InfoBytes, June 13, 2008
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Securities
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
President Bush Signs Credit and Debit Card Receipt Clarification Act. On June 3, President Bush signed the Credit and Debit Card Receipt Clarification Act (H.R. 4008) (first reported in InfoBytes, May 16, 2008), which limits lawsuits against merchants based on the failure to remove card expiration dates from card receipts, but only if the failure occurred prior to June 3, 2008. H.R. 4008 provides that it is not a willful violation of the Fair Credit Reporting Act (FCRA) for a merchant to fail to remove an expiration date from a card receipt through June 3, 2008, provided the merchant has properly truncated the account number. Pursuant to the bill, a merchant could still be liable for a negligent violation of the FCRA for failure to remove the card expiration date from a card receipt as of the original FACTA compliance deadline. However, to recover for such a violation, a consumer would need to prove that he or she suffered actual damages as a result of the violation. See 15 U.S.C. § 1681o (FCRA § 617). For a copy of the bill, please see http://www.buckleykolar.com/documents/HR4008.pdf.
SEC Proposes Change to Credit Rating Process. On June 11, the Securities and Exchange Commission (SEC) proposed a series of credit rating agency changes to bring increased transparency to the ratings process and curb practices that contributed to recent turmoil in the credit markets. The proposed rulemaking continues the implementation of new regulatory authority that the SEC recently received from Congress to register and oversee nationally recognized statistical rating organizations (NRSROs). The SEC is proposing the rulemaking in three parts, with the first two portions proposed on June 11 and the third portion to be considered on June 25. The first part of the Commission’s rule proposal would, among other things, (i) prohibit a credit rating agency from issuing a rating on a structured product unless information on assets underlying the product was available, (ii) require credit rating agencies to make all of their ratings and subsequent rating actions publicly available, (iii) prohibit gifts from those who receive ratings to those who rate them, in any amount over $25, (iv) require credit rating agencies to publish performance statistics for 1, 3, and 10 years within each rating category, in a way that facilitates comparison with their competitors in the industry, (v) require disclosure by the rating agencies of the way they rely on the due diligence of others to verify the assets underlying a structured product, and (vi) require the public disclosure of the information a credit rating agency uses to determine a rating on a structured product, including information on the underlying assets. The second part of the SEC’s proposal would require credit rating agencies to differentiate the ratings they issue on structured products from those they issue on bonds, either through the use of different symbols, such as attaching an identifier to the rating, or by issuing a report disclosing the differences between ratings of structured products and other securities. The third set of recommendations for the SEC’s proposal, to be considered on June 25, are being designed to ensure that the role the SEC has assigned to ratings in its rules is consistent with the objective of having investors make an independent judgment of risks and of making it clear to investors the limits and purposes of credit ratings for structured products. Public comments on the June 11 proposed amendments and rule must be received by the Commission within 30 days after their publication in the Federal Register, which is not yet available as of the date of this publication. For a copy of the SEC press release, please see http://www.sec.gov/news/press/2008/2008-110.htm.
HUD Waives Anti-Flipping Rule for Foreclosed Properties. On June 9, HUD Assistant Secretary Brian Montgomery signed a one-year waiver of HUD’s anti-flipping rule as applied to properties acquired by a mortgagee. Under the anti-flipping rule, a borrower may not purchase a property with an FHA-insured loan if the property was acquired by the seller in the previous 90 days. This rule is intended to prevent property flipping, but the rule also had been preventing certain mortgagees from promptly disposing of REO property to borrowers with FHA-insured mortgages. One of several exceptions to this 90-day prohibition allows mortgage insurance for properties sold by state-and federally-chartered financial institutions and government-sponsored enterprises (e.g., Fannie Mae and Freddie Mac). Under this waiver, FHA financing will be made available to borrowers who purchase properties that have been owned for fewer than 90 days, if the properties were acquired by foreclosure by mortgagees that are not state or federally chartered financial institutions. Subsidiaries of the lender and vendors are also subject to this waiver. The waiver of the regulation (24 C.F.R. § 203.37a(b)(2)) will expire on June 9, 2009. A copy of HUD’s waiver is available at http://www.buckleykolar.com/documents/PropertyFlippingWaiver.pdf.
FDIC Issues Guidance on Managing Third-Party Relationships. On June 6, the Federal Deposit Insurance Corporation (FDIC) issued guidance, FIL-44-2008, regarding managing third-party risk. The guidance discusses the types of potential risks that third-party relationships may pose to financial institutions. The guidance then outlines the risk management process focusing upon: (i) risk assessment, (ii) due diligence in selecting a third party, (iii) contract structuring and review, and (iv) oversight. Future FDIC compliance examinations may focus upon the failure of financial institutions to manage those risks, and corrective actions, including enforcement actions, may be pursued for deficiencies related to third-party relationships that pose a safety and soundness or compliance management concern or result in violations of applicable laws or regulations. For a copy of this guidance, please see http://www.fdic.gov/news/news/financial/2008/fil08044a.html.
GAO Reports that FDIC Made Progress with Information Security but Improvement Still Needed. On May 30, the United States Government Accountability Office (GAO) issued a report indicating that the Federal Deposit Insurance Corporation (FDIC) had made a great deal of progress in improving information security issues raised in the GAO’s 2006 audit of the FDIC. However, the report highlights a number of unresolved information security issues, as well as raises a number of new issues that have developed since the previous audit. The report concludes that these information security concerns could result in unauthorized disclosure of FDIC financial information or management decisions based on erroneous information. For a copy of the full report, please see http://www.buckleykolar.com/documents/GAOReportonFDICInformationSecurity.pdf.
FTC to Host Debt Settlement Workshop. The Federal Trade Commission will host a workshop to examine a trend in the industry toward for-profit consumer debt relief services. The workshop will be held in Washington, D.C. on September 25, 2008 and will focus on how the for-profit debt relief model is affecting consumers and businesses. The event is free and open to the public, and no pre-registration is required. For more information on the agenda and panelists, please see http://www.ftc.gov/opa/2008/06/debt.shtm.
OCC Releases New Mortgage Metrics Report. On June 11, the Office of the Comptroller of the Currency (OCC) released the first OCC Mortgage Metrics Report. The report analyzes national bank mortgage loan data for loans held or serviced by nine national banks between October 1, 2007 and March 31, 2008. The report reviews first residential mortgages involved in delinquencies, loss mitigation, or foreclosure and provides information on delinquencies and loss mitigation on a month-to-month basis during the report time frame. The OCC anticipates providing future OCC Mortgage Metrics Reports on a quarterly basis. For a copy of the Mortgage Metrics Report, please see http://www.occ.treas.gov/ftp/release/2008-65b.pdf.
Defendants in Debt Collection Scheme Targeting Spanish Speakers Agree to Settle FTC Charges. Two defendants agreed to settle Federal Trade Commission (FTC) charges for allegedly victimizing Spanish-speaking consumers nationwide by posing as debt collectors seeking money the consumers did not owe. Maria Oceguera, her daughter Dulce Rickards (collectively, Defendants) have been barred from further violations of the FTC Act and the Fair Debt Collection Practices Act (FDCPA). The complaint alleged that the Defendants were selling an English-language course, which was advertised as free except for a shipping and handling fee. Several years after the defendants stopped selling the course, they engaged in a variety of deceptive debt collection practices in an attempt to collect monies from consumers who had purchased or inquired about the language course, but that did not owe any money. In 2007, at the FTC’s request, a federal judge issued a preliminary injunction against the Defendants to halt the deceptive collecting practices and also froze their assets. Under the recently issued consent decree, Defendants, and the companies they controlled, are barred from violating the FTC Act by making misrepresentations that they are collecting on a valid debt, are attorneys or represent attorneys, will take action they cannot take legally or do not intend to take, and from claiming that nonpayment of an alleged obligation will result in arrest, imprisonment, or loss of property or wages. In addition, the Defendants are also banned from violating the FDCPA by using falsehood or deception to collect a debt, indicating that they are attorneys or represent attorneys, and representing that nonpayment will result in arrest, imprisonment, or loss of property or wages unless the action is lawful and they intend to pursue such action. For a copy of the consent decree, please see http://www.ftc.gov/os/caselist/0723012/080501tonostlmntocegueraugalde.pdf.
State Issues
Rhode Island Extensively Revises Reverse Mortgage Statutes. On June 6, Rhode Island Governor Donald L. Carcieri signed House Bill 7723 (S.B. 2598), which extensively amends the state’s reverse mortgage statutes. The bill includes provisions that (i) prohibit prepayment penalties unless the mortgagee waives all usual fees, (ii) prohibit reducing periodic advances as a result of changes in interest rate, and (iii) provide for treble damages if a lender fails to make advances. In addition, the bill regulates when the loan may become due and when repayment may be required, restricts the sale of annuities in connection with reverse mortgages, restricts fees that may be collected at closing, sets out requirements for borrower counseling, and mandates ongoing disclosure requirements. The bill also clarifies that the state’s reverse mortgage statutes do not apply to FHA-insured HECMs. For a copy of the bill, please see http://www.rilin.state.ri.us/BillText08/HouseText08/H7723.pdf.
Vermont Governor Signs Bill Authorizing Participation in the Nationwide Mortgage Licensing System. On May 28, Vermont Governor Jim Douglas signed S.B. 284, which, among other things, gives the Vermont Department of Banking, Insurance, Securities, and Health Care Administration the authority to participate in the Nationwide Mortgage Licensing System (NMLS). The section of the bill authorizing participation in the NMLS went into effect immediately upon passage. For a copy of S.B. 284, please see http://www.leg.state.vt.us/docs/legdoc.cfm?URL=/docs/2008/acts/ACT178.HTM.
Colorado Passes Law Providing Additional Protections for Homeowners Facing Foreclosure. On June 5, Colorado Governor Bill Ritter signed H.B. 1402, which requires mortgage lenders to provide written notice to borrowers at least 30 days after default and at least 30 days before filing a notice of election and demand to initiate foreclosure. The bill requires that this written notice provide the borrower with the telephone number for Colorado’s foreclosure hotline as well as the telephone number for the mortgage lender’s loss mitigation department. H.B. 1402 also creates a Foreclosure Prevention Grant Fund, which is to be used to provide outreach and notice of foreclosure prevention assistance to individuals at risk of foreclosure. H.B. 1402 became effective on June 5, 2008. For a copy of the full text of the bill, please see http://www.buckleykolar.com/documents/COHB1402.pdf.
Oklahoma Governor Signs Security Breach Notice Law. Oklahoma Governor Brad Henry recently signed a bill (H.B. 2245) that will require individuals or entities that own or license computerized data that includes personal information to notify Oklahoma residents of any breach of the security of the system if their personal information was, or is reasonably believed to have been, accessed and acquired by an unauthorized person. The law becomes effective November 1, 2008. For a copy of the bill, please see http://webserver1.lsb.state.ok.us/2007-08bills/HB/hb2245_enr.rtf.
Courts
Ninth Circuit Upholds Exclusionary List Against Tort and Defamation Claims. Freddie Mac placed a mortgage broker on its Exclusionary List after determining that loans originated by the broker were prepaying rapidly because the broker encouraged its borrowers to apply for initial loans at a high interest rate, and then to engage in early refinancing. Family Home and Finance Center v. Federal Home Loan Mortgage Corporation, CV-05-08752-PA (9th Cir., April 7, 2008). National City, the lender on the loans, also terminated the broker’s contract. In the broker’s suit against Freddie Mac for tortuous interference of contract, unfair competition, and defamation, a U.S. district court in California granted summary judgment for Freddie Mac. On appeal, the Court of Appeals for the Ninth Circuit upheld the summary judgment, ruling (i) there was no evidence that Freddie Mac intentionally influenced or caused National City to terminate the broker contract, (ii) there was no unfair competition because Freddie Mac had a legitimate business reason for placing the broker on the Exclusionary List, and (iii) absent a finding of malice, which was lacking in the case, the “Common Interest Privilege” recognized in California protects Freddie Mac’s disclosure against defamation claims. Under this privilege, absent malice, communications are privileged if the communicator and the recipient have a common interest and the communication is of a kind reasonably calculated to protect or further that interest. For a copy of the opinion, please see http://www.buckleykolar.com/documents/FamilyHomeandFinanceCentervFHLMC.pdf.
U.S. Supreme Court Vacates and Remands FCRA “Willfulness” Case With Instructions to Dismiss. On June 9, the U.S. Supreme Court vacated and remanded with instructions to dismiss as moot a Third Circuit opinion (reported in InfoBytes, Nov. 9, 2007) on the meaning of willfulness in connection with the Fair Credit Reporting Act (FCRA). Whitfield v. Radian Guaranty, Inc., No. 05-5017. Despite the opinion in Safeco Ins. Co. of America v. Burr, 127 S.Ct. 2201 (2007) (reported in InfoBytes Special Alert, June 4, 2007), in which the Supreme Court clarified the meaning of “willful” as it pertains to FCRA, stating that it encompasses a “knowing or reckless violation,” a number of courts, including the Third Circuit, have required a factual inquiry into the defendant’s state of mind in determining whether it acted willfully. The Court’s order eliminates the only circuit-level opinion holding that a factual inquiry is needed to decide whether the defendant’s interpretation of the statute is “objectively reasonable.” An amicus brief submitted on behalf of the Consumer Mortgage Coalition, the American Financial Services Association, the Consumer Bankers Association, the Mortgage Bankers Association, and the Housing Policy Council of the Financial Services Roundtable, urged the Court to vacate and dismiss the Third Circuit’s opinion (see http://www.buckleykolar.com/documents/RadianvWhitfield-AmicusSupportingCert.pdf). In this brief, which Buckley Kolar participated in drafting, the foregoing trade groups argued, based on Safeco, thatthe Third Circuit erred in holding that willfulness is a factual issue that cannot be decided as a matter of law.For a copy of the United States Supreme Court Order List, please see http://www.buckleykolar.com/documents/USSCOrderList-6-9-08.pdf.
Ninth Circuit Rules Against FDIC on Issues Regarding Capital Pledges by Holding Companies. On June 4, the U.S. Court of Appeals for the Ninth Circuit reversed the district court’s grant of summary judgment in favor of the Federal Deposit Insurance Corporation (FDIC) on the issue of whether a federally insured bank’s failure to cure a deficit in a Chapter 11 case gives rise to an administrative priority in a Chapter 7 case. In re Imperial Credit Industries, Inc., No. 05-56073 (9th Cir. June 4, 2008). In this case, the FDIC was attempting to collect on an $18 million pledge subject to the federally-insured parent company filing for bankruptcy protection to make up for a capital shortfall by the parent company’s subsidiary, Imperial Credit Industries, Inc. The Ninth Circuit rejected the FDIC’s argument that the holding could make it more difficult to rely on capital guarantees by the parent companies of federally insured institutions. Subject to the ruling on appeal, two factors may frustrate the FDIC’s ability to collect on the guaranty: (i) the parent company’s trustee may argue that the guaranty of the failed subsidiary’s capital position was a fraudulent conveyance under the Bankruptcy Code; and (ii) the FDIC was given lower priority than eight other parties, whose claims included claims for contributions to employee benefits plans, unsecured claims by individuals in various cases, and other disputes. With respect to (i), the Ninth Circuit found that 12 U.S.C. § 1829(u) did not address obligations (what the parent company was attempting to avoid as a fraudulent conveyance) and that it only barred fraudulent conveyance claims for “assets.” With respect to (ii), the Ninth Circuit found that the FDIC had only ninth priority under 11 U.S.C. § 507(a)(9), which expressly provides for unsecured claims in connection with capital commitments. For a copy of this opinion, please see http://www.buckleykolar.com/documents/WolkowitzvFDIC.pdf.
Capital One Bank Claims Federal Preemption As Basis for Refusal to Cooperate With State Investigation. On May 2, Capital One Bank, N.A. (“Capital One”) filed a complaint in the U.S. District Court for the Northern District of California requesting that the federal court block a probe of the firm’s marketing practices initiated by California Attorney General Edmund Brown, Jr. (CA AG) based on the assertion that federal preemption renders it beyond the reach of the state investigation. Capital One Bank (USA), N.A. v. Brown, N.D. Cal., No. CV-08-2289, filed 5/2/08. Capital One argues it is pre-empted from state regulation and visitorial powers because it acquired national bank status on March 1, 2008, although it was a state-chartered institution when the probe began in 2006. Capital One previously produced books and records to the CA AG when the investigation began, but then notified the CA AG of its charter conversion and subsequently refused to cooperate with the CA AG’s additional requests. For a copy of Capital One’s complaint, please see http://www.buckleykolar.com/documents/CapitalOneBankvBrown-Complaint.pdf.
Court Holds FACTA Truncation Provisions Are Unconstitutional. In a new twist on lawsuits alleging violations of the credit card truncation prohibition in the Fair and Accurate Credit Transaction Act (FACTA), a federal district court judge in Alabama held that FACTA violates the due process clause of the Fifth Amendment and is therefore unconstitutional. Grimes v. Rave Motion Pictures Birmingham, 2008 WL 2338131, No. 07-AR-1397-S (N.D. Ala. May 28, 2008). This case arose when the plaintiff, seeking class status, brought suit against four different vendors for printing her expiration date on electronic credit card receipts. Eschewing claims for actual damages, the plaintiff instead sought the statutory damages provided by FACTA of $100 to $1000 per willful violation of the statute, plus punitive damages and attorney fees. The court noted that were the plaintiffs to succeed, a class recovery would bankrupt each defendant, stating “annihilation is assured if each member of the class gets what FACTA purports to guarantee him.” Ruling on the defendants’ motions for summary judgment, the court held that the statute violates the due process clause of the Fifth Amendment of the U.S. Constitution. Specifically, the Court held that the damages provision for willful violations is unconstitutionally vague because no jury could make a rational determination of the proper amount of the award between $100 and $1000, stating, “the statute here under consideration provides no guidance for deciding between $100 and $1000, leaving it to the whim of the jury, that is, unless the court violates the doctrine of separation of powers and assumes the role of legislator as the only way to make sense of the present non-sensical language.” The court also noted that the combination of the statutory damages, which both the plaintiffs and the United States admitted would represent punishment of the defendants if assessed, and the punitive damages provision constitutes double punishment, which “only exacerbates the problem of how to instruct a jury using the FACTA language.” In addition, the court declined to demur to the U.S. Justice Department, which filed a successful motion to intervene in which it urged the court to wait for the actual outcome of the case before evaluating the constitutional implications. The court declined, reasoning, “to wait for the assured destruction of these four defendants before removing their exposure to the destructive effects of this unconstitutional statute would be both unfair and a great waste of judicial time and effort, and this court respectfully declines the request of the United States to put off the inevitable.” With that, the court concluded that (i) there was no way to avoid certifying a class; (ii) it was obvious that defendants did willfully fail to truncate the credit card receipts; and (iii) there would be no way to approve a settlement that awards less than $100 to each class member (“the defendants probably know that they have not found a court who will approve a ‘coupon’ settlement”). The court granted summary judgment for the defendants, writing “either summary judgment for defendants must be granted now, or summary judgment for the plaintiffs will be granted later.” For a copy of this decision, please see http://www.buckleykolar.com/documents/GrimesvRaveMotionPicturesBirmingham.pdf.
Federal Court Denies FCRA Claim Due To Statute of Limitations. On May 30, a U.S. District Court for the Eastern District of Michigan affirmed a motion to dismiss a claim arising under the Fair Credit Reporting Act (FCRA) due to the expiration of the statute of limitations. Hancock v. Charter One Mortgage, 2008 WL 2246042, No. 07-15118 (E.D. Mich. May 30, 2008). In this case, the plaintiffs failed to file their claim within two years of first discovering an error in their credit report. The plaintiffs argued that notifications to credit report agencies (CRAs) about errors in their credit report restarted the statute of limitations. The court, relying upon Bittick v. Experian, 419 F.Supp.2d 917 (N.D. Tex. 2006), held that restarting the statute merely because the consumer continues to report errors to the CRA would allow for the extension of the statute of limitations indefinitely. For a copy of the opinion, please see http://www.buckleykolar.com/documents/HancockvCharterOneMortgage.pdf.
Federal Court Denies FACTA Motion to Dismiss. On May 30, a federal district court in Florida denied a defendant’s motion to dismiss that argued that knowing or reckless conduct is required to establish willful noncompliance under the Fair and Accurate Credit Transaction Act (FACTA). Bauer v. Shell Factory, LC, No. 2_08-cv-68, 2008 WL 2261764 (M.D. Fla. May 30, 2008). The court held that “printing the type of card, last four digits of the credit/debit card number and the expiration [d]ate on a receipt more than four years after FACTA passed” is sufficient to state a claim for a willful violation. For a copy of the opinion, please see http://www.buckleykolar.com/documents/BauervTheShellFactory.pdf.
Court Rejects FCC Interpretation of Prior Express Consent in the TCPA. Recently, a federal district court rejected the propriety of an Federal Communication Commission (FCC) ruling, FCC Declaratory Ruling, FCC 07-232 (Dec. 28, 2007), clarifying that “autodialed and prerecorded message calls to wireless numbers provided by the called party in connection with an existing debt” are permissible under the Telecommunications Consumer Protection Act (TCPA) because they fall under the exception for calls made with the “prior express consent” of the called party. Leckler v. CashCall, Inc., No. C 07-040002 SI (N.D. Cal. May 20, 2008). In this case, the plaintiff/consumer provided her cell phone number on an application for credit and began to receive autodialed debt collection calls on her cell phone after becoming delinquent for failing to make timely payments on the debt. The TCPA permits debt collectors to use autodialed and prerecorded calls with the “prior express consent” of the consumer, 47 U.S.C. § 227(b)(1)(A)(iii). The court strictly interpreted the statutory language of the TCPA and held that the consumer had not given “prior express consent” which requires words or “direct and appropriate language” explicitly stating that the consumer consents to be called with an autodialer or prerecorded message. The court granted the plaintiff’s motion for summary judgment and denied defendant’s cross-motion for summary judgment on the same question. For a copy of this decision, please see http://www.buckleykolar.com/documents/LecklervCashcall.pdf.
Firm News
Joseph Kolar will be speaking at the Mealey’s Subprime Mortgage Litigation & Insurance Coverage Conference on June 20 in Washington, DC. Mr. Kolar’s presentation is entitled, “The New Structure of the Mortgage Lending Industry.” For more information or to register, please see http://bookstore.lexis.com/bookstore/product/69880t.html.
Mortgages
HUD Waives Anti-Flipping Rule for Foreclosed Properties. On June 9, HUD Assistant Secretary Brian Montgomery signed a one-year waiver of HUD’s anti-flipping rule as applied to properties acquired by a mortgagee. Under the anti-flipping rule, a borrower may not purchase a property with an FHA-insured loan if the property was acquired by the seller in the previous 90 days. This rule is intended to prevent property flipping, but the rule also had been preventing certain mortgagees from promptly disposing of REO property to borrowers with FHA-insured mortgages. One of several exceptions to this 90-day prohibition allows mortgage insurance for properties sold by state-and federally-chartered financial institutions and government-sponsored enterprises (e.g., Fannie Mae and Freddie Mac). Under this waiver, FHA financing will be made available to borrowers who purchase properties that have been owned for fewer than 90 days, if the properties were acquired by foreclosure by mortgagees that are not state or federally chartered financial institutions. Subsidiaries of the lender and vendors are also subject to this waiver. The waiver of the regulation (24 C.F.R. § 203.37a(b)(2)) will expire on June 9, 2009. A copy of HUD’s waiver is available at http://www.buckleykolar.com/documents/PropertyFlippingWaiver.pdf.
OCC Releases New Mortgage Metrics Report. On June 11, the Office of the Comptroller of the Currency (OCC) released the first OCC Mortgage Metrics Report. The report analyzes national bank mortgage loan data for loans held or serviced by nine national banks between October 1, 2007 and March 31, 2008. The report reviews first residential mortgages involved in delinquencies, loss mitigation, or foreclosure and provides information on delinquencies and loss mitigation on a month-to-month basis during the report time frame. The OCC anticipates providing future OCC Mortgage Metrics Reports on a quarterly basis. For a copy of the Mortgage Metrics Report, please see http://www.occ.treas.gov/ftp/release/2008-65b.pdf.
Rhode Island Extensively Revises Reverse Mortgage Statutes. On June 6, Rhode Island Governor Donald L. Carcieri signed House Bill 7723 (S.B. 2598), which extensively amends the state’s reverse mortgage statutes. The bill includes provisions that (i) prohibit prepayment penalties unless the mortgagee waives all usual fees, (ii) prohibit reducing periodic advances as a result of changes in interest rate, and (iii) provide for treble damages if a lender fails to make advances. In addition, the bill regulates when the loan may become due and when repayment may be required, restricts the sale of annuities in connection with reverse mortgages, restricts fees that may be collected at closing, sets out requirements for borrower counseling, and mandates ongoing disclosure requirements. The bill also clarifies that the state’s reverse mortgage statutes do not apply to FHA-insured HECMs. For a copy of the bill, please see http://www.rilin.state.ri.us/BillText08/HouseText08/H7723.pdf.
Vermont Governor Signs Bill Authorizing Participation in the Nationwide Mortgage Licensing System. On May 28, Vermont Governor Jim Douglas signed S.B. 284, which, among other things, gives the Vermont Department of Banking, Insurance, Securities, and Health Care Administration the authority to participate in the Nationwide Mortgage Licensing System (NMLS). The section of the bill authorizing participation in the NMLS went into effect immediately upon passage. For a copy of S.B. 284, please see http://www.leg.state.vt.us/docs/legdoc.cfm?URL=/docs/2008/acts/ACT178.HTM.
Colorado Passes Law Providing Additional Protections for Homeowners Facing Foreclosure. On June 5, Colorado Governor Bill Ritter signed H.B. 1402, which requires mortgage lenders to provide written notice to borrowers at least 30 days after default and at least 30 days before filing a notice of election and demand to initiate foreclosure. The bill requires that this written notice provide the borrower with the telephone number for Colorado’s foreclosure hotline as well as the telephone number for the mortgage lender’s loss mitigation department. H.B. 1402 also creates a Foreclosure Prevention Grant Fund, which is to be used to provide outreach and notice of foreclosure prevention assistance to individuals at risk of foreclosure. H.B. 1402 became effective on June 5, 2008. For a copy of the full text of the bill, please see http://www.buckleykolar.com/documents/COHB1402.pdf.
Ninth Circuit Upholds Exclusionary List Against Tort and Defamation Claims. Freddie Mac placed a mortgage broker on its Exclusionary List after determining that loans originated by the broker were prepaying rapidly because the broker encouraged its borrowers to apply for initial loans at a high interest rate, and then to engage in early refinancing. Family Home and Finance Center v. Federal Home Loan Mortgage Corporation, CV-05-08752-PA (9th Cir., April 7, 2008). National City, the lender on the loans, also terminated the broker’s contract. In the broker’s suit against Freddie Mac for tortuous interference of contract, unfair competition, and defamation, a U.S. district court in California granted summary judgment for Freddie Mac. On appeal, the Court of Appeals for the Ninth Circuit upheld the summary judgment, ruling (i) there was no evidence that Freddie Mac intentionally influenced or caused National City to terminate the broker contract, (ii) there was no unfair competition because Freddie Mac had a legitimate business reason for placing the broker on the Exclusionary List, and (iii) absent a finding of malice, which was lacking in the case, the “Common Interest Privilege” recognized in California protects Freddie Mac’s disclosure against defamation claims. Under this privilege, absent malice, communications are privileged if the communicator and the recipient have a common interest and the communication is of a kind reasonably calculated to protect or further that interest. For a copy of the opinion, please see http://www.buckleykolar.com/documents/FamilyHomeandFinanceCentervFHLMC.pdf.
Banking
HUD Waives Anti-Flipping Rule for Foreclosed Properties. On June 9, HUD Assistant Secretary Brian Montgomery signed a one-year waiver of HUD’s anti-flipping rule as applied to properties acquired by a mortgagee. Under the anti-flipping rule, a borrower may not purchase a property with an FHA-insured loan if the property was acquired by the seller in the previous 90 days. This rule is intended to prevent property flipping, but the rule also had been preventing certain mortgagees from promptly disposing of REO property to borrowers with FHA-insured mortgages. One of several exceptions to this 90-day prohibition allows mortgage insurance for properties sold by state-and federally-chartered financial institutions and government-sponsored enterprises (e.g., Fannie Mae and Freddie Mac). Under this waiver, FHA financing will be made available to borrowers who purchase properties that have been owned for fewer than 90 days, if the properties were acquired by foreclosure by mortgagees that are not state or federally chartered financial institutions. Subsidiaries of the lender and vendors are also subject to this waiver. The waiver of the regulation (24 C.F.R. § 203.37a(b)(2)) will expire on June 9, 2009. A copy of HUD’s waiver is available at http://www.buckleykolar.com/documents/PropertyFlippingWaiver.pdf.
FDIC Issues Guidance on Managing Third-Party Relationships. On June 6, the Federal Deposit Insurance Corporation (FDIC) issued guidance, FIL-44-2008, regarding managing third-party risk. The guidance discusses the types of potential risks that third-party relationships may pose to financial institutions. The guidance then outlines the risk management process focusing upon: (i) risk assessment, (ii) due diligence in selecting a third party, (iii) contract structuring and review, and (iv) oversight. Future FDIC compliance examinations may focus upon the failure of financial institutions to manage those risks, and corrective actions, including enforcement actions, may be pursued for deficiencies related to third-party relationships that pose a safety and soundness or compliance management concern or result in violations of applicable laws or regulations. For a copy of this guidance, please see http://www.fdic.gov/news/news/financial/2008/fil08044a.html.
OCC Releases New Mortgage Metrics Report. On June 11, the Office of the Comptroller of the Currency (OCC) released the first OCC Mortgage Metrics Report. The report analyzes national bank mortgage loan data for loans held or serviced by nine national banks between October 1, 2007 and March 31, 2008. The report reviews first residential mortgages involved in delinquencies, loss mitigation, or foreclosure and provides information on delinquencies and loss mitigation on a month-to-month basis during the report time frame. The OCC anticipates providing future OCC Mortgage Metrics Reports on a quarterly basis. For a copy of the Mortgage Metrics Report, please see http://www.occ.treas.gov/ftp/release/2008-65b.pdf.
Ninth Circuit Rules Against FDIC on Issues Regarding Capital Pledges by Holding Companies. On June 4, the U.S. Court of Appeals for the Ninth Circuit reversed the district court’s grant of summary judgment in favor of the Federal Deposit Insurance Corporation (FDIC) on the issue of whether a federally insured bank’s failure to cure a deficit in a Chapter 11 case gives rise to an administrative priority in a Chapter 7 case. In re Imperial Credit Industries, Inc., No. 05-56073 (9th Cir. June 4, 2008). In this case, the FDIC was attempting to collect on an $18 million pledge subject to the federally-insured parent company filing for bankruptcy protection to make up for a capital shortfall by the parent company’s subsidiary, Imperial Credit Industries, Inc. The Ninth Circuit rejected the FDIC’s argument that the holding could make it more difficult to rely on capital guarantees by the parent companies of federally insured institutions. Subject to the ruling on appeal, two factors may frustrate the FDIC’s ability to collect on the guaranty: (i) the parent company’s trustee may argue that the guaranty of the failed subsidiary’s capital position was a fraudulent conveyance under the Bankruptcy Code; and (ii) the FDIC was given lower priority than eight other parties, whose claims included claims for contributions to employee benefits plans, unsecured claims by individuals in various cases, and other disputes. With respect to (i), the Ninth Circuit found that 12 U.S.C. § 1829(u) did not address obligations (what the parent company was attempting to avoid as a fraudulent conveyance) and that it only barred fraudulent conveyance claims for “assets.” With respect to (ii), the Ninth Circuit found that the FDIC had only ninth priority under 11 U.S.C. § 507(a)(9), which expressly provides for unsecured claims in connection with capital commitments. For a copy of this opinion, please see http://www.buckleykolar.com/documents/WolkowitzvFDIC.pdf.
Capital One Bank Claims Federal Preemption As Basis for Refusal to Cooperate With State Investigation. On May 2, Capital One Bank, N.A. (“Capital One”) filed a complaint in the U.S. District Court for the Northern District of California requesting that the federal court block a probe of the firm’s marketing practices initiated by California Attorney General Edmund Brown, Jr. (CA AG) based on the assertion that federal preemption renders it beyond the reach of the state investigation. Capital One Bank (USA), N.A. v. Brown, N.D. Cal., No. CV-08-2289, filed 5/2/08. Capital One argues it is pre-empted from state regulation and visitorial powers because it acquired national bank status on March 1, 2008, although it was a state-chartered institution when the probe began in 2006. Capital One previously produced books and records to the CA AG when the investigation began, but then notified the CA AG of its charter conversion and subsequently refused to cooperate with the CA AG’s additional requests. For a copy of Capital One’s complaint, please see http://www.buckleykolar.com/documents/CapitalOneBankvBrown-Complaint.pdf.
Consumer Finance
FTC to Host Debt Settlement Workshop. The Federal Trade Commission will host a workshop to examine a trend in the industry toward for-profit consumer debt relief services. The workshop will be held in Washington, D.C. on September 25, 2008 and will focus on how the for-profit debt relief model is affecting consumers and businesses. The event is free and open to the public, and no pre-registration is required. For more information on the agenda and panelists, please see http://www.ftc.gov/opa/2008/06/debt.shtm.
Defendants in Debt Collection Scheme Targeting Spanish Speakers Agree to Settle FTC Charges. Two defendants agreed to settle Federal Trade Commission (FTC) charges for allegedly victimizing Spanish-speaking consumers nationwide by posing as debt collectors seeking money the consumers did not owe. Maria Oceguera, her daughter Dulce Rickards (collectively, Defendants) have been barred from further violations of the FTC Act and the Fair Debt Collection Practices Act (FDCPA). The complaint alleged that the Defendants were selling an English-language course, which was advertised as free except for a shipping and handling fee. Several years after the defendants stopped selling the course, they engaged in a variety of deceptive debt collection practices in an attempt to collect monies from consumers who had purchased or inquired about the language course, but that did not owe any money. In 2007, at the FTC’s request, a federal judge issued a preliminary injunction against the Defendants to halt the deceptive collecting practices and also froze their assets. Under the recently issued consent decree, Defendants, and the companies they controlled, are barred from violating the FTC Act by making misrepresentations that they are collecting on a valid debt, are attorneys or represent attorneys, will take action they cannot take legally or do not intend to take, and from claiming that nonpayment of an alleged obligation will result in arrest, imprisonment, or loss of property or wages. In addition, the Defendants are also banned from violating the FDCPA by using falsehood or deception to collect a debt, indicating that they are attorneys or represent attorneys, and representing that nonpayment will result in arrest, imprisonment, or loss of property or wages unless the action is lawful and they intend to pursue such action. For a copy of the consent decree, please see http://www.ftc.gov/os/caselist/0723012/080501tonostlmntocegueraugalde.pdf.
Federal Court Denies FCRA Claim Due To Statute of Limitations. On May 30, a U.S. District Court for the Eastern District of Michigan affirmed a motion to dismiss a claim arising under the Fair Credit Reporting Act (FCRA) due to the expiration of the statute of limitations. Hancock v. Charter One Mortgage, 2008 WL 2246042, No. 07-15118 (E.D. Mich. May 30, 2008). In this case, the plaintiffs failed to file their claim within two years of first discovering an error in their credit report. The plaintiffs argued that notifications to credit report agencies (CRAs) about errors in their credit report restarted the statute of limitations. The court, relying upon Bittick v. Experian, 419 F.Supp.2d 917 (N.D. Tex. 2006), held that restarting the statute merely because the consumer continues to report errors to the CRA would allow for the extension of the statute of limitations indefinitely. For a copy of the opinion, please see http://www.buckleykolar.com/documents/HancockvCharterOneMortgage.pdf.
Federal Court Denies FACTA Motion to Dismiss. On May 30, a federal district court in Florida denied a defendant’s motion to dismiss that argued that knowing or reckless conduct is required to establish willful noncompliance under the Fair and Accurate Credit Transaction Act (FACTA). Bauer v. Shell Factory, LC, No. 2_08-cv-68, 2008 WL 2261764 (M.D. Fla. May 30, 2008). The court held that “printing the type of card, last four digits of the credit/debit card number and the expiration [d]ate on a receipt more than four years after FACTA passed” is sufficient to state a claim for a willful violation. For a copy of the opinion, please see http://www.buckleykolar.com/documents/BauervTheShellFactory.pdf.
Securities
SEC Proposes Change to Credit Rating Process. On June 11, the Securities and Exchange Commission (SEC) proposed a series of credit rating agency changes to bring increased transparency to the ratings process and curb practices that contributed to recent turmoil in the credit markets. The proposed rulemaking continues the implementation of new regulatory authority that the SEC recently received from Congress to register and oversee nationally recognized statistical rating organizations (NRSROs). The SEC is proposing the rulemaking in three parts, with the first two portions proposed on June 11 and the third portion to be considered on June 25. The first part of the Commission’s rule proposal would, among other things, (i) prohibit a credit rating agency from issuing a rating on a structured product unless information on assets underlying the product was available, (ii) require credit rating agencies to make all of their ratings and subsequent rating actions publicly available, (iii) prohibit gifts from those who receive ratings to those who rate them, in any amount over $25, (iv) require credit rating agencies to publish performance statistics for 1, 3, and 10 years within each rating category, in a way that facilitates comparison with their competitors in the industry, (v) require disclosure by the rating agencies of the way they rely on the due diligence of others to verify the assets underlying a structured product, and (vi) require the public disclosure of the information a credit rating agency uses to determine a rating on a structured product, including information on the underlying assets. The second part of the SEC’s proposal would require credit rating agencies to differentiate the ratings they issue on structured products from those they issue on bonds, either through the use of different symbols, such as attaching an identifier to the rating, or by issuing a report disclosing the differences between ratings of structured products and other securities. The third set of recommendations for the SEC’s proposal, to be considered on June 25, are being designed to ensure that the role the SEC has assigned to ratings in its rules is consistent with the objective of having investors make an independent judgment of risks and of making it clear to investors the limits and purposes of credit ratings for structured products. Public comments on the June 11 proposed amendments and rule must be received by the Commission within 30 days after their publication in the Federal Register, which is not yet available as of the date of this publication. For a copy of the SEC press release, please see http://www.sec.gov/news/press/2008/2008-110.htm .
Litigation
Ninth Circuit Upholds Exclusionary List Against Tort and Defamation Claims. Freddie Mac placed a mortgage broker on its Exclusionary List after determining that loans originated by the broker were prepaying rapidly because the broker encouraged its borrowers to apply for initial loans at a high interest rate, and then to engage in early refinancing. Family Home and Finance Center v. Federal Home Loan Mortgage Corporation, CV-05-08752-PA (9th Cir., April 7, 2008). National City, the lender on the loans, also terminated the broker’s contract. In the broker’s suit against Freddie Mac for tortuous interference of contract, unfair competition, and defamation, a U.S. district court in California granted summary judgment for Freddie Mac. On appeal, the Court of Appeals for the Ninth Circuit upheld the summary judgment, ruling (i) there was no evidence that Freddie Mac intentionally influenced or caused National City to terminate the broker contract, (ii) there was no unfair competition because Freddie Mac had a legitimate business reason for placing the broker on the Exclusionary List, and (iii) absent a finding of malice, which was lacking in the case, the “Common Interest Privilege” recognized in California protects Freddie Mac’s disclosure against defamation claims. Under this privilege, absent malice, communications are privileged if the communicator and the recipient have a common interest and the communication is of a kind reasonably calculated to protect or further that interest. For a copy of the opinion, please see http://www.buckleykolar.com/documents/FamilyHomeandFinanceCentervFHLMC.pdf.
U.S. Supreme Court Vacates and Remands FCRA “Willfulness” Case With Instructions to Dismiss. On June 9, the U.S. Supreme Court vacated and remanded with instructions to dismiss as moot a Third Circuit opinion (reported in InfoBytes, Nov. 9, 2007) on the meaning of willfulness in connection with the Fair Credit Reporting Act (FCRA). Whitfield v. Radian Guaranty, Inc., No. 05-5017. Despite the opinion in Safeco Ins. Co. of America v. Burr, 127 S.Ct. 2201 (2007) (reported in InfoBytes Special Alert, June 4, 2007), in which the Supreme Court clarified the meaning of “willful” as it pertains to FCRA, stating that it encompasses a “knowing or reckless violation,” a number of courts, including the Third Circuit, have required a factual inquiry into the defendant’s state of mind in determining whether it acted willfully. The Court’s order eliminates the only circuit-level opinion holding that a factual inquiry is needed to decide whether the defendant’s interpretation of the statute is “objectively reasonable.” An amicus brief submitted on behalf of the Consumer Mortgage Coalition, the American Financial Services Association, the Consumer Bankers Association, the Mortgage Bankers Association, and the Housing Policy Council of the Financial Services Roundtable, urged the Court to vacate and dismiss the Third Circuit’s opinion (see http://www.buckleykolar.com/documents/RadianvWhitfield-AmicusSupportingCert.pdf). In this brief, which Buckley Kolar participated in drafting, the foregoing trade groups argued, based on Safeco, thatthe Third Circuit erred in holding that willfulness is a factual issue that cannot be decided as a matter of law.For a copy of the United States Supreme Court Order List, please see http://www.buckleykolar.com/documents/USSCOrderList-6-9-08.pdf.
Ninth Circuit Rules Against FDIC on Issues Regarding Capital Pledges by Holding Companies. On June 4, the U.S. Court of Appeals for the Ninth Circuit reversed the district court’s grant of summary judgment in favor of the Federal Deposit Insurance Corporation (FDIC) on the issue of whether a federally insured bank’s failure to cure a deficit in a Chapter 11 case gives rise to an administrative priority in a Chapter 7 case. In re Imperial Credit Industries, Inc., No. 05-56073 (9th Cir. June 4, 2008). In this case, the FDIC was attempting to collect on an $18 million pledge subject to the federally-insured parent company filing for bankruptcy protection to make up for a capital shortfall by the parent company’s subsidiary, Imperial Credit Industries, Inc. The Ninth Circuit rejected the FDIC’s argument that the holding could make it more difficult to rely on capital guarantees by the parent companies of federally insured institutions. Subject to the ruling on appeal, two factors may frustrate the FDIC’s ability to collect on the guaranty: (i) the parent company’s trustee may argue that the guaranty of the failed subsidiary’s capital position was a fraudulent conveyance under the Bankruptcy Code; and (ii) the FDIC was given lower priority than eight other parties, whose claims included claims for contributions to employee benefits plans, unsecured claims by individuals in various cases, and other disputes. With respect to (i), the Ninth Circuit found that 12 U.S.C. § 1829(u) did not address obligations (what the parent company was attempting to avoid as a fraudulent conveyance) and that it only barred fraudulent conveyance claims for “assets.” With respect to (ii), the Ninth Circuit found that the FDIC had only ninth priority under 11 U.S.C. § 507(a)(9), which expressly provides for unsecured claims in connection with capital commitments. For a copy of this opinion, please see http://www.buckleykolar.com/documents/WolkowitzvFDIC.pdf.
Capital One Bank Claims Federal Preemption As Basis for Refusal to Cooperate With State Investigation. On May 2, Capital One Bank, N.A. (“Capital One”) filed a complaint in the U.S. District Court for the Northern District of California requesting that the federal court block a probe of the firm’s marketing practices initiated by California Attorney General Edmund Brown, Jr. (CA AG) based on the assertion that federal preemption renders it beyond the reach of the state investigation. Capital One Bank (USA), N.A. v. Brown, N.D. Cal., No. CV-08-2289, filed 5/2/08. Capital One argues it is pre-empted from state regulation and visitorial powers because it acquired national bank status on March 1, 2008, although it was a state-chartered institution when the probe began in 2006. Capital One previously produced books and records to the CA AG when the investigation began, but then notified the CA AG of its charter conversion and subsequently refused to cooperate with the CA AG’s additional requests. For a copy of Capital One’s complaint, please see http://www.buckleykolar.com/documents/CapitalOneBankvBrown-Complaint.pdf.
Court Holds FACTA Truncation Provisions Are Unconstitutional. In a new twist on lawsuits alleging violations of the credit card truncation prohibition in the Fair and Accurate Credit Transaction Act (FACTA), a federal district court judge in Alabama held that FACTA violates the due process clause of the Fifth Amendment and is therefore unconstitutional. Grimes v. Rave Motion Pictures Birmingham, 2008 WL 2338131, No. 07-AR-1397-S (N.D. Ala. May 28, 2008). This case arose when the plaintiff, seeking class status, brought suit against four different vendors for printing her expiration date on electronic credit card receipts. Eschewing claims for actual damages, the plaintiff instead sought the statutory damages provided by FACTA of $100 to $1000 per willful violation of the statute, plus punitive damages and attorney fees. The court noted that were the plaintiffs to succeed, a class recovery would bankrupt each defendant, stating “annihilation is assured if each member of the class gets what FACTA purports to guarantee him.” Ruling on the defendants’ motions for summary judgment, the court held that the statute violates the due process clause of the Fifth Amendment of the U.S. Constitution. Specifically, the Court held that the damages provision for willful violations is unconstitutionally vague because no jury could make a rational determination of the proper amount of the award between $100 and $1000, stating, “the statute here under consideration provides no guidance for deciding between $100 and $1000, leaving it to the whim of the jury, that is, unless the court violates the doctrine of separation of powers and assumes the role of legislator as the only way to make sense of the present non-sensical language.” The court also noted that the combination of the statutory damages, which both the plaintiffs and the United States admitted would represent punishment of the defendants if assessed, and the punitive damages provision constitutes double punishment, which “only exacerbates the problem of how to instruct a jury using the FACTA language.” In addition, the court declined to demur to the U.S. Justice Department, which filed a successful motion to intervene in which it urged the court to wait for the actual outcome of the case before evaluating the constitutional implications. The court declined, reasoning, “to wait for the assured destruction of these four defendants before removing their exposure to the destructive effects of this unconstitutional statute would be both unfair and a great waste of judicial time and effort, and this court respectfully declines the request of the United States to put off the inevitable.” With that, the court concluded that (i) there was no way to avoid certifying a class; (ii) it was obvious that defendants did willfully fail to truncate the credit card receipts; and (iii) there would be no way to approve a settlement that awards less than $100 to each class member (“the defendants probably know that they have not found a court who will approve a ‘coupon’ settlement”). The court granted summary judgment for the defendants, writing “either summary judgment for defendants must be granted now, or summary judgment for the plaintiffs will be granted later.” For a copy of this decision, please see http://www.buckleykolar.com/documents/GrimesvRaveMotionPicturesBirmingham.pdf.
Federal Court Denies FCRA Claim Due To Statute of Limitations. On May 30, a U.S. District Court for the Eastern District of Michigan affirmed a motion to dismiss a claim arising under the Fair Credit Reporting Act (FCRA) due to the expiration of the statute of limitations. Hancock v. Charter One Mortgage, 2008 WL 2246042, No. 07-15118 (E.D. Mich. May 30, 2008). In this case, the plaintiffs failed to file their claim within two years of first discovering an error in their credit report. The plaintiffs argued that notifications to credit report agencies (CRAs) about errors in their credit report restarted the statute of limitations. The court, relying upon Bittick v. Experian, 419 F.Supp.2d 917 (N.D. Tex. 2006), held that restarting the statute merely because the consumer continues to report errors to the CRA would allow for the extension of the statute of limitations indefinitely. For a copy of the opinion, please see http://www.buckleykolar.com/documents/HancockvCharterOneMortgage.pdf.
Federal Court Denies FACTA Motion to Dismiss. On May 30, a federal district court in Florida denied a defendant’s motion to dismiss that argued that knowing or reckless conduct is required to establish willful noncompliance under the Fair and Accurate Credit Transaction Act (FACTA). Bauer v. Shell Factory, LC, No. 2_08-cv-68, 2008 WL 2261764 (M.D. Fla. May 30, 2008). The court held that “printing the type of card, last four digits of the credit/debit card number and the expiration [d]ate on a receipt more than four years after FACTA passed” is sufficient to state a claim for a willful violation. For a copy of the opinion, please see http://www.buckleykolar.com/documents/BauervTheShellFactory.pdf.
Court Rejects FCC Interpretation of Prior Express Consent in the TCPA. Recently, a federal district court rejected the propriety of an Federal Communication Commission (FCC) ruling, FCC Declaratory Ruling, FCC 07-232 (Dec. 28, 2007), clarifying that “autodialed and prerecorded message calls to wireless numbers provided by the called party in connection with an existing debt” are permissible under the Telecommunications Consumer Protection Act (TCPA) because they fall under the exception for calls made with the “prior express consent” of the called party. Leckler v. CashCall, Inc., No. C 07-040002 SI (N.D. Cal. May 20, 2008). In this case, the plaintiff/consumer provided her cell phone number on an application for credit and began to receive autodialed debt collection calls on her cell phone after becoming delinquent for failing to make timely payments on the debt. The TCPA permits debt collectors to use autodialed and prerecorded calls with the “prior express consent” of the consumer, 47 U.S.C. § 227(b)(1)(A)(iii). The court strictly interpreted the statutory language of the TCPA and held that the consumer had not given “prior express consent” which requires words or “direct and appropriate language” explicitly stating that the consumer consents to be called with an autodialer or prerecorded message. The court granted the plaintiff’s motion for summary judgment and denied defendant’s cross-motion for summary judgment on the same question. For a copy of this decision, please see http://www.buckleykolar.com/documents/LecklervCashcall.pdf.
E-Financial Services
President Bush Signs Credit and Debit Card Receipt Clarification Act. On June 3, President Bush signed the Credit and Debit Card Receipt Clarification Act (H.R. 4008) (first reported in InfoBytes, May 16, 2008), which limits lawsuits against merchants based on the failure to remove card expiration dates from card receipts, but only if the failure occurred prior to June 3, 2008. H.R. 4008 provides that it is not a willful violation of the Fair Credit Reporting Act (FCRA) for a merchant to fail to remove an expiration date from a card receipt through June 3, 2008, provided the merchant has properly truncated the account number. Pursuant to the bill, a merchant could still be liable for a negligent violation of the FCRA for failure to remove the card expiration date from a card receipt as of the original FACTA compliance deadline. However, to recover for such a violation, a consumer would need to prove that he or she suffered actual damages as a result of the violation. See 15 U.S.C. § 1681o (FCRA § 617). For a copy of the bill, please see http://www.buckleykolar.com/documents/HR4008.pdf.
Oklahoma Governor Signs Security Breach Notice Law. Oklahoma Governor Brad Henry recently signed a bill (H.B. 2245) that will require individuals or entities that own or license computerized data that includes personal information to notify Oklahoma residents of any breach of the security of the system if their personal information was, or is reasonably believed to have been, accessed and acquired by an unauthorized person. The law becomes effective November 1, 2008. For a copy of the bill, please see http://webserver1.lsb.state.ok.us/2007-08bills/HB/hb2245_enr.rtf.
U.S. Supreme Court Vacates and Remands FCRA “Willfulness” Case With Instructions to Dismiss. On June 9, the U.S. Supreme Court vacated and remanded with instructions to dismiss as moot a Third Circuit opinion (reported in InfoBytes, Nov. 9, 2007) on the meaning of willfulness in connection with the Fair Credit Reporting Act (FCRA). Whitfield v. Radian Guaranty, Inc., No. 05-5017. Despite the opinion in Safeco Ins. Co. of America v. Burr, 127 S.Ct. 2201 (2007) (reported in InfoBytes Special Alert, June 4, 2007), in which the Supreme Court clarified the meaning of “willful” as it pertains to FCRA, stating that it encompasses a “knowing or reckless violation,” a number of courts, including the Third Circuit, have required a factual inquiry into the defendant’s state of mind in determining whether it acted willfully. The Court’s order eliminates the only circuit-level opinion holding that a factual inquiry is needed to decide whether the defendant’s interpretation of the statute is “objectively reasonable.” An amicus brief submitted on behalf of the Consumer Mortgage Coalition, the American Financial Services Association, the Consumer Bankers Association, the Mortgage Bankers Association, and the Housing Policy Council of the Financial Services Roundtable, urged the Court to vacate and dismiss the Third Circuit’s opinion (see http://www.buckleykolar.com/documents/RadianvWhitfield-AmicusSupportingCert.pdf). In this brief, which Buckley Kolar participated in drafting, the foregoing trade groups argued, based on Safeco, thatthe Third Circuit erred in holding that willfulness is a factual issue that cannot be decided as a matter of law.For a copy of the United States Supreme Court Order List, please see http://www.buckleykolar.com/documents/USSCOrderList-6-9-08.pdf.
Court Holds FACTA Truncation Provisions Are Unconstitutional. In a new twist on lawsuits alleging violations of the credit card truncation prohibition in the Fair and Accurate Credit Transaction Act (FACTA), a federal district court judge in Alabama held that FACTA violates the due process clause of the Fifth Amendment and is therefore unconstitutional. Grimes v. Rave Motion Pictures Birmingham, 2008 WL 2338131, No. 07-AR-1397-S (N.D. Ala. May 28, 2008). This case arose when the plaintiff, seeking class status, brought suit against four different vendors for printing her expiration date on electronic credit card receipts. Eschewing claims for actual damages, the plaintiff instead sought the statutory damages provided by FACTA of $100 to $1000 per willful violation of the statute, plus punitive damages and attorney fees. The court noted that were the plaintiffs to succeed, a class recovery would bankrupt each defendant, stating “annihilation is assured if each member of the class gets what FACTA purports to guarantee him.” Ruling on the defendants’ motions for summary judgment, the court held that the statute violates the due process clause of the Fifth Amendment of the U.S. Constitution. Specifically, the Court held that the damages provision for willful violations is unconstitutionally vague because no jury could make a rational determination of the proper amount of the award between $100 and $1000, stating, “the statute here under consideration provides no guidance for deciding between $100 and $1000, leaving it to the whim of the jury, that is, unless the court violates the doctrine of separation of powers and assumes the role of legislator as the only way to make sense of the present non-sensical language.” The court also noted that the combination of the statutory damages, which both the plaintiffs and the United States admitted would represent punishment of the defendants if assessed, and the punitive damages provision constitutes double punishment, which “only exacerbates the problem of how to instruct a jury using the FACTA language.” In addition, the court declined to demur to the U.S. Justice Department, which filed a successful motion to intervene in which it urged the court to wait for the actual outcome of the case before evaluating the constitutional implications. The court declined, reasoning, “to wait for the assured destruction of these four defendants before removing their exposure to the destructive effects of this unconstitutional statute would be both unfair and a great waste of judicial time and effort, and this court respectfully declines the request of the United States to put off the inevitable.” With that, the court concluded that (i) there was no way to avoid certifying a class; (ii) it was obvious that defendants did willfully fail to truncate the credit card receipts; and (iii) there would be no way to approve a settlement that awards less than $100 to each class member (“the defendants probably know that they have not found a court who will approve a ‘coupon’ settlement”). The court granted summary judgment for the defendants, writing “either summary judgment for defendants must be granted now, or summary judgment for the plaintiffs will be granted later.” For a copy of this decision, please see http://www.buckleykolar.com/documents/GrimesvRaveMotionPicturesBirmingham.pdf.
Privacy/Data Security
President Bush Signs Credit and Debit Card Receipt Clarification Act. On June 3, President Bush signed the Credit and Debit Card Receipt Clarification Act (H.R. 4008) (first reported in InfoBytes, May 16, 2008), which limits lawsuits against merchants based on the failure to remove card expiration dates from card receipts, but only if the failure occurred prior to June 3, 2008. H.R. 4008 provides that it is not a willful violation of the Fair Credit Reporting Act (FCRA) for a merchant to fail to remove an expiration date from a card receipt through June 3, 2008, provided the merchant has properly truncated the account number. Pursuant to the bill, a merchant could still be liable for a negligent violation of the FCRA for failure to remove the card expiration date from a card receipt as of the original FACTA compliance deadline. However, to recover for such a violation, a consumer would need to prove that he or she suffered actual damages as a result of the violation. See 15 U.S.C. § 1681o (FCRA § 617). For a copy of the bill, please see http://www.buckleykolar.com/documents/HR4008.pdf.
GAO Reports that FDIC Made Progress with Information Security but Improvement Still Needed. On May 30, the United States Government Accountability Office (GAO) issued a report indicating that the Federal Deposit Insurance Corporation (FDIC) had made a great deal of progress in improving information security issues raised in the GAO’s 2006 audit of the FDIC. However, the report highlights a number of unresolved information security issues, as well as raises a number of new issues that have developed since the previous audit. The report concludes that these information security concerns could result in unauthorized disclosure of FDIC financial information or management decisions based on erroneous information. For a copy of the full report, please see http://www.buckleykolar.com/documents/GAOReportonFDICInformationSecurity.pdf.
Oklahoma Governor Signs Security Breach Notice Law. Oklahoma Governor Brad Henry recently signed a bill (H.B. 2245) that will require individuals or entities that own or license computerized data that includes personal information to notify Oklahoma residents of any breach of the security of the system if their personal information was, or is reasonably believed to have been, accessed and acquired by an unauthorized person. The law becomes effective November 1, 2008. For a copy of the bill, please see http://webserver1.lsb.state.ok.us/2007-08bills/HB/hb2245_enr.rtf.
Court Holds FACTA Truncation Provisions Are Unconstitutional. In a new twist on lawsuits alleging violations of the credit card truncation prohibition in the Fair and Accurate Credit Transaction Act (FACTA), a federal district court judge in Alabama held that FACTA violates the due process clause of the Fifth Amendment and is therefore unconstitutional. Grimes v. Rave Motion Pictures Birmingham, 2008 WL 2338131, No. 07-AR-1397-S (N.D. Ala. May 28, 2008). This case arose when the plaintiff, seeking class status, brought suit against four different vendors for printing her expiration date on electronic credit card receipts. Eschewing claims for actual damages, the plaintiff instead sought the statutory damages provided by FACTA of $100 to $1000 per willful violation of the statute, plus punitive damages and attorney fees. The court noted that were the plaintiffs to succeed, a class recovery would bankrupt each defendant, stating “annihilation is assured if each member of the class gets what FACTA purports to guarantee him.” Ruling on the defendants’ motions for summary judgment, the court held that the statute violates the due process clause of the Fifth Amendment of the U.S. Constitution. Specifically, the Court held that the damages provision for willful violations is unconstitutionally vague because no jury could make a rational determination of the proper amount of the award between $100 and $1000, stating, “the statute here under consideration provides no guidance for deciding between $100 and $1000, leaving it to the whim of the jury, that is, unless the court violates the doctrine of separation of powers and assumes the role of legislator as the only way to make sense of the present non-sensical language.” The court also noted that the combination of the statutory damages, which both the plaintiffs and the United States admitted would represent punishment of the defendants if assessed, and the punitive damages provision constitutes double punishment, which “only exacerbates the problem of how to instruct a jury using the FACTA language.” In addition, the court declined to demur to the U.S. Justice Department, which filed a successful motion to intervene in which it urged the court to wait for the actual outcome of the case before evaluating the constitutional implications. The court declined, reasoning, “to wait for the assured destruction of these four defendants before removing their exposure to the destructive effects of this unconstitutional statute would be both unfair and a great waste of judicial time and effort, and this court respectfully declines the request of the United States to put off the inevitable.” With that, the court concluded that (i) there was no way to avoid certifying a class; (ii) it was obvious that defendants did willfully fail to truncate the credit card receipts; and (iii) there would be no way to approve a settlement that awards less than $100 to each class member (“the defendants probably know that they have not found a court who will approve a ‘coupon’ settlement”). The court granted summary judgment for the defendants, writing “either summary judgment for defendants must be granted now, or summary judgment for the plaintiffs will be granted later.” For a copy of this decision, please see http://www.buckleykolar.com/documents/GrimesvRaveMotionPicturesBirmingham.pdf.
Court Rejects FCC Interpretation of Prior Express Consent in the TCPA. Recently, a federal district court rejected the propriety of an Federal Communication Commission (FCC) ruling, FCC Declaratory Ruling, FCC 07-232 (Dec. 28, 2007), clarifying that “autodialed and prerecorded message calls to wireless numbers provided by the called party in connection with an existing debt” are permissible under the Telecommunications Consumer Protection Act (TCPA) because they fall under the exception for calls made with the “prior express consent” of the called party. Leckler v. CashCall, Inc., No. C 07-040002 SI (N.D. Cal. May 20, 2008). In this case, the plaintiff/consumer provided her cell phone number on an application for credit and began to receive autodialed debt collection calls on her cell phone after becoming delinquent for failing to make timely payments on the debt. The TCPA permits debt collectors to use autodialed and prerecorded calls with the “prior express consent” of the consumer, 47 U.S.C. § 227(b)(1)(A)(iii). The court strictly interpreted the statutory language of the TCPA and held that the consumer had not given “prior express consent” which requires words or “direct and appropriate language” explicitly stating that the consumer consents to be called with an autodialer or prerecorded message. The court granted the plaintiff’s motion for summary judgment and denied defendant’s cross-motion for summary judgment on the same question. For a copy of this decision, please see http://www.buckleykolar.com/documents/LecklervCashcall.pdf.
Credit Cards
President Bush Signs Credit and Debit Card Receipt Clarification Act. On June 3, President Bush signed the Credit and Debit Card Receipt Clarification Act (H.R. 4008) (first reported in InfoBytes, May 16, 2008), which limits lawsuits against merchants based on the failure to remove card expiration dates from card receipts, but only if the failure occurred prior to June 3, 2008. H.R. 4008 provides that it is not a willful violation of the Fair Credit Reporting Act (FCRA) for a merchant to fail to remove an expiration date from a card receipt through June 3, 2008, provided the merchant has properly truncated the account number. Pursuant to the bill, a merchant could still be liable for a negligent violation of the FCRA for failure to remove the card expiration date from a card receipt as of the original FACTA compliance deadline. However, to recover for such a violation, a consumer would need to prove that he or she suffered actual damages as a result of the violation. See 15 U.S.C. § 1681o (FCRA § 617). For a copy of the bill, please see http://www.buckleykolar.com/documents/HR4008.pdf.
U.S. Supreme Court Vacates and Remands FCRA “Willfulness” Case With Instructions to Dismiss. On June 9, the U.S. Supreme Court vacated and remanded with instructions to dismiss as moot a Third Circuit opinion (reported in InfoBytes, Nov. 9, 2007) on the meaning of willfulness in connection with the Fair Credit Reporting Act (FCRA). Whitfield v. Radian Guaranty, Inc., No. 05-5017. Despite the opinion in Safeco Ins. Co. of America v. Burr, 127 S.Ct. 2201 (2007) (reported in InfoBytes Special Alert, June 4, 2007), in which the Supreme Court clarified the meaning of “willful” as it pertains to FCRA, stating that it encompasses a “knowing or reckless violation,” a number of courts, including the Third Circuit, have required a factual inquiry into the defendant’s state of mind in determining whether it acted willfully. The Court’s order eliminates the only circuit-level opinion holding that a factual inquiry is needed to decide whether the defendant’s interpretation of the statute is “objectively reasonable.” An amicus brief submitted on behalf of the Consumer Mortgage Coalition, the American Financial Services Association, the Consumer Bankers Association, the Mortgage Bankers Association, and the Housing Policy Council of the Financial Services Roundtable, urged the Court to vacate and dismiss the Third Circuit’s opinion (see http://www.buckleykolar.com/documents/RadianvWhitfield-AmicusSupportingCert.pdf). In this brief, which Buckley Kolar participated in drafting, the foregoing trade groups argued, based on Safeco, thatthe Third Circuit erred in holding that willfulness is a factual issue that cannot be decided as a matter of law.For a copy of the United States Supreme Court Order List, please see http://www.buckleykolar.com/documents/USSCOrderList-6-9-08.pdf.
Court Holds FACTA Truncation Provisions Are Unconstitutional. In a new twist on lawsuits alleging violations of the credit card truncation prohibition in the Fair and Accurate Credit Transaction Act (FACTA), a federal district court judge in Alabama held that FACTA violates the due process clause of the Fifth Amendment and is therefore unconstitutional. Grimes v. Rave Motion Pictures Birmingham, 2008 WL 2338131, No. 07-AR-1397-S (N.D. Ala. May 28, 2008). This case arose when the plaintiff, seeking class status, brought suit against four different vendors for printing her expiration date on electronic credit card receipts. Eschewing claims for actual damages, the plaintiff instead sought the statutory damages provided by FACTA of $100 to $1000 per willful violation of the statute, plus punitive damages and attorney fees. The court noted that were the plaintiffs to succeed, a class recovery would bankrupt each defendant, stating “annihilation is assured if each member of the class gets what FACTA purports to guarantee him.” Ruling on the defendants’ motions for summary judgment, the court held that the statute violates the due process clause of the Fifth Amendment of the U.S. Constitution. Specifically, the Court held that the damages provision for willful violations is unconstitutionally vague because no jury could make a rational determination of the proper amount of the award between $100 and $1000, stating, “the statute here under consideration provides no guidance for deciding between $100 and $1000, leaving it to the whim of the jury, that is, unless the court violates the doctrine of separation of powers and assumes the role of legislator as the only way to make sense of the present non-sensical language.” The court also noted that the combination of the statutory damages, which both the plaintiffs and the United States admitted would represent punishment of the defendants if assessed, and the punitive damages provision constitutes double punishment, which “only exacerbates the problem of how to instruct a jury using the FACTA language.” In addition, the court declined to demur to the U.S. Justice Department, which filed a successful motion to intervene in which it urged the court to wait for the actual outcome of the case before evaluating the constitutional implications. The court declined, reasoning, “to wait for the assured destruction of these four defendants before removing their exposure to the destructive effects of this unconstitutional statute would be both unfair and a great waste of judicial time and effort, and this court respectfully declines the request of the United States to put off the inevitable.” With that, the court concluded that (i) there was no way to avoid certifying a class; (ii) it was obvious that defendants did willfully fail to truncate the credit card receipts; and (iii) there would be no way to approve a settlement that awards less than $100 to each class member (“the defendants probably know that they have not found a court who will approve a ‘coupon’ settlement”). The court granted summary judgment for the defendants, writing “either summary judgment for defendants must be granted now, or summary judgment for the plaintiffs will be granted later.” For a copy of this decision, please see http://www.buckleykolar.com/documents/GrimesvRaveMotionPicturesBirmingham.pdf.
Federal Court Denies FACTA Motion to Dismiss. On May 30, a federal district court in Florida denied a defendant’s motion to dismiss that argued that knowing or reckless conduct is required to establish willful noncompliance under the Fair and Accurate Credit Transaction Act (FACTA). Bauer v. Shell Factory, LC, No. 2_08-cv-68, 2008 WL 2261764 (M.D. Fla. May 30, 2008). The court held that “printing the type of card, last four digits of the credit/debit card number and the expiration [d]ate on a receipt more than four years after FACTA passed” is sufficient to state a claim for a willful violation. For a copy of the opinion, please see http://www.buckleykolar.com/documents/BauervTheShellFactory.pdf.