Cushman v. TransUnion Corp., 115 F.3d 220, 255 (3rd Cir. 1997) – that is, “in order to fulfill its obligation under section 1681i(a) [of FCRA,] a credit reporting agency may be required, in certain circumstances, to verify the accuracy of its initial source of information.” Because factual issues existed as to whether Experian’s procedures were “reasonable,” the court denied Experian’s motion for summary judgment in part. The court granted HSBC’s motion for summary judgment in its entirety, finding, inter alia, that the plaintiff failed to present sufficient evidence that any alleged FCRA violation by HSBC resulted in actual damages. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Gorman_v_Experian.pdf.
Firm News
Clint Rockwell will be speaking on RESPA and Appraisals at the California Mortgage Bankers Association Conference in Anaheim, CA on December 8. Click here for additional information.
Joe Kolar is scheduled to make a presentation with HUD officials at an online webinar sponsored by the Consumer Bankers Association discussing the RESPA rule on December 9 at 2 p.m. EST. For more information, click here.
Jonathan Jerison will be a speaker for a "Compliance Tune-Up" presented by the Regulatory Risk Monitor on December 9 at 2 p.m. EST. For more information, click here.
Jerry Buckley and Margo Tank conducted a panel discussion on electronic-related legal and regulatory issues at the Electronic Signature and Records Association (ESRA) Second Annual Conference: E-Signatures ’08: Business, Legal and Technology Trends on November 12 and 13 in Washington, D.C.
Joe Kolar participated in a webinar on November 17 sponsored by the Mortgage Bankers Association, with representatives from CSBS and AARMR, regarding the SAFE Mortgage Licensing Act.
Jeff Naimon spoke about the amended Regulation Z at the District of Columbia Bar Association’s Off-The-Record luncheon program in Washington, DC, on November 17.
Joe Kolar spoke on the RESPA Rule LIVE Online Conference sponsored by the Mortgage Bankers Association on December 2.
Mortgages
Fed Seeks Comment Regarding Amendments to Regulation Z. On December 5, the Federal Reserve Board proposed for public comment changes affecting the disclosure requirements for mortgage loans under Regulation Z. The revisions would implement the Mortgage Disclosure Improvement Act of 2008 (MDIA), as amended by the Emergency Economic Stabilization Act of 2008. Under the proposed amendments, (i) creditors would be required to deliver early Truth in Lending Act disclosures, or place them in the mail, no later than three business days after receiving a consumer’s application for any dwelling-secured closed-end loan (the delivery of which would have to occur at least seven business days before consummation), (ii) if the annual percentage rate provided in the early disclosures changed beyond a stated tolerance, creditors would be required to provide corrected disclosures, to be received by the consumer at least three business days before consummation, and (ii) consumers would be allowed to expedite consummation to meet a bona fide personal financial emergency. If adopted, the proposed rules would become effective on July 30, 2009. The public comment period ends January 23, 2009. For a copy of the Federal Register notice, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20081205a1.pdf. All public comments will be made available at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
New Jersey Regulator Adjusts “High Cost Home Loan” Amount. On December 3, the New Jersey Department of Banking and Insurance issued a bulletin (Bulletin 08-25) regarding the New Jersey Home Ownership Security Act of 2002 (Act). The bulletin announces an increase in the maximum principal amount, subject to the other triggering provisions, that may result in a loan being deemed a “high cost home loan” under the Act to $428,615.60. The new amount applies to loans closed on or after January 1, 2009. For a copy of the bulletin, please see http://www.state.nj.us/dobi/bulletins/blt08_25.pdf.
Indiana Mortgage Task Force Issues Recommendations. On November 1, Indiana’s Mortgage Lending and Fraud Prevention Task Force issued a legislative report recommending (i) the passage of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 to prevent preemption by Article V of the Housing and Economic Recovery Act of 2008, (ii) new requirements for books and records loan brokers, (iii) an increase in criminal penalties for certain violations of the Indiana Loan Broker Act, and (iv) the implementation of a “suitability requirement” regarding the ability to repay a loan, as determined at the time of the transaction. The report also includes a summary of enforcement actions taken by the state from January 1, 2008 to October 16, 2008, and describes challenges faced by the task force. For a copy of the report, please see http://www.in.gov/dfi/Task_Force_Final_11_1_08.pdf.
South Carolina Regulator Releases Information on Certain Creditors. On December 3, the South Carolina Department of Consumer Affairs announced it will publish an online listing that provides information on all creditors that have filed maximum rate schedules with interest rates above 18%. The South Carolina Consumer Protection Code requires certain creditors charging interest rates greater than 18% per year to file those rates. For a copy of the press release, please see http://www.scconsumer.gov/press_releases/2008/08107.pdf.
Massachusetts Federal Court Rejects Lender’s Motion to Dismiss TILA Rescission Case. On November 14, the U.S. District Court for the District of Massachusetts rejected a lender’s motion to dismiss a case in which the plaintiff borrowers claimed a right to a three-year period to rescind their mortgage loan transaction due to incomplete notices of the right to cancel. Reynolds v. E-Loan, Inc., No. 07-cv-11862, 2008 WL 4939320 (D. Mass. Nov. 14, 2008). In Reynolds, the defendant lenders provided the borrowers with rescission notices at closing, but the dates for the opening of the account and for the expiration of the rescission period were allegedly left blank, in violation of the Truth in Lending Act (TILA) and its implementing Regulation Z. The plaintiffs claimed that, because they were provided defective notices, their rescission period extended beyond the standard three days. The lender, however, produced complete, signed copies of the notices. The court noted that there is a “clear factual dispute” as to which documents accurately depict the notices the borrowers received at closing and that courts in the First Circuit do not adhere to a “hypertechnicality” standard with respect to alleged violations of TILA. The court further noted that the notices produced by the borrowers were “insufficiently ‘clear and conspicuous’ to satisfy Regulation Z because the average consumer could not readily calculate the rescission expiration date.” Therefore, the court denied the defendant’s motion to dismiss. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Reynolds_v_E_Loan.pdf.
Texas Federal Court Stipulated Dismissal of Harris Fee-Splitting Lawsuit. On December 3, there was a stipulated dismissal in the U.S. District Court for the Southern District of Texas of a case filed against Fidelity National Information Services, Inc. (Fidelity) in which the plaintiffs alleged that Fidelity violated certain provisions of the United States Bankruptcy Code, Federal Rules of Bankruptcy Procedure, and state law by engaging in unauthorized fee-splitting with lawyers. Harris v. Fidelity Nat’l Info. Servs., 4:08-cv-01243 (S.D. Tex. Dec. 3, 2008). In this suit, the plaintiffs alleged that Fidelity, a default servicer, received an undisclosed “kickback” of attorney fees in exchange for the referral of business to various law firms. The plaintiffs, debtors in a Chapter 13 bankruptcy case, argued that this practice, inter alia, violated the automatic stay under 11 U.S.C. § 362(a)(3), as well as Federal Rule of Bankruptcy Procedure 2016(a), which requires entities seeking compensation or reimbursement from the bankruptcy estate to disclose agreements regarding the sharing of compensation received for services rendered. Fidelity responded that § 362(a)(3) and Rule 2016(a) are limited to creditors seeking compensation from “property of the estate” and that fees paid from attorneys to Fidelity are not “property of the estate.” On February 22, 2008, Fidelity filed a motion to dismiss with the U.S. Bankruptcy Court for the Southern District of Texas, Houston Division. That court dismissed several counts of the plaintiff’s complaint, and the remaining claims were subsequently removed to the District Court. Fidelity then submitted a motion to reconsider with the District Court, arguing that the Bankruptcy Court erred in denying its motion to dismiss the remaining claims. The parties subsequently entered into a stipulation to dismiss the remaining claims pursuant to Rule 41(a)(1)(A)(ii). Under the terms of the stipulation, the case was dismissed with prejudice. For a copy of the Final Dismissal, please see http://www.buckleykolar.com/documents/Harris_Dismissal.pdf.
California Federal Court Finds No TILA Violation Where Lender Provided Two TILA Disclosures. On November 21, the U.S. District Court for the Eastern District of California granted summary judgment to a defendant assignee of a home loan and a defendant foreclosure agent. The plaintiffs in the case sought to forestall non-judicial foreclosure on their home, arguing that the mortgage taken out to fund the purchase of the residence violated the Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA). Lynch v. RKS Mortgage, Inc., No. 2:08-cv-01513, 2008 WL 5061616 (E.D. Cal. Nov. 21, 2008). Before taking out their loan in January 2007, the plaintiffs received two TILA disclosures – a December 2006 disclosure and a January 2007 disclosure – for two separate loan proposals. Despite receiving the January 2007 disclosure two days before they signed the loan documents, the plaintiffs alleged that they were confused by the differences between the earlier December 2006 disclosure and the loan that they ultimately selected after receiving the second January 2007 disclosure. The plaintiffs sought damages under TILA for the alleged failure to provide consistent loan disclosures and for failing to rescind their loan upon demand. The court rejected this claim, finding that there was “no reasonable dispute” that the plaintiffs’ loan was in accordance with the second disclosure. Thus, there was no misrepresentation, or failure to provide “clear and conspicuous” disclosures, in violation of TILA. The court opined that, if the plaintiffs’ argument that the discrepancy between the two disclosures alone constituted a TILA violation, this would prevent a lender from ever offering a different loan proposal because the difference between a subsequent proposal and its predecessor might be deemed “confusing” to the average consumer. In addition, the court found that the TILA claim was time barred, and that the claim could not be brought against a subsequent assignee of the loan because the alleged TILA violation would not have been apparent on the face of the Disclosure Statement the assignee received. Moreover, the court found that the plaintiffs’ HOEPA claim failed because (i) the complaint failed to allege any particular facts showing that the percentage threshold for HOEPA protection was actually crossed, (ii) the loan documents showed that the threshold was not crossed, and (iii) the claim was time barred. The court further found that, because the loan documents complied with both TILA and HOEPA, there was no basis for extending the right of rescission to three years as the plaintiffs claimed, and that the plaintiffs had no right to injunctive relief. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Lynch_v_RKS.pdf.
Banking
Treasury Announces Systemically Significant Failing Institutions Program. The U.S. Department of the Treasury (Treasury) recently released guidelines for its Systemically Significant Failing Institutions (SSFI) Program. Participation in the SSFI Program will be considered on a case-by-case basis pursuant to the Emergency Economic Stabilization Act of 2008. Inter alia, the Treasury will consider (i) the extent to which the failure of an institution could threaten the viability of its creditors and counterparties because of their direct exposures to the institution, (ii) the number and size of financial institutions that are seen by investors or counterparties as similarly situated to the failing institution, or that would otherwise be likely to experience indirect negative effects from the failure of the institution, (iii) whether the institution is sufficiently important to the nation’s financial and economic system that a disorderly failure would, with a high probability, cause certain major disruptions to the financial system, and/or (iv) the extent and probability of the institution’s ability to access alternative sources of capital and liquidity. When making its determination, the Treasury will consider information from a variety of sources, including, if applicable, recommendations from an institution’s primary regulator. The Treasury may invest in any financial instrument of an institution, including debt, equity, or warrants, determined to be a troubled asset. The Treasury will require any institution participating in the SSFI Program to provide the Treasury with warrants or alternative consideration, as it determines to be necessary. Institutions must also comply with the Treasury’s limitations on executive compensation, and the Treasury may impose additional corporate governance limitations, including restrictions on an institution’s expenditures or bonus payments. For more information regarding the SSFI Program, please see http://www.treas.gov/initiatives/eesa/program-descriptions/ssfip.shtml.
FDIC Will Allow Entities Without a Bank Charter to Bid for Failing Depository Institutions. On November 26, the Federal Deposit Insurance Corporation (FDIC) announced that it will allow entities without a bank charter to participate in the bidder qualification process for the deposits and assets of failing depository institutions (reported in InfoBytes Special Alert, Dec. 2, 2008). The FDIC will require (i) a business plan compliant with the Community Reinvestment Act, (ii) readily available capital, and (iii) an identified management team subject to financial and biographical review. The FDIC will consider abbreviated information submissions and applications, and may issue conditional approval for deposit insurance, in order to qualify such entities. Entities wishing to participate must have conditional approval for a bank charter and meet the bid criteria established by the FDIC. In some cases, such entities must also obtain conditional approval to establish a bank or thrift holding company. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2008/pr08127.html. For additional information, please contact Bob Serino of Buckley Kolar at 202-349-8053, or via email at .
FinCEN Final Rule Simplifies CTR Reporting Exemptions. On December 4, the Financial Crimes Enforcement Network (FinCEN) finalized a rule simplifying certain requirements for depository institutions to exempt various eligible customers from currency transaction reports (CTRs). The Bank Secrecy Act and subsequent amendments allow depository institutions to exempt certain categories of customers from the CTR filing requirements. The final rule, inter alia, (i) removes the requirement that depository institutions file an initial designation of exemption form and conduct an annual review of eligibility, (ii) reduces the length of time a non-listed business or payroll customer must maintain a transaction account before becoming eligible for an exemption to two months, and permits an exemption for customers with a “legitimate business purpose” for conducting “frequent” large cash transactions, (iii) redefines the term “frequently” to mean eight or more large cash transactions per year, (iv) removes the requirement that institutions biennially file a designation of exempt person form for non-listed and payroll customers, and (v) removes the requirement that institutions report a change in control of a non-listed or payroll customer. To review the press release and the final rule, please see http://www.fincen.gov/news_room/nr/pdf/20081204.pdf.
FDIC Releases Findings of Study Regarding Bank Overdraft Programs. The Federal Deposit Insurance Corporation (FDIC) recently published findings from a two-part study, initiated in 2006, to gather empirical data on the types, characteristics, and use of overdraft programs operated by FDIC-supervised banks. The study was undertaken in response to the recent rapid growth in the use of automated overdraft programs, defined as programs in which the bank honors a customer’s overdraft obligations using standardized procedures to determine whether the nonsufficient fund (NSF) transaction qualifies for overdraft coverage. Data and information for the FDIC’s study were gathered through a survey of a sample of banks that represented 1,171 FDIC-supervised institutions, and a separate data request of customer account and transaction level data from a smaller set of 39 institutions. The study was designed to obtain information related to overdraft programs, including (i) characteristics, features, and fees of overdraft programs, (ii) transaction-processing policies, (iii) marketing and disclosure practices, (iv) internal controls and monitoring practices, (v) the role of vendors and third parties in overdraft program implementation, and (vi) NSF-related fee income and growth. The customer account and transaction-level data collection was designed to gather information on the provision of overdraft services on customer accounts, the occurrence of NSF activity covered under automated overdraft programs, and the characteristics of customer accounts that tend to incur the highest volume of overdraft fees. For a copy of the findings, please see http://www.fdic.gov/bank/analytical/overdraft/FDIC138_Report_FinalTOC.pdf.
Fed Extends Period for Liquidity Facilities. On December 2, the Federal Reserve Board announced the extension of three liquidity facilities – the Primary Dealer Credit Facility, the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility, and the Term Securities Lending Facility – from January 30, 2009 to April 30, 2009. For a copy of the press release, please see http://www.federalreserve.gov/newsevents/press/monetary/20081202b.htm.
Consumer Finance
Alabama Bankruptcy Court Holds Exclusion of GAP Insurance Premium from Finance Charge Permissible Under TILA, Regulation Z. On November 4, the Bankruptcy Court for the Northern District of Alabama held that guaranteed asset insurance protection (GAP) insurance can be excluded from the finance charge under the Truth in Lending Act (TILA) and Regulation Z. Jones v. Regional Acceptance Corp., No. 08-40069, 2008 WL 4830538 (Bankr. N.D. Ala. Nov. 4, 2008). This bankruptcy proceeding arose when one of the plaintiffs purchased an automobile, for which the plaintiff signed a three-party Retail Installment Contract and Security Agreement (RISCA). The premium for the GAP insurance was disclosed on the face of the RICSA as a line item under the “Itemization of Amount Financed” in the Truth in Lending (TIL) disclosures section. This plaintiff also signed a separate GAP Insurance application. In the bankruptcy proceeding, the plaintiffs argued that that the GAP insurance premium should have been disclosed as a finance charge on the TIL disclosure. The court, citing Jones v. General Motors Acceptance Corp. (In re Jones), 2007 Bankr. LEXIS 2049 (Bankr. N.D. Ala. June 13, 2007), found that the premiums for the GAP Insurance could be excluded from the finance charge under Regulation Z because the GAP application clearly and conspicuously disclosed that the purchase of GAP Insurance is not required, nor is a condition of the extension of credit. The application also disclosed the premium, the effective date and the expiration date of coverage. However, TILA disclosures must be made before a credit transaction is consummated, and evidence showed that the plaintiff did not sign the GAP application until after the transaction. Notwithstanding, the court granted the defendant’s motion for summary judgment because the plaintiffs’ claims were time-barred by TILA’s one year statute of limitations. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Jones_v_Regional.pdf.
Florida Federal Court Holds FACTA Statutory Damages Constitutional; Disagrees with Grimes Holding. On December 2, the U.S. District Court for the Southern District of Florida rejected an attempt to dismiss a Fair and Accurate Credit Transactions Act (FACTA) claim on the grounds that FACTA’s statutory damages provision is unconstitutional. Turner v. Creative Hospitality Ventures, Inc., No. 08-61040-CIV, 2008 WL 5062689 (S.D. Fla. Dec. 2, 2008). The plaintiff in Turner sought statutory damages for an alleged willful violation of FACTA §1681(n)(a)(1), claiming that the defendant included the expiration date of the plaintiff’s credit card on a purchase receipt. The defendant argued that FACTA’s statutory damages window – “not less than $100 and not more than $1,000” – is unconstitutionally vague, because it does not instruct a jury on the proper manner of determining a damage award, and violates due process, because it punishes the same conduct twice. This argument was based on the decision in Grimes v. Rave Motion Pictures Birmingham, No. 07-AR-1397, 2008 WL 2338131 (N.D. Ala. May 28, 2008), which struck down §1681(n)(a)(1) as unconstitutional (reported in the InfoBytes, June 13, 2008). The Turner Court respectfully disagreed with the defendant and the holding in Grimes, holding that §1681(n)(a)(1) was neither vague nor violative of due process. With respect to the vagueness argument, the court reasoned that a jury “will be able to affix the proper amount of damages” based on the evidence presented. With respect to the due process argument, the court held that “the mere possibility of punitive damages [does not] violate[] any due process right.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/Turner_v_Creative.pdf.
Fifth Circuit Holds Discovery Rule Does Not Apply to ECOA. On November 26, the U.S. Court of Appeals for the Fifth Circuit held that the discovery rule does not extend the two year statute of limitations for Equal Credit Opportunity Act (ECOA) claims. Archer v. Nissan Motor Acceptance Corp., No. 07-60812, 2008 WL 5005207 (5th Cir. Nov. 26, 2008). In Archer, the plaintiffs, five African American car buyers, received dealer financing from their Nissan dealerships. The dealers then sold these loans to the defendant at a “buy rate.” The dealer was free to add a markup to the “buy rate” to arrive at the retail rate. Plaintiffs allege that this markup resulted in increased rates to African Americans, as compared with similarly situated white customers, and that the defendant violated the ECOA by subsequently purchasing these loans. Analogizing from cases interpreting the Employee Retirement Income Security Act, the court stated that the ECOA sets clear outside limits, measured from the date of the violation itself, within which suit must be filed. The court held that federal courts may not extend the limitations period beyond, in the case of the ECOA, "two years from the date of the occurrence of the violation." The court also rejected as time barred claims brought under Mississippi state law. For a copy of the opinion, please see http://www.ca5.uscourts.gov/opinions%5Cpub%5C07/07-60812-CV0.wpd.pdf.
Florida Federal Court Determines Certain FACTA Provisions Do Not Apply to Merchant Copies of Receipts. On November 18, the U.S. District Court for the Southern District of Florida ruled that § 1681c(g) of the Fair and Accurate Credit Transactions Act (FACTA) does not cover merchant copies of receipts because merchant receipts are not “provided to the cardholder.” Turner v. Matador Argentinian Steakhouse Corp., No. 08-60968, 2008 WL 4935445 (S.D. Fla. Nov. 18, 2008). In Turner, the consumer plaintiff accused the defendant of violating § 1681c(g) of FACTA by providing a printed credit card receipt containing more than the last five digits and the expiration date of the credit card. The defendant argued that it did not violate FACTA because the plaintiff’s claim was based on a “merchant copy” of his credit card receipt and, therefore, the receipt was never provided to him as required by the statute. The court agreed; citing precedent from both the Third and Eleventh Circuits, the court reasoned that, under FACTA, “provide” means “to furnish or supply.” Therefore, the plain language of FACTA is unambiguous, and a merchant copy of a receipt, even though given to the cardholder, is never “provided to the cardholder” because it must be returned to the merchant. Consequently, the court dismissed the plaintiff’s claim. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Turner_v_Matador.pdf.
Florida Federal Court Rules Voicemail Messages Left by Debt Collector May Violate FDCPA. On October 31, the U.S. Federal Court for the Southern District of Florida held that an allegation that a debt collector left voicemail messages that were overheard by third parties is a cognizable claim under the Fair Debt Collection Practices Act (FDCPA). Berg v. Merchs. Ass’n Collection Div., No. 08-60660, 2008 WL 4936432 (S.D. Fla. Oct. 31, 2008). In Berg, the defendant left pre-recorded messages on the plaintiff’s voicemail seeking to collect a debt. The plaintiff alleged that these messages violated § 1692c(b) of the FDCPA because unauthorized third parties overheard the messages. In response, the defendant raised three arguments. First, it asserted that the plain language of § 1692c(b) does not prohibit debt collectors from leaving voice mail messages for a debtor. Second, it argued that interpreting Berg’s claim as a violation of the FDCPA would render the statute unconstitutional. Finally, it asserted the “bona fide error” defense under the FDCPA. The court rejected all three arguments. First, the court disagreed that the plain language of § 1692c(b) excluded the types of messages left by the defendant because they fell within the statute’s definition of “communications.” Furthermore, the FDCPA states that "prior consent of the consumer" must be "given directly to the debt collector" before the debt collector may communicate with third parties. In addition, the court cited Federal Trade Commission commentary which states that "[a] debt collector does not violate this provision when an eavesdropper overhears a conversation with the consumer, unless the debt collector has reason to anticipate the conversation will be overheard." Therefore, although the defendant did not directly contact third parties concerning the plaintiff’s debt, it arguably had reason to know that third parties might overhear the message. The court also rejected the defendant’s second argument, reasoning that the FDCPA is not unconstitutional because the FDCPA’s restrictions receive intermediate scrutiny by the courts and that the legislation was narrowly tailored to serve a significant government interest. Finally, the court found that a bona fide error defense cannot be substantiated based upon the pleadings and requires the presentation of triable facts. Consequently, the court denied the defendant’s motion for summary judgment. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Berg_v_Merchants.pdf.
New Jersey Federal Court Allows FCRA Claim to Proceed. On November 20, the U.S. District Court for the District of New Jersey denied in part and granted in part a credit furnisher’s motion to dismiss a consumer’s complaint arising under the Fair Credit Reporting Act (FCRA). Martinez v. Granite State Management and Resources, No. 08-2769, 2008 WL 5046792 (D. N.J. Nov. 20, 2008). The consumer plaintiff alleged that the defendant failed to notify credit reporting agencies that the plaintiff’s debt was disputed, in violation of FCRA. The court dismissed this claim, reasoning that § 1681s-2(a)(3) does not permit a private right of action. The court, however, did not dismiss the plaintiff’s claim under § 1681s-2(b). The court reasoned that discovery is generally necessary to evaluate the strength of such a claim. In this case, the plaintiff (i) provided the type of debt, (ii) gave an indication of the other party signed to the obligation, and (iii) indicated throughout her pleading that a substantial paper trail exists that would serve to clarify the issues in the case following discovery. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Martinez_v_Granite.pdf.
New York Federal Court Rules on CRA’s Duty to Reinvestigate Under FCRA. On November 19, the U.S. District Court for the Southern District of New York granted in part and denied in part a motion for summary judgment filed by Experian Information Solutions, Inc. (Experian) and granted a motion for summary judgment filed by HSBC Mortgage Services, Inc. (HSBC) in a case involving allegations that both Experian and HSBC violated the Fair Credit Reporting Act (FCRA). Gorman v. Experian Info. Solutions, No. 07 CV 1846, 2008 WL 4934047 (S.D.N.Y. Nov. 19, 2008). In Gorman, the plaintiff disputed entries on his Experian credit report regarding mortgage loans that he had obtained from HSBC’s predecessor four years earlier – but that he had closed after he was unable to make payments. Experian, after confirming the status of the loans with HSBC, then issued a report that did not reflect the correct closed date of the loans. The plaintiff alleged that the inaccurate information on his credit report caused three different mortgage companies to deny him mortgage loans. In ruling on Experian’s motion for summary judgment, the court opined that Experian may have failed to follow reasonable procedures to verify that the plaintiff’s credit report was accurate, as required under FCRA. The court pointed out that Experian did not confirm the information provided by the plaintiff and, instead, solely relied on the information that it received from HSBC. In this regard, the court extended the holding of Cushman v. TransUnion Corp., 115 F.3d 220, 255 (3rd Cir. 1997) – that is, “in order to fulfill its obligation under section 1681i(a) [of FCRA,] a credit reporting agency may be required, in certain circumstances, to verify the accuracy of its initial source of information.” Because factual issues existed as to whether Experian’s procedures were “reasonable,” the court denied Experian’s motion for summary judgment in part. The court granted HSBC’s motion for summary judgment in its entirety, finding, inter alia, that the plaintiff failed to present sufficient evidence that any alleged FCRA violation by HSBC resulted in actual damages. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Gorman_v_Experian.pdf.
Litigation
Massachusetts Federal Court Rejects Lender’s Motion to Dismiss TILA Rescission Case. On November 14, the U.S. District Court for the District of Massachusetts rejected a lender’s motion to dismiss a case in which the plaintiff borrowers claimed a right to a three-year period to rescind their mortgage loan transaction due to incomplete notices of the right to cancel. Reynolds v. E-Loan, Inc., No. 07-cv-11862, 2008 WL 4939320 (D. Mass. Nov. 14, 2008). In Reynolds, the defendant lenders provided the borrowers with rescission notices at closing, but the dates for the opening of the account and for the expiration of the rescission period were allegedly left blank, in violation of the Truth in Lending Act (TILA) and its implementing Regulation Z. The plaintiffs claimed that, because they were provided defective notices, their rescission period extended beyond the standard three days. The lender, however, produced complete, signed copies of the notices. The court noted that there is a “clear factual dispute” as to which documents accurately depict the notices the borrowers received at closing and that courts in the First Circuit do not adhere to a “hypertechnicality” standard with respect to alleged violations of TILA. The court further noted that the notices produced by the borrowers were “insufficiently ‘clear and conspicuous’ to satisfy Regulation Z because the average consumer could not readily calculate the rescission expiration date.” Therefore, the court denied the defendant’s motion to dismiss. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Reynolds_v_E_Loan.pdf.
Alabama Bankruptcy Court Holds Exclusion of GAP Insurance Premium from Finance Charge Permissible Under TILA, Regulation Z. On November 4, the Bankruptcy Court for the Northern District of Alabama held that guaranteed asset insurance protection (GAP) insurance can be excluded from the finance charge under the Truth in Lending Act (TILA) and Regulation Z. Jones v. Regional Acceptance Corp., No. 08-40069, 2008 WL 4830538 (Bankr. N.D. Ala. Nov. 4, 2008). This bankruptcy proceeding arose when one of the plaintiffs purchased an automobile, for which the plaintiff signed a three-party Retail Installment Contract and Security Agreement (RISCA). The premium for the GAP insurance was disclosed on the face of the RICSA as a line item under the “Itemization of Amount Financed” in the Truth in Lending (TIL) disclosures section. This plaintiff also signed a separate GAP Insurance application. In the bankruptcy proceeding, the plaintiffs argued that that the GAP insurance premium should have been disclosed as a finance charge on the TIL disclosure. The court, citing Jones v. General Motors Acceptance Corp. (In re Jones), 2007 Bankr. LEXIS 2049 (Bankr. N.D. Ala. June 13, 2007), found that the premiums for the GAP Insurance could be excluded from the finance charge under Regulation Z because the GAP application clearly and conspicuously disclosed that the purchase of GAP Insurance is not required, nor is a condition of the extension of credit. The application also disclosed the premium, the effective date and the expiration date of coverage. However, TILA disclosures must be made before a credit transaction is consummated, and evidence showed that the plaintiff did not sign the GAP application until after the transaction. Notwithstanding, the court granted the defendant’s motion for summary judgment because the plaintiffs’ claims were time-barred by TILA’s one year statute of limitations. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Jones_v_Regional.pdf.
Texas Federal Court Stipulated Dismissal of Harris Fee-Splitting Lawsuit. On December 3, there was a stipulated dismissal in the U.S. District Court for the Southern District of Texas of a case filed against Fidelity National Information Services, Inc. (Fidelity) in which the plaintiffs alleged that Fidelity violated certain provisions of the United States Bankruptcy Code, Federal Rules of Bankruptcy Procedure, and state law by engaging in unauthorized fee-splitting with lawyers. Harris v. Fidelity Nat’l Info. Servs., 4:08-cv-01243 (S.D. Tex. Dec. 3, 2008). In this suit, the plaintiffs alleged that Fidelity, a default servicer, received an undisclosed “kickback” of attorney fees in exchange for the referral of business to various law firms. The plaintiffs, debtors in a Chapter 13 bankruptcy case, argued that this practice, inter alia, violated the automatic stay under 11 U.S.C. § 362(a)(3), as well as Federal Rule of Bankruptcy Procedure 2016(a), which requires entities seeking compensation or reimbursement from the bankruptcy estate to disclose agreements regarding the sharing of compensation received for services rendered. Fidelity responded that § 362(a)(3) and Rule 2016(a) are limited to creditors seeking compensation from “property of the estate” and that fees paid from attorneys to Fidelity are not “property of the estate.” On February 22, 2008, Fidelity filed a motion to dismiss with the U.S. Bankruptcy Court for the Southern District of Texas, Houston Division. That court dismissed several counts of the plaintiff’s complaint, and the remaining claims were subsequently removed to the District Court. Fidelity then submitted a motion to reconsider with the District Court, arguing that the Bankruptcy Court erred in denying its motion to dismiss the remaining claims. The parties subsequently entered into a stipulation to dismiss the remaining claims pursuant to Rule 41(a)(1)(A)(ii). Under the terms of the stipulation, the case was dismissed with prejudice. For a copy of the Final Dismissal, please see http://www.buckleykolar.com/documents/Harris_Dismissal.pdf.
Florida Federal Court Holds FACTA Statutory Damages Constitutional; Disagrees with Grimes Holding. On December 2, the U.S. District Court for the Southern District of Florida rejected an attempt to dismiss a Fair and Accurate Credit Transactions Act (FACTA) claim on the grounds that FACTA’s statutory damages provision is unconstitutional. Turner v. Creative Hospitality Ventures, Inc., No. 08-61040-CIV, 2008 WL 5062689 (S.D. Fla. Dec. 2, 2008). The plaintiff in Turner sought statutory damages for an alleged willful violation of FACTA §1681(n)(a)(1), claiming that the defendant included the expiration date of the plaintiff’s credit card on a purchase receipt. The defendant argued that FACTA’s statutory damages window – “not less than $100 and not more than $1,000” – is unconstitutionally vague, because it does not instruct a jury on the proper manner of determining a damage award, and violates due process, because it punishes the same conduct twice. This argument was based on the decision in Grimes v. Rave Motion Pictures Birmingham, No. 07-AR-1397, 2008 WL 2338131 (N.D. Ala. May 28, 2008), which struck down §1681(n)(a)(1) as unconstitutional (reported in the InfoBytes, June 13, 2008). The Turner Court respectfully disagreed with the defendant and the holding in Grimes, holding that §1681(n)(a)(1) was neither vague nor violative of due process. With respect to the vagueness argument, the court reasoned that a jury “will be able to affix the proper amount of damages” based on the evidence presented. With respect to the due process argument, the court held that “the mere possibility of punitive damages [does not] violate[] any due process right.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/Turner_v_Creative.pdf.
Fifth Circuit Holds Discovery Rule Does Not Apply to ECOA. On November 26, the U.S. Court of Appeals for the Fifth Circuit held that the discovery rule does not extend the two year statute of limitations for Equal Credit Opportunity Act (ECOA) claims. Archer v. Nissan Motor Acceptance Corp., No. 07-60812, 2008 WL 5005207 (5th Cir. Nov. 26, 2008). In Archer, the plaintiffs, five African American car buyers, received dealer financing from their Nissan dealerships. The dealers then sold these loans to the defendant at a “buy rate.” The dealer was free to add a markup to the “buy rate” to arrive at the retail rate. Plaintiffs allege that this markup resulted in increased rates to African Americans, as compared with similarly situated white customers, and that the defendant violated the ECOA by subsequently purchasing these loans. Analogizing from cases interpreting the Employee Retirement Income Security Act, the court stated that the ECOA sets clear outside limits, measured from the date of the violation itself, within which suit must be filed. The court held that federal courts may not extend the limitations period beyond, in the case of the ECOA, "two years from the date of the occurrence of the violation." The court also rejected as time barred claims brought under Mississippi state law. For a copy of the opinion, please see http://www.ca5.uscourts.gov/opinions%5Cpub%5C07/07-60812-CV0.wpd.pdf.
California Federal Court Finds No TILA Violation Where Lender Provided Two TILA Disclosures. On November 21, the U.S. District Court for the Eastern District of California granted summary judgment to a defendant assignee of a home loan and a defendant foreclosure agent. The plaintiffs in the case sought to forestall non-judicial foreclosure on their home, arguing that the mortgage taken out to fund the purchase of the residence violated the Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA). Lynch v. RKS Mortgage, Inc., No. 2:08-cv-01513, 2008 WL 5061616 (E.D. Cal. Nov. 21, 2008). Before taking out their loan in January 2007, the plaintiffs received two TILA disclosures – a December 2006 disclosure and a January 2007 disclosure – for two separate loan proposals. Despite receiving the January 2007 disclosure two days before they signed the loan documents, the plaintiffs alleged that they were confused by the differences between the earlier December 2006 disclosure and the loan that they ultimately selected after receiving the second January 2007 disclosure. The plaintiffs sought damages under TILA for the alleged failure to provide consistent loan disclosures and for failing to rescind their loan upon demand. The court rejected this claim, finding that there was “no reasonable dispute” that the plaintiffs’ loan was in accordance with the second disclosure. Thus, there was no misrepresentation, or failure to provide “clear and conspicuous” disclosures, in violation of TILA. The court opined that, if the plaintiffs’ argument that the discrepancy between the two disclosures alone constituted a TILA violation, this would prevent a lender from ever offering a different loan proposal because the difference between a subsequent proposal and its predecessor might be deemed “confusing” to the average consumer. In addition, the court found that the TILA claim was time barred, and that the claim could not be brought against a subsequent assignee of the loan because the alleged TILA violation would not have been apparent on the face of the Disclosure Statement the assignee received. Moreover, the court found that the plaintiffs’ HOEPA claim failed because (i) the complaint failed to allege any particular facts showing that the percentage threshold for HOEPA protection was actually crossed, (ii) the loan documents showed that the threshold was not crossed, and (iii) the claim was time barred. The court further found that, because the loan documents complied with both TILA and HOEPA, there was no basis for extending the right of rescission to three years as the plaintiffs claimed, and that the plaintiffs had no right to injunctive relief. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Lynch_v_RKS.pdf.
Florida Federal Court Determines Certain FACTA Provisions Do Not Apply to Merchant Copies of Receipts. On November 18, the U.S. District Court for the Southern District of Florida ruled that § 1681c(g) of the Fair and Accurate Credit Transactions Act (FACTA) does not cover merchant copies of receipts because merchant receipts are not “provided to the cardholder.” Turner v. Matador Argentinian Steakhouse Corp., No. 08-60968, 2008 WL 4935445 (S.D. Fla. Nov. 18, 2008). In Turner, the consumer plaintiff accused the defendant of violating § 1681c(g) of FACTA by providing a printed credit card receipt containing more than the last five digits and the expiration date of the credit card. The defendant argued that it did not violate FACTA because the plaintiff’s claim was based on a “merchant copy” of his credit card receipt and, therefore, the receipt was never provided to him as required by the statute. The court agreed; citing precedent from both the Third and Eleventh Circuits, the court reasoned that, under FACTA, “provide” means “to furnish or supply.” Therefore, the plain language of FACTA is unambiguous, and a merchant copy of a receipt, even though given to the cardholder, is never “provided to the cardholder” because it must be returned to the merchant. Consequently, the court dismissed the plaintiff’s claim. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Turner_v_Matador.pdf.
Florida Federal Court Rules Voicemail Messages Left by Debt Collector May Violate FDCPA. On October 31, the U.S. Federal Court for the Southern District of Florida held that an allegation that a debt collector left voicemail messages that were overheard by third parties is a cognizable claim under the Fair Debt Collection Practices Act (FDCPA). Berg v. Merchs. Ass’n Collection Div., No. 08-60660, 2008 WL 4936432 (S.D. Fla. Oct. 31, 2008). In Berg, the defendant left pre-recorded messages on the plaintiff’s voicemail seeking to collect a debt. The plaintiff alleged that these messages violated § 1692c(b) of the FDCPA because unauthorized third parties overheard the messages. In response, the defendant raised three arguments. First, it asserted that the plain language of § 1692c(b) does not prohibit debt collectors from leaving voice mail messages for a debtor. Second, it argued that interpreting Berg’s claim as a violation of the FDCPA would render the statute unconstitutional. Finally, it asserted the “bona fide error” defense under the FDCPA. The court rejected all three arguments. First, the court disagreed that the plain language of § 1692c(b) excluded the types of messages left by the defendant because they fell within the statute’s definition of “communications.” Furthermore, the FDCPA states that "prior consent of the consumer" must be "given directly to the debt collector" before the debt collector may communicate with third parties. In addition, the court cited Federal Trade Commission commentary which states that "[a] debt collector does not violate this provision when an eavesdropper overhears a conversation with the consumer, unless the debt collector has reason to anticipate the conversation will be overheard." Therefore, although the defendant did not directly contact third parties concerning the plaintiff’s debt, it arguably had reason to know that third parties might overhear the message. The court also rejected the defendant’s second argument, reasoning that the FDCPA is not unconstitutional because the FDCPA’s restrictions receive intermediate scrutiny by the courts and that the legislation was narrowly tailored to serve a significant government interest. Finally, the court found that a bona fide error defense cannot be substantiated based upon the pleadings and requires the presentation of triable facts. Consequently, the court denied the defendant’s motion for summary judgment. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Berg_v_Merchants.pdf.
New Jersey Federal Court Allows FCRA Claim to Proceed. On November 20, the U.S. District Court for the District of New Jersey denied in part and granted in part a credit furnisher’s motion to dismiss a consumer’s complaint arising under the Fair Credit Reporting Act (FCRA). Martinez v. Granite State Management and Resources, No. 08-2769, 2008 WL 5046792 (D. N.J. Nov. 20, 2008). The consumer plaintiff alleged that the defendant failed to notify credit reporting agencies that the plaintiff’s debt was disputed, in violation of FCRA. The court dismissed this claim, reasoning that § 1681s-2(a)(3) does not permit a private right of action. The court, however, did not dismiss the plaintiff’s claim under § 1681s-2(b). The court reasoned that discovery is generally necessary to evaluate the strength of such a claim. In this case, the plaintiff (i) provided the type of debt, (ii) gave an indication of the other party signed to the obligation, and (iii) indicated throughout her pleading that a substantial paper trail exists that would serve to clarify the issues in the case following discovery. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Martinez_v_Granite.pdf.
New York Federal Court Rules on CRA’s Duty to Reinvestigate Under FCRA. On November 19, the U.S. District Court for the Southern District of New York granted in part and denied in part a motion for summary judgment filed by Experian Information Solutions, Inc. (Experian) and granted a motion for summary judgment filed by HSBC Mortgage Services, Inc. (HSBC) in a case involving allegations that both Experian and HSBC violated the Fair Credit Reporting Act (FCRA). Gorman v. Experian Info. Solutions, No. 07 CV 1846, 2008 WL 4934047 (S.D.N.Y. Nov. 19, 2008). In Gorman, the plaintiff disputed entries on his Experian credit report regarding mortgage loans that he had obtained from HSBC’s predecessor four years earlier – but that he had closed after he was unable to make payments. Experian, after confirming the status of the loans with HSBC, then issued a report that did not reflect the correct closed date of the loans. The plaintiff alleged that the inaccurate information on his credit report caused three different mortgage companies to deny him mortgage loans. In ruling on Experian’s motion for summary judgment, the court opined that Experian may have failed to follow reasonable procedures to verify that the plaintiff’s credit report was accurate, as required under FCRA. The court pointed out that Experian did not confirm the information provided by the plaintiff and, instead, solely relied on the information that it received from HSBC. In this regard, the court extended the holding of Cushman v. TransUnion Corp., 115 F.3d 220, 255 (3rd Cir. 1997) – that is, “in order to fulfill its obligation under section 1681i(a) [of FCRA,] a credit reporting agency may be required, in certain circumstances, to verify the accuracy of its initial source of information.” Because factual issues existed as to whether Experian’s procedures were “reasonable,” the court denied Experian’s motion for summary judgment in part. The court granted HSBC’s motion for summary judgment in its entirety, finding, inter alia, that the plaintiff failed to present sufficient evidence that any alleged FCRA violation by HSBC resulted in actual damages. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Gorman_v_Experian.pdf.
Privacy/Data Security
Florida Federal Court Holds FACTA Statutory Damages Constitutional; Disagrees with Grimes Holding. On December 2, the U.S. District Court for the Southern District of Florida rejected an attempt to dismiss a Fair and Accurate Credit Transactions Act (FACTA) claim on the grounds that FACTA’s statutory damages provision is unconstitutional. Turner v. Creative Hospitality Ventures, Inc., No. 08-61040-CIV, 2008 WL 5062689 (S.D. Fla. Dec. 2, 2008). The plaintiff in Turner sought statutory damages for an alleged willful violation of FACTA §1681(n)(a)(1), claiming that the defendant included the expiration date of the plaintiff’s credit card on a purchase receipt. The defendant argued that FACTA’s statutory damages window – “not less than $100 and not more than $1,000” – is unconstitutionally vague, because it does not instruct a jury on the proper manner of determining a damage award, and violates due process, because it punishes the same conduct twice. This argument was based on the decision in Grimes v. Rave Motion Pictures Birmingham, No. 07-AR-1397, 2008 WL 2338131 (N.D. Ala. May 28, 2008), which struck down §1681(n)(a)(1) as unconstitutional (reported in the InfoBytes, June 13, 2008). The Turner Court respectfully disagreed with the defendant and the holding in Grimes, holding that §1681(n)(a)(1) was neither vague nor violative of due process. With respect to the vagueness argument, the court reasoned that a jury “will be able to affix the proper amount of damages” based on the evidence presented. With respect to the due process argument, the court held that “the mere possibility of punitive damages [does not] violate[] any due process right.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/Turner_v_Creative.pdf.
Florida Federal Court Determines Certain FACTA Provisions Do Not Apply to Merchant Copies of Receipts. On November 18, the U.S. District Court for the Southern District of Florida ruled that § 1681c(g) of the Fair and Accurate Credit Transactions Act (FACTA) does not cover merchant copies of receipts because merchant receipts are not “provided to the cardholder.” Turner v. Matador Argentinian Steakhouse Corp., No. 08-60968, 2008 WL 4935445 (S.D. Fla. Nov. 18, 2008). In Turner, the consumer plaintiff accused the defendant of violating § 1681c(g) of FACTA by providing a printed credit card receipt containing more than the last five digits and the expiration date of the credit card. The defendant argued that it did not violate FACTA because the plaintiff’s claim was based on a “merchant copy” of his credit card receipt and, therefore, the receipt was never provided to him as required by the statute. The court agreed; citing precedent from both the Third and Eleventh Circuits, the court reasoned that, under FACTA, “provide” means “to furnish or supply.” Therefore, the plain language of FACTA is unambiguous, and a merchant copy of a receipt, even though given to the cardholder, is never “provided to the cardholder” because it must be returned to the merchant. Consequently, the court dismissed the plaintiff’s claim. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Turner_v_Matador.pdf.
Florida Federal Court Rules Voicemail Messages Left by Debt Collector May Violate FDCPA. On October 31, the U.S. Federal Court for the Southern District of Florida held that an allegation that a debt collector left voicemail messages that were overheard by third parties is a cognizable claim under the Fair Debt Collection Practices Act (FDCPA). Berg v. Merchs. Ass’n Collection Div., No. 08-60660, 2008 WL 4936432 (S.D. Fla. Oct. 31, 2008). In Berg, the defendant left pre-recorded messages on the plaintiff’s voicemail seeking to collect a debt. The plaintiff alleged that these messages violated § 1692c(b) of the FDCPA because unauthorized third parties overheard the messages. In response, the defendant raised three arguments. First, it asserted that the plain language of § 1692c(b) does not prohibit debt collectors from leaving voice mail messages for a debtor. Second, it argued that interpreting Berg’s claim as a violation of the FDCPA would render the statute unconstitutional. Finally, it asserted the “bona fide error” defense under the FDCPA. The court rejected all three arguments. First, the court disagreed that the plain language of § 1692c(b) excluded the types of messages left by the defendant because they fell within the statute’s definition of “communications.” Furthermore, the FDCPA states that "prior consent of the consumer" must be "given directly to the debt collector" before the debt collector may communicate with third parties. In addition, the court cited Federal Trade Commission commentary which states that "[a] debt collector does not violate this provision when an eavesdropper overhears a conversation with the consumer, unless the debt collector has reason to anticipate the conversation will be overheard." Therefore, although the defendant did not directly contact third parties concerning the plaintiff’s debt, it arguably had reason to know that third parties might overhear the message. The court also rejected the defendant’s second argument, reasoning that the FDCPA is not unconstitutional because the FDCPA’s restrictions receive intermediate scrutiny by the courts and that the legislation was narrowly tailored to serve a significant government interest. Finally, the court found that a bona fide error defense cannot be substantiated based upon the pleadings and requires the presentation of triable facts. Consequently, the court denied the defendant’s motion for summary judgment. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Berg_v_Merchants.pdf.