InfoBytes, February 27, 2009
Sign up for weekly updates
RSS feed
Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Securities
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
FHFA, FHA Announce Increase of HECM, Other Loan Limits. On February 25, the U.S. Department of Housing and Urban Development (HUD) announced that it will temporarily increase the loan limits of FHA loans in high-cost areas to $729,750. Further, HUD will increase the national mortgage limit for Home Equity Conversion Mortgages from $417,000 to $625,500. These increased loan limits apply to all FHA-insured mortgage loans endorsed until December 31, 2009. Additionally, on February 23, the Federal Housing Finance Agency (FHFA) announced that H.R. 1, the American Recovery and Reinvestment Act of 2009, increased the maximum conforming loan limit for certain Fannie Mae and Freddie Mac mortgages to $729,750. This change applies only to mortgages for one-unit properties originated in 2009 within 250 specific counties, but does not otherwise affect conforming loan limits. For a copy of HUD’s press release, please see http://www.hud.gov/recovery/2009/02/25/comms/pr09-014.cfm?CFID=18001490&CFTOKEN=31239841. For a copy of the FHFA’s press release, please see http://www.fhfa.gov/webfiles/1279/CLLarra022309_final.pdf.
FDIC Board of Directors Votes to Impose Special Assessment on FDIC-Insured Institutions. On February 27, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) voted in favor of both amending its restoration plan for the Deposit Insurance Fund and imposing a special assessment on insured institutions. Under the final rule, assessments will be higher for institutions that “significantly” rely on brokered deposits but, for well-capitalized and well-managed institutions, only when accompanied by “rapid” asset growth. Under the final rule, banks in the “best risk” category will pay initial base rates ranging from 12 cents per $100 to 16 cents per $100 on an annual basis, beginning on April 1, 2009. The board also adopted an interim rule that would impose a 20 basis point “emergency special assessment” for banks to be collected on September 30, 2009. The interim rule would also permit the Board to impose an additional emergency special assessment of up to 10 basis points. Comments on the interim rule are due no later than 30 days after publication in the Federal Register, which is forthcoming. Additionally, the Board extended the restoration plan horizon approved last October to raise the Deposit Insurance Fund reserve ratio to seven years. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09030.html.
FTC Issues Report Advocating FDCPA Reform, Modernization. On February 26, the Federal Trade Commission (FTC) issued a “workshop report” recommending that Congress expand the Fair Debt Collection Practices Act (FDCPA). According to the report, the FDCPA should require debt collectors to provide consumers with more detailed validation notices that (i) disclose the name of the original creditor, (ii) break down the debt by principal, interest, and fees, and (iii) inform consumers of their rights under the FDCPA. Further, the FDCPA should require debt collectors to conduct “reasonable” investigations of consumer disputes. (The report, however, does define what might constitute a “reasonable” investigation). The report notes that the FDCPA has failed to keep pace with new technology and changes in the marketplace. In this regard, the report recommends that Congress amend the FDCPA to (i) allow debt collectors contact consumers through a broader range of communication technology, (ii) prohibit debt collectors from using communication devices that will charge consumers a fee, such as cell phones or texting, (iii) require debt collectors who use new payment technologies to obtain express verifiable authorization from consumers before accessing their accounts, and (iv) increase the amount of statutory damages awards to reflect inflation. Concurrent with the release of its workshop report, the FTC also issued its annual report to Congress regarding the FDCPA, as well as a list of top consumer complaints for 2008. The annual report, among other things, summarizes the number and types of consumer complaints that the FTC received regarding third-party debt collectors, as well as law enforcement actions that the agency brought against debt collectors. For a copy of the workshop report, the annual report, and the list of top consumer complaints, please see http://www.ftc.gov/os/2009/02/P094804fdcpareport.pdf">http://www.ftc.gov/bcp/workshops/debtcollection/dcwr.pdf, http://www.ftc.gov/os/2009/02/P094804fdcpareport.pdf, and http://www.ftc.gov/opa/2009/02/2008cmpts.shtm, respectively.
OFAC Releases Additional Guidance on When a Wire Transfer is Blocked Property. On February 24, the Office of Foreign Assets Control (OFAC) issued frequently asked questions (FAQ) explaining under what circumstances it expects financial institutions to investigate and block wire transfers for entities controlled by specially designated nationals (SDNs). The new FAQ clarifies guidance issued by the OFAC on February 14, 2008, which requires U.S. persons to block the property of a SDN and the property of entities in which an SDN has a 50% or greater interest – even if this other entity is not on OFAC’s SDN list. Under the 2008 guidance, it was unclear whether a financial institution had a duty to investigate wire transfers where (i) it was merely an intermediary, (ii) there was no direct relationship to the entity, or (iii) it did not know or have reason to know of the entity’s ownership by an SDN or other information demonstrating the blocked status of the entity’s property. The new FAQ states that when these three conditions are met OFAC does not expect financial institutions to research any non-account parties listed in the wire transfer that do not appear on the SDN list. Additionally, OFAC pledges that it will not pursue an enforcement action against a financial institution for processing such a transaction. However, with regard to other types of transactions where a bank is acting solely as an intermediary and fails to block transactions involving a sanctions target, OFAC will consider the totality of the circumstances surrounding the bank’s processing of the transaction, including but not limited to the three factors listed above, to determine what, if any, enforcement action to take against the financial institution. For a copy of the FAQ, please see http://www.treas.gov/offices/enforcement/ofac/faq/answer.shtml#116.
FTC Obtains Injunction Regarding FTC Act, TILA Claims Against Internet Payday Lenders. On February 23, the Federal Trade Commission (FTC) announced that the U.S. District Court for the District of Nevada issued a stipulated preliminary injunction on January 6 in a matter alleging violations of the FTC Act and TILA by internet payday lenders. (The case was first reported in InfoBytes, Nov. 14, 2008.) The FTC’s complaint alleged that the defendants violated the FTC Act by using unfair and deceptive collection tactics, such a falsely threatening consumers with arrest or imprisonment and disclosing the purported debts of consumers to co-workers and employers. The complaint also alleged that the defendants violated the Truth in Lending Act (TILA) by failing to provide consumers with written disclosures required by TILA. Under the terms of the stipulated preliminary injunction, the defendants are prohibited from engaging in unfair and deceptive debt collection practices and from making loans from Nevada without the required license(s). Additionally, the injunction imposes record-keeping requirements and prohibits the defendants from disclosing to an unaffiliated third party the personally identifiable or financial information of any person who applied for and/or obtained a loan from the defendants. For a copy of the press release, please see http://www.ftc.gov/opa/2009/02/cash2day.shtm.
FinCEN Issues CTR Reporting Pamphlet. On February 24, the Financial Crimes Enforcement Network made available an educational pamphlet, “Notice to Customers: A CTR Reference Guide,” for financial institutions to explain to customers certain aspects of the currency transaction reporting (CTR) requirement of the Bank Secrecy Act (BSA). The pamphlet (i) explains why financial institutions require identification and personal information for transactions that trigger CTR, and (ii) defines “structuring” and provides examples of structured transactions. The pamphlet does not alter a financial institution’s BSA reporting requirements, and financial institutions are not required to use the pamphlet. For a copy of the pamphlet, please see http://www.fincen.gov/whatsnew/pdf/CTRPamphletBW.pdf.
State Issues
California Enacts Law Aimed at Preventing Foreclosures. On February 20, California Governor Arnold Swarzenegger signed the California Foreclosure Prevention Act (the Act) into law, which requires a person that files a notice of default to wait six months (versus three months) before filing a notice of sale. The waiting period is extended only if (i) the loan is secured by residential real property and was recorded between January 1, 2003 and January 1, 2008, (ii) the loan is the first mortgage or deed of trust that secures the property, (iii) the property was borrower-occupied and was the borrower’s principal residence at the time of default, and (iv) the notice of default has been filed. The Act exempts mortgage loans serviced by a mortgage loan servicer who has obtained an order of exemption after implementing a comprehensive loan modification program meeting the requirements set forth in the Act. Regulations clarifying the requirements applicable to obtaining an order of exemption are forthcoming, and the Act becomes effective 14 days after the issuance of these regulations. For a copy of the law, please see http://www.buckleykolar.com/CA_AB_7.pdf.
Courts
NAMB Files Suit Against FHFA Regarding Home Valuation Code of Conduct. On February 23, the National Association of Mortgage Brokers, Inc. (NAMB) sued the Federal Housing Finance Agency (FHFA) regarding its final rule promulgating the Home Valuation Code of Conduct. The complaint alleges that the FHFA violated the Administrative Procedure Act and the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 by (i) placing mortgage brokers at a significant and permanent competitive disadvantage by forcing mortgage brokers to rely on lenders and their affiliates to obtain appraisals for their customers, (ii) failing to provide notice or the opportunity for public comment, (iii) promulgating a final rule that goes beyond the authority of the Director of the FHFA to regulate Fannie Mae and Freddie Mac and which gives “improper delegation” of regulatory authority to the New York Attorney General, and (iv) promulgating a rule that is “arbitrary and capricious.” The NAMB contends that enforcing the final rule will cause “irreparable harm” and that the rule is “contrary to the public interest.” The complaint requests a declaratory judgment striking down the final rule and an injunction preventing its enforcement. For a copy of the complaint, please see http://www.buckleykolar.com/NAMB_v_FHFA.pdf.
Delaware Chancery Court Dismisses Most of Citigroup Lawsuit Regarding Subprime Loan Risk. On February 24, the Delaware Chancery Court dismissed most of the plaintiffs’ claims in the shareholder derivative action against former directors and officers of Citigroup. In Re Citigroup Inc. Shareholder Derivative Litigation, No. 3338-CC (Del. Ch. Feb. 24, 2009). In this case, various shareholders alleged that the defendants breached their fiduciary duties to the company by (i) failing to properly monitor and manage the risks related to Citigroup’s exposure to (and subsequent losses caused by) the subprime lending market, (ii) failing to properly disclose Citigroup’s exposure to subprime assets, and (iii) engaging in corporate waste. The court applied the common law doctrines of the fiduciary duty of care and the business judgment rule to the director liability oversight claims and found that the list of “red flags” alleged in the complaint were “little more than portions of public documents that reflected the worsening conditions in the subprime mortgage market and in the economy generally,” and, at most, evidence poor business decisions. The court held that the plaintiffs did not plead particularized facts showing that the defendants failed to adhere to their duty of care, and dismissed the claims for failure to adequately plead demand futility as to the failure to monitor and manage risks, and for the failure to adequately disclose the exposure to the subprime assets. With respect to the corporate waste claims, the plaintiffs specifically challenged the directors’ decisions (i) permitting the purchase of $2.7 billion in subprime loans from certain subprime lenders, (ii) authorizing a share repurchase program in the first quarter of 2007 which resulted in the purchase of its own shares at “artificially inflated prices,” (iii) approving a letter agreement that authorized a multi-million dollar payment and benefit package for CEO Charles Prince, and (iv) allowing the company to invest in certain structured investment vehicles that were unable to pay off maturing debt. The court rejected all of these claims except those regarding the letter agreement, stating that plaintiffs failed to argue with sufficient particularity that the directors authorized a transaction “so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.” The court did, however, allow the claim regarding the letter agreement to survive the motion to dismiss, stating that there is reasonable doubt as to whether the letter agreement meets the stringent standard for corporate waste. For a copy of the opinion, please see http://www.buckleykolar.com/In_Re_Citi.pdf.
Mississippi Federal Court Rules Jury Must Determine Whether Furnishers of Information Meet FCRA’s “Reasonable Investigation” Standard. On February 19, the U.S. District Court for the Northern District of Mississippi held that the reasonableness of an information furnisher’s investigation of a disputed account under the Fair Credit Reporting Act (FCRA) is a question of fact for a jury. Zimmerman v. Bank of America, No. 1_07CV294, 2009 WL 418606 (N.D. Miss. Feb. 19, 2009). In Zimmerman, the plaintiff claimed that the defendant’s investigation into whether a credit card account that was placed in collections was opened in Zimmerman’s name did not satisfy FCRA’s reasonable investigation requirement. The plaintiff argued that the defendant failed to investigate whether his identity was stolen to open the disputed account. Without controlling precedent in the Fifth Circuit regarding this issue, the court resolved competing interpretations of the requirement. The court did not follow persuasive precedent from the Third and Seventh Circuits, reasoning that those standards related to credit reporting agencies, not to furnishers of information, and that the burden on reporting agencies was greater than the burden imposed on furnishers of information. Likewise, the court did not follow the standard applied in a 2001 FTC consent decree, reasoning that the consent decree arguably imposed a burden on furnishers of information greater than that required by FCRA. Ultimately, the court followed the Fourth Circuit’s approach, reasoning that it was consistent with the Southern District of Mississippi’s ruling in Robertson v. J.C. Penny Co., Inc., 2008 WL 623397 (S.D. Miss. March 4, 2008), and because it evidenced a “proper respect for reliance on the good sense of juries.” As a result, the court denied the defendant’s motion for summary judgment. For a copy of the opinion, please see http://www.buckleykolar.com/Zimmerman_v_BOA.pdf.
Illinois Federal Court Requires Joining of Mortgage Brokers in Lending Discrimination Suit. On February 17, the U.S. District Court for the Northern District of Illinois held that the plaintiffs’ mortgage loan brokers are required parties in a lawsuit alleging violations of the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA). Steele v. GE Money Bank, No. 08-C-1880, 2009 WL 393860 (N.D. Ill. Feb. 17, 2008). In Steele, the plaintiffs, all minority consumers, received mortgage loans through brokers from the defendant lenders. The plaintiffs alleged that the lenders designed and profited from a discretionary pricing policy wherein the brokers charged higher fees to minority borrowers than to comparable non-minority borrowers. However, the plaintiffs did not join the brokers as parties to the litigation. The defendants moved to dismiss, or, alternatively, for a finding that the brokers are necessary parties to the litigation. The court granted the motion to dismiss in part (regarding the plaintiff’s agency theory), finding a lack of an agency relationship between the lenders and the brokers, but did not dismiss direct claims against the lenders. The court also held that, because complete relief could not be granted without the brokers’ taking part, and because the brokers’ interests could be affected by the litigation, the brokers are necessary parties and must be joined. For a copy of the opinion, please see http://www.buckleykolar.com/Steele_v_GE_Bank.pdf.
Pennsylvania Federal Court Finds Defendants Did Not "Willfully" Violate FCRA. On February 19, the U.S District Court for the Eastern District of Pennsylvania found that defendant credit reporting agencies did not "willfully" violate the Fair Credit Reporting Act (FCRA) by including inaccurate statements on credit reports because the defendants’ understanding of Federal Trade Commission (FTC) actions and appellate court decisions at the time of the reporting was "not objectively unreasonable." Harper v. Trans Union, LLC, Civil Action No. 04-3510, 2009 WL 415940 (E.D. Pa. Feb. 19, 2009). In Harper, the plaintiff filed a putative class action alleging that the defendants, among other things, willfully violated FCRA by generating credit reports that were misleading to potential creditors by indicating that members of the putative class had filed for bankruptcy protection. The credit reports at issue contained a bankruptcy remark in instances where the consumer held a joint account with another person that did file for bankruptcy, even though the consumer did not. The court rejected the plaintiff’s claim, holding that the defendants’ interpretation of § 1681e(b) was "not objectively unreasonable.” Following the U.S. Supreme Court’s interpretation of "willfulness" from Safeco Ins. Co. of America v. Burr, 127 S.Ct. 2201 (U.S. 2007) (reported in InfoBytes Special Alert, June 4, 2007), the court reasoned that, at the time the credit reporting agencies generated the reports, no FTC action or appellate court established that such reporting was unreasonable or that the inclusion of the information was inaccurate – in fact, several appellate court decisions supported the defendants’ position. As a result, the court granted the defendants’’ motion to dismiss the willful violation of FCRA claim. For a copy of the opinion, please see http://www.buckleykolar.com/Harper_v_Trans_Union.pdf.
Missouri Federal Court Rejects Defense to Alleged FDCPA Violation. On February 17, the U.S. District Court for the Western District of Missouri held that a debt collection agency that mistakenly believed a debt was in default remains a “debt collector” subject to the Fair Debt Collection Practices Act (FDCPA). Wells v. Southwestern Bell Telephone Co., No. 08-0241, 2009 WL 398222 (W.D. Mo. Feb. 17, 2009). In Wells, defendant AT&T billed the plaintiff for services that she did not receive. The parties subsequently resolved the dispute but AT&T nonetheless turned her account over to Asset Acceptance, LLC (AA), a debt collection agency. The plaintiff subsequently filed suit, alleging that AT&T and AA violated the FDCPA when attempting to collect the debt. After finding that AT&T was not a "debt collector" pursuant to the FDCPA, the court denied AA’s motion to dismiss the claim. The court, following Schlosser v. Fairbanks Capital Corp., 323 F.3d 534 (7th Cir. 2003), reasoned that it would be contrary to the purpose of the FDCPA to find that AA was not a “debt collector” solely because AA later became aware that the debt was not actually in default. For a copy of the opinion, please see http://www.buckleykolar.com/Wells_v_Southwestern.pdf.
Banks File Class Action Suits in New Jersey Federal Court Regarding Heartland Data Security Breach. Three banks recently filed separate class action suits in the U.S. District Court for the District of New Jersey against Heartland Payment Systems, Inc., alleging breach of contract and negligence for failure to take adequate steps to prevent a 2008 data security breach. TriCentry Bank v. Heartland Payment Systems, Inc., No. 3:09-cv-00697 (D.N.J. Feb. 26, 2009). Amalgamated Bank v. Heartland Payment Systems, Inc. (D.N.J. Feb. 20, 2009). Lone Summit Bank v. Heartland Payment Systems, Inc. (D.N.J. Feb. 2, 2009). The plaintiff banks allege that Heartland knew, or had reason to know, that their computer systems for processing credit and/or debit transactions and information were not secure, 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 prevented the alleged negligence by properly safeguarding consumer data. The plaintiffs seek relief from the costs associated with canceling and/or reissuing the compromised cards for their consumers. Separate class action suits on behalf of consumers were filed in the same court last month (reported in InfoBytes, Feb. 6, 2009). For a copy of the complaints, please see http://www.buckleykolar.com/Heartland_Bank_1.pdf, http://www.buckleykolar.com/Heartland_Bank_2.pdf, and http://www.buckleykolar.com/Heartland_Bank_3.pdf.
Firm News
Colgate Selden will present in a webcast sponsored by the National Association of Federal Credit Unions regarding the RESPA Reform Rule on March 4. Mr. Selden’s presentation is entitled “Real Estate Settlement Overhaul: Complying with RESPA Reform.”
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.
Heidi Bauer presented during a panel discussion at the Nationwide Mortgage Licensing System User Conference in New Orleans, Louisiana on February 10.
Jonathan Cannon spoke on RESPA litigation at the National Compliance Summit for Title Companies in Las Vegas, NV on February 19-20.
Mortgages
FHFA, FHA Announce Increase of HECM, Other Loan Limits. On February 25, the U.S. Department of Housing and Urban Development (HUD) announced that it will temporarily increase the loan limits of FHA loans in high-cost areas to $729,750. Further, HUD will increase the national mortgage limit for Home Equity Conversion Mortgages from $417,000 to $625,500. These increased loan limits apply to all FHA-insured mortgage loans endorsed until December 31, 2009. Additionally, on February 23, the Federal Housing Finance Agency (FHFA) announced that H.R. 1, the American Recovery and Reinvestment Act of 2009, increased the maximum conforming loan limit for certain Fannie Mae and Freddie Mac mortgages to $729,750. This change applies only to mortgages for one-unit properties originated in 2009 within 250 specific counties, but does not otherwise affect conforming loan limits. For a copy of HUD’s press release, please see http://www.hud.gov/recovery/2009/02/25/comms/pr09-014.cfm?CFID=18001490&CFTOKEN=31239841. For a copy of the FHFA’s press release, please see http://www.fhfa.gov/webfiles/1279/CLLarra022309_final.pdf.
FTC Issues Report Advocating FDCPA Reform, Modernization. On February 26, the Federal Trade Commission (FTC) issued a “workshop report” recommending that Congress expand the Fair Debt Collection Practices Act (FDCPA). According to the report, the FDCPA should require debt collectors to provide consumers with more detailed validation notices that (i) disclose the name of the original creditor, (ii) break down the debt by principal, interest, and fees, and (iii) inform consumers of their rights under the FDCPA. Further, the FDCPA should require debt collectors to conduct “reasonable” investigations of consumer disputes. (The report, however, does define what might constitute a “reasonable” investigation). The report notes that the FDCPA has failed to keep pace with new technology and changes in the marketplace. In this regard, the report recommends that Congress amend the FDCPA to (i) allow debt collectors to contact consumers through a broader range of communication technology, (ii) prohibit debt collectors from using communication devices that will charge consumers a fee, such as cell phones or texting, (iii) require debt collectors who use new payment technologies to obtain express verifiable authorization from consumers before accessing their accounts, and (iv) increase the amount of statutory damages awards to reflect inflation. Concurrent with the release of its workshop report, the FTC also issued its annual report to Congress regarding the FDCPA, as well as a list of top consumer complaints for 2008. The annual report, among other things, summarizes the number and types of consumer complaints that the FTC received regarding third-party debt collectors, as well as law enforcement actions that the agency brought against debt collectors. For a copy of the workshop report, the annual report, and the list of top consumer complaints, please see http://www.ftc.gov/bcp/workshops/debtcollection/dcwr.pdf, http://www.ftc.gov/os/2009/02/P094804fdcpareport.pdf, and http://www.ftc.gov/opa/2009/02/2008cmpts.shtm, respectively.
California Enacts Law Aimed at Preventing Foreclosures. On February 20, California Governor Arnold Schwarzenegger signed the California Foreclosure Prevention Act (the Act) into law, which requires a person that files a notice of default to wait six months (versus three months) before filing a notice of sale. The waiting period is extended only if (i) the loan is secured by residential real property and was recorded between January 1, 2003 and January 1, 2008, (ii) the loan is the first mortgage or deed of trust that secures the property, (iii) the property was borrower-occupied and was the borrower’s principal residence at the time of default, and (iv) the notice of default has been filed. The Act exempts mortgage loans serviced by a mortgage loan servicer who has obtained an order of exemption after implementing a comprehensive loan modification program meeting the requirements set forth in the Act. Regulations clarifying the requirements applicable to obtaining an order of exemption are forthcoming, and the Act becomes effective 14 days after the issuance of these regulations. For a copy of the law, please see http://www.buckleykolar.com/CA_AB_7.pdf.
NAMB Files Suit Against FHFA Regarding Home Valuation Code of Conduct. On February 23, the National Association of Mortgage Brokers, Inc. (NAMB) sued the Federal Housing Finance Agency (FHFA) regarding its final rule promulgating the Home Valuation Code of Conduct. The complaint alleges that the FHFA violated the Administrative Procedure Act and the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 by (i) placing mortgage brokers at a significant and permanent competitive disadvantage by forcing mortgage brokers to rely on lenders and their affiliates to obtain appraisals for their customers, (ii) failing to provide notice or the opportunity for public comment, (iii) promulgating a final rule that goes beyond the authority of the Director of the FHFA to regulate Fannie Mae and Freddie Mac and which gives “improper delegation” of regulatory authority to the New York Attorney General, and (iv) promulgating a rule that is “arbitrary and capricious.” The NAMB contends that enforcing the final rule will cause “irreparable harm” and that the rule is “contrary to the public interest.” The complaint requests a declaratory judgment striking down the final rule and an injunction preventing its enforcement. For a copy of the complaint, please see http://www.buckleykolar.com/NAMB_v_FHFA.pdf.
Delaware Chancery Court Dismisses Most of Citigroup Lawsuit Regarding Subprime Loan Risk. On February 24, the Delaware Chancery Court dismissed most of the plaintiffs’ claims in the shareholder derivative action against former directors and officers of Citigroup. In Re Citigroup Inc. Shareholder Derivative Litigation, No. 3338-CC (Del. Ch. Feb. 24, 2009). In this case, various shareholders alleged that the defendants breached their fiduciary duties to the company by (i) failing to properly monitor and manage the risks related to Citigroup’s exposure to (and subsequent losses caused by) the subprime lending market, (ii) failing to properly disclose Citigroup’s exposure to subprime assets, and (iii) engaging in corporate waste. The court applied the common law doctrines of the fiduciary duty of care and the business judgment rule to the director liability oversight claims and found that the list of “red flags” alleged in the complaint were “little more than portions of public documents that reflected the worsening conditions in the subprime mortgage market and in the economy generally,” and, at most, evidence poor business decisions. The court held that the plaintiffs did not plead particularized facts showing that the defendants failed to adhere to their duty of care, and dismissed the claims for failure to adequately plead demand futility as to the failure to monitor and manage risks, and for the failure to adequately disclose the exposure to the subprime assets. With respect to the corporate waste claims, the plaintiffs specifically challenged the directors’ decisions (i) permitting the purchase of $2.7 billion in subprime loans from certain subprime lenders, (ii) authorizing a share repurchase program in the first quarter of 2007 which resulted in the purchase of its own shares at “artificially inflated prices,” (iii) approving a letter agreement that authorized a multi-million dollar payment and benefit package for CEO Charles Prince, and (iv) allowing the company to invest in certain structured investment vehicles that were unable to pay off maturing debt. The court rejected all of these claims except those regarding the letter agreement, stating that plaintiffs failed to argue with sufficient particularity that the directors authorized a transaction “so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.” The court did, however, allow the claim regarding the letter agreement to survive the motion to dismiss, stating that there is reasonable doubt as to whether the letter agreement meets the stringent standard for corporate waste. For a copy of the opinion, please see http://www.buckleykolar.com/In_Re_Citi.pdf.
Illinois Federal Court Requires Joining of Mortgage Brokers in Lending Discrimination Suit. On February 17, the U.S. District Court for the Northern District of Illinois held that the plaintiffs’ mortgage loan brokers are required parties in a lawsuit alleging violations of the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA). Steele v. GE Money Bank, No. 08-C-1880, 2009 WL 393860 (N.D. Ill. Feb. 17, 2008). In Steele, the plaintiffs, all minority consumers, received mortgage loans through brokers from the defendant lenders. The plaintiffs alleged that the lenders designed and profited from a discretionary pricing policy wherein the brokers charged higher fees to minority borrowers than to comparable non-minority borrowers. However, the plaintiffs did not join the brokers as parties to the litigation. The defendants moved to dismiss, or, alternatively, for a finding that the brokers are necessary parties to the litigation. The court granted the motion to dismiss in part (regarding the plaintiff’s agency theory), finding a lack of an agency relationship between the lenders and the brokers, but did not dismiss direct claims against the lenders. The court also held that, because complete relief could not be granted without the brokers’ taking part, and because the brokers’ interests could be affected by the litigation, the brokers are necessary parties and must be joined. For a copy of the opinion, please see http://www.buckleykolar.com/Steele_v_GE_Bank.pdf.
Banking
FDIC Board of Directors Votes to Impose Special Assessment on FDIC-Insured Institutions. On February 27, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) voted in favor of both amending its restoration plan for the Deposit Insurance Fund and imposing a special assessment on insured institutions. Under the final rule, assessments will be higher for institutions that “significantly” rely on brokered deposits but, for well-capitalized and well-managed institutions, only when accompanied by “rapid” asset growth. Under the final rule, banks in the “best risk” category will pay initial base rates ranging from 12 cents per $100 to 16 cents per $100 on an annual basis, beginning on April 1, 2009. The board also adopted an interim rule that would impose a 20 basis point “emergency special assessment” for banks to be collected on September 30, 2009. The interim rule would also permit the Board to impose an additional emergency special assessment of up to 10 basis points. Comments on the interim rule are due no later than 30 days after publication in the Federal Register, which is forthcoming. Additionally, the Board extended the restoration plan horizon approved last October to raise the Deposit Insurance Fund reserve ratio to seven years. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09030.html.
OFAC Releases Additional Guidance on When a Wire Transfer is Blocked Property. On February 24, the Office of Foreign Assets Control (OFAC) issued frequently asked questions (FAQ) explaining under what circumstances it expects financial institutions to investigate and block wire transfers for entities controlled by specially designated nationals (SDNs). The new FAQ clarifies guidance issued by OFAC on February 14, 2008, which requires U.S. persons to block the property of a SDN and the property of entities in which an SDN has a 50% or greater interest – even if this other entity is not on OFAC’s SDN list. Under the 2008 guidance, it was unclear whether a financial institution had a duty to investigate wire transfers where (i) it was merely an intermediary, (ii) there was no direct relationship to the entity, or (iii) it did not know or have reason to know of the entity’s ownership by an SDN or other information demonstrating the blocked status of the entity’s property. The new FAQ states that when these three conditions are met OFAC does not expect financial institutions to research any non-account parties listed in the wire transfer that do not appear on the SDN list. Additionally, OFAC pledges that it will not pursue an enforcement action against a financial institution for processing such a transaction. However, with regard to other types of transactions where a bank is acting solely as an intermediary and fails to block transactions involving a sanctions target, OFAC will consider the totality of the circumstances surrounding the bank’s processing of the transaction, including but not limited to the three factors listed above, to determine what, if any, enforcement action to take against the financial institution. For a copy of the FAQ, please see http://www.treas.gov/offices/enforcement/ofac/faq/answer.shtml#116.
FinCEN Issues CTR Reporting Pamphlet. On February 24, the Financial Crimes Enforcement Network made available an educational pamphlet, “Notice to Customers: A CTR Reference Guide,” for financial institutions to explain to customers certain aspects of the currency transaction reporting (CTR) requirement of the Bank Secrecy Act (BSA). The pamphlet (i) explains why financial institutions require identification and personal information for transactions that trigger CTR, and (ii) defines “structuring” and provides examples of structured transactions. The pamphlet does not alter a financial institution’s BSA reporting requirements, and financial institutions are not required to use the pamphlet. For a copy of the pamphlet, please see http://www.fincen.gov/whatsnew/pdf/CTRPamphletBW.pdf.
Delaware Chancery Court Dismisses Most of Citigroup Lawsuit Regarding Subprime Loan Risk. On February 24, the Delaware Chancery Court dismissed most of the plaintiffs’ claims in the shareholder derivative action against former directors and officers of Citigroup. In Re Citigroup Inc. Shareholder Derivative Litigation, No. 3338-CC (Del. Ch. Feb. 24, 2009). In this case, various shareholders alleged that the defendants breached their fiduciary duties to the company by (i) failing to properly monitor and manage the risks related to Citigroup’s exposure to (and subsequent losses caused by) the subprime lending market, (ii) failing to properly disclose Citigroup’s exposure to subprime assets, and (iii) engaging in corporate waste. The court applied the common law doctrines of the fiduciary duty of care and the business judgment rule to the director liability oversight claims and found that the list of “red flags” alleged in the complaint were “little more than portions of public documents that reflected the worsening conditions in the subprime mortgage market and in the economy generally,” and, at most, evidence poor business decisions. The court held that the plaintiffs did not plead particularized facts showing that the defendants failed to adhere to their duty of care, and dismissed the claims for failure to adequately plead demand futility as to the failure to monitor and manage risks, and for the failure to adequately disclose the exposure to the subprime assets. With respect to the corporate waste claims, the plaintiffs specifically challenged the directors’ decisions (i) permitting the purchase of $2.7 billion in subprime loans from certain subprime lenders, (ii) authorizing a share repurchase program in the first quarter of 2007 which resulted in the purchase of its own shares at “artificially inflated prices,” (iii) approving a letter agreement that authorized a multi-million dollar payment and benefit package for CEO Charles Prince, and (iv) allowing the company to invest in certain structured investment vehicles that were unable to pay off maturing debt. The court rejected all of these claims except those regarding the letter agreement, stating that plaintiffs failed to argue with sufficient particularity that the directors authorized a transaction “so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.” The court did, however, allow the claim regarding the letter agreement to survive the motion to dismiss, stating that there is reasonable doubt as to whether the letter agreement meets the stringent standard for corporate waste. For a copy of the opinion, please see http://www.buckleykolar.com/In_Re_Citi.pdf.
Banks File Class Action Suits in New Jersey Federal Court Regarding Heartland Data Security Breach. Three banks recently filed separate class action suits in the U.S. District Court for the District of New Jersey against Heartland Payment Systems, Inc., alleging breach of contract and negligence for failure to take adequate steps to prevent a 2008 data security breach. TriCentry Bank v. Heartland Payment Systems, Inc., No. 3:09-cv-00697 (D.N.J. Feb. 26, 2009). Amalgamated Bank v. Heartland Payment Systems, Inc. (D.N.J. Feb. 20, 2009). Lone Summit Bank v. Heartland Payment Systems, Inc. (D.N.J. Feb. 2, 2009). The plaintiff banks allege that Heartland knew, or had reason to know, that their computer systems for processing credit and/or debit transactions and information were not secure, 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 prevented the alleged negligence by properly safeguarding consumer data. The plaintiffs seek relief from the costs associated with canceling and/or reissuing the compromised cards for their consumers. Separate class action suits on behalf of consumers were filed in the same court last month (reported in InfoBytes, Feb. 6, 2009). For a copy of the complaints, please see http://www.buckleykolar.com/Heartland_Bank_1.pdf, http://www.buckleykolar.com/Heartland_Bank_2.pdf, and http://www.buckleykolar.com/Heartland_Bank_3.pdf.
Consumer Finance
FTC Issues Report Advocating FDCPA Reform, Modernization. On February 26, the Federal Trade Commission (FTC) issued a “workshop report” recommending that Congress expand the Fair Debt Collection Practices Act (FDCPA). According to the report, the FDCPA should require debt collectors to provide consumers with more detailed validation notices that (i) disclose the name of the original creditor, (ii) break down the debt by principal, interest, and fees, and (iii) inform consumers of their rights under the FDCPA. Further, the FDCPA should require debt collectors to conduct “reasonable” investigations of consumer disputes. (The report, however, does define what might constitute a “reasonable” investigation). The report notes that the FDCPA has failed to keep pace with new technology and changes in the marketplace. In this regard, the report recommends that Congress amend the FDCPA to (i) allow debt collectors to contact consumers through a broader range of communication technology, (ii) prohibit debt collectors from using communication devices that will charge consumers a fee, such as cell phones or texting, (iii) require debt collectors who use new payment technologies to obtain express verifiable authorization from consumers before accessing their accounts, and (iv) increase the amount of statutory damages awards to reflect inflation. Concurrent with the release of its workshop report, the FTC also issued its annual report to Congress regarding the FDCPA, as well as a list of top consumer complaints for 2008. The annual report, among other things, summarizes the number and types of consumer complaints that the FTC received regarding third-party debt collectors, as well as law enforcement actions that the agency brought against debt collectors. For a copy of the workshop report, the annual report, and the list of top consumer complaints, please see http://www.ftc.gov/bcp/workshops/debtcollection/dcwr.pdf, http://www.ftc.gov/os/2009/02/P094804fdcpareport.pdf, and http://www.ftc.gov/opa/2009/02/2008cmpts.shtm, respectively.
FTC Obtains Injunction Regarding FTC Act, TILA Claims Against Internet Payday Lenders. On February 23, the Federal Trade Commission (FTC) announced that the U.S. District Court for the District of Nevada issued a stipulated preliminary injunction on January 6 in a matter alleging violations of the FTC Act and TILA by internet payday lenders. (The case was first reported in InfoBytes, Nov. 14, 2008.) The FTC’s complaint alleged that the defendants violated the FTC Act by using unfair and deceptive collection tactics, such a falsely threatening consumers with arrest or imprisonment and disclosing the purported debts of consumers to co-workers and employers. The complaint also alleged that the defendants violated the Truth in Lending Act (TILA) by failing to provide consumers with written disclosures required by TILA. Under the terms of the stipulated preliminary injunction, the defendants are prohibited from engaging in unfair and deceptive debt collection practices and from making loans from Nevada without the required license(s). Additionally, the injunction imposes record-keeping requirements and prohibits the defendants from disclosing to an unaffiliated third party the personally identifiable or financial information of any person who applied for and/or obtained a loan from the defendants. For a copy of the press release, please see http://www.ftc.gov/opa/2009/02/cash2day.shtm.
Missouri Federal Court Rejects Defense to Alleged FDCPA Violation. On February 17, the U.S. District Court for the Western District of Missouri held that a debt collection agency that mistakenly believed a debt was in default remains a “debt collector” subject to the Fair Debt Collection Practices Act (FDCPA). Wells v. Southwestern Bell Telephone Co., No. 08-0241, 2009 WL 398222 (W.D. Mo. Feb. 17, 2009). In Wells, defendant AT&T billed the plaintiff for services that she did not receive. The parties subsequently resolved the dispute but AT&T nonetheless turned her account over to Asset Acceptance, LLC (AA), a debt collection agency. The plaintiff subsequently filed suit, alleging that AT&T and AA violated the FDCPA when attempting to collect the debt. After finding that AT&T was not a "debt collector" pursuant to the FDCPA, the court denied AA’s motion to dismiss the claim. The court, following Schlosser v. Fairbanks Capital Corp., 323 F.3d 534 (7th Cir. 2003), reasoned that it would be contrary to the purpose of the FDCPA to find that AA was not a “debt collector” solely because AA later became aware that the debt was not actually in default. For a copy of the opinion, please see http://www.buckleykolar.com/Wells_v_Southwestern.pdf.
Securities
Delaware Chancery Court Dismisses Most of Citigroup Lawsuit Regarding Subprime Loan Risk. On February 24, the Delaware Chancery Court dismissed most of the plaintiffs’ claims in the shareholder derivative action against former directors and officers of Citigroup. In Re Citigroup Inc. Shareholder Derivative Litigation, No. 3338-CC (Del. Ch. Feb. 24, 2009). In this case, various shareholders alleged that the defendants breached their fiduciary duties to the company by (i) failing to properly monitor and manage the risks related to Citigroup’s exposure to (and subsequent losses caused by) the subprime lending market, (ii) failing to properly disclose Citigroup’s exposure to subprime assets, and (iii) engaging in corporate waste. The court applied the common law doctrines of the fiduciary duty of care and the business judgment rule to the director liability oversight claims and found that the list of “red flags” alleged in the complaint were “little more than portions of public documents that reflected the worsening conditions in the subprime mortgage market and in the economy generally,” and, at most, evidence poor business decisions. The court held that the plaintiffs did not plead particularized facts showing that the defendants failed to adhere to their duty of care, and dismissed the claims for failure to adequately plead demand futility as to the failure to monitor and manage risks, and for the failure to adequately disclose the exposure to the subprime assets. With respect to the corporate waste claims, the plaintiffs specifically challenged the directors’ decisions (i) permitting the purchase of $2.7 billion in subprime loans from certain subprime lenders, (ii) authorizing a share repurchase program in the first quarter of 2007 which resulted in the purchase of its own shares at “artificially inflated prices,” (iii) approving a letter agreement that authorized a multi-million dollar payment and benefit package for CEO Charles Prince, and (iv) allowing the company to invest in certain structured investment vehicles that were unable to pay off maturing debt. The court rejected all of these claims except those regarding the letter agreement, stating that plaintiffs failed to argue with sufficient particularity that the directors authorized a transaction “so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.” The court did, however, allow the claim regarding the letter agreement to survive the motion to dismiss, stating that there is reasonable doubt as to whether the letter agreement meets the stringent standard for corporate waste. For a copy of the opinion, please see http://www.buckleykolar.com/In_Re_Citi.pdf.
Litigation
NAMB Files Suit Against FHFA Regarding Home Valuation Code of Conduct. On February 23, the National Association of Mortgage Brokers, Inc. (NAMB) sued the Federal Housing Finance Agency (FHFA) regarding its final rule promulgating the Home Valuation Code of Conduct. The complaint alleges that the FHFA violated the Administrative Procedure Act and the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 by (i) placing mortgage brokers at a significant and permanent competitive disadvantage by forcing mortgage brokers to rely on lenders and their affiliates to obtain appraisals for their customers, (ii) failing to provide notice or the opportunity for public comment, (iii) promulgating a final rule that goes beyond the authority of the Director of the FHFA to regulate Fannie Mae and Freddie Mac and which gives “improper delegation” of regulatory authority to the New York Attorney General, and (iv) promulgating a rule that is “arbitrary and capricious.” The NAMB contends that enforcing the final rule will cause “irreparable harm” and that the rule is “contrary to the public interest.” The complaint requests a declaratory judgment striking down the final rule and an injunction preventing its enforcement. For a copy of the complaint, please see http://www.buckleykolar.com/NAMB_v_FHFA.pdf.
Delaware Chancery Court Dismisses Most of Citigroup Lawsuit Regarding Subprime Loan Risk. On February 24, the Delaware Chancery Court dismissed most of the plaintiffs’ claims in the shareholder derivative action against former directors and officers of Citigroup. In Re Citigroup Inc. Shareholder Derivative Litigation, No. 3338-CC (Del. Ch. Feb. 24, 2009). In this case, various shareholders alleged that the defendants breached their fiduciary duties to the company by (i) failing to properly monitor and manage the risks related to Citigroup’s exposure to (and subsequent losses caused by) the subprime lending market, (ii) failing to properly disclose Citigroup’s exposure to subprime assets, and (iii) engaging in corporate waste. The court applied the common law doctrines of the fiduciary duty of care and the business judgment rule to the director liability oversight claims and found that the list of “red flags” alleged in the complaint were “little more than portions of public documents that reflected the worsening conditions in the subprime mortgage market and in the economy generally,” and, at most, evidence poor business decisions. The court held that the plaintiffs did not plead particularized facts showing that the defendants failed to adhere to their duty of care, and dismissed the claims for failure to adequately plead demand futility as to the failure to monitor and manage risks, and for the failure to adequately disclose the exposure to the subprime assets. With respect to the corporate waste claims, the plaintiffs specifically challenged the directors’ decisions (i) permitting the purchase of $2.7 billion in subprime loans from certain subprime lenders, (ii) authorizing a share repurchase program in the first quarter of 2007 which resulted in the purchase of its own shares at “artificially inflated prices,” (iii) approving a letter agreement that authorized a multi-million dollar payment and benefit package for CEO Charles Prince, and (iv) allowing the company to invest in certain structured investment vehicles that were unable to pay off maturing debt. The court rejected all of these claims except those regarding the letter agreement, stating that plaintiffs failed to argue with sufficient particularity that the directors authorized a transaction “so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.” The court did, however, allow the claim regarding the letter agreement to survive the motion to dismiss, stating that there is reasonable doubt as to whether the letter agreement meets the stringent standard for corporate waste. For a copy of the opinion, please see http://www.buckleykolar.com/In_Re_Citi.pdf.
Mississippi Federal Court Rules Jury Must Determine Whether Furnishers of Information Meet FCRA’s “Reasonable Investigation” Standard. On February 19, the U.S. District Court for the Northern District of Mississippi held that the reasonableness of an information furnisher’s investigation of a disputed account under the Fair Credit Reporting Act (FCRA) is a question of fact for a jury. Zimmerman v. Bank of America, No. 1_07CV294, 2009 WL 418606 (N.D. Miss. Feb. 19, 2009). In Zimmerman, the plaintiff claimed that the defendant’s investigation into whether a credit card account that was placed in collections was opened in Zimmerman’s name did not satisfy FCRA’s reasonable investigation requirement. The plaintiff argued that the defendant failed to investigate whether his identity was stolen to open the disputed account. Without controlling precedent in the Fifth Circuit regarding this issue, the court resolved competing interpretations of the requirement. The court did not follow persuasive precedent from the Third and Seventh Circuits, reasoning that those standards related to credit reporting agencies, not to furnishers of information, and that the burden on reporting agencies was greater than the burden imposed on furnishers of information. Likewise, the court did not follow the standard applied in a 2001 FTC consent decree, reasoning that the consent decree arguably imposed a burden on furnishers of information greater than that required by FCRA. Ultimately, the court followed the Fourth Circuit’s approach, reasoning that it was consistent with the Southern District of Mississippi’s ruling in Robertson v. J.C. Penny Co., Inc., 2008 WL 623397 (S.D. Miss. March 4, 2008), and because it evidenced a “proper respect for reliance on the good sense of juries.” As a result, the court denied the defendant’s motion for summary judgment. For a copy of the opinion, please see http://www.buckleykolar.com/Zimmerman_v_BOA.pdf.
Illinois Federal Court Requires Joining of Mortgage Brokers in Lending Discrimination Suit. On February 17, the U.S. District Court for the Northern District of Illinois held that the plaintiffs’ mortgage loan brokers are required parties in a lawsuit alleging violations of the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA). Steele v. GE Money Bank, No. 08-C-1880, 2009 WL 393860 (N.D. Ill. Feb. 17, 2008). In Steele, the plaintiffs, all minority consumers, received mortgage loans through brokers from the defendant lenders. The plaintiffs alleged that the lenders designed and profited from a discretionary pricing policy wherein the brokers charged higher fees to minority borrowers than to comparable non-minority borrowers. However, the plaintiffs did not join the brokers as parties to the litigation. The defendants moved to dismiss, or, alternatively, for a finding that the brokers are necessary parties to the litigation. The court granted the motion to dismiss in part (regarding the plaintiff’s agency theory), finding a lack of an agency relationship between the lenders and the brokers, but did not dismiss direct claims against the lenders. The court also held that, because complete relief could not be granted without the brokers’ taking part, and because the brokers’ interests could be affected by the litigation, the brokers are necessary parties and must be joined. For a copy of the opinion, please see http://www.buckleykolar.com/Steele_v_GE_Bank.pdf.
Pennsylvania Federal Court Finds Defendants Did Not "Willfully" Violate FCRA. On February 19, the U.S District Court for the Eastern District of Pennsylvania found that defendant credit reporting agencies did not "willfully" violate the Fair Credit Reporting Act (FCRA) by including inaccurate statements on credit reports because the defendants’ understanding of Federal Trade Commission (FTC) actions and appellate court decisions at the time of the reporting was "not objectively unreasonable." Harper v. Trans Union, LLC, Civil Action No. 04-3510, 2009 WL 415940 (E.D. Pa. Feb. 19, 2009). In Harper, the plaintiff filed a putative class action alleging that the defendants, among other things, willfully violated FCRA by generating credit reports that were misleading to potential creditors by indicating that members of the putative class had filed for bankruptcy protection. The credit reports at issue contained a bankruptcy remark in instances where the consumer held a joint account with another person that did file for bankruptcy, even though the consumer did not. The court rejected the plaintiff’s claim, holding that the defendants’ interpretation of § 1681e(b) was "not objectively unreasonable.” Following the U.S. Supreme Court’s interpretation of "willfulness" from Safeco Ins. Co. of America v. Burr, 127 S.Ct. 2201 (U.S. 2007) (reported in InfoBytes Special Alert, June 4, 2007), the court reasoned that, at the time the credit reporting agencies generated the reports, no FTC action or appellate court established that such reporting was unreasonable or that the inclusion of the information was inaccurate – in fact, several appellate court decisions supported the defendants’ position. As a result, the court granted the defendants’’ motion to dismiss the willful violation of FCRA claim. For a copy of the opinion, please see http://www.buckleykolar.com/Harper_v_Trans_Union.pdf.
Missouri Federal Court Rejects Defense to Alleged FDCPA Violation. On February 17, the U.S. District Court for the Western District of Missouri held that a debt collection agency that mistakenly believed a debt was in default remains a “debt collector” subject to the Fair Debt Collection Practices Act (FDCPA). Wells v. Southwestern Bell Telephone Co., No. 08-0241, 2009 WL 398222 (W.D. Mo. Feb. 17, 2009). In Wells, defendant AT&T billed the plaintiff for services that she did not receive. The parties subsequently resolved the dispute but AT&T nonetheless turned her account over to Asset Acceptance, LLC (AA), a debt collection agency. The plaintiff subsequently filed suit, alleging that AT&T and AA violated the FDCPA when attempting to collect the debt. After finding that AT&T was not a "debt collector" pursuant to the FDCPA, the court denied AA’s motion to dismiss the claim. The court, following Schlosser v. Fairbanks Capital Corp., 323 F.3d 534 (7th Cir. 2003), reasoned that it would be contrary to the purpose of the FDCPA to find that AA was not a “debt collector” solely because AA later became aware that the debt was not actually in default. For a copy of the opinion, please see http://www.buckleykolar.com/Wells_v_Southwestern.pdf.
Banks File Class Action Suits in New Jersey Federal Court Regarding Heartland Data Security Breach. Three banks recently filed separate class action suits in the U.S. District Court for the District of New Jersey against Heartland Payment Systems, Inc., alleging breach of contract and negligence for failure to take adequate steps to prevent a 2008 data security breach. TriCentry Bank v. Heartland Payment Systems, Inc., No. 3:09-cv-00697 (D.N.J. Feb. 26, 2009). Amalgamated Bank v. Heartland Payment Systems, Inc. (D.N.J. Feb. 20, 2009). Lone Summit Bank v. Heartland Payment Systems, Inc. (D.N.J. Feb. 2, 2009). The plaintiff banks allege that Heartland knew, or had reason to know, that their computer systems for processing credit and/or debit transactions and information were not secure, 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 prevented the alleged negligence by properly safeguarding consumer data. The plaintiffs seek relief from the costs associated with canceling and/or reissuing the compromised cards for their consumers. Separate class action suits on behalf of consumers were filed in the same court last month (reported in InfoBytes, Feb. 6, 2009). For a copy of the complaints, please see http://www.buckleykolar.com/Heartland_Bank_1.pdf, http://www.buckleykolar.com/Heartland_Bank_2.pdf, and http://www.buckleykolar.com/Heartland_Bank_3.pdf.
E-Financial Services
OFAC Releases Additional Guidance on When a Wire Transfer is Blocked Property. On February 24, the Office of Foreign Assets Control (OFAC) issued frequently asked questions (FAQ) explaining under what circumstances it expects financial institutions to investigate and block wire transfers for entities controlled by specially designated nationals (SDNs). The new FAQ clarifies guidance issued by OFAC on February 14, 2008, which requires U.S. persons to block the property of a SDN and the property of entities in which an SDN has a 50% or greater interest – even if this other entity is not on OFAC’s SDN list. Under the 2008 guidance, it was unclear whether a financial institution had a duty to investigate wire transfers where (i) it was merely an intermediary, (ii) there was no direct relationship to the entity, or (iii) it did not know or have reason to know of the entity’s ownership by an SDN or other information demonstrating the blocked status of the entity’s property. The new FAQ states that when these three conditions are met OFAC does not expect financial institutions to research any non-account parties listed in the wire transfer that do not appear on the SDN list. Additionally, OFAC pledges that it will not pursue an enforcement action against a financial institution for processing such a transaction. However, with regard to other types of transactions where a bank is acting solely as an intermediary and fails to block transactions involving a sanctions target, OFAC will consider the totality of the circumstances surrounding the bank’s processing of the transaction, including but not limited to the three factors listed above, to determine what, if any, enforcement action to take against the financial institution. For a copy of the FAQ, please see http://www.treas.gov/offices/enforcement/ofac/faq/answer.shtml#116.
FTC Obtains Injunction Regarding FTC Act, TILA Claims Against Internet Payday Lenders. On February 23, the Federal Trade Commission (FTC) announced that the U.S. District Court for the District of Nevada issued a stipulated preliminary injunction on January 6 in a matter alleging violations of the FTC Act and TILA by internet payday lenders. (The case was first reported in InfoBytes, Nov. 14, 2008.) The FTC’s complaint alleged that the defendants violated the FTC Act by using unfair and deceptive collection tactics, such a falsely threatening consumers with arrest or imprisonment and disclosing the purported debts of consumers to co-workers and employers. The complaint also alleged that the defendants violated the Truth in Lending Act (TILA) by failing to provide consumers with written disclosures required by TILA. Under the terms of the stipulated preliminary injunction, the defendants are prohibited from engaging in unfair and deceptive debt collection practices and from making loans from Nevada without the required license(s). Additionally, the injunction imposes record-keeping requirements and prohibits the defendants from disclosing to an unaffiliated third party the personally identifiable or financial information of any person who applied for and/or obtained a loan from the defendants. For a copy of the press release, please see http://www.ftc.gov/opa/2009/02/cash2day.shtm.
Banks File Class Action Suits in New Jersey Federal Court Regarding Heartland Data Security Breach. Three banks recently filed separate class action suits in the U.S. District Court for the District of New Jersey against Heartland Payment Systems, Inc., alleging breach of contract and negligence for failure to take adequate steps to prevent a 2008 data security breach. TriCentry Bank v. Heartland Payment Systems, Inc., No. 3:09-cv-00697 (D.N.J. Feb. 26, 2009). Amalgamated Bank v. Heartland Payment Systems, Inc. (D.N.J. Feb. 20, 2009). Lone Summit Bank v. Heartland Payment Systems, Inc. (D.N.J. Feb. 2, 2009). The plaintiff banks allege that Heartland knew, or had reason to know, that their computer systems for processing credit and/or debit transactions and information were not secure, 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 prevented the alleged negligence by properly safeguarding consumer data. The plaintiffs seek relief from the costs associated with canceling and/or reissuing the compromised cards for their consumers. Separate class action suits on behalf of consumers were filed in the same court last month (reported in InfoBytes, Feb. 6, 2009). For a copy of the complaints, please see http://www.buckleykolar.com/Heartland_Bank_1.pdf, http://www.buckleykolar.com/Heartland_Bank_2.pdf, and http://www.buckleykolar.com/Heartland_Bank_3.pdf.
Privacy/Data Security
FTC Obtains Injunction Regarding FTC Act, TILA Claims Against Internet Payday Lenders. On February 23, the Federal Trade Commission (FTC) announced that the U.S. District Court for the District of Nevada issued a stipulated preliminary injunction on January 6 in a matter alleging violations of the FTC Act and TILA by internet payday lenders. (The case was first reported in InfoBytes, Nov. 14, 2008.) The FTC’s complaint alleged that the defendants violated the FTC Act by using unfair and deceptive collection tactics, such a falsely threatening consumers with arrest or imprisonment and disclosing the purported debts of consumers to co-workers and employers. The complaint also alleged that the defendants violated the Truth in Lending Act (TILA) by failing to provide consumers with written disclosures required by TILA. Under the terms of the stipulated preliminary injunction, the defendants are prohibited from engaging in unfair and deceptive debt collection practices and from making loans from Nevada without the required license(s). Additionally, the injunction imposes record-keeping requirements and prohibits the defendants from disclosing to an unaffiliated third party the personally identifiable or financial information of any person who applied for and/or obtained a loan from the defendants. For a copy of the press release, please see http://www.ftc.gov/opa/2009/02/cash2day.shtm.
Mississippi Federal Court Rules Jury Must Determine Whether Furnishers of Information Meet FCRA’s “Reasonable Investigation” Standard. On February 19, the U.S. District Court for the Northern District of Mississippi held that the reasonableness of an information furnisher’s investigation of a disputed account under the Fair Credit Reporting Act (FCRA) is a question of fact for a jury. Zimmerman v. Bank of America, No. 1_07CV294, 2009 WL 418606 (N.D. Miss. Feb. 19, 2009). In Zimmerman, the plaintiff claimed that the defendant’s investigation into whether a credit card account that was placed in collections was opened in Zimmerman’s name did not satisfy FCRA’s reasonable investigation requirement. The plaintiff argued that the defendant failed to investigate whether his identity was stolen to open the disputed account. Without controlling precedent in the Fifth Circuit regarding this issue, the court resolved competing interpretations of the requirement. The court did not follow persuasive precedent from the Third and Seventh Circuits, reasoning that those standards related to credit reporting agencies, not to furnishers of information, and that the burden on reporting agencies was greater than the burden imposed on furnishers of information. Likewise, the court did not follow the standard applied in a 2001 FTC consent decree, reasoning that the consent decree arguably imposed a burden on furnishers of information greater than that required by FCRA. Ultimately, the court followed the Fourth Circuit’s approach, reasoning that it was consistent with the Southern District of Mississippi’s ruling in Robertson v. J.C. Penny Co., Inc., 2008 WL 623397 (S.D. Miss. March 4, 2008), and because it evidenced a “proper respect for reliance on the good sense of juries.” As a result, the court denied the defendant’s motion for summary judgment. For a copy of the opinion, please see http://www.buckleykolar.com/Zimmerman_v_BOA.pdf.
Pennsylvania Federal Court Finds Defendants Did Not "Willfully" Violate FCRA. On February 19, the U.S District Court for the Eastern District of Pennsylvania found that defendant credit reporting agencies did not "willfully" violate the Fair Credit Reporting Act (FCRA) by including inaccurate statements on credit reports because the defendants’ understanding of Federal Trade Commission (FTC) actions and appellate court decisions at the time of the reporting was "not objectively unreasonable." Harper v. Trans Union, LLC, Civil Action No. 04-3510, 2009 WL 415940 (E.D. Pa. Feb. 19, 2009). In Harper, the plaintiff filed a putative class action alleging that the defendants, among other things, willfully violated FCRA by generating credit reports that were misleading to potential creditors by indicating that members of the putative class had filed for bankruptcy protection. The credit reports at issue contained a bankruptcy remark in instances where the consumer held a joint account with another person that did file for bankruptcy, even though the consumer did not. The court rejected the plaintiff’s claim, holding that the defendants’ interpretation of § 1681e(b) was "not objectively unreasonable.” Following the U.S. Supreme Court’s interpretation of "willfulness" from Safeco Ins. Co. of America v. Burr, 127 S.Ct. 2201 (U.S. 2007) (reported in InfoBytes Special Alert, June 4, 2007), the court reasoned that, at the time the credit reporting agencies generated the reports, no FTC action or appellate court established that such reporting was unreasonable or that the inclusion of the information was inaccurate – in fact, several appellate court decisions supported the defendants’ position. As a result, the court granted the defendants’’ motion to dismiss the willful violation of FCRA claim. For a copy of the opinion, please see http://www.buckleykolar.com/Harper_v_Trans_Union.pdf.
Banks File Class Action Suits in New Jersey Federal Court Regarding Heartland Data Security Breach. Three banks recently filed separate class action suits in the U.S. District Court for the District of New Jersey against Heartland Payment Systems, Inc., alleging breach of contract and negligence for failure to take adequate steps to prevent a 2008 data security breach. TriCentry Bank v. Heartland Payment Systems, Inc., No. 3:09-cv-00697 (D.N.J. Feb. 26, 2009). Amalgamated Bank v. Heartland Payment Systems, Inc. (D.N.J. Feb. 20, 2009). Lone Summit Bank v. Heartland Payment Systems, Inc. (D.N.J. Feb. 2, 2009). The plaintiff banks allege that Heartland knew, or had reason to know, that their computer systems for processing credit and/or debit transactions and information were not secure, 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 prevented the alleged negligence by properly safeguarding consumer data. The plaintiffs seek relief from the costs associated with canceling and/or reissuing the compromised cards for their consumers. Separate class action suits on behalf of consumers were filed in the same court last month (reported in InfoBytes, Feb. 6, 2009). For a copy of the complaints, please see http://www.buckleykolar.com/Heartland_Bank_1.pdf, http://www.buckleykolar.com/Heartland_Bank_2.pdf, and http://www.buckleykolar.com/Heartland_Bank_3.pdf.
Credit Cards
Banks File Class Action Suits in New Jersey Federal Court Regarding Heartland Data Security Breach. Three banks recently filed separate class action suits in the U.S. District Court for the District of New Jersey against Heartland Payment Systems, Inc., alleging breach of contract and negligence for failure to take adequate steps to prevent a 2008 data security breach. TriCentry Bank v. Heartland Payment Systems, Inc., No. 3:09-cv-00697 (D.N.J. Feb. 26, 2009). Amalgamated Bank v. Heartland Payment Systems, Inc. (D.N.J. Feb. 20, 2009). Lone Summit Bank v. Heartland Payment Systems, Inc. (D.N.J. Feb. 2, 2009). The plaintiff banks allege that Heartland knew, or had reason to know, that their computer systems for processing credit and/or debit transactions and information were not secure, 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 prevented the alleged negligence by properly safeguarding consumer data. The plaintiffs seek relief from the costs associated with canceling and/or reissuing the compromised cards for their consumers. Separate class action suits on behalf of consumers were filed in the same court last month (reported in InfoBytes, Feb. 6, 2009). For a copy of the complaints, please see http://www.buckleykolar.com/Heartland_Bank_1.pdf, http://www.buckleykolar.com/Heartland_Bank_2.pdf, and http://www.buckleykolar.com/Heartland_Bank_3.pdf.