InfoBytes, June 19, 2009
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Securities
- Litigation
- Privacy/Data Security
- Credit Cards
Federal Issues
Obama Administration Releases Proposal to Reform Financial Regulatory System. On June 17, the Obama Administration released a white paper entitled "A New Foundation: Rebuilding Financial Supervision and Regulation" (the "White Paper"). The White Paper sets forth a wide array of proposals designed to overhaul the nation’s financial regulatory oversight structure in the wake of the current financial crisis. The Administration’s proposals are framed within the construct of five overarching regulatory objectives. The stated objectives are (i) comprehensive supervision and regulation of financial firms, (ii) comprehensive supervision and regulation of financial markets, (iii) enhancing consumer protection, (iv) improving resolution tools to manage future financial crises, and (v) raising international regulatory standards and improving international cooperation. Among the many specific proposals recommended in the White Paper are the following:
• grant the Federal Reserve Board the authority to act as the "systemic risk" regulator and allow it to supervise all firms that could pose a threat to the financial system;
• consolidate the OCC and OTS into a National Bank Supervisor, which would regulate all federally-chartered institutions, with a corresponding elimination of the federal thrift charter;
• require "nonbank" banks such as thrift holding companies, industrial loan companies, and credit card banks to be subject to Federal Reserve oversight under the Bank Holding Company Act;
• require registration of hedge fund advisers, private equity funds and venture capital funds of a certain capital threshold with the SEC;
• require loan originators or sponsors to retain a 5% economic interest of the credit risk of loans they securitize;
• overhaul the regulation of all over-the-counter derivatives, including credit default swaps;
• establish a new, independent consumer protection regulator and arm it with sole rule-making authority and primary enforcement authority for consumer protection statutes (including HMDA and CRA);
• specify that states would have the ability to adopt and enforce laws stricter than those adopted on a federal level for consumer protection;
• revise the Federal Reserve’s emergency lending authority to require approval from Treasury; and
• promote global initiatives that are compatible with the proposed domestic regulatory reforms through the Basel Committee, the G-20 and the Financial Stability Board, among others.
For a more detailed summary of the White Paper, along with regular updates on financial regulatory restructuring as the debate moves forward, please see the BuckleySandler Regulatory Restructuring Report, Issue One. For the full text of the White Paper, please see http://www.financialstability.gov/docs/regs/FinalReport_web.pdf.
FHFA Announces Proposed Rule for the Reporting of Fraudulent Financial Instruments. On June 17, the Federal Housing Finance Agency (FHFA) issued a proposed rule that would require Fannie Mae, Freddie Mac, and any Federal Home Loan Bank (collectively, the regulated entities) to establish fraud reporting procedures and to implement internal controls to detect fraud. Under the proposed rule, the FHFA would require the regulated entities to submit written reports to the FHFA Director disclosing any financial instruments discovered to be or suspected of being fraudulent. Moreover, if the regulated entity determined that the fraud requires the FHFA’s immediate attention, the entity would have to report the matter immediately. In addition to outlining reporting requirements, the proposed rule would require each regulated entity to establish internal controls, procedures, and training programs aimed at detecting and reporting fraud. Finally, the proposed rule contains provisions protecting the regulated entities from any possible private liability for submitting reports in good faith or from notifying individuals identified in the report. Instead, the proposed rule calls for the FHFA to enforce accurate reporting and disclosure through administrative proceedings that allow the FHFA to issue cease-and-desist orders or assess civil money penalties. Comments on the proposed rule are due by August 17, 2009. For a copy of the proposed rule, please see http://edocket.access.gpo.gov/2009/pdf/E9-14189.pdf.
FTC Presents Testimony Regarding Identity Theft. On June 17, the Federal Trade Commission (FTC) presented testimony regarding identity theft before the U.S. House Subcommittee on Information Policy, Census, and National Archives of the Committee on Oversight and Government Reform. The testimony summarized the FTC’s efforts to fight identity theft through (i) participation on the President’s Identity Theft Task Force, (ii) law enforcement on data security, (iii) consumer and business education, and (iv) implementation of the identity theft-related provisions of the Fair and Accurate Credit Transactions Act ("FACT Act"). The testimony also discussed the FTC’s legislative recommendations on developing national data security standards, granting the FTC authority to seek civil penalties in data security cases, and passing legislation to help reduce the unnecessary use and display of social security numbers. For a copy of the testimony, please see http://www.ftc.gov/os/2009/06/P065411idtheftvictimsbill.pdf.
FTC Obtains Judgment Against Payment Processor. On June 18, the Federal Trade Commission (FTC) announced that it had obtained a $1.7 million judgment against a payment processor that allegedly debited consumer bank accounts without authorization in violation of the Telemarketing Sales Rule and the FTC Act. According to the FTC, the company continued to process charges even after receiving complaints regarding the unauthorized debits. The complaint alleged that more than $2.38 million was debited from consumers’ accounts. In addition to the monetary judgment, the company and its owner are (i) prohibited from engaging in the unfair and deceptive practices alleged in the complaint, (ii) required to perform a "reasonable" investigation before processing payments, and (iii) required to allow the FTC to monitor compliance with record-keeping provisions. For a copy of the press release, please see http://www.ftc.gov/opa/2009/06/interbill.shtm. For a copy of the final judgment, please see http://www.ftc.gov/os/caselist/0423192/090618interbillfo.pdf.
House Passes Bill to Make Inspector General Positions at SEC, CTFC a Presidential Appointment. On June 8, the U.S. House of Representatives passed H.R. 885, the "2009 Improved Financial and Commodity Markets Oversight and Accountability Act." The bill would elevate the position of Inspector General at the Securities and Exchange Commission, the Commodity Futures Trading Commission, and several other agencies to a presidential appointment subject to Congressional approval under section 3 of the Inspector General Act of 1978. Pursuant to a May 18 amendment of the bill, the relevant Inspector Generals will have subpoena authority over issues under their purview and heads of the relevant agencies will be required to take corrective measures to address any deficiencies identified by their respective Inspectors General. For a copy of the bill, please see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h885eh.txt.pdf.
FinCEN Issues Guidance Regarding Information Sharing Safe Harbor Under USA PATRIOT Act. On June 16, the Financial Crimes Enforcement Network (FinCEN) issued guidance regarding the rule implementing section 314(b) of the USA PATRIOT Act, which permits information sharing between financial institutions in connection with money laundering or terrorism. The guidance clarifies that, to remain within the "safe harbor" protection of this provision, a financial institution participating in the section 314(b) program must, among other things, (i) give notice to FinCEN regarding participation, (ii) take "reasonable" steps to verify that the other financial institution has also submitted such a notice, and (iii) place restrictions on the use of the information. For a copy of the guidance, please see http://www.fincen.gov/news_room/nr/pdf/20090616.pdf.
State Issues
Connecticut AG Requests Information from Default Servicers Regarding Selection of Law Firms in Foreclosure Proceedings. On June 16, the Connecticut Attorney General’s Office announced that it has requested information from Lender Processing Services, Inc., Freddie Mac, and Fannie Mae regarding how each of these three default servicers selects law firms to represent them in foreclosure actions. The information request was triggered by reports claiming that the representation of lenders in a majority of Connecticut foreclosure actions is concentrated in only a handful of law firms. Among other items, the Connecticut Attorney General has asked the parties to (i) identify each Connecticut law firm that has performed foreclosure-related legal services for them from 2007 to the present, (ii) explain what criteria they use to select a law firm to perform foreclosure-related services, and (iii) submit copies of all agreements with law firms, including fee schedules. For a copy of the press release, please see http://www.ct.gov/ag/cwp/view.asp?A=3673&Q=441316. For a copy of the letter, please see http://www.ct.gov/ag/lib/ag/consumers/ctdefaultservicing.pdf.
Courts
Supreme Court Grants Cert in Class Arbitration Case. On June 15, the U.S. Supreme Court granted a petition for writ of certiorari in Stolt-Nielsen S.A. v. AnimalFeeds International Corp. (08-1198), in which the Court will consider whether imposing class arbitration on parties whose arbitration clauses are silent on that issue is consistent with the Federal Arbitration Act. In 2003, the respondent, AnimalFeeds International Corp., filed suit against the petitioners (international ocean carriers) alleging a global price-fixing conspiracy. The U.S. Court of Appeals for the Second Circuit determined that such claim fell within the scope of the parties’ arbitration agreement. AnimalFeeds sought to arbitrate the claim on behalf of itself and a putative class of buyers of ocean-transportation services. The ocean carriers opposed AnimalFeeds’ class-arbitration demand, arguing they never consented to class arbitration. The panel of arbitrators concluded that class-wide arbitration is permitted where the parties’ agreement to arbitrate is silent on the issue. The district court vacated the arbitrators’ award, concluding that the arbitrators engaged in a manifest disregard of federal maritime law, which precluded class arbitration absent specific consent by all parties. The Second Circuit reversed, holding that the arbitrators’ class arbitration award did not meet the "manifest disregard" of law standard. The Second Circuit relied in part on Justice Stevens’ opinion in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), a case in which the Supreme Court had granted certiorari to decide this issue but did not due to a threshold question. For a copy of the court of appeals decision, please see http://www.ca2.uscourts.gov/decisions/isysquery/eda34386-ac61-4c68-8b62-043b751182cb/1/doc/06-3474-cv_opn.pdf. For a copy of the Supreme Court docket, please see http://origin.www.supremecourtus.gov/docket/08-1198.htm.
First Circuit Holds Rescission Notice is Effective Under TILA Even Though Transaction Date Missing. On June 11, the U.S. Court of Appeals for the First Circuit held that a rescission notice required under the Truth in Lending Act (TILA) provided effective notice to the borrower of the borrower’s right to rescind the loan in three (3) days even though the space for the transaction date was left blank. Melfi v. WMC Mortgage Corp., No. 09-1066, 2009 WL 1623459 (1st Cir. June 11, 2009). In this case, the rescission notice for the plaintiff borrower’s mortgage loan provided at closing, based on the model form established by the Federal Reserve Board, contained a blank space for the transaction date. The court concluded that the omitted date made no difference for the purpose of extending the borrower’s right of rescission period under TILA. According to the court, "[the] test is whether any reasonable person, in reading the form provided in this case, would so understand it." The court noted that the date the plaintiff "closed on the loan can hardly have been unknown to him and was in fact hand stamped or typed on the form given to him. From that date, it is easy enough to count three days; completing the blank avoids only the risk created by the fact that Saturday counts as a business day under [Federal Reserve] Board regulations." For a copy of the opinion, please see http://www.ca1.uscourts.gov/pdf.opinions/09-1066P-01A.pdf.
Illinois Federal Court Denies Motion to Compel Arbitration of Private Label Credit Card Dispute. On June 11, the U.S. District Court for the Southern District of Illinois held that a merchant could not compel arbitration of a credit card dispute brought by a consumer where the merchant was neither a signatory to the credit card account agreement nor a third-party beneficiary of that agreement, and where the plaintiff was not equitably estopped from refusing to arbitrate the dispute. Masters v. Lowe’s Home Centers, Inc., No. 09-cv-255, 2009 WL 1657925 (S.D. Ill. June 11, 2009). In Masters, the plaintiff claimed that the defendant, Lowe’s Home Centers, Inc. (Lowe’s), violated the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act (FACTA), by providing a receipt that displayed more than the last five digits of the plaintiff’s credit card number. The "receipt" in question was the written documentation of an in-person payment made by the plaintiff on her Lowe’s credit card at a Lowe’s store. The defendant moved to compel arbitration of the dispute pursuant to the Lowe’s credit card account agreement, which the plaintiff had entered into with GE Money Bank, arguing that, by making an in-person payment on the card, the plaintiff was exercising a right under the agreement which contained an arbitration clause. Applying Utah law, the court held that the defendant was not entitled to invoke the terms of the agreement because it was not a party to the Agreement or a third-party beneficiary of the agreement. The court held further that, because the plaintiff’s claims did not rely on any terms or provisions of the agreement with GE Money Bank, she was not equitably estopped from repudiating the arbitration clause. The court therefore denied the defendant’s motion to stay and to compel arbitration. For a copy of the opinion, please see http://www.buckleysandler.com/Masters_v_Lowes.pdf.
Kansas Federal Court Holds Certain Types of Defamation Claims Preempted by FCRA. On June 12, the U.S. District Court for the District of Kansas granted in part and denied in part a lender’s motion to dismiss in which the lender argued that the plaintiffs’ defamation claims were preempted by FCRA’s absolute immunity provision. In Wenner v. Bank of America, NA, No. 08-2269, 2009 WL 1650273 (D. Kan. June 12, 2009), the plaintiffs brought FCRA and defamation claims against their lender as a result of the lender’s reporting of a disputed debt. The lender moved to dismiss the defamation claims, among other claims, arguing that they were preempted by FCRA. The court granted the motion to the extent that plaintiffs’ defamation claim arose from the lender’s alleged conduct in furnishing information to credit reporting agencies (CRAs). According to the court, such a claim was preempted by the absolute immunity provision found in 15 U.S.C. §1681t(b)(1)(f). However, to the extent that the claim arose from the lender’s alleged publication of the defamatory statements to the third party debt collector, the court held that the claim was not preempted by the more limited qualified immunity provision found in 15 U.S.C. §1681h(e). For a copy of the opinion, please see http://www.buckleysandler.com/Wenner_v_BOA.pdf.
Connecticut District Court Holds that Staffing Agency is a Consumer Reporting Agency for FCRA Purposes. On May 28, the U.S. District Court for the District of Connecticut held that a staffing agency is a consumer reporting agency for purposes of the FCRA. In Adams v. Nat’l Eng’g Serv. Corp., No. 07-cv-1035, 2009 WL 1538086 (D. Conn. May 28, 2009), the plaintiff argued that the defendant staffing agency violated FCRA by failing to follow reasonable procedures to assure the accuracy of its credit report and by reporting inaccurate information about the plaintiff, allegedly resulting in the revocation of a contingent job offer. The defendant countered that it is not subject to FCRA because, among other things, (i) it is not a "consumer reporting agency," and (ii) it did not "prepare" the plaintiff’s background investigation. The court disagreed with defendant’s arguments, and denied summary judgment as to these claims, holding first that the defendant staffing agency was a consumer reporting agency bound by the requirements of FCRA because, in exchange for a monetary fee, it assembled and evaluated consumer reports relating to its job candidates for the purpose of furnishing these reports to third parties by means of interstate commerce. Second, the court held that, because the defendant combined information it received from a background investigation report with its own evaluation of that information, it had "prepared" the consumer report for purposes of FCRA. The plaintiff also alleged that the defendant violated FCRA by failing to provide her notice that it was taking "adverse action" until after it furnished its inaccurate report to the third party. The defendant countered that it did not take, and could not have taken, adverse action against the plaintiff because it did not have the ultimate authority to make the hiring decision. The court rejected this argument, holding that adverse action includes any decision that adversely affects any prospective employee, including the defendant’s decision to furnish the background investigation report to the third party for employment purposes. The court, however, dismissed the plaintiff’s state law claims for defamation and negligence pursuant to FCRA’s qualified immunity provision. For a copy of the opinion, please see http://www.buckleysandler.com/Adams_v_National_Engineering.pdf.
Firm News
Andrea Lee Negroni will deliver a 1-hour audio conference on foreclosure rescue scams, how they work and government efforts to prevent them (including recent enforcement actions), on June 30 at 2pm through Sheshunoff/A.S. Pratt Audio Conferences. The audio conference will be followed by a 30-minute Q&A session (by phone). To register, call (512) 472-2244 or see http://www.sheshunoff.com/audio/.
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.
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.
Mortgages
FHFA Announces Proposed Rule for the Reporting of Fraudulent Financial Instruments. On June 17, the Federal Housing Finance Agency (FHFA) issued a proposed rule that would require Fannie Mae, Freddie Mac, and any Federal Home Loan Bank (collectively, the regulated entities) to establish fraud reporting procedures and to implement internal controls to detect fraud. Under the proposed rule, the FHFA would require the regulated entities to submit written reports to the FHFA Director disclosing any financial instruments discovered to be or suspected of being fraudulent. Moreover, if the regulated entity determined that the fraud requires the FHFA’s immediate attention, the entity would have to report the matter immediately. In addition to outlining reporting requirements, the proposed rule would require each regulated entity to establish internal controls, procedures, and training programs aimed at detecting and reporting fraud. Finally, the proposed rule contains provisions protecting the regulated entities from any possible private liability for submitting reports in good faith or from notifying individuals identified in the report. Instead, the proposed rule calls for the FHFA to enforce accurate reporting and disclosure through administrative proceedings that allow the FHFA to issue cease-and-desist orders or assess civil money penalties. Comments on the proposed rule are due by August 17, 2009. For a copy of the proposed rule, please see http://edocket.access.gpo.gov/2009/pdf/E9-14189.pdf.
Connecticut AG Requests Information from Default Servicers Regarding Selection of Law Firms in Foreclosure Proceedings. On June 16, the Connecticut Attorney General’s Office announced that it has requested information from Lender Processing Services, Inc., Freddie Mac, and Fannie Mae regarding how each of these three default servicers selects law firms to represent them in foreclosure actions. The information request was triggered by reports claiming that the representation of lenders in a majority of Connecticut foreclosure actions is concentrated in only a handful of law firms. Among other items, the Connecticut Attorney General has asked the parties to (i) identify each Connecticut law firm that has performed foreclosure-related legal services for them from 2007 to the present, (ii) explain what criteria they use to select a law firm to perform foreclosure-related services, and (iii) submit copies of all agreements with law firms, including fee schedules. For a copy of the press release, please see http://www.ct.gov/ag/cwp/view.asp?A=3673&Q=441316. For a copy of the letter, please see http://www.ct.gov/ag/lib/ag/consumers/ctdefaultservicing.pdf.
Banking
Obama Administration Releases Proposal to Reform Financial Regulatory System. On June 17, the Obama Administration released a white paper entitled "A New Foundation: Rebuilding Financial Supervision and Regulation" (the "White Paper"). The White Paper sets forth a wide array of proposals designed to overhaul the nation’s financial regulatory oversight structure in the wake of the current financial crisis. The Administration’s proposals are framed within the construct of five overarching regulatory objectives. The stated objectives are (i) comprehensive supervision and regulation of financial firms, (ii) comprehensive supervision and regulation of financial markets, (iii) enhancing consumer protection, (iv) improving resolution tools to manage future financial crises, and (v) raising international regulatory standards and improving international cooperation. Among the many specific proposals recommended in the White Paper are the following:
• grant the Federal Reserve Board the authority to act as the "systemic risk" regulator and allow it to supervise all firms that could pose a threat to the financial system;
• consolidate the OCC and OTS into a National Bank Supervisor, which would regulate all federally-chartered institutions, with a corresponding elimination of the federal thrift charter;
• require "nonbank" banks such as thrift holding companies, industrial loan companies, and credit card banks to be subject to Federal Reserve oversight under the Bank Holding Company Act;
• require registration of hedge fund advisers, private equity funds and venture capital funds of a certain capital threshold with the SEC;
• require loan originators or sponsors to retain a 5% economic interest of the credit risk of loans they securitize;
• overhaul the regulation of all over-the-counter derivatives, including credit default swaps;
• establish a new, independent consumer protection regulator and arm it with sole rule-making authority and primary enforcement authority for consumer protection statutes (including HMDA and CRA);
• specify that states would have the ability to adopt and enforce laws stricter than those adopted on a federal level for consumer protection;
• revise the Federal Reserve’s emergency lending authority to require approval from Treasury; and
• promote global initiatives that are compatible with the proposed domestic regulatory reforms through the Basel Committee, the G-20 and the Financial Stability Board, among others.
For a more detailed summary of the White Paper, along with regular updates on financial regulatory restructuring as the debate moves forward, please see the BuckleySandler Regulatory Restructuring Report, Issue One. For the full text of the White Paper, please see http://www.financialstability.gov/docs/regs/FinalReport_web.pdf.
FinCEN Issues Guidance Regarding Information Sharing Safe Harbor Under USA PATRIOT Act. On June 16, the Financial Crimes Enforcement Network (FinCEN) issued guidance regarding the rule implementing section 314(b) of the USA PATRIOT Act, which permits information sharing between financial institutions in connection with money laundering or terrorism. The guidance clarifies that, to remain within the "safe harbor" protection of this provision, a financial institution participating in the section 314(b) program must, among other things, (i) give notice to FinCEN regarding participation, (ii) take "reasonable" steps to verify that the other financial institution has also submitted such a notice, and (iii) place restrictions on the use of the information. For a copy of the guidance, please see http://www.fincen.gov/news_room/nr/pdf/20090616.pdf
Consumer Finance
Supreme Court Grants Cert in Student Loan Bankruptcy Case. On June 15, the U.S. Supreme Court granted a petition for writ of certiorari in United Student Aid Funds, Inc. v. Espinosa (08-1134). Previously in this case, the U.S. Court of Appeals for the Ninth Circuit held that if a creditor fails to object to a proposed Chapter 13 plan in which a student loan debt will be discharged, "it is doubtless the result of a careful calculation that this course is the one most likely to yield repayment of at least a portion of the debt. In such circumstances, bankruptcy courts have no business standing in the way." The petitioner has asked the court to resolve (i) whether student loans are statutorily non-dischargeable without showing that repayment would cause an "undue hardship," and (ii) if a debtor includes a declaration of discharge in a Chapter 13 plan that was mailed to the creditor’s post office, whether such a procedure violates procedural due process rights (by not providing a hearing) and whether orders resulting from such a procedure are subject to res judicata. For a copy of the court of appeals opinion, please see http://www.ca9.uscourts.gov/datastore/opinions/2008/10/01/0616421.pdf. For a copy of the Supreme Court docket, please see http://origin.www.supremecourtus.gov/docket/08-1134.htm.
First Circuit Holds Rescission Notice is Effective Under TILA Even Though Transaction Date Missing. On June 11, the U.S. Court of Appeals for the First Circuit held that a rescission notice required under the Truth in Lending Act (TILA) provided effective notice to the borrower of the borrower’s right to rescind the loan in three (3) days even though the space for the transaction date was left blank. Melfi v. WMC Mortgage Corp., No. 09-1066, 2009 WL 1623459 (1st Cir. June 11, 2009). In this case, the rescission notice for the plaintiff borrower’s mortgage loan provided at closing, based on the model form established by the Federal Reserve Board, contained a blank space for the transaction date. The court concluded that the omitted date made no difference for the purpose of extending the borrower’s right of rescission period under TILA. According to the court, "[the] test is whether any reasonable person, in reading the form provided in this case, would so understand it." The court noted that the date the plaintiff "closed on the loan can hardly have been unknown to him and was in fact hand stamped or typed on the form given to him. From that date, it is easy enough to count three days; completing the blank avoids only the risk created by the fact that Saturday counts as a business day under [Federal Reserve] Board regulations." For a copy of the opinion, please see http://www.ca1.uscourts.gov/pdf.opinions/09-1066P-01A.pdf.
Kansas Federal Court Holds Certain Types of Defamation Claims Preempted by FCRA. On June 12, the U.S. District Court for the District of Kansas granted in part and denied in part a lender’s motion to dismiss in which the lender argued that the plaintiffs’ defamation claims were preempted by FCRA’s absolute immunity provision. In Wenner v. Bank of America, NA, No. 08-2269, 2009 WL 1650273 (D. Kan. June 12, 2009), the plaintiffs brought FCRA and defamation claims against their lender as a result of the lender’s reporting of a disputed debt. The lender moved to dismiss the defamation claims, among other claims, arguing that they were preempted by FCRA. The court granted the motion to the extent that plaintiffs’ defamation claim arose from the lender’s alleged conduct in furnishing information to credit reporting agencies (CRAs). According to the court, such a claim was preempted by the absolute immunity provision found in 15 U.S.C. §1681t(b)(1)(f). However, to the extent that the claim arose from the lender’s alleged publication of the defamatory statements to the third party debt collector, the court held that the claim was not preempted by the more limited qualified immunity provision found in 15 U.S.C. §1681h(e). For a copy of the opinion, please see http://www.buckleysandler.com/Wenner_v_BOA.pdf.
Connecticut District Court Holds that Staffing Agency is a Consumer Reporting Agency for FCRA Purposes. On May 28, the U.S. District Court for the District of Connecticut held that a staffing agency is a consumer reporting agency for purposes of the FCRA. In Adams v. Nat’l Eng’g Serv. Corp., No. 07-cv-1035, 2009 WL 1538086 (D. Conn. May 28, 2009), the plaintiff argued that the defendant staffing agency violated FCRA by failing to follow reasonable procedures to assure the accuracy of its credit report and by reporting inaccurate information about the plaintiff, allegedly resulting in the revocation of a contingent job offer. The defendant countered that it is not subject to FCRA because, among other things, (i) it is not a "consumer reporting agency," and (ii) it did not "prepare" the plaintiff’s background investigation. The court disagreed with defendant’s arguments, and denied summary judgment as to these claims, holding first that the defendant staffing agency was a consumer reporting agency bound by the requirements of FCRA because, in exchange for a monetary fee, it assembled and evaluated consumer reports relating to its job candidates for the purpose of furnishing these reports to third parties by means of interstate commerce. Second, the court held that, because the defendant combined information it received from a background investigation report with its own evaluation of that information, it had "prepared" the consumer report for purposes of FCRA. The plaintiff also alleged that the defendant violated FCRA by failing to provide her notice that it was taking "adverse action" until after it furnished its inaccurate report to the third party. The defendant countered that it did not take, and could not have taken, adverse action against the plaintiff because it did not have the ultimate authority to make the hiring decision. The court rejected this argument, holding that adverse action includes any decision that adversely affects any prospective employee, including the defendant’s decision to furnish the background investigation report to the third party for employment purposes. The court, however, dismissed the plaintiff’s state law claims for defamation and negligence pursuant to FCRA’s qualified immunity provision. For a copy of the opinion, please see http://www.buckleysandler.com/Adams_v_National_Engineering.pdf.
Securities
House Passes Bill to Make Inspector General Positions at SEC, CTFC a Presidential Appointment. On June 8, the U.S. House of Representatives passed H.R. 885, the "2009 Improved Financial and Commodity Markets Oversight and Accountability Act." The bill would elevate the position of Inspector General at the Securities and Exchange Commission, the Commodity Futures Trading Commission, and several other agencies to a presidential appointment subject to Congressional approval under section 3 of the Inspector General Act of 1978. Pursuant to a May 18 amendment of the bill, the relevant Inspector Generals will have subpoena authority over issues under their purview and heads of the relevant agencies will be required to take corrective measures to address any deficiencies identified by their respective Inspectors General. For a copy of the bill, please see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h885eh.txt.pdf.
Litigation
FTC Obtains Judgment Against Payment Processor. On June 18, the Federal Trade Commission (FTC) announced that it had obtained a $1.7 million judgment against a payment processor that allegedly debited consumer bank accounts without authorization in violation of the Telemarketing Sales Rule and the FTC Act. According to the FTC, the company continued to process charges even after receiving complaints regarding the unauthorized debits. The complaint alleged that more than $2.38 million was debited from consumers’ accounts. In addition to the monetary judgment, the company and its owner are (i) prohibited from engaging in the unfair and deceptive practices alleged in the complaint, (ii) required to perform a "reasonable" investigation before processing payments, and (iii) required to allow the FTC to monitor compliance with record-keeping provisions. For a copy of the press release, please see http://www.ftc.gov/opa/2009/06/interbill.shtm. For a copy of the final judgment, please see http://www.ftc.gov/os/caselist/0423192/090618interbillfo.pdf.
Supreme Court Grants Cert in Class Arbitration Case. On June 15, the U.S. Supreme Court granted a petition for writ of certiorari in Stolt-Nielsen S.A. v. AnimalFeeds International Corp. (08-1198), in which the Court will consider whether imposing class arbitration on parties whose arbitration clauses are silent on that issue is consistent with the Federal Arbitration Act. In 2003, the respondent, AnimalFeeds International Corp., filed suit against the petitioners (international ocean carriers) alleging a global price-fixing conspiracy. The U.S. Court of Appeals for the Second Circuit determined that such claim fell within the scope of the parties’ arbitration agreement. AnimalFeeds sought to arbitrate the claim on behalf of itself and a putative class of buyers of ocean-transportation services. The ocean carriers opposed AnimalFeeds’ class-arbitration demand, arguing they never consented to class arbitration. The panel of arbitrators concluded that class-wide arbitration is permitted where the parties’ agreement to arbitrate is silent on the issue. The district court vacated the arbitrators’ award, concluding that the arbitrators engaged in a manifest disregard of federal maritime law, which precluded class arbitration absent specific consent by all parties. The Second Circuit reversed, holding that the arbitrators’ class arbitration award did not meet the "manifest disregard" of law standard. The Second Circuit relied in part on Justice Stevens’ opinion in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), a case in which the Supreme Court had granted certiorari to decide this issue but did not due to a threshold question. For a copy of the court of appeals decision, please see http://www.ca2.uscourts.gov/decisions/isysquery/eda34386-ac61-4c68-8b62-043b751182cb/1/doc/06-3474-cv_opn.pdf. For a copy of the Supreme Court docket, please see http://origin.www.supremecourtus.gov/docket/08-1198.htm.
Supreme Court Grants Cert in Student Loan Bankruptcy Case. On June 15, the U.S. Supreme Court granted a petition for writ of certiorari in United Student Aid Funds, Inc. v. Espinosa (08-1134). Previously in this case, the U.S. Court of Appeals for the Ninth Circuit held that if a creditor fails to object to a proposed Chapter 13 plan in which a student loan debt will be discharged, "it is doubtless the result of a careful calculation that this course is the one most likely to yield repayment of at least a portion of the debt. In such circumstances, bankruptcy courts have no business standing in the way." The petitioner has asked the court to resolve (i) whether student loans are statutorily non-dischargeable without showing that repayment would cause an "undue hardship," and (ii) if a debtor includes a declaration of discharge in a Chapter 13 plan that was mailed to the creditor’s post office, whether such a procedure violates procedural due process rights (by not providing a hearing) and whether orders resulting from such a procedure are subject to res judicata. For a copy of the court of appeals opinion, please see http://www.ca9.uscourts.gov/datastore/opinions/2008/10/01/0616421.pdf. For a copy of the Supreme Court docket, please see http://origin.www.supremecourtus.gov/docket/08-1134.htm.
First Circuit Holds Rescission Notice is Effective Under TILA Even Though Transaction Date Missing. On June 11, the U.S. Court of Appeals for the First Circuit held that a rescission notice required under the Truth in Lending Act (TILA) provided effective notice to the borrower of the borrower’s right to rescind the loan in three (3) days even though the space for the transaction date was left blank. Melfi v. WMC Mortgage Corp., No. 09-1066, 2009 WL 1623459 (1st Cir. June 11, 2009). In this case, the rescission notice for the plaintiff borrower’s mortgage loan provided at closing, based on the model form established by the Federal Reserve Board, contained a blank space for the transaction date. The court concluded that the omitted date made no difference for the purpose of extending the borrower’s right of rescission period under TILA. According to the court, "[the] test is whether any reasonable person, in reading the form provided in this case, would so understand it." The court noted that the date the plaintiff "closed on the loan can hardly have been unknown to him and was in fact hand stamped or typed on the form given to him. From that date, it is easy enough to count three days; completing the blank avoids only the risk created by the fact that Saturday counts as a business day under [Federal Reserve] Board regulations." For a copy of the opinion, please see http://www.ca1.uscourts.gov/pdf.opinions/09-1066P-01A.pdf.
Illinois Federal Court Denies Motion to Compel Arbitration of Private Label Credit Card Dispute. On June 11, the U.S. District Court for the Southern District of Illinois held that a merchant could not compel arbitration of a credit card dispute brought by a consumer where the merchant was neither a signatory to the credit card account agreement nor a third-party beneficiary of that agreement, and where the plaintiff was not equitably estopped from refusing to arbitrate the dispute. Masters v. Lowe’s Home Centers, Inc., No. 09-cv-255, 2009 WL 1657925 (S.D. Ill. June 11, 2009). In Masters, the plaintiff claimed that the defendant, Lowe’s Home Centers, Inc. (Lowe’s), violated the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act (FACTA), by providing a receipt that displayed more than the last five digits of the plaintiff’s credit card number. The "receipt" in question was the written documentation of an in-person payment made by the plaintiff on her Lowe’s credit card at a Lowe’s store. The defendant moved to compel arbitration of the dispute pursuant to the Lowe’s credit card account agreement, which the plaintiff had entered into with GE Money Bank, arguing that, by making an in-person payment on the card, the plaintiff was exercising a right under the agreement which contained an arbitration clause. Applying Utah law, the court held that the defendant was not entitled to invoke the terms of the agreement because it was not a party to the Agreement or a third-party beneficiary of the agreement. The court held further that, because the plaintiff’s claims did not rely on any terms or provisions of the agreement with GE Money Bank, she was not equitably estopped from repudiating the arbitration clause. The court therefore denied the defendant’s motion to stay and to compel arbitration. For a copy of the opinion, please see http://www.buckleysandler.com/Masters_v_Lowes.pdf.
Kansas Federal Court Holds Certain Types of Defamation Claims Preempted by FCRA. On June 12, the U.S. District Court for the District of Kansas granted in part and denied in part a lender’s motion to dismiss in which the lender argued that the plaintiffs’ defamation claims were preempted by FCRA’s absolute immunity provision. In Wenner v. Bank of America, NA, No. 08-2269, 2009 WL 1650273 (D. Kan. June 12, 2009), the plaintiffs brought FCRA and defamation claims against their lender as a result of the lender’s reporting of a disputed debt. The lender moved to dismiss the defamation claims, among other claims, arguing that they were preempted by FCRA. The court granted the motion to the extent that plaintiffs’ defamation claim arose from the lender’s alleged conduct in furnishing information to credit reporting agencies (CRAs). According to the court, such a claim was preempted by the absolute immunity provision found in 15 U.S.C. §1681t(b)(1)(f). However, to the extent that the claim arose from the lender’s alleged publication of the defamatory statements to the third party debt collector, the court held that the claim was not preempted by the more limited qualified immunity provision found in 15 U.S.C. §1681h(e). For a copy of the opinion, please see http://www.buckleysandler.com/Wenner_v_BOA.pdf.
Connecticut District Court Holds that Staffing Agency is a Consumer Reporting Agency for FCRA Purposes. On May 28, the U.S. District Court for the District of Connecticut held that a staffing agency is a consumer reporting agency for purposes of the FCRA. In Adams v. Nat’l Eng’g Serv. Corp., No. 07-cv-1035, 2009 WL 1538086 (D. Conn. May 28, 2009), the plaintiff argued that the defendant staffing agency violated FCRA by failing to follow reasonable procedures to assure the accuracy of its credit report and by reporting inaccurate information about the plaintiff, allegedly resulting in the revocation of a contingent job offer. The defendant countered that it is not subject to FCRA because, among other things, (i) it is not a "consumer reporting agency," and (ii) it did not "prepare" the plaintiff’s background investigation. The court disagreed with defendant’s arguments, and denied summary judgment as to these claims, holding first that the defendant staffing agency was a consumer reporting agency bound by the requirements of FCRA because, in exchange for a monetary fee, it assembled and evaluated consumer reports relating to its job candidates for the purpose of furnishing these reports to third parties by means of interstate commerce. Second, the court held that, because the defendant combined information it received from a background investigation report with its own evaluation of that information, it had "prepared" the consumer report for purposes of FCRA. The plaintiff also alleged that the defendant violated FCRA by failing to provide her notice that it was taking "adverse action" until after it furnished its inaccurate report to the third party. The defendant countered that it did not take, and could not have taken, adverse action against the plaintiff because it did not have the ultimate authority to make the hiring decision. The court rejected this argument, holding that adverse action includes any decision that adversely affects any prospective employee, including the defendant’s decision to furnish the background investigation report to the third party for employment purposes. The court, however, dismissed the plaintiff’s state law claims for defamation and negligence pursuant to FCRA’s qualified immunity provision. For a copy of the opinion, please see http://www.buckleysandler.com/Adams_v_National_Engineering.pdf.
Privacy/Data Security
FHFA Announces Proposed Rule for the Reporting of Fraudulent Financial Instruments. On June 17, the Federal Housing Finance Agency (FHFA) issued a proposed rule that would require Fannie Mae, Freddie Mac, and any Federal Home Loan Bank (collectively, the regulated entities) to establish fraud reporting procedures and to implement internal controls to detect fraud. Under the proposed rule, the FHFA would require the regulated entities to submit written reports to the FHFA Director disclosing any financial instruments discovered to be or suspected of being fraudulent. Moreover, if the regulated entity determined that the fraud requires the FHFA’s immediate attention, the entity would have to report the matter immediately. In addition to outlining reporting requirements, the proposed rule would require each regulated entity to establish internal controls, procedures, and training programs aimed at detecting and reporting fraud. Finally, the proposed rule contains provisions protecting the regulated entities from any possible private liability for submitting reports in good faith or from notifying individuals identified in the report. Instead, the proposed rule calls for the FHFA to enforce accurate reporting and disclosure through administrative proceedings that allow the FHFA to issue cease-and-desist orders or assess civil money penalties. Comments on the proposed rule are due by August 17, 2009. For a copy of the proposed rule, please see http://edocket.access.gpo.gov/2009/pdf/E9-14189.pdf.
FTC Presents Testimony Regarding Identity Theft. On June 17, the Federal Trade Commission (FTC) presented testimony regarding identity theft before the U.S. House Subcommittee on Information Policy, Census, and National Archives of the Committee on Oversight and Government Reform. The testimony summarized the FTC’s efforts to fight identity theft through (i) participation on the President’s Identity Theft Task Force, (ii) law enforcement on data security, (iii) consumer and business education, and (iv) implementation of the identity theft-related provisions of the Fair and Accurate Credit Transactions Act ("FACT Act"). The testimony also discussed the FTC’s legislative recommendations on developing national data security standards, granting the FTC authority to seek civil penalties in data security cases, and passing legislation to help reduce the unnecessary use and display of social security numbers. For a copy of the testimony, please see http://www.ftc.gov/os/2009/06/P065411idtheftvictimsbill.pdf.
Credit Cards
Illinois Federal Court Denies Motion to Compel Arbitration of Private Label Credit Card Dispute. On June 11, the U.S. District Court for the Southern District of Illinois held that a merchant could not compel arbitration of a credit card dispute brought by a consumer where the merchant was neither a signatory to the credit card account agreement nor a third-party beneficiary of that agreement, and where the plaintiff was not equitably estopped from refusing to arbitrate the dispute. Masters v. Lowe’s Home Centers, Inc., No. 09-cv-255, 2009 WL 1657925 (S.D. Ill. June 11, 2009). In Masters, the plaintiff claimed that the defendant, Lowe’s Home Centers, Inc. (Lowe’s), violated the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Credit Transactions Act (FACTA), by providing a receipt that displayed more than the last five digits of the plaintiff’s credit card number. The "receipt" in question was the written documentation of an in-person payment made by the plaintiff on her Lowe’s credit card at a Lowe’s store. The defendant moved to compel arbitration of the dispute pursuant to the Lowe’s credit card account agreement, which the plaintiff had entered into with GE Money Bank, arguing that, by making an in-person payment on the card, the plaintiff was exercising a right under the agreement which contained an arbitration clause. Applying Utah law, the court held that the defendant was not entitled to invoke the terms of the agreement because it was not a party to the Agreement or a third-party beneficiary of the agreement. The court held further that, because the plaintiff’s claims did not rely on any terms or provisions of the agreement with GE Money Bank, she was not equitably estopped from repudiating the arbitration clause. The court therefore denied the defendant’s motion to stay and to compel arbitration. For a copy of the opinion, please see http://www.buckleysandler.com/Masters_v_Lowes.pdf.