InfoBytes, July 25, 2008
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
House Passes Housing Bill, President Bush Removes Veto Threat. On July 23, the U.S. House of Representatives passed the Housing and Economic Recovery Act of 2008 (H.R. 3221) as amended by the Senate on July 11, 2008 (see InfoBytes, July 11, 2008). The bill now goes back to the Senate for final clearance. The bill, among other items, modernizes the Federal Housing Administration (FHA), reforms the regulation of Government Sponsored Entities, and provides $300 billion for FHA refinancings of distressed loans (as reported in InfoBytes, May 9, 2008, and InfoBytes, April 11, 2008). The U.S. Senate is scheduled to vote on the bill on July 26 at 11AM. On July 22, President Bush stated that, if passed by the House and Senate, he would not veto the bill despite concerns regarding a provision of the bill providing $3.9 billion to help local governments buy and rehabilitate foreclosed homes. For a copy of the bill as passed by the House, please see http://www.house.gov/apps/list/press/financialsvcs_dem/hr3221_bill_text.pdf. For a transcript of the press briefing held by White House Press Secretary Dana Perino, elaborating on President Bush’s stance on the pending legislation, please see http://www.whitehouse.gov/news/releases/2008/07/20080723-6.html.
Senator Proposes National Usury Law. On July 17, Senator Dan Durbin (D-Ill.) introduced S. 3287, a bill which would amend the Truth in Lending Act (TILA) by creating a national usury rate. The bill, titled “Protecting Consumers From Unreasonable Credit Rates Act of 2008,” would create a maximum annual percentage credit rate of thirty-six percent. Defined as part of the credit rate would be (i) any payment compensating the borrower for the extension of credit or the breach by the borrower of a condition for the extension of credit, (ii) all fees that constitute the finance charge as defined by the Federal Reserve Board, (iii) credit insurance premiums, and (iv) all charges for ancillary products sold in connection with the credit transaction. Any credit transaction made in violation of these provisions would be deemed null and void, and parties that violated the law would be liable for a prison term of up to one year and a fine equal to the greater of three times the debt associated with the transaction or $50,000. State attorneys general would be permitted to enforce the usury provision through equitable relief. The federal law would not preempt any state law that provides greater protection to consumers. For a copy of this bill, please see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:s3287is.txt.pdf.
FDIC Issues Interim Rule on the Processing of Deposit Accounts in the Event of an Insured Depository Institution Failure. On July 17, the Federal Deposit Insurance Corporation (FDIC) issued an interim rule establishing practices for determining deposit and other liability account balances at failed insured depository institutions. Upon the failure of an FDIC-insured depository institution, the FDIC must ascertain the balances of all deposit accounts owned by the same depositor at a failed institution as of the day of failure. The interim rule describes the method for determining the value and nature of claims against a failed insured depository institution and mandates that depository institutions adopt mechanisms that will enable the FDIC, as receiver, to place holds on liability accounts, including deposits, in the event of failure. The rule does not establish any new operational requirements for insured institutions. For more details on the purpose and reach of the FDIC’s interim rule please see http://www.fdic.gov/news/news/financial/2008/fil08064.pdf.
House Financial Services Committee Holds Hearing on Mortgage Servicing Practices, Foreclosure Mitigation. On July 25, the House Financial Services Committee held a full committee hearing to review mortgage servicing practices and foreclosure mitigation. The Committee planned to examine the role of mortgage servicing in the foreclosure crisis, focusing specifically on ongoing problems with loan modifications and the need for improvements in servicing practices and responsiveness to consumers. For more information on the hearing, please see http://www.house.gov/apps/list/hearing/financialsvcs_dem/hr072508.shtml.
State Issues
New York Governor Signs Bill to Strengthen Identity Theft and Consumer Protection Laws. On June 7, New York State Governor David Paterson signed S.8376-A, a comprehensive bill designed to strengthen identity theft and consumer protection laws by imposing a number of requirements on both private and state-run entities. The bill requires consumer credit agencies to (i) create and maintain a secure website and a toll-free number through which consumers may place and lift credit freezes on their account, (ii) place a consumer-requested freeze within 24 hours, (iii) honor a consumer-request for a temporary lift of a freeze within fifteen minutes, and (iv) provide consumers notification regarding their rights with respect to the credit freeze process. Additionally, the bill (i) extends existing prohibitions on private business use of social security numbers to state and local entities, (ii) places additional restrictions on employer use of employee personal identifying information, (iii) prohibits all entities from embedding or encoding social security numbers in documents or cards (such as ID tags) in lieu of removal as required by the bill, and (iv) creates criminal penalties for possession of credit card “skimming” devices. The bill enables victims of identity theft to sue entities that violate provisions of the act for time spent fixing their credit history. Most of the provisions in the bill are effective 180 days after June 7, 2008; however, public entities are not required to be in compliance until January 1, 2010. For a copy of the bill, please see http://assembly.state.ny.us/leg/?bn=S08376&sh=t.
Delaware Passes Bill Requiring Counseling Prior To Finalizing A Reverse Mortgage Loan. On July 9, Delaware governor Ruth Ann Minner signed H.B. 425, a bill affecting the finalization of reverse mortgage loans. The bill requires an independent housing counselor to provide a written certification that a prospective borrower has received counseling on reverse mortgage loans prior to the finalization of a reverse mortgage loan by a licensed mortgage broker or lender. “Independent housing counselor” is defined as a housing counseling agency “approved by the United States Department of Housing and Urban Development, or any government agency or non-profit organization that is not affiliated with either the reverse mortgage lender or any other person receiving a fee from the transaction” who provides counseling regarding the “advisability of entering into a reverse mortgage transaction.” The counseling must include information specified in 12 U.S.C. § 1715z-20(f) (Section 255 of the National Housing Act). The bill grants the Delaware State Bank Commissioner the authority to designate additional required information by regulation. The bill becomes effective October 9, 2008. For a copy of the bill, please see http://legis.delaware.gov/LIS/lis144.nsf/vwLegislation/HB+475/$file/legis.html?open.
San Diego City Attorney Sues Countrywide. On July 23, the San Diego, California City Attorney filed a complaint in San Diego Superior Court against Countrywide, Bank of America, Angelo Mozilo (Countrywide Co-founder, Chairman of the Board and Chief Executive Officer), and others. The complaint alleges that the defendants engaged in unfair competition in violation of California Business and Professions Code Section 17200 by, among other things, “significantly deviating from traditional underwriting standards when originating non-traditional loan products such as Pay-Option ARMs and hybrid ARMs,” and “ignoring internal controls that suggested certain loan applications be denied and funding those loan applications merely to increase market share.” The complaint requests that the court permanently enjoin the defendants from foreclosing on residential mortgages involving owner-occupied properties in certain circumstances, including where (i) an adjustable rate mortgage has an introductory rate period of three years or less, (ii) a loan has a teaser rate that is at least 3% lower than the fully indexed rate, (iii) the borrower has a debt-to-income ratio that would have exceeded 50% if the lender’s underwriters had measured the debt by the debt due under the fully indexed rate (as opposed to the debt due under the teaser rate), or (iv) the loan-to-value ratio is 100% or the loan carries a substantial prepayment penalty or a prepayment penalty that extends beyond the introductory period. The complaint further requests that the defendants be required to show proof to the City of San Diego that reasonable steps were taken to avoid foreclosure before reinitiating foreclosure proceedings under the circumstances described above. For a copy of the complaint, please see http://www.sandiego.gov/cityattorney/reports/pdf/080723countrywide.pdf.
California Governor Announces Launch of Foreclosure Relief Program. On July 21, California Governor Arnold Schwarzenegger announced the launch of the “Community Stabilization Home Loan Program,” an effort to aid first-time homebuyers in purchasing homes in communities burdened by high foreclosure rates. Under the program, first-time homebuyers will be eligible for below-market interest rate loans to purchase foreclosed homes in areas with some of the state’s highest foreclosure rates. The California Housing Finance Agency (CalHFA) will administer the program, which will provide $200 million in relief. The program is restricted to homes at or under sales price limits determined by CalHFA and to families meeting certain income requirements. For a copy of the press release, please see http://gov.ca.gov/index.php?/press-release/10245/.
California Attorney General Amends Complaint Against Countrywide. On July 17, California Attorney General Edmund G. Brown, Jr. filed a complaint amending a June 25, 2008 complaint against Countrywide alleging deceptive mortgage lending practices, which was first reported in the June 27, 2008 edition of InfoBytes. The amended complaint alleges that the company’s loan officers disregarded the recommendations of the company’s automated underwriting system and underwriting team and made high-risk loans to borrowers because the loan officers allegedly received higher commissions for selling products like Payment Option Adjustable Rate Mortgages. For a copy of the amended complaint, please see http://ag.ca.gov/cms_attachments/press/pdfs/n1588_firstamendedcomplaint.pdf.
Courts
Third Circuit Reverses Summary Judgment on Third-Party Beneficiary Breach of Contract Claim. On July 16, the U.S. Court of Appeals for the Third Circuit reversed a grant of summary judgment in favor of an “acquiring” bank on a third-party beneficiary breach of contract claim brought by “issuing” banks in a case arising from a credit card security breach. Sovereign Bank v. BJ’s Wholesale Club, Inc., et al., Nos. 06-3392/3405 (3rd Cir. July 16, 2008). This case involved an agreement made by Visa U.S.A., Inc. and an acquiring bank—a bank that processes transactions on behalf of merchants by transferring money from issuing banks (which issue credit-cards to consumers) to the merchant. The agreement required the acquiring bank to ensure that its merchants were not retaining or storing cardholder information after a credit card transaction was completed. In this case, two issuing banks alleged that they had sustained significant losses after a security breach resulting from a merchant’s retention of cardholder information in its electronic database system. The issuing banks brought suit against the merchant and the acquiring bank to recover these losses, asserting claims of third-party beneficiary breach of contract, equitable indemnification, negligence, and unjust enrichment. The Court of Appeals reversed the district court’s grant of summary judgment in favor of the acquiring bank on the third-party beneficiary breach of contract claim, finding that there was sufficient evidence on record to demonstrate that the issuing banks were intended beneficiaries of the agreement between Visa and the acquiring bank. However, the Court upheld the dismissal of the issuing banks’ (i) equitable indemnification claim against the acquiring bank, holding that Section 1643 of the Truth in Lending Act does not include an equitable indemnification claim for issuing banks, and (ii) negligence and unjust enrichment claims against the merchant and the acquiring bank, based on the economic loss doctrine, and the lack of benefit to the merchant and the acquiring bank from the issuing banks’ cancelling and reissuing credit cards pursuant to its contractual obligation with its cardholders, respectively. For a copy of this decision, please see http://www.buckleykolar.com/documents/Sovereign_Bank_v_BJs_Wholesale.pdf.
Lender’s Choice-of-Law Provision Unenforceable, Conflicts With Fundamental Policy of California Law. In a recent case in a California state court, the court held that a defendant lender’s choice-of-law provision in its loan contracts favoring Nevada law was unenforceable because the provision conflicted with a fundamental policy of California law and because California had a greater interest in the transactions than did Nevada. Brack v. Omni Loan Co., Ltd., No. GIN034309, 2008 WL 2433830 (Cal. Ct. App. June 17, 2008). Omni Loan Company (Omni) was a consumer lender based in Nevada that wanted to extend short-term loans to non-resident military personnel stationed in California without having to obtain a finance lender license in California. Despite the fact that the Commissioner of Corporations rejected Omni’s request to rule that its activities did not trigger licensure, Omni opened branches in California and commenced lending to nonresident members of the military without a license. The plaintiff, who applied for a loan at a California office, brought various California state law claims against Omni, including that Omni was operating as a finance lender without a license. The trial court agreed that the plaintiff’s loan agreement included a choice-of-law provision subjecting the contract to Nevada law. On appeal, while agreeing that Nevada law was reasonably applicable, the appellate court inquired whether the choice-of-law provision (i) conflicts with a fundamental policy of California law and, if so, (ii) whether California has a materially greater interest than Nevada in the dispute. The court reviewed the finance lender law and held that “the Legislature … has made it clear that the Finance Lenders Law is a matter of significant importance to the state and … is fundamental and may not be waived.” Secondly, the court found that California had a materially greater interest in the loan transactions than Nevada, citing that 12,000 loans were made to California consumers, secured with collateral located in California, and that competitors were deprived of the opportunity to make those loans, whereas Nevada’s interest was “limited to the out-of-state activities of one of its corporate citizens.” Consequently, the court reversed the trial court and held that the choice-of-law provisions favoring Nevada law in the loan agreements were unenforceable in California. For a copy of this decision, please see http://www.buckleykolar.com/documents/Brack_v_Omni.pdf.
Pennsylvania District Court Affirms FCRA Does Not Require The Investigation of Claims By CROs. On July 16, a federal district court in Pennsylvania granted a credit reporting agency’s (CRA) motion for summary judgment in a putative class action credit report dispute arising under the Fair Credit Reporting Act (FCRA), affirming that CRAs are not required to investigate disputes prepared by credit repair organizations (CRO) that a consumer subsequently signs and submits to a CRA. Klotz v. Trans Union, LLC, Civ. No. 05-4580, 2008 WL 2758445 (E.D. Penn. July 16, 2008). The consumer plaintiff challenged the accuracy of an April 2003 credit report by TransUnion by submitting a dispute letter to TransUnion that a CRO prepared, and that the plaintiff subsequently signed. The plaintiff had no role in formulating the disputes, did not check them for accuracy and did not read them. The court held that the plaintiff’s claim failed under Sec. 1681i of FCRA because the disputes were not “by” him, nor did he notify the CRA “directly” of the disputes. The court based its ruling both on the plain language of the statute (the dispute must be made “by the consumer”) and FTC guidelines interpreting the word “directly” (stating that a CRA is not required to investigate a dispute raised by a third party). For a copy of this decision, please see http://www.buckleykolar.com/documents/Klotz_v_Trans_Union.pdf.
California District Court Rules No Private Right to Equitable Relief Under FCRA. On July 16, a federal district court in California dismissed a borrower’s claim for an injunction under the Fair Credit Reporting Act (FCRA), holding that FCRA does not permit a private right of action for equitable relief. Yasin v. Equifax Info. Servs. LLC, No. C-08-1234 MMC, 2008 WL 2782704 (C.D. Cal. July 16, 2008). The consumer plaintiff alleged that an account described as a “charge-off” was misleading because it implied that the debt had not been paid. Noting that the “overwhelming” majority of courts in other districts have denied a private right to equitable relief, the court dismissed the claim for an injunction because (i) there was no express provision in the text of FCRA permitting consumers to seek equitable relief, (ii) the majority of courts interpreting the Fair Debt Collection Practices Act (FDCPA), which has similar text and consumer protection purposes as FCRA, have not found a private right to equitable relief, and (iii) the 2003 Congressional amendments to section 1681(o) of FCRA explicitly identify consumer remedies for a negligent violation, and equitable relief is not included. For a copy of this decision, please see http://www.buckleykolar.com/documents/Yasin_v_Equifax.pdf.
Missouri Federal Court Confirms Arbitration Award in Favor of Credit Card Company. A federal district court in Missouri confirmed an arbitration award in favor of Chase Bank USA, NA (Chase), holding that use of the credit card demonstrated an “intent to be bound” to the terms of the card, which included an arbitration clause. Reeves v. Chase Bank USA, Case No. 4:07-CV-1101 (E.D. Mo. July 15, 2008). The plaintiff’s credit card account with Chase was subject to the terms of a Cardmember Agreement, which contained an Arbitration Agreement. Chase initiated arbitration proceedings against the plaintiff pursuant to the Arbitration Agreement in regard to an unpaid balance on the card. The arbitrator subsequently entered an award in favor of Chase. The plaintiff argued that there was no agreement between the parties to arbitrate disputes related to the card, and, as a result, the award should be vacated. The district court disagreed, affirming that the use of the card constituted acceptance of its terms, and that the plaintiff thus had no claim which could overcome the deference to arbitration awards established by the Federal Arbitration Act (9 U.S.C. §§ 1-16). The court further rejected the plaintiff’s claim that the arbitration clause was unconscionable, in part because the arbitration clause afforded both parties the ability to seek arbitration, and thus was not “one-sided.” For a copy of this decision, please see http://www.buckleykolar.com/documents/Reeves_v_Chase.pdf.
New York Federal Court Dismisses FDCPA Claim Against Citibank. On July 17, the U.S. District Court for the Southern District of New York granted summary judgment against a plaintiff alleging that Citibank N.A. (Citibank) and Citibank South Dakota N.A. (Citibank SD) violated the Fair Debt Collection Practices Act (FDCPA), affirming that the defendants were not “debt collectors,” and thus not subject to the FDCPA. Williams v. Citibank, N.A., No. 07-06680 (S.D. N.Y. July 17, 2008). The plaintiff alleged, among other things, that the defendant violated numerous provisions of the FDCPA through communications with the plaintiff via telephone and mail regarding his credit card debts. The defendants, CitiBank and Citibank SD, moved to dismiss these claims on the grounds that they are not “debt collectors” subject to the FDCPA. The FDCPA defines debt collector as a “person who uses any instrumentality of interstate commerce … in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect … debts owed or due … another.” The FDCPA does not apply to a creditor or to a debt collector attempting to collect a debt for another entity related by common ownership or affiliated by corporate control, if the person acting as a debt collector does so only for persons to whom it is so related or affiliated and if the principal business of such person is not the collection of debts. Here, it was alleged that Citibank was the principal creditor of the plaintiff’s accounts, while Citibank SD performed billing, payment processing, and collection services. The court reasoned that Citibank SD is not a debt collector under the FDCPA because it performs various services other than debt collection. The court further noted that the plaintiff failed to plead facts indicating that the “false name exception” is applicable, i.e., that either defendant in the process of collecting its own debts, used any name other than its own which would indicate that a third person is collecting or attempting to collect such debts. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Williams_v_Citi.pdf.
Michigan Federal Court Affirms Defendant’s Motion To Dismiss FCRA Claims In Two Recent Cases. On July 17, a federal district court in Michigan affirmed a defendant’s motion to dismiss claims under the Fair Credit Reporting Act (FCRA), arguing, in part, that inaccuracies in a consumer credit report must be reported by a credit reporting agency (CRA), not merely by a consumer. Arnold v. GMAC, LLC, No. 1_07-CV-881, 2008 WL 2783255 (W.D. Mich. July 17, 2008). The case arose when the plaintiffs leased an automobile from GMAC, for which GMAC reported a late payment to CRAs. The plaintiffs later disputed the reporting of the late payment. GMAC subsequently informed the CRAs that the account was current and had a perfect payment history. However, the plaintiffs’ credit report, as reported by Equifax, thereafter still reflected a late payment on the account. There was no evidence that a CRA ever notified GMAC about the error. The court held that the plaintiffs’ complaint failed under Section 1681s-2(a) of the FCRA because this section does not allow for a private cause of action for violations of that section, as well as Section 1681s-2(b) because, assuming arguendo that violations of this section could provide a private cause of action, notification about an inaccurate report must be given by a CRA, not merely by a consumer. Approximately one month earlier, in a separate case, a magistrate judge for the Eastern District of Michigan recommended that, unless the plaintiff filed an amended complaint, a motion to dismiss a claim under Section 1681s-2(b) should be granted, in part because the notification of inaccuracies contained within a credit report must be given by a CRA, not merely a consumer. Khalil v. TransUnion, LLC, 2008 WL 2782912 (E.D. Mich. July 17, 2008). For a copy of the Arnold opinion, please see http://www.buckleykolar.com/documents/Arnold_v_GMAC.pdf. For a copy of the Khalil opinion, please see http://www.buckleykolar.com/documents/Khalil_v_Transunion.pdf.
Firm News
Jon Jerison will be the featured speaker on a Pratt audio conference entitled New Risk-Based Pricing Notice Rule: How FCRA Will Change on Tuesday, July 29, 2008 from 1:00-2:30 PM ET. The conference will explore key developments regarding the Fair Credit Reporting Act and will analyze how the new rule will affect lending and financial institutions. For more information or to register, please see http://www.aspratt.com/store/50G.php.
On July 24, Buckley Kolar lawyers hosted a webinar to discuss the provisions of the Federal Reserve Board’s final rule amending home mortgage provisions of Regulation Z and its implications for mortgage lenders. The PowerPoint presentation summary for the webinar is available at http://www.buckleykolar.com/documents/HOEPARulePresentation.pdf.
Mortgages
House Passes Housing Bill, President Bush Removes Veto Threat. On July 23, the U.S. House of Representatives passed the Housing and Economic Recovery Act of 2008 (H.R. 3221) as amended by the Senate on July 11, 2008 (see InfoBytes, July 11, 2008). The bill now goes back to the Senate for final clearance. The bill, among other items, modernizes the Federal Housing Administration (FHA), reforms the regulation of Government Sponsored Entities, and provides $300 billion for FHA refinancings of distressed loans (as reported in InfoBytes, May 9, 2008, and InfoBytes, April 11, 2008). The U.S. Senate is scheduled to vote on the bill on July 26 at 11AM. On July 22, President Bush stated that, if passed by the House and Senate, he would not veto the bill despite concerns regarding a provision of the bill providing $3.9 billion to help local governments buy and rehabilitate foreclosed homes. For a copy of the bill as passed by the House, please see http://www.house.gov/apps/list/press/financialsvcs_dem/hr3221_bill_text.pdf. For a transcript of the press briefing held by White House Press Secretary Dana Perino, elaborating on President Bush’s stance on the pending legislation, please see http://www.whitehouse.gov/news/releases/2008/07/20080723-6.html.
Senator Proposes National Usury Law. On July 17, Senator Dan Durbin (D-Ill.) introduced S. 3287, a bill which would amend the Truth in Lending Act (TILA) by creating a national usury rate. The bill, titled “Protecting Consumers From Unreasonable Credit Rates Act of 2008,” would create a maximum annual percentage credit rate of thirty-six percent. Defined as part of the credit rate would be (i) any payment compensating the borrower for the extension of credit or the breach by the borrower of a condition for the extension of credit, (ii) all fees that constitute the finance charge as defined by the Federal Reserve Board, (iii) credit insurance premiums, and (iv) all charges for ancillary products sold in connection with the credit transaction. Any credit transaction made in violation of these provisions would be deemed null and void, and parties that violated the law would be liable for a prison term of up to one year and a fine equal to the greater of three times the debt associated with the transaction or $50,000. State attorneys general would be permitted to enforce the usury provision through equitable relief. The federal law would not preempt any state law that provides greater protection to consumers. For a copy of this bill, please see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:s3287is.txt.pdf.
House Financial Services Committee Holds Hearing on Mortgage Servicing Practices, Foreclosure Mitigation. On July 25, the House Financial Services Committee held a full committee hearing to review mortgage servicing practices and foreclosure mitigation. The Committee planned to examine the role of mortgage servicing in the foreclosure crisis, focusing specifically on ongoing problems with loan modifications and the need for improvements in servicing practices and responsiveness to consumers. For more information on the hearing, please see http://www.house.gov/apps/list/hearing/financialsvcs_dem/hr072508.shtml.
Delaware Passes Bill Requiring Counseling Prior To Finalizing A Reverse Mortgage Loan. On July 9, Delaware governor Ruth Ann Minner signed H.B. 425, a bill affecting the finalization of reverse mortgage loans. The bill requires an independent housing counselor to provide a written certification that a prospective borrower has received counseling on reverse mortgage loans prior to the finalization of a reverse mortgage loan by a licensed mortgage broker or lender. “Independent housing counselor” is defined as a housing counseling agency “approved by the United States Department of Housing and Urban Development, or any government agency or non-profit organization that is not affiliated with either the reverse mortgage lender or any other person receiving a fee from the transaction” who provides counseling regarding the “advisability of entering into a reverse mortgage transaction.” The counseling must include information specified in 12 U.S.C. § 1715z-20(f) (Section 255 of the National Housing Act). The bill grants the Delaware State Bank Commissioner the authority to designate additional required information by regulation. The bill becomes effective October 9, 2008. For a copy of the bill, please see http://legis.delaware.gov/LIS/lis144.nsf/vwLegislation/HB+475/$file/legis.html?open.
San Diego City Attorney Sues Countrywide. On July 23, the San Diego, California City Attorney filed a complaint in San Diego Superior Court against Countrywide, Bank of America, Angelo Mozilo (Countrywide Co-founder, Chairman of the Board and Chief Executive Officer), and others. The complaint alleges that the defendants engaged in unfair competition in violation of California Business and Professions Code Section 17200 by, among other things, “significantly deviating from traditional underwriting standards when originating non-traditional loan products such as Pay-Option ARMs and hybrid ARMs,” and “ignoring internal controls that suggested certain loan applications be denied and funding those loan applications merely to increase market share.” The complaint requests that the court permanently enjoin the defendants from foreclosing on residential mortgages involving owner-occupied properties in certain circumstances, including where (i) an adjustable rate mortgage has an introductory rate period of three years or less, (ii) a loan has a teaser rate that is at least 3% lower than the fully indexed rate, (iii) the borrower has a debt-to-income ratio that would have exceeded 50% if the lender’s underwriters had measured the debt by the debt due under the fully indexed rate (as opposed to the debt due under the teaser rate), or (iv) the loan-to-value ratio is 100% or the loan carries a substantial prepayment penalty or a prepayment penalty that extends beyond the introductory period. The complaint further requests that the defendants be required to show proof to the City of San Diego that reasonable steps were taken to avoid foreclosure before reinitiating foreclosure proceedings under the circumstances described above. For a copy of the complaint, please see http://www.sandiego.gov/cityattorney/reports/pdf/080723countrywide.pdf.
California Governor Announces Launch of Foreclosure Relief Program. On July 21, California Governor Arnold Schwarzenegger announced the launch of the “Community Stabilization Home Loan Program,” an effort to aid first-time homebuyers in purchasing homes in communities burdened by high foreclosure rates. Under the program, first-time homebuyers will be eligible for below-market interest rate loans to purchase foreclosed homes in areas with some of the state’s highest foreclosure rates. The California Housing Finance Agency (CalHFA) will administer the program, which will provide $200 million in relief. The program is restricted to homes at or under sales price limits determined by CalHFA and to families meeting certain income requirements. For a copy of the press release, please see http://gov.ca.gov/index.php?/press-release/10245/.
California Attorney General Amends Complaint Against Countrywide. On July 17, California Attorney General Edmund G. Brown, Jr. filed a complaint amending a June 25, 2008 complaint against Countrywide alleging deceptive mortgage lending practices, which was first reported in the June 27, 2008 edition of InfoBytes. The amended complaint alleges that the company’s loan officers disregarded the recommendations of the company’s automated underwriting system and underwriting team and made high-risk loans to borrowers because the loan officers allegedly received higher commissions for selling products like Payment Option Adjustable Rate Mortgages. For a copy of the amended complaint, please see http://ag.ca.gov/cms_attachments/press/pdfs/n1588_firstamendedcomplaint.pdf.
Lender’s Choice-of-Law Provision Unenforceable, Conflicts With Fundamental Policy of California Law. In a recent case in a California state court, the court held that a defendant lender’s choice-of-law provision in its loan contracts favoring Nevada law was unenforceable because the provision conflicted with a fundamental policy of California law and because California had a greater interest in the transactions than did Nevada. Brack v. Omni Loan Co., Ltd., No. GIN034309, 2008 WL 2433830 (Cal. Ct. App. June 17, 2008). Omni Loan Company (Omni) was a consumer lender based in Nevada that wanted to extend short-term loans to non-resident military personnel stationed in California without having to obtain a finance lender license in California. Despite the fact that the Commissioner of Corporations rejected Omni’s request to rule that its activities did not trigger licensure, Omni opened branches in California and commenced lending to nonresident members of the military without a license. The plaintiff, who applied for a loan at a California office, brought various California state law claims against Omni, including that Omni was operating as a finance lender without a license. The trial court agreed that the plaintiff’s loan agreement included a choice-of-law provision subjecting the contract to Nevada law. On appeal, while agreeing that Nevada law was reasonably applicable, the appellate court inquired whether the choice-of-law provision (i) conflicts with a fundamental policy of California law and, if so, (ii) whether California has a materially greater interest than Nevada in the dispute. The court reviewed the finance lender law and held that “the Legislature … has made it clear that the Finance Lenders Law is a matter of significant importance to the state and … is fundamental and may not be waived.” Secondly, the court found that California had a materially greater interest in the loan transactions than Nevada, citing that 12,000 loans were made to California consumers, secured with collateral located in California, and that competitors were deprived of the opportunity to make those loans, whereas Nevada’s interest was “limited to the out-of-state activities of one of its corporate citizens.” Consequently, the court reversed the trial court and held that the choice-of-law provisions favoring Nevada law in the loan agreements were unenforceable in California. For a copy of this decision, please see http://www.buckleykolar.com/documents/Brack_v_Omni.pdf.
Banking
FDIC Issues Interim Rule on the Processing of Deposit Accounts in the Event of an Insured Depository Institution Failure. On July 17, the Federal Deposit Insurance Corporation (FDIC) issued an interim rule establishing practices for determining deposit and other liability account balances at failed insured depository institutions. Upon the failure of an FDIC-insured depository institution, the FDIC must ascertain the balances of all deposit accounts owned by the same depositor at a failed institution as of the day of failure. The interim rule describes the method for determining the value and nature of claims against a failed insured depository institution and mandates that depository institutions adopt mechanisms that will enable the FDIC, as receiver, to place holds on liability accounts, including deposits, in the event of failure. The rule does not establish any new operational requirements for insured institutions. For more details on the purpose and reach of the FDIC’s interim rule please see http://www.fdic.gov/news/news/financial/2008/fil08064.pdf.
Third Circuit Reverses Summary Judgment on Third-Party Beneficiary Breach of Contract Claim. On July 16, the U.S. Court of Appeals for the Third Circuit reversed a grant of summary judgment in favor of an “acquiring” bank on a third-party beneficiary breach of contract claim brought by “issuing” banks in a case arising from a credit card security breach. Sovereign Bank v. BJ’s Wholesale Club, Inc., et al., Nos. 06-3392/3405 (3rd Cir. July 16, 2008). This case involved an agreement made by Visa U.S.A., Inc. and an acquiring bank—a bank that processes transactions on behalf of merchants by transferring money from issuing banks (which issue credit-cards to consumers) to the merchant. The agreement required the acquiring bank to ensure that its merchants were not retaining or storing cardholder information after a credit card transaction was completed. In this case, two issuing banks alleged that they had sustained significant losses after a security breach resulting from a merchant’s retention of cardholder information in its electronic database system. The issuing banks brought suit against the merchant and the acquiring bank to recover these losses, asserting claims of third-party beneficiary breach of contract, equitable indemnification, negligence, and unjust enrichment. The Court of Appeals reversed the district court’s grant of summary judgment in favor of the acquiring bank on the third-party beneficiary breach of contract claim, finding that there was sufficient evidence on record to demonstrate that the issuing banks were intended beneficiaries of the agreement between Visa and the acquiring bank. However, the Court upheld the dismissal of the issuing banks’ (i) equitable indemnification claim against the acquiring bank, holding that Section 1643 of the Truth in Lending Act does not include an equitable indemnification claim for issuing banks, and (ii) negligence and unjust enrichment claims against the merchant and the acquiring bank, based on the economic loss doctrine, and the lack of benefit to the merchant and the acquiring bank from the issuing banks’ cancelling and reissuing credit cards pursuant to its contractual obligation with its cardholders, respectively. For a copy of this decision, please see http://www.buckleykolar.com/documents/Sovereign_Bank_v_BJs_Wholesale.pdf.
Consumer Finance
New York Governor Signs Bill to Strengthen Identity Theft and Consumer Protection Laws. On June 7, New York State Governor David Paterson signed S.8376-A, a comprehensive bill designed to strengthen identity theft and consumer protection laws by imposing a number of requirements on both private and state-run entities. The bill requires consumer credit agencies to (i) create and maintain a secure website and a toll-free number through which consumers may place and lift credit freezes on their account, (ii) place a consumer-requested freeze within 24 hours, (iii) honor a consumer-request for a temporary lift of a freeze within fifteen minutes, and (iv) provide consumers notification regarding their rights with respect to the credit freeze process. Additionally, the bill (i) extends existing prohibitions on private business use of social security numbers to state and local entities, (ii) places additional restrictions on employer use of employee personal identifying information, (iii) prohibits all entities from embedding or encoding social security numbers in documents or cards (such as ID tags) in lieu of removal as required by the bill, and (iv) creates criminal penalties for possession of credit card “skimming” devices. The bill enables victims of identity theft to sue entities that violate provisions of the act for time spent fixing their credit history. Most of the provisions in the bill are effective 180 days after June 7, 2008; however, public entities are not required to be in compliance until January 1, 2010. For a copy of the bill, please see http://assembly.state.ny.us/leg/?bn=S08376&sh=t.
Pennsylvania District Court Affirms FCRA Does Not Require The Investigation of Claims By CROs. On July 16, a federal district court in Pennsylvania granted a credit reporting agency’s (CRA) motion for summary judgment in a putative class action credit report dispute arising under the Fair Credit Reporting Act (FCRA), affirming that CRAs are not required to investigate disputes prepared by credit repair organizations (CRO) that a consumer subsequently signs and submits to a CRA. Klotz v. Trans Union, LLC, Civ. No. 05-4580, 2008 WL 2758445 (E.D. Penn. July 16, 2008). The consumer plaintiff challenged the accuracy of an April 2003 credit report by TransUnion by submitting a dispute letter to TransUnion that a CRO prepared, and that the plaintiff subsequently signed. The plaintiff had no role in formulating the disputes, did not check them for accuracy and did not read them. The court held that the plaintiff’s claim failed under Sec. 1681i of FCRA because the disputes were not “by” him, nor did he notify the CRA “directly” of the disputes. The court based its ruling both on the plain language of the statute (the dispute must be made “by the consumer”) and FTC guidelines interpreting the word “directly” (stating that a CRA is not required to investigate a dispute raised by a third party). For a copy of this decision, please see http://www.buckleykolar.com/documents/Klotz_v_Trans_Union.pdf.
California District Court Rules No Private Right to Equitable Relief Under FCRA. On July 16, a federal district court in California dismissed a borrower’s claim for an injunction under the Fair Credit Reporting Act (FCRA), holding that FCRA does not permit a private right of action for equitable relief. Yasin v. Equifax Info. Servs. LLC, No. C-08-1234 MMC, 2008 WL 2782704 (C.D. Cal. July 16, 2008). The consumer plaintiff alleged that an account described as a “charge-off” was misleading because it implied that the debt had not been paid. Noting that the “overwhelming” majority of courts in other districts have denied a private right to equitable relief, the court dismissed the claim for an injunction because (i) there was no express provision in the text of FCRA permitting consumers to seek equitable relief, (ii) the majority of courts interpreting the Fair Debt Collection Practices Act (FDCPA), which has similar text and consumer protection purposes as FCRA, have not found a private right to equitable relief, and (iii) the 2003 Congressional amendments to section 1681(o) of FCRA explicitly identify consumer remedies for a negligent violation, and equitable relief is not included. For a copy of this decision, please see http://www.buckleykolar.com/documents/Yasin_v_Equifax.pdf.
Missouri Federal Court Confirms Arbitration Award in Favor of Credit Card Company. A federal district court in Missouri confirmed an arbitration award in favor of Chase Bank USA, NA (Chase), holding that use of the credit card demonstrated an “intent to be bound” to the terms of the card, which included an arbitration clause. Reeves v. Chase Bank USA, Case No. 4:07-CV-1101 (E.D. Mo. July 15, 2008). The plaintiff’s credit card account with Chase was subject to the terms of a Cardmember Agreement, which contained an Arbitration Agreement. Chase initiated arbitration proceedings against the plaintiff pursuant to the Arbitration Agreement in regard to an unpaid balance on the card. The arbitrator subsequently entered an award in favor of Chase. The plaintiff argued that there was no agreement between the parties to arbitrate disputes related to the card, and, as a result, the award should be vacated. The district court disagreed, affirming that the use of the card constituted acceptance of its terms, and that the plaintiff thus had no claim which could overcome the deference to arbitration awards established by the Federal Arbitration Act (9 U.S.C. §§ 1-16). The court further rejected the plaintiff’s claim that the arbitration clause was unconscionable, in part because the arbitration clause afforded both parties the ability to seek arbitration, and thus was not “one-sided.” For a copy of this decision, please see http://www.buckleykolar.com/documents/Reeves_v_Chase.pdf.
New York Federal Court Dismisses FDCPA Claim Against Citibank. On July 17, the U.S. District Court for the Southern District of New York granted summary judgment against a plaintiff alleging that Citibank N.A. (Citibank) and Citibank South Dakota N.A. (Citibank SD) violated the Fair Debt Collection Practices Act (FDCPA), affirming that the defendants were not “debt collectors,” and thus not subject to the FDCPA. Williams v. Citibank, N.A., No. 07-06680 (S.D. N.Y. July 17, 2008). The plaintiff alleged, among other things, that the defendant violated numerous provisions of the FDCPA through communications with the plaintiff via telephone and mail regarding his credit card debts. The defendants, CitiBank and Citibank SD, moved to dismiss these claims on the grounds that they are not “debt collectors” subject to the FDCPA. The FDCPA defines debt collector as a “person who uses any instrumentality of interstate commerce … in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect … debts owed or due … another.” The FDCPA does not apply to a creditor or to a debt collector attempting to collect a debt for another entity related by common ownership or affiliated by corporate control, if the person acting as a debt collector does so only for persons to whom it is so related or affiliated and if the principal business of such person is not the collection of debts. Here, it was alleged that Citibank was the principal creditor of the plaintiff’s accounts, while Citibank SD performed billing, payment processing, and collection services. The court reasoned that Citibank SD is not a debt collector under the FDCPA because it performs various services other than debt collection. The court further noted that the plaintiff failed to plead facts indicating that the “false name exception” is applicable, i.e., that either defendant in the process of collecting its own debts, used any name other than its own which would indicate that a third person is collecting or attempting to collect such debts. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Williams_v_Citi.pdf.
Michigan Federal Court Affirms Defendant’s Motion To Dismiss FCRA Claims In Two Recent Cases. On July 17, a federal district court in Michigan affirmed a defendant’s motion to dismiss claims under the Fair Credit Reporting Act (FCRA), arguing, in part, that inaccuracies in a consumer credit report must be reported by a credit reporting agency (CRA), not merely by a consumer. Arnold v. GMAC, LLC, No. 1_07-CV-881, 2008 WL 2783255 (W.D. Mich. July 17, 2008). The case arose when the plaintiffs leased an automobile from GMAC, for which GMAC reported a late payment to CRAs. The plaintiffs later disputed the reporting of the late payment. GMAC subsequently informed the CRAs that the account was current and had a perfect payment history. However, the plaintiffs’ credit report, as reported by Equifax, thereafter still reflected a late payment on the account. There was no evidence that a CRA ever notified GMAC about the error. The court held that the plaintiffs’ complaint failed under Section 1681s-2(a) of the FCRA because this section does not allow for a private cause of action for violations of that section, as well as Section 1681s-2(b) because, assuming arguendo that violations of this section could provide a private cause of action, notification about an inaccurate report must be given by a CRA, not merely by a consumer. Approximately one month earlier, in a separate case, a magistrate judge for the Eastern District of Michigan recommended that, unless the plaintiff filed an amended complaint, a motion to dismiss a claim under Section 1681s-2(b) should be granted, in part because the notification of inaccuracies contained within a credit report must be given by a CRA, not merely a consumer. Khalil v. TransUnion, LLC, 2008 WL 2782912 (E.D. Mich. July 17, 2008). For a copy of the Arnold opinion, please see http://www.buckleykolar.com/documents/Arnold_v_GMAC.pdf. For a copy of the Khalil opinion, please see http://www.buckleykolar.com/documents/Khalil_v_Transunion.pdf.
Litigation
San Diego City Attorney Sues Countrywide. On July 23, the San Diego, California City Attorney filed a complaint in San Diego Superior Court against Countrywide, Bank of America, Angelo Mozilo (Countrywide Co-founder, Chairman of the Board and Chief Executive Officer), and others. The complaint alleges that the defendants engaged in unfair competition in violation of California Business and Professions Code Section 17200 by, among other things, “significantly deviating from traditional underwriting standards when originating non-traditional loan products such as Pay-Option ARMs and hybrid ARMs,” and “ignoring internal controls that suggested certain loan applications be denied and funding those loan applications merely to increase market share.” The complaint requests that the court permanently enjoin the defendants from foreclosing on residential mortgages involving owner-occupied properties in certain circumstances, including where (i) an adjustable rate mortgage has an introductory rate period of three years or less, (ii) a loan has a teaser rate that is at least 3% lower than the fully indexed rate, (iii) the borrower has a debt-to-income ratio that would have exceeded 50% if the lender’s underwriters had measured the debt by the debt due under the fully indexed rate (as opposed to the debt due under the teaser rate), or (iv) the loan-to-value ratio is 100% or the loan carries a substantial prepayment penalty or a prepayment penalty that extends beyond the introductory period. The complaint further requests that the defendants be required to show proof to the City of San Diego that reasonable steps were taken to avoid foreclosure before reinitiating foreclosure proceedings under the circumstances described above. For a copy of the complaint, please see http://www.sandiego.gov/cityattorney/reports/pdf/080723countrywide.pdf.
California Attorney General Amends Complaint Against Countrywide. On July 17, California Attorney General Edmund G. Brown, Jr. filed a complaint amending a June 25, 2008 complaint against Countrywide alleging deceptive mortgage lending practices, which was first reported in the June 27, 2008 edition of InfoBytes. The amended complaint alleges that the company’s loan officers disregarded the recommendations of the company’s automated underwriting system and underwriting team and made high-risk loans to borrowers because the loan officers allegedly received higher commissions for selling products like Payment Option Adjustable Rate Mortgages. For a copy of the amended complaint, please see http://ag.ca.gov/cms_attachments/press/pdfs/n1588_firstamendedcomplaint.pdf.
Third Circuit Reverses Summary Judgment on Third-Party Beneficiary Breach of Contract Claim. On July 16, the U.S. Court of Appeals for the Third Circuit reversed a grant of summary judgment in favor of an “acquiring” bank on a third-party beneficiary breach of contract claim brought by “issuing” banks in a case arising from a credit card security breach. Sovereign Bank v. BJ’s Wholesale Club, Inc., et al., Nos. 06-3392/3405 (3rd Cir. July 16, 2008). This case involved an agreement made by Visa U.S.A., Inc. and an acquiring bank—a bank that processes transactions on behalf of merchants by transferring money from issuing banks (which issue credit-cards to consumers) to the merchant. The agreement required the acquiring bank to ensure that its merchants were not retaining or storing cardholder information after a credit card transaction was completed. In this case, two issuing banks alleged that they had sustained significant losses after a security breach resulting from a merchant’s retention of cardholder information in its electronic database system. The issuing banks brought suit against the merchant and the acquiring bank to recover these losses, asserting claims of third-party beneficiary breach of contract, equitable indemnification, negligence, and unjust enrichment. The Court of Appeals reversed the district court’s grant of summary judgment in favor of the acquiring bank on the third-party beneficiary breach of contract claim, finding that there was sufficient evidence on record to demonstrate that the issuing banks were intended beneficiaries of the agreement between Visa and the acquiring bank. However, the Court upheld the dismissal of the issuing banks’ (i) equitable indemnification claim against the acquiring bank, holding that Section 1643 of the Truth in Lending Act does not include an equitable indemnification claim for issuing banks, and (ii) negligence and unjust enrichment claims against the merchant and the acquiring bank, based on the economic loss doctrine, and the lack of benefit to the merchant and the acquiring bank from the issuing banks’ cancelling and reissuing credit cards pursuant to its contractual obligation with its cardholders, respectively. For a copy of this decision, please see http://www.buckleykolar.com/documents/Sovereign_Bank_v_BJs_Wholesale.pdf.
Lender’s Choice-of-Law Provision Unenforceable, Conflicts With Fundamental Policy of California Law. In a recent case in a California state court, the court held that a defendant lender’s choice-of-law provision in its loan contracts favoring Nevada law was unenforceable because the provision conflicted with a fundamental policy of California law and because California had a greater interest in the transactions than did Nevada. Brack v. Omni Loan Co., Ltd., No. GIN034309, 2008 WL 2433830 (Cal. Ct. App. June 17, 2008). Omni Loan Company (Omni) was a consumer lender based in Nevada that wanted to extend short-term loans to non-resident military personnel stationed in California without having to obtain a finance lender license in California. Despite the fact that the Commissioner of Corporations rejected Omni’s request to rule that its activities did not trigger licensure, Omni opened branches in California and commenced lending to nonresident members of the military without a license. The plaintiff, who applied for a loan at a California office, brought various California state law claims against Omni, including that Omni was operating as a finance lender without a license. The trial court agreed that the plaintiff’s loan agreement included a choice-of-law provision subjecting the contract to Nevada law. On appeal, while agreeing that Nevada law was reasonably applicable, the appellate court inquired whether the choice-of-law provision (i) conflicts with a fundamental policy of California law and, if so, (ii) whether California has a materially greater interest than Nevada in the dispute. The court reviewed the finance lender law and held that “the Legislature … has made it clear that the Finance Lenders Law is a matter of significant importance to the state and … is fundamental and may not be waived.” Secondly, the court found that California had a materially greater interest in the loan transactions than Nevada, citing that 12,000 loans were made to California consumers, secured with collateral located in California, and that competitors were deprived of the opportunity to make those loans, whereas Nevada’s interest was “limited to the out-of-state activities of one of its corporate citizens.” Consequently, the court reversed the trial court and held that the choice-of-law provisions favoring Nevada law in the loan agreements were unenforceable in California. For a copy of this decision, please see http://www.buckleykolar.com/documents/Brack_v_Omni.pdf.
Pennsylvania District Court Affirms FCRA Does Not Require The Investigation of Claims By CROs. On July 16, a federal district court in Pennsylvania granted a credit reporting agency’s (CRA) motion for summary judgment in a putative class action credit report dispute arising under the Fair Credit Reporting Act (FCRA), affirming that CRAs are not required to investigate disputes prepared by credit repair organizations (CRO) that a consumer subsequently signs and submits to a CRA. Klotz v. Trans Union, LLC, Civ. No. 05-4580, 2008 WL 2758445 (E.D. Penn. July 16, 2008). The consumer plaintiff challenged the accuracy of an April 2003 credit report by TransUnion by submitting a dispute letter to TransUnion that a CRO prepared, and that the plaintiff subsequently signed. The plaintiff had no role in formulating the disputes, did not check them for accuracy and did not read them. The court held that the plaintiff’s claim failed under Sec. 1681i of FCRA because the disputes were not “by” him, nor did he notify the CRA “directly” of the disputes. The court based its ruling both on the plain language of the statute (the dispute must be made “by the consumer”) and FTC guidelines interpreting the word “directly” (stating that a CRA is not required to investigate a dispute raised by a third party). For a copy of this decision, please see http://www.buckleykolar.com/documents/Klotz_v_Trans_Union.pdf.
California District Court Rules No Private Right to Equitable Relief Under FCRA. On July 16, a federal district court in California dismissed a borrower’s claim for an injunction under the Fair Credit Reporting Act (FCRA), holding that FCRA does not permit a private right of action for equitable relief. Yasin v. Equifax Info. Servs. LLC, No. C-08-1234 MMC, 2008 WL 2782704 (C.D. Cal. July 16, 2008). The consumer plaintiff alleged that an account described as a “charge-off” was misleading because it implied that the debt had not been paid. Noting that the “overwhelming” majority of courts in other districts have denied a private right to equitable relief, the court dismissed the claim for an injunction because (i) there was no express provision in the text of FCRA permitting consumers to seek equitable relief, (ii) the majority of courts interpreting the Fair Debt Collection Practices Act (FDCPA), which has similar text and consumer protection purposes as FCRA, have not found a private right to equitable relief, and (iii) the 2003 Congressional amendments to section 1681(o) of FCRA explicitly identify consumer remedies for a negligent violation, and equitable relief is not included. For a copy of this decision, please see http://www.buckleykolar.com/documents/Yasin_v_Equifax.pdf.
Missouri Federal Court Confirms Arbitration Award in Favor of Credit Card Company. A federal district court in Missouri confirmed an arbitration award in favor of Chase Bank USA, NA (Chase), holding that use of the credit card demonstrated an “intent to be bound” to the terms of the card, which included an arbitration clause. Reeves v. Chase Bank USA, Case No. 4:07-CV-1101 (E.D. Mo. July 15, 2008). The plaintiff’s credit card account with Chase was subject to the terms of a Cardmember Agreement, which contained an Arbitration Agreement. Chase initiated arbitration proceedings against the plaintiff pursuant to the Arbitration Agreement in regard to an unpaid balance on the card. The arbitrator subsequently entered an award in favor of Chase. The plaintiff argued that there was no agreement between the parties to arbitrate disputes related to the card, and, as a result, the award should be vacated. The district court disagreed, affirming that the use of the card constituted acceptance of its terms, and that the plaintiff thus had no claim which could overcome the deference to arbitration awards established by the Federal Arbitration Act (9 U.S.C. §§ 1-16). The court further rejected the plaintiff’s claim that the arbitration clause was unconscionable, in part because the arbitration clause afforded both parties the ability to seek arbitration, and thus was not “one-sided.” For a copy of this decision, please see http://www.buckleykolar.com/documents/Reeves_v_Chase.pdf.
New York Federal Court Dismisses FDCPA Claim Against Citibank. On July 17, the U.S. District Court for the Southern District of New York granted summary judgment against a plaintiff alleging that Citibank N.A. (Citibank) and Citibank South Dakota N.A. (Citibank SD) violated the Fair Debt Collection Practices Act (FDCPA), affirming that the defendants were not “debt collectors,” and thus not subject to the FDCPA. Williams v. Citibank, N.A., No. 07-06680 (S.D. N.Y. July 17, 2008). The plaintiff alleged, among other things, that the defendant violated numerous provisions of the FDCPA through communications with the plaintiff via telephone and mail regarding his credit card debts. The defendants, CitiBank and Citibank SD, moved to dismiss these claims on the grounds that they are not “debt collectors” subject to the FDCPA. The FDCPA defines debt collector as a “person who uses any instrumentality of interstate commerce … in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect … debts owed or due … another.” The FDCPA does not apply to a creditor or to a debt collector attempting to collect a debt for another entity related by common ownership or affiliated by corporate control, if the person acting as a debt collector does so only for persons to whom it is so related or affiliated and if the principal business of such person is not the collection of debts. Here, it was alleged that Citibank was the principal creditor of the plaintiff’s accounts, while Citibank SD performed billing, payment processing, and collection services. The court reasoned that Citibank SD is not a debt collector under the FDCPA because it performs various services other than debt collection. The court further noted that the plaintiff failed to plead facts indicating that the “false name exception” is applicable, i.e., that either defendant in the process of collecting its own debts, used any name other than its own which would indicate that a third person is collecting or attempting to collect such debts. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Williams_v_Citi.pdf.
Michigan Federal Court Affirms Defendant’s Motion To Dismiss FCRA Claims In Two Recent Cases. On July 17, a federal district court in Michigan affirmed a defendant’s motion to dismiss claims under the Fair Credit Reporting Act (FCRA), arguing, in part, that inaccuracies in a consumer credit report must be reported by a credit reporting agency (CRA), not merely by a consumer. Arnold v. GMAC, LLC, No. 1_07-CV-881, 2008 WL 2783255 (W.D. Mich. July 17, 2008). The case arose when the plaintiffs leased an automobile from GMAC, for which GMAC reported a late payment to CRAs. The plaintiffs later disputed the reporting of the late payment. GMAC subsequently informed the CRAs that the account was current and had a perfect payment history. However, the plaintiffs’ credit report, as reported by Equifax, thereafter still reflected a late payment on the account. There was no evidence that a CRA ever notified GMAC about the error. The court held that the plaintiffs’ complaint failed under Section 1681s-2(a) of the FCRA because this section does not allow for a private cause of action for violations of that section, as well as Section 1681s-2(b) because, assuming arguendo that violations of this section could provide a private cause of action, notification about an inaccurate report must be given by a CRA, not merely by a consumer. Approximately one month earlier, in a separate case, a magistrate judge for the Eastern District of Michigan recommended that, unless the plaintiff filed an amended complaint, a motion to dismiss a claim under Section 1681s-2(b) should be granted, in part because the notification of inaccuracies contained within a credit report must be given by a CRA, not merely a consumer. Khalil v. TransUnion, LLC, 2008 WL 2782912 (E.D. Mich. July 17, 2008). For a copy of the Arnold opinion, please see http://www.buckleykolar.com/documents/Arnold_v_GMAC.pdf. For a copy of the Khalil opinion, please see http://www.buckleykolar.com/documents/Khalil_v_Transunion.pdf.
E-Financial Services
Third Circuit Reverses Summary Judgment on Third-Party Beneficiary Breach of Contract Claim. On July 16, the U.S. Court of Appeals for the Third Circuit reversed a grant of summary judgment in favor of an “acquiring” bank on a third-party beneficiary breach of contract claim brought by “issuing” banks in a case arising from a credit card security breach. Sovereign Bank v. BJ’s Wholesale Club, Inc., et al., Nos. 06-3392/3405 (3rd Cir. July 16, 2008). This case involved an agreement made by Visa U.S.A., Inc. and an acquiring bank—a bank that processes transactions on behalf of merchants by transferring money from issuing banks (which issue credit-cards to consumers) to the merchant. The agreement required the acquiring bank to ensure that its merchants were not retaining or storing cardholder information after a credit card transaction was completed. In this case, two issuing banks alleged that they had sustained significant losses after a security breach resulting from a merchant’s retention of cardholder information in its electronic database system. The issuing banks brought suit against the merchant and the acquiring bank to recover these losses, asserting claims of third-party beneficiary breach of contract, equitable indemnification, negligence, and unjust enrichment. The Court of Appeals reversed the district court’s grant of summary judgment in favor of the acquiring bank on the third-party beneficiary breach of contract claim, finding that there was sufficient evidence on record to demonstrate that the issuing banks were intended beneficiaries of the agreement between Visa and the acquiring bank. However, the Court upheld the dismissal of the issuing banks’ (i) equitable indemnification claim against the acquiring bank, holding that Section 1643 of the Truth in Lending Act does not include an equitable indemnification claim for issuing banks, and (ii) negligence and unjust enrichment claims against the merchant and the acquiring bank, based on the economic loss doctrine, and the lack of benefit to the merchant and the acquiring bank from the issuing banks’ cancelling and reissuing credit cards pursuant to its contractual obligation with its cardholders, respectively. For a copy of this decision, please see http://www.buckleykolar.com/documents/Sovereign_Bank_v_BJs_Wholesale.pdf.
Privacy/Data Security
New York Governor Signs Bill to Strengthen Identity Theft and Consumer Protection Laws. On June 7, New York State Governor David Paterson signed S.8376-A, a comprehensive bill designed to strengthen identity theft and consumer protection laws by imposing a number of requirements on both private and state-run entities. The bill requires consumer credit agencies to (i) create and maintain a secure website and a toll-free number through which consumers may place and lift credit freezes on their account, (ii) place a consumer-requested freeze within 24 hours, (iii) honor a consumer-request for a temporary lift of a freeze within fifteen minutes, and (iv) provide consumers notification regarding their rights with respect to the credit freeze process. Additionally, the bill (i) extends existing prohibitions on private business use of social security numbers to state and local entities, (ii) places additional restrictions on employer use of employee personal identifying information, (iii) prohibits all entities from embedding or encoding social security numbers in documents or cards (such as ID tags) in lieu of removal as required by the bill, and (iv) creates criminal penalties for possession of credit card “skimming” devices. The bill enables victims of identity theft to sue entities that violate provisions of the act for time spent fixing their credit history. Most of the provisions in the bill are effective 180 days after June 7, 2008; however, public entities are not required to be in compliance until January 1, 2010. For a copy of the bill, please see http://assembly.state.ny.us/leg/?bn=S08376&sh=t.
Third Circuit Reverses Summary Judgment on Third-Party Beneficiary Breach of Contract Claim. On July 16, the U.S. Court of Appeals for the Third Circuit reversed a grant of summary judgment in favor of an “acquiring” bank on a third-party beneficiary breach of contract claim brought by “issuing” banks in a case arising from a credit card security breach. Sovereign Bank v. BJ’s Wholesale Club, Inc., et al., Nos. 06-3392/3405 (3rd Cir. July 16, 2008). This case involved an agreement made by Visa U.S.A., Inc. and an acquiring bank—a bank that processes transactions on behalf of merchants by transferring money from issuing banks (which issue credit-cards to consumers) to the merchant. The agreement required the acquiring bank to ensure that its merchants were not retaining or storing cardholder information after a credit card transaction was completed. In this case, two issuing banks alleged that they had sustained significant losses after a security breach resulting from a merchant’s retention of cardholder information in its electronic database system. The issuing banks brought suit against the merchant and the acquiring bank to recover these losses, asserting claims of third-party beneficiary breach of contract, equitable indemnification, negligence, and unjust enrichment. The Court of Appeals reversed the district court’s grant of summary judgment in favor of the acquiring bank on the third-party beneficiary breach of contract claim, finding that there was sufficient evidence on record to demonstrate that the issuing banks were intended beneficiaries of the agreement between Visa and the acquiring bank. However, the Court upheld the dismissal of the issuing banks’ (i) equitable indemnification claim against the acquiring bank, holding that Section 1643 of the Truth in Lending Act does not include an equitable indemnification claim for issuing banks, and (ii) negligence and unjust enrichment claims against the merchant and the acquiring bank, based on the economic loss doctrine, and the lack of benefit to the merchant and the acquiring bank from the issuing banks’ cancelling and reissuing credit cards pursuant to its contractual obligation with its cardholders, respectively. For a copy of this decision, please see http://www.buckleykolar.com/documents/Sovereign_Bank_v_BJs_Wholesale.pdf.
Credit Cards
Third Circuit Reverses Summary Judgment on Third-Party Beneficiary Breach of Contract Claim. On July 16, the U.S. Court of Appeals for the Third Circuit reversed a grant of summary judgment in favor of an “acquiring” bank on a third-party beneficiary breach of contract claim brought by “issuing” banks in a case arising from a credit card security breach. Sovereign Bank v. BJ’s Wholesale Club, Inc., et al., Nos. 06-3392/3405 (3rd Cir. July 16, 2008). This case involved an agreement made by Visa U.S.A., Inc. and an acquiring bank—a bank that processes transactions on behalf of merchants by transferring money from issuing banks (which issue credit-cards to consumers) to the merchant. The agreement required the acquiring bank to ensure that its merchants were not retaining or storing cardholder information after a credit card transaction was completed. In this case, two issuing banks alleged that they had sustained significant losses after a security breach resulting from a merchant’s retention of cardholder information in its electronic database system. The issuing banks brought suit against the merchant and the acquiring bank to recover these losses, asserting claims of third-party beneficiary breach of contract, equitable indemnification, negligence, and unjust enrichment. The Court of Appeals reversed the district court’s grant of summary judgment in favor of the acquiring bank on the third-party beneficiary breach of contract claim, finding that there was sufficient evidence on record to demonstrate that the issuing banks were intended beneficiaries of the agreement between Visa and the acquiring bank. However, the Court upheld the dismissal of the issuing banks’ (i) equitable indemnification claim against the acquiring bank, holding that Section 1643 of the Truth in Lending Act does not include an equitable indemnification claim for issuing banks, and (ii) negligence and unjust enrichment claims against the merchant and the acquiring bank, based on the economic loss doctrine, and the lack of benefit to the merchant and the acquiring bank from the issuing banks’ cancelling and reissuing credit cards pursuant to its contractual obligation with its cardholders, respectively. For a copy of this decision, please see http://www.buckleykolar.com/documents/Sovereign_Bank_v_BJs_Wholesale.pdf.
Missouri Federal Court Confirms Arbitration Award in Favor of Credit Card Company. A federal district court in Missouri confirmed an arbitration award in favor of Chase Bank USA, NA (Chase), holding that use of the credit card demonstrated an “intent to be bound” to the terms of the card, which included an arbitration clause. Reeves v. Chase Bank USA, Case No. 4:07-CV-1101 (E.D. Mo. July 15, 2008). The plaintiff’s credit card account with Chase was subject to the terms of a Cardmember Agreement, which contained an Arbitration Agreement. Chase initiated arbitration proceedings against the plaintiff pursuant to the Arbitration Agreement in regard to an unpaid balance on the card. The arbitrator subsequently entered an award in favor of Chase. The plaintiff argued that there was no agreement between the parties to arbitrate disputes related to the card, and, as a result, the award should be vacated. The district court disagreed, affirming that the use of the card constituted acceptance of its terms, and that the plaintiff thus had no claim which could overcome the deference to arbitration awards established by the Federal Arbitration Act (9 U.S.C. §§ 1-16). The court further rejected the plaintiff’s claim that the arbitration clause was unconscionable, in part because the arbitration clause afforded both parties the ability to seek arbitration, and thus was not “one-sided.” For a copy of this decision, please see http://www.buckleykolar.com/documents/Reeves_v_Chase.pdf.