InfoBytes, January 30, 2009
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Insurance
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
Treasury Revises Executive Compensation Standards for TARP Programs. On January 16, the U.S. Department of the Treasury issued interim final rules regarding executive compensation standards under the Troubled Asset Relief Program’s (TARP) Capital Purchase Program. Under the rules, the chief executive officer of a participating financial institution must (i) certify annually, and within 135 days of the entity’s fiscal year end, that the financial institution and its compensation committee have complied with the Treasury’s executive compensation standards, and (ii) certify, within 120 days of the closing date of the Securities Purchase Agreement between the financial institution and the Treasury, that the compensation committee has reviewed the senior executives’ incentive compensation arrangements to ensure that they do not encourage “unnecessary and excessive” risks that could potentially threaten the institution. The participating financial institution must retain the relevant records regarding these certifications for at least six years following each certification and, upon request, must provide such documents to the TARP Chief Compliance Officer. The rules also prohibit (i) incentive compensation paid to a senior executive based on materially inaccurate statements, including earnings statements (the rule allows for the “clawback” of these payments), (ii) “golden parachute” payments, and (iii) tax deductions for executive compensation in excess of $500,000. The interim rule is effective upon publication in the Federal Register, which is forthcoming, and comments regarding the interim rule are due within thirty days after publication in the Federal Register. The Treasury also revised the guidelines for its Systemically Significant Failing Institutions Program to include substantively similar compliance-reporting and recordkeeping requirements. For a copy of the press release, which contains links to additional documents, please see http://www.treas.gov/press/releases/hp1364.htm.
Rhode Island, Illinois Attorneys General Express Concern Regarding Potential TARP Preemption. Rhode Island Attorney General Patrick C. Lynch recently expressed concern to the U.S. Department of the Treasury that the Troubled Asset Relief Program may inadvertently preempt state laws that require entities to publish public notices in newspapers prior to the disposition of property in foreclosure sales. On December 8, Illinois Attorney General Lisa Madigan sent a similar letter to Neel Kashkari, Interim Assistant Secretary for Financial Stability. For a copy of the Illinois Attorney General’s letter, please see http://www.pnrc.net/documents/Illiinoisletter.pdf. For a copy of the Rhode Island Attorney General’s press release, please see http://www.riag.state.ri.us/news/.
Treasury Publishes TARP Investment Contracts. On January 28, the U.S. Department of the Treasury announced that new investment contracts for future completed transactions in connection with the Troubled Asset Relief Program (TARP) will be posted on the Treasury’s website within ten business days. The Treasury will make available completed contracts on a rolling basis. As of January 28, the Treasury has made available the contracts for Bank of America, Goldman Sachs, and Chrysler, among other entities. For a copy of the press release, please see http://www.treas.gov/press/releases/tg04.htm. For a copy of the posted contracts, please see http://www.treas.gov/initiatives/eesa/agreements/index.shtml.
House Panel Approves Bill Allowing “Cramdowns” for Mortgages. On January 27, a U.S. House of Representatives panel reportedly approved H.R. 200, the "Helping Families Save Their Homes in Bankruptcy Act of 2009." The bill, among other things, would (i) allow bankruptcy judges to reduce (“cramdown”) the principal balance for certain mortgages, and (ii) require a bankruptcy court to disallow a claim that is subject to any remedy for damages or rescission due to violations of, among other laws, the Truth in Lending Act, notwithstanding a prior entry of a foreclosure judgment. Thus far, a "cramdown" provision has not been included in the omnibus H.R.1, "The American Recovery and Reinvestment Act of 2009," which the U.S. House of Representatives passed on January 28. For a copy of H.R. 200, please see http://www.thomas.gov/cgi-bin/query/z?c111:H.R.200:
Federal Court Orders $1.2 Million Penalty for Alleged FTC Do Not Call Violations. On January 27, a federal district court granted orders against two vacation and timeshare companies for alleged violations of the Federal Trade Commission’s Do Not Call (DNC) Rule. According to the complaint, the companies allegedly, among other things, called consumers with phone numbers registered on the DNC Registry without obtaining an express written agreement or maintaining an “established business relationship.” The court (i) imposed civil money penalties, (ii) barred the companies from violating the terms of the DNC Registry and the Telemarketing Sales Rule, and (iii) ordered record keeping and other provisions to ensure compliance with the order. For a copy of the press release, please see http://www.ftc.gov/opa/2009/01/westgate.shtm. For a copy of the orders, please see http://www.ftc.gov/os/caselist/0623123/090127westgatestiporder.pdf and http://www.ftc.gov/os/caselist/0723047/090126allinonevacatiostipjudgmnt.pdf.
FDIC Issues Final Rule Regarding the Processing of Deposit Accounts at Failed Institutions. On January 27, the Federal Deposit Insurance Corporation (FDIC) issued the draft of a final rule establishing its practices for determining deposit and other liability account balances at failed insured depository institutions. The rule, substantively similar to the FDIC’s interim rule promulgated in July 2008 (reported in InfoBytes, July 25, 2008), states that the FDIC, in the case of a depository institution failure, will (i) utilize certain general principles for determining account balances, (ii) define the end-of-day ledger balance of the deposit account as the account balance to determine deposit insurance, (iii) usually use cutoff rules previously applied by the institution when establishing the end-of-day ledger balances for deposit insurance determination purposes, and (iv) separately treat uncollected deposited checks and swept funds for deposit insurance purposes. The rule also states that insured depository institutions must inform their sweep account customers of the nature of such funds, and of how those funds would be treated if the depository institution failed. The final rule does not alter the requirements regarding sweep arrangements where funds are moved between deposit accounts and the customer’s available deposit insurance. The final rule is effective thirty days after publication in the Federal Register, which is forthcoming, except for the provision regarding informing sweep account customers, which becomes effective July 1, 2009. For a copy of the draft final rule, please see http://www.fdic.gov/news/board/22Jan09_Rule_Claims.pdf.
Fed Proposes Establishment of Excess Balance Accounts. On January 29, the Federal Reserve Board issued a notice of proposed rulemaking that would authorize, under Regulation D, the establishment of "excess balance accounts" at Federal Reserve member banks. The proposal defines “excess balance accounts” as limited purpose accounts for the excess balances of institutions eligible to receive earnings on their balances maintained at Federal Reserve member banks. Participating eligible institutions would authorize another institution to manage the excess balance account. The public comment period ends March 2, 2009. For a copy of the notice, please see http://www.federalreserve.gov/newsevents/press/monetary/monetary20090129a1.pdf.
FINRA Fines E*Trade for Unreasonable Anti-Money Laundering Policies and Procedures. On January 2, the Financial Industry Regulatory Authority (FINRA) announced a $1 million fine against E*Trade Securities, LLC and E*Trade Clearing, LLC for failing to have sufficient automated tools that could “reasonably” detect and cause the reporting of suspicious securities transactions. According to FINRA, manual monitoring by E*Trade’s analysts and other employees was not reasonable for the purpose of effective anti-money laundering detection and reporting. By consenting to the entry of the findings, E*Trade did not admit or deny FINRA’s charges. For a copy of the press release, please see http://www.finra.org/Newsroom/NewsReleases/2009/P117667.
State Issues
Ohio Issues Advisory Opinion Regarding Standardized Mortgage Form Preparation. The Board on the Unauthorized Practice of Law of the Supreme Court of Ohio recently issued Advisory Opinion UPL 2008-02 to clarify that a non-attorney employee of a bank or lender may complete a standardized mortgage form for the banking or lending employer without the supervision of an Ohio-certified attorney. The opinion reasoned that the completion of a form mortgage document is “chiefly clerical” and not the "preparation of a legal instrument for another." The opinion notes that such advisory opinions are informal and nonbinding. For a copy of the opinion, please see http://www.buckleykolar.com/OH_SC_UPL _2008_2.pdf.
New Hampshire Regulator Deems Proposed Credit Line Product Unfair and Deceptive. On January 15, the New Hampshire Banking Department ruled that a loan company’s proposed credit line product involving an annual percentage rate of 365% or more was an unfair and deceptive trade practice under New Hampshire law. The company introduced the credit line product following New Hampshire’s 2008 ban on payday lending. The ruling analyzed section 383:10-d of the New Hampshire statutes, which grants the New Hampshire Bank Commissioner’s distinctive and exclusive authority to determine the legality of certain financial products. As a result of the decision, the company immediately ceased offering the credit line product and agreed to the terms of the repayment of product loans made after the company requested the declaratory ruling, but prior to the ruling. For a copy of the ruling, please see http://www.nh.gov/banking/Order_AdvanceAmerica_01152009.pdf.
Minnesota Attorney General Alleges Usury, Mortgage Foreclosure Violations. On January 29, Minnesota Attorney General Lori Swanson announced a lawsuit against a health care service provider for violating Minnesota usury laws by allegedly charging patients interest rates of up to 18% for medical debts. Separately, the Attorney General filed suit against two mortgage foreclosure consultant companies, alleging that the companies charged illegal up-front fees and did not provide promised foreclosure services. For a copy of Attorney General’s press releases, please see http://www.ag.state.mn.us/Consumer/PressRelease/090129ForeclosureConsultants.asp and http://www.ag.state.mn.us/Consumer/PressRelease/090122AllinaInterest.asp.
Pennsylvania, Oregon Attorneys General Reach Settlement with Countrywide. On January 28, the Pennsylvania and Oregon Attorneys General announced a settlement with Countrywide Financial Corporation to obtain mortgage relief and cash assistance for certain eligible borrowers. In Pennsylvania, Countrywide agreed, among other things, to (i) modify certain subprime and pay-option loans for eligible borrowers, (ii) provide more than $2.7 million in foreclosure relief, (iii) waive certain default/delinquency fees, loan modification fees, and prepayment penalties, and (iv) temporarily freeze foreclosures. In Oregon, Countrywide agreed, among other things, to (i) pay $1 million to settle potential legal claims, (ii) cease offering certain subprime loans, and (iii) modify certain loans for eligible borrowers. For a copy of the Pennsylvania Attorney General’s press release, please see http://www.attorneygeneral.gov/press.aspx?id=4273. For a copy of the Oregon Attorney General’s press release, please see http://www.doj.state.or.us/releases/2009/rel012909.shtml.
Courts
U.S. Supreme Court Grants Cert in Cuomo National Bank Preemption Case. On January 16, the U.S. Supreme Court granted a writ of certiorari in a dispute involving the federal preemption of the New York Attorney General’s investigation of several national banks and their operating subsidiaries for evidence of alleged discriminatory real estate lending practices. In 2005, the Office of the Comptroller of the Currency (OCC) and the Clearing House Association, LLC filed suit against then-New York Attorney General Eliot Spitzer, alleging that the investigation was an “impermissible visitation” prohibited by the National Bank Act and corresponding OCC regulations. A district court previously enjoined the Attorney General from investigating the banks; the U.S. Court of Appeals for the Second Circuit subsequently affirmed (reported in InfoBytes, Dec. 7, 2007). On appeal, the Supreme Court will consider (i) whether the OCC regulation is entitled to judicial deference under Chevron v. Natural Resources Defense Council, and (ii) whether the OCC regulation is inconsistent with First National Bank in St. Louis v. Missouri and thus invalid. For a copy of the Supreme Court docket, please see http://www.supremecourtus.gov/docket/08-453.htm.
Ninth Circuit Holds Universal Default Provision Complies with TILA. On January 23, the U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal of a Truth in Lending Act (TILA) claim that arose from the imposition of a higher annual percentage rate (APR) following the borrower’s default to another creditor that occurred prior to the acceptance of the credit agreement. Hauk v. JP Morgan Chase Bank USA, No. 06-56846, 2009 WL 153236 (9th Cir. Jan. 23, 2009). In Hauk, the plaintiff accepted the defendant bank’s balance transfer offer (BTO), which allowed the defendant to impose a higher APR if the plaintiff made a late payment to the defendant or to any other creditor. The defendant subsequently imposed the higher APR based on a report that the plaintiff had made a late payment on another account three months before he accepted the BTO. Alleging that the defendant failed to adequately disclose that a late payment prior to the BTO could result in an APR increase and that the defendant was aware or should have been aware of the late payment prior to the time he accepted the BTO, the plaintiff brought a class action against the defendant, leveling claims under TILA, the California Unfair Competition Law (CUCL), and the California False Advertising Law (CFAL), among other statutes. The defendant moved for summary judgment, arguing that its disclosures complied with TILA and that the plaintiff’s state-law claims were preempted by this compliance. The district court agreed, finding that the disclosures complied with TILA. While disagreeing that TILA compliance preempted the plaintiff’s CUCL and CFAL claims, the court nonetheless granted summary judgment on those claims, finding that the plaintiff did not prove that the defendant had knowledge of the late payment prior to the acceptance of the BTO. On appeal, the Court of Appeals for the Ninth Circuit affirmed the TILA holding but reversed the CUCL and CFAL holding. With respect to plaintiff’s state-law claims, the court agreed with the district court that the defendant’s compliance with TILA did not protect it from liability under the state law claims. According to the court, while defendant may have complied with TILA, the Act did not allow defendant “to subsequently take an action at odds with the disclosures it made,” as alleged by plaintiff. Furthermore, the court held that plaintiff’s evidence established a genuine issue of material fact as to whether defendant knew or should have known about the late payment prior to the acceptance of the BTO in violation of the CUCL or CFAL, and remanded the issue to the district court for trial. For a copy of the opinion, please see http://www.buckleykolar.com/Hauk_v_JP_Morgan.pdf.
Second Circuit Strikes Down Class Action Arbitration Ban. On January 30, the U.S. Court of Appeals for the Second Circuit ruled that a class action waiver in a credit card merchant agreement is unenforceable because it would preclude litigants from pursuing statutory rights. Italian Colors Restaurant v. American Express Travel Related Services Co. (In re: American Express Merchants’ Litigation), No. 06-1871 (2nd Cir. Jan. 30, 2009). In this case, a merchant agreement contained a mandatory arbitration clause that precluded anything other than individual treatment of the claims in arbitration; the agreement also contained a general class action litigation waiver. The Second Circuit struck down the ban in the arbitration clause, finding that enforcement of the ban would effectively preclude any action seeking to vindicate the statutory rights asserted by plaintiffs under antitrust law, owing to, among other things, the substantial costs associated with antitrust actions. The court emphasized that it was ruling only on the class action waiver in the contract at issue, not “whether class action waiver provisions are either void or enforceable per se.” For a copy of the opinion, please see http://www.buckleykolar.com/Italian_Colors_v_American_Express.pdf.
New York Federal Court Holds Plaintiffs Have Standing in Credit Card Putative Antitrust Class Action. On January 21, the U.S. District Court for the Southern District of New York held that plaintiffs have both antirust and Article III standing in a putative antitrust class action suit filed against credit card issuers that allegedly conspired to include mandatory arbitration clauses in cardholder agreements. Ross v. Bank of America, N.A., No. 05 Civ. 7116, 2009 WL 151168 (S.D.N.Y. Jan. 21, 2009). In Ross, the plaintiffs argued that the defendants conspired to include mandatory arbitration clauses in the cardholder agreements, in violation of the Sherman Antitrust Act, while the defendants argued that the plaintiffs lacked antitrust and Article III standing. The court held that the plaintiffs had Article III standing under the court’s test from Lujan v. Defenders of Wildlife, 504 U.S. 555 (U.S. 1992) because the plaintiffs alleged that the mandatory arbitration clause deprived customers of “meaningful choice” in dispute resolution, the lack of which allegedly caused (i) "reduced choice and diminished quality of credit card services," (ii) “increased costs of credit card services attributable to dispute resolution expenses," and (iii) “increased costs of credit card services attributable to violations of consumer protection and antitrust statutes." The court further reasoned that the requested remedy of an injunction would redress the alleged harms. The court rejected defendant Discover’s argument that an opt-out clause gave cardholders a “meaningful choice” in dispute resolution, reasoning that discovery might evidence such a provision to be “illusory.” The court also held that the plaintiffs had antitrust standing, reasoning that the Article III injury-in-fact and the antirust injury-in-fact appeared coextensive, and that the plaintiffs satisfied the "efficient enforcer" test for antitrust actions. Finally, the court found that alleged meetings between Discover and American Express elevated the claim above Twombly’s “reasonably speculative” standard. The court, however, granted the defendants’ motion to strike the plaintiff’s jury demand, reasoning that requested relief was entirely injunctive. For a copy of the opinion, please see http://www.buckleykolar.com/In_Re_Currency_Conversion.pdf.
New York Federal Court Holds RESPA Prohibits Charging for Overhead. On January 28, the U.S. District Court for the Eastern District of New York refused to grant a lender’s motion for summary judgment in a case in which the borrowers alleged that the lender’s “post-closing fee” violated the Real Estate Settlement Procedures Act (RESPA). Cohen v. JP Morgan Chase, CV-04-4098 (E.D.N.Y. Jan. 28, 2009). The district court was hearing the motion on remand following the Second Circuit’s 2007 ruling in this case that RESPA’s section 8(b), which explicitly prohibits fee splitting, also prohibits the collection of an unearned fee that is not split with another party (reported in InfoBytes, Aug. 10, 2007). On remand, the district court considered whether the lender’s “post-closing fee” represented a fee for bona fide services, or whether it was unearned. In rejecting the defendant’s motion for summary judgment, the court determined that the fee was not in exchange for specific settlement services, and that a lender’s overhead is not a compensable settlement service. Therefore, the fee may not be charged under the guise of a “post-closing fee.” Also, the court emphasized that “settlement services” under RESPA must benefit the borrower and/or be performed at or before closing. For a copy of the opinion, please see http://www.buckleykolar.com/Cohen_v_JP_Morgan.pdf.
Pennsylvania Federal Court Applies Continuing Violations Doctrine to FDCPA Claims. On January 21, the U.S. District Court for the Middle District of Pennsylvania applied the continuing violations doctrine to a claim arising under the Fair Debt Collections Practices Act (FDCPA). Tucker v. Mann Bracken, LLC, No. 1:88-CV-1677, 2009 WL 151669 (M.D. Penn. Jan. 21, 2009). In Tucker, the defendant made a series of calls to the plaintiffs from January 14, 2005 to March 14, 2008 while attempting to collect a credit card debt. On September 10, 2008, the plaintiffs filed suit, alleging that the defendant’s calls violated §§ 1692c, 1692d, and 1692k of the FDCPA. The defendant subsequently filed a motion to dismiss, arguing that § 1692k(d) of the FDCPA time-barred the plaintiff’s complaint. The plaintiffs argued, and the court agreed, that the defendant’s conduct constituted a “continuing violation.” While addressing this matter of first impression, the court noted that the Third Circuit previously held that the “application of the continuing violations theory may be appropriate in cases in which a plaintiff can demonstrate that the defendant’s allegedly wrongful conduct was part of a practice or pattern of conduct in which he engaged both without and within the limitations period.” Additionally, the court recognized that applying the limitations period “mechanically” might defeat some of the FDCPA’s remedial consumer-protection goals. As a result, the court ruled that the continuing violations doctrine should apply to FDCPA claims if (i) at least one act occurred within the filing period, and (ii) the alleged conduct constituted a “a persistent, on-going pattern.” In this case, the defendant made ten calls within the filing period, and the court determined that these calls were part of a series of calls that “continued unabated” from 2005 to 2008. As a result, the court denied the defendant’s motion to dismiss. For a copy of the opinion, please see http://www.buckleykolar.com/Tucker_v_Bracken.pdf.
California Court Holds National Bank Act Preempts State “Holiday Statutes” for Credit Card Payments. On January 28, a California Court of Appeal held that the National Bank Act preempts state “holiday statutes” that prohibit lenders from charging late fees or interest for credit card payments posted due on the first day following a holiday. Miller v. Bank of America, N.A., No. CV 02-478, 2009 WL 189969 (Cal. App. Jan. 28, 2009). In Miller, the plaintiffs alleged that the defendant lender violated California and Arizona “holiday statutes” that allow a legal or contractual act due on a statutorily defined holiday to be performed on the next business day without any adverse consequence. The court found that, by changing when a payment is due, the state holiday statutes affect the “schedule for repayment of principal and interest” and the “payments due” set by a national bank. The statutes, thus, “obstruct, impair, or condition” a national bank’s ability to fully exercise its federally authorized powers. As a result, the court affirmed the decision of the trial court that the statutes were preempted. For a copy of the opinion, please see http://www.buckleykolar.com/Miller_v_BoA.pdf
California Federal Court Denies Class Certification in Option ARM Case. On January 27, the U.S. District Court for the Northern District of California denied a plaintiff’s motion for class certification in a case involving option ARM payment disclosures because the plaintiff lacked standing and typicality requirements. Jordan v. Paul Financial, LLC, No. C 07-04496 (N.D. Cal. Jan. 27, 2009). In Jordan, the plaintiff filed his complaint—which asserted claims for violations of the Truth in Lending Act (TILA) and California’s Unfair Competition Law, as well as for common-law fraud, breach of contract, and breach of the covenant of good faith and fair dealing—on behalf of a nationwide TILA class and two California classes, alleging that the defendant promised a low, fixed rate that subsequently substantially increased and that the option ARM was "designed to cause negative amortization." The court denied the plaintiff’s motion for class certification because the plaintiff did not meet key requirements for class certification, reasoning that (i) the plaintiff lacked standing to represent the nationwide TILA class because the statute of limitations barred his TILA claim, and (ii) the plaintiff lacked standing to represent the two California classes because he could not establish traceability on account of the fact that “members of the putative class own loans that are held and serviced by entities other than the companies that hold and service plaintiff’s loans.” The court further explained that the plaintiff did not satisfy the typicality requirement because his fraud claims were subject to unique defenses. For a copy of the opinion, please see http://www.buckleykolar.com/Jordan_v_Paul_Financial.pdf.
Ohio Federal Court Finds Triable Issues in FCRA “Reasonable Investigation” Case. On January 16, the U.S. District Court for the Southern District of Ohio denied summary judgment to a defendant debt purchaser in a Fair Credit Reporting Act (FCRA) “reasonable investigation” case, finding that there were triable issues of fact. Ferrarelli v. Federated Fin. Corp. of America, No. 1:07cv685, 2009 WL 116972 (S.D. Ohio Jan. 16, 2009). In Ferrarelli, the plaintiff alleged that he was a victim of identity theft, which resulted in multiple accounts being opened in his name without his knowledge, including a business credit card account. This account was acquired by the defendant, a purchaser of charged-off business credit card accounts. After the defendant attempted to collect on the account, the plaintiff sent a dispute letter to TransUnion and to the defendant; TransUnion then notified the defendant of the dispute. The defendant concluded that the account belonged to the plaintiff, but modified its status to “disputed by consumer.” The plaintiff then filed suit, alleging, among other things, that the defendant did not conduct a reasonable investigation, in violation of § 1681s-2(b) of FCRA. Concluding that a private right of action exists under § 1681s-2(b), and noting that the defendant employees responsible for conducting the investigation received their investigative training “on-the-job,” the court found that there were genuine issues of material fact as to whether the defendant conducted a reasonable investigation. The court also concluded that there was a genuine issue of material fact as to whether the defendant willfully violated § 1681s-2(b) and whether the defendant’s failure to investigate was a material factor in causing the plaintiff’s damages. Therefore, the court denied the defendant’s motion for summary judgment. For a copy of the opinion, please see
http://www.buckleykolar.com/Ferrarelli_v_Federated.pdf.
Tennessee Court Holds Commencement of Foreclosure Not an Increase in Hazard. On January 29, the Supreme Court of Tennessee held that the initiation of foreclosure proceedings does not constitute an “increase in hazard” requiring a bank to report the foreclosure to the insurer or risk invalidation of a hazard insurance policy. U.S. Bank N.A. v. Tennessee Farmers Mut. Ins. Co., No. W2006-02536-SC-R11-CV, 2009 WL 199856 (Tenn. Jan. 29, 2009). In this case, the plaintiff bank began foreclosure proceedings on a borrower’s residence but did not notify the hazard insurance issuer of the proceedings. The borrower’s bankruptcy filing stayed the foreclosure, which was never completed; fire subsequently destroyed the property. The hazard insurance policy contained a “standard” or “union” mortgage clause, which protected the bank from loss even in the event of an “increase in hazard,” provided that the bank notified the insurer of “any increase in hazard.” The clause did not expressly require notification of a foreclosure proceeding. After the fire, the insurer refused to pay the bank’s claim, and the bank filed suit. The trial court granted summary judgment in favor of the bank, finding that notice of foreclosure proceeding was not required by the policy. The Court of Appeals reversed, noting a split of authority as to whether the commencement of foreclosure proceedings constituted an increase in hazard. On appeal, the Supreme Court of Tennessee reversed the Court of Appeals, holding that the plain meaning of the phrase “increase in hazard” does not include the commencement of foreclosure proceedings. Buckley Kolar LLP reported the decision of the Court of Appeals in InfoBytes, Jan. 11, 2008. In the present action, Buckley Kolar LLP filed a brief on behalf of Amicus Curiae Mortgage Bankers Association in support of the petitioner. For copy of the opinion, please contact .
Firm News
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 spoke on a panel of in-house counsel at the ACI Consumer Finance Class Actions 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.
Mortgages
House Panel Approves Bill Allowing “Cramdowns” for Mortgages. On January 27, a U.S. House of Representatives panel reportedly approved H.R. 200, the "Helping Families Save Their Homes in Bankruptcy Act of 2009." The bill, among other things, would (i) allow bankruptcy judges to reduce (“cramdown”) the principal balance for certain mortgages, and (ii) require a bankruptcy court to disallow a claim that is subject to any remedy for damages or rescission due to violations of, among other laws, the Truth in Lending Act, notwithstanding a prior entry of a foreclosure judgment. Thus far, a "cramdown" provision has not been included in the omnibus H.R.1, "The American Recovery and Reinvestment Act of 2009," which the U.S. House of Representatives passed on January 28. For a copy of H.R. 200, please see http://www.thomas.gov/cgi-bin/query/z?c111:H.R.200:
Ohio Issues Advisory Opinion Regarding Standardized Mortgage Form Preparation. The Board on the Unauthorized Practice of Law of the Supreme Court of Ohio recently issued Advisory Opinion UPL 2008-02 to clarify that a non-attorney employee of a bank or lender may complete a standardized mortgage form for the banking or lending employer without the supervision of an Ohio-certified attorney. The opinion reasoned that the completion of a form mortgage document is “chiefly clerical” and not the "preparation of a legal instrument for another." The opinion notes that such advisory opinions are informal and nonbinding. For a copy of the opinion, please see http://www.buckleykolar.com/OH_SC_UPL _2008_2.pdf.
New Hampshire Regulator Deems Proposed Credit Line Product Unfair and Deceptive. On January 15, the New Hampshire Banking Department ruled that a loan company’s proposed credit line product involving an annual percentage rate of 365% or more was an unfair and deceptive trade practice under New Hampshire law. The company introduced the credit line product following New Hampshire’s 2008 ban on payday lending. The ruling analyzed section 383:10-d of the New Hampshire statutes, which grants the New Hampshire Bank Commissioner’s distinctive and exclusive authority to determine the legality of certain financial products. As a result of the decision, the company immediately ceased offering the credit line product and agreed to the terms of the repayment of product loans made after the company requested the declaratory ruling, but prior to the ruling. For a copy of the ruling, please see http://www.nh.gov/banking/Order_AdvanceAmerica_01152009.pdf.
Minnesota Attorney General Alleges Usury, Mortgage Foreclosure Violations. On January 29, Minnesota Attorney General Lori Swanson announced a lawsuit against a health care service provider for violating Minnesota usury laws by allegedly charging patients interest rates of up to 18% for medical debts. Separately, the Attorney General filed suit against two mortgage foreclosure consultant companies, alleging that the companies charged illegal up-front fees and did not provide promised foreclosure services. For a copy of Attorney General’s press releases, please see http://www.ag.state.mn.us/Consumer/PressRelease/090129ForeclosureConsultants.asp and http://www.ag.state.mn.us/Consumer/PressRelease/090122AllinaInterest.asp.
Pennsylvania, Oregon Attorneys General Reach Settlement with Countrywide. On January 28, the Pennsylvania and Oregon Attorneys General announced a settlement with Countrywide Financial Corporation to obtain mortgage relief and cash assistance for certain eligible borrowers. In Pennsylvania, Countrywide agreed, among other things, to (i) modify certain subprime and pay-option loans for eligible borrowers, (ii) provide more than $2.7 million in foreclosure relief, (iii) waive certain default/delinquency fees, loan modification fees, and prepayment penalties, and (iv) temporarily freeze foreclosures. In Oregon, Countrywide agreed, among other things, to (i) pay $1 million to settle potential legal claims, (ii) cease offering certain subprime loans, and (iii) modify certain loans for eligible borrowers. For a copy of the Pennsylvania Attorney General’s press release, please see http://www.attorneygeneral.gov/press.aspx?id=4273. For a copy of the Oregon Attorney General’s press release, please see http://www.doj.state.or.us/releases/2009/rel012909.shtml.
Ninth Circuit Holds Universal Default Provision Complies with TILA. On January 23, the U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal of a Truth in Lending Act (TILA) claim that arose from the imposition of a higher annual percentage rate (APR) following the borrower’s default to another creditor that occurred prior to the acceptance of the credit agreement. Hauk v. JP Morgan Chase Bank USA, No. 06-56846, 2009 WL 153236 (9th Cir. Jan. 23, 2009). In Hauk, the plaintiff accepted the defendant bank’s balance transfer offer (BTO), which allowed the defendant to impose a higher APR if the plaintiff made a late payment to the defendant or to any other creditor. The defendant subsequently imposed the higher APR based on a report that the plaintiff had made a late payment on another account three months before he accepted the BTO. Alleging that the defendant failed to adequately disclose that a late payment prior to the BTO could result in an APR increase and that the defendant was aware or should have been aware of the late payment prior to the time he accepted the BTO, the plaintiff brought a class action against the defendant, leveling claims under TILA, the California Unfair Competition Law (CUCL), and the California False Advertising Law (CFAL), among other statutes. The defendant moved for summary judgment, arguing that its disclosures complied with TILA and that the plaintiff’s state-law claims were preempted by this compliance. The district court agreed, finding that the disclosures complied with TILA. While disagreeing that TILA compliance preempted the plaintiff’s CUCL and CFAL claims, the court nonetheless granted summary judgment on those claims, finding that the plaintiff did not prove that the defendant had knowledge of the late payment prior to the acceptance of the BTO. On appeal, the Court of Appeals for the Ninth Circuit affirmed the TILA holding but reversed the CUCL and CFAL holding. With respect to plaintiff’s state-law claims, the court agreed with the district court that the defendant’s compliance with TILA did not protect it from liability under the state law claims. According to the court, while defendant may have complied with TILA, the Act did not allow defendant “to subsequently take an action at odds with the disclosures it made,” as alleged by plaintiff. Furthermore, the court held that plaintiff’s evidence established a genuine issue of material fact as to whether defendant knew or should have known about the late payment prior to the acceptance of the BTO in violation of the CUCL or CFAL, and remanded the issue to the district court for trial. For a copy of the opinion, please see http://www.buckleykolar.com/Hauk_v_JP_Morgan.pdf.
New York Federal Court Holds RESPA Prohibits Charging for Overhead. On January 28, the U.S. District Court for the Eastern District of New York refused to grant a lender’s motion for summary judgment in a case in which the borrowers alleged that the lender’s “post-closing fee” violated the Real Estate Settlement Procedures Act (RESPA). Cohen v. JP Morgan Chase, CV-04-4098 (E.D.N.Y. Jan. 28, 2009). The district court was hearing the motion on remand following the Second Circuit’s 2007 ruling in this case that RESPA’s section 8(b), which explicitly prohibits fee splitting, also prohibits the collection of an unearned fee that is not split with another party (reported in InfoBytes, Aug. 10, 2007). On remand, the district court considered whether the lender’s “post-closing fee” represented a fee for bona fide services, or whether it was unearned. In rejecting the defendant’s motion for summary judgment, the court determined that the fee was not in exchange for specific settlement services, and that a lender’s overhead is not a compensable settlement service. Therefore, the fee may not be charged under the guise of a “post-closing fee.” Also, the court emphasized that “settlement services” under RESPA must benefit the borrower and/or be performed at or before closing. For a copy of the opinion, please see http://www.buckleykolar.com/Cohen_v_JP_Morgan.pdf.
California Federal Court Denies Class Certification in Option ARM Case. On January 27, the U.S. District Court for the Northern District of California denied a plaintiff’s motion for class certification in a case involving option ARM payment disclosures because the plaintiff lacked standing and typicality requirements. Jordan v. Paul Financial, LLC, No. C 07-04496 (N.D. Cal. Jan. 27, 2009). In Jordan, the plaintiff filed his complaint—which asserted claims for violations of the Truth in Lending Act (TILA) and California’s Unfair Competition Law, as well as for common-law fraud, breach of contract, and breach of the covenant of good faith and fair dealing—on behalf of a nationwide TILA class and two California classes, alleging that the defendant promised a low, fixed rate that subsequently substantially increased and that the option ARM was "designed to cause negative amortization." The court denied the plaintiff’s motion for class certification because the plaintiff did not meet key requirements for class certification, reasoning that (i) the plaintiff lacked standing to represent the nationwide TILA class because the statute of limitations barred his TILA claim, and (ii) the plaintiff lacked standing to represent the two California classes because he could not establish traceability on account of the fact that “members of the putative class own loans that are held and serviced by entities other than the companies that hold and service plaintiff’s loans.” The court further explained that the plaintiff did not satisfy the typicality requirement because his fraud claims were subject to unique defenses. For a copy of the opinion, please see http://www.buckleykolar.com/Jordan_v_Paul_Financial.pdf.
Banking
Treasury Revises Executive Compensation Standards for TARP Programs. On January 16, the U.S. Department of the Treasury issued interim final rules regarding executive compensation standards under the Troubled Asset Relief Program’s (TARP) Capital Purchase Program. Under the rules, the chief executive officer of a participating financial institution must (i) certify annually, and within 135 days of the entity’s fiscal year end, that the financial institution and its compensation committee have complied with the Treasury’s executive compensation standards, and (ii) certify, within 120 days of the closing date of the Securities Purchase Agreement between the financial institution and the Treasury, that the compensation committee has reviewed the senior executives’ incentive compensation arrangements to ensure that they do not encourage “unnecessary and excessive” risks that could potentially threaten the institution. The participating financial institution must retain the relevant records regarding these certifications for at least six years following each certification and, upon request, must provide such documents to the TARP Chief Compliance Officer. The rules also prohibit (i) incentive compensation paid to a senior executive based on materially inaccurate statements, including earnings statements (the rule allows for the “clawback” of these payments), (ii) “golden parachute” payments, and (iii) tax deductions for executive compensation in excess of $500,000. The interim rule is effective upon publication in the Federal Register, which is forthcoming, and comments regarding the interim rule are due within thirty days after publication in the Federal Register. The Treasury also revised the guidelines for its Systemically Significant Failing Institutions Program to include substantively similar compliance-reporting and recordkeeping requirements. For a copy of the press release, which contains links to additional documents, please see http://www.treas.gov/press/releases/hp1364.htm.
Rhode Island, Illinois Attorneys General Express Concern Regarding Potential TARP Preemption. Rhode Island Attorney General Patrick C. Lynch recently expressed concern to the U.S. Department of the Treasury that the Troubled Asset Relief Program may inadvertently preempt state laws that require entities to publish public notices in newspapers prior to the disposition of property in foreclosure sales. On December 8, Illinois Attorney General Lisa Madigan sent a similar letter to Neel Kashkari, Interim Assistant Secretary for Financial Stability. For a copy of the Illinois Attorney General’s letter, please see http://www.pnrc.net/documents/Illiinoisletter.pdf. For a copy of the Rhode Island Attorney General’s press release, please see http://www.riag.state.ri.us/news/.
Treasury Publishes TARP Investment Contracts. On January 28, the U.S. Department of the Treasury announced that new investment contracts for future completed transactions in connection with the Troubled Asset Relief Program (TARP) will be posted on the Treasury’s website within ten business days. The Treasury will make available completed contracts on a rolling basis. As of January 28, the Treasury has made available the contracts for Bank of America, Goldman Sachs, and Chrysler, among other entities. For a copy of the press release, please see http://www.treas.gov/press/releases/tg04.htm. For a copy of the posted contracts, please see http://www.treas.gov/initiatives/eesa/agreements/index.shtml.
FDIC Issues Final Rule Regarding the Processing of Deposit Accounts at Failed Institutions. On January 27, the Federal Deposit Insurance Corporation (FDIC) issued the draft of a final rule establishing its practices for determining deposit and other liability account balances at failed insured depository institutions. The rule, substantively similar to the FDIC’s interim rule promulgated in July 2008 (reported in InfoBytes, July 25, 2008), states that the FDIC, in the case of a depository institution failure, will (i) utilize certain general principles for determining account balances, (ii) define the end-of-day ledger balance of the deposit account as the account balance to determine deposit insurance, (iii) usually use cutoff rules previously applied by the institution when establishing the end-of-day ledger balances for deposit insurance determination purposes, and (iv) separately treat uncollected deposited checks and swept funds for deposit insurance purposes. The rule also states that insured depository institutions must inform their sweep account customers of the nature of such funds, and of how those funds would be treated if the depository institution failed. The final rule does not alter the requirements regarding sweep arrangements where funds are moved between deposit accounts and the customer’s available deposit insurance. The final rule is effective thirty days after publication in the Federal Register, which is forthcoming, except for the provision regarding informing sweep account customers, which becomes effective July 1, 2009. For a copy of the draft final rule, please see http://www.fdic.gov/news/board/22Jan09_Rule_Claims.pdf.
Fed Proposes Establishment of Excess Balance Accounts. On January 29, the Federal Reserve Board issued a notice of proposed rulemaking that would authorize, under Regulation D, the establishment of "excess balance accounts" at Federal Reserve member banks. The proposal defines “excess balance accounts” as limited purpose accounts for the excess balances of institutions eligible to receive earnings on their balances maintained at Federal Reserve member banks. Participating eligible institutions would authorize another institution to manage the excess balance account. The public comment period ends March 2, 2009. For a copy of the notice, please see http://www.federalreserve.gov/newsevents/press/monetary/monetary20090129a1.pdf.
FINRA Fines E*Trade for Unreasonable Anti-Money Laundering Policies and Procedures. On January 2, the Financial Industry Regulatory Authority (FINRA) announced a $1 million fine against E*Trade Securities, LLC and E*Trade Clearing, LLC for failing to have sufficient automated tools that could “reasonably” detect and cause the reporting of suspicious securities transactions. According to FINRA, manual monitoring by E*Trade’s analysts and other employees was not reasonable for the purpose of effective anti-money laundering detection and reporting. By consenting to the entry of the findings, E*Trade did not admit or deny FINRA’s charges. For a copy of the press release, please see http://www.finra.org/Newsroom/NewsReleases/2009/P117667.
U.S. Supreme Court Grants Cert in Cuomo National Bank Preemption Case. On January 16, the U.S. Supreme Court granted a writ of certiorari in a dispute involving the federal preemption of the New York Attorney General’s investigation of several national banks and their operating subsidiaries for evidence of alleged discriminatory real estate lending practices. In 2005, the Office of the Comptroller of the Currency (OCC) and the Clearing House Association, LLC filed suit against then-New York Attorney General Eliot Spitzer, alleging that the investigation was an “impermissible visitation” prohibited by the National Bank Act and corresponding OCC regulations. A district court previously enjoined the Attorney General from investigating the banks; the U.S. Court of Appeals for the Second Circuit subsequently affirmed (reported in InfoBytes, Dec. 7, 2007). On appeal, the Supreme Court will consider (i) whether the OCC regulation is entitled to judicial deference under Chevron v. Natural Resources Defense Council, and (ii) whether the OCC regulation is inconsistent with First National Bank in St. Louis v. Missouri and thus invalid. For a copy of the Supreme Court docket, please see http://www.supremecourtus.gov/docket/08-453.htm.
California Court Holds National Bank Act Preempts State “Holiday Statutes” for Credit Card Payments. On January 28, a California Court of Appeal held that the National Bank Act preempts state “holiday statutes” that prohibit lenders from charging late fees or interest for credit card payments posted due on the first day following a holiday. Miller v. Bank of America, N.A., No. CV 02-478, 2009 WL 189969 (Cal. App. Jan. 28, 2009). In Miller, the plaintiffs alleged that the defendant lender violated California and Arizona “holiday statutes” that allow a legal or contractual act due on a statutorily defined holiday to be performed on the next business day without any adverse consequence. The court found that, by changing when a payment is due, the state holiday statutes affect the “schedule for repayment of principal and interest” and the “payments due” set by a national bank. The statutes, thus, “obstruct, impair, or condition” a national bank’s ability to fully exercise its federally authorized powers. As a result, the court affirmed the decision of the trial court that the statutes were preempted. For a copy of the opinion, please see http://www.buckleykolar.com/Miller_v_BoA.pdf
Tennessee Court Holds Commencement of Foreclosure Not an Increase in Hazard. On January 29, the Supreme Court of Tennessee held that the initiation of foreclosure proceedings does not constitute an “increase in hazard” requiring a bank to report the foreclosure to the insurer or risk invalidation of a hazard insurance policy. U.S. Bank N.A. v. Tennessee Farmers Mut. Ins. Co., No. W2006-02536-SC-R11-CV, 2009 WL 199856 (Tenn. Jan. 29, 2009). In this case, the plaintiff bank began foreclosure proceedings on a borrower’s residence but did not notify the hazard insurance issuer of the proceedings. The borrower’s bankruptcy filing stayed the foreclosure, which was never completed; fire subsequently destroyed the property. The hazard insurance policy contained a “standard” or “union” mortgage clause, which protected the bank from loss even in the event of an “increase in hazard,” provided that the bank notified the insurer of “any increase in hazard.” The clause did not expressly require notification of a foreclosure proceeding. After the fire, the insurer refused to pay the bank’s claim, and the bank filed suit. The trial court granted summary judgment in favor of the bank, finding that notice of foreclosure proceeding was not required by the policy. The Court of Appeals reversed, noting a split of authority as to whether the commencement of foreclosure proceedings constituted an increase in hazard. On appeal, the Supreme Court of Tennessee reversed the Court of Appeals, holding that the plain meaning of the phrase “increase in hazard” does not include the commencement of foreclosure proceedings. Buckley Kolar LLP reported the decision of the Court of Appeals in InfoBytes, Jan. 11, 2008. In the present action, Buckley Kolar LLP filed a brief on behalf of Amicus Curiae Mortgage Bankers Association in support of the petitioner. For copy of the opinion, please contact .
Consumer Finance
Federal Court Orders $1.2 Million Penalty for Alleged FTC Do Not Call Violations. On January 27, a federal district court granted orders against two vacation and timeshare companies for alleged violations of the Federal Trade Commission’s Do Not Call (DNC) Rule. According to the complaint, the companies allegedly, among other things, called consumers with phone numbers registered on the DNC Registry without obtaining an express written agreement or maintaining an “established business relationship.” The court (i) imposed civil money penalties, (ii) barred the companies from violating the terms of the DNC Registry and the Telemarketing Sales Rule, and (iii) ordered record keeping and other provisions to ensure compliance with the order. For a copy of the press release, please see http://www.ftc.gov/opa/2009/01/westgate.shtm. For a copy of the orders, please see http://www.ftc.gov/os/caselist/0623123/090127westgatestiporder.pdf and http://www.ftc.gov/os/caselist/0723047/090126allinonevacatiostipjudgmnt.pdf.
Pennsylvania Federal Court Applies Continuing Violations Doctrine to FDCPA Claims. On January 21, the U.S. District Court for the Middle District of Pennsylvania applied the continuing violations doctrine to a claim arising under the Fair Debt Collections Practices Act (FDCPA). Tucker v. Mann Bracken, LLC, No. 1:88-CV-1677, 2009 WL 151669 (M.D. Penn. Jan. 21, 2009). In Tucker, the defendant made a series of calls to the plaintiffs from January 14, 2005 to March 14, 2008 while attempting to collect a credit card debt. On September 10, 2008, the plaintiffs filed suit, alleging that the defendant’s calls violated §§ 1692c, 1692d, and 1692k of the FDCPA. The defendant subsequently filed a motion to dismiss, arguing that § 1692k(d) of the FDCPA time-barred the plaintiff’s complaint. The plaintiffs argued, and the court agreed, that the defendant’s conduct constituted a “continuing violation.” While addressing this matter of first impression, the court noted that the Third Circuit previously held that the “application of the continuing violations theory may be appropriate in cases in which a plaintiff can demonstrate that the defendant’s allegedly wrongful conduct was part of a practice or pattern of conduct in which he engaged both without and within the limitations period.” Additionally, the court recognized that applying the limitations period “mechanically” might defeat some of the FDCPA’s remedial consumer-protection goals. As a result, the court ruled that the continuing violations doctrine should apply to FDCPA claims if (i) at least one act occurred within the filing period, and (ii) the alleged conduct constituted a “a persistent, on-going pattern.” In this case, the defendant made ten calls within the filing period, and the court determined that these calls were part of a series of calls that “continued unabated” from 2005 to 2008. As a result, the court denied the defendant’s motion to dismiss. For a copy of the opinion, please see http://www.buckleykolar.com/Tucker_v_Bracken.pdf.
Ohio Federal Court Finds Triable Issues in FCRA “Reasonable Investigation” Case. On January 16, the U.S. District Court for the Southern District of Ohio denied summary judgment to a defendant debt purchaser in a Fair Credit Reporting Act (FCRA) “reasonable investigation” case, finding that there were triable issues of fact. Ferrarelli v. Federated Fin. Corp. of America, No. 1:07cv685, 2009 WL 116972 (S.D. Ohio Jan. 16, 2009). In Ferrarelli, the plaintiff alleged that he was a victim of identity theft, which resulted in multiple accounts being opened in his name without his knowledge, including a business credit card account. This account was acquired by the defendant, a purchaser of charged-off business credit card accounts. After the defendant attempted to collect on the account, the plaintiff sent a dispute letter to TransUnion and to the defendant; TransUnion then notified the defendant of the dispute. The defendant concluded that the account belonged to the plaintiff, but modified its status to “disputed by consumer.” The plaintiff then filed suit, alleging, among other things, that the defendant did not conduct a reasonable investigation, in violation of § 1681s-2(b) of FCRA. Concluding that a private right of action exists under § 1681s-2(b), and noting that the defendant employees responsible for conducting the investigation received their investigative training “on-the-job,” the court found that there were genuine issues of material fact as to whether the defendant conducted a reasonable investigation. The court also concluded that there was a genuine issue of material fact as to whether the defendant willfully violated § 1681s-2(b) and whether the defendant’s failure to investigate was a material factor in causing the plaintiff’s damages. Therefore, the court denied the defendant’s motion for summary judgment. For a copy of the opinion, please see
http://www.buckleykolar.com/Ferrarelli_v_Federated.pdf.
Insurance
Tennessee Court Holds Commencement of Foreclosure Not an Increase in Hazard. On January 29, the Supreme Court of Tennessee held that the initiation of foreclosure proceedings does not constitute an “increase in hazard” requiring a bank to report the foreclosure to the insurer or risk invalidation of a hazard insurance policy. U.S. Bank N.A. v. Tennessee Farmers Mut. Ins. Co., No. W2006-02536-SC-R11-CV, 2009 WL 199856 (Tenn. Jan. 29, 2009). In this case, the plaintiff bank began foreclosure proceedings on a borrower’s residence but did not notify the hazard insurance issuer of the proceedings. The borrower’s bankruptcy filing stayed the foreclosure, which was never completed; fire subsequently destroyed the property. The hazard insurance policy contained a “standard” or “union” mortgage clause, which protected the bank from loss even in the event of an “increase in hazard,” provided that the bank notified the insurer of “any increase in hazard.” The clause did not expressly require notification of a foreclosure proceeding. After the fire, the insurer refused to pay the bank’s claim, and the bank filed suit. The trial court granted summary judgment in favor of the bank, finding that notice of foreclosure proceeding was not required by the policy. The Court of Appeals reversed, noting a split of authority as to whether the commencement of foreclosure proceedings constituted an increase in hazard. On appeal, the Supreme Court of Tennessee reversed the Court of Appeals, holding that the plain meaning of the phrase “increase in hazard” does not include the commencement of foreclosure proceedings. Buckley Kolar LLP reported the decision of the Court of Appeals in InfoBytes, Jan. 11, 2008. In the present action, Buckley Kolar LLP filed a brief on behalf of Amicus Curiae Mortgage Bankers Association in support of the petitioner. For copy of the opinion, please contact .
Litigation
U.S. Supreme Court Grants Cert in Cuomo National Bank Preemption Case. On January 16, the U.S. Supreme Court granted a writ of certiorari in a dispute involving the federal preemption of the New York Attorney General’s investigation of several national banks and their operating subsidiaries for evidence of alleged discriminatory real estate lending practices. In 2005, the Office of the Comptroller of the Currency (OCC) and the Clearing House Association, LLC filed suit against then-New York Attorney General Eliot Spitzer, alleging that the investigation was an “impermissible visitation” prohibited by the National Bank Act and corresponding OCC regulations. A district court previously enjoined the Attorney General from investigating the banks; the U.S. Court of Appeals for the Second Circuit subsequently affirmed (reported in InfoBytes, Dec. 7, 2007). On appeal, the Supreme Court will consider (i) whether the OCC regulation is entitled to judicial deference under Chevron v. Natural Resources Defense Council, and (ii) whether the OCC regulation is inconsistent with First National Bank in St. Louis v. Missouri and thus invalid. For a copy of the Supreme Court docket, please see http://www.supremecourtus.gov/docket/08-453.htm.
Ninth Circuit Holds Universal Default Provision Complies with TILA. On January 23, the U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal of a Truth in Lending Act (TILA) claim that arose from the imposition of a higher annual percentage rate (APR) following the borrower’s default to another creditor that occurred prior to the acceptance of the credit agreement. Hauk v. JP Morgan Chase Bank USA, No. 06-56846, 2009 WL 153236 (9th Cir. Jan. 23, 2009). In Hauk, the plaintiff accepted the defendant bank’s balance transfer offer (BTO), which allowed the defendant to impose a higher APR if the plaintiff made a late payment to the defendant or to any other creditor. The defendant subsequently imposed the higher APR based on a report that the plaintiff had made a late payment on another account three months before he accepted the BTO. Alleging that the defendant failed to adequately disclose that a late payment prior to the BTO could result in an APR increase and that the defendant was aware or should have been aware of the late payment prior to the time he accepted the BTO, the plaintiff brought a class action against the defendant, leveling claims under TILA, the California Unfair Competition Law (CUCL), and the California False Advertising Law (CFAL), among other statutes. The defendant moved for summary judgment, arguing that its disclosures complied with TILA and that the plaintiff’s state-law claims were preempted by this compliance. The district court agreed, finding that the disclosures complied with TILA. While disagreeing that TILA compliance preempted the plaintiff’s CUCL and CFAL claims, the court nonetheless granted summary judgment on those claims, finding that the plaintiff did not prove that the defendant had knowledge of the late payment prior to the acceptance of the BTO. On appeal, the Court of Appeals for the Ninth Circuit affirmed the TILA holding but reversed the CUCL and CFAL holding. With respect to plaintiff’s state-law claims, the court agreed with the district court that the defendant’s compliance with TILA did not protect it from liability under the state law claims. According to the court, while defendant may have complied with TILA, the Act did not allow defendant “to subsequently take an action at odds with the disclosures it made,” as alleged by plaintiff. Furthermore, the court held that plaintiff’s evidence established a genuine issue of material fact as to whether defendant knew or should have known about the late payment prior to the acceptance of the BTO in violation of the CUCL or CFAL, and remanded the issue to the district court for trial. For a copy of the opinion, please see http://www.buckleykolar.com/Hauk_v_JP_Morgan.pdf.
Second Circuit Strikes Down Class Action Arbitration Ban. On January 30, the U.S. Court of Appeals for the Second Circuit ruled that a class action waiver in a credit card merchant agreement is unenforceable because it would preclude litigants from pursuing statutory rights. Italian Colors Restaurant v. American Express Travel Related Services Co. (In re: American Express Merchants’ Litigation), No. 06-1871 (2nd Cir. Jan. 30, 2009). In this case, a merchant agreement contained a mandatory arbitration clause that precluded anything other than individual treatment of the claims in arbitration; the agreement also contained a general class action litigation waiver. The Second Circuit struck down the ban in the arbitration clause, finding that enforcement of the ban would effectively preclude any action seeking to vindicate the statutory rights asserted by plaintiffs under antitrust law, owing to, among other things, the substantial costs associated with antitrust actions. The court emphasized that it was ruling only on the class action waiver in the contract at issue, not “whether class action waiver provisions are either void or enforceable per se.” For a copy of the opinion, please see http://www.buckleykolar.com/Italian_Colors_v_American_Express.pdf.
New York Federal Court Holds Plaintiffs Have Standing in Credit Card Putative Antitrust Class Action. On January 21, the U.S. District Court for the Southern District of New York held that plaintiffs have both antirust and Article III standing in a putative antitrust class action suit filed against credit card issuers that allegedly conspired to include mandatory arbitration clauses in cardholder agreements. Ross v. Bank of America, N.A., No. 05 Civ. 7116, 2009 WL 151168 (S.D.N.Y. Jan. 21, 2009). In Ross, the plaintiffs argued that the defendants conspired to include mandatory arbitration clauses in the cardholder agreements, in violation of the Sherman Antitrust Act, while the defendants argued that the plaintiffs lacked antitrust and Article III standing. The court held that the plaintiffs had Article III standing under the court’s test from Lujan v. Defenders of Wildlife, 504 U.S. 555 (U.S. 1992) because the plaintiffs alleged that the mandatory arbitration clause deprived customers of “meaningful choice” in dispute resolution, the lack of which allegedly caused (i) "reduced choice and diminished quality of credit card services," (ii) “increased costs of credit card services attributable to dispute resolution expenses," and (iii) “increased costs of credit card services attributable to violations of consumer protection and antitrust statutes." The court further reasoned that the requested remedy of an injunction would redress the alleged harms. The court rejected defendant Discover’s argument that an opt-out clause gave cardholders a “meaningful choice” in dispute resolution, reasoning that discovery might evidence such a provision to be “illusory.” The court also held that the plaintiffs had antitrust standing, reasoning that the Article III injury-in-fact and the antirust injury-in-fact appeared coextensive, and that the plaintiffs satisfied the "efficient enforcer" test for antitrust actions. Finally, the court found that alleged meetings between Discover and American Express elevated the claim above Twombly’s “reasonably speculative” standard. The court, however, granted the defendants’ motion to strike the plaintiff’s jury demand, reasoning that requested relief was entirely injunctive. For a copy of the opinion, please see http://www.buckleykolar.com/In_Re_Currency_Conversion.pdf.
New York Federal Court Holds RESPA Prohibits Charging for Overhead. On January 28, the U.S. District Court for the Eastern District of New York refused to grant a lender’s motion for summary judgment in a case in which the borrowers alleged that the lender’s “post-closing fee” violated the Real Estate Settlement Procedures Act (RESPA). Cohen v. JP Morgan Chase, CV-04-4098 (E.D.N.Y. Jan. 28, 2009). The district court was hearing the motion on remand following the Second Circuit’s 2007 ruling in this case that RESPA’s section 8(b), which explicitly prohibits fee splitting, also prohibits the collection of an unearned fee that is not split with another party (reported in InfoBytes, Aug. 10, 2007). On remand, the district court considered whether the lender’s “post-closing fee” represented a fee for bona fide services, or whether it was unearned. In rejecting the defendant’s motion for summary judgment, the court determined that the fee was not in exchange for specific settlement services, and that a lender’s overhead is not a compensable settlement service. Therefore, the fee may not be charged under the guise of a “post-closing fee.” Also, the court emphasized that “settlement services” under RESPA must benefit the borrower and/or be performed at or before closing. For a copy of the opinion, please see http://www.buckleykolar.com/Cohen_v_JP_Morgan.pdf.
Pennsylvania Federal Court Applies Continuing Violations Doctrine to FDCPA Claims. On January 21, the U.S. District Court for the Middle District of Pennsylvania applied the continuing violations doctrine to a claim arising under the Fair Debt Collections Practices Act (FDCPA). Tucker v. Mann Bracken, LLC, No. 1:88-CV-1677, 2009 WL 151669 (M.D. Penn. Jan. 21, 2009). In Tucker, the defendant made a series of calls to the plaintiffs from January 14, 2005 to March 14, 2008 while attempting to collect a credit card debt. On September 10, 2008, the plaintiffs filed suit, alleging that the defendant’s calls violated §§ 1692c, 1692d, and 1692k of the FDCPA. The defendant subsequently filed a motion to dismiss, arguing that § 1692k(d) of the FDCPA time-barred the plaintiff’s complaint. The plaintiffs argued, and the court agreed, that the defendant’s conduct constituted a “continuing violation.” While addressing this matter of first impression, the court noted that the Third Circuit previously held that the “application of the continuing violations theory may be appropriate in cases in which a plaintiff can demonstrate that the defendant’s allegedly wrongful conduct was part of a practice or pattern of conduct in which he engaged both without and within the limitations period.” Additionally, the court recognized that applying the limitations period “mechanically” might defeat some of the FDCPA’s remedial consumer-protection goals. As a result, the court ruled that the continuing violations doctrine should apply to FDCPA claims if (i) at least one act occurred within the filing period, and (ii) the alleged conduct constituted a “a persistent, on-going pattern.” In this case, the defendant made ten calls within the filing period, and the court determined that these calls were part of a series of calls that “continued unabated” from 2005 to 2008. As a result, the court denied the defendant’s motion to dismiss. For a copy of the opinion, please see http://www.buckleykolar.com/Tucker_v_Bracken.pdf.
California Court Holds National Bank Act Preempts State “Holiday Statutes” for Credit Card Payments. On January 28, a California Court of Appeal held that the National Bank Act preempts state “holiday statutes” that prohibit lenders from charging late fees or interest for credit card payments posted due on the first day following a holiday. Miller v. Bank of America, N.A., No. CV 02-478, 2009 WL 189969 (Cal. App. Jan. 28, 2009). In Miller, the plaintiffs alleged that the defendant lender violated California and Arizona “holiday statutes” that allow a legal or contractual act due on a statutorily defined holiday to be performed on the next business day without any adverse consequence. The court found that, by changing when a payment is due, the state holiday statutes affect the “schedule for repayment of principal and interest” and the “payments due” set by a national bank. The statutes, thus, “obstruct, impair, or condition” a national bank’s ability to fully exercise its federally authorized powers. As a result, the court affirmed the decision of the trial court that the statutes were preempted. For a copy of the opinion, please see http://www.buckleykolar.com/Miller_v_BoA.pdf
California Federal Court Denies Class Certification in Option ARM Case. On January 27, the U.S. District Court for the Northern District of California denied a plaintiff’s motion for class certification in a case involving option ARM payment disclosures because the plaintiff lacked standing and typicality requirements. Jordan v. Paul Financial, LLC, No. C 07-04496 (N.D. Cal. Jan. 27, 2009). In Jordan, the plaintiff filed his complaint—which asserted claims for violations of the Truth in Lending Act (TILA) and California’s Unfair Competition Law, as well as for common-law fraud, breach of contract, and breach of the covenant of good faith and fair dealing—on behalf of a nationwide TILA class and two California classes, alleging that the defendant promised a low, fixed rate that subsequently substantially increased and that the option ARM was "designed to cause negative amortization." The court denied the plaintiff’s motion for class certification because the plaintiff did not meet key requirements for class certification, reasoning that (i) the plaintiff lacked standing to represent the nationwide TILA class because the statute of limitations barred his TILA claim, and (ii) the plaintiff lacked standing to represent the two California classes because he could not establish traceability on account of the fact that “members of the putative class own loans that are held and serviced by entities other than the companies that hold and service plaintiff’s loans.” The court further explained that the plaintiff did not satisfy the typicality requirement because his fraud claims were subject to unique defenses. For a copy of the opinion, please see http://www.buckleykolar.com/Jordan_v_Paul_Financial.pdf.
Ohio Federal Court Finds Triable Issues in FCRA “Reasonable Investigation” Case. On January 16, the U.S. District Court for the Southern District of Ohio denied summary judgment to a defendant debt purchaser in a Fair Credit Reporting Act (FCRA) “reasonable investigation” case, finding that there were triable issues of fact. Ferrarelli v. Federated Fin. Corp. of America, No. 1:07cv685, 2009 WL 116972 (S.D. Ohio Jan. 16, 2009). In Ferrarelli, the plaintiff alleged that he was a victim of identity theft, which resulted in multiple accounts being opened in his name without his knowledge, including a business credit card account. This account was acquired by the defendant, a purchaser of charged-off business credit card accounts. After the defendant attempted to collect on the account, the plaintiff sent a dispute letter to TransUnion and to the defendant; TransUnion then notified the defendant of the dispute. The defendant concluded that the account belonged to the plaintiff, but modified its status to “disputed by consumer.” The plaintiff then filed suit, alleging, among other things, that the defendant did not conduct a reasonable investigation, in violation of § 1681s-2(b) of FCRA. Concluding that a private right of action exists under § 1681s-2(b), and noting that the defendant employees responsible for conducting the investigation received their investigative training “on-the-job,” the court found that there were genuine issues of material fact as to whether the defendant conducted a reasonable investigation. The court also concluded that there was a genuine issue of material fact as to whether the defendant willfully violated § 1681s-2(b) and whether the defendant’s failure to investigate was a material factor in causing the plaintiff’s damages. Therefore, the court denied the defendant’s motion for summary judgment. For a copy of the opinion, please see
http://www.buckleykolar.com/Ferrarelli_v_Federated.pdf.
Tennessee Court Holds Commencement of Foreclosure Not an Increase in Hazard. On January 29, the Supreme Court of Tennessee held that the initiation of foreclosure proceedings does not constitute an “increase in hazard” requiring a bank to report the foreclosure to the insurer or risk invalidation of a hazard insurance policy. U.S. Bank N.A. v. Tennessee Farmers Mut. Ins. Co., No. W2006-02536-SC-R11-CV, 2009 WL 199856 (Tenn. Jan. 29, 2009). In this case, the plaintiff bank began foreclosure proceedings on a borrower’s residence but did not notify the hazard insurance issuer of the proceedings. The borrower’s bankruptcy filing stayed the foreclosure, which was never completed; fire subsequently destroyed the property. The hazard insurance policy contained a “standard” or “union” mortgage clause, which protected the bank from loss even in the event of an “increase in hazard,” provided that the bank notified the insurer of “any increase in hazard.” The clause did not expressly require notification of a foreclosure proceeding. After the fire, the insurer refused to pay the bank’s claim, and the bank filed suit. The trial court granted summary judgment in favor of the bank, finding that notice of foreclosure proceeding was not required by the policy. The Court of Appeals reversed, noting a split of authority as to whether the commencement of foreclosure proceedings constituted an increase in hazard. On appeal, the Supreme Court of Tennessee reversed the Court of Appeals, holding that the plain meaning of the phrase “increase in hazard” does not include the commencement of foreclosure proceedings. Buckley Kolar LLP reported the decision of the Court of Appeals in InfoBytes, Jan. 11, 2008. In the present action, Buckley Kolar LLP filed a brief on behalf of Amicus Curiae Mortgage Bankers Association in support of the petitioner. For copy of the opinion, please contact .
E-Financial Services
Ohio Federal Court Finds Triable Issues in FCRA “Reasonable Investigation” Case. On January 16, the U.S. District Court for the Southern District of Ohio denied summary judgment to a defendant debt purchaser in a Fair Credit Reporting Act (FCRA) “reasonable investigation” case, finding that there were triable issues of fact. Ferrarelli v. Federated Fin. Corp. of America, No. 1:07cv685, 2009 WL 116972 (S.D. Ohio Jan. 16, 2009). In Ferrarelli, the plaintiff alleged that he was a victim of identity theft, which resulted in multiple accounts being opened in his name without his knowledge, including a business credit card account. This account was acquired by the defendant, a purchaser of charged-off business credit card accounts. After the defendant attempted to collect on the account, the plaintiff sent a dispute letter to TransUnion and to the defendant; TransUnion then notified the defendant of the dispute. The defendant concluded that the account belonged to the plaintiff, but modified its status to “disputed by consumer.” The plaintiff then filed suit, alleging, among other things, that the defendant did not conduct a reasonable investigation, in violation of § 1681s-2(b) of FCRA. Concluding that a private right of action exists under § 1681s-2(b), and noting that the defendant employees responsible for conducting the investigation received their investigative training “on-the-job,” the court found that there were genuine issues of material fact as to whether the defendant conducted a reasonable investigation. The court also concluded that there was a genuine issue of material fact as to whether the defendant willfully violated § 1681s-2(b) and whether the defendant’s failure to investigate was a material factor in causing the plaintiff’s damages. Therefore, the court denied the defendant’s motion for summary judgment. For a copy of the opinion, please see
http://www.buckleykolar.com/Ferrarelli_v_Federated.pdf.
Privacy/Data Security
Ohio Federal Court Finds Triable Issues in FCRA “Reasonable Investigation” Case. On January 16, the U.S. District Court for the Southern District of Ohio denied summary judgment to a defendant debt purchaser in a Fair Credit Reporting Act (FCRA) “reasonable investigation” case, finding that there were triable issues of fact. Ferrarelli v. Federated Fin. Corp. of America, No. 1:07cv685, 2009 WL 116972 (S.D. Ohio Jan. 16, 2009). In Ferrarelli, the plaintiff alleged that he was a victim of identity theft, which resulted in multiple accounts being opened in his name without his knowledge, including a business credit card account. This account was acquired by the defendant, a purchaser of charged-off business credit card accounts. After the defendant attempted to collect on the account, the plaintiff sent a dispute letter to TransUnion and to the defendant; TransUnion then notified the defendant of the dispute. The defendant concluded that the account belonged to the plaintiff, but modified its status to “disputed by consumer.” The plaintiff then filed suit, alleging, among other things, that the defendant did not conduct a reasonable investigation, in violation of § 1681s-2(b) of FCRA. Concluding that a private right of action exists under § 1681s-2(b), and noting that the defendant employees responsible for conducting the investigation received their investigative training “on-the-job,” the court found that there were genuine issues of material fact as to whether the defendant conducted a reasonable investigation. The court also concluded that there was a genuine issue of material fact as to whether the defendant willfully violated § 1681s-2(b) and whether the defendant’s failure to investigate was a material factor in causing the plaintiff’s damages. Therefore, the court denied the defendant’s motion for summary judgment. For a copy of the opinion, please see
http://www.buckleykolar.com/Ferrarelli_v_Federated.pdf.
Credit Cards
New York Federal Court Holds Plaintiffs Have Standing in Credit Card Putative Antitrust Class Action. On January 21, the U.S. District Court for the Southern District of New York held that plaintiffs have both antirust and Article III standing in a putative antitrust class action suit filed against credit card issuers that allegedly conspired to include mandatory arbitration clauses in cardholder agreements. Ross v. Bank of America, N.A., No. 05 Civ. 7116, 2009 WL 151168 (S.D.N.Y. Jan. 21, 2009). In Ross, the plaintiffs argued that the defendants conspired to include mandatory arbitration clauses in the cardholder agreements, in violation of the Sherman Antitrust Act, while the defendants argued that the plaintiffs lacked antitrust and Article III standing. The court held that the plaintiffs had Article III standing under the court’s test from Lujan v. Defenders of Wildlife, 504 U.S. 555 (U.S. 1992) because the plaintiffs alleged that the mandatory arbitration clause deprived customers of “meaningful choice” in dispute resolution, the lack of which allegedly caused (i) "reduced choice and diminished quality of credit card services," (ii) “increased costs of credit card services attributable to dispute resolution expenses," and (iii) “increased costs of credit card services attributable to violations of consumer protection and antitrust statutes." The court further reasoned that the requested remedy of an injunction would redress the alleged harms. The court rejected defendant Discover’s argument that an opt-out clause gave cardholders a “meaningful choice” in dispute resolution, reasoning that discovery might evidence such a provision to be “illusory.” The court also held that the plaintiffs had antitrust standing, reasoning that the Article III injury-in-fact and the antirust injury-in-fact appeared coextensive, and that the plaintiffs satisfied the "efficient enforcer" test for antitrust actions. Finally, the court found that alleged meetings between Discover and American Express elevated the claim above Twombly’s “reasonably speculative” standard. The court, however, granted the defendants’ motion to strike the plaintiff’s jury demand, reasoning that requested relief was entirely injunctive. For a copy of the opinion, please see http://www.buckleykolar.com/In_Re_Currency_Conversion.pdf.
Second Circuit Strikes Down Class Action Arbitration Ban. On January 30, the U.S. Court of Appeals for the Second Circuit ruled that a class action waiver in a credit card merchant agreement is unenforceable because it would preclude litigants from pursuing statutory rights. Italian Colors Restaurant v. American Express Travel Related Services Co. (In re: American Express Merchants’ Litigation), No. 06-1871 (2nd Cir. Jan. 30, 2009). In this case, a merchant agreement contained a mandatory arbitration clause that precluded anything other than individual treatment of the claims in arbitration; the agreement also contained a general class action litigation waiver. The Second Circuit struck down the ban in the arbitration clause, finding that enforcement of the ban would effectively preclude any action seeking to vindicate the statutory rights asserted by plaintiffs under antitrust law, owing to, among other things, the substantial costs associated with antitrust actions. The court emphasized that it was ruling only on the class action waiver in the contract at issue, not “whether class action waiver provisions are either void or enforceable per se.” For a copy of the opinion, please see http://www.buckleykolar.com/Italian_Colors_v_American_Express.pdf.
California Court Holds National Bank Act Preempts State “Holiday Statutes” for Credit Card Payments. On January 28, a California Court of Appeal held that the National Bank Act preempts state “holiday statutes” that prohibit lenders from charging late fees or interest for credit card payments posted due on the first day following a holiday. Miller v. Bank of America, N.A., No. CV 02-478, 2009 WL 189969 (Cal. App. Jan. 28, 2009). In Miller, the plaintiffs alleged that the defendant lender violated California and Arizona “holiday statutes” that allow a legal or contractual act due on a statutorily defined holiday to be performed on the next business day without any adverse consequence. The court found that, by changing when a payment is due, the state holiday statutes affect the “schedule for repayment of principal and interest” and the “payments due” set by a national bank. The statutes, thus, “obstruct, impair, or condition” a national bank’s ability to fully exercise its federally authorized powers. As a result, the court affirmed the decision of the trial court that the statutes were preempted. For a copy of the opinion, please see http://www.buckleykolar.com/Miller_v_BoA.pdf