InfoBytes, February 6, 2009

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Federal Issues

Treasury Issues New Executive Compensation Guidelines. On February 4, the U.S. Department of Treasury issued new executive compensation guidelines for financial institutions receiving government assistance. The new compensation guidelines distinguish between “generally available” and "exceptional assistance" programs. Generally available programs are meant to assist the financial system as a whole to provide the credit necessary for recovery, whereas exceptional assistance programs provide assistance to banks beyond what may be available under generally available programs. In addition, while generally available programs have the same terms for all recipients, limit the amount each institution may receive, and specify returns for taxpayers, exceptional assistance programs involve bank-specific negotiated agreements with the Treasury. As to executive compensation, the guidelines for “exceptional assistance” programs (i) prohibit senior executives from receiving greater than $500,000 in total annual compensation - additional compensation, if any, must be made in the form of restricted stock subject to the repayment of TARP funds, (ii) allow for the “clawback” of bonuses for the “top five” and twenty additional senior executives, (iii) require executive compensation structure to be agreed to by a non-binding shareholder resolution ("say on pay"), (iv) increase the ban on “golden parachutes” for senior executives, and (v) require corporate policies to require the approval of “luxury” expenditures. The compensation guidelines for “generally available” programs are substantively similar, but, notably, allow for the waiver of the senior executive compensation cap if a firm provides "full public disclosure" and puts the waiver to a shareholder vote. The new guidelines do not retroactively apply to existing investments or to previously announced programs, such as the Capital Purchase Program. For a copy of the announcement, please see http://www.ustreas.gov/press/releases/tg15.htm.

Fed Announces Homeownership Preservation Policy. On January 30, the Federal Reserve Board issued its Homeownership Preservation Policy, which seeks to prevent foreclosures on certain residential mortgage assets held, owned, or controlled by a Federal Reserve Bank. Under the new policy, Federal Reserve Banks or their agents (collectively, Fed Banks) must proactively review their portfolio of residential mortgage loans that are in danger of foreclosure to determine whether loan modification is a viable option by assessing whether borrowers are (i) at least 60 days delinquent on payments, or (ii) in danger of becoming 60 days delinquent due to a decline in income, an interest rate reset, or other common trigger event. Additionally, the modified loan must have an expected net present value greater than the net present value expected from the property’s foreclosure. If a borrower meets these qualifications, the Fed Banks will offer that borrower a loan modification substantially similar to the type of modification offered through HUD’s HOPE for Homeowner’s program (reported in InfoBytes, Nov. 25, 2008). If the borrower has both a senior mortgage and a subordinate mortgage on the same property, the Fed Banks will either seek to modify both mortgages or consolidate the loans into a single loan. For those borrowers who do not qualify for a modification under the policy, the Fed Banks may (i) offer the borrower a temporary repayment plan, or (ii) inform the borrower about additional federal assistance available. The new policy is effective immediately and has already been applied to assets in connection with JPMorgan Chase’s acquisition of The Bear Stearns Companies, Inc. For a copy of the new Homeownership Preservation Policy, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090130a1.pdf.

FTC Issues Proposed Settlement Regarding Alleged FTC Act Violations by Online Merchant. On February 5, the Federal Trade Commission (FTC) issued a proposed settlement in a dispute that an online merchant violated the FTC Act by failing to implement "reasonable" security measures to protect customer information, including credit card numbers. The defendant allegedly (i) stored personal consumer information without encryption, (ii) did not adequately assess whether its website and computer network were vulnerable to "commonly" or "reasonably foreseeable" attacks, (iii) did not implement defenses to such attacks, and (iv) falsely represented that it implemented "reasonable and appropriate" measures to protect against unauthorized access. Under the proposed settlement, the defendant cannot make deceptive privacy and data security claims. Further, the defendant must (i) implement and maintain a comprehensive information-security program, (ii) for every other year for 10 years, obtain an audit, by a qualified, independent third-party, evidencing compliance with the order, and (iii) allow the FTC to monitor compliance with the order. The proposed agreement is subject to public comment for 30 days, ending March 9, 2009. For a copy of the press release, please see http://www.ftc.gov/opa/2009/02/compgeeks.shtm.

State Foreclosure Prevention Working Group Urges Greater Transparency for Loan Modification Reporting. On February 2, the State Foreclosure Prevention Working Group, a group of state attorneys general and state banking agencies, urged federal banking regulators to provide greater transparency regarding the reporting of loan modifications made by national banks and federal thrift institutions. The group would require that such entities provide (as of September 30, 2008, or as of the latest available data), (i) the type of loan modifications that reduced the interest rate, extended the term, and/or deferred or reduced the principal balance of the loan, (ii) a breakdown of the number of loan modifications that resulted in monthly payments that were higher, equivalent, lower by less than 10%, or lower by greater than 10%, and (iii) a breakdown of the number of loans that have been modified and then entered into default, where the loan modification resulted in monthly payments that were higher, equivalent, lower by less than 10%, or lower by greater than 10%. The group would also require banking entities to provide a copy of the data instrument currently used by the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) to collect data on loan modifications and an explanation of the analytics used to calculate the redefault rate in the OCC/OTS Report. For a copy of the letter, please see http://www.ag.state.oh.us/press/09/20090202_OCC_OTS_Metrics_Report_Letter.pdf.

VA Proposes Settlement Regarding 2006 Data Breach. On January 27, the U.S. Department of Veterans Affairs (VA) proposed a settlement regarding the 2006 theft of a VA employee’s laptop computer containing the personal data, including social security numbers and birth dates, of up to 26.5 million veterans and 2.2 million active duty personnel (reported in InfoBytes, May 26, 2006). Three class action lawsuits were subsequently filed; however, forensics indicated that the data was likely not compromised. Under the proposed settlement, the VA does not admit liability or any wrongdoing, but would, among other things, (i) pay up to $1,500 to active duty military personnel and veterans who evidence being affected as a result of the breach, and (ii) pay a minimum of $75 for valid claims by veterans who were emotionally distressed or incurred credit monitoring costs. The overall settlement amount agreed to is $20,000,000. For a copy of the proposed settlement, please see http://www.buckleykolar.com/VA_Settlement.pdf. 

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State Issues

Colorado Emergency Rule Increases Errors and Omissions Insurance Deductible for Reverse Mortgage Transactions. Recently, the Colorado Division of Real Estate adopted an emergency rule increasing the deductible limit for errors and omissions insurance policies covering licensed mortgage brokers engaging in reverse mortgage transactions. Under the emergency rule, such coverage must contain a deductible that does not exceed $21,000 (currently, the limit is $10,000). The rule sets forth additional required terms of coverage, including that (i) the coverage must encompass every type of transaction conducted by the mortgage broker, and (ii) there must be at least $100,000 of coverage for each licensed individual per covered claim, as well as an annual aggregate limit per licensed individual of at least $300,000. While group policies administered by associations or companies to obtain volume discounts are expressly not prohibited, each person required to be licensed as a mortgage broker must acquire and maintain the foregoing coverage on an individual basis. Sanctions for noncompliance include, but are not limited to, license revocation, fines, and restitution for any financial loss. The rule became effective February 2, 2009. For a copy of the rule, please visit http://www.dora.state.co.us/real-estate/rulemaking/MB/ERIncEandOInsDeductRevMortTrans020209.pdf.

Ohio Attorney General Files Suits Against Mortgage Broker, Foreclosure Rescue Companies. On January 27, Ohio Attorney General Richard Cordray filed suit against an Ohio mortgage broker for allegedly failing to provide mortgage loan disclosures required by the Real Estate Settlement Procedures Act and the Ohio Consumer Sales Practice Act. The complaint also alleges that the company violated the Gramm-Leach-Bliley Act by failing to properly store or dispose of certain business records. On January 23, Attorney General Corday separately filed suit against two Ohio foreclosure rescue companies who advertised, but failed to provide, foreclosure assistance, in violation of Ohio’s Consumer Sales Practices Act, Credit Services Organization Act and Debt Adjusters Act. For a copy of the press releases, please see http://www.ag.state.oh.us/press/09/pr090127.asp and http://www.ag.state.oh.us/press/09/pr090123.asp.

Connecticut Attorney General Reaches Settlement with Countrywide Regarding Data Breach. On January 29, Connecticut Attorney General Richard Blumenthal and the Connecticut Department of Consumer of Protection announced a settlement with Countrywide Financial Corporation regarding an alleged data breach that affected approximately 30,000 Connecticut consumers. The data breach resulted when a former employee allegedly sold the financial data, including social security numbers, of more than 2 million customers nationwide. Under the settlement, Countrywide will, among other things, (i) pay $350,000 in penalties, (ii) establish a fund to reimburse consumers for un-freezing credit, and (iii) adopt "best practices” for data management and security. For a copy of the press release, please see http://www.ct.gov/ag/cwp/view.asp?Q=432774&A=3673.

West Virginia Attorney General Reaches Settlement with Countrywide Regarding Alleged Predatory Lending. On February 3, Attorney General Darrell McGraw settled a suit filed against Countrywide Financial Corporation and its affiliates for alleged predatory lending practices. Under the settlement, Countrywide will, among other things, (i) modify certain loans for eligible borrowers, (ii) waive certain loan modification, late/delinquency fees and prepayment penalties for eligible borrowers, and (iii) pay $340,901.00 to provide foreclosure relief to certain borrowers. For a copy of the press release, please see http://www.wvago.gov/press.cfm?ID=463&fx=more.

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Courts

Illinois Federal Court Rules Against Original Creditor in TILA Rescission Case. On January 29, the U.S. District Court for the Northern District of Illinois denied summary judgment for the original creditor of a mortgage loan because the plaintiff had the right to rescind the loan and provided adequate notice of rescission by filing suit against the creditor. Harris v. OSI Fin. Servs., Inc., No. 07 C 3552, 2009 WL 212138 (N.D. Ill. Jan. 29, 2009). In Harris, the plaintiff borrowers obtained a mortgage loan from the defendant creditor Encore Credit Corp. (Encore) in 2004 and refinanced the loan with Encore in 2005. Encore subsequently assigned the 2004 loan to a third party. The plaintiffs filed suit to rescind both loans, alleging inadequate notice of their right to cancel, as required by the Truth in Lending Act. The court refused to grant summary judgment to Encore for these claims, finding that Encore provided improper forms, which mischaracterized the right of rescission for the loans, to the borrowers. Noting a split of authority for courts in the Seventh Circuit regarding adequate notice for rescission, the court found that the plaintiffs provided adequate notice of rescission when they filed suit against Encore. However, the court granted summary judgment in favor of the assignee of the 2004 loan, reasoning that (i) providing adequate notice of rescission to Encore did not provide constructive notice to the assignee, and (ii) actual notice to the assignee occurred after the right to cancel period expired. For a copy of the opinion, please see http://www.buckleykolar.com/Harris_v_OSI.pdf.

Sixth Circuit Holds Standing in RESPA Suit Does Not Require Concrete Financial Injury-In-Fact. On January 23, the U.S. Court of Appeals for the Sixth Circuit held that plaintiffs are not required to allege a concrete financial injury-in-fact, such as an overcharge, to have Article III standing for a Real Estate Settlement Procedures Act (RESPA) claim. Carter v. Welles-Bowen Realty, Inc., et al., No. 07-3965, 2009 WL 151319 (6th Cir. Jan. 23, 2009). In Carter, the plaintiffs alleged that the defendants violated RESPA’s anti-kickback and anti-fee splitting provisions, but did not allege a concrete financial injury-in-fact (e.g., economic damages or an overcharge). Thus, the defendants argued, and the lower court agreed, that the plaintiffs lacked Article III standing. The appellate court reversed, holding that standing for a RESPA claim does not require a concrete financial injury-in-fact. The court relied on the plain meaning of RESPA and persuasive authorities to hold that Congress created a private right of action under RESPA to impose damages where kickbacks and unearned fees have occurred, even where there is no overcharge. As a result, the court held that the plaintiffs have Article III standing and reversed the lower court’s ruling. For a copy of the opinion, please see http://www.buckleykolar.com/Carter_v_Welles_Bowen.pdf.

Virginia Federal Court Determines TILA Claim Time-Barred, Ineligible for Tolling. On January 21, the U.S. District Court for the Eastern District of Virginia awarded summary judgment to the defendant lender in a claim arising under the Truth in Lending Act (TILA), reasoning that plaintiff’s claim was time-barred and ineligible for equitable or statutory tolling. Roach v. Option One Mortgage Corp., 1:08cv225, 2009 WL 159704 (E.D. Va. Jan. 21, 2009). In Roach, the plaintiff obtained an adjustable rate mortgage (ARM) from the defendant. The plaintiff subsequently alleged that an agent of the defendant falsely led her to believe that her monthly payments on the ARM would not increase above the amounts listed on the TILA-required disclosures presented to her at closing. According to the plaintiff, this misrepresentation negated the disclosures, which the plaintiff conceded were otherwise in compliance with TILA. In response, the defendant argued that the plaintiff’s claim was time-barred. The court agreed, finding that the plaintiff’s claim was time-barred because the plaintiff filed her claim more than three years after the alleged TILA violation. Additionally, the court determined that equitable tolling of the limitations period was inappropriate because, even if the plaintiff could establish fraudulent concealment warranting equitable tolling, in January 2007 the plaintiff received notice that the ARM payments would increase to a higher amount. The court also disagreed with the plaintiff’s argument that filing a Chapter 13 bankruptcy petition in September 2007 tolled the limitations period, reasoning that (i) the plaintiff voluntarily abated the bankruptcy proceeding, and (ii) the plaintiff’s assertions of the alleged TILA violation were defensive in nature. For a copy of the opinion, please see http://www.buckleykolar.com/Roach_v_Option_One.pdf.

Pennsylvania Federal Court Rules FCRA Does Not Preempt State Tort Claims. On January 16, the U.S. District Court for the Middle District of Pennsylvania granted the defendant’s motion to dismiss a plaintiffs’ claim under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL), finding that the Fair Credit Reporting Act (FCRA) preempted the claim, but denied the motion to dismiss the plaintiffs’ state tort law claims. Sites v. Nationstar Mortgage LLC, Civ. Action No. 1:07-cv-00469, 2009 WL 117844 (M.D. Pa. Jan. 16, 2008). In their complaint, the plaintiffs alleged violations of state tort law and the UTPCPL, claiming that the defendant acted with malice and willful intent to injure the plaintiffs by furnishing false information to the credit reporting agencies. The defendant countered that FCRA preempts these state law claims. Rejecting defendant’s argument that section FCRA section 1681t(b)(1)(F) preempts all state law claims, the court held that the provision preempts only state statutory claims while section 1681h(e) preempts state tort claims unless the furnisher acts with malice or willful intent. For a copy of the opinion, please see http://www.buckleykolar.com/Sites_v_Nationstar.pdf.

California Appellate Court Holds FCRA Does Not Preempt State Credit Reporting Law. On January 26, a California state appellate court held that the federal Fair Credit Reporting Act (FCRA) does not preempt an action brought under the California Consumer Credit Reporting Agencies Act (CCRAA) for failure to investigate the accuracy of reported information. Sanai v. Saltz, – Cal. Rptr. 3d –, 2009 WL 162059 (Cal. App. 2 Dist. Jan. 26, 2009). In Sanai, the plaintiff disputed an unpaid rent with his landlord; he subsequently obtained his credit report and found that the landlord hired a company to report the past due unpaid rent. The plaintiff then brought an action alleging violations of FCRA, the CCRAA, and various state law claims. The FCRA and CCRAA claims were based on the allegation that the company that reported the debt did not properly investigate the accuracy of the claim after being notified by the plaintiff that he disputed the debt. As to FCRA, the appellate court agreed with the trial court’s holding that there is no private right of action for violating 1681s-2(a) (the duty to provide accurate information), and that the duty under 1681s-2(b) (the duty to investigate the accuracy of the reported information upon receiving notice of a dispute) was never triggered because the notice of dispute must come from the credit reporting agency, not from the consumer himself. Regarding the CCRAA, the trial court held that, although FCRA expressly excepted 1785.25(a) (regarding the furnishing of incomplete or inaccurate information), the FCRA does not except the CCRAA provision allowing private causes of action. The appellate court reversed, finding that the enforcement mechanism under 1681s-2(d) related only to claims brought under 1681s-2(a), while private enforcement is specifically contemplated in 1681s-2(b). Consequently, the appellate court held that it was “simply incorrect” to hold that Congress meant to preempt private enforcement of all obligations imposed by the FCRA on furnishers of credit. Moreover, the appellate court found that, because the CCRAA provision authorizing a private right of action was “procedural,” Congress did not need to except it from preemption. As to other state law claims, the court upheld the holding that the FCRA preempts all such causes of action that impose duties or requirements on furnishers of credit information. For a copy of the opinion, please see http://www.buckleykolar.com/Sanai_v_Saltz.pdf.

Florida Federal Court Finds Triable Facts Exist Regarding FDCPA Bona Fide Error Defense. On January 9, the U.S. District Court for the Southern District of Florida denied a defendants’ motion for summary judgment based on the Fair Debt Collection Practices Act’s (FDCPA) bona fide error defense because a triable issue of fact existed to substantiate the defense. Gaisser v. Portfolio Recovery Services, LLC, No. 08-60177-CIV (S.D. Fla. Jan. 9, 2009). In Gaisser, a law firm, Orovitz, P.A., filed a debt collection action against the plaintiff. In response, the plaintiff filed a complaint in Florida federal court alleging that the defendants violated the FDCPA by attempting to collect a debt that was beyond the applicable statute of limitations. The plaintiff argued, and it was later found, that New Hampshire law governed the disputed debt, which provided for a three-year statute of limitations on debt collection actions. Orovitz subsequently moved for summary judgment, contending that unintentionally filing the time-barred collection action was a “bona fide” error. Orovitz argued that the attempted collection was a mistake of law because it believed that Florida courts applied Florida’s statute of limitations to all debt collection actions filed in Florida. The court assessed whether Orovitz could show that the filing of its time-barred action was (i) unintentional, (ii) a bona fide error, and (iii) made despite the maintenance of procedures reasonably adapted to avoid the error. Focusing on the third prong of the bona fide error test, the court questioned whether Orovitz maintained proper procedures to avoid error, because (i) ample precedent existed before Orovitz filed its suit applying foreign statutes of limitations in analogous situations, and (ii) Orovitz previously attached Florida trial court opinions where courts had applied Virginia’s statute of limitations in debt collection actions in which the credit agreement included a Virginia choice-of-law provision. Therefore, the court found a triable fact existed as to whether Orovitz had reasonable procedures in place to prevent the error, and denied Orovitz’s motion for summary judgment. For a copy of the opinion, please see http://www.buckleykolar.com/Gaisser_v_Portfolio_Recovery.pdf.

Three Class Action Suits Filed in New Jersey Federal Court Regarding Heartland Credit Card Information Breaches. On January 29, Merino v. Heartland Payment Systems joined two other class action law suits against Heartland Payment Systems, Inc. (Heartland) filed in the U.S. District Court for the District of New Jersey alleging negligence for failure to take adequate steps to prevent a data breach, violation of the New Jersey Consumer Fraud Act (NJCFA), and violation of the Fair Credit Reporting Act (FCRA). Merino v. Heartland Payment Systems (D. N.J. Jan. 29, 2009). The plaintiff alleged that Heartland knew, or had reason to know, that a data security breach was occurring as early as October 2008, yet the defendant did not take action or notify customers or third party merchants until January 20, 2009. Each putative class action alleges that that Heartland should have (i) prevented the alleged negligence by properly assuming its duty to customers to secure data and attempt to mitigate customer losses, (ii) contained or mitigated customer damage by taking action earlier than January 20, and (iii) avoided NJCFA and FCRA violations by more carefully safeguarding customer information, such as by utilizing industry-wide procedures for storing data. Analysts estimate that approximately 100 million credit and debit card holders’ private financial information was stolen, accessed, and/or compromised. For a copy of the complaints, please see http://www.buckleykolar.com/Heartland_1.pdf, http://www.buckleykolar.com/Heartland_2.pdf, and http://www.buckleykolar.com/Heartland_3.pdf.

Florida Federal Court Grants Summary Judgment Against Plaintiffs’ RESPA Damages Claims. On January 28, the U.S. District Court for the Southern District of Florida granted summary judgment to a defendant mortgage lender in a claim brought under the Real Estate Settlement Procedures Act (RESPA) because the plaintiffs presented no evidence of actual damages resulting from the alleged violation. McLean v. GMAC Mortgage Corp., No. 06-22795, 2009 WL 21068 (S.D. Fla. Jan. 28, 2009). In McLean, the plaintiffs alleged that their lender failed to respond to qualified written requests, in violation of RESPA. The lender moved for summary judgment on the issue of damages, arguing that even if it did violate RESPA, the plaintiffs did not shown that they suffered any damages as a result. The court agreed. First, with respect to statutory damages, the court held that, while the plaintiffs may have provided evidence that the lender failed to respond to two letters plaintiffs sent, plaintiffs failed to provide evidence that such failures were “standard or institutionalized” and thereby sufficient to support a pattern or practice of noncompliance claim entitling plaintiffs to statutory damages. Next, the court rejected each of plaintiffs’ claims for actual damages. Although the court allowed the plaintiffs to establish emotional distress damages with the use of lay experts rather than experts, the court held that plaintiffs’ own deposition testimony that the lender’s conduct caused them “panic” was insufficient. Similarly, the court rejected the plaintiffs’ other claims for actual damages, finding that claims for lost time, a car accident, damage to their home, unemployment and lost wages, and damage to their credit were not attributable to the lenders’ failure to respond to their letters. In each instance, the court determined that the expenses or injury claimed was not caused by the lender’s conduct, was too speculative, or both. For a copy of the opinion, please see http://www.buckleykolar.com/McLean_v_GMAC.pdf.

Sixth Circuit Holds False Statements on HUD-1 “Material” in Mortgage Fraud Case. On January 29, the U.S. Court of Appeals for the Sixth Circuit held that inflated sales prices on HUD-1 forms were “material” misstatements allowing for a mortgage fraud conviction. U.S. v. Wilkins, No. 07-5512, 2009 WL 211812 (6th Cir. Jan. 29, 2009). In Wilkins, the defendant purchased various properties; in connection with the sale of the properties, the owner of a title company prepared two HUD-1 forms under the direction of a mortgage broker. One HUD-1 reflected the actual sales price, which the defendant gave to the seller; the defendant gave another HUD-1, reflecting an inflated sales price, to the lender (a “double-HUD” transaction). The defendant and the mortgage broker split the difference provided by the lender. The defendant was subsequently indicted and convicted for mortgage fraud. On appeal, the defendant argued that the misstated sales prices on the HUD-1 forms were not “material,”as required for such a conviction under the jurisdiction of the U.S. government. Rejecting the defendant’s argument, the court found that the disclosures on the HUD-1 are “material” in the closing, the mortgage process, and the lender’s decision because the statements have a “natural tendency to influence,” even if HUD did not directly rely upon them. The court also concluded that the misstatements pertained to a matter within the jurisdiction of the U.S. Housing and Urban Development (HUD) because the “Secretary of HUD has the authority to develop and prescribe the HUD-1 form ‘as the standard real estate form in all transactions in the United States which involve federally related mortgage loans.’” For a copy of the opinion, please see http://www.buckleykolar.com/US_v_Wilkins.pdf.

Ohio Federal Court Holds Furnisher of Information Did Not “Reasonably” Investigate Dispute Under FCRA. On January 22, the U.S. District Court for the Southern District of Ohio held that a furnisher of information did not “reasonably” investigate a disputed debt pursuant to the Fair Credit Reporting Act (FCRA) because it relied upon its own records and did not contact the debt collection agency regarding the dispute. Watson v. Citi Corp., No. 2_07-cv-0777, 2009 WL 161222 (S.D. Ohio Jan. 22, 2009). In Watson, the plaintiff maintained accounts with several creditors - including Citigroup - that went into default. Citigroup referred plaintiff’s debt for collection to ARS National Services, Inc. (ARS), a third party collection agency. Thereafter, the plaintiff settled the Citigroup debt with ARS; however, Citigroup continued to report that debt to the credit reporting agencies. The plaintiff disputed her report with a credit reporting agency, but Citigroup continued to report a balance due. The plaintiff subsequently filed suit, alleging, among other things, that Citibank failed to conduct a “reasonable” investigation of the dispute, as required by FCRA. The court agreed, reasoning that Citibank failed to reasonably investigate the dispute when it relied solely on its own incomplete records and failed to contact the debt collection agency regarding the disputed account. However, the court, in awarding the plaintiff only $1, rejected the plaintiff’s claim for statutory or punitive damages, reasoning that the plaintiff did not prove that the defendant acted “willfully.” For a copy of the opinion, please see http://www.buckleykolar.com/Watson_v_Citi.pdf.

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Firm News

Heidi Bauer will present during a panel discussion at the Nationwide Mortgage Licensing System User Conference in New Orleans, Louisiana on February 10. The title of her panel is “Making NMLS Work for your Company.”

Jonathan Cannon will speak on RESPA litigation at the National Compliance Summit for Title Companies in Las Vegas, NV on February 19-20.

Matthew Previn moderated a panel of in-house counsel at the ACI Consumer Finance Class action and Litigation Conference in New York City on Jan. 27-28.

John Kromer moderated a panel entitled “The New Frontier of Housing Finance” at the ABA’s Committee on Consumer Financial Services Winter Meeting in Scottsdale, Arizona on January 12.

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Mortgages

Fed Announces Homeownership Preservation Policy. On January 30, the Federal Reserve Board issued its Homeownership Preservation Policy, which seeks to prevent foreclosures on certain residential mortgage assets held, owned, or controlled by a Federal Reserve Bank. Under the new policy, Federal Reserve Banks or their agents (collectively, Fed Banks) must proactively review their portfolio of residential mortgage loans that are in danger of foreclosure to determine whether loan modification is a viable option by assessing whether borrowers are (i) at least 60 days delinquent on payments, or (ii) in danger of becoming 60 days delinquent due to a decline in income, an interest rate reset, or other common trigger event. Additionally, the modified loan must have an expected net present value greater than the net present value expected from the property’s foreclosure. If a borrower meets these qualifications, the Fed Banks will offer that borrower a loan modification substantially similar to the type of modification offered through HUD’s HOPE for Homeowner’s program (reported in InfoBytes, Nov. 25, 2008). If the borrower has both a senior mortgage and a subordinate mortgage on the same property, the Fed Banks will either seek to modify both mortgages or consolidate the loans into a single loan. For those borrowers who do not qualify for a modification under the policy, the Fed Banks may (i) offer the borrower a temporary repayment plan, or (ii) inform the borrower about additional federal assistance available. The new policy is effective immediately and has already been applied to assets in connection with JPMorgan Chase’s acquisition of The Bear Stearns Companies, Inc. For a copy of the new Homeownership Preservation Policy, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090130a1.pdf.

State Foreclosure Prevention Working Group Urges Greater Transparency for Loan Modification Reporting. On February 2, the State Foreclosure Prevention Working Group, a group of state attorneys general and state banking agencies, urged federal banking regulators to provide greater transparency regarding the reporting of loan modifications made by national banks and federal thrift institutions. The group would require that such entities provide (as of September 30, 2008, or as of the latest available data), (i) the type of loan modifications that reduced the interest rate, extended the term, and/or deferred or reduced the principal balance of the loan, (ii) a breakdown of the number of loan modifications that resulted in monthly payments that were higher, equivalent, lower by less than 10%, or lower by greater than 10%, and (iii) a breakdown of the number of loans that have been modified and then entered into default, where the loan modification resulted in monthly payments that were higher, equivalent, lower by less than 10%, or lower by greater than 10%. The group would also require banking entities to provide a copy of the data instrument currently used by the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) to collect data on loan modifications and an explanation of the analytics used to calculate the redefault rate in the OCC/OTS Report. For a copy of the letter, please see http://www.ag.state.oh.us/press/09/20090202_OCC_OTS_Metrics_Report_Letter.pdf.

Colorado Emergency Rule Increases Errors and Omissions Insurance Deductible for Reverse Mortgage Transactions. Recently, the Colorado Division of Real Estate adopted an emergency rule increasing the deductible limit for errors and omissions insurance policies covering licensed mortgage brokers engaging in reverse mortgage transactions. Under the emergency rule, such coverage must contain a deductible that does not exceed $21,000 (currently, the limit is $10,000). The rule sets forth additional required terms of coverage, including that (i) the coverage must encompass every type of transaction conducted by the mortgage broker, and (ii) there must be at least $100,000 of coverage for each licensed individual per covered claim, as well as an annual aggregate limit per licensed individual of at least $300,000. While group policies administered by associations or companies to obtain volume discounts are expressly not prohibited, each person required to be licensed as a mortgage broker must acquire and maintain the foregoing coverage on an individual basis. Sanctions for noncompliance include, but are not limited to, license revocation, fines, and restitution for any financial loss. The rule became effective February 2, 2009. For a copy of the rule, please visit http://www.dora.state.co.us/real-estate/rulemaking/MB/ERIncEandOInsDeductRevMortTrans020209.pdf.

Ohio Attorney General Files Suits Against Mortgage Broker, Foreclosure Rescue Companies. On January 27, Ohio Attorney General Richard Cordray filed suit against an Ohio mortgage broker for allegedly failing to provide mortgage loan disclosures required by the Real Estate Settlement Procedures Act and the Ohio Consumer Sales Practice Act. The complaint also alleges that the company violated the Gramm-Leach-Bliley Act by failing to properly store or dispose of certain business records. On January 23, Attorney General Corday separately filed suit against two Ohio foreclosure rescue companies who advertised, but failed to provide, foreclosure assistance, in violation of Ohio’s Consumer Sales Practices Act, Credit Services Organization Act and Debt Adjusters Act. For a copy of the press releases, please see http://www.ag.state.oh.us/press/09/pr090127.asp and http://www.ag.state.oh.us/press/09/pr090123.asp.

West Virginia Attorney General Reaches Settlement with Countrywide Regarding Alleged Predatory Lending. On February 3, Attorney General Darrell McGraw settled a suit filed against Countrywide Financial Corporation and its affiliates for alleged predatory lending practices. Under the settlement, Countrywide will, among other things, (i) modify certain loans for eligible borrowers, (ii) waive certain loan modification, late/delinquency fees and prepayment penalties for eligible borrowers, and (iii) pay $340,901.00 to provide foreclosure relief to certain borrowers. For a copy of the press release, please see http://www.wvago.gov/press.cfm?ID=463&fx=more.

Illinois Federal Court Rules Against Original Creditor in TILA Rescission Case. On January 29, the U.S. District Court for the Northern District of Illinois denied summary judgment for the original creditor of a mortgage loan because the plaintiff had the right to rescind the loan and provided adequate notice of rescission by filing suit against the creditor. Harris v. OSI Fin. Servs., Inc., No. 07 C 3552, 2009 WL 212138 (N.D. Ill. Jan. 29, 2009). In Harris, the plaintiff borrowers obtained a mortgage loan from the defendant creditor Encore Credit Corp. (Encore) in 2004 and refinanced the loan with Encore in 2005. Encore subsequently assigned the 2004 loan to a third party. The plaintiffs filed suit to rescind both loans, alleging inadequate notice of their right to cancel, as required by the Truth in Lending Act. The court refused to grant summary judgment to Encore for these claims, finding that Encore provided improper forms, which mischaracterized the right of rescission for the loans, to the borrowers. Noting a split of authority for courts in the Seventh Circuit regarding adequate notice for rescission, the court found that the plaintiffs provided adequate notice of rescission when they filed suit against Encore. However, the court granted summary judgment in favor of the assignee of the 2004 loan, reasoning that (i) providing adequate notice of rescission to Encore did not provide constructive notice to the assignee, and (ii) actual notice to the assignee occurred after the right to cancel period expired. For a copy of the opinion, please see http://www.buckleykolar.com/Harris_v_OSI.pdf.

Sixth Circuit Holds Standing in RESPA Suit Does Not Require Concrete Financial Injury-In-Fact. On January 23, the U.S. Court of Appeals for the Sixth Circuit held that plaintiffs are not required to allege a concrete financial injury-in-fact, such as an overcharge, to have Article III standing for a Real Estate Settlement Procedures Act (RESPA) claim. Carter v. Welles-Bowen Realty, Inc., et al., No. 07-3965, 2009 WL 151319 (6th Cir. Jan. 23, 2009). In Carter, the plaintiffs alleged that the defendants violated RESPA’s anti-kickback and anti-fee splitting provisions, but did not allege a concrete financial injury-in-fact (e.g., economic damages or an overcharge). Thus, the defendants argued, and the lower court agreed, that the plaintiffs lacked Article III standing. The appellate court reversed, holding that standing for a RESPA claim does not require a concrete financial injury-in-fact. The court relied on the plain meaning of RESPA and persuasive authorities to hold that Congress created a private right of action under RESPA to impose damages where kickbacks and unearned fees have occurred, even where there is no overcharge. As a result, the court held that the plaintiffs have Article III standing and reversed the lower court’s ruling. For a copy of the opinion, please see http://www.buckleykolar.com/Carter_v_Welles_Bowen.pdf.

Virginia Federal Court Determines TILA Claim Time-Barred, Ineligible for Tolling. On January 21, the U.S. District Court for the Eastern District of Virginia awarded summary judgment to the defendant lender in a claim arising under the Truth in Lending Act (TILA), reasoning that plaintiff’s claim was time-barred and ineligible for equitable or statutory tolling. Roach v. Option One Mortgage Corp., 1:08cv225, 2009 WL 159704 (E.D. Va. Jan. 21, 2009). In Roach, the plaintiff obtained an adjustable rate mortgage (ARM) from the defendant. The plaintiff subsequently alleged that an agent of the defendant falsely led her to believe that her monthly payments on the ARM would not increase above the amounts listed on the TILA-required disclosures presented to her at closing. According to the plaintiff, this misrepresentation negated the disclosures, which the plaintiff conceded were otherwise in compliance with TILA. In response, the defendant argued that the plaintiff’s claim was time-barred. The court agreed, finding that the plaintiff’s claim was time-barred because the plaintiff filed her claim more than three years after the alleged TILA violation. Additionally, the court determined that equitable tolling of the limitations period was inappropriate because, even if the plaintiff could establish fraudulent concealment warranting equitable tolling, in January 2007 the plaintiff received notice that the ARM payments would increase to a higher amount. The court also disagreed with the plaintiff’s argument that filing a Chapter 13 bankruptcy petition in September 2007 tolled the limitations period, reasoning that (i) the plaintiff voluntarily abated the bankruptcy proceeding, and (ii) the plaintiff’s assertions of the alleged TILA violation were defensive in nature. For a copy of the opinion, please see http://www.buckleykolar.com/Roach_v_Option_One.pdf.

Florida Federal Court Grants Summary Judgment Against Plaintiffs’ RESPA Damages Claims. On January 28, the U.S. District Court for the Southern District of Florida granted summary judgment to a defendant mortgage lender in a claim brought under the Real Estate Settlement Procedures Act (RESPA) because the plaintiffs presented no evidence of actual damages resulting from the alleged violation. McLean v. GMAC Mortgage Corp., No. 06-22795, 2009 WL 21068 (S.D. Fla. Jan. 28, 2009). In McLean, the plaintiffs alleged that their lender failed to respond to qualified written requests, in violation of RESPA. The lender moved for summary judgment on the issue of damages, arguing that even if it did violate RESPA, the plaintiffs did not shown that they suffered any damages as a result. The court agreed. First, with respect to statutory damages, the court held that, while the plaintiffs may have provided evidence that the lender failed to respond to two letters plaintiffs sent, plaintiffs failed to provide evidence that such failures were “standard or institutionalized” and thereby sufficient to support a pattern or practice of noncompliance claim entitling plaintiffs to statutory damages. Next, the court rejected each of plaintiffs’ claims for actual damages. Although the court allowed the plaintiffs to establish emotional distress damages with the use of lay experts rather than experts, the court held that plaintiffs’ own deposition testimony that the lender’s conduct caused them “panic” was insufficient. Similarly, the court rejected the plaintiffs’ other claims for actual damages, finding that claims for lost time, a car accident, damage to their home, unemployment and lost wages, and damage to their credit were not attributable to the lenders’ failure to respond to their letters. In each instance, the court determined that the expenses or injury claimed was not caused by the lender’s conduct, was too speculative, or both. For a copy of the opinion, please see http://www.buckleykolar.com/McLean_v_GMAC.pdf.

Sixth Circuit Holds False Statements on HUD-1 “Material” in Mortgage Fraud Case. On January 29, the U.S. Court of Appeals for the Sixth Circuit held that inflated sales prices on HUD-1 forms were “material” misstatements allowing for a mortgage fraud conviction. U.S. v. Wilkins, No. 07-5512, 2009 WL 211812 (6th Cir. Jan. 29, 2009). In Wilkins, the defendant purchased various properties; in connection with the sale of the properties, the owner of a title company prepared two HUD-1 forms under the direction of a mortgage broker. One HUD-1 reflected the actual sales price, which the defendant gave to the seller; the defendant gave another HUD-1, reflecting an inflated sales price, to the lender (a “double-HUD” transaction). The defendant and the mortgage broker split the difference provided by the lender. The defendant was subsequently indicted and convicted for mortgage fraud. On appeal, the defendant argued that the misstated sales prices on the HUD-1 forms were not “material,” as required for such a conviction under the jurisdiction of the U.S. government. Rejecting the defendant’s argument, the court found that the disclosures on the HUD-1 are “material” in the closing, the mortgage process, and the lender’s decision because the statements have a “natural tendency to influence,” even if HUD did not directly rely upon them. The court also concluded that the misstatements pertained to a matter within the jurisdiction of the U.S. Housing and Urban Development (HUD) because the “Secretary of HUD has the authority to develop and prescribe the HUD-1 form ‘as the standard real estate form in all transactions in the United States which involve federally related mortgage loans.’” For a copy of the opinion, please see http://www.buckleykolar.com/US_v_Wilkins.pdf.

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Banking

Treasury Issues New Executive Compensation Guidelines. On February 4, the U.S. Department of Treasury issued new executive compensation guidelines for financial institutions receiving government assistance. The new compensation guidelines distinguish between “generally available” and "exceptional assistance" programs. Generally available programs are meant to assist the financial system as a whole to provide the credit necessary for recovery, whereas exceptional assistance programs provide assistance to banks beyond what may be available under generally available programs. In addition, while generally available programs have the same terms for all recipients, limit the amount each institution may receive, and specify returns for taxpayers, exceptional assistance programs involve bank-specific negotiated agreements with the Treasury. As to executive compensation, the guidelines for “exceptional assistance” programs (i) prohibit senior executives from receiving greater than $500,000 in total annual compensation - additional compensation, if any, must be made in the form of restricted stock subject to the repayment of TARP funds, (ii) allow for the “clawback” of bonuses for the “top five” and twenty additional senior executives, (iii) require executive compensation structure to be agreed to by a non-binding shareholder resolution ("say on pay"), (iv) increase the ban on “golden parachutes” for senior executives, and (v) require corporate policies to require the approval of “luxury” expenditures. The compensation guidelines for “generally available” programs are substantively similar, but, notably, allow for the waiver of the senior executive compensation cap if a firm provides "full public disclosure" and puts the waiver to a shareholder vote. The new guidelines do not retroactively apply to existing investments or to previously announced programs, such as the Capital Purchase Program. For a copy of the announcement, please see http://www.ustreas.gov/press/releases/tg15.htm.

Fed Announces Homeownership Preservation Policy. On January 30, the Federal Reserve Board issued its Homeownership Preservation Policy, which seeks to prevent foreclosures on certain residential mortgage assets held, owned, or controlled by a Federal Reserve Bank. Under the new policy, Federal Reserve Banks or their agents (collectively, Fed Banks) must proactively review their portfolio of residential mortgage loans that are in danger of foreclosure to determine whether loan modification is a viable option by assessing whether borrowers are (i) at least 60 days delinquent on payments, or (ii) in danger of becoming 60 days delinquent due to a decline in income, an interest rate reset, or other common trigger event. Additionally, the modified loan must have an expected net present value greater than the net present value expected from the property’s foreclosure. If a borrower meets these qualifications, the Fed Banks will offer that borrower a loan modification substantially similar to the type of modification offered through HUD’s HOPE for Homeowner’s program (reported in InfoBytes, Nov. 25, 2008). If the borrower has both a senior mortgage and a subordinate mortgage on the same property, the Fed Banks will either seek to modify both mortgages or consolidate the loans into a single loan. For those borrowers who do not qualify for a modification under the policy, the Fed Banks may (i) offer the borrower a temporary repayment plan, or (ii) inform the borrower about additional federal assistance available. The new policy is effective immediately and has already been applied to assets in connection with JPMorgan Chase’s acquisition of The Bear Stearns Companies, Inc. For a copy of the new Homeownership Preservation Policy, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090130a1.pdf.

State Foreclosure Prevention Working Group Urges Greater Transparency for Loan Modification Reporting. On February 2, the State Foreclosure Prevention Working Group, a group of state attorneys general and state banking agencies, urged federal banking regulators to provide greater transparency regarding the reporting of loan modifications made by national banks and federal thrift institutions. The group would require that such entities provide (as of September 30, 2008, or as of the latest available data), (i) the type of loan modifications that reduced the interest rate, extended the term, and/or deferred or reduced the principal balance of the loan, (ii) a breakdown of the number of loan modifications that resulted in monthly payments that were higher, equivalent, lower by less than 10%, or lower by greater than 10%, and (iii) a breakdown of the number of loans that have been modified and then entered into default, where the loan modification resulted in monthly payments that were higher, equivalent, lower by less than 10%, or lower by greater than 10%. The group would also require banking entities to provide a copy of the data instrument currently used by the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) to collect data on loan modifications and an explanation of the analytics used to calculate the redefault rate in the OCC/OTS Report. For a copy of the letter, please see http://www.ag.state.oh.us/press/09/20090202_OCC_OTS_Metrics_Report_Letter.pdf.

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Consumer Finance

Pennsylvania Federal Court Rules FCRA Does Not Preempt State Tort Claims. On January 16, the U.S. District Court for the Middle District of Pennsylvania granted the defendant’s motion to dismiss a plaintiffs’ claim under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL), finding that the Fair Credit Reporting Act (FCRA) preempted the claim, but denied the motion to dismiss the plaintiffs’ state tort law claims. Sites v. Nationstar Mortgage LLC, Civ. Action No. 1:07-cv-00469, 2009 WL 117844 (M.D. Pa. Jan. 16, 2008). In their complaint, the plaintiffs alleged violations of state tort law and the UTPCPL, claiming that the defendant acted with malice and willful intent to injure the plaintiffs by furnishing false information to the credit reporting agencies. The defendant countered that FCRA preempts these state law claims. Rejecting defendant’s argument that section FCRA section 1681t(b)(1)(F) preempts all state law claims, the court held that the provision preempts only state statutory claims while section 1681h(e) preempts state tort claims unless the furnisher acts with malice or willful intent. For a copy of the opinion, please see http://www.buckleykolar.com/Sites_v_Nationstar.pdf.

California Appellate Court Holds FCRA Does Not Preempt State Credit Reporting Law. On January 26, a California state appellate court held that the federal Fair Credit Reporting Act (FCRA) does not preempt an action brought under the California Consumer Credit Reporting Agencies Act (CCRAA) for failure to investigate the accuracy of reported information. Sanai v. Saltz, – Cal. Rptr. 3d –, 2009 WL 162059 (Cal. App. 2 Dist. Jan. 26, 2009). In Sanai, the plaintiff disputed an unpaid rent with his landlord; he subsequently obtained his credit report and found that the landlord hired a company to report the past due unpaid rent. The plaintiff then brought an action alleging violations of FCRA, the CCRAA, and various state law claims. The FCRA and CCRAA claims were based on the allegation that the company that reported the debt did not properly investigate the accuracy of the claim after being notified by the plaintiff that he disputed the debt. As to FCRA, the appellate court agreed with the trial court’s holding that there is no private right of action for violating 1681s-2(a) (the duty to provide accurate information), and that the duty under 1681s-2(b) (the duty to investigate the accuracy of the reported information upon receiving notice of a dispute) was never triggered because the notice of dispute must come from the credit reporting agency, not from the consumer himself. Regarding the CCRAA, the trial court held that, although FCRA expressly excepted 1785.25(a) (regarding the furnishing of incomplete or inaccurate information), the FCRA does not except the CCRAA provision allowing private causes of action. The appellate court reversed, finding that the enforcement mechanism under 1681s-2(d) related only to claims brought under 1681s-2(a), while private enforcement is specifically contemplated in 1681s-2(b). Consequently, the appellate court held that it was “simply incorrect” to hold that Congress meant to preempt private enforcement of all obligations imposed by the FCRA on furnishers of credit. Moreover, the appellate court found that, because the CCRAA provision authorizing a private right of action was “procedural,” Congress did not need to except it from preemption. As to other state law claims, the court upheld the holding that the FCRA preempts all such causes of action that impose duties or requirements on furnishers of credit information. For a copy of the opinion, please see http://www.buckleykolar.com/Sanai_v_Saltz.pdf.

Florida Federal Court Finds Triable Facts Exist Regarding FDCPA Bona Fide Error Defense. On January 9, the U.S. District Court for the Southern District of Florida denied a defendants’ motion for summary judgment based on the Fair Debt Collection Practices Act’s (FDCPA) bona fide error defense because a triable issue of fact existed to substantiate the defense. Gaisser v. Portfolio Recovery Services, LLC, No. 08-60177-CIV (S.D. Fla. Jan. 9, 2009). In Gaisser, a law firm, Orovitz, P.A., filed a debt collection action against the plaintiff. In response, the plaintiff filed a complaint in Florida federal court alleging that the defendants violated the FDCPA by attempting to collect a debt that was beyond the applicable statute of limitations. The plaintiff argued, and it was later found, that New Hampshire law governed the disputed debt, which provided for a three-year statute of limitations on debt collection actions. Orovitz subsequently moved for summary judgment, contending that unintentionally filing the time-barred collection action was a “bona fide” error. Orovitz argued that the attempted collection was a mistake of law because it believed that Florida courts applied Florida’s statute of limitations to all debt collection actions filed in Florida. The court assessed whether Orovitz could show that the filing of its time-barred action was (i) unintentional, (ii) a bona fide error, and (iii) made despite the maintenance of procedures reasonably adapted to avoid the error. Focusing on the third prong of the bona fide error test, the court questioned whether Orovitz maintained proper procedures to avoid error, because (i) ample precedent existed before Orovitz filed its suit applying foreign statutes of limitations in analogous situations, and (ii) Orovitz previously attached Florida trial court opinions where courts had applied Virginia’s statute of limitations in debt collection actions in which the credit agreement included a Virginia choice-of-law provision. Therefore, the court found a triable fact existed as to whether Orovitz had reasonable procedures in place to prevent the error, and denied Orovitz’s motion for summary judgment. For a copy of the opinion, please see http://www.buckleykolar.com/Gaisser_v_Portfolio_Recovery.pdf.

Three Class Action Suits Filed in New Jersey Federal Court Regarding Heartland Credit Card Information Breaches. On January 29, Merino v. Heartland Payment Systems joined two other class action law suits against Heartland Payment Systems, Inc. (Heartland) filed in the U.S. District Court for the District of New Jersey alleging negligence for failure to take adequate steps to prevent a data breach, violation of the New Jersey Consumer Fraud Act (NJCFA), and violation of the Fair Credit Reporting Act (FCRA). Merino v. Heartland Payment Systems (D. N.J. Jan. 29, 2009). The plaintiff alleged that Heartland knew, or had reason to know, that a data security breach was occurring as early as October 2008, yet the defendant did not take action or notify customers or third party merchants until January 20, 2009. Each putative class action alleges that that Heartland should have (i) prevented the alleged negligence by properly assuming its duty to customers to secure data and attempt to mitigate customer losses, (ii) contained or mitigated customer damage by taking action earlier than January 20, and (iii) avoided NJCFA and FCRA violations by more carefully safeguarding customer information, such as by utilizing industry-wide procedures for storing data. Analysts estimate that approximately 100 million credit and debit card holders’ private financial information was stolen, accessed, and/or compromised. For a copy of the complaints, please see http://www.buckleykolar.com/Heartland_1.pdf, http://www.buckleykolar.com/Heartland_2.pdf, and http://www.buckleykolar.com/Heartland_3.pdf.

Ohio Federal Court Holds Furnisher of Information Did Not “Reasonably” Investigate Dispute Under FCRA. On January 22, the U.S. District Court for the Southern District of Ohio held that a furnisher of information did not “reasonably” investigate a disputed debt pursuant to the Fair Credit Reporting Act (FCRA) because it relied upon its own records and did not contact the debt collection agency regarding the dispute. Watson v. Citi Corp., No. 2_07-cv-0777, 2009 WL 161222 (S.D. Ohio Jan. 22, 2009). In Watson, the plaintiff maintained accounts with several creditors - including Citigroup - that went into default. Citigroup referred plaintiff’s debt for collection to ARS National Services, Inc. (ARS), a third party collection agency. Thereafter, the plaintiff settled the Citigroup debt with ARS; however, Citigroup continued to report that debt to the credit reporting agencies. The plaintiff disputed her report with a credit reporting agency, but Citigroup continued to report a balance due. The plaintiff subsequently filed suit, alleging, among other things, that Citibank failed to conduct a “reasonable” investigation of the dispute, as required by FCRA. The court agreed, reasoning that Citibank failed to reasonably investigate the dispute when it relied solely on its own incomplete records and failed to contact the debt collection agency regarding the disputed account. However, the court, in awarding the plaintiff only $1, rejected the plaintiff’s claim for statutory or punitive damages, reasoning that the plaintiff did not prove that the defendant acted “willfully.” For a copy of the opinion, please see http://www.buckleykolar.com/Watson_v_Citi.pdf.

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Litigation

Illinois Federal Court Rules Against Original Creditor in TILA Rescission Case. On January 29, the U.S. District Court for the Northern District of Illinois denied summary judgment for the original creditor of a mortgage loan because the plaintiff had the right to rescind the loan and provided adequate notice of rescission by filing suit against the creditor. Harris v. OSI Fin. Servs., Inc., No. 07 C 3552, 2009 WL 212138 (N.D. Ill. Jan. 29, 2009). In Harris, the plaintiff borrowers obtained a mortgage loan from the defendant creditor Encore Credit Corp. (Encore) in 2004 and refinanced the loan with Encore in 2005. Encore subsequently assigned the 2004 loan to a third party. The plaintiffs filed suit to rescind both loans, alleging inadequate notice of their right to cancel, as required by the Truth in Lending Act. The court refused to grant summary judgment to Encore for these claims, finding that Encore provided improper forms, which mischaracterized the right of rescission for the loans, to the borrowers. Noting a split of authority for courts in the Seventh Circuit regarding adequate notice for rescission, the court found that the plaintiffs provided adequate notice of rescission when they filed suit against Encore. However, the court granted summary judgment in favor of the assignee of the 2004 loan, reasoning that (i) providing adequate notice of rescission to Encore did not provide constructive notice to the assignee, and (ii) actual notice to the assignee occurred after the right to cancel period expired. For a copy of the opinion, please see http://www.buckleykolar.com/Harris_v_OSI.pdf.

Sixth Circuit Holds Standing in RESPA Suit Does Not Require Concrete Financial Injury-In-Fact. On January 23, the U.S. Court of Appeals for the Sixth Circuit held that plaintiffs are not required to allege a concrete financial injury-in-fact, such as an overcharge, to have Article III standing for a Real Estate Settlement Procedures Act (RESPA) claim. Carter v. Welles-Bowen Realty, Inc., et al., No. 07-3965, 2009 WL 151319 (6th Cir. Jan. 23, 2009). In Carter, the plaintiffs alleged that the defendants violated RESPA’s anti-kickback and anti-fee splitting provisions, but did not allege a concrete financial injury-in-fact (e.g., economic damages or an overcharge). Thus, the defendants argued, and the lower court agreed, that the plaintiffs lacked Article III standing. The appellate court reversed, holding that standing for a RESPA claim does not require a concrete financial injury-in-fact. The court relied on the plain meaning of RESPA and persuasive authorities to hold that Congress created a private right of action under RESPA to impose damages where kickbacks and unearned fees have occurred, even where there is no overcharge. As a result, the court held that the plaintiffs have Article III standing and reversed the lower court’s ruling. For a copy of the opinion, please see http://www.buckleykolar.com/Carter_v_Welles_Bowen.pdf.

Virginia Federal Court Determines TILA Claim Time-Barred, Ineligible for Tolling. On January 21, the U.S. District Court for the Eastern District of Virginia awarded summary judgment to the defendant lender in a claim arising under the Truth in Lending Act (TILA), reasoning that plaintiff’s claim was time-barred and ineligible for equitable or statutory tolling. Roach v. Option One Mortgage Corp., 1:08cv225, 2009 WL 159704 (E.D. Va. Jan. 21, 2009). In Roach, the plaintiff obtained an adjustable rate mortgage (ARM) from the defendant. The plaintiff subsequently alleged that an agent of the defendant falsely led her to believe that her monthly payments on the ARM would not increase above the amounts listed on the TILA-required disclosures presented to her at closing. According to the plaintiff, this misrepresentation negated the disclosures, which the plaintiff conceded were otherwise in compliance with TILA. In response, the defendant argued that the plaintiff’s claim was time-barred. The court agreed, finding that the plaintiff’s claim was time-barred because the plaintiff filed her claim more than three years after the alleged TILA violation. Additionally, the court determined that equitable tolling of the limitations period was inappropriate because, even if the plaintiff could establish fraudulent concealment warranting equitable tolling, in January 2007 the plaintiff received notice that the ARM payments would increase to a higher amount. The court also disagreed with the plaintiff’s argument that filing a Chapter 13 bankruptcy petition in September 2007 tolled the limitations period, reasoning that (i) the plaintiff voluntarily abated the bankruptcy proceeding, and (ii) the plaintiff’s assertions of the alleged TILA violation were defensive in nature. For a copy of the opinion, please see http://www.buckleykolar.com/Roach_v_Option_One.pdf.

Pennsylvania Federal Court Rules FCRA Does Not Preempt State Tort Claims. On January 16, the U.S. District Court for the Middle District of Pennsylvania granted the defendant’s motion to dismiss a plaintiffs’ claim under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL), finding that the Fair Credit Reporting Act (FCRA) preempted the claim, but denied the motion to dismiss the plaintiffs’ state tort law claims. Sites v. Nationstar Mortgage LLC, Civ. Action No. 1:07-cv-00469, 2009 WL 117844 (M.D. Pa. Jan. 16, 2008). In their complaint, the plaintiffs alleged violations of state tort law and the UTPCPL, claiming that the defendant acted with malice and willful intent to injure the plaintiffs by furnishing false information to the credit reporting agencies. The defendant countered that FCRA preempts these state law claims. Rejecting defendant’s argument that section FCRA section 1681t(b)(1)(F) preempts all state law claims, the court held that the provision preempts only state statutory claims while section 1681h(e) preempts state tort claims unless the furnisher acts with malice or willful intent. For a copy of the opinion, please see http://www.buckleykolar.com/Sites_v_Nationstar.pdf.

California Appellate Court Holds FCRA Does Not Preempt State Credit Reporting Law. On January 26, a California state appellate court held that the federal Fair Credit Reporting Act (FCRA) does not preempt an action brought under the California Consumer Credit Reporting Agencies Act (CCRAA) for failure to investigate the accuracy of reported information. Sanai v. Saltz, – Cal. Rptr. 3d –, 2009 WL 162059 (Cal. App. 2 Dist. Jan. 26, 2009). In Sanai, the plaintiff disputed an unpaid rent with his landlord; he subsequently obtained his credit report and found that the landlord hired a company to report the past due unpaid rent. The plaintiff then brought an action alleging violations of FCRA, the CCRAA, and various state law claims. The FCRA and CCRAA claims were based on the allegation that the company that reported the debt did not properly investigate the accuracy of the claim after being notified by the plaintiff that he disputed the debt. As to FCRA, the appellate court agreed with the trial court’s holding that there is no private right of action for violating 1681s-2(a) (the duty to provide accurate information), and that the duty under 1681s-2(b) (the duty to investigate the accuracy of the reported information upon receiving notice of a dispute) was never triggered because the notice of dispute must come from the credit reporting agency, not from the consumer himself. Regarding the CCRAA, the trial court held that although FCRA expressly excepted 1785.25(a) (regarding the furnishing of incomplete or inaccurate information), the FCRA does not except the CCRAA provision allowing private causes of action. The appellate court reversed, finding that the enforcement mechanism under 1681s-2(d) related only to claims brought under 1681s-2(a), while private enforcement is specifically contemplated in 1681s-2(b). Consequently, the appellate court held that it was “simply incorrect” to hold that Congress meant to preempt private enforcement of all obligations imposed by the FCRA on furnishers of credit. Moreover, the appellate court found that, because the CCRAA provision authorizing a private right of action was “procedural,” Congress did not need to except it from preemption. As to other state law claims, the court upheld the holding that the FCRA preempts all such causes of action that impose duties or requirements on furnishers of credit information. For a copy of the opinion, please see http://www.buckleykolar.com/Sanai_v_Saltz.pdf.

Florida Federal Court Finds Triable Facts Exist Regarding FDCPA Bona Fide Error Defense. On January 9, the U.S. District Court for the Southern District of Florida denied a defendants’ motion for summary judgment based on the Fair Debt Collection Practices Act’s (FDCPA) bona fide error defense because a triable issue of fact existed to substantiate the defense. Gaisser v. Portfolio Recovery Services, LLC, No. 08-60177-CIV (S.D. Fla. Jan. 9, 2009). In Gaisser, a law firm, Orovitz, P.A., filed a debt collection action against the plaintiff. In response, the plaintiff filed a complaint in Florida federal court alleging that the defendants violated the FDCPA by attempting to collect a debt that was beyond the applicable statute of limitations. The plaintiff argued, and it was later found, that New Hampshire law governed the disputed debt, which provided for a three-year statute of limitations on debt collection actions. Orovitz subsequently moved for summary judgment, contending that unintentionally filing the time-barred collection action was a “bona fide” error. Orovitz argued that the attempted collection was a mistake of law because it believed that Florida courts applied Florida’s statute of limitations to all debt collection actions filed in Florida. The court assessed whether Orovitz could show that the filing of its time-barred action was (i) unintentional, (ii) a bona fide error, and (iii) made despite the maintenance of procedures reasonably adapted to avoid the error. Focusing on the third prong of the bona fide error test, the court questioned whether Orovitz maintained proper procedures to avoid error, because (i) ample precedent existed before Orovitz filed its suit applying foreign statutes of limitations in analogous situations, and (ii) Orovitz previously attached Florida trial court opinions where courts had applied Virginia’s statute of limitations in debt collection actions in which the credit agreement included a Virginia choice-of-law provision. Therefore, the court found a triable fact existed as to whether Orovitz had reasonable procedures in place to prevent the error, and denied Orovitz’s motion for summary judgment. For a copy of the opinion, please see http://www.buckleykolar.com/Gaisser_v_Portfolio_Recovery.pdf.

Three Class Action Suits Filed in New Jersey Federal Court Regarding Heartland Credit Card Information Breaches. On January 29, Merino v. Heartland Payment Systems joined two other class action law suits against Heartland Payment Systems, Inc. (Heartland) filed in the U.S. District Court for the District of New Jersey alleging negligence for failure to take adequate steps to prevent a data breach, violation of the New Jersey Consumer Fraud Act (NJCFA), and violation of the Fair Credit Reporting Act (FCRA). Merino v. Heartland Payment Systems (D. N.J. Jan. 29, 2009). The plaintiff alleged that Heartland knew, or had reason to know, that a data security breach was occurring as early as October 2008, yet the defendant did not take action or notify customers or third party merchants until January 20, 2009. Each putative class action alleges that that Heartland should have (i) prevented the alleged negligence by properly assuming its duty to customers to secure data and attempt to mitigate customer losses, (ii) contained or mitigated customer damage by taking action earlier than January 20, and (iii) avoided NJCFA and FCRA violations by more carefully safeguarding customer information, such as by utilizing industry-wide procedures for storing data. Analysts estimate that approximately 100 million credit and debit card holders’ private financial information was stolen, accessed, and/or compromised. For a copy of the complaints, please see http://www.buckleykolar.com/Heartland_1.pdf, http://www.buckleykolar.com/Heartland_2.pdf, and http://www.buckleykolar.com/Heartland_3.pdf.

Florida Federal Court Grants Summary Judgment Against Plaintiffs’ RESPA Damages Claims. On January 28, the U.S. District Court for the Southern District of Florida granted summary judgment to a defendant mortgage lender in a claim brought under the Real Estate Settlement Procedures Act (RESPA) because the plaintiffs presented no evidence of actual damages resulting from the alleged violation. McLean v. GMAC Mortgage Corp., No. 06-22795, 2009 WL 21068 (S.D. Fla. Jan. 28, 2009). In McLean, the plaintiffs alleged that their lender failed to respond to qualified written requests, in violation of RESPA. The lender moved for summary judgment on the issue of damages, arguing that even if it did violate RESPA, the plaintiffs did not shown that they suffered any damages as a result. The court agreed. First, with respect to statutory damages, the court held that, while the plaintiffs may have provided evidence that the lender failed to respond to two letters plaintiffs sent, plaintiffs failed to provide evidence that such failures were “standard or institutionalized” and thereby sufficient to support a pattern or practice of noncompliance claim entitling plaintiffs to statutory damages. Next, the court rejected each of plaintiffs’ claims for actual damages. Although the court allowed the plaintiffs to establish emotional distress damages with the use of lay experts rather than experts, the court held that plaintiffs’ own deposition testimony that the lender’s conduct caused them “panic” was insufficient. Similarly, the court rejected the plaintiffs’ other claims for actual damages, finding that claims for lost time, a car accident, damage to their home, unemployment and lost wages, and damage to their credit were not attributable to the lenders’ failure to respond to their letters. In each instance, the court determined that the expenses or injury claimed was not caused by the lender’s conduct, was too speculative, or both. For a copy of the opinion, please see http://www.buckleykolar.com/McLean_v_GMAC.pdf.

Sixth Circuit Holds False Statements on HUD-1 “Material” in Mortgage Fraud Case. On January 29, the U.S. Court of Appeals for the Sixth Circuit held that inflated sales prices on HUD-1 forms were “material” misstatements allowing for a mortgage fraud conviction. U.S. v. Wilkins, No. 07-5512, 2009 WL 211812 (6th Cir. Jan. 29, 2009). In Wilkins, the defendant purchased various properties; in connection with the sale of the properties, the owner of a title company prepared two HUD-1 forms under the direction of a mortgage broker. One HUD-1 reflected the actual sales price, which the defendant gave to the seller; the defendant gave another HUD-1, reflecting an inflated sales price, to the lender (a “double-HUD” transaction). The defendant and the mortgage broker split the difference provided by the lender. The defendant was subsequently indicted and convicted for mortgage fraud. On appeal, the defendant argued that the misstated sales prices on the HUD-1 forms were not “material,” as required for such a conviction under the jurisdiction of the U.S. government. Rejecting the defendant’s argument, the court found that the disclosures on the HUD-1 are “material” in the closing, the mortgage process, and the lender’s decision because the statements have a “natural tendency to influence,” even if HUD did not directly rely upon them. The court also concluded that the misstatements pertained to a matter within the jurisdiction of the U.S. Housing and Urban Development (HUD) because the “Secretary of HUD has the authority to develop and prescribe the HUD-1 form ‘as the standard real estate form in all transactions in the United States which involve federally related mortgage loans.’” For a copy of the opinion, please see http://www.buckleykolar.com/US_v_Wilkins.pdf.

Ohio Federal Court Holds Furnisher of Information Did Not “Reasonably” Investigate Dispute Under FCRA. On January 22, the U.S. District Court for the Southern District of Ohio held that a furnisher of information did not “reasonably” investigate a disputed debt pursuant to the Fair Credit Reporting Act (FCRA) because it relied upon its own records and did not contact the debt collection agency regarding the dispute. Watson v. Citi Corp., No. 2_07-cv-0777, 2009 WL 161222 (S.D. Ohio Jan. 22, 2009). In Watson, the plaintiff maintained accounts with several creditors - including Citigroup - that went into default. Citigroup referred plaintiff’s debt for collection to ARS National Services, Inc. (ARS), a third party collection agency. Thereafter, the plaintiff settled the Citigroup debt with ARS; however, Citigroup continued to report that debt to the credit reporting agencies. The plaintiff disputed her report with a credit reporting agency, but Citigroup continued to report a balance due. The plaintiff subsequently filed suit, alleging, among other things, that Citibank failed to conduct a “reasonable” investigation of the dispute, as required by FCRA. The court agreed, reasoning that Citibank failed to reasonably investigate the dispute when it relied solely on its own incomplete records and failed to contact the debt collection agency regarding the disputed account. However, the court, in awarding the plaintiff only $1, rejected the plaintiff’s claim for statutory or punitive damages, reasoning that the plaintiff did not prove that the defendant acted “willfully.” For a copy of the opinion, please see http://www.buckleykolar.com/Watson_v_Citi.pdf.

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E-Financial Services

FTC Issues Proposed Settlement Regarding Alleged FTC Act Violations by Online Merchant. On February 5, the Federal Trade Commission (FTC) issued a proposed settlement in a dispute that an online merchant violated the FTC Act by failing to implement "reasonable" security measures to protect customer information, including credit card numbers. The defendant allegedly (i) stored personal consumer information without encryption, (ii) did not adequately assess whether its website and computer network were vulnerable to "commonly" or "reasonably foreseeable" attacks, (iii) did not implement defenses to such attacks, and (iv) falsely represented that it implemented "reasonable and appropriate" measures to protect against unauthorized access. Under the proposed settlement, the defendant cannot make deceptive privacy and data security claims. Further, the defendant must (i) implement and maintain a comprehensive information-security program, (ii) for every other year for 10 years, obtain an audit, by a qualified, independent third-party, evidencing compliance with the order, and (iii) allow the FTC to monitor compliance with the order. The proposed agreement is subject to public comment for 30 days, ending March 9, 2009. For a copy of the press release, please see http://www.ftc.gov/opa/2009/02/compgeeks.shtm.

Three Class Action Suits Filed in New Jersey Federal Court Regarding Heartland Credit Card Information Breaches. On January 29, Merino v. Heartland Payment Systems joined two other class action law suits against Heartland Payment Systems, Inc. (Heartland) filed in the U.S. District Court for the District of New Jersey alleging negligence for failure to take adequate steps to prevent a data breach, violation of the New Jersey Consumer Fraud Act (NJCFA), and violation of the Fair Credit Reporting Act (FCRA). Merino v. Heartland Payment Systems (D. N.J. Jan. 29, 2009). The plaintiff alleged that Heartland knew, or had reason to know, that a data security breach was occurring as early as October 2008, yet the defendant did not take action or notify customers or third party merchants until January 20, 2009. Each putative class action alleges that that Heartland should have (i) prevented the alleged negligence by properly assuming its duty to customers to secure data and attempt to mitigate customer losses, (ii) contained or mitigated customer damage by taking action earlier than January 20, and (iii) avoided NJCFA and FCRA violations by more carefully safeguarding customer information, such as by utilizing industry-wide procedures for storing data. Analysts estimate that approximately 100 million credit and debit card holders’ private financial information was stolen, accessed, and/or compromised. For a copy of the complaints, please see http://www.buckleykolar.com/Heartland_1.pdf, http://www.buckleykolar.com/Heartland_2.pdf, and http://www.buckleykolar.com/Heartland_3.pdf.

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Privacy/Data Security

FTC Issues Proposed Settlement Regarding Alleged FTC Act Violations by Online Merchant. On February 5, the Federal Trade Commission (FTC) issued a proposed settlement in a dispute that an online merchant violated the FTC Act by failing to implement "reasonable" security measures to protect customer information, including credit card numbers. The defendant allegedly (i) stored personal consumer information without encryption, (ii) did not adequately assess whether its website and computer network were vulnerable to "commonly" or "reasonably foreseeable" attacks, (iii) did not implement defenses to such attacks, and (iv) falsely represented that it implemented "reasonable and appropriate" measures to protect against unauthorized access. Under the proposed settlement, the defendant cannot make deceptive privacy and data security claims. Further, the defendant must (i) implement and maintain a comprehensive information-security program, (ii) for every other year for 10 years, obtain an audit, by a qualified, independent third-party, evidencing compliance with the order, and (iii) allow the FTC to monitor compliance with the order. The proposed agreement is subject to public comment for 30 days, ending March 9, 2009. For a copy of the press release, please see http://www.ftc.gov/opa/2009/02/compgeeks.shtm.

VA Proposes Settlement Regarding 2006 Data Breach. On January 27, the U.S. Department of Veterans Affairs (VA) proposed a settlement regarding the 2006 theft of a VA employee’s laptop computer containing the personal data, including social security numbers and birth dates, of up to 26.5 million veterans and 2.2 million active duty personnel (reported in InfoBytes, May 26, 2006). Three class action lawsuits were subsequently filed; however, forensics indicated that the data was likely not compromised. Under the proposed settlement, the VA does not admit liability or any wrongdoing, but would, among other things, (i) pay up to $1,500 to active duty military personnel and veterans who evidence being affected as a result of the breach, and (ii) pay a minimum of $75 for valid claims by veterans who were emotionally distressed or incurred credit monitoring costs. The overall settlement amount agreed to is $20,000,000. For a copy of the proposed settlement, please see http://www.buckleykolar.com/VA_Settlement.pdf.

Connecticut Attorney General Reaches Settlement with Countrywide Regarding Data Breach. On January 29, Connecticut Attorney General Richard Blumenthal and the Connecticut Department of Consumer of Protection announced a settlement with Countrywide Financial Corporation regarding an alleged data breach that affected approximately 30,000 Connecticut consumers. The data breach resulted when a former employee allegedly sold the financial data, including social security numbers, of more than 2 million customers nationwide. Under the settlement, Countrywide will, among other things, (i) pay $350,000 in penalties, (ii) establish a fund to reimburse consumers for un-freezing credit, and (iii) adopt "best practices” for data management and security. For a copy of the press release, please see http://www.ct.gov/ag/cwp/view.asp?Q=432774&A=3673.

Pennsylvania Federal Court Rules FCRA Does Not Preempt State Tort Claims. On January 16, the U.S. District Court for the Middle District of Pennsylvania granted the defendant’s motion to dismiss a plaintiffs’ claim under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL), finding that the Fair Credit Reporting Act (FCRA) preempted the claim, but denied the motion to dismiss the plaintiffs’ state tort law claims. Sites v. Nationstar Mortgage LLC, Civ. Action No. 1:07-cv-00469, 2009 WL 117844 (M.D. Pa. Jan. 16, 2008). In their complaint, the plaintiffs alleged violations of state tort law and the UTPCPL, claiming that the defendant acted with malice and willful intent to injure the plaintiffs by furnishing false information to the credit reporting agencies. The defendant countered that FCRA preempts these state law claims. Rejecting defendant’s argument that section FCRA section 1681t(b)(1)(F) preempts all state law claims, the court held that the provision preempts only state statutory claims while section 1681h(e) preempts state tort claims unless the furnisher acts with malice or willful intent. For a copy of the opinion, please see http://www.buckleykolar.com/Sites_v_Nationstar.pdf.

California Appellate Court Holds FCRA Does Not Preempt State Credit Reporting Law. On January 26, a California state appellate court held that the federal Fair Credit Reporting Act (FCRA) does not preempt an action brought under the California Consumer Credit Reporting Agencies Act (CCRAA) for failure to investigate the accuracy of reported information. Sanai v. Saltz, – Cal. Rptr. 3d –, 2009 WL 162059 (Cal. App. 2 Dist. Jan. 26, 2009). In Sanai, the plaintiff disputed an unpaid rent with his landlord; he subsequently obtained his credit report and found that the landlord hired a company to report the past due unpaid rent. The plaintiff then brought an action alleging violations of FCRA, the CCRAA, and various state law claims. The FCRA and CCRAA claims were based on the allegation that the company that reported the debt did not properly investigate the accuracy of the claim after being notified by the plaintiff that he disputed the debt. As to FCRA, the appellate court agreed with the trial court’s holding that there is no private right of action for violating 1681s-2(a) (the duty to provide accurate information), and that the duty under 1681s-2(b) (the duty to investigate the accuracy of the reported information upon receiving notice of a dispute) was never triggered because the notice of dispute must come from the credit reporting agency, not from the consumer himself. Regarding the CCRAA, the trial court held that, although FCRA expressly excepted 1785.25(a) (regarding the furnishing of incomplete or inaccurate information), the FCRA does not except the CCRAA provision allowing private causes of action. The appellate court reversed, finding that the enforcement mechanism under 1681s-2(d) related only to claims brought under 1681s-2(a), while private enforcement is specifically contemplated in 1681s-2(b). Consequently, the appellate court held that it was “simply incorrect” to hold that Congress meant to preempt private enforcement of all obligations imposed by the FCRA on furnishers of credit. Moreover, the appellate court found that, because the CCRAA provision authorizing a private right of action was “procedural,” Congress did not need to except it from preemption. As to other state law claims, the court upheld the holding that the FCRA preempts all such causes of action that impose duties or requirements on furnishers of credit information. For a copy of the opinion, please see http://www.buckleykolar.com/Sanai_v_Saltz.pdf.

Three Class Action Suits Filed in New Jersey Federal Court Regarding Heartland Credit Card Information Breaches. On January 29, Merino v. Heartland Payment Systems joined two other class action law suits against Heartland Payment Systems, Inc. (Heartland) filed in the U.S. District Court for the District of New Jersey alleging negligence for failure to take adequate steps to prevent a data breach, violation of the New Jersey Consumer Fraud Act (NJCFA), and violation of the Fair Credit Reporting Act (FCRA). Merino v. Heartland Payment Systems (D. N.J. Jan. 29, 2009). The plaintiff alleged that Heartland knew, or had reason to know, that a data security breach was occurring as early as October 2008, yet the defendant did not take action or notify customers or third party merchants until January 20, 2009. Each putative class action alleges that that Heartland should have (i) prevented the alleged negligence by properly assuming its duty to customers to secure data and attempt to mitigate customer losses, (ii) contained or mitigated customer damage by taking action earlier than January 20, and (iii) avoided NJCFA and FCRA violations by more carefully safeguarding customer information, such as by utilizing industry-wide procedures for storing data. Analysts estimate that approximately 100 million credit and debit card holders’ private financial information was stolen, accessed, and/or compromised. For a copy of the complaints, please see http://www.buckleykolar.com/Heartland_1.pdf, http://www.buckleykolar.com/Heartland_2.pdf, and http://www.buckleykolar.com/Heartland_3.pdf.

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Credit Cards

FTC Issues Proposed Settlement Regarding Alleged FTC Act Violations by Online Merchant. On February 5, the Federal Trade Commission (FTC) issued a proposed settlement in a dispute that an online merchant violated the FTC Act by failing to implement "reasonable" security measures to protect customer information, including credit card numbers. The defendant allegedly (i) stored personal consumer information without encryption, (ii) did not adequately assess whether its website and computer network were vulnerable to "commonly" or "reasonably foreseeable" attacks, (iii) did not implement defenses to such attacks, and (iv) falsely represented that it implemented "reasonable and appropriate" measures to protect against unauthorized access. Under the proposed settlement, the defendant cannot make deceptive privacy and data security claims. Further, the defendant must (i) implement and maintain a comprehensive information-security program, (ii) for every other year for 10 years, obtain an audit, by a qualified, independent third-party, evidencing compliance with the order, and (iii) allow the FTC to monitor compliance with the order. The proposed agreement is subject to public comment for 30 days, ending March 9, 2009. For a copy of the press release, please see http://www.ftc.gov/opa/2009/02/compgeeks.shtm.

Three Class Action Suits Filed in New Jersey Federal Court Regarding Heartland Credit Card Information Breaches. On January 29, Merino v. Heartland Payment Systems joined two other class action law suits against Heartland Payment Systems, Inc. (Heartland) filed in the U.S. District Court for the District of New Jersey alleging negligence for failure to take adequate steps to prevent a data breach, violation of the New Jersey Consumer Fraud Act (NJCFA), and violation of the Fair Credit Reporting Act (FCRA). Merino v. Heartland Payment Systems (D. N.J. Jan. 29, 2009). The plaintiff alleged that Heartland knew, or had reason to know, that a data security breach was occurring as early as October 2008, yet the defendant did not take action or notify customers or third party merchants until January 20, 2009. Each putative class action alleges that that Heartland should have (i) prevented the alleged negligence by properly assuming its duty to customers to secure data and attempt to mitigate customer losses, (ii) contained or mitigated customer damage by taking action earlier than January 20, and (iii) avoided NJCFA and FCRA violations by more carefully safeguarding customer information, such as by utilizing industry-wide procedures for storing data. Analysts estimate that approximately 100 million credit and debit card holders’ private financial information was stolen, accessed, and/or compromised. For a copy of the complaints, please see http://www.buckleykolar.com/Heartland_1.pdf, http://www.buckleykolar.com/Heartland_2.pdf, and http://www.buckleykolar.com/Heartland_3.pdf.

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