InfoBytes, July 3, 2009
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Consumer Finance
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
Administration Submits Proposed Legislation to Create Consumer Financial Protection Agency. On June 30, the Obama Administration delivered to Congress legislative language that would create the proposed “Consumer Financial Protection Agency” (CFPA), a critical element of the Administration’s financial regulatory reform plan. Generally, the legislation describes the powers (both general and specific) that would be granted to the CFPA as a new independent agency in the executive branch, how those powers can be enforced, the mechanics of transferring those powers to the CFPA, and the relationship between the rules and enforcement authority of the CFPA and those of the individual states. As part of their general powers, the CFPA would be granted the ability to conduct rulemaking and issue orders and guidance to enforce the federal consumer protection laws, as well as the ability to examine or require reporting, and to act as the primary enforcement authority to enforce those laws. The specific powers granted to the CFPA would include, among other things, the ability to (i) take action to prevent unfair, deceptive or abusive acts or practices and/or proscribe rules identifying certain acts or practices as unlawful or unfair, deceptive or abusive, (ii) establish standards and procedures for “pilot disclosures” to provide to consumers, (iii) proscribe federal minimum standards to deter and detect unfair, deceptive, abusive, fraudulent or illegal consumer financial transactions, and (iv) adopt rules to create “standard consumer financial products or services,” as well as how and when those standard products or services are offered. The legislation also specifies that any rule adopted by the CFPA would not preempt more stringent state laws, would preserve the enforcement authority of state attorneys general, would amend the National Bank Act and the Home Owners’ Loan Act to clarify that those laws do not preempt state enforcement of consumer protection statutes, and would clarify that state attorneys general retain visitorial powers. For a more detailed summary of the legislation, please see InfoBytes Regulatory Restructuring Report, Issue Four, July 2, 2009. For a copy of the press release, along with the full text of the legislation and a section-by-section analysis, please see http://www.treas.gov/press/releases/tg189.htm.
Agencies Issue Final FACTA Accuracy, Direct-Dispute Rules. On July 1, the Federal Trade Commission, Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, and National Credit Union Administration issued final rules implementing Fair and Accurate Credit Transactions Act of 2003 (FACTA) provisions that (i) require furnishers to take steps to ensure the accuracy and the integrity of the information that they provide to credit bureaus and (ii) allow consumers to dispute credit report items directly with the furnisher of the information. 74 Fed. Reg. 31484 (July 1, 2009). The first rule requires furnishers to establish and implement written policies and procedures related to the accuracy and integrity of the information they furnish to credit bureaus. “Integrity” is defined to include information, identified by each agency, whose omission could present a misleading picture of the consumer’s creditworthiness. Each agency will define such information in guidelines. Each agency has determined that the credit limit, where applicable (i.e., in open-end accounts with a credit limit) represents an example of such information. The agencies rejected an approach in which the FACTA requirements would have been implemented as guidelines rather than regulations and in which inclusion of items such as the credit limit would not have been required. The agencies also issued an Advance Notice of Proposed Rulemaking (ANPR) asking whether information other than the credit limit, including specifically the account-opening date, should also be furnished to promote integrity. 74 Fed. Reg. 31529 (July 1, 2009).
The direct-dispute rule requires furnishers of information, including collection agencies, to investigate disputes submitted directly to them that “pertain to an account or other relationship that the furnisher has or has had with the consumer.” Under the previous law, the Fair Credit Reporting Act only required furnishers to investigate items that the consumer disputed with the consumer reporting agency. Both of the final rules go into effect on July 1, 2010. Comments on the ANPR are due by August 31, 2009. For a copy of the press release, please see http://www.ftc.gov/opa/2009/07/facta.shtm. For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2009/pdf/E9-15323.pdf.
FTC Issues Advisory Opinion to Resolve Potential Conflict Between New Direct Dispute Rule, FDCPA. On June 23, the Federal Trade Commission (FTC) issued an advisory opinion that clarifies the conflicting duties of debt collectors under the FTC’s new direct-dispute rule (the Rule) and the Fair Debt Collection Practices Act (FDCPA). The Rule, which was published in the Federal Register on July 1, 2009 and become effective July 1, 2010, require entities that furnish information to consumer reporting agencies (CRAs) to report their investigations of consumer disputes directly to consumers or to notify consumers if they determine that a dispute is frivolous or irrelevant. This requirement potentially conflicts with a provision of the FDCPA that requires debt collectors to cease communication with consumers who demand in writing that the debt collector cease further communication with the consumer. The potential conflict between the two requirements arises when a consumer orders a debt collector in writing to cease communication, but at some future time submits a direct dispute about information that the debt collector has provided to a CRA. Under this scenario, a debt collector would potentially violate the FDCPA if it provided the notices required by the Rule, but would violate the Rule if the notices were omitted. To resolve this conflict, the advisory opinion states that a debt collector that has received a “cease communication letter” does not violate the FDCPA if the debt collector sends the consumer a notice that has no purpose other than to comply with the Rule. For a copy of the FTC advisory opinion, please see http://www.ftc.gov/os/2009/07/P064803facta-adop.pdf.
FTC Settles Charges Against Debt Collection Company. On July 2, the Federal Trade Commission (FTC) settled charges with a debt collection company that allegedly violated the FTC Act and the Fair Debt Collection Practices Act (FDCPA) when it falsely threatened consumers with garnishment of wages, arrest, or legal action and used other unlawful tactics to collect consumer debts. According to the FTC, the company (i) called consumers before 8 a.m. and after 9 p.m., (ii) called consumers at work when it had had reason to know that the calls were inconvenient, (iii) informed third parties about the consumers’ debts, (iv) did not cease making calls to consumers after receiving written requests to cease such activity, and (v) used harassing and abusive tactics, such as calling consumers multiple times each day, calling back consumers immediately after they hung up a collector’s call, and using profane or otherwise abusive language. The settlements (i) prohibit the defendants from further violations of the FTC Act and the FDCPA, (ii) impose civil penalties, and (iii) impose record-keeping and reporting provisions to ensure compliance. For a copy of the press release, please see http://www.ftc.gov/opa/2009/07/oxford.shtm. For a copy of the consent decrees, please see http://www.ftc.gov/os/caselist/0623177/090624oxforddecreeoms.pdf and http://www.ftc.gov/os/caselist/0623177/090624oxforddecreespinelli.pdf.
Federal Banking Agencies Issue Host State Loan-to-Deposit Ratios. On June 29, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued the host state loan-to-deposit ratios that the banking regulatory agencies will use to determine compliance with the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. The host state loan-to-deposit ratios are used in a loan-to-deposit ratio screen that compares a bank’s statewide loan-to-deposit ratio to the host state loan-to-deposit ratio for banks in a particular state. If a bank’s statewide loan-to-deposit ratio is less than one-half of the published ratio for that state, or if information is not available to perform the ratio screen, the applicable banking regulatory agency must determine whether the bank is “reasonably helping to meet the credit needs of the communities served by the bank’s interstate branches.” For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09106.html. For a copy of the host state loan-to-deposit ratios, please see http://www.fdic.gov/news/news/press/2009/pr09106a.html.
FFIEC Issues Statement Regarding Regulatory Conversions. On July 1, the Federal Financial Institutions Examination Council (FFIEC) issued the "FFIEC Statement on Regulatory Conversions" to re-affirm that charter conversions or changes in a primary federal regulator should be conducted only for “legitimate business and strategic reasons.” The statement underscores that making conversion requests while serious or material enforcements actions are pending may delay or undermine supervisory actions. Additionally, the statement provides that institutions intending to change their charter or banking supervisor must continue to seek approval via an application process that includes review by the prospective chartering authority and the institution’s primary federal regulator, as well as consultation with appropriate state regulators. Furthermore, according to the statement, prospective supervisors will consult with the current supervisors to obtain information on any pending or outstanding supervisory actions, including plans for ratings downgrades and enforcement actions. If an existing supervisor’s examination is not recent, or as other circumstances warrant, a prospective supervisor may elect to conduct an eligibility examination, which may be performed in conjunction with the current supervisor. For a copy of the statement, please see http://www.ffiec.gov/pdf/pr070109_statement.pdf.
OTS, FDIC Announce Enforcement Actions, Settlement Regarding Convenience Checks. On June 30, the Office of Thrift Supervision (OTS) announced the execution of two enforcement actions with American Express Bank, FSB. The enforcement actions pertain to convenience checks that the bank sent to credit card consumers that could not subsequently be honored because of changes in the consumers’ credit ratings and/or credit limits. The declined checks resulted in returned-check and other associated fees and allegedly may have resulted in negative reports to credit rating agencies. Pursuant to the enforcement actions, the bank (i) consented to civil penalties without admitting or denying liability, (ii) will establish a $1.5 reserve fund to reimburse consumers for declined convenience checks, and (iii) will provide consumers with information to remedy negative effects resulting from the declined convenience checks. Also on June 30, the Federal Deposit Insurance Corporation (FDIC) announced a related settlement with American Express Centurion Bank regarding its convenience check program. According to the FDIC, the bank improved its disclosures prior to the settlement to make customers more aware that the convenience checks may be dishonored. Under the settlement, the bank (i) did not admit or deny liability regarding the allegations, (ii) stipulated to a cease-and-desist order, (iii) agreed to implement procedures for reviewing credit limits prior to marketing and issuing convenience checks, (iv) will clearly disclose a customer’s established credit limit in convenience check offers and marketing materials, (v) will implement procedures allowing a consumer to obtain preauthorization to use a convenience check for a specified amount at a particular time, (vi) will reimburse consumers for the costs associated with the dishonored checks, and (vii) will provide consumers with information to mitigate the negative effects resulting from a declined convenience check. Both banks have suspended their respective convenience check programs. For a copy of the press releases, please see http://www.ots.treas.gov/?p=PressReleases&ContentRecord_id=32787056-1e0b-8562-eb3c-b9e8691f8271 and http://www.fdic.gov/news/news/press/2009/pr09108.html. For a copy of the OTS cease-and-desist order, please see http://files.ots.treas.gov/enforcement/97146.pdf. For a copy of the OTS civil money penalty assessment, please see http://files.ots.treas.gov/enforcement/97147.pdf. For a copy of the FDIC order to pay, please see http://www.fdic.gov/news/news/press/2009/pr09108a.pdf. For a copy of the FDIC cease-and-desist order, please see http://www.fdic.gov/news/news/press/2009/pr09108b.pdf.
Mortgage Company Settles with DOJ, HUD for False Claims Act Violations. On July 1, the Department of Justice (DOJ) announced that Beazer Mortgage Corp. and Beazer Homes, Inc. USA (Beazer) will pay a $5 million fine to the U.S. Department of Housing and Urban Development to settle allegations that Beazer engaged in fraudulent mortgage origination activities for FHA-insured mortgage loans. Beazer was charged with violating the federal False Claims Act by (i) failing to reduce a loan’s interest rate after requiring cash at closing for a reduced interest rate, (ii) providing money to borrowers through indirect “gifts” to ensure minimum required down payments could be met (even if the borrower did not have sufficient funds), then increasing the principal on the loan despite representing to borrowers that such funds did not require repayment, (iii) failing to indicate to the FHA which branch office had made defaulting loans to avoid detection of excessive default rates, and (iv) disregarding “stated income” requirements in making loans to unqualified borrowers. The settlement was reached in conjunction with a Deferred Prosecution Agreement (DPA) between Beazer and the U.S. Attorney’s Office for the Western District of North Carolina. Under the DPA, the U.S. Attorney has agreed not to prosecute the alleged violations and Beazer will provide up to $50 million to homeowners. Additionally, Beazer/Squires Realty, Inc. and Beazer Homes Corp. have entered into a settlement agreement with the North Carolina Real Estate Commission. Under the consent orders, a reprimand will not be issued if (i) Beazer Homes completes certain remedial measures, and (ii) the broker license held by Beazer/Squires Realty, Inc. is revoked. In February 2008, Beazer voluntarily ceased its mortgage origination business. For a copy of the DOJ press release, please see http://www.usdoj.gov/opa/pr/2009/July/09-civ-654.html. For a copy of Beazer’s press release, please see http://ir.beazer.com/phoenix.zhtml?c=98372&p=irol-newsArticle_Print&ID=1304005&highlight=.
FTC Employs U.S. SAFE WEB Act to Obtain Judgment Against Internet Spammers. On July 2, the Federal Trade Commission (FTC) announced that the U.S. District Court for the Northern District of Illinois Eastern Division has entered a $3.7 million default judgment against an international internet spam ring. FTC v. Spear Systems, No. 07 C 5597 (N.D. Ill. Jan. 29, 2009). The case, filed by the FTC in October 2007, marked the first time that the FTC employed the U.S. SAFE WEB Act to share information with foreign law enforcement entities. Using this information, the agency brought claims against the defendants for violations of both the FTC Act and the Controlling the Assault of Non-Solicited Pornography And Marketing Act (CAN-SPAM Act); specifically, the FTC alleged that the defendants violated the CAN-SPAM Act by sending emails that lacked opt-out links or physical postal addresses. For a copy of the press release, please see http://www.ftc.gov/opa/2009/07/spear.shtm.
HUD Expands Making Homes Affordable Program. On July 1, the U.S. Department of Housing and Urban Development announced the expansion of the Making Home Affordable Program to include borrowers who are current on mortgage payments but have a loan-to-value ratio ceiling of up to 125 percent. Prior to this announcement, only borrowers with first mortgage loans that did not exceed 105 percent of the current market value could participate in the program. For a copy of the press release, please see http://www.hud.gov/news/release.cfm?content=pr09-104.cfm.
State Issues
Additional States Enact SAFE Act Legislation. Recently, Alaska, Florida, Maine, and Tennessee each signed into law legislation designed to meet the mandate of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 by providing for the licensing of mortgage loan originators under the Nationwide Mortgage Licensing System (NMLS). Alaska HB 221 authorizes participation in the NMLS and allows for emergency regulations to further implement the legislation. Among other items, Florida SB 2226, Maine SB 523, and Tennessee SB 2279 each require mortgage loan originators to (i) submit to fingerprinting for the purpose of a criminal history background check, (ii) complete at least twenty hours of pre-licensing education, (iii) receive a passing score (i.e., 75%) on a qualified written test developed by the NMLS, and (iv) complete at least eight hours of continuing education annually. The Florida and Tennessee bills also amend certain definitions and licensing requirements applicable to mortgage lenders and mortgage brokers. Maine SB 523 also sets forth new requirements applicable to residential mortgage loans and higher-priced mortgage loans. Most provisions of Florida SB 2226 became effective July 1, 2009. The mortgage loan originator licensing provisions of Maine SB 523 become effective July 31, 2010. Most provisions of Tennessee SB 2279 become effective July 31, 2009. Alaska SB 221 is effective immediately. For a copy of Florida SB 2226, please see http://www.buckleysandler.com/FL_SB_2226_2009.pdf. For a copy of Maine SB 523, please see http://www.mainelegislature.org/legis/bills/bills_124th/chappdfs/PUBLIC362.pdf. For a copy of Tennessee SB 2279, please see http://www.capitol.tn.gov/Bills/106/Bill/SB2279.pdf. For a copy of Alaska HB 221, please see http://www.legis.state.ak.us/basis/get_bill_text.asp?hsid=HB0221Z&session=26.
Oregon Legislation Limits Negative Amortization Loans; Requires Multi-Lingual Disclosures. On June 26, Oregon Governor Ted Kulongoski signed H.B. 2188, a bill that amends the Oregon Mortgage Lender Law. Under the new law, mortgage bankers, mortgage brokers, and loan originators may not negotiate or make, or offer to negotiate or make, a negative amortization loan without regard to the borrower’s repayment ability at the time the loan is made. Also, under the new law, mortgage bankers, mortgage brokers, and loan originators that advertise or otherwise solicit business and conduct transactions substantially in a language other than English are required to provide the borrower with certain materials in the language in which the parties conducted the transaction. For a copy of the bill, please see http://www.leg.state.or.us/09reg/measpdf/hb2100.dir/hb2188.b.pdf.
Pennsylvania Governor Signs Two Bills Amending State Mortgage Law. On June 29, Pennsylvania Governor Edward G. Rendell signed SB 170 and HB 985 to amend Pennsylvania mortgage law. SB 170 prohibits a mortgage broker or mortgage originator from being or designating the sole recipient of communications from a lender or servicer to a consumer. HB 985 prohibits mortgage companies from bringing a cause of action for damages against employees who report illegal activity or take part in an investigation, hearing or inquiry against the company. Both bills become effective August 28, 2009. For a copy of SB 170, please see http://www.buckleysandler.com/PA_SB_170_2009.pdf. For a copy of HB 985, please see http://www.buckleysandler.com/PA_HB_985_2009.pdf.
Courts
Supreme Court Holds States May Enforce Non-Preempted State Laws Against National Banks. In a 5-4 decision issued June 29, the U.S. Supreme Court held that states have the power to enforce state laws against national banks through the judicial process but lack the authority to examine banks or subpoena documents or other information without judicial process. Cuomo v. The Clearing House Association, LLC, 557 U.S. ---, No. 08-453 (U.S. June 29, 2009). (Reported in InfoBytes Special Alert, June 30, 2009). The Clearing House decision arises from letters sent to several national banks by then-New York Attorney General Eliot Spitzer in 2005. The letters requested certain non-public information about the banks’ lending practices, "in lieu of subpoena," to determine whether the banks violated New York fair lending laws. The Office of the Comptroller of the Currency (OCC) and a banking trade group brought suit to enjoin the requests, arguing that OCC regulation promulgated under the National Bank Act (NBA) prohibits such an enforcement of state laws against national banks because only the OCC may exercise "visitorial powers" - defined by the OCC to include the prosecutions of enforcement actions - over national banks. The United States District Court for the Southern District of New York entered the requested injunction, and the Second Circuit affirmed. Both courts held that the OCC’s interpretation of the term "visitorial powers" in the NBA was entitled to Chevron deference and was reasonable. Justice Scalia, writing for the majority that included Justices Ginsburg, Souter, Stevens and Breyer, affirmed in part and reversed in part - upholding the injunction to the extent that it enjoined the threatened issuance of an executive subpoena by the state, and overruling the injunction to the extent that it prohibited the Attorney General from bringing any judicial enforcement action against national banks. According to the majority, the OCC’s interpretation of the NBA’s "visitorial powers" provision was unreasonable because "a sovereign’s ‘visitorial powers’ and its powers to enforce the law are two different things." In short, the OCC could not prevent states from enforcing laws by virtue of the "visitorial powers" provision because there was no reasonable basis to "extend[] the definition of ‘visitorial powers’ to include ‘prosecuting enforcement actions’ in state courts." The result of this decision is that, going forward, the Attorney General would have to pursue the action as a "civil litigant," subject to the rules of civil procedure and discovery, not as a "visitor," which could "inspect books and records at any time for any or no reason." Justice Thomas issued a dissent, in which he was joined by Chief Justice Roberts, Justice Kennedy, and Justice Alito. According to the dissenters, the term "visitorial powers" was "susceptible to multiple interpretations," and in light of the ordinary meaning of this term, the structure of the NBA, and the history of "visitation," the OCC’s regulation was reasonable and entitled to Chevron deference. For a copy of the opinion, please see http://www.buckleysandler.com/Cuomo_v_Clearing_House.pdf.
Supreme Court Grants Cert in FDCPA Bona Fide Error Defense Case. On June 26, the U.S. Supreme Court granted a petition for writ of certiorari in a case disputing whether a legal error qualifies for the bona fide error defense under the Fair Debt Collection Practices Act (FDCPA). Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, No. 08-1200. Previously in this case, the U.S. Court of Appeals for the Sixth Circuit, following the Tenth Circuit’s opinion in Johnson v. Riddle, 305 F.3d 1107 (10th Cir. 2002), held that legal errors qualify as bona fide errors under the FDCPA (reported in InfoBytes, Sept. 26, 2008). The decisions of the Tenth Circuit and Sixth Circuit are in tension with decisions from the Second, Eighth, and Ninth Circuits that hold that legal errors are not bona fide errors under the FDCPA. The latter decisions reason that the FDCPA’s bona fide error provision is similar to a provision in the Truth in Lending Act that explicitly excludes legal errors from the category of bona fide errors. For a copy of the court of appeals decision in Jerman, please see http://www.ca6.uscourts.gov/opinions.pdf/08a0299p-06.pdf. For a copy of the Supreme Court docket, please see http://origin.www.supremecourtus.gov/docket/08-1200.htm.
Supreme Court Denies Cert in FCRA Preemption Case. On June 29, the U.S. Supreme Court denied a petition for writ of certiorari to resolve to what extent the Fair Credit Reporting Act (FCRA) preempts restrictions under the California Financial Information Privacy Act (the Act) regarding the exchange of consumer information among affiliated financial institutions. American Bankers Ass’n. v. Brown, No. 08-730. In this case, the U.S. Court of Appeals for the Ninth Circuit first held that the affiliate-sharing preemption clause of FCRA preempted the affiliate-sharing provision of the Act "insofar as [the Act] attempts to regulate the communication between affiliates of ‘information.’” The court held that the meaning of "information" should be construed in relation to FCRA’s definition of consumer report information. On remand, the district court then held that, under this framework, (i) no portion of the applicable section of the Act would survive preemption, and (ii) even if a portion did survive preemption, the court lacked the power to sever the preempted applications. On appeal from remand, the Ninth Circuit held that (i) some communications of non-public personal information under the Act would fall outside FCRA’s basic definition of “consumer report” and, thus, FCRA would not preempt some applications of the Act, and (ii) the valid applications of the state law were severable from those that were preempted. For a copy of the court of appeals decisions, please see http://www.ca9.uscourts.gov/datastore/opinions/2005/06/20/0416334.pdf and http://www.ca9.uscourts.gov/datastore/opinions/2008/09/04/0517163.pdf. For a copy of the Supreme Court docket, please see http://origin.www.supremecourtus.gov/docket/08-730.htm.
California Court Holds Class Action Waiver with Opt-Out Provision in Cardholder Agreement Unenforceable. On June 19, the California Court of Appeals held that a class action waiver with an opt-out provision contained in an arbitration provision of a cardholder agreement is procedurally unconscionable. Duran v. Discover Bank, No. B203338, 2009 WL 1709569 (Cal. Ct. App. Jun. 19, 2009). Previously in this case, the lower court held that the class action waiver in the defendant bank’s credit card agreement was unconscionable, and therefore unenforceable, under California law. On appeal, the defendant challenged the finding of procedural unconscionability, arguing that (i) the contract was not a contract of adhesion because the contract contained an opt-out provision, and (ii) Delaware law, not California law, should govern the dispute. The court first held that opt-out provisions do not automatically render contracts nonadhesive under California law. The court reasoned that a class action waiver might not sufficiently explain the disadvantages of the arbitration agreement compared to litigation, thus potentially preventing a consumer from making an “authentic informed choice” about whether to opt-out. In this case, the court found that the agreement did not sufficiently explain (i) the disadvantages of consenting to the arbitration and class waiver provisions, (ii) the costs of arbitration, and (iii) the “practical consequences” of a class action waiver. In addition, the court held that California law governed the dispute, reasoning that, even though Delaware has a substantial relationship to the dispute and class action waivers are enforceable under Delaware law, (i) the enforcement of the waiver would “contravene a fundamental policy of California,” and (ii) California has a materially greater interest than Delaware as to the enforceability of the class action waiver at issue. As a result, the court affirmed the lower court’s finding that the class action waiver provision of the agreement was procedurally unconscionable under California law. For a copy of the opinion, please see http://www.buckleysandler.com/Duran_v_Discover.pdf.
Florida Federal Court Allows “Willful,” Negligent Violation Claims Under FACTA to Proceed. On June 29, the U.S. District Court for the Southern District of Florida rejected the defendant merchants’ motion to dismiss allegations that they “willfully” and negligently violated the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act (FACTA), by including a credit card expiration date on a receipt. Rosenthal v. Longchamp Coral Gables LLC, No. 08-21757, 2009 WL 1854846 (S.D. Fla. June 29, 2009). Previously in this case, the court dismissed a claim that the merchants violated FACTA by including the expiration date of a credit card on a printed receipt after June 3, 2008 (reported in InfoBytes, Apr. 3, 2009). In this decision, the court held that the amended complaint’s allegations elevated the willfulness and negligence claims from ‘conceivable to plausible’ under the pleading standard of Bell Atlantic Corp. v. Twombly by alleging constructive and actual notice by the merchants of the requirements under FACTA. Specifically, the consumer argued that the merchants’ bank (i) advised the merchants regarding FACTA’s truncation and expiration date requirements beginning in 2003, and (ii) advised the merchants that the Credit and Debit Card Clarification Act of 2007, an amendment to FCRA, “did not apply to merchants who printed expiration dates on their receipts after June 3, 2008.” The complaint also alleges that (i) the credit card rules that the merchants entered into prohibited the printing of credit card expiration dates, (ii) the Federal Trade Commission had distributed a national business alert regarding FACTA’s requirements, and (iii) by May 2008, sixteen federal courts had found FACTA prohibited printing expiration dates. For a copy of the opinion, please see http://www.buckleysandler.com/Rosenthal_v_Longchamp_062909.pdf.
Firm News
Jerry Buckley was recently quoted in a BankInfoSecurity.com article regarding the proposed regulatory reform by the Obama Administration. See http://www.bankinfosecurity.com/articles.php?art_id=1560 for the text of the article.
Comments by Andrew Sandler along with a reference to BuckleySandler were included in an article published by Reuters. For a copy of the article, please see http://www.reuters.com/article/domesticNews/idUSTRE5546ZC20090605.
Andrew Sandler was interviewed by the Washington Business Journal. The interview concerning Corporate Risk Advisers appeared in the June 19-25, 2009 issue.
Jeff Naimon spoke on June 7 and June 8 at the American Bankers Association Regulatory Compliance Conference in Orlando, Florida on the “New Mortgage Transaction” panel.
Margo Tank spoke in an audio conference series entitled "Building Effective Electronic Records and Electronic Records Management Systems: Navigating the Legal Traps" on June 10.
Andrea Lee Negroni delivered an audio conference on foreclosure rescue scams through Sheshunoff/A.S. Pratt Audio Conferences on June 30.
Mortgages
Mortgage Company Settles with DOJ, HUD for False Claims Act Violations. On July 1, the Department of Justice (DOJ) announced that Beazer Mortgage Corp. and Beazer Homes, Inc. USA (Beazer) will pay a $5 million fine to the U.S. Department of Housing and Urban Development to settle allegations that Beazer engaged in fraudulent mortgage origination activities for FHA-insured mortgage loans. Beazer was charged with violating the federal False Claims Act by (i) failing to reduce a loan’s interest rate after requiring cash at closing for a reduced interest rate, (ii) providing money to borrowers through indirect “gifts” to ensure minimum required down payments could be met (even if the borrower did not have sufficient funds), then increasing the principal on the loan despite representing to borrowers that such funds did not require repayment, (iii) failing to indicate to the FHA which branch office had made defaulting loans to avoid detection of excessive default rates, and (iv) disregarding “stated income” requirements in making loans to unqualified borrowers. The settlement was reached in conjunction with a Deferred Prosecution Agreement (DPA) between Beazer and the U.S. Attorney’s Office for the Western District of North Carolina. Under the DPA, the U.S. Attorney has agreed not to prosecute the alleged violations and Beazer will provide up to $50 million to homeowners. Additionally, Beazer/Squires Realty, Inc. and Beazer Homes Corp. have entered into a settlement agreement with the North Carolina Real Estate Commission. Under the consent orders, a reprimand will not be issued if (i) Beazer Homes completes certain remedial measures, and (ii) the broker license held by Beazer/Squires Realty, Inc. is revoked. In February 2008, Beazer voluntarily ceased its mortgage origination business. For a copy of the DOJ press release, please see http://www.usdoj.gov/opa/pr/2009/July/09-civ-654.html. For a copy of Beazer’s press release, please see http://ir.beazer.com/phoenix.zhtml?c=98372&p=irol-newsArticle_Print&ID=1304005&highlight=.
HUD Expands Making Homes Affordable Program. On July 1, the U.S. Department of Housing and Urban Development announced the expansion of the Making Home Affordable Program to include borrowers who are current on mortgage payments but have a loan-to-value ratio ceiling of up to 125 percent. Prior to this announcement, only borrowers with first mortgage loans that did not exceed 105 percent of the current market value could participate in the program. For a copy of the press release, please see http://www.hud.gov/news/release.cfm?content=pr09-104.cfm.
Additional States Enact SAFE Act Legislation. Recently, Alaska, Florida, Maine, and Tennessee each signed into law legislation designed to meet the mandate of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 by providing for the licensing of mortgage loan originators under the Nationwide Mortgage Licensing System (NMLS). Alaska HB 221 authorizes participation in the NMLS and allows for emergency regulations to further implement the legislation. Among other items, Florida SB 2226, Maine SB 523, and Tennessee SB 2279 each require mortgage loan originators to (i) submit to fingerprinting for the purpose of a criminal history background check, (ii) complete at least twenty hours of pre-licensing education, (iii) receive a passing score (i.e., 75%) on a qualified written test developed by the NMLS, and (iv) complete at least eight hours of continuing education annually. The Florida and Tennessee bills also amend certain definitions and licensing requirements applicable to mortgage lenders and mortgage brokers. Maine SB 523 also sets forth new requirements applicable to residential mortgage loans and higher-priced mortgage loans. Most provisions of Florida SB 2226 became effective July 1, 2009. The mortgage loan originator licensing provisions of Maine SB 523 become effective July 31, 2010. Most provisions of Tennessee SB 2279 become effective July 31, 2009. Alaska SB 221 is effective immediately. For a copy of Florida SB 2226, please see http://www.buckleysandler.com/FL_SB_2226_2009.pdf. For a copy of Maine SB 523, please see http://www.mainelegislature.org/legis/bills/bills_124th/chappdfs/PUBLIC362.pdf. For a copy of Tennessee SB 2279, please see http://www.capitol.tn.gov/Bills/106/Bill/SB2279.pdf. For a copy of Alaska HB 221, please see http://www.legis.state.ak.us/basis/get_bill_text.asp?hsid=HB0221Z&session=26.
Oregon Legislation Limits Negative Amortization Loans; Requires Multi-Lingual Disclosures. On June 26, Oregon Governor Ted Kulongoski signed H.B. 2188, a bill that amends the Oregon Mortgage Lender Law. Under the new law, mortgage bankers, mortgage brokers, and loan originators may not negotiate or make, or offer to negotiate or make, a negative amortization loan without regard to the borrower’s repayment ability at the time the loan is made. Also, under the new law, mortgage bankers, mortgage brokers, and loan originators that advertise or otherwise solicit business and conduct transactions substantially in a language other than English are required to provide the borrower with certain materials in the language in which the parties conducted the transaction. For a copy of the bill, please see http://www.leg.state.or.us/09reg/measpdf/hb2100.dir/hb2188.b.pdf.
Pennsylvania Governor Signs Two Bills Amending State Mortgage Law. On June 29, Pennsylvania Governor Edward G. Rendell signed SB 170 and HB 985 to amend Pennsylvania mortgage law. SB 170 prohibits a mortgage broker or mortgage originator from being or designating the sole recipient of communications from a lender or servicer to a consumer. HB 985 prohibits mortgage companies from bringing a cause of action for damages against employees who report illegal activity or take part in an investigation, hearing or inquiry against the company. Both bills become effective August 28, 2009. For a copy of SB 170, please see http://www.buckleysandler.com/PA_SB_170_2009.pdf. For a copy of HB 985, please see http://www.buckleysandler.com/PA_HB_985_2009.pdf.
Administration Submits Proposed Legislation to Create Consumer Financial Protection Agency. On June 30, the Obama Administration delivered to Congress legislative language that would create the proposed “Consumer Financial Protection Agency” (CFPA), a critical element of the Administration’s financial regulatory reform plan. Generally, the legislation describes the powers (both general and specific) that would be granted to the CFPA as a new independent agency in the executive branch, how those powers can be enforced, the mechanics of transferring those powers to the CFPA, and the relationship between the rules and enforcement authority of the CFPA and those of the individual states. As part of their general powers, the CFPA would be granted the ability to conduct rulemaking and issue orders and guidance to enforce the federal consumer protection laws, as well as the ability to examine or require reporting, and to act as the primary enforcement authority to enforce those laws. The specific powers granted to the CFPA would include, among other things, the ability to (i) take action to prevent unfair, deceptive or abusive acts or practices and/or proscribe rules identifying certain acts or practices as unlawful or unfair, deceptive or abusive, (ii) establish standards and procedures for “pilot disclosures” to provide to consumers, (iii) proscribe federal minimum standards to deter and detect unfair, deceptive, abusive, fraudulent or illegal consumer financial transactions, and (iv) adopt rules to create “standard consumer financial products or services,” as well as how and when those standard products or services are offered. The legislation also specifies that any rule adopted by the CFPA would not preempt more stringent state laws, would preserve the enforcement authority of state attorneys general, would amend the National Bank Act and the Home Owners’ Loan Act to clarify that those laws do not preempt state enforcement of consumer protection statutes, and would clarify that state attorneys general retain visitorial powers. For a more detailed summary of the legislation, please see InfoBytes Regulatory Restructuring Report, Issue Four, July 2, 2009. For a copy of the press release, along with the full text of the legislation and a section-by-section analysis, please see http://www.treas.gov/press/releases/tg189.htm.
Federal Banking Agencies Issue Host State Loan-to-Deposit Ratios. On June 29, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued the host state loan-to-deposit ratios that the banking regulatory agencies will use to determine compliance with the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. The host state loan-to-deposit ratios are used in a loan-to-deposit ratio screen that compares a bank’s statewide loan-to-deposit ratio to the host state loan-to-deposit ratio for banks in a particular state. If a bank’s statewide loan-to-deposit ratio is less than one-half of the published ratio for that state, or if information is not available to perform the ratio screen, the applicable banking regulatory agency must determine whether the bank is “reasonably helping to meet the credit needs of the communities served by the bank’s interstate branches.” For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09106.html. For a copy of the host state loan-to-deposit ratios, please see http://www.fdic.gov/news/news/press/2009/pr09106a.html.
FFIEC Issues Statement Regarding Regulatory Conversions. On July 1, the Federal Financial Institutions Examination Council (FFIEC) issued the "FFIEC Statement on Regulatory Conversions" to re-affirm that charter conversions or changes in a primary federal regulator should be conducted only for “legitimate business and strategic reasons.” The statement underscores that making conversion requests while serious or material enforcements actions are pending may delay or undermine supervisory actions. Additionally, the statement provides that institutions intending to change their charter or banking supervisor must continue to seek approval via an application process that includes review by the prospective chartering authority and the institution’s primary federal regulator, as well as consultation with appropriate state regulators. Furthermore, according to the statement, prospective supervisors will consult with the current supervisors to obtain information on any pending or outstanding supervisory actions, including plans for ratings downgrades and enforcement actions. If an existing supervisor’s examination is not recent, or as other circumstances warrant, a prospective supervisor may elect to conduct an eligibility examination, which may be performed in conjunction with the current supervisor. For a copy of the statement, please see http://www.ffiec.gov/pdf/pr070109_statement.pdf.
OTS, FDIC Announce Enforcement Actions, Settlement Regarding Convenience Checks. On June 30, the Office of Thrift Supervision (OTS) announced the execution of two enforcement actions with American Express Bank, FSB. The enforcement actions pertain to convenience checks that the bank sent to credit card consumers that could not subsequently be honored because of changes in the consumers’ credit ratings and/or credit limits. The declined checks resulted in returned-check and other associated fees and allegedly may have resulted in negative reports to credit rating agencies. Pursuant to the enforcement actions, the bank (i) consented to civil penalties without admitting or denying liability, (ii) will establish a $1.5 reserve fund to reimburse consumers for declined convenience checks, and (iii) will provide consumers with information to remedy negative effects resulting from the declined convenience checks. Also on June 30, the Federal Deposit Insurance Corporation (FDIC) announced a related settlement with American Express Centurion Bank regarding its convenience check program. According to the FDIC, the bank improved its disclosures prior to the settlement to make customers more aware that the convenience checks may be dishonored. Under the settlement, the bank (i) did not admit or deny liability regarding the allegations, (ii) stipulated to a cease-and-desist order, (iii) agreed to implement procedures for reviewing credit limits prior to marketing and issuing convenience checks, (iv) will clearly disclose a customer’s established credit limit in convenience check offers and marketing materials, (v) will implement procedures allowing a consumer to obtain preauthorization to use a convenience check for a specified amount at a particular time, (vi) will reimburse consumers for the costs associated with the dishonored checks, and (vii) will provide consumers with information to mitigate the negative effects resulting from a declined convenience check. Both banks have suspended their respective convenience check programs. For a copy of the press releases, please see http://www.ots.treas.gov/?p=PressReleases&ContentRecord_id=32787056-1e0b-8562-eb3c-b9e8691f8271 and http://www.fdic.gov/news/news/press/2009/pr09108.html. For a copy of the OTS cease-and-desist order, please see http://files.ots.treas.gov/enforcement/97146.pdf. For a copy of the OTS civil money penalty assessment, please see http://files.ots.treas.gov/enforcement/97147.pdf. For a copy of the FDIC order to pay, please see http://www.fdic.gov/news/news/press/2009/pr09108a.pdf. For a copy of the FDIC cease-and-desist order, please see http://www.fdic.gov/news/news/press/2009/pr09108b.pdf.
Supreme Court Holds States May Enforce Non-Preempted State Laws Against National Banks. In a 5-4 decision issued June 29, the U.S. Supreme Court held that states have the power to enforce state laws against national banks through the judicial process but lack the authority to examine banks or subpoena documents or other information without judicial process. Cuomo v. The Clearing House Association, LLC, 557 U.S. ---, No. 08-453 (U.S. June 29, 2009). (Reported in InfoBytes Special Alert, June 30, 2009). The Clearing House decision arises from letters sent to several national banks by then-New York Attorney General Eliot Spitzer in 2005. The letters requested certain non-public information about the banks’ lending practices, "in lieu of subpoena," to determine whether the banks violated New York fair lending laws. The Office of the Comptroller of the Currency (OCC) and a banking trade group brought suit to enjoin the requests, arguing that OCC regulation promulgated under the National Bank Act (NBA) prohibits such an enforcement of state laws against national banks because only the OCC may exercise "visitorial powers" - defined by the OCC to include the prosecutions of enforcement actions - over national banks. The United States District Court for the Southern District of New York entered the requested injunction, and the Second Circuit affirmed. Both courts held that the OCC’s interpretation of the term "visitorial powers" in the NBA was entitled to Chevron deference and was reasonable. Justice Scalia, writing for the majority that included Justices Ginsburg, Souter, Stevens and Breyer, affirmed in part and reversed in part - upholding the injunction to the extent that it enjoined the threatened issuance of an executive subpoena by the state, and overruling the injunction to the extent that it prohibited the Attorney General from bringing any judicial enforcement action against national banks. According to the majority, the OCC’s interpretation of the NBA’s "visitorial powers" provision was unreasonable because "a sovereign’s ‘visitorial powers’ and its powers to enforce the law are two different things." In short, the OCC could not prevent states from enforcing laws by virtue of the "visitorial powers" provision because there was no reasonable basis to "extend[] the definition of ‘visitorial powers’ to include ‘prosecuting enforcement actions’ in state courts." The result of this decision is that, going forward, the Attorney General would have to pursue the action as a "civil litigant," subject to the rules of civil procedure and discovery, not as a "visitor," which could "inspect books and records at any time for any or no reason." Justice Thomas issued a dissent, in which he was joined by Chief Justice Roberts, Justice Kennedy, and Justice Alito. According to the dissenters, the term "visitorial powers" was "susceptible to multiple interpretations," and in light of the ordinary meaning of this term, the structure of the NBA, and the history of "visitation," the OCC’s regulation was reasonable and entitled to Chevron deference. For a copy of the opinion, please see http://www.buckleysandler.com/Cuomo_v_Clearing_House.pdf.
Consumer Finance
Agencies Issue Final FACTA Accuracy, Direct-Dispute Rules. On July 1, the Federal Trade Commission, Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, and National Credit Union Administration issued final rules implementing Fair and Accurate Credit Transactions Act of 2003 (FACTA) provisions that (i) require furnishers to take steps to ensure the accuracy and the integrity of the information that they provide to credit bureaus and (ii) allow consumers to dispute credit report items directly with the furnisher of the information. 74 Fed. Reg. 31484 (July 1, 2009). The first rule requires furnishers to establish and implement written policies and procedures related to the accuracy and integrity of the information they furnish to credit bureaus. “Integrity” is defined to include information, identified by each agency, whose omission could present a misleading picture of the consumer’s creditworthiness. Each agency will define such information in guidelines. Each agency has determined that the credit limit, where applicable (i.e., in open-end accounts with a credit limit) represents an example of such information. The agencies rejected an approach in which the FACTA requirements would have been implemented as guidelines rather than regulations and in which inclusion of items such as the credit limit would not have been required. The agencies also issued an Advance Notice of Proposed Rulemaking (ANPR) asking whether information other than the credit limit, including specifically the account-opening date, should also be furnished to promote integrity. 74 Fed. Reg. 31529 (July 1, 2009).
The direct-dispute rule requires furnishers of information, including collection agencies, to investigate disputes submitted directly to them that “pertain to an account or other relationship that the furnisher has or has had with the consumer.” Under the previous law, the Fair Credit Reporting Act only required furnishers to investigate items that the consumer disputed with the consumer reporting agency. Both of the final rules go into effect on July 1, 2010. Comments on the ANPR are due by August 31, 2009. For a copy of the press release, please see http://www.ftc.gov/opa/2009/07/facta.shtm. For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2009/pdf/E9-15323.pdf.
FTC Issues Advisory Opinion to Resolve Potential Conflict Between New Direct Dispute Rule, FDCPA. On June 23, the Federal Trade Commission (FTC) issued an advisory opinion that clarifies the conflicting duties of debt collectors under the FTC’s new direct-dispute rule (the Rule) and the Fair Debt Collection Practices Act (FDCPA). The Rule, which was published in the Federal Register on July 1, 2009 and become effective July 1, 2010, require entities that furnish information to consumer reporting agencies (CRAs) to report their investigations of consumer disputes directly to consumers or to notify consumers if they determine that a dispute is frivolous or irrelevant. This requirement potentially conflicts with a provision of the FDCPA that requires debt collectors to cease communication with consumers who demand in writing that the debt collector cease further communication with the consumer. The potential conflict between the two requirements arises when a consumer orders a debt collector in writing to cease communication, but at some future time submits a direct dispute about information that the debt collector has provided to a CRA. Under this scenario, a debt collector would potentially violate the FDCPA if it provided the notices required by the Rule, but would violate the Rule if the notices were omitted. To resolve this conflict, the advisory opinion states that a debt collector that has received a “cease communication letter” does not violate the FDCPA if the debt collector sends the consumer a notice that has no purpose other than to comply with the Rule. For a copy of the FTC advisory opinion, please see http://www.ftc.gov/os/2009/07/P064803facta-adop.pdf.
FTC Settles Charges Against Debt Collection Company. On July 2, the Federal Trade Commission (FTC) settled charges with a debt collection company that allegedly violated the FTC Act and the Fair Debt Collection Practices Act (FDCPA) when it falsely threatened consumers with garnishment of wages, arrest, or legal action and used other unlawful tactics to collect consumer debts. According to the FTC, the company (i) called consumers before 8 a.m. and after 9 p.m., (ii) called consumers at work when it had had reason to know that the calls were inconvenient, (iii) informed third parties about the consumers’ debts, (iv) did not cease making calls to consumers after receiving written requests to cease such activity, and (v) used harassing and abusive tactics, such as calling consumers multiple times each day, calling back consumers immediately after they hung up a collector’s call, and using profane or otherwise abusive language. The settlements (i) prohibit the defendants from further violations of the FTC Act and the FDCPA, (ii) impose civil penalties, and (iii) impose record-keeping and reporting provisions to ensure compliance. For a copy of the press release, please see http://www.ftc.gov/opa/2009/07/oxford.shtm. For a copy of the consent decrees, please see http://www.ftc.gov/os/caselist/0623177/090624oxforddecreeoms.pdf and http://www.ftc.gov/os/caselist/0623177/090624oxforddecreespinelli.pdf.
Supreme Court Grants Cert in FDCPA Bona Fide Error Defense Case. On June 26, the U.S. Supreme Court granted a petition for writ of certiorari in a case disputing whether a legal error qualifies for the bona fide error defense under the Fair Debt Collection Practices Act (FDCPA). Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, No. 08-1200. Previously in this case, the U.S. Court of Appeals for the Sixth Circuit, following the Tenth Circuit’s opinion in Johnson v. Riddle, 305 F.3d 1107 (10th Cir. 2002), held that legal errors qualify as bona fide errors under the FDCPA (reported in InfoBytes, Sept. 26, 2008). The decisions of the Tenth Circuit and Sixth Circuit are in tension with decisions from the Second, Eighth, and Ninth Circuits that hold that legal errors are not bona fide errors under the FDCPA. The latter decisions reason that the FDCPA’s bona fide error provision is similar to a provision in the Truth in Lending Act that explicitly excludes legal errors from the category of bona fide errors. For a copy of the court of appeals decision in Jerman, please see http://www.ca6.uscourts.gov/opinions.pdf/08a0299p-06.pdf. For a copy of the Supreme Court docket, please see http://origin.www.supremecourtus.gov/docket/08-1200.htm.
Supreme Court Denies Cert in FCRA Preemption Case. On June 29, the U.S. Supreme Court denied a petition for writ of certiorari to resolve to what extent the Fair Credit Reporting Act (FCRA) preempts restrictions under the California Financial Information Privacy Act (the Act) regarding the exchange of consumer information among affiliated financial institutions. American Bankers Ass’n. v. Brown, No. 08-730. In this case, the U.S. Court of Appeals for the Ninth Circuit first held that the affiliate-sharing preemption clause of FCRA preempted the affiliate-sharing provision of the Act "insofar as [the Act] attempts to regulate the communication between affiliates of ‘information.’” The court held that the meaning of "information" should be construed in relation to FCRA’s definition of consumer report information. On remand, the district court then held that, under this framework, (i) no portion of the applicable section of the Act would survive preemption, and (ii) even if a portion did survive preemption, the court lacked the power to sever the preempted applications. On appeal from remand, the Ninth Circuit held that (i) some communications of non-public personal information under the Act would fall outside FCRA’s basic definition of “consumer report” and, thus, FCRA would not preempt some applications of the Act, and (ii) the valid applications of the state law were severable from those that were preempted. For a copy of the court of appeals decisions, please see http://www.ca9.uscourts.gov/datastore/opinions/2005/06/20/0416334.pdf and http://www.ca9.uscourts.gov/datastore/opinions/2008/09/04/0517163.pdf. For a copy of the Supreme Court docket, please see http://origin.www.supremecourtus.gov/docket/08-730.htm.
Florida Federal Court Allows “Willful,” Negligent Violation Claims Under FACTA to Proceed. On June 29, the U.S. District Court for the Southern District of Florida rejected the defendant merchants’ motion to dismiss allegations that they “willfully” and negligently violated the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act (FACTA), by including a credit card expiration date on a receipt. Rosenthal v. Longchamp Coral Gables LLC, No. 08-21757, 2009 WL 1854846 (S.D. Fla. June 29, 2009). Previously in this case, the court dismissed a claim that the merchants violated FACTA by including the expiration date of a credit card on a printed receipt after June 3, 2008 (reported in InfoBytes, Apr. 3, 2009). In this decision, the court held that the amended complaint’s allegations elevated the willfulness and negligence claims from ‘conceivable to plausible’ under the pleading standard of Bell Atlantic Corp. v. Twombly by alleging constructive and actual notice by the merchants of the requirements under FACTA. Specifically, the consumer argued that the merchants’ bank (i) advised the merchants regarding FACTA’s truncation and expiration date requirements beginning in 2003, and (ii) advised the merchants that the Credit and Debit Card Clarification Act of 2007, an amendment to FCRA, “did not apply to merchants who printed expiration dates on their receipts after June 3, 2008.” The complaint also alleges that (i) the credit card rules that the merchants entered into prohibited the printing of credit card expiration dates, (ii) the Federal Trade Commission had distributed a national business alert regarding FACTA’s requirements, and (iii) by May 2008, sixteen federal courts had found FACTA prohibited printing expiration dates. For a copy of the opinion, please see http://www.buckleysandler.com/Rosenthal_v_Longchamp_062909.pdf.
Litigation
Supreme Court Holds States May Enforce Non-Preempted State Laws Against National Banks. In a 5-4 decision issued June 29, the U.S. Supreme Court held that states have the power to enforce state laws against national banks through the judicial process but lack the authority to examine banks or subpoena documents or other information without judicial process. Cuomo v. The Clearing House Association, LLC, 557 U.S. ---, No. 08-453 (U.S. June 29, 2009). (Reported in InfoBytes Special Alert, June 30, 2009). The Clearing House decision arises from letters sent to several national banks by then-New York Attorney General Eliot Spitzer in 2005. The letters requested certain non-public information about the banks’ lending practices, "in lieu of subpoena," to determine whether the banks violated New York fair lending laws. The Office of the Comptroller of the Currency (OCC) and a banking trade group brought suit to enjoin the requests, arguing that OCC regulation promulgated under the National Bank Act (NBA) prohibits such an enforcement of state laws against national banks because only the OCC may exercise "visitorial powers" - defined by the OCC to include the prosecutions of enforcement actions - over national banks. The United States District Court for the Southern District of New York entered the requested injunction, and the Second Circuit affirmed. Both courts held that the OCC’s interpretation of the term "visitorial powers" in the NBA was entitled to Chevron deference and was reasonable. Justice Scalia, writing for the majority that included Justices Ginsburg, Souter, Stevens and Breyer, affirmed in part and reversed in part - upholding the injunction to the extent that it enjoined the threatened issuance of an executive subpoena by the state, and overruling the injunction to the extent that it prohibited the Attorney General from bringing any judicial enforcement action against national banks. According to the majority, the OCC’s interpretation of the NBA’s "visitorial powers" provision was unreasonable because "a sovereign’s ‘visitorial powers’ and its powers to enforce the law are two different things." In short, the OCC could not prevent states from enforcing laws by virtue of the "visitorial powers" provision because there was no reasonable basis to "extend[] the definition of ‘visitorial powers’ to include ‘prosecuting enforcement actions’ in state courts." The result of this decision is that, going forward, the Attorney General would have to pursue the action as a "civil litigant," subject to the rules of civil procedure and discovery, not as a "visitor," which could "inspect books and records at any time for any or no reason." Justice Thomas issued a dissent, in which he was joined by Chief Justice Roberts, Justice Kennedy, and Justice Alito. According to the dissenters, the term "visitorial powers" was "susceptible to multiple interpretations," and in light of the ordinary meaning of this term, the structure of the NBA, and the history of "visitation," the OCC’s regulation was reasonable and entitled to Chevron deference. For a copy of the opinion, please see http://www.buckleysandler.com/Cuomo_v_Clearing_House.pdf.
Supreme Court Grants Cert in FDCPA Bona Fide Error Defense Case. On June 26, the U.S. Supreme Court granted a petition for writ of certiorari in a case disputing whether a legal error qualifies for the bona fide error defense under the Fair Debt Collection Practices Act (FDCPA). Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, No. 08-1200. Previously in this case, the U.S. Court of Appeals for the Sixth Circuit, following the Tenth Circuit’s opinion in Johnson v. Riddle, 305 F.3d 1107 (10th Cir. 2002), held that legal errors qualify as bona fide errors under the FDCPA (reported in InfoBytes, Sept. 26, 2008). The decisions of the Tenth Circuit and Sixth Circuit are in tension with decisions from the Second, Eighth, and Ninth Circuits that hold that legal errors are not bona fide errors under the FDCPA. The latter decisions reason that the FDCPA’s bona fide error provision is similar to a provision in the Truth in Lending Act that explicitly excludes legal errors from the category of bona fide errors. For a copy of the court of appeals decision in Jerman, please see http://www.ca6.uscourts.gov/opinions.pdf/08a0299p-06.pdf. For a copy of the Supreme Court docket, please see http://origin.www.supremecourtus.gov/docket/08-1200.htm.
Supreme Court Denies Cert in FCRA Preemption Case. On June 29, the U.S. Supreme Court denied a petition for writ of certiorari to resolve to what extent the Fair Credit Reporting Act (FCRA) preempts restrictions under the California Financial Information Privacy Act (the Act) regarding the exchange of consumer information among affiliated financial institutions. American Bankers Ass’n. v. Brown, No. 08-730. In this case, the U.S. Court of Appeals for the Ninth Circuit first held that the affiliate-sharing preemption clause of FCRA preempted the affiliate-sharing provision of the Act "insofar as [the Act] attempts to regulate the communication between affiliates of ‘information.’” The court held that the meaning of "information" should be construed in relation to FCRA’s definition of consumer report information. On remand, the district court then held that, under this framework, (i) no portion of the applicable section of the Act would survive preemption, and (ii) even if a portion did survive preemption, the court lacked the power to sever the preempted applications. On appeal from remand, the Ninth Circuit held that (i) some communications of non-public personal information under the Act would fall outside FCRA’s basic definition of “consumer report” and, thus, FCRA would not preempt some applications of the Act, and (ii) the valid applications of the state law were severable from those that were preempted. For a copy of the court of appeals decisions, please see http://www.ca9.uscourts.gov/datastore/opinions/2005/06/20/0416334.pdf and http://www.ca9.uscourts.gov/datastore/opinions/2008/09/04/0517163.pdf. For a copy of the Supreme Court docket, please see http://origin.www.supremecourtus.gov/docket/08-730.htm.
California Court Holds Class Action Waiver with Opt-Out Provision in Cardholder Agreement Unenforceable. On June 19, the California Court of Appeals held that a class action waiver with an opt-out provision contained in an arbitration provision of a cardholder agreement is procedurally unconscionable. Duran v. Discover Bank, No. B203338, 2009 WL 1709569 (Cal. Ct. App. Jun. 19, 2009). Previously in this case, the lower court held that the class action waiver in the defendant bank’s credit card agreement was unconscionable, and therefore unenforceable, under California law. On appeal, the defendant challenged the finding of procedural unconscionability, arguing that (i) the contract was not a contract of adhesion because the contract contained an opt-out provision, and (ii) Delaware law, not California law, should govern the dispute. The court first held that opt-out provisions do not automatically render contracts nonadhesive under California law. The court reasoned that a class action waiver might not sufficiently explain the disadvantages of the arbitration agreement compared to litigation, thus potentially preventing a consumer from making an “authentic informed choice” about whether to opt-out. In this case, the court found that the agreement did not sufficiently explain (i) the disadvantages of consenting to the arbitration and class waiver provisions, (ii) the costs of arbitration, and (iii) the “practical consequences” of a class action waiver. In addition, the court held that California law governed the dispute, reasoning that, even though Delaware has a substantial relationship to the dispute and class action waivers are enforceable under Delaware law, (i) the enforcement of the waiver would “contravene a fundamental policy of California,” and (ii) California has a materially greater interest than Delaware as to the enforceability of the class action waiver at issue. As a result, the court affirmed the lower court’s finding that the class action waiver provision of the agreement was procedurally unconscionable under California law. For a copy of the opinion, please see http://www.buckleysandler.com/Duran_v_Discover.pdf.
Florida Federal Court Allows “Willful,” Negligent Violation Claims Under FACTA to Proceed. On June 29, the U.S. District Court for the Southern District of Florida rejected the defendant merchants’ motion to dismiss allegations that they “willfully” and negligently violated the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act (FACTA), by including a credit card expiration date on a receipt. Rosenthal v. Longchamp Coral Gables LLC, No. 08-21757, 2009 WL 1854846 (S.D. Fla. June 29, 2009). Previously in this case, the court dismissed a claim that the merchants violated FACTA by including the expiration date of a credit card on a printed receipt after June 3, 2008 (reported in InfoBytes, Apr. 3, 2009). In this decision, the court held that the amended complaint’s allegations elevated the willfulness and negligence claims from ‘conceivable to plausible’ under the pleading standard of Bell Atlantic Corp. v. Twombly by alleging constructive and actual notice by the merchants of the requirements under FACTA. Specifically, the consumer argued that the merchants’ bank (i) advised the merchants regarding FACTA’s truncation and expiration date requirements beginning in 2003, and (ii) advised the merchants that the Credit and Debit Card Clarification Act of 2007, an amendment to FCRA, “did not apply to merchants who printed expiration dates on their receipts after June 3, 2008.” The complaint also alleges that (i) the credit card rules that the merchants entered into prohibited the printing of credit card expiration dates, (ii) the Federal Trade Commission had distributed a national business alert regarding FACTA’s requirements, and (iii) by May 2008, sixteen federal courts had found FACTA prohibited printing expiration dates. For a copy of the opinion, please see http://www.buckleysandler.com/Rosenthal_v_Longchamp_062909.pdf.
E-Financial Services
FTC Employs U.S. SAFE WEB Act to Obtain Judgment Against Internet Spammers. On July 2, the Federal Trade Commission (FTC) announced that the U.S. District Court for the Northern District of Illinois Eastern Division has entered a $3.7 million default judgment against an international internet spam ring. FTC v. Spear Systems, No. 07 C 5597 (N.D. Ill. Jan. 29, 2009). The case, filed by the FTC in October 2007, marked the first time that the FTC employed the U.S. SAFE WEB Act to share information with foreign law enforcement entities. Using this information, the agency brought claims against the defendants for violations of both the FTC Act and the Controlling the Assault of Non-Solicited Pornography And Marketing Act (CAN-SPAM Act); specifically, the FTC alleged that the defendants violated the CAN-SPAM Act by sending emails that lacked opt-out links or physical postal addresses. For a copy of the press release, please see http://www.ftc.gov/opa/2009/07/spear.shtm.
Privacy/Data Security
Agencies Issue Final FACTA Accuracy, Direct-Dispute Rules. On July 1, the Federal Trade Commission, Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, and National Credit Union Administration issued final rules implementing Fair and Accurate Credit Transactions Act of 2003 (FACTA) provisions that (i) require furnishers to take steps to ensure the accuracy and the integrity of the information that they provide to credit bureaus and (ii) allow consumers to dispute credit report items directly with the furnisher of the information. 74 Fed. Reg. 31484 (July 1, 2009). The first rule requires furnishers to establish and implement written policies and procedures related to the accuracy and integrity of the information they furnish to credit bureaus. “Integrity” is defined to include information, identified by each agency, whose omission could present a misleading picture of the consumer’s creditworthiness. Each agency will define such information in guidelines. Each agency has determined that the credit limit, where applicable (i.e., in open-end accounts with a credit limit) represents an example of such information. The agencies rejected an approach in which the FACTA requirements would have been implemented as guidelines rather than regulations and in which inclusion of items such as the credit limit would not have been required. The agencies also issued an Advance Notice of Proposed Rulemaking (ANPR) asking whether information other than the credit limit, including specifically the account-opening date, should also be furnished to promote integrity. 74 Fed. Reg. 31529 (July 1, 2009).
The direct-dispute rule requires furnishers of information, including collection agencies, to investigate disputes submitted directly to them that “pertain to an account or other relationship that the furnisher has or has had with the consumer.” Under the previous law, the Fair Credit Reporting Act only required furnishers to investigate items that the consumer disputed with the consumer reporting agency. Both of the final rules go into effect on July 1, 2010. Comments on the ANPR are due by August 31, 2009. For a copy of the press release, please see http://www.ftc.gov/opa/2009/07/facta.shtm. For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2009/pdf/E9-15323.pdf.
FTC Issues Advisory Opinion to Resolve Potential Conflict Between New Direct Dispute Rule, FDCPA. On June 23, the Federal Trade Commission (FTC) issued an advisory opinion that clarifies the conflicting duties of debt collectors under the FTC’s new direct-dispute rule (the Rule) and the Fair Debt Collection Practices Act (FDCPA). The Rule, which was published in the Federal Register on July 1, 2009 and become effective July 1, 2010, require entities that furnish information to consumer reporting agencies (CRAs) to report their investigations of consumer disputes directly to consumers or to notify consumers if they determine that a dispute is frivolous or irrelevant. This requirement potentially conflicts with a provision of the FDCPA that requires debt collectors to cease communication with consumers who demand in writing that the debt collector cease further communication with the consumer. The potential conflict between the two requirements arises when a consumer orders a debt collector in writing to cease communication, but at some future time submits a direct dispute about information that the debt collector has provided to a CRA. Under this scenario, a debt collector would potentially violate the FDCPA if it provided the notices required by the Rule, but would violate the Rule if the notices were omitted. To resolve this conflict, the advisory opinion states that a debt collector that has received a “cease communication letter” does not violate the FDCPA if the debt collector sends the consumer a notice that has no purpose other than to comply with the Rule. For a copy of the FTC advisory opinion, please see http://www.ftc.gov/os/2009/07/P064803facta-adop.pdf.
OTS, FDIC Announce Enforcement Actions, Settlement Regarding Convenience Checks. On June 30, the Office of Thrift Supervision (OTS) announced the execution of two enforcement actions with American Express Bank, FSB. The enforcement actions pertain to convenience checks that the bank sent to credit card consumers that could not subsequently be honored because of changes in the consumers’ credit ratings and/or credit limits. The declined checks resulted in returned-check and other associated fees and allegedly may have resulted in negative reports to credit rating agencies. Pursuant to the enforcement actions, the bank (i) consented to civil penalties without admitting or denying liability, (ii) will establish a $1.5 reserve fund to reimburse consumers for declined convenience checks, and (iii) will provide consumers with information to remedy negative effects resulting from the declined convenience checks. Also on June 30, the Federal Deposit Insurance Corporation (FDIC) announced a related settlement with American Express Centurion Bank regarding its convenience check program. According to the FDIC, the bank improved its disclosures prior to the settlement to make customers more aware that the convenience checks may be dishonored. Under the settlement, the bank (i) did not admit or deny liability regarding the allegations, (ii) stipulated to a cease-and-desist order, (iii) agreed to implement procedures for reviewing credit limits prior to marketing and issuing convenience checks, (iv) will clearly disclose a customer’s established credit limit in convenience check offers and marketing materials, (v) will implement procedures allowing a consumer to obtain preauthorization to use a convenience check for a specified amount at a particular time, (vi) will reimburse consumers for the costs associated with the dishonored checks, and (vii) will provide consumers with information to mitigate the negative effects resulting from a declined convenience check. Both banks have suspended their respective convenience check programs. For a copy of the press releases, please see http://www.ots.treas.gov/?p=PressReleases&ContentRecord_id=32787056-1e0b-8562-eb3c-b9e8691f8271 and http://www.fdic.gov/news/news/press/2009/pr09108.html. For a copy of the OTS cease-and-desist order, please see http://files.ots.treas.gov/enforcement/97146.pdf. For a copy of the OTS civil money penalty assessment, please see http://files.ots.treas.gov/enforcement/97147.pdf. For a copy of the FDIC order to pay, please see http://www.fdic.gov/news/news/press/2009/pr09108a.pdf. For a copy of the FDIC cease-and-desist order, please see http://www.fdic.gov/news/news/press/2009/pr09108b.pdf.
Mortgage Company Settles with DOJ, HUD for False Claims Act Violations. On July 1, the Department of Justice (DOJ) announced that Beazer Mortgage Corp. and Beazer Homes, Inc. USA (Beazer) will pay a $5 million fine to the U.S. Department of Housing and Urban Development to settle allegations that Beazer engaged in fraudulent mortgage origination activities for FHA-insured mortgage loans. Beazer was charged with violating the federal False Claims Act by (i) failing to reduce a loan’s interest rate after requiring cash at closing for a reduced interest rate, (ii) providing money to borrowers through indirect “gifts” to ensure minimum required down payments could be met (even if the borrower did not have sufficient funds), then increasing the principal on the loan despite representing to borrowers that such funds did not require repayment, (iii) failing to indicate to the FHA which branch office had made defaulting loans to avoid detection of excessive default rates, and (iv) disregarding “stated income” requirements in making loans to unqualified borrowers. The settlement was reached in conjunction with a Deferred Prosecution Agreement (DPA) between Beazer and the U.S. Attorney’s Office for the Western District of North Carolina. Under the DPA, the U.S. Attorney has agreed not to prosecute the alleged violations and Beazer will provide up to $50 million to homeowners. Additionally, Beazer/Squires Realty, Inc. and Beazer Homes Corp. have entered into a settlement agreement with the North Carolina Real Estate Commission. Under the consent orders, a reprimand will not be issued if (i) Beazer Homes completes certain remedial measures, and (ii) the broker license held by Beazer/Squires Realty, Inc. is revoked. In February 2008, Beazer voluntarily ceased its mortgage origination business. For a copy of the DOJ press release, please see http://www.usdoj.gov/opa/pr/2009/July/09-civ-654.html. For a copy of Beazer’s press release, please see http://ir.beazer.com/phoenix.zhtml?c=98372&p=irol-newsArticle_Print&ID=1304005&highlight=.
Supreme Court Denies Cert in FCRA Preemption Case. On June 29, the U.S. Supreme Court denied a petition for writ of certiorari to resolve to what extent the Fair Credit Reporting Act (FCRA) preempts restrictions under the California Financial Information Privacy Act (the Act) regarding the exchange of consumer information among affiliated financial institutions. American Bankers Ass’n. v. Brown, No. 08-730. In this case, the U.S. Court of Appeals for the Ninth Circuit first held that the affiliate-sharing preemption clause of FCRA preempted the affiliate-sharing provision of the Act "insofar as [the Act] attempts to regulate the communication between affiliates of ‘information.’” The court held that the meaning of "information" should be construed in relation to FCRA’s definition of consumer report information. On remand, the district court then held that, under this framework, (i) no portion of the applicable section of the Act would survive preemption, and (ii) even if a portion did survive preemption, the court lacked the power to sever the preempted applications. On appeal from remand, the Ninth Circuit held that (i) some communications of non-public personal information under the Act would fall outside FCRA’s basic definition of “consumer report” and, thus, FCRA would not preempt some applications of the Act, and (ii) the valid applications of the state law were severable from those that were preempted. For a copy of the court of appeals decisions, please see http://www.ca9.uscourts.gov/datastore/opinions/2005/06/20/0416334.pdf and http://www.ca9.uscourts.gov/datastore/opinions/2008/09/04/0517163.pdf. For a copy of the Supreme Court docket, please see http://origin.www.supremecourtus.gov/docket/08-730.htm.
Credit Cards
OTS, FDIC Announce Enforcement Actions, Settlement Regarding Convenience Checks. On June 30, the Office of Thrift Supervision (OTS) announced the execution of two enforcement actions with American Express Bank, FSB. The enforcement actions pertain to convenience checks that the bank sent to credit card consumers that could not subsequently be honored because of changes in the consumers’ credit ratings and/or credit limits. The declined checks resulted in returned-check and other associated fees and allegedly may have resulted in negative reports to credit rating agencies. Pursuant to the enforcement actions, the bank (i) consented to civil penalties without admitting or denying liability, (ii) will establish a $1.5 reserve fund to reimburse consumers for declined convenience checks, and (iii) will provide consumers with information to remedy negative effects resulting from the declined convenience checks. Also on June 30, the Federal Deposit Insurance Corporation (FDIC) announced a related settlement with American Express Centurion Bank regarding its convenience check program. According to the FDIC, the bank improved its disclosures prior to the settlement to make customers more aware that the convenience checks may be dishonored. Under the settlement, the bank (i) did not admit or deny liability regarding the allegations, (ii) stipulated to a cease-and-desist order, (iii) agreed to implement procedures for reviewing credit limits prior to marketing and issuing convenience checks, (iv) will clearly disclose a customer’s established credit limit in convenience check offers and marketing materials, (v) will implement procedures allowing a consumer to obtain preauthorization to use a convenience check for a specified amount at a particular time, (vi) will reimburse consumers for the costs associated with the dishonored checks, and (vii) will provide consumers with information to mitigate the negative effects resulting from a declined convenience check. Both banks have suspended their respective convenience check programs. For a copy of the press releases, please see http://www.ots.treas.gov/?p=PressReleases&ContentRecord_id=32787056-1e0b-8562-eb3c-b9e8691f8271 and http://www.fdic.gov/news/news/press/2009/pr09108.html. For a copy of the OTS cease-and-desist order, please see http://files.ots.treas.gov/enforcement/97146.pdf. For a copy of the OTS civil money penalty assessment, please see http://files.ots.treas.gov/enforcement/97147.pdf. For a copy of the FDIC order to pay, please see http://www.fdic.gov/news/news/press/2009/pr09108a.pdf. For a copy of the FDIC cease-and-desist order, please see http://www.fdic.gov/news/news/press/2009/pr09108b.pdf.
California Court Holds Class Action Waiver with Opt-Out Provision in Cardholder Agreement Unenforceable. On June 19, the California Court of Appeals held that a class action waiver with an opt-out provision contained in an arbitration provision of a cardholder agreement is procedurally unconscionable. Duran v. Discover Bank, No. B203338, 2009 WL 1709569 (Cal. Ct. App. Jun. 19, 2009). Previously in this case, the lower court held that the class action waiver in the defendant bank’s credit card agreement was unconscionable, and therefore unenforceable, under California law. On appeal, the defendant challenged the finding of procedural unconscionability, arguing that (i) the contract was not a contract of adhesion because the contract contained an opt-out provision, and (ii) Delaware law, not California law, should govern the dispute. The court first held that opt-out provisions do not automatically render contracts nonadhesive under California law. The court reasoned that a class action waiver might not sufficiently explain the disadvantages of the arbitration agreement compared to litigation, thus potentially preventing a consumer from making an “authentic informed choice” about whether to opt-out. In this case, the court found that the agreement did not sufficiently explain (i) the disadvantages of consenting to the arbitration and class waiver provisions, (ii) the costs of arbitration, and (iii) the “practical consequences” of a class action waiver. In addition, the court held that California law governed the dispute, reasoning that, even though Delaware has a substantial relationship to the dispute and class action waivers are enforceable under Delaware law, (i) the enforcement of the waiver would “contravene a fundamental policy of California,” and (ii) California has a materially greater interest than Delaware as to the enforceability of the class action waiver at issue. As a result, the court affirmed the lower court’s finding that the class action waiver provision of the agreement was procedurally unconscionable under California law. For a copy of the opinion, please see http://www.buckleysandler.com/Duran_v_Discover.pdf.
Florida Federal Court Allows “Willful,” Negligent Violation Claims Under FACTA to Proceed. On June 29, the U.S. District Court for the Southern District of Florida rejected the defendant merchants’ motion to dismiss allegations that they “willfully” and negligently violated the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act (FACTA), by including a credit card expiration date on a receipt. Rosenthal v. Longchamp Coral Gables LLC, No. 08-21757, 2009 WL 1854846 (S.D. Fla. June 29, 2009). Previously in this case, the court dismissed a claim that the merchants violated FACTA by including the expiration date of a credit card on a printed receipt after June 3, 2008 (reported in InfoBytes, Apr. 3, 2009). In this decision, the court held that the amended complaint’s allegations elevated the willfulness and negligence claims from ‘conceivable to plausible’ under the pleading standard of Bell Atlantic Corp. v. Twombly by alleging constructive and actual notice by the merchants of the requirements under FACTA. Specifically, the consumer argued that the merchants’ bank (i) advised the merchants regarding FACTA’s truncation and expiration date requirements beginning in 2003, and (ii) advised the merchants that the Credit and Debit Card Clarification Act of 2007, an amendment to FCRA, “did not apply to merchants who printed expiration dates on their receipts after June 3, 2008.” The complaint also alleges that (i) the credit card rules that the merchants entered into prohibited the printing of credit card expiration dates, (ii) the Federal Trade Commission had distributed a national business alert regarding FACTA’s requirements, and (iii) by May 2008, sixteen federal courts had found FACTA prohibited printing expiration dates. For a copy of the opinion, please see http://www.buckleysandler.com/Rosenthal_v_Longchamp_062909.pdf.