InfoBytes, June 5, 2009
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Litigation
- E-Financial Services
- Privacy/Data Security
Federal Issues
FDIC Issues Rule Tightening Interest Rate Restrictions on “Less than Well Capitalized” Institutions. On May 29, the Federal Deposit Insurance Corporation (FDIC) published a final rule that modifies how the agency determines the interest rate restrictions applicable to insured depository institutions that are “less than well capitalized.” Under § 29 of the Federal Deposit Insurance Act, insured institutions that are less than well capitalized cannot offer interest rates that are significantly higher than the prevailing interest rates on deposits offered by other insured institutions in its normal market area or in a market are where such deposits would be normally accepted. Prior to the new rule, the FDIC determined the prevailing interest rates for deposits solicited nationally using a formula based on yields of similar maturity Treasury obligations. For deposits solicited locally, the FDIC used an average of local interest rates. The final rule changes the method of calculation for both national and local rates. National rates will be determined through a direct calculation of average national rates, as computed and published by the FDIC based on data available to it. For local rates, the FDIC has established a presumption that local rates equal national rates, but that this presumption can be overturned by sufficient evidence. The term “significantly higher” is defined to mean up to 75 basis points above the prevailing rate. The new rule does not become effective until January 1, 2010. However, effective immediately, the FDIC will regularly publish national rates and caps, and permit institutions that are less than well capitalized to avail themselves of these rates as a safe harbor for complying with the statutory interest rate restrictions. For a copy of the final rule, please see http://www.fdic.gov/news/board/May29no8.pdf.
FDIC Postpones Asset Sale Under Legacy Loans Program; Proceeds with Sale of Receivership Assets. On June 3, the Federal Deposit Insurance Corporation (FDIC) announced that, because banks have been able to raise capital without selling bad assets, a previously-planned pilot sale of “toxic” assets through the Legacy Loans Program (LLP) will be postponed. The next step for the LLP will be a test of the funding mechanism contemplated by the program in a sale of receivership assets this summer. The FDIC expects to solicit bids for the sale of these assets in July. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09084.html.
FTC Settles Charges Against Sears Regarding Online Tracking Software. On June 4, the Federal Trade Commission (FTC) announced a settlement with Sears Holdings Management Corporation (Sears) regarding allegations that Sears violated the FTC Act by failing to adequately disclose the scope of consumer personal information that it collected via a software application. According to the FTC’s complaint, Sears stated to consumers that the “research” software would confidentially track online browsing. However, only in a lengthy user license agreement, available to consumers at the end of a multi-step registration process, did Sears disclose the full extent of the information the software tracked, which included consumers’ online secure sessions, online bank statements and emails, according to the complaint. Under the settlement, Sears must stop collecting data from consumers who downloaded the software and destroy any previously-collected data. In the future, Sears must also, prior to a consumer’s installation of software, and separate from any license agreement, make clear and prominent disclosures regarding how the software will monitor, record, or transmit data. For a copy of the press release, please see http://www.ftc.gov/opa/2009/06/sears.shtm. For a copy of the agreement, please see http://www.ftc.gov/os/caselist/0823099/090604searsagreement.pdf.
FHFA Proposes Executive Compensation Regulation. On June 5, the Federal Housing Finance Agency (FHFA) issued a proposed Executive Compensation regulation for comment. The proposed regulation would supersede the OFHEO Executive Compensation regulation, 12 CFR part 1770, pursuant to the FHFA’s authority under the Federal Housing Enterprise Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008 (HERA). Among other things, the proposed regulation is issued to effect sections 1113 and 1117 of HERA. Section 1113 addresses the authority of the FHFA Director to prohibit and withhold compensation of executive officers of the government-sponsored enterprises and the Federal Home Loan Banks (regulated entities.) Section 1117 provides the Director with temporary authority to approve, disapprove, or modify the executive compensation of the regulated entities. Comments on the proposed regulation are due by August 4, 2009. For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2009/pdf/E9-13117.pdf.
State Issues
Mortgage Foreclosure Consultants to Register with California Attorney General by July 1. On June 1, California Attorney General Edmund G. Brown Jr. issued a directive requiring foreclosure consultants to register with the California Office of the Attorney General by July 1, 2009. In addition to submitting a “Foreclosure Consultant Registration Form,” foreclosure consultants must post a $100,000 bond. Foreclosure consultants must submit the registration form and bond in advance of July 1, 2009 to be registered in time for the deadline. For a copy of the press release, please see http://ag.ca.gov/newsalerts/release.php?id=1748; for a copy of the Foreclosure Consultant Registration Form, please see http://ag.ca.gov/consumers/pdf/JUS_8833.pdf.
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); namely, (i) on May 21, Colorado Governor Bill Ritter signed HB 1085, (ii) on May 12, Indiana Governor Mitch Daniels signed HB 1646, (iii) on May 12, Oklahoma Governor Brad Henry signed SB 1062, and (iv) on May 21, Vermont Governor Jim Douglas signed H.171. The bills implement the mandate of 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. Vermont H.171 additionally includes a provision requiring a mortgage holder to file a notice of foreclosure with the Vermont Commissioner of the Department of Banking, Insurance, Securities, and Health Care Administration at the same time that the mortgage holder files a foreclosure action. Oklahoma SB 1062 becomes effective July 1, 2009, with licensure under the bill required as early as July 31, 2010; Colorado HB 1085 becomes effective July 31, 2009 with licensure under the bill required by January 1, 2010; Indiana HB 1646 becomes effective July 1, 2009, with licensure under the bill required by January 1, 2010. Vermont HB 171 becomes effective July 1, 2009, with licensure under the bill required as early as July 1, 2010, and the foreclosure notice provision becoming effective June 20, 2009. For a copy of Colorado HB 1085, please see http://www.buckleysandler.com/CO_HB_1085_2009.pdf; for a copy of Indiana HB 1646, please see http://www.in.gov/legislative/bills/2009/PDF/HE/HE1646.1.pdf; for a copy of Oklahoma SB 1062, please see http://webserver1.lsb.state.ok.us/2009-10bills/SB/sb1062_engr.rtf; and for a copy of Vermont H.171, please see http://www.leg.state.vt.us/docs/2010/bills/Passed/H-171.pdf.
Nevada Amends State Mortgage Law. On May 29, Nevada Governor Jim Gibbons signed AB 513, a bill amending Nevada state mortgage law. Among other things, the bill (i) requires additional disclosures pertaining to fees earned by mortgage brokers, (ii) eliminates the mortgage broker, agent, and banker licensure exemption for “consumer finance companies,” and (iii) requires proof of the right to transact mortgage loans, if applicable, in another jurisdiction as a condition to obtaining, among other things, a licensing exemption. The cited portions of the bill are effective immediately. For a copy of the bill, please see http://www.leg.state.nv.us/75th2009/Bills/AB/AB513_EN.pdf.
New York Attorney General Reaches Settlement with Debt Collection Agencies. On June 2, New York Attorney General Andrew M. Cuomo announced a settlement with three New York debt collection agencies that allegedly failed to adequately supervise employees who engaged in deceptive and fraudulent methods to collect debts, in violation of the federal Fair Debt Collection Practices Act and New York state law. Among other things, the agencies allegedly (i) contacted consumers without a lawful justification, (ii) contacted consumers at work, aware that such contact was prohibited by the consumers’ employers, (iii) discussed debts with third parties, (iv) falsely claimed to be acting on behalf of an attorney and/or that legal action would be initiated against the consumer, and (v) failed to respond to consumer requests for debt verification. Under the settlement, the companies will (i) enhance compliance protocols to better facilitate consumer complaints, including a direct web link on their respective web sites to address consumer complaints, (ii) maintain an employee disciplinary history database, as well as a comprehensive database of all complaints made by consumers or third parties against the debt collectors, and (iii) pay approximately $245,000, collectively, in fines. For a copy of the press release, please see http://www.oag.state.ny.us/media_center/2009/june/june2a_09.html.
California Regulator Makes Available California Foreclosure Prevention Act Exemption Application. On June 3, the California Department of Corporations posted several documents pertaining to the California Foreclosure Prevention Act (CFPA). Under the CFPA, servicers must wait an additional 90 days (in addition to the period already provided by law) before filing a Notice of Sale (most recently reported in InfoBytes, May 29, 2009). Servicers may be exempted from the 90-day notice requirement by submitting an application for exemption. For a copy of the application, please see http://www.corp.ca.gov/forms/pdf/CFP_Application_Package.pdf. Also available is a notice to servicers providing an overview of the new requirements under the CFPA, available at http://www.corp.ca.gov/FSD/CFP/pdf/CFPALtr060309.pdf, and a FAQ regarding the CFPA, available at http://www.corp.ca.gov/FSD/faq/CFPA.asp.
Courts
New York Court Denies Foreclosure When “Abundantly Clear” to Lender that Borrower Could Not Repay Mortgage Loan. On April 17, the Supreme Court of Kings County, New York held that foreclosure is inappropriate when it is “abundantly clear” to a lender that a borrower could not repay a mortgage loan. Argent Mortgage v. Mentesana, No. 25828/2004, 2009 WL 1110635 (NY Sup. Ct. Apr. 17, 2009). Unsatisfied with the pleadings in the foreclosure complaint, the judge in this case appointed a special referee to gather information about how a 64-year old taxi driver obtained a mortgage for over $319,000 based on undocumented income. The special referee discovered that the borrower was ailing; the foreclosure complaint was served on his live-in nurse. When the special referee located the borrower, he was in a daze and taking morphine. After appointing a guardian ad litem for the borrower, it turned out that the former owner of the house had apparently sold the home to his son, using the elderly Mr. Mentesana as the straw man in the purchase. Mentesana allowed the former owner’s son to use his identity to procure the loan, and claimed he was told he did not have to make any payments. According to the court, “the unresolved issues that form the basis of this foreclosure matter represent the epitome of the fraud inherent in the mortgage market which has led to the serious economic problems this country now faces.” The court refused to enforce a mortgage transaction that was “clearly fraudulent” and therefore denied the foreclosure. The Mentesana opinion should sound a loud warning to lenders attempting to foreclose New York loans involving fraud in the loan application. For a copy of the opinion, please email .
California Court Holds Bank May Deduct Overdraft Fees from Accounts Holding Public Benefit Funds. On June 1, the Supreme Court of California upheld an appellate court ruling, and thus overturned a billion-dollar class action award, holding that the defendant bank did not violate California law by recouping overdrawn amounts and insufficient funds fees from an overdrawn account, even though the account held public benefit funds. Miller v. Bank of America, No.S149178, 2009 WL 1507681 (Cal. June 1, 2009). In this class action, the plaintiffs argued that the bank’s practice violated Kruger v. Wells Fargo Bank, 11 Cal.3d 352 (1974), which held that a bank could not satisfy a borrower’s credit card debt by debiting money derived from unemployment and disability benefits from the unrelated checking account of that same borrower. The court disagreed, stating that recouping overdraft amounts and fees from the same account is distinguishable from the setoff of independent debt at issue in Kruger. Despite public policy considerations involved with deducting from public benefit funds, the court ultimately found support in the language and legislative history of California Financial Code section 864, a statute enacted a year after Kruger that specifically exempts overdrafts and bank charges from the restrictions against bank set off practices. The court also referred to a more recent interpretation by the Office of the Comptroller of the Currency of an analogous federal law that authorizes a national bank, under the National Bank Act, to deduct the amount of an overdraft and charge “non-sufficient funds” fees from overdrawn accounts. In affirming the appellate court ruling on the basis of California law, the court declined to consider whether federal preemption applied. For a copy of the opinion, please see http://www.courtinfo.ca.gov/opinions/documents/S149178.PDF/.
Pennsylvania Federal Court Holds Chapter 7 Bankruptcy Filing Prevents Homeowner from Bringing TILA Claims. On May 29, the U.S. District Court for the Eastern District of Pennsylvania dismissed the plaintiff’s Truth in Lending Act (TILA) claims against a lender based on lack of standing of the plaintiff due to her bankruptcy filing. Schafer v. Decision One Mortgage Corporation, No. 08-5653, 2009 WL 1532048 (E.D. Pa. May 29, 2009). The plaintiff in Schafer refinanced her home mortgage in December 2004. In July 2005, the plaintiff filed a Chapter 7 Bankruptcy Petition and was granted a discharge in November 2005. Later, the plaintiff sued her lender, alleging violations of TILA in connection with the refinance transaction. The court dismissed the plaintiff’s claims, holding that, as a result of the Chapter 7 bankruptcy proceeding, the plaintiff no longer had standing to bring her TILA claims. To the extent anyone had standing to bring these claims, it was the Trustee of the Chapter 7 Bankruptcy because “legal claims which accrued before the filing of the bankruptcy petition are included in the estate,” which is solely represented by the Trustee. For a copy of the opinion, please email .
Michigan Federal Court Holds No Private Right of Action for Adverse Action Under FCRA. On May 27, the U.S. District Court for the Eastern District of Michigan held that there is no private right of action under the Fair Credit Reporting Act (FCRA) for “adverse action.” Tobler v. Equifax, No. 08-cv-12610, 2009 WL 1491046 (E.D. Mich. May 27, 2009). In Tobler, the plaintiff alleged that the defendant insurance company violated FCRA by charging higher rates and failing to notify the plaintiff of “adverse action” taken, based on false information obtained from a consumer report. Among other things, FCRA requires any person who takes “adverse action” based on information contained in a consumer report to notify the affected consumer. As it applies to an insurance company, adverse action includes an increase in any charge for any insurance. FCRA also provides, however, that the notice requirement is to be enforced exclusively by federal agencies. As a result, the court, agreeing with almost all federal courts that have addressed the issue, held that there is no private right of action for failure to comply with FCRA adverse action disclosure requirements. For a copy of the opinion, please see http://www.buckleysandler.com/Tobler_v_Equifax.pdf.
California Federal Court Rules Credit Report Fraud Alerts Placed by Company Violate California State Unfair Competition Law. On May 19, the U.S. District Court for the Central District of California held that a company offering identity theft protection services to its customers violated California’s Unfair Competition Law when it placed fraud alerts on behalf of its customers with the plaintiff credit reporting agency, Experian Information Solutions, Inc. (Experian). Experian Information Solutions, Inc. v. Lifelock, Inc., No. SACV08-00165, 2009 WL 1449037 (C.D. Cal. May 19, 2009). In arriving at its decision, the court agreed with Experian’s argument that, pursuant to public policy established by the Fair Credit Reporting Act, credit reporting agencies are not required to process fraud alerts placed by companies, but rather only those placed by individuals. The court also emphasized that, as a result of the defendant company’s unfair business practice, Experian “suffered an injury in fact and lost money or property.” Specifically, Experian incurred costs in responding to the defendant company’s fraud alerts, such as having to deliver disclosures to each individual on whose behalf a fraud alert was requested. As a result, the court granted partial summary judgment in favor of Experian. For a copy of the opinion, please see http://www.buckleysandler.com/Experian_v_Lifelock.pdf.
Firm News
Margo Tank will be speaking in an audio conference series entitled "Building Effective Electronic Records and Electronic Records Management Systems: Navigating the Legal Traps" on June 10. Please see http://www.alexinformation.com/store/39N.php#author for more information.
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/.
Mortgages
FHFA Proposes Executive Compensation Regulation. On June 5, the Federal Housing Finance Agency (FHFA) issued a proposed Executive Compensation regulation for comment. The proposed regulation would supersede the OFHEO Executive Compensation regulation, 12 CFR part 1770, pursuant to the FHFA’s authority under the Federal Housing Enterprise Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008 (HERA). Among other things, the proposed regulation is issued to effect sections 1113 and 1117 of HERA. Section 1113 addresses the authority of the FHFA Director to prohibit and withhold compensation of executive officers of the government-sponsored enterprises and the Federal Home Loan Banks (regulated entities.) Section 1117 provides the Director with temporary authority to approve, disapprove, or modify the executive compensation of the regulated entities. Comments on the proposed regulation are due by August 4, 2009. For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2009/pdf/E9-13117.pdf.
Mortgage Foreclosure Consultants to Register with California Attorney General by July 1. On June 1, California Attorney General Edmund G. Brown Jr. issued a directive requiring foreclosure consultants to register with the California Office of the Attorney General by July 1, 2009. In addition to submitting a “Foreclosure Consultant Registration Form,” foreclosure consultants must post a $100,000 bond. Foreclosure consultants must submit the registration form and bond in advance of July 1, 2009 to be registered in time for the deadline. For a copy of the press release, please see http://ag.ca.gov/newsalerts/release.php?id=1748; for a copy of the Foreclosure Consultant Registration Form, please see http://ag.ca.gov/consumers/pdf/JUS_8833.pdf.
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); namely, (i) on May 21, Colorado Governor Bill Ritter signed HB 1085, (ii) on May 12, Indiana Governor Mitch Daniels signed HB 1646, (iii) on May 12, Oklahoma Governor Brad Henry signed SB 1062, and (iv) on May 21, Vermont Governor Jim Douglas signed H.171. The bills implement the mandate of 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. Vermont H.171 additionally includes a provision requiring a mortgage holder to file a notice of foreclosure with the Vermont Commissioner of the Department of Banking, Insurance, Securities, and Health Care Administration at the same time that the mortgage holder files a foreclosure action. Oklahoma SB 1062 becomes effective July 1, 2009, with licensure under the bill required as early as July 31, 2010; Colorado HB 1085 becomes effective July 31, 2009 with licensure under the bill required by January 1, 2010; Indiana HB 1646 becomes effective July 1, 2009, with licensure under the bill required by January 1, 2010. Vermont HB 171 becomes effective July 1, 2009, with licensure under the bill required as early as July 1, 2010, and the foreclosure notice provision becoming effective June 20, 2009. For a copy of Colorado HB 1085, please see http://www.buckleysandler.com/CO_HB_1085_2009.pdf; for a copy of Indiana HB 1646, please see http://www.in.gov/legislative/bills/2009/PDF/HE/HE1646.1.pdf; for a copy of Oklahoma SB 1062, please see http://webserver1.lsb.state.ok.us/2009-10bills/SB/sb1062_engr.rtf; and for a copy of Vermont H.171, please see http://www.leg.state.vt.us/docs/2010/bills/Passed/H-171.pdf.
Nevada Amends State Mortgage Law. On May 29, Nevada Governor Jim Gibbons signed AB 513, a bill amending Nevada state mortgage law. Among other things, the bill (i) requires additional disclosures pertaining to fees earned by mortgage brokers, (ii) eliminates the mortgage broker, agent, and banker licensure exemption for “consumer finance companies,” and (iii) requires proof of the right to transact mortgage loans, if applicable, in another jurisdiction as a condition to obtaining, among other things, a licensing exemption. The cited portions of the bill are effective immediately. For a copy of the bill, please see http://www.leg.state.nv.us/75th2009/Bills/AB/AB513_EN.pdf.
California Regulator Makes Available California Foreclosure Prevention Act Exemption Application. On June 3, the California Department of Corporations posted several documents pertaining to the California Foreclosure Prevention Act (CFPA). Under the CFPA, servicers must wait an additional 90 days (in addition to the period already provided by law) before filing a Notice of Sale (most recently reported in InfoBytes, May 29, 2009). Servicers may be exempted from the 90-day notice requirement by submitting an application for exemption. For a copy of the application, please see http://www.corp.ca.gov/forms/pdf/CFP_Application_Package.pdf. Also available is a notice to servicers providing an overview of the new requirements under the CFPA, available at http://www.corp.ca.gov/FSD/CFP/pdf/CFPALtr060309.pdf, and a FAQ regarding the CFPA, available at http://www.corp.ca.gov/FSD/faq/CFPA.asp.
New York Court Denies Foreclosure When “Abundantly Clear” to Lender that Borrower Could Not Repay Mortgage Loan. On April 17, the Supreme Court of Kings County, New York held that foreclosure is inappropriate when it is “abundantly clear” to a lender that a borrower could not repay a mortgage loan. Argent Mortgage v. Mentesana, No. 25828/2004, 2009 WL 1110635 (NY Sup. Ct. Apr. 17, 2009). Unsatisfied with the pleadings in the foreclosure complaint, the judge in this case appointed a special referee to gather information about how a 64-year old taxi driver obtained a mortgage for over $319,000 based on undocumented income. The special referee discovered that the borrower was ailing; the foreclosure complaint was served on his live-in nurse. When the special referee located the borrower, he was in a daze and taking morphine. After appointing a guardian ad litem for the borrower, it turned out that the former owner of the house had apparently sold the home to his son, using the elderly Mr. Mentesana as the straw man in the purchase. Mentesana allowed the former owner’s son to use his identity to procure the loan, and claimed he was told he did not have to make any payments. According to the court, “the unresolved issues that form the basis of this foreclosure matter represent the epitome of the fraud inherent in the mortgage market which has led to the serious economic problems this country now faces.” The court refused to enforce a mortgage transaction that was “clearly fraudulent” and therefore denied the foreclosure. The Mentesana opinion should sound a loud warning to lenders attempting to foreclose New York loans involving fraud in the loan application. For a copy of the opinion, please email .
Pennsylvania Federal Court Holds Chapter 7 Bankruptcy Filing Prevents Homeowner from Bringing TILA Claims. On May 29, the U.S. District Court for the Eastern District of Pennsylvania dismissed the plaintiff’s Truth in Lending Act (TILA) claims against a lender based on lack of standing of the plaintiff due to her bankruptcy filing. Schafer v. Decision One Mortgage Corporation, No. 08-5653, 2009 WL 1532048 (E.D. Pa. May 29, 2009). The plaintiff in Schafer refinanced her home mortgage in December 2004. In July 2005, the plaintiff filed a Chapter 7 Bankruptcy Petition and was granted a discharge in November 2005. Later, the plaintiff sued her lender, alleging violations of TILA in connection with the refinance transaction. The court dismissed the plaintiff’s claims, holding that, as a result of the Chapter 7 bankruptcy proceeding, the plaintiff no longer had standing to bring her TILA claims. To the extent anyone had standing to bring these claims, it was the Trustee of the Chapter 7 Bankruptcy because “legal claims which accrued before the filing of the bankruptcy petition are included in the estate,” which is solely represented by the Trustee. For a copy of the opinion, please email .
Banking
FDIC Issues Rule Tightening Interest Rate Restrictions on “Less than Well Capitalized” Institutions. On May 29, the Federal Deposit Insurance Corporation (FDIC) published a final rule that modifies how the agency determines the interest rate restrictions applicable to insured depository institutions that are “less than well capitalized.” Under § 29 of the Federal Deposit Insurance Act, insured institutions that are less than well capitalized cannot offer interest rates that are significantly higher than the prevailing interest rates on deposits offered by other insured institutions in its normal market area or in a market are where such deposits would be normally accepted. Prior to the new rule, the FDIC determined the prevailing interest rates for deposits solicited nationally using a formula based on yields of similar maturity Treasury obligations. For deposits solicited locally, the FDIC used an average of local interest rates. The final rule changes the method of calculation for both national and local rates. National rates will be determined through a direct calculation of average national rates, as computed and published by the FDIC based on data available to it. For local rates, the FDIC has established a presumption that local rates equal national rates, but that this presumption can be overturned by sufficient evidence. The term “significantly higher” is defined to mean up to 75 basis points above the prevailing rate. The new rule does not become effective until January 1, 2010. However, effective immediately, the FDIC will regularly publish national rates and caps, and permit institutions that are less than well capitalized to avail themselves of these rates as a safe harbor for complying with the statutory interest rate restrictions. For a copy of the final rule, please see http://www.fdic.gov/news/board/May29no8.pdf.
FDIC Postpones Asset Sale Under Legacy Loans Program; Proceeds with Sale of Receivership Assets. On June 3, the Federal Deposit Insurance Corporation (FDIC) announced that, because banks have been able to raise capital without selling bad assets, a previously-planned pilot sale of “toxic” assets through the Legacy Loans Program (LLP) will be postponed. The next step for the LLP will be a test of the funding mechanism contemplated by the program in a sale of receivership assets this summer. The FDIC expects to solicit bids for the sale of these assets in July. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09084.html.
California Court Holds Bank May Deduct Overdraft Fees from Accounts Holding Public Benefit Funds. On June 1, the Supreme Court of California upheld an appellate court ruling, and thus overturned a billion-dollar class action award, holding that the defendant bank did not violate California law by recouping overdrawn amounts and insufficient funds fees from an overdrawn account, even though the account held public benefit funds. Miller v. Bank of America, No.S149178, 2009 WL 1507681 (Cal. June 1, 2009). In this class action, the plaintiffs argued that the bank’s practice violated Kruger v. Wells Fargo Bank, 11 Cal.3d 352 (1974), which held that a bank could not satisfy a borrower’s credit card debt by debiting money derived from unemployment and disability benefits from the unrelated checking account of that same borrower. The court disagreed, stating that recouping overdraft amounts and fees from the same account is distinguishable from the setoff of independent debt at issue in Kruger. Despite public policy considerations involved with deducting from public benefit funds, the court ultimately found support in the language and legislative history of California Financial Code section 864, a statute enacted a year after Kruger that specifically exempts overdrafts and bank charges from the restrictions against bank set off practices. The court also referred to a more recent interpretation by the Office of the Comptroller of the Currency of an analogous federal law that authorizes a national bank, under the National Bank Act, to deduct the amount of an overdraft and charge “non-sufficient funds” fees from overdrawn accounts. In affirming the appellate court ruling on the basis of California law, the court declined to consider whether federal preemption applied. For a copy of the opinion, please see http://www.courtinfo.ca.gov/opinions/documents/S149178.PDF/.
Consumer Finance
Michigan Federal Court Holds No Private Right of Action for Adverse Action Under FCRA. On May 27, the U.S. District Court for the Eastern District of Michigan held that there is no private right of action under the Fair Credit Reporting Act (FCRA) for “adverse action.” Tobler v. Equifax, No. 08-cv-12610, 2009 WL 1491046 (E.D. Mich. May 27, 2009). In Tobler, the plaintiff alleged that the defendant insurance company violated FCRA by charging higher rates and failing to notify the plaintiff of “adverse action” taken, based on false information obtained from a consumer report. Among other things, FCRA requires any person who takes “adverse action” based on information contained in a consumer report to notify the affected consumer. As it applies to an insurance company, adverse action includes an increase in any charge for any insurance. FCRA also provides, however, that the notice requirement is to be enforced exclusively by federal agencies. As a result, the court, agreeing with almost all federal courts that have addressed the issue, held that there is no private right of action for failure to comply with FCRA adverse action disclosure requirements. For a copy of the opinion, please see http://www.buckleysandler.com/Tobler_v_Equifax.pdf.
California Federal Court Rules Credit Report Fraud Alerts Placed by Company Violate California State Unfair Competition Law. On May 19, the U.S. District Court for the Central District of California held that a company offering identity theft protection services to its customers violated California’s Unfair Competition Law when it placed fraud alerts on behalf of its customers with the plaintiff credit reporting agency, Experian Information Solutions, Inc. (Experian). Experian Information Solutions, Inc. v. Lifelock, Inc., No. SACV08-00165, 2009 WL 1449037 (C.D. Cal. May 19, 2009). In arriving at its decision, the court agreed with Experian’s argument that, pursuant to public policy established by the Fair Credit Reporting Act, credit reporting agencies are not required to process fraud alerts placed by companies, but rather only those placed by individuals. The court also emphasized that, as a result of the defendant company’s unfair business practice, Experian “suffered an injury in fact and lost money or property.” Specifically, Experian incurred costs in responding to the defendant company’s fraud alerts, such as having to deliver disclosures to each individual on whose behalf a fraud alert was requested. As a result, the court granted partial summary judgment in favor of Experian. For a copy of the opinion, please see http://www.buckleysandler.com/Experian_v_Lifelock.pdf.
Litigation
New York Court Denies Foreclosure When “Abundantly Clear” to Lender that Borrower Could Not Repay Mortgage Loan. On April 17, the Supreme Court of Kings County, New York held that foreclosure is inappropriate when it is “abundantly clear” to a lender that a borrower could not repay a mortgage loan. Argent Mortgage v. Mentesana, No. 25828/2004, 2009 WL 1110635 (NY Sup. Ct. Apr. 17, 2009). Unsatisfied with the pleadings in the foreclosure complaint, the judge in this case appointed a special referee to gather information about how a 64-year old taxi driver obtained a mortgage for over $319,000 based on undocumented income. The special referee discovered that the borrower was ailing; the foreclosure complaint was served on his live-in nurse. When the special referee located the borrower, he was in a daze and taking morphine. After appointing a guardian ad litem for the borrower, it turned out that the former owner of the house had apparently sold the home to his son, using the elderly Mr. Mentesana as the straw man in the purchase. Mentesana allowed the former owner’s son to use his identity to procure the loan, and claimed he was told he did not have to make any payments. According to the court, “the unresolved issues that form the basis of this foreclosure matter represent the epitome of the fraud inherent in the mortgage market which has led to the serious economic problems this country now faces.” The court refused to enforce a mortgage transaction that was “clearly fraudulent” and therefore denied the foreclosure. The Mentesana opinion should sound a loud warning to lenders attempting to foreclose New York loans involving fraud in the loan application. For a copy of the opinion, please email .
California Court Holds Bank May Deduct Overdraft Fees from Accounts Holding Public Benefit Funds. On June 1, the Supreme Court of California upheld an appellate court ruling, and thus overturned a billion-dollar class action award, holding that the defendant bank did not violate California law by recouping overdrawn amounts and insufficient funds fees from an overdrawn account, even though the account held public benefit funds. Miller v. Bank of America, No.S149178, 2009 WL 1507681 (Cal. June 1, 2009). In this class action, the plaintiffs argued that the bank’s practice violated Kruger v. Wells Fargo Bank, 11 Cal.3d 352 (1974), which held that a bank could not satisfy a borrower’s credit card debt by debiting money derived from unemployment and disability benefits from the unrelated checking account of that same borrower. The court disagreed, stating that recouping overdraft amounts and fees from the same account is distinguishable from the setoff of independent debt at issue in Kruger. Despite public policy considerations involved with deducting from public benefit funds, the court ultimately found support in the language and legislative history of California Financial Code section 864, a statute enacted a year after Kruger that specifically exempts overdrafts and bank charges from the restrictions against bank set off practices. The court also referred to a more recent interpretation by the Office of the Comptroller of the Currency of an analogous federal law that authorizes a national bank, under the National Bank Act, to deduct the amount of an overdraft and charge “non-sufficient funds” fees from overdrawn accounts. In affirming the appellate court ruling on the basis of California law, the court declined to consider whether federal preemption applied. For a copy of the opinion, please see http://www.courtinfo.ca.gov/opinions/documents/S149178.PDF/.
Pennsylvania Federal Court Holds Chapter 7 Bankruptcy Filing Prevents Homeowner from Bringing TILA Claims. On May 29, the U.S. District Court for the Eastern District of Pennsylvania dismissed the plaintiff’s Truth in Lending Act (TILA) claims against a lender based on lack of standing of the plaintiff due to her bankruptcy filing. Schafer v. Decision One Mortgage Corporation, No. 08-5653, 2009 WL 1532048 (E.D. Pa. May 29, 2009). The plaintiff in Schafer refinanced her home mortgage in December 2004. In July 2005, the plaintiff filed a Chapter 7 Bankruptcy Petition and was granted a discharge in November 2005. Later, the plaintiff sued her lender, alleging violations of TILA in connection with the refinance transaction. The court dismissed the plaintiff’s claims, holding that, as a result of the Chapter 7 bankruptcy proceeding, the plaintiff no longer had standing to bring her TILA claims. To the extent anyone had standing to bring these claims, it was the Trustee of the Chapter 7 Bankruptcy because “legal claims which accrued before the filing of the bankruptcy petition are included in the estate,” which is solely represented by the Trustee. For a copy of the opinion, please email .
Michigan Federal Court Holds No Private Right of Action for Adverse Action Under FCRA. On May 27, the U.S. District Court for the Eastern District of Michigan held that there is no private right of action under the Fair Credit Reporting Act (FCRA) for “adverse action.” Tobler v. Equifax, No. 08-cv-12610, 2009 WL 1491046 (E.D. Mich. May 27, 2009). In Tobler, the plaintiff alleged that the defendant insurance company violated FCRA by charging higher rates and failing to notify the plaintiff of “adverse action” taken, based on false information obtained from a consumer report. Among other things, FCRA requires any person who takes “adverse action” based on information contained in a consumer report to notify the affected consumer. As it applies to an insurance company, adverse action includes an increase in any charge for any insurance. FCRA also provides, however, that the notice requirement is to be enforced exclusively by federal agencies. As a result, the court, agreeing with almost all federal courts that have addressed the issue, held that there is no private right of action for failure to comply with FCRA adverse action disclosure requirements. For a copy of the opinion, please see http://www.buckleysandler.com/Tobler_v_Equifax.pdf.
California Federal Court Rules Credit Report Fraud Alerts Placed by Company Violate California State Unfair Competition Law. On May 19, the U.S. District Court for the Central District of California held that a company offering identity theft protection services to its customers violated California’s Unfair Competition Law when it placed fraud alerts on behalf of its customers with the plaintiff credit reporting agency, Experian Information Solutions, Inc. (Experian). Experian Information Solutions, Inc. v. Lifelock, Inc., No. SACV08-00165, 2009 WL 1449037 (C.D. Cal. May 19, 2009). In arriving at its decision, the court agreed with Experian’s argument that, pursuant to public policy established by the Fair Credit Reporting Act, credit reporting agencies are not required to process fraud alerts placed by companies, but rather only those placed by individuals. The court also emphasized that, as a result of the defendant company’s unfair business practice, Experian “suffered an injury in fact and lost money or property.” Specifically, Experian incurred costs in responding to the defendant company’s fraud alerts, such as having to deliver disclosures to each individual on whose behalf a fraud alert was requested. As a result, the court granted partial summary judgment in favor of Experian. For a copy of the opinion, please see http://www.buckleysandler.com/Experian_v_Lifelock.pdf.
E-Financial Services
FTC Settles Charges Against Sears Regarding Online Tracking Software. On June 4, the Federal Trade Commission (FTC) announced a settlement with Sears Holdings Management Corporation (Sears) regarding allegations that Sears violated the FTC Act by failing to adequately disclose the scope of consumer personal information that it collected via a software application. According to the FTC’s complaint, Sears stated to consumers that the “research” software would confidentially track online browsing. However, only in a lengthy user license agreement, available to consumers at the end of a multi-step registration process, did Sears disclose the full extent of the information the software tracked, which included consumers’ online secure sessions, online bank statements and emails, according to the complaint. Under the settlement, Sears must stop collecting data from consumers who downloaded the software and destroy any previously-collected data. In the future, Sears must also, prior to a consumer’s installation of software, and separate from any license agreement, make clear and prominent disclosures regarding how the software will monitor, record, or transmit data. For a copy of the press release, please see http://www.ftc.gov/opa/2009/06/sears.shtm. For a copy of the agreement, please see http://www.ftc.gov/os/caselist/0823099/090604searsagreement.pdf.
Privacy/Data Security
FTC Settles Charges Against Sears Regarding Online Tracking Software. On June 4, the Federal Trade Commission (FTC) announced a settlement with Sears Holdings Management Corporation (Sears) regarding allegations that Sears violated the FTC Act by failing to adequately disclose the scope of consumer personal information that it collected via a software application. According to the FTC’s complaint, Sears stated to consumers that the “research” software would confidentially track online browsing. However, only in a lengthy user license agreement, available to consumers at the end of a multi-step registration process, did Sears disclose the full extent of the information the software tracked, which included consumers’ online secure sessions, online bank statements and emails, according to the complaint. Under the settlement, Sears must stop collecting data from consumers who downloaded the software and destroy any previously-collected data. In the future, Sears must also, prior to a consumer’s installation of software, and separate from any license agreement, make clear and prominent disclosures regarding how the software will monitor, record, or transmit data. For a copy of the press release, please see http://www.ftc.gov/opa/2009/06/sears.shtm. For a copy of the agreement, please see http://www.ftc.gov/os/caselist/0823099/090604searsagreement.pdf.
Michigan Federal Court Holds No Private Right of Action for Adverse Action Under FCRA. On May 27, the U.S. District Court for the Eastern District of Michigan held that there is no private right of action under the Fair Credit Reporting Act (FCRA) for “adverse action.” Tobler v. Equifax, No. 08-cv-12610, 2009 WL 1491046 (E.D. Mich. May 27, 2009). In Tobler, the plaintiff alleged that the defendant insurance company violated FCRA by charging higher rates and failing to notify the plaintiff of “adverse action” taken, based on false information obtained from a consumer report. Among other things, FCRA requires any person who takes “adverse action” based on information contained in a consumer report to notify the affected consumer. As it applies to an insurance company, adverse action includes an increase in any charge for any insurance. FCRA also provides, however, that the notice requirement is to be enforced exclusively by federal agencies. As a result, the court, agreeing with almost all federal courts that have addressed the issue, held that there is no private right of action for failure to comply with FCRA adverse action disclosure requirements. For a copy of the opinion, please see http://www.buckleysandler.com/Tobler_v_Equifax.pdf.
California Federal Court Rules Credit Report Fraud Alerts Placed by Company Violate California State Unfair Competition Law. On May 19, the U.S. District Court for the Central District of California held that a company offering identity theft protection services to its customers violated California’s Unfair Competition Law when it placed fraud alerts on behalf of its customers with the plaintiff credit reporting agency, Experian Information Solutions, Inc. (Experian). Experian Information Solutions, Inc. v. Lifelock, Inc., No. SACV08-00165, 2009 WL 1449037 (C.D. Cal. May 19, 2009). In arriving at its decision, the court agreed with Experian’s argument that, pursuant to public policy established by the Fair Credit Reporting Act, credit reporting agencies are not required to process fraud alerts placed by companies, but rather only those placed by individuals. The court also emphasized that, as a result of the defendant company’s unfair business practice, Experian “suffered an injury in fact and lost money or property.” Specifically, Experian incurred costs in responding to the defendant company’s fraud alerts, such as having to deliver disclosures to each individual on whose behalf a fraud alert was requested. As a result, the court granted partial summary judgment in favor of Experian. For a copy of the opinion, please see http://www.buckleysandler.com/Experian_v_Lifelock.pdf.