InfoBytes, January 8, 2010
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Securities
- Litigation
- Privacy/Data Security
- Credit Cards
Federal Issues
FDIC, in Coordination with FFIEC, Releases Interest Rate Risk Advisory. On January 7, the Federal Deposit Insurance Corporation (FDIC), in coordination with the other regulator members of the Federal Financial Institutions Examination Council (FFIEC), released an advisory that reminds regulated institutions of the regulators’ expectations in connection with sound practices for managing interest rate risk. The advisory, which has been adopted by each of the financial regulators, emphasizes that depository institutions must strive for effective corporate governance, policies and procedures, risk measuring and monitoring systems, stress testing, and internal controls related to interest rate risk exposure. The advisory also provides examples of interest rate risk management techniques that have proven successful. For a copy of the advisory, please see http://www.fdic.gov/news/news/press/2010/pr1002.pdf. For a copy of the FDIC’s press release, please see http://www.fdic.gov/news/news/press/2010/pr10002.html.
SEC Approves Rules Enhancing Disclosure About Risk Compensation, Corporate Governance. On December 16, the Securities and Exchange Commission (SEC) announced its approval of rules designed to enhance corporate disclosures to shareholders with respect to risk, executive compensation and corporate governance matters. Specifically, the SEC’s rules will (i) require disclosure of a company’s compensation policies and practices as they relate to the company’s risk management, (ii) enhance information about directors and nominees, (iii) disclose how diversity is considered in the director nomination process, (iv) provide information about board leadership structure and the board’s role in risk oversight, (v) require quicker reporting of voting results, (vi) revise the summary compensation table with respect to reporting of stock and option awards, and (vii) enhance disclosure about compensation consultants and potential conflicts of interest. The new rules will be effective February 28, 2010 and are applicable to the upcoming annual reporting and proxy season. For a copy of the press release, please see http://sec.gov/news/press/2009/2009-268.htm.
FDIC Board to Discuss Bank Employee Compensation. The Board of Directors of the Federal Deposit Insurance Corporation will convene on Tuesday, January 12, to consider an Advanced Notice of Proposed Rulemaking (ANPR) on bank employee compensation. A detailed analysis of the ANPR, once made available, will appear in a forthcoming InfoBytes. On October 22, 2009 the Federal Reserve Board released its own proposal outlining a tiered supervisory scheme to monitor compensation practices at complex institutions as well as at smaller banks. For a copy of the FDIC meeting notice, please see http://www.fdic.gov/news/board/notice12Jan2010.html. The meeting will also be webcast at http://www.vodium.com/goto/fdic/boardmeetings.asp.
FTC to Study Consumer Debt-Purchasing Industry. On January 5, the Federal Trade Commission (FTC) unanimously approved orders that require the largest buyers of consumer debt obligations to submit information for an FTC study on the debt-buying industry. According to the FTC, the study was prompted by the receipt of consumer complaints that debt collectors frequently try to collect the wrong amounts or from the wrong consumers. The order will require the nine largest debt buyers, who collectively make up about 75% of the consumer debt sold in the U.S, to submit data for the study. For a copy of the notice, please see http://www.ftc.gov/opa/2010/01/sci.shtm.
State Issues
Illinois Bill Amends Real Estate License Act; Expands Anti-Predatory Lending Database. On December 31, Illinois Governor Pat Quinn signed into law Senate Bill 1894, a bill that increases education requirements for Illinois real estate agents and expands the state’s anti-predatory lending database to three additional counties. Specifically, the bill (i) increases the pre-licensing education requirements for Illinois real estate agents from 45 to 120 hours, (ii) eliminates the “salesperson” license category, (iii) establishes the “broker” license category as the entry-level real estate license in the state, and (iv) establishes a “managing broker” license category, which requires 165 hours of pre-licensing education and 24 hours of continuing education every renewal period. The bill also expands the state’s anti-predatory lending database program to include Kane, Will, and Peoria counties, which rank among the state’s highest foreclosure rates. The program, which currently only applies to Cook County (most-recently reported in InfoBytes, May 16, 2008), aims to reduce predatory lending practices by assisting the borrower in understanding the terms and conditions of the loan for which he or she has applied. The program is set to expand into the three additional counties on July 1, 2010. Finally, the bill includes a provision that allows municipalities, until certain conditions take place, to obtain a lien for costs associated with the clean-up of abandoned residential properties. For the full text of the bill, see http://www.ilga.gov/legislation/publicacts/96/PDF/096-0856.pdf.
Rhode Island Legislation Requires 45-Day Pre-Foreclosure Notice. On January 5, the Rhode Island General Assembly passed legislation requiring a 45-day pre-foreclosure notice to be provided to borrowers prior to initiating foreclosure proceedings. The legislation was previously vetoed by Rhode Island Governor Donald Carcieri in November 2009. The notice, which must be provided in English and Spanish, must alert the borrower of the availability of free foreclosure counseling approved by the U.S. Department of Housing and Urban Development (HUD), as well as provide the toll-free telephone number and website for HUD-approved counseling. The legislation becomes effective March 6, 2010, and the Rhode Island Department of Business Regulation is required to develop a model notice prior to that date. For a copy of the legislation, please see http://www.rilin.state.ri.us/BillText09/SenateText09/S1002A.pdf.
California Department of Real Estate Clarifies Good Faith Estimate Compliance for Brokers. Recently, the California Department of Real Estate (the Department) posted on its website a reminder that brokers who arrange federally related mortgage loans as of January 1, 2010 must use the new Good Faith Estimate form promulgated by the U.S. Department of Housing and Urban Development (HUD). Because the combined California Mortgage Loan Disclosure Statement/Good Faith Estimate form, RE 883, no longer satisfies federal disclosure requirements under the Real Estate Settlement Procedures Act, California brokers must now provide two separate disclosure forms to borrowers when arranging federally related mortgage loans: the RE 882 Mortgage Loan Disclosure Statement and HUD’s Good Faith Estimate. The disclosure forms must be provided to the borrower within 3 days of receipt of a loan application. In the future, the Department intends to offer a new combined form that will comply with both state and federal disclosure requirements. Finally, the Department reminds California brokers who arrange non-traditional mortgage loans that the Good Faith Estimate portion of the California Mortgage Loan Disclosure Statement/Good Faith Estimate, RE 885, also does not currently satisfy federal disclosure obligation requirements. For a copy of the announcement, please see http://www.dre.ca.gov/ind_GoodFaithEstimate_info.html.
Courts
Maryland Federal Court Dismisses Baltimore’s Fair Housing Act Case Against Wells Fargo. On January 6, the U.S. District Court for the District of Maryland dismissed the Mayor and City Council of Baltimore’s (City) Fair Housing Act case against Wells Fargo Bank, N.A. and Wells Fargo Financial Leasing, Inc. (Wells Fargo) based on allegations of predatory and discriminatory practices characterized as reverse redlining. BuckleySandler LLP represented Wells Fargo in this case. Mayor and City Council of Baltimore v. Wells Fargo Bank, N.A., Civ. No. 1:08-CV-00062 (D. Md. Jan. 6, 2010). The City asserted that Wells Fargo targeted its underserved and unsophisticated minority neighborhoods for loans designed to fail, leading to a disproportionately high rate of foreclosure in these neighborhoods, and causing tens of millions of dollars in harm to the City. The alleged injuries included (i) a decline in the value of properties surrounding Wells Fargo foreclosures, resulting in a decrease in the property tax base; (ii) an increase in the number of abandoned and vacant homes, leading to crime and gang activity; (iii) increased expenditures for police and fire protection; (iv) increased expenditures to secure and rehabilitate vacant and abandoned properties; and (v) additional expenditures for administrative, legal, and social services. In dismissing the Amended Complaint, the court concluded that the causal connection posited by the City between the allegations of Wells Fargo’s misconduct and its own damages was not sufficiently plausible to confer Article III standing. Specifically, the court observed that, based on the City’s own allegations in its Amended Complaint, there are between 16,000 and 30,000 vacant homes in Baltimore, and there have been more than 33,000 foreclosure filings in Baltimore since 2000. The City itself claimed that Wells Fargo foreclosed on only 401 properties between 2005 and 2008, representing a "negligible portion of the City’s vacant housing stock." The court also noted a multitude of other factors contributing to Baltimore’s deterioration, including "extensive unemployment, lack of educational opportunity and choice, irresponsible parenting, disrespect for the law, widespread drug use, and violence." In light of these factors, the court concluded that, while it may be reasonable to infer "that unscrupulous lenders took advantage of inner city residents living in a dysfunctional environment," it was nevertheless unreasonable to infer that "the unscrupulous lenders themselves created the dysfunctional environment." For a copy of the opinion, please see http://www.buckleysandler.com/Baltimore_v_WF.pdf.
Third Circuit Confirms Detrimental Reliance Required for Actual Damages Under TILA. On December 31, the U.S. District Court of Appeals for the Third Circuit affirmed a Pennsylvania district court decision, finding that detrimental reliance is required in order to recover actual damages for a disclosure violation under the Truth in Lending Act (TILA). Vallies v. Sky Bank, No. 08-4160, 2009 WL 5154473 (3rd Cir. Dec. 31, 2009). In Vallies, the plaintiff consumer brought the case on behalf of a putative class of allegedly tens of thousands of consumers who financed their motor vehicles through Sky Bank. The consumer and Sky Bank had entered into a financing agreement for an automobile that included a premium of $395 for Guaranteed Auto Protection (GAP), a form of debt cancellation insurance, which was not calculated into the finance charge as required by TILA. In addition, instead of itemizing the GAP premium individually, the loan agreement combined it with a $1395 service contract charge, and disclosed the two generally as $1790 to the service contract seller. With respect to the consumer’s actual damages claim, Sky Bank sought summary judgment, arguing that the consumer failed to plead, and could not prove, detrimental reliance. The district court granted Sky Bank’s summary judgment motion based on a four-part test for recovery of actual damages under TILA (reported in InfoBytes, Oct. 3, 2008). Without addressing the district court’s four-part test, the Third Circuit affirmed the lower court’s decision, noting that every court of appeals to have spoken on the issue, and most district courts, required a showing of detrimental reliance, and that the consumer did not allege, and would not be able to prove, detrimental reliance. For a copy of the opinion, please see http://www.buckleysandler.com/Vallies_v_Sky_Bank_3rd_Circuit.pdf.
Texas Court of Appeals Upholds 3% Cap On All Lenders’ Fees on Home Equity Loans. On January 8, the Texas Court of Appeals upheld a trial court’s ruling that "fees" that are considered "interest" under Texas usury law are subject to the 3% fee cap for home equity loans contained in the Texas constitution. Texas Bankers Ass’n. v. Ass’n. of Community Organizations for Reform Now, No. 03-06-00273-CV, 2010 WL 4587 (Tex. App. Jan. 8, 2010). The case arose after the Finance Commission of Texas and the Credit Union Commission of Texas (collectively, the Commissions) issued a rule interpreting Article 16, section 50(a)(6)(E) of the Texas Constitution. This section restricts the total amount of fees, other than interest, that can be charged on home equity loans to 3%. In interpreting the section, the Commissions stated that the term “interest” mirrored the definition of interest in Texas usury laws. As a result, the Commissions’ regulations permitted certain types of fees to avoid the 3% cap. The Association of Community Organizations for Reform Now (ACORN) challenged the Commissions’ interpretation under the Texas Administrative Procedures Act, arguing that it contradicted the Constitutional provision’s plain meaning. Instead, ACORN advocated a strict definition of interest that would include only the amount of interest described in the promissory note and would exclude fees. Both the trial court and the Texas Court of Appeals agreed. In upholding the lower court, the Court of Appeals reasoned that the Commissions’ interpretation (i) would render the Constitutional cap meaningless, because it would exclude nearly all fees charged by lenders, and (ii) conflicted with legislative intent. As a result, the court affirmed the invalidation of the regulations. For a copy of the opinion, please see http://www.buckleysandler.com/TBA_v_Acorn.pdf.
Florida Supreme Court Approves Mandatory Mediation For All Homestead Foreclosure Cases in Florida State Courts. On December 28, the Florida Supreme Court approved a model administrative order that requires mediation for all foreclosure cases in Florida state courts involving residential homestead property unless (i) the plaintiff and borrower agree otherwise, (ii) effective pre-suit mediation that substantially complies with the model administrative order’s mediation program requirements has been conducted, or (iii) a borrower opts out of the mediation process. In re Final Report and Recommendations on Residential Mortgage Foreclosure Cases, No. AOSC09-54 (Fl. Sup. Ct. Dec. 28, 2009). A task force, charged with recommending policies, strategies, and methods for easing the backlog of pending residential mortgage foreclosure cases in Florida recommended the model administrative order, which the Florida Supreme Court approved with minor changes. Features of the model administrative order’s mediation program include (i) referral of the borrower to foreclosure counseling prior to mediation, (ii) early electronic exchange of borrower and lender information prior to mediation, and (iii) the ability of a plaintiff’s representative to appear at mediation by telephone. Under the model administrative order, a designated mediation manager must schedule a mediation program between 60 and 120 days after a suit is filed. Mediation program costs are to be paid initially by plaintiffs, but these costs are recoverable in the final judgment of foreclosure or settlement order. For a copy of the court’s order and the model administrative order, please see http://www.floridasupremecourt.org/pub_info/documents/AOSC09-54_Foreclosures.pdf.
Michigan District Court Grants Lenders’ Motion to Dismiss Mortgage Loan Misrepresentation Claims. On December 22, the U.S. District Court for the Eastern District of Michigan granted a defendant mortgage lender’s motion to dismiss claims of fraudulent and negligent misrepresentation in connection with origination of a mortgage loan. McLean v. Countrywide Home Loans, Inc., No. 09-CV-11239, 2009 WL 5171842 (E.D. Mich. Dec. 22, 2009). In McLean, the borrowers alleged that the defendant lender (i) made fraudulent statements on loan applications regarding the borrowers’ income, (ii) misrepresented that the borrowers’ home was worth more than it actually was, and (iii) misrepresented that the borrowers could refinance the loan or sell their home if they could not afford the monthly payments. The court held that the borrowers had not established that they justifiably relied on any of the statements allegedly made by the lender in the loan application or in the lender’s alleged representations regarding the value of the property. The court further noted that the alleged statements regarding the borrowers’ ability to refinance the loan or sell their home constituted mere contractual “puffing” and could not serve as the basis for a claim of fraudulent or negligent misrepresentation. For a copy of the opinion, please see http://www.buckleysandler.com/McLean_v_Countrywide.pdf.
Massachusetts Supreme Judicial Court Dismisses Claims Against BJ’s Wholesale in Data Breach Litigation. On December 11, the Supreme Judicial Court of Massachusetts dismissed claims brought by various credit unions and their insurer against BJ’s Wholesale Club and Fifth Third Bank arising out of a credit card data breach that compromised approximately 9.2 million credit card accounts. Cumis Ins. Soc’y, Inc. v. BJ’s Wholesale Club, Inc., 918 N.E.2d 36 (Mass. Dec. 11, 2009). Following the breach, BJ’s admitted that it had been storing credit card magnetic stripe data, thus violating Visa and MasterCard regulations and breaching agreements between BJ’s and its acquiring bank, Fifth Third. The plaintiff credit unions – issuers of the compromised credit cards – argued that they were entitled to relief as third party beneficiaries of the agreements between BJ’s and Fifth Third. The court, however, found that these agreements contained an express exclusion of third party beneficiaries and affirmed the lower court’s dismissal of the credit unions’ contract claims. The court also concluded that the credit unions’ negligence claims were barred by the economic loss doctrine, as the credit unions could not show that their injuries involved physical harm or property damage, rather than solely economic loss. Finally, the court affirmed the lower court’s dismissal of the credit unions’ fraud and negligent misrepresentation claims because the credit unions (i) “presented no evidence that any representations by the defendants induced them to become or remain issuers in the Visa and MasterCard system,” and (ii) could not “establish that any reliance on the defendants’ implied misrepresentations would have been reasonable or justifiable.” For a copy of the opinion, please see http://www.buckleysandler.com/Cumis_v_Wholesale.pdf.
Firm News
Andrew Sandler has been selected to receive a Good Apple Award at the Louisiana Appleseed’s Good Apple Gala for his vision aimed at expanding access to financial institutions for Latino immigrants and his leadership in bringing together Louisiana banks and Federal banking regulators to discuss barriers to access and solutions.
Louisiana Appleseed is part of a nationwide nonprofit organization that uncovers and corrects injustices and barriers to opportunity through legal, legislative and market-based structural reform. Working with its extensive pro bono network, Louisiana Appleseed identifies, researches, and analyzes social injustices in order to make specific recommendations and advocate for effective solutions to deep-seated structural problems.
The Gala will be held Thursday, January 21, 2010 at Basin St. Station in New Orleans.
For more information about Louisiana Appleseed, please visit their website - http://louisiana.appleseednetwork.org/.
Kirk Jensen will be speaking on January 9 at the winter meeting of the Consumer Financial Services Committee of the American Bar Association’s Business Law Section in Park City, Utah. He will be giving a presentation entitled: "Consumer Financial Protection Agency: Past, Present and Future." Kirk has also been named chair of the Residential Real Estate Subcommittee of the ABA Litigation Section’s Real Estate Litigation Committee.
Jeff Naimon will be speaking on January 10 at the winter meeting of the Consumer Financial Services Committee of the American Bar Association’s Business Law Section in Park City, Utah on Truth in Lending Act case law developments.
Jeff Naimon will be participating on January 12 in an American Bankers Association Telephone Briefing “RESPA and TILA Compliance in the NEW Mortgage World.”
Joe Kolar will be speaking to member institutions of the Federal Home Loan Bank of Chicago on the new RESPA and TILA rules on January 13.
Mortgages
Illinois Bill Amends Real Estate License Act; Expands Anti-Predatory Lending Database. On December 31, Illinois Governor Pat Quinn signed into law Senate Bill 1894, a bill that increases education requirements for Illinois real estate agents and expands the state’s anti-predatory lending database to three additional counties. Specifically, the bill (i) increases the pre-licensing education requirements for Illinois real estate agents from 45 to 120 hours, (ii) eliminates the “salesperson” license category, (iii) establishes the “broker” license category as the entry-level real estate license in the state, and (iv) establishes a “managing broker” license category, which requires 165 hours of pre-licensing education and 24 hours of continuing education every renewal period. The bill also expands the state’s anti-predatory lending database program to include Kane, Will, and Peoria counties, which rank among the state’s highest foreclosure rates. The program, which currently only applies to Cook County (most-recently reported in InfoBytes, May 16, 2008), aims to reduce predatory lending practices by assisting the borrower in understanding the terms and conditions of the loan for which he or she has applied. The program is set to expand into the three additional counties on July 1, 2010. Finally, the bill includes a provision that allows municipalities, until certain conditions take place, to obtain a lien for costs associated with the clean-up of abandoned residential properties. For the full text of the bill, see http://www.ilga.gov/legislation/publicacts/96/PDF/096-0856.pdf.
Rhode Island Legislation Requires 45-Day Pre-Foreclosure Notice. On January 5, the Rhode Island General Assembly passed legislation requiring a 45-day pre-foreclosure notice to be provided to borrowers prior to initiating foreclosure proceedings. The legislation was previously vetoed by Rhode Island Governor Donald Carcieri in November 2009. The notice, which must be provided in English and Spanish, must alert the borrower of the availability of free foreclosure counseling approved by the U.S. Department of Housing and Urban Development (HUD), as well as provide the toll-free telephone number and website for HUD-approved counseling. The legislation becomes effective March 6, 2010, and the Rhode Island Department of Business Regulation is required to develop a model notice prior to that date. For a copy of the legislation, please see http://www.rilin.state.ri.us/BillText09/SenateText09/S1002A.pdf.
California Department of Real Estate Clarifies Good Faith Estimate Compliance for Brokers. Recently, the California Department of Real Estate (the Department) posted on its website a reminder that brokers who arrange federally related mortgage loans as of January 1, 2010 must use the new Good Faith Estimate form promulgated by the U.S. Department of Housing and Urban Development (HUD). Because the combined California Mortgage Loan Disclosure Statement/Good Faith Estimate form, RE 883, no longer satisfies federal disclosure requirements under the Real Estate Settlement Procedures Act, California brokers must now provide two separate disclosure forms to borrowers when arranging federally related mortgage loans: the RE 882 Mortgage Loan Disclosure Statement and HUD’s Good Faith Estimate. The disclosure forms must be provided to the borrower within 3 days of receipt of a loan application. In the future, the Department intends to offer a new combined form that will comply with both state and federal disclosure requirements. Finally, the Department reminds California brokers who arrange non-traditional mortgage loans that the Good Faith Estimate portion of the California Mortgage Loan Disclosure Statement/Good Faith Estimate, RE 885, also does not currently satisfy federal disclosure obligation requirements. For a copy of the announcement, please see http://www.dre.ca.gov/ind_GoodFaithEstimate_info.html.
Maryland Federal Court Dismisses Baltimore’s Fair Housing Act Case Against Wells Fargo. On January 6, the U.S. District Court for the District of Maryland dismissed the Mayor and City Council of Baltimore’s (City) Fair Housing Act case against Wells Fargo Bank, N.A. and Wells Fargo Financial Leasing, Inc. (Wells Fargo) based on allegations of predatory and discriminatory practices characterized as reverse redlining. BuckleySandler LLP represented Wells Fargo in this case. Mayor and City Council of Baltimore v. Wells Fargo Bank, N.A., Civ. No. 1:08-CV-00062 (D. Md. Jan. 6, 2010). The City asserted that Wells Fargo targeted its underserved and unsophisticated minority neighborhoods for loans designed to fail, leading to a disproportionately high rate of foreclosure in these neighborhoods, and causing tens of millions of dollars in harm to the City. The alleged injuries included (i) a decline in the value of properties surrounding Wells Fargo foreclosures, resulting in a decrease in the property tax base; (ii) an increase in the number of abandoned and vacant homes, leading to crime and gang activity; (iii) increased expenditures for police and fire protection; (iv) increased expenditures to secure and rehabilitate vacant and abandoned properties; and (v) additional expenditures for administrative, legal, and social services. In dismissing the Amended Complaint, the court concluded that the causal connection posited by the City between the allegations of Wells Fargo’s misconduct and its own damages was not sufficiently plausible to confer Article III standing. Specifically, the court observed that, based on the City’s own allegations in its Amended Complaint, there are between 16,000 and 30,000 vacant homes in Baltimore, and there have been more than 33,000 foreclosure filings in Baltimore since 2000. The City itself claimed that Wells Fargo foreclosed on only 401 properties between 2005 and 2008, representing a "negligible portion of the City’s vacant housing stock." The court also noted a multitude of other factors contributing to Baltimore’s deterioration, including "extensive unemployment, lack of educational opportunity and choice, irresponsible parenting, disrespect for the law, widespread drug use, and violence." In light of these factors, the court concluded that, while it may be reasonable to infer "that unscrupulous lenders took advantage of inner city residents living in a dysfunctional environment," it was nevertheless unreasonable to infer that "the unscrupulous lenders themselves created the dysfunctional environment." For a copy of the opinion, please see http://www.buckleysandler.com/Baltimore_v_WF.pdf.
Florida Supreme Court Approves Mandatory Mediation For All Homestead Foreclosure Cases in Florida State Courts. On December 28, the Florida Supreme Court approved a model administrative order that requires mediation for all foreclosure cases in Florida state courts involving residential homestead property unless (i) the plaintiff and borrower agree otherwise, (ii) effective pre-suit mediation that substantially complies with the model administrative order’s mediation program requirements has been conducted, or (iii) a borrower opts out of the mediation process. In re Final Report and Recommendations on Residential Mortgage Foreclosure Cases, No. AOSC09-54 (Fl. Sup. Ct. Dec. 28, 2009). A task force, charged with recommending policies, strategies, and methods for easing the backlog of pending residential mortgage foreclosure cases in Florida recommended the model administrative order, which the Florida Supreme Court approved with minor changes. Features of the model administrative order’s mediation program include (i) referral of the borrower to foreclosure counseling prior to mediation, (ii) early electronic exchange of borrower and lender information prior to mediation, and (iii) the ability of a plaintiff’s representative to appear at mediation by telephone. Under the model administrative order, a designated mediation manager must schedule a mediation program between 60 and 120 days after a suit is filed. Mediation program costs are to be paid initially by plaintiffs, but these costs are recoverable in the final judgment of foreclosure or settlement order. For a copy of the court’s order and the model administrative order, please see http://www.floridasupremecourt.org/pub_info/documents/AOSC09-54_Foreclosures.pdf.
Michigan District Court Grants Lenders’ Motion to Dismiss Mortgage Loan Misrepresentation Claims. On December 22, the U.S. District Court for the Eastern District of Michigan granted a defendant mortgage lender’s motion to dismiss claims of fraudulent and negligent misrepresentation in connection with origination of a mortgage loan. McLean v. Countrywide Home Loans, Inc., No. 09-CV-11239, 2009 WL 5171842 (E.D. Mich. Dec. 22, 2009). In McLean, the borrowers alleged that the defendant lender (i) made fraudulent statements on loan applications regarding the borrowers’ income, (ii) misrepresented that the borrowers’ home was worth more than it actually was, and (iii) misrepresented that the borrowers could refinance the loan or sell their home if they could not afford the monthly payments. The court held that the borrowers had not established that they justifiably relied on any of the statements allegedly made by the lender in the loan application or in the lender’s alleged representations regarding the value of the property. The court further noted that the alleged statements regarding the borrowers’ ability to refinance the loan or sell their home constituted mere contractual “puffing” and could not serve as the basis for a claim of fraudulent or negligent misrepresentation. For a copy of the opinion, please see http://www.buckleysandler.com/McLean_v_Countrywide.pdf.
Banking
FDIC, in Coordination with FFIEC, Releases Interest Rate Risk Advisory. On January 7, the Federal Deposit Insurance Corporation (FDIC), in coordination with the other regulator members of the Federal Financial Institutions Examination Council (FFIEC), released an advisory that reminds regulated institutions of the regulators’ expectations in connection with sound practices for managing interest rate risk. The advisory, which has been adopted by each of the financial regulators, emphasizes that depository institutions must strive for effective corporate governance, policies and procedures, risk measuring and monitoring systems, stress testing, and internal controls related to interest rate risk exposure. The advisory also provides examples of interest rate risk management techniques that have proven successful. For a copy of the advisory, please see http://www.fdic.gov/news/news/press/2010/pr1002.pdf. For a copy of the FDIC’s press release, please see http://www.fdic.gov/news/news/press/2010/pr10002.html.
FDIC Board to Discuss Bank Employee Compensation. The Board of Directors of the Federal Deposit Insurance Corporation will convene on Tuesday, January 12, to consider an Advanced Notice of Proposed Rulemaking (ANPR) on bank employee compensation. A detailed analysis of the ANPR, once made available, will appear in a forthcoming InfoBytes. On October 22, 2009 the Federal Reserve Board released its own proposal outlining a tiered supervisory scheme to monitor compensation practices at complex institutions as well as at smaller banks. For a copy of the FDIC meeting notice, please see http://www.fdic.gov/news/board/notice12Jan2010.html. The meeting will also be webcast at http://www.vodium.com/goto/fdic/boardmeetings.asp.
Consumer Finance
FTC to Study Consumer Debt-Purchasing Industry. On January 5, the Federal Trade Commission (FTC) unanimously approved orders that require the largest buyers of consumer debt obligations to submit information for an FTC study on the debt-buying industry. According to the FTC, the study was prompted by the receipt of consumer complaints that debt collectors frequently try to collect the wrong amounts or from the wrong consumers. The order will require the nine largest debt buyers, who collectively make up about 75% of the consumer debt sold in the U.S, to submit data for the study. For a copy of the notice, please see http://www.ftc.gov/opa/2010/01/sci.shtm.
Third Circuit Confirms Detrimental Reliance Required for Actual Damages Under TILA. On December 31, the U.S. District Court of Appeals for the Third Circuit affirmed a Pennsylvania district court decision, finding that detrimental reliance is required in order to recover actual damages for a disclosure violation under the Truth in Lending Act (TILA). Vallies v. Sky Bank, No. 08-4160, 2009 WL 5154473 (3rd Cir. Dec. 31, 2009). In Vallies, the plaintiff consumer brought the case on behalf of a putative class of allegedly tens of thousands of consumers who financed their motor vehicles through Sky Bank. The consumer and Sky Bank had entered into a financing agreement for an automobile that included a premium of $395 for Guaranteed Auto Protection (GAP), a form of debt cancellation insurance, which was not calculated into the finance charge as required by TILA. In addition, instead of itemizing the GAP premium individually, the loan agreement combined it with a $1395 service contract charge, and disclosed the two generally as $1790 to the service contract seller. With respect to the consumer’s actual damages claim, Sky Bank sought summary judgment, arguing that the consumer failed to plead, and could not prove, detrimental reliance. The district court granted Sky Bank’s summary judgment motion based on a four-part test for recovery of actual damages under TILA (reported in InfoBytes, Oct. 3, 2008). Without addressing the district court’s four-part test, the Third Circuit affirmed the lower court’s decision, noting that every court of appeals to have spoken on the issue, and most district courts, required a showing of detrimental reliance, and that the consumer did not allege, and would not be able to prove, detrimental reliance. For a copy of the opinion, please see http://www.buckleysandler.com/Vallies_v_Sky_Bank_3rd_Circuit.pdf.
Texas Court of Appeals Upholds 3% Cap On All Lenders’ Fees on Home Equity Loans. On January 8, the Texas Court of Appeals upheld a trial court’s ruling that "fees" that are considered "interest" under Texas usury law are subject to the 3% fee cap for home equity loans contained in the Texas constitution. Texas Bankers Ass’n. v. Ass’n. of Community Organizations for Reform Now, No. 03-06-00273-CV, 2010 WL 4587 (Tex. App. Jan. 8, 2010). The case arose after the Finance Commission of Texas and the Credit Union Commission of Texas (collectively, the Commissions) issued a rule interpreting Article 16, section 50(a)(6)(E) of the Texas Constitution. This section restricts the total amount of fees, other than interest, that can be charged on home equity loans to 3%. In interpreting the section, the Commissions stated that the term “interest” mirrored the definition of interest in Texas usury laws. As a result, the Commissions’ regulations permitted certain types of fees to avoid the 3% cap. The Association of Community Organizations for Reform Now (ACORN) challenged the Commissions’ interpretation under the Texas Administrative Procedures Act, arguing that it contradicted the Constitutional provision’s plain meaning. Instead, ACORN advocated a strict definition of interest that would include only the amount of interest described in the promissory note and would exclude fees. Both the trial court and the Texas Court of Appeals agreed. In upholding the lower court, the Court of Appeals reasoned that the Commissions’ interpretation (i) would render the Constitutional cap meaningless, because it would exclude nearly all fees charged by lenders, and (ii) conflicted with legislative intent. As a result, the court affirmed the invalidation of the regulations. For a copy of the opinion, please see http://www.buckleysandler.com/TBA_v_Acorn.pdf.
Securities
SEC Approves Rules Enhancing Disclosure About Risk Compensation, Corporate Governance. On December 16, the Securities and Exchange Commission (SEC) announced its approval of rules designed to enhance corporate disclosures to shareholders with respect to risk, executive compensation and corporate governance matters. Specifically, the SEC’s rules will (i) require disclosure of a company’s compensation policies and practices as they relate to the company’s risk management, (ii) enhance information about directors and nominees, (iii) disclose how diversity is considered in the director nomination process, (iv) provide information about board leadership structure and the board’s role in risk oversight, (v) require quicker reporting of voting results, (vi) revise the summary compensation table with respect to reporting of stock and option awards, and (vii) enhance disclosure about compensation consultants and potential conflicts of interest. The new rules will be effective February 28, 2010 and are applicable to the upcoming annual reporting and proxy season. For a copy of the press release, please see http://sec.gov/news/press/2009/2009-268.htm.
Litigation
Maryland Federal Court Dismisses Baltimore’s Fair Housing Act Case Against Wells Fargo. On January 6, the U.S. District Court for the District of Maryland dismissed the Mayor and City Council of Baltimore’s (City) Fair Housing Act case against Wells Fargo Bank, N.A. and Wells Fargo Financial Leasing, Inc. (Wells Fargo) based on allegations of predatory and discriminatory practices characterized as reverse redlining. BuckleySandler LLP represented Wells Fargo in this case. Mayor and City Council of Baltimore v. Wells Fargo Bank, N.A., Civ. No. 1:08-CV-00062 (D. Md. Jan. 6, 2010). The City asserted that Wells Fargo targeted its underserved and unsophisticated minority neighborhoods for loans designed to fail, leading to a disproportionately high rate of foreclosure in these neighborhoods, and causing tens of millions of dollars in harm to the City. The alleged injuries included (i) a decline in the value of properties surrounding Wells Fargo foreclosures, resulting in a decrease in the property tax base; (ii) an increase in the number of abandoned and vacant homes, leading to crime and gang activity; (iii) increased expenditures for police and fire protection; (iv) increased expenditures to secure and rehabilitate vacant and abandoned properties; and (v) additional expenditures for administrative, legal, and social services. In dismissing the Amended Complaint, the court concluded that the causal connection posited by the City between the allegations of Wells Fargo’s misconduct and its own damages was not sufficiently plausible to confer Article III standing. Specifically, the court observed that, based on the City’s own allegations in its Amended Complaint, there are between 16,000 and 30,000 vacant homes in Baltimore, and there have been more than 33,000 foreclosure filings in Baltimore since 2000. The City itself claimed that Wells Fargo foreclosed on only 401 properties between 2005 and 2008, representing a "negligible portion of the City’s vacant housing stock." The court also noted a multitude of other factors contributing to Baltimore’s deterioration, including "extensive unemployment, lack of educational opportunity and choice, irresponsible parenting, disrespect for the law, widespread drug use, and violence." In light of these factors, the court concluded that, while it may be reasonable to infer "that unscrupulous lenders took advantage of inner city residents living in a dysfunctional environment," it was nevertheless unreasonable to infer that "the unscrupulous lenders themselves created the dysfunctional environment." For a copy of the opinion, please see http://www.buckleysandler.com/Baltimore_v_WF.pdf.
Third Circuit Confirms Detrimental Reliance Required for Actual Damages Under TILA. On December 31, the U.S. District Court of Appeals for the Third Circuit affirmed a Pennsylvania district court decision, finding that detrimental reliance is required in order to recover actual damages for a disclosure violation under the Truth in Lending Act (TILA). Vallies v. Sky Bank, No. 08-4160, 2009 WL 5154473 (3rd Cir. Dec. 31, 2009). In Vallies, the plaintiff consumer brought the case on behalf of a putative class of allegedly tens of thousands of consumers who financed their motor vehicles through Sky Bank. The consumer and Sky Bank had entered into a financing agreement for an automobile that included a premium of $395 for Guaranteed Auto Protection (GAP), a form of debt cancellation insurance, which was not calculated into the finance charge as required by TILA. In addition, instead of itemizing the GAP premium individually, the loan agreement combined it with a $1395 service contract charge, and disclosed the two generally as $1790 to the service contract seller. With respect to the consumer’s actual damages claim, Sky Bank sought summary judgment, arguing that the consumer failed to plead, and could not prove, detrimental reliance. The district court granted Sky Bank’s summary judgment motion based on a four-part test for recovery of actual damages under TILA (reported in InfoBytes, Oct. 3, 2008). Without addressing the district court’s four-part test, the Third Circuit affirmed the lower court’s decision, noting that every court of appeals to have spoken on the issue, and most district courts, required a showing of detrimental reliance, and that the consumer did not allege, and would not be able to prove, detrimental reliance. For a copy of the opinion, please see http://www.buckleysandler.com/Vallies_v_Sky_Bank_3rd_Circuit.pdf.
Texas Court of Appeals Upholds 3% Cap On All Lenders’ Fees on Home Equity Loans. On January 8, the Texas Court of Appeals upheld a trial court’s ruling that "fees" that are considered "interest" under Texas usury law are subject to the 3% fee cap for home equity loans contained in the Texas constitution. Texas Bankers Ass’n. v. Ass’n. of Community Organizations for Reform Now, No. 03-06-00273-CV, 2010 WL 4587 (Tex. App. Jan. 8, 2010). The case arose after the Finance Commission of Texas and the Credit Union Commission of Texas (collectively, the Commissions) issued a rule interpreting Article 16, section 50(a)(6)(E) of the Texas Constitution. This section restricts the total amount of fees, other than interest, that can be charged on home equity loans to 3%. In interpreting the section, the Commissions stated that the term “interest” mirrored the definition of interest in Texas usury laws. As a result, the Commissions’ regulations permitted certain types of fees to avoid the 3% cap. The Association of Community Organizations for Reform Now (ACORN) challenged the Commissions’ interpretation under the Texas Administrative Procedures Act, arguing that it contradicted the Constitutional provision’s plain meaning. Instead, ACORN advocated a strict definition of interest that would include only the amount of interest described in the promissory note and would exclude fees. Both the trial court and the Texas Court of Appeals agreed. In upholding the lower court, the Court of Appeals reasoned that the Commissions’ interpretation (i) would render the Constitutional cap meaningless, because it would exclude nearly all fees charged by lenders, and (ii) conflicted with legislative intent. As a result, the court affirmed the invalidation of the regulations. For a copy of the opinion, please see http://www.buckleysandler.com/TBA_v_Acorn.pdf.
Florida Supreme Court Approves Mandatory Mediation For All Homestead Foreclosure Cases in Florida State Courts. On December 28, the Florida Supreme Court approved a model administrative order that requires mediation for all foreclosure cases in Florida state courts involving residential homestead property unless (i) the plaintiff and borrower agree otherwise, (ii) effective pre-suit mediation that substantially complies with the model administrative order’s mediation program requirements has been conducted, or (iii) a borrower opts out of the mediation process. In re Final Report and Recommendations on Residential Mortgage Foreclosure Cases, No. AOSC09-54 (Fl. Sup. Ct. Dec. 28, 2009). A task force, charged with recommending policies, strategies, and methods for easing the backlog of pending residential mortgage foreclosure cases in Florida recommended the model administrative order, which the Florida Supreme Court approved with minor changes. Features of the model administrative order’s mediation program include (i) referral of the borrower to foreclosure counseling prior to mediation, (ii) early electronic exchange of borrower and lender information prior to mediation, and (iii) the ability of a plaintiff’s representative to appear at mediation by telephone. Under the model administrative order, a designated mediation manager must schedule a mediation program between 60 and 120 days after a suit is filed. Mediation program costs are to be paid initially by plaintiffs, but these costs are recoverable in the final judgment of foreclosure or settlement order. For a copy of the court’s order and the model administrative order, please see http://www.floridasupremecourt.org/pub_info/documents/AOSC09-54_Foreclosures.pdf.
Michigan District Court Grants Lenders’ Motion to Dismiss Mortgage Loan Misrepresentation Claims. On December 22, the U.S. District Court for the Eastern District of Michigan granted a defendant mortgage lender’s motion to dismiss claims of fraudulent and negligent misrepresentation in connection with origination of a mortgage loan. McLean v. Countrywide Home Loans, Inc., No. 09-CV-11239, 2009 WL 5171842 (E.D. Mich. Dec. 22, 2009). In McLean, the borrowers alleged that the defendant lender (i) made fraudulent statements on loan applications regarding the borrowers’ income, (ii) misrepresented that the borrowers’ home was worth more than it actually was, and (iii) misrepresented that the borrowers could refinance the loan or sell their home if they could not afford the monthly payments. The court held that the borrowers had not established that they justifiably relied on any of the statements allegedly made by the lender in the loan application or in the lender’s alleged representations regarding the value of the property. The court further noted that the alleged statements regarding the borrowers’ ability to refinance the loan or sell their home constituted mere contractual “puffing” and could not serve as the basis for a claim of fraudulent or negligent misrepresentation. For a copy of the opinion, please see http://www.buckleysandler.com/McLean_v_Countrywide.pdf.
Massachusetts Supreme Judicial Court Dismisses Claims Against BJ’s Wholesale in Data Breach Litigation. On December 11, the Supreme Judicial Court of Massachusetts dismissed claims brought by various credit unions and their insurer against BJ’s Wholesale Club and Fifth Third Bank arising out of a credit card data breach that compromised approximately 9.2 million credit card accounts. Cumis Ins. Soc’y, Inc. v. BJ’s Wholesale Club, Inc., 918 N.E.2d 36 (Mass. Dec. 11, 2009). Following the breach, BJ’s admitted that it had been storing credit card magnetic stripe data, thus violating Visa and MasterCard regulations and breaching agreements between BJ’s and its acquiring bank, Fifth Third. The plaintiff credit unions – issuers of the compromised credit cards – argued that they were entitled to relief as third party beneficiaries of the agreements between BJ’s and Fifth Third. The court, however, found that these agreements contained an express exclusion of third party beneficiaries and affirmed the lower court’s dismissal of the credit unions’ contract claims. The court also concluded that the credit unions’ negligence claims were barred by the economic loss doctrine, as the credit unions could not show that their injuries involved physical harm or property damage, rather than solely economic loss. Finally, the court affirmed the lower court’s dismissal of the credit unions’ fraud and negligent misrepresentation claims because the credit unions (i) “presented no evidence that any representations by the defendants induced them to become or remain issuers in the Visa and MasterCard system,” and (ii) could not “establish that any reliance on the defendants’ implied misrepresentations would have been reasonable or justifiable.” For a copy of the opinion, please see http://www.buckleysandler.com/Cumis_v_Wholesale.pdf.
Privacy/Data Security
Massachusetts Supreme Judicial Court Dismisses Claims Against BJ’s Wholesale in Data Breach Litigation. On December 11, the Supreme Judicial Court of Massachusetts dismissed claims brought by various credit unions and their insurer against BJ’s Wholesale Club and Fifth Third Bank arising out of a credit card data breach that compromised approximately 9.2 million credit card accounts. Cumis Ins. Soc’y, Inc. v. BJ’s Wholesale Club, Inc., 918 N.E.2d 36 (Mass. Dec. 11, 2009). Following the breach, BJ’s admitted that it had been storing credit card magnetic stripe data, thus violating Visa and MasterCard regulations and breaching agreements between BJ’s and its acquiring bank, Fifth Third. The plaintiff credit unions – issuers of the compromised credit cards – argued that they were entitled to relief as third party beneficiaries of the agreements between BJ’s and Fifth Third. The court, however, found that these agreements contained an express exclusion of third party beneficiaries and affirmed the lower court’s dismissal of the credit unions’ contract claims. The court also concluded that the credit unions’ negligence claims were barred by the economic loss doctrine, as the credit unions could not show that their injuries involved physical harm or property damage, rather than solely economic loss. Finally, the court affirmed the lower court’s dismissal of the credit unions’ fraud and negligent misrepresentation claims because the credit unions (i) “presented no evidence that any representations by the defendants induced them to become or remain issuers in the Visa and MasterCard system,” and (ii) could not “establish that any reliance on the defendants’ implied misrepresentations would have been reasonable or justifiable.” For a copy of the opinion, please see http://www.buckleysandler.com/Cumis_v_Wholesale.pdf.
Credit Cards
Massachusetts Supreme Judicial Court Dismisses Claims Against BJ’s Wholesale in Data Breach Litigation. On December 11, the Supreme Judicial Court of Massachusetts dismissed claims brought by various credit unions and their insurer against BJ’s Wholesale Club and Fifth Third Bank arising out of a credit card data breach that compromised approximately 9.2 million credit card accounts. Cumis Ins. Soc’y, Inc. v. BJ’s Wholesale Club, Inc., 918 N.E.2d 36 (Mass. Dec. 11, 2009). Following the breach, BJ’s admitted that it had been storing credit card magnetic stripe data, thus violating Visa and MasterCard regulations and breaching agreements between BJ’s and its acquiring bank, Fifth Third. The plaintiff credit unions – issuers of the compromised credit cards – argued that they were entitled to relief as third party beneficiaries of the agreements between BJ’s and Fifth Third. The court, however, found that these agreements contained an express exclusion of third party beneficiaries and affirmed the lower court’s dismissal of the credit unions’ contract claims. The court also concluded that the credit unions’ negligence claims were barred by the economic loss doctrine, as the credit unions could not show that their injuries involved physical harm or property damage, rather than solely economic loss. Finally, the court affirmed the lower court’s dismissal of the credit unions’ fraud and negligent misrepresentation claims because the credit unions (i) “presented no evidence that any representations by the defendants induced them to become or remain issuers in the Visa and MasterCard system,” and (ii) could not “establish that any reliance on the defendants’ implied misrepresentations would have been reasonable or justifiable.” For a copy of the opinion, please see http://www.buckleysandler.com/Cumis_v_Wholesale.pdf.