InfoBytes, June 26, 2009
Sign up for weekly updates
RSS feed
Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Insurance
- E-Financial Services
- Privacy/Data Security
Federal Issues
Agencies Announce Notice of Proposed CRA Rulemaking. On June 23, the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision jointly proposed revisions to regulations implementing the Community Reinvestment Act (CRA). The joint proposal incorporates provisions of the recently-enacted Higher Education Opportunity Act, which revised the CRA to, among other things, require that the agencies consider low-cost education loans provided by the financial institution to low-income borrowers when assessing an institution’s record of meeting community credit needs. The proposal specifically requests comments regarding (i) how "education loans" should be defined, (ii) whether the proposed definition of "low-cost" is appropriate, and (iii) whether the definition of "low-income" under CRA regulations should be amended. Public comments are due 30 days after the proposal is published in the Federal Register. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09098.html. For a copy of the proposed rulemaking, please see http://www.fdic.gov/news/news/press/2009/pr09098a.pdf.
Federal Banking Regulators Issue Proposed Rule Regarding Making Home Affordable Program Loans. On June 23, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision issued a proposed interim rule regarding residential mortgage loans modified under the Making Home Affordable Program. Under the proposal, mortgage loans modified under the program will retain the risk weight assigned to the loan prior to the modification if the loan continues to meet other applicable prudential criteria. Comments on the proposed rule are due 30 days after being published in the Federal Register. For a copy of the proposed interim rule, please see http://www.fdic.gov/news/board/june2309no2.pdf.
FTC Obtains Injunction Against Mortgage Foreclosure Rescue Operation. On June 16, the Federal Trade Commission (FTC) obtained a preliminary injunction against a mortgage foreclosure rescue operation. According to the FTC, the operation falsely claimed that it could prevent foreclosure in 97 percent of cases and that it would fully refund consumers if it could not prevent a foreclosure. The defendants also allegedly charged up-front fees, instructed homeowners to stop making mortgage payments, and instructed homeowners not to contact the lender, resulting in late fees, penalties, and other costs. For a copy of the press release, please see http://www.ftc.gov/opa/2009/06/freedom.shtm. For a copy of the stipulated preliminary injunction order, please see http://www.ftc.gov/os/caselist/0923061/090617freedomforclosestippreliminj.pdf.
FTC Obtains Final Judgment Against Credit Repair Organization. On June 25, the Federal Trade Commission announced a stipulated final judgment against a credit repair organization and its principals for allegedly collecting advance fees and for failing to remove negative information from consumer credit reports as was promised. Under the order, the defendants are prohibited from (i) collecting money from consumers who purchased services prior to December 3, 2008, (ii) charging consumers advance fees, (iii) claiming that they can permanently remove negative information from consumer credit reports, including accurate negative information, and (iv) making deceptive claims when marketing a product or service. The order also requires the defendants to take “reasonable” measures to protect consumer information during disposal. For a copy of the press release, please see http://www.ftc.gov/opa/2009/06/acegroup.shtm. For a copy of the final judgments, please see http://www.ftc.gov/os/caselist/0823172/090625acejdgmtroth.pdf and http://www.ftc.gov/os/caselist/0823172/090625acejdgmtkessler.pdf.
Fed Announces Changes to Liquidity Programs. On June 25, the Federal Reserve Board (FRB) issued a press release announcing that it has extended a number of its credit facilities through early 2010, while it has modified others due to improved financial conditions and reduced usage. The FRB has extended through February 1, 2010 the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility (TSLF). Swap lines between the Fed and certain central banks have also been extended through February 1, 2010. The December 31, 2009 expiration date for the Term Asset-Backed Securities Loan Facility will remain in place, while the authorization for the Money Market Investor Funding Facility will not be extended. Additionally, while there is no fixed expiration date for the Term Auction Facility, it will have its funding reduced because of lower-than-expected extensions of credit under the program. Finally, TSLF auctions backed by Schedule 1 collateral will be suspended as of July 1, while auctions backed by Schedule 2 collateral will be conducted every four weeks instead of every two weeks. For a copy of the press release, please see http://www.federalreserve.gov/newsevents/press/monetary/20090625a.htm.
FDIC Proposes Extension of Guarantee Program for Accounts over $250,000. On June 23, the Federal Deposit Insurance Corporation (FDIC) issued a notice of proposed rulemaking regarding the Transaction Account Guarantee component of the Temporary Liquidity Guarantee Program, which guarantees deposits over $250,000 on qualifying accounts. Under one proposal, the FDIC’s guarantee of deposits held in qualifying accounts would continue until December 31, 2009 without any modification of the existing fee structure or any other change in the FDIC’s guarantee of the relevant accounts. Under a second proposal, the program would be extended until June 30, 2010, and insured depository institutions currently participating in the program would be able to opt-out of continuing participation. Comments on the proposed rulemaking are due 30 days after being published in the Federal Register. For a copy of the proposed rulemaking, please see http://www.fdic.gov/news/board/june2309no6.pdf.
FDIC Amends Regulations Implementing Federal Deposit Insurance Act. On June 23, the Federal Deposit Insurance Corporation amended the regulations implementing the Federal Deposit Insurance Act. The final rule largely pertains to annual independent audits and reporting requirements for certain insured depository institutions. Among other things, the final rule (i) extends the time period for a non-public institution to file its annual report, (ii) provides relief from various reporting requirements, including for institutions merged out of existence or acquired during that fiscal year, (iii) requires management to provide a conclusion regarding compliance and disclose any noncompliance with insider loan and dividend restriction laws and regulations, and (iv) provides for various audit and internal control revisions to identify and disclose material weaknesses. Most of the final rule is effective 30 days after being published in the Federal Register. For a copy of the final rule, please see http://www.fdic.gov/news/board/june2309no10.pdf.
HUD Publishes Website Regarding SAFE Act. The U.S. Department of Housing and Urban Development (HUD) has made available a website regarding the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act). The website currently contains links to the SAFE Act, the Model State Law with HUD Commentary, a FAQ, and a link to the NMLS Resource Center. To view the website, please see http://www.hud.gov/offices/hsg/ramh/safe/sfea.cfm.
State Issues
Additional States Enact SAFE Act Legislation. Several states recently amended applicable state law to reflect compliance with the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act). Texas, Connecticut, Nevada, and South Carolina all enacted legislation that implements the SAFE Act by providing for the licensing of all mortgage loan originators under the Nationwide Mortgage Licensing System. In addition to technical amendments, the bills prescribe loan originator requirements relating to licensing, prior and continuing education, testing, minimum net worth, and surety bond coverage. Connecticut SB 948 also, among other things, requires lenders to enter into a previously optional foreclosure mediation program with borrowers after July 1, 2009. Unless the mediation period is not required, is unavailable, has expired, or has been otherwise terminated, no judgment of strict foreclosure or foreclosure by sale can be entered prior to July 1, 2010. Most provisions of Connecticut SB 948 become effective July 31, 2009, with licensure required by April 1, 2010. South Carolina SB 673 becomes effective January 1, 2010, except that the definition of “mortgage loan originator” does not include an individual servicing a mortgage loan until July 31, 2011. Texas HB 10 becomes effective September 1, 2009. Nevada AB 523 became effective June 8, 2009, with licensure required by October 1, 2009. For a copy of the public law for Connecticut SB 948, please see http://www.cga.ct.gov/2009/ACT/Pa/pdf/2009PA-00209-R00SB-00948-PA.pdf. For a copy of Texas HB 10, please see http://www.capitol.state.tx.us/tlodocs/81R/billtext/pdf/HB00010F.pdf. For a copy of South Carolina SB 673, please see http://www.scstatehouse.gov/sess118_2009-2010/bills/673.docx. For a copy of Nevada AB 523, please see http://leg.state.nv.us/75th2009/Bills/AB/AB523_EN.pdf.
Multi-State Agreement Reached in TJX Data Security Breach Case. On June 23, the TJX Companies, Inc. (TJX) reached an agreement with 41 state Attorneys General to settle charges that it failed to adequately protect consumer information in connection with a January 2007 data breach that has also generated litigation and a separate agreement with the Federal Trade Commission (reported in InfoBytes, Mar. 28, 2008). Under the agreement, TJX will pay $9.75 million and implement a comprehensive “Information Security Program” that will (i) assess internal and external risks to consumers’ personal information, (ii) implement safeguards to protect consumer information, (iii) regularly monitor and test the efficacy of such safeguards, and (iv) be independently assessed by a third party. Under the Information Security Program, TJX will, among other things (i) upgrade WEP wireless systems to wired or WPA wireless systems, (ii) not store credit or debit card data on its network “any longer than necessary for legitimate business purposes,” (iii) utilize firewalls, access controls, and related measures for the network-based portions of its computer system that store, process, or transmit personal information, and (iv) implement security password management for computer systems that store, process, or transmit personal information. TJX will regularly report on the efficacy of the program to the state Attorneys General. For a copy of the press release, please see http://www.ri.gov/press/view/9173.
Massachusetts Attorney General Obtains Preliminary Injunction Against Mortgage Foreclosure Relief Companies. On June 22, Massachusetts Attorney General Martha Coakley obtained a preliminary injunction for alleged violations of a Massachusetts law against defendants providing mortgage foreclosure relief services. The defendants allegedly collected advance fees for foreclosure-related services and failed to provide the advertised foreclosure relief services. The complaint also alleges that the defendant H.O.P.E. Alliance used a deceptively similar name to the government-sponsored non-profit organization, HOPE NOW Alliance. The preliminary injunction prohibits the defendants from (i) advertising foreclosure-related services, (ii) contacting Massachusetts consumers regarding foreclosures and/or mortgages, and (ii) taking and/or soliciting advance fees from consumers. For a copy of the press release, please see http://www.buckleysandler.com/MA_AG_06_19_09.pdf.
Courts
Fourth Circuit Dismisses Claims in RESPA Mark-up Case. On June 18, the U.S. Court of Appeals for the Fourth Circuit dismissed a borrower’s claim that a title insurance company violated the Real Estate Settlement Procedures Act (RESPA) by charging title insurance rates in excess of the rates filed with the Maryland Insurance Commissioner. Arthur v. Ticor Title Ins. Co. of Florida, No. 08-1727, 2009 WL 1703151 (4th Cir. June 18, 2009). In this case, the plaintiff refinanced his mortgage loan and purchased title insurance from the defendant title insurance agency. The defendant charged the plaintiff insurance rates in excess of the rates it had on file with the state insurance commissioner. The plaintiff alleged that the practice of charging higher rates and allegedly splitting excessive fees with local title agents violated section 8 of RESPA, which bars fee splitting when no services are performed. The district court dismissed the plaintiff’s claims, and the Fourth Circuit affirmed the dismissal, finding that the defendant and its agents performed services in exchange for the fees. In explicitly rejecting HUD’s interpretation in this area, the Fourth Circuit emphasized that RESPA is “not a broad price-control provision,” and that courts should not split charges for services actually performed into “reasonable” and “unreasonable” parts. For a copy of the opinion, please see http://pacer.ca4.uscourts.gov/opinion.pdf/081727.P.pdf.
New York Court Denies Foreclosure of “High-Cost” Loan. Recently, the New York Supreme Court barred foreclosure on a property because the loan exceeded New York law’s 5% threshold for loan fees and costs on loans over $50,000 by $4.83 and, thus, was considered a “high-cost” loan. LaSalle Bank v. Shearon, --- N.Y.S. 2d ---, 2009 WL 323294 (N.Y. Sup. Ct. Feb. 9, 2009). In this case, a homeowner challenged the foreclosure of his property, claiming that the loan was predatory, after buying the home with an 80/20 loan under a contract where the sellers increased the price to allow the buyer to obtain 100% financing. Since the buyer put no money into the transaction, all the closing costs were financed. The court essentially found an unlawful conspiracy between the sellers, who artificially increased the home price to allow the borrower to finance the closing costs, and the lender, who obtained a monetary benefit from the loan interest attributable to the financed closing costs. On the basis of this attempt to “circumvent the banking law restrictions on the closing costs to mortgage ratios” and manipulation of the property price, the court moved the closing costs that are ordinarily “excludible” from the loan finance charge into the includible portion, including, among other costs, the escrowed taxes. The lender’s fees and charges, recalculated to account for inclusion of the tax escrows, exceeded (by $4.83) the New York law’s 5% threshold for loan fees on loans over $50,000, making it a “high-cost” loan. Because the high-cost loan had fees greater than permitted by New York’s high-cost loan law, the lender was held to have violated the statute and was barred from foreclosing. In addition, the court held the borrower may be entitled to actual, consequential or incidental damages, as well as all interest earned and fees paid to close the loan. For a copy of the opinion, please email .
Seventh Circuit Holds Rooker-Feldman Doctrine, Res Judicata Do Not Bar Mortgage Loan Fraud Recovery Action. On June 23, the U.S. Court of Appeals for the Seventh Circuit held that the Rooker-Feldman doctrine and res judicata did not bar a mortgage lender’s loan fraud recovery action. Freedom Mortgage Corp. v. Burnham Mortgage, Inc., No. 08-3007, 2009 WL 1751394 (7th Cir. Jun. 23, 2009). In the underlying lawsuit, the lender alleged that the defendants conducted a mortgage-flipping scam and, thus, fraudulently induced it to extend the mortgage credit at issue. In particular, the lender alleged breach of contract and tort theories, as well as RICO violations predicated on mail and wire fraud. The trial court granted the defendants’ motions for summary judgment, ruling that the lender’s lawsuit was barred by claim preclusion under 28 U.S.C. § 1738, as well as by the Rooker-Feldman doctrine. Reversing the district court, the Seventh Circuit held that the Rooker-Feldman doctrine "does not prevent the pursuit of compensation for injury caused by fraudulent schemes,” but that the statute and principles of defensive non-mutual issue preclusion could limit the amount of recoverable damages. With respect to claims preclusion, the Seventh Circuit observed that “[w]e cannot imagine any argument for allowing a separate action on a guaranty [which the court noted was a well-settled right under the operative law], while precluding a separate action against people who induced the loan through fraud.” Thus, although the lender was limited to the value of its credit bids by collateral estoppel, the court found that if the lender could establish the merits of its claims, then it could collect the shortfall on existing deficiency judgments on the properties at issue and to receive treble damages. In dicta, the court noted that the earlier state judgments that the lender had obtained could have preclusive effects on the lender’s right to recover damages, including whether the operative insurance contracts could bar such recovery. For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=08-3007_002.pdf.
Eighth Circuit Holds Presumption of Delivery and Receipt Appropriate for Electronic Service. On June 4, the U.S. Court of Appeals for the Eighth Circuit held that notice of a denied motion sent electronically through a court’s electronic case management and filing system is presumed delivered and received by the intended recipient because, among other things, the e-mail address had been verified and there was no “bounce back” indicating an invalid e-mail address. American Boat Company v. Unknown Sunken Barge, No. 08-2166, 2009 WL 1544431 (8th Cir. June 4, 2009). In 2000, American Boat Company sued the United States for failure to maintain a navigable waterway in the lower Mississippi River and attempted to amend the summary judgment filed by the district court. The motion to amend was denied, and the court used the CM/ECF electronic case management and filing system to send notice of the denied motion to American Boat’s local counsel in Missouri. However, American Boat’s attorneys claimed that they never received notice of the denial. The court of appeals held that the district court did not abuse its discretion in ruling that the e-mail was presumed delivered. The court of appeals noted that (i) the e-mail address was verified, (ii) the e-mail address was able to promptly receive other notices from CM/ECF, (iii) the CM/ECF system did not receive a "bounce-back" regarding the e-mail or otherwise experience any glitches, and (iv) merely because the e-mail was not found on the attorney’s computer did not establish that the e-mail was not received by the attorney because, as the district court found, the attorney could have accessed the notice from a different computer. For a copy of the opinion, please see http://www.ca8.uscourts.gov/opndir/09/06/082166P.pdf.
Louisiana Federal Court Allows Fraud Claim Based on Companies’ Failure to Enforce Privacy Policy Through Adequate Policy and Procedures. On June 5, the US District Court for the Eastern District of Louisiana held that a plaintiff sufficiently pled a claim of fraud when she alleged that defendant tax service providers failed to maintain legally sufficient policies and procedures to implement their customer privacy policy. Pinero v. Jackson Hewitt Tax Service Inc., No. 08-3535, 2009 WL 1605147 (E.D. La. June 5, 2009). The case arose after the defendants disposed of the plaintiff’s customer records in violation of the defendants’ customer privacy policy. The policy provided that customer information would not be placed in the public domain. The plaintiff alleged that the defendants committed fraud when they knowingly misrepresented that they had privacy policies that complied with applicable law. Specifically, the plaintiff alleged, among other things, that the defendants failed to (i) properly monitor their agents and employees and adequately discipline employees for violations of customer confidentiality or security protocol, (ii) properly store confidential information and documents, (iii) sufficiently secure and limit access to their premises, (iv) sufficiently maintain a chain of custody for confidential documents, (v) adequately prohibit employees/agents from removing confidential customer information from the premises, and (vi) properly dispose of confidential customer documents. The plaintiff further alleged that the knowing misrepresentations contained in the defendant’s privacy policy fraudulently induced her to enter into a contract with the defendants. The defendants argued that the plaintiff failed to allege fraud with any particularity, stating that the complaint relies on the “group pleading doctrine” – that various corporate statements may be held as the collective work of individuals in the company – that is not followed by courts in the Fifth Circuit. The court disagreed, and found that the plaintiff adequately pled a connection between the individual corporate defendants and the allegedly fraudulent statement. As such, the court denied the defendants’ motion to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/Pinero_v_Jackson_Hewitt.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.
Andrew Sandler was interviewed by the Washington Business Journal. The interview concerning Corporate Risk Advisers appeared in the June 19-25, 2009 issue.
Jeff Naimon spoke on June 7 and June 8 at the American Bankers Association Regulatory Compliance Conference in Orlando, Florida on the “New Mortgage Transaction” panel.
Margo Tank spoke in an audio conference series entitled "Building Effective Electronic Records and Electronic Records Management Systems: Navigating the Legal Traps" on June 10.
Mortgages
Federal Banking Regulators Issue Proposed Rule Regarding Making Home Affordable Program Loans. On June 23, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision issued a proposed interim rule regarding residential mortgage loans modified under the Making Home Affordable Program. Under the proposal, mortgage loans modified under the program will retain the risk weight assigned to the loan prior to the modification if the loan continues to meet other applicable prudential criteria. Comments on the proposed rule are due 30 days after being published in the Federal Register. For a copy of the proposed interim rule, please see http://www.fdic.gov/news/board/june2309no2.pdf.
FTC Obtains Injunction Against Mortgage Foreclosure Rescue Operation. On June 16, the Federal Trade Commission (FTC) obtained a preliminary injunction against a mortgage foreclosure rescue operation. According to the FTC, the operation falsely claimed that it could prevent foreclosure in 97 percent of cases and that it would fully refund consumers if it could not prevent a foreclosure. The defendants also allegedly charged up-front fees, instructed homeowners to stop making mortgage payments, and instructed homeowners not to contact the lender, resulting in late fees, penalties, and other costs. For a copy of the press release, please see http://www.ftc.gov/opa/2009/06/freedom.shtm. For a copy of the stipulated preliminary injunction order, please see http://www.ftc.gov/os/caselist/0923061/090617freedomforclosestippreliminj.pdf
HUD Publishes Website Regarding SAFE Act. The U.S. Department of Housing and Urban Development (HUD) has made available a website regarding the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act). The website currently contains links to the SAFE Act, the Model State Law with HUD Commentary, a FAQ, and a link to the NMLS Resource Center. To view the website, please see http://www.hud.gov/offices/hsg/ramh/safe/sfea.cfm.
Additional States Enact SAFE Act Legislation. Several states recently amended applicable state law to reflect compliance with the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act). Texas, Connecticut, Nevada, and South Carolina all enacted legislation that implements the SAFE Act by providing for the licensing of all mortgage loan originators under the Nationwide Mortgage Licensing System. In addition to technical amendments, the bills prescribe loan originator requirements relating to licensing, prior and continuing education, testing, minimum net worth, and surety bond coverage. Connecticut SB 948 also, among other things, requires lenders to enter into a previously optional foreclosure mediation program with borrowers after July 1, 2009. Unless the mediation period is not required, is unavailable, has expired, or has been otherwise terminated, no judgment of strict foreclosure or foreclosure by sale can be entered prior to July 1, 2010. Most provisions of Connecticut SB 948 become effective July 31, 2009, with licensure required by April 1, 2010. South Carolina SB 673 becomes effective January 1, 2010, except that the definition of “mortgage loan originator” does not include an individual servicing a mortgage loan until July 31, 2011. Texas HB 10 becomes effective September 1, 2009. Nevada AB 523 became effective June 8, 2009, with licensure required by October 1, 2009. For a copy of the public law for Connecticut SB 948, please see http://www.cga.ct.gov/2009/ACT/Pa/pdf/2009PA-00209-R00SB-00948-PA.pdf. For a copy of Texas HB 10, please see http://www.capitol.state.tx.us/tlodocs/81R/billtext/pdf/HB00010F.pdf. For a copy of South Carolina SB 673, please see http://www.scstatehouse.gov/sess118_2009-2010/bills/673.docx. For a copy of Nevada AB 523, please see http://leg.state.nv.us/75th2009/Bills/AB/AB523_EN.pdf.
Massachusetts Attorney General Obtains Preliminary Injunction Against Mortgage Foreclosure Relief Companies. On June 22, Massachusetts Attorney General Martha Coakley obtained a preliminary injunction for alleged violations of a Massachusetts law against defendants providing mortgage foreclosure relief services. The defendants allegedly collected advance fees for foreclosure-related services and failed to provide the advertised foreclosure relief services. The complaint also alleges that the defendant H.O.P.E. Alliance used a deceptively similar name to the government-sponsored non-profit organization, HOPE NOW Alliance. The preliminary injunction prohibits the defendants from (i) advertising foreclosure-related services, (ii) contacting Massachusetts consumers regarding foreclosures and/or mortgages, and (ii) taking and/or soliciting advance fees from consumers. For a copy of the press release, please see http://www.buckleysandler.com/MA_AG_06_19_09.pdf.
Fourth Circuit Dismisses Claims in RESPA Mark-up Case. On June 18, the U.S. Court of Appeals for the Fourth Circuit dismissed a borrower’s claim that a title insurance company violated the Real Estate Settlement Procedures Act (RESPA) by charging title insurance rates in excess of the rates filed with the Maryland Insurance Commissioner. Arthur v. Ticor Title Ins. Co. of Florida, No. 08-1727, 2009 WL 1703151 (4th Cir. June 18, 2009). In this case, the plaintiff refinanced his mortgage loan and purchased title insurance from the defendant title insurance agency. The defendant charged the plaintiff insurance rates in excess of the rates it had on file with the state insurance commissioner. The plaintiff alleged that the practice of charging higher rates and allegedly splitting excessive fees with local title agents violated section 8 of RESPA, which bars fee splitting when no services are performed. The district court dismissed the plaintiff’s claims, and the Fourth Circuit affirmed the dismissal, finding that the defendant and its agents performed services in exchange for the fees. In explicitly rejecting HUD’s interpretation in this area, the Fourth Circuit emphasized that RESPA is “not a broad price-control provision,” and that courts should not split charges for services actually performed into “reasonable” and “unreasonable” parts. For a copy of the opinion, please see http://pacer.ca4.uscourts.gov/opinion.pdf/081727.P.pdf.
New York Court Denies Foreclosure of “High-Cost” Loan. Recently, the New York Supreme Court barred foreclosure on a property because the loan exceeded New York law’s 5% threshold for loan fees and costs on loans over $50,000 by $4.83 and, thus, was considered a “high-cost” loan. LaSalle Bank v. Shearon, --- N.Y.S. 2d ---, 2009 WL 323294 (N.Y. Sup. Ct. Feb. 9, 2009). In this case, a homeowner challenged the foreclosure of his property, claiming that the loan was predatory, after buying the home with an 80/20 loan under a contract where the sellers increased the price to allow the buyer to obtain 100% financing. Since the buyer put no money into the transaction, all the closing costs were financed. The court essentially found an unlawful conspiracy between the sellers, who artificially increased the home price to allow the borrower to finance the closing costs, and the lender, who obtained a monetary benefit from the loan interest attributable to the financed closing costs. On the basis of this attempt to “circumvent the banking law restrictions on the closing costs to mortgage ratios” and manipulation of the property price, the court moved the closing costs that are ordinarily “excludible” from the loan finance charge into the includible portion, including, among other costs, the escrowed taxes. The lender’s fees and charges, recalculated to account for inclusion of the tax escrows, exceeded (by $4.83) the New York law’s 5% threshold for loan fees on loans over $50,000, making it a “high-cost” loan. Because the high-cost loan had fees greater than permitted by New York’s high-cost loan law, the lender was held to have violated the statute and was barred from foreclosing. In addition, the court held the borrower may be entitled to actual, consequential or incidental damages, as well as all interest earned and fees paid to close the loan. For a copy of the opinion, please email .
Seventh Circuit Holds Rooker-Feldman Doctrine, Res Judicata Do Not Bar Mortgage Loan Fraud Recovery Action. On June 23, the U.S. Court of Appeals for the Seventh Circuit held that the Rooker-Feldman doctrine and res judicata did not bar a mortgage lender’s loan fraud recovery action. Freedom Mortgage Corp. v. Burnham Mortgage, Inc., No. 08-3007, 2009 WL 1751394 (7th Cir. Jun. 23, 2009). In the underlying lawsuit, the lender alleged that the defendants conducted a mortgage-flipping scam and, thus, fraudulently induced it to extend the mortgage credit at issue. In particular, the lender alleged breach of contract and tort theories, as well as RICO violations predicated on mail and wire fraud. The trial court granted the defendants’ motions for summary judgment, ruling that the lender’s lawsuit was barred by claim preclusion under 28 U.S.C. § 1738, as well as by the Rooker-Feldman doctrine. Reversing the district court, the Seventh Circuit held that the Rooker-Feldman doctrine "does not prevent the pursuit of compensation for injury caused by fraudulent schemes,” but that the statute and principles of defensive non-mutual issue preclusion could limit the amount of recoverable damages. With respect to claims preclusion, the Seventh Circuit observed that “[w]e cannot imagine any argument for allowing a separate action on a guaranty [which the court noted was a well-settled right under the operative law], while precluding a separate action against people who induced the loan through fraud.” Thus, although the lender was limited to the value of its credit bids by collateral estoppel, the court found that if the lender could establish the merits of its claims, then it could collect the shortfall on existing deficiency judgments on the properties at issue and to receive treble damages. In dicta, the court noted that the earlier state judgments that the lender had obtained could have preclusive effects on the lender’s right to recover damages, including whether the operative insurance contracts could bar such recovery. For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=08-3007_002.pdf.
Banking
Agencies Announce Notice of Proposed CRA Rulemaking. On June 23, the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision jointly proposed revisions to regulations implementing the Community Reinvestment Act (CRA). The joint proposal incorporates provisions of the recently-enacted Higher Education Opportunity Act, which revised the CRA to, among other things, require that the agencies consider low-cost education loans provided by the financial institution to low-income borrowers when assessing an institution’s record of meeting community credit needs. The proposal specifically requests comments regarding (i) how "education loans" should be defined, (ii) whether the proposed definition of "low-cost" is appropriate, and (iii) whether the definition of "low-income" under CRA regulations should be amended. Public comments are due 30 days after the proposal is published in the Federal Register. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09098.html. For a copy of the proposed rulemaking, please see http://www.fdic.gov/news/news/press/2009/pr09098a.pdf.
Fed Announces Changes to Liquidity Programs. On June 25, the Federal Reserve Board (FRB) issued a press release announcing that it has extended a number of its credit facilities through early 2010, while it has modified others due to improved financial conditions and reduced usage. The FRB has extended through February 1, 2010 the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility (TSLF). Swap lines between the Fed and certain central banks have also been extended through February 1, 2010. The December 31, 2009 expiration date for the Term Asset-Backed Securities Loan Facility will remain in place, while the authorization for the Money Market Investor Funding Facility will not be extended. Additionally, while there is no fixed expiration date for the Term Auction Facility, it will have its funding reduced because of lower-than-expected extensions of credit under the program. Finally, TSLF auctions backed by Schedule 1 collateral will be suspended as of July 1, while auctions backed by Schedule 2 collateral will be conducted every four weeks instead of every two weeks. For a copy of the press release, please see http://www.federalreserve.gov/newsevents/press/monetary/20090625a.htm.
FDIC Proposes Extension of Guarantee Program for Accounts over $250,000. On June 23, the Federal Deposit Insurance Corporation (FDIC) issued a notice of proposed rulemaking regarding the Transaction Account Guarantee component of the Temporary Liquidity Guarantee Program, which guarantees deposits over $250,000 on qualifying accounts. Under one proposal, the FDIC’s guarantee of deposits held in qualifying accounts would continue until December 31, 2009 without any modification of the existing fee structure or any other change in the FDIC’s guarantee of the relevant accounts. Under a second proposal, the program would be extended until June 30, 2010, and insured depository institutions currently participating in the program would be able to opt-out of continuing participation. Comments on the proposed rulemaking are due 30 days after being published in the Federal Register. For a copy of the proposed rulemaking, please see http://www.fdic.gov/news/board/june2309no6.pdf.
FDIC Amends Regulations Implementing Federal Deposit Insurance Act. On June 23, the Federal Deposit Insurance Corporation amended the regulations implementing the Federal Deposit Insurance Act. The final rule largely pertains to annual independent audits and reporting requirements for certain insured depository institutions. Among other things, the final rule (i) extends the time period for a non-public institution to file its annual report, (ii) provides relief from various reporting requirements, including for institutions merged out of existence or acquired during that fiscal year, (iii) requires management to provide a conclusion regarding compliance and disclose any noncompliance with insider loan and dividend restriction laws and regulations, and (iv) provides for various audit and internal control revisions to identify and disclose material weaknesses. Most of the final rule is effective 30 days after being published in the Federal Register. For a copy of the final rule, please see http://www.fdic.gov/news/board/june2309no10.pdf.
Consumer Finance
FTC Obtains Injunction Against Mortgage Foreclosure Rescue Operation. On June 16, the Federal Trade Commission (FTC) obtained a preliminary injunction against a mortgage foreclosure rescue operation. According to the FTC, the operation falsely claimed that it could prevent foreclosure in 97 percent of cases and that it would fully refund consumers if it could not prevent a foreclosure. The defendants also allegedly charged up-front fees, instructed homeowners to stop making mortgage payments, and instructed homeowners not to contact the lender, resulting in late fees, penalties, and other costs. For a copy of the press release, please see http://www.ftc.gov/opa/2009/06/freedom.shtm. For a copy of the stipulated preliminary injunction order, please see http://www.ftc.gov/os/caselist/0923061/090617freedomforclosestippreliminj.pdf.
FTC Obtains Final Judgment Against Credit Repair Organization. On June 25, the Federal Trade Commission announced a stipulated final judgment against a credit repair organization and its principals for allegedly collecting advance fees and for failing to remove negative information from consumer credit reports as was promised. Under the order, the defendants are prohibited from (i) collecting money from consumers who purchased services prior to December 3, 2008, (ii) charging consumers advance fees, (iii) claiming that they can permanently remove negative information from consumer credit reports, including accurate negative information, and (iv) making deceptive claims when marketing a product or service. The order also requires the defendants to take “reasonable” measures to protect consumer information during disposal. For a copy of the press release, please see http://www.ftc.gov/opa/2009/06/acegroup.shtm. For a copy of the final judgments, please see http://www.ftc.gov/os/caselist/0823172/090625acejdgmtroth.pdf and http://www.ftc.gov/os/caselist/0823172/090625acejdgmtkessler.pdf.
Fourth Circuit Dismisses Claims in RESPA Mark-up Case. On June 18, the U.S. Court of Appeals for the Fourth Circuit dismissed a borrower’s claim that a title insurance company violated the Real Estate Settlement Procedures Act (RESPA) by charging title insurance rates in excess of the rates filed with the Maryland Insurance Commissioner. Arthur v. Ticor Title Ins. Co. of Florida, No. 08-1727, 2009 WL 1703151 (4th Cir. June 18, 2009). In this case, the plaintiff refinanced his mortgage loan and purchased title insurance from the defendant title insurance agency. The defendant charged the plaintiff insurance rates in excess of the rates it had on file with the state insurance commissioner. The plaintiff alleged that the practice of charging higher rates and allegedly splitting excessive fees with local title agents violated section 8 of RESPA, which bars fee splitting when no services are performed. The district court dismissed the plaintiff’s claims, and the Fourth Circuit affirmed the dismissal, finding that the defendant and its agents performed services in exchange for the fees. In explicitly rejecting HUD’s interpretation in this area, the Fourth Circuit emphasized that RESPA is “not a broad price-control provision,” and that courts should not split charges for services actually performed into “reasonable” and “unreasonable” parts. For a copy of the opinion, please see http://pacer.ca4.uscourts.gov/opinion.pdf/081727.P.pdf.
New York Court Denies Foreclosure of “High-Cost” Loan. Recently, the New York Supreme Court barred foreclosure on a property because the loan exceeded New York law’s 5% threshold for loan fees and costs on loans over $50,000 by $4.83 and, thus, was considered a “high-cost” loan. LaSalle Bank v. Shearon, --- N.Y.S. 2d ---, 2009 WL 323294 (N.Y. Sup. Ct. Feb. 9, 2009). In this case, a homeowner challenged the foreclosure of his property, claiming that the loan was predatory, after buying the home with an 80/20 loan under a contract where the sellers increased the price to allow the buyer to obtain 100% financing. Since the buyer put no money into the transaction, all the closing costs were financed. The court essentially found an unlawful conspiracy between the sellers, who artificially increased the home price to allow the borrower to finance the closing costs, and the lender, who obtained a monetary benefit from the loan interest attributable to the financed closing costs. On the basis of this attempt to “circumvent the banking law restrictions on the closing costs to mortgage ratios” and manipulation of the property price, the court moved the closing costs that are ordinarily “excludible” from the loan finance charge into the includible portion, including, among other costs, the escrowed taxes. The lender’s fees and charges, recalculated to account for inclusion of the tax escrows, exceeded (by $4.83) the New York law’s 5% threshold for loan fees on loans over $50,000, making it a “high-cost” loan. Because the high-cost loan had fees greater than permitted by New York’s high-cost loan law, the lender was held to have violated the statute and was barred from foreclosing. In addition, the court held the borrower may be entitled to actual, consequential or incidental damages, as well as all interest earned and fees paid to close the loan. For a copy of the opinion, please email .
Seventh Circuit Holds Rooker-Feldman Doctrine, Res Judicata Do Not Bar Mortgage Loan Fraud Recovery Action. On June 23, the U.S. Court of Appeals for the Seventh Circuit held that the Rooker-Feldman doctrine and res judicata did not bar a mortgage lender’s loan fraud recovery action. Freedom Mortgage Corp. v. Burnham Mortgage, Inc., No. 08-3007, 2009 WL 1751394 (7th Cir. Jun. 23, 2009). In the underlying lawsuit, the lender alleged that the defendants conducted a mortgage-flipping scam and, thus, fraudulently induced it to extend the mortgage credit at issue. In particular, the lender alleged breach of contract and tort theories, as well as RICO violations predicated on mail and wire fraud. The trial court granted the defendants’ motions for summary judgment, ruling that the lender’s lawsuit was barred by claim preclusion under 28 U.S.C. § 1738, as well as by the Rooker-Feldman doctrine. Reversing the district court, the Seventh Circuit held that the Rooker-Feldman doctrine "does not prevent the pursuit of compensation for injury caused by fraudulent schemes,” but that the statute and principles of defensive non-mutual issue preclusion could limit the amount of recoverable damages. With respect to claims preclusion, the Seventh Circuit observed that “[w]e cannot imagine any argument for allowing a separate action on a guaranty [which the court noted was a well-settled right under the operative law], while precluding a separate action against people who induced the loan through fraud.” Thus, although the lender was limited to the value of its credit bids by collateral estoppel, the court found that if the lender could establish the merits of its claims, then it could collect the shortfall on existing deficiency judgments on the properties at issue and to receive treble damages. In dicta, the court noted that the earlier state judgments that the lender had obtained could have preclusive effects on the lender’s right to recover damages, including whether the operative insurance contracts could bar such recovery. For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=08-3007_002.pdf.
Eighth Circuit Holds Presumption of Delivery and Receipt Appropriate for Electronic Service. On June 4, the U.S. Court of Appeals for the Eighth Circuit held that notice of a denied motion sent electronically through a court’s electronic case management and filing system is presumed delivered and received by the intended recipient because, among other things, the e-mail address had been verified and there was no “bounce back” indicating an invalid e-mail address. American Boat Company v. Unknown Sunken Barge, No. 08-2166, 2009 WL 1544431 (8th Cir. June 4, 2009). In 2000, American Boat Company sued the United States for failure to maintain a navigable waterway in the lower Mississippi River and attempted to amend the summary judgment filed by the district court. The motion to amend was denied, and the court used the CM/ECF electronic case management and filing system to send notice of the denied motion to American Boat’s local counsel in Missouri. However, American Boat’s attorneys claimed that they never received notice of the denial. The court of appeals held that the district court did not abuse its discretion in ruling that the e-mail was presumed delivered. The court of appeals noted that (i) the e-mail address was verified, (ii) the e-mail address was able to promptly receive other notices from CM/ECF, (iii) the CM/ECF system did not receive a "bounce-back" regarding the e-mail or otherwise experience any glitches, and (iv) merely because the e-mail was not found on the attorney’s computer did not establish that the e-mail was not received by the attorney because, as the district court found, the attorney could have accessed the notice from a different computer. For a copy of the opinion, please see http://www.ca8.uscourts.gov/opndir/09/06/082166P.pdf.
Louisiana Federal Court Allows Fraud Claim Based on Companies’ Failure to Enforce Privacy Policy Through Adequate Policy and Procedures. On June 5, the US District Court for the Eastern District of Louisiana held that a plaintiff sufficiently pled a claim of fraud when she alleged that defendant tax service providers failed to maintain legally sufficient policies and procedures to implement their customer privacy policy. Pinero v. Jackson Hewitt Tax Service Inc., No. 08-3535, 2009 WL 1605147 (E.D. La. June 5, 2009). The case arose after the defendants disposed of the plaintiff’s customer records in violation of the defendants’ customer privacy policy. The policy provided that customer information would not be placed in the public domain. The plaintiff alleged that the defendants committed fraud when they knowingly misrepresented that they had privacy policies that complied with applicable law. Specifically, the plaintiff alleged, among other things, that the defendants failed to (i) properly monitor their agents and employees and adequately discipline employees for violations of customer confidentiality or security protocol, (ii) properly store confidential information and documents, (iii) sufficiently secure and limit access to their premises, (iv) sufficiently maintain a chain of custody for confidential documents, (v) adequately prohibit employees/agents from removing confidential customer information from the premises, and (vi) properly dispose of confidential customer documents. The plaintiff further alleged that the knowing misrepresentations contained in the defendant’s privacy policy fraudulently induced her to enter into a contract with the defendants. The defendants argued that the plaintiff failed to allege fraud with any particularity, stating that the complaint relies on the “group pleading doctrine” – that various corporate statements may be held as the collective work of individuals in the company – that is not followed by courts in the Fifth Circuit. The court disagreed, and found that the plaintiff adequately pled a connection between the individual corporate defendants and the allegedly fraudulent statement. As such, the court denied the defendants’ motion to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/Pinero_v_Jackson_Hewitt.pdf.
Insurance
Fourth Circuit Dismisses Claims in RESPA Mark-up Case. On June 18, the U.S. Court of Appeals for the Fourth Circuit dismissed a borrower’s claim that a title insurance company violated the Real Estate Settlement Procedures Act (RESPA) by charging title insurance rates in excess of the rates filed with the Maryland Insurance Commissioner. Arthur v. Ticor Title Ins. Co. of Florida, No. 08-1727, 2009 WL 1703151 (4th Cir. June 18, 2009). In this case, the plaintiff refinanced his mortgage loan and purchased title insurance from the defendant title insurance agency. The defendant charged the plaintiff insurance rates in excess of the rates it had on file with the state insurance commissioner. The plaintiff alleged that the practice of charging higher rates and allegedly splitting excessive fees with local title agents violated section 8 of RESPA, which bars fee splitting when no services are performed. The district court dismissed the plaintiff’s claims, and the Fourth Circuit affirmed the dismissal, finding that the defendant and its agents performed services in exchange for the fees. In explicitly rejecting HUD’s interpretation in this area, the Fourth Circuit emphasized that RESPA is “not a broad price-control provision,” and that courts should not split charges for services actually performed into “reasonable” and “unreasonable” parts. For a copy of the opinion, please see http://pacer.ca4.uscourts.gov/opinion.pdf/081727.P.pdf.
E-Financial Services
Multi-State Agreement Reached in TJX Data Security Breach Case. On June 23, the TJX Companies, Inc. (TJX) reached an agreement with 41 state Attorneys General to settle charges that it failed to adequately protect consumer information in connection with a January 2007 data breach that has also generated litigation and a separate agreement with the Federal Trade Commission (reported in InfoBytes, Mar. 28, 2008). Under the agreement, TJX will pay $9.75 million and implement a comprehensive “Information Security Program” that will (i) assess internal and external risks to consumers’ personal information, (ii) implement safeguards to protect consumer information, (iii) regularly monitor and test the efficacy of such safeguards, and (iv) be independently assessed by a third party. Under the Information Security Program, TJX will, among other things (i) upgrade WEP wireless systems to wired or WPA wireless systems, (ii) not store credit or debit card data on its network “any longer than necessary for legitimate business purposes,” (iii) utilize firewalls, access controls, and related measures for the network-based portions of its computer system that store, process, or transmit personal information, and (iv) implement security password management for computer systems that store, process, or transmit personal information. TJX will regularly report on the efficacy of the program to the state Attorneys General. For a copy of the press release, please see http://www.ri.gov/press/view/9173.
Eighth Circuit Holds Presumption of Delivery and Receipt Appropriate for Electronic Service. On June 4, the U.S. Court of Appeals for the Eighth Circuit held that notice of a denied motion sent electronically through a court’s electronic case management and filing system is presumed delivered and received by the intended recipient because, among other things, the e-mail address had been verified and there was no “bounce back” indicating an invalid e-mail address. American Boat Company v. Unknown Sunken Barge, No. 08-2166, 2009 WL 1544431 (8th Cir. June 4, 2009). In 2000, American Boat Company sued the United States for failure to maintain a navigable waterway in the lower Mississippi River and attempted to amend the summary judgment filed by the district court. The motion to amend was denied, and the court used the CM/ECF electronic case management and filing system to send notice of the denied motion to American Boat’s local counsel in Missouri. However, American Boat’s attorneys claimed that they never received notice of the denial. The court of appeals held that the district court did not abuse its discretion in ruling that the e-mail was presumed delivered. The court of appeals noted that (i) the e-mail address was verified, (ii) the e-mail address was able to promptly receive other notices from CM/ECF, (iii) the CM/ECF system did not receive a "bounce-back" regarding the e-mail or otherwise experience any glitches, and (iv) merely because the e-mail was not found on the attorney’s computer did not establish that the e-mail was not received by the attorney because, as the district court found, the attorney could have accessed the notice from a different computer. For a copy of the opinion, please see http://www.ca8.uscourts.gov/opndir/09/06/082166P.pdf.
Privacy/Data Security
Multi-State Agreement Reached in TJX Data Security Breach Case. On June 23, the TJX Companies, Inc. (TJX) reached an agreement with 41 state Attorneys General to settle charges that it failed to adequately protect consumer information in connection with a January 2007 data breach that has also generated litigation and a separate agreement with the Federal Trade Commission (reported in InfoBytes, Mar. 28, 2008). Under the agreement, TJX will pay $9.75 million and implement a comprehensive “Information Security Program” that will (i) assess internal and external risks to consumers’ personal information, (ii) implement safeguards to protect consumer information, (iii) regularly monitor and test the efficacy of such safeguards, and (iv) be independently assessed by a third party. Under the Information Security Program, TJX will, among other things (i) upgrade WEP wireless systems to wired or WPA wireless systems, (ii) not store credit or debit card data on its network “any longer than necessary for legitimate business purposes,” (iii) utilize firewalls, access controls, and related measures for the network-based portions of its computer system that store, process, or transmit personal information, and (iv) implement security password management for computer systems that store, process, or transmit personal information. TJX will regularly report on the efficacy of the program to the state Attorneys General. For a copy of the press release, please see http://www.ri.gov/press/view/9173.