InfoBytes, June 6, 2008
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Miscellany
- Mortgages
- Banking
- Consumer Finance
- Securities
- Litigation
- E-Financial Services
- Privacy/Data Security
Federal Issues
NY AG Announces Agreements With Credit Rating Agencies. On June 5, New York Attorney General (NY AG) Andrew Cuomo announced that he reached agreements with the three principal credit rating agencies, Standard & Poor’s, Moody’s Investors Service, Inc., and Fitch, Inc., to reduce their incentive to give favorable ratings on the Residential Mortgage-Backed Securities (RMBS). The agreements will establish a fee-for-service structure, where the rating agencies will be compensated regardless of whether the investment bank ultimately selects them to rate a RMBS. In addition, the three rating agencies have agreed to implement the following changes: (i) credit rating agencies will disclose information about all securitizations submitted for their initial review, which is intended to enable investors to determine whether issuers sought, but subsequently decided not to use, ratings from a credit rating agency; (ii) credit rating agencies will review and evaluate individual mortgage lenders and disclose their evaluations on their websites; (iii) credit rating agencies will receive loan level results of due diligence and review those results prior to issuing ratings; (iv) credit rating agencies will perform an annual review of their RMBS businesses to identify practices that could compromise their independent ratings; and (v) credit rating agencies will require a series of representations and warranties from investment banks and other financially responsible parties about the loans underlying the RMBS. For a copy of the NY AG press release, please see http://www.oag.state.ny.us/press/2008/june/june5a_08.html. For a copy of Securities and Exchange Commission Chairman Christopher Cox’s statement regarding the agreements, please see http://www.sec.gov/news/press/2008/2008-109.htm.
Senate Confirms Steve Preston as HUD Secretary. On June 4, the U.S. Senate confirmed Steve Preston to serve as Secretary of the Department of Housing and Urban Development. Preston was nominated by President Bush on April 18, 2008 (reported in InfoBytes, April 18, 2008), and previously served as head of the Small Business Administration. For a copy of the HUD news release, please see http://www.hud.gov/news/release.cfm?content=2008-06-05.cfm.
National City Mortgage Agrees to Pay $4.6 Million for Alleged False Claims Act Violations. On May 22, National City Mortgage agreed to pay the federal government $4.6 million to settle allegations arising under the False Claims Act in connection with 58 loans submitted to the Department of Housing and Urban Development (HUD) for FHA insurance coverage. HUD regulations require lenders to make certain certifications when submitting a loan for insurance more than 60 days following loan closing, referred to as “late endorsement loans.” One such certification is that the loan payment is not more than 30 days past due when the loan is submitted for FHA insurance coverage. The government alleges that National City improperly submitted 58 late endorsement loans to HUD that were not current, in violation of FHA regulations. For a copy of the Department of Justice press release, please see http://www.usdoj.gov/opa/pr/2008/May/08-civ-457.html.
FRB Approves Bank of America’s Acquisition of Countrywide. On June 5, the Federal Reserve Board (FRB) announced its approval of Bank of America to acquire Countrywide Financial Corporation, and thereby indirectly acquire Countrywide Bank, FSB and certain other nonbanking subsidiaries of Countrywide. According to the FRB Order, on consummation of the proposal, Bank of America would remain the largest depository organization in the United States, with total consolidated assets of approximately $1.9 trillion. Bank of America would control deposits of approximately $773.4 billion, representing approximately 10.91 percent of the total amount of deposits of insured depository institutions in the United States. For a copy of the FRB’s Order relating to this action, please see http://www.federalreserve.gov/newsevents/press/orders/orders20080605a1.pdf.
State Issues
Florida Foreclosure Fraud Prevention Bill Enacted. On May 28, Florida Governor Charlie Crist signed into law H.B. 643, which creates a new Section 501.1377 of the Florida Statutes relating to protection of homeowners against foreclosure fraud schemes. The bill regulates certain activities of equity purchasers (persons who purchase residential real property from homeowners facing foreclosure) and foreclosure-rescue consultants (persons who, for a fee, offer to provide foreclosure-related rescue services to homeowners). The bill requires foreclosure-rescue consultants to execute a written agreement with the homeowner before engaging in services. The written agreement must contain certain disclosures, be provided to the homeowner for review at least 1 business day before the date it is signed, and provide the homeowner a right to cancel the agreement within 3 business days after signing the agreement. The consultant may not receive payment until the services have been completed. An equity purchaser must enter into a written agreement containing certain disclosures prior to executing any deed conveying an interest in the property to the equity purchaser. The agreement must provide the homeowner the right to cancel the transaction without penalty if the equity purchaser is notified no later than 5 pm on the third business day after signing the written agreement. If the transaction provides the homeowner the right to repurchase the property, the homeowner has a 30-day right to cure any default of the terms of the contract with the equity purchaser, and the equity purchaser must verify that the homeowner has a reasonable ability to make the required payments to repurchase the home (there is a rebuttable presumption that a reasonable ability to repurchase exists if the homeowner’s monthly payments for housing expenses and regular monthly principal and interest payments do not exceed 60% of the homeowner’s monthly gross income). The price the homeowner pays to repurchase must be reasonable (there is a rebuttable presumption that the price is unconscionable if it is greater than 17% more than the amount paid by the equity purchaser to acquire and maintain). Finally, there is a rebuttable presumption that a transaction involving a lease option is a loan transaction and the conveyance to the equity purchaser is a mortgage. The bill goes into effect October 1, 2008. Each violation of the bill is subject to a monetary penalty of up to $15,000. For a copy of H.B. 643, please see http://www.buckleykolar.com/documents/FLHB643.pdf.
Florida Governor Signs HB 743, Requiring Agencies to Notify Property Appraisers About Mortgage Fraud. On May 28, Florida Governor Charlie Crist signed H.B. 743, which requires law enforcement agencies to notify appraisers about incidents of mortgage fraud that could artificially inflate the value of the property affected by the fraud. The bill allows property appraisers to adjust assessments on affected properties. In addition, the bill establishes that mortgage fraud involving properties valued at more than $100,000 is considered a second-degree felony. The bill goes into effect on July 1, 2008. For a copy of H.B. 743, please see http://www.buckleykolar.com/documents/FLHB743.pdf.
Philadelphia Unveils Mortgage Foreclosure Protection Plan. On June 4, Philadelphia Mayor Michael Nutter unveiled the Philadelphia Mortgage Foreclosure Protection Plan. The Plan consists of a number of measures designed to help Philadelphia homeowners affected by the mortgage foreclosure crisis, including free housing counseling services and a hotline that people can call if they are having trouble with their mortgages. Other steps taken in Philadelphia to assist residents to stay in their homes include: (i) Sheriff John Green delayed foreclosure sales scheduled for the months of April and May until July (reported in InfoBytes, April 11, 2008); (ii) the Philadelphia Court of Common Pleas established the Residential Mortgage Foreclosure Diversion Pilot Program to require all owner occupied properties scheduled for sheriff’s sale to be scheduled for a conciliation conference before they can be sold; and (iii) additional funding in the FY 2009 budget to provide $700,000 for housing counseling, $300,000 for legal services, and $1 million for the Pennsylvania Housing Finance Agency’s HERO (Homeowners’ Equity Recovery Opportunity) program, which assists those who are unable to afford their current mortgage payments. For a copy of the Mayor’s press release, please see http://www.buckleykolar.com/documents/PhiladelphiaPressRelease.pdf.
Massachusetts Seeks to Increase Lender Responsiveness to Borrowers in Effort to Stem Foreclosures. On May 30, Massachusetts Governor Deval Patrick requested the Division of Banks to begin reviewing state licensed mortgage lenders’ responsiveness to delinquent borrowers seeking help through loan modifications. The request is intended to enhance one of the main provisions in Massachusetts’ recently enacted foreclosure prevention law, which extends Community Reinvestment Act (CRA)-type requirements to non-bank mortgage lenders. According to the Governor’s press release, the effort “would further extend CRA to include this evaluation through proposed regulation and the pace at which all state licensed mortgage lenders address the needs of the borrowers and modify loans will be assessed and made public.” In addition, lenders and homeowners will be brought together at regional workshops in communities that have been hard-hit by the mortgage crisis in an attempt to stem foreclosure and increase the pace of loan modifications. For a copy of the Massachusetts Governor’s press release, please see http://www.buckleykolar.com/documents/MAPR05-30-08.pdf.
South Carolina Enacts Property Recording Act to Allow Electronic Recording of Documents. South Carolina Governor Mark Sanford recently approved the Uniform Real Property Recording Act (H.B. 3451), which authorizes electronic signatures and recording in real property transactions. Pursuant to the new law, if a law requires, as a condition for recording, that a document be signed, or that a document be an original, be on paper or another tangible medium, or be in writing, the requirement is satisfied by an electronic signature or by an electronic document, respectively. The new law also authorizes the electronic payment of any fee or tax that is collected by the recorder. The bill became effective on May 13, 2008. For a copy of the bill, please see http://www.scstatehouse.net/sess117_2007-2008/bills/3451.htm.
Courts
Massachusetts AG Sues Mortgage Lender Alleging Unfair and Deceptive Lending and Servicing Practices and Fair Lending Violations. On June 3, the Massachusetts Attorney General filed a lawsuit in state court against subprime mortgage lender Option One, an H&R Block subsidiary, on allegations of predatory lending, inappropriate broker compensation policies, unfair servicing practices, and racial discrimination in pricing. The complaint alleges that Option One marketed loan products such as 80/20 piggybacks, 2/28s with teaser rates, stated income and no-doc/low-doc loans that the company knew, or should have known, were destined to fail. In addition, the AG alleges that Latino and black borrowers were targeted with special marketing campaigns promoting subprime products and were given subprime loans even when they were prime-rated borrowers. American Home Mortgage (AHM), the current servicer for most of Option One’s Massachusetts mortgages, has also been named as a defendant. The complaint requests the court to prohibit AHM and Option One from selling or transferring any Massachusetts mortgages or from foreclosing on any Massachusetts loan without giving the AG’s office a 90-day period to review and contest the foreclosure. It also requests a court order requiring the defendants to modify existing loans, provide fair lending training to employees, and report any racial disparities in lending-related activities. For a copy of the complaint, please see http://www.mass.gov/Cago/docs/press/2008_06_03_option_one_suit_attachment1.pdf.
Pennsylvania Supreme Court Strikes Down Payday Lender’s “Line of Credit” Product. On May 29, the Pennsylvania Supreme Court upheld a ruling finding that a payday lender’s line of credit product violates the fee limits in the state’s Consumer Discount Company Act. Pa. Dept. of Banking v. NCAS of Delaware, LLC, No. 79 MAP 2007, J-97-2008 (Pa. May 29, 2008). In this case, the Pennsylvania Department of Banking filed suit against NCAS, doing business as Advance America Cash Advance Center (Advance America), alleging that Advance America’s modified loan program violated state consumer protection laws. Under Advance America’s “Choice Line of Credit,” consumers could receive a $500 credit line at six percent interest, but the consumers were charged a $150 “monthly participation fee” for each month the consumer had any outstanding charges. State law capped interest on these loans at six percent (because Advance America did not hold a license). The Department of Banking alleged that, with the monthly fee, these loans had annual percentage rates of up 368 percent. The supreme court upheld the trial court’s ruling that the monthly fee should be included in the aggregate APR calculation, thus rendering the loan product usurious. For a copy of the opinion, see http://www.courts.state.pa.us/OpPosting/Supreme/out/J-97-2008mo.pdf.
Supreme Court Issues Money Laundering Decisions. On June 2, the United States Supreme Court decided two cases concerning definitions within the federal money laundering statute, 18 U.S.C. § 1956. In the first case, Cuellar v. United States, No. 06-1456, 2008 WL 2229165 (U.S. June 2, 2008), the Court held that merely transporting illegal funds does not constitute money laundering. According to the Court, the government must prove that the purpose of the transportation was to conceal “the nature, the location, the source, the ownership, or the control” of the proceeds. In the second case, United States v. Santos, No. 06-1006, 2008 WL 2229212 (U.S. June 02, 2008), Justice Stevens’ controlling opinion held that whether “proceeds” of an illegal activity means profits or all money involved in the criminal activity is determined by the nature of the criminal activity. For a copy of the Cuellar and Santos decisions, please see http://www.buckleykolar.com/documents/CuellarvUS.pdf and http://www.buckleykolar.com/documents/USvSantos.pdf, respectively.
Bankruptcy Court Holds that Chapter 13 Debtor Has Standing To Sue Lender. On May 30, a federal bankruptcy court in Pennsylvania held that an individual Chapter 13 debtor has standing to commence lawsuits on behalf of the bankruptcy estate. In re McConnell, No. 06-70724, 2008 Bankr. LEXIS 1559 (Bankr. W.D. Pa. 2008). The case arose when a Chapter 13 debtor filed a lawsuit against a mortgage lender (and the successors in interest to the mortgage) for various lender-liability claims, such as common law fraud, “predatory lending,” and the Pennsylvania Unfair Trade Practices and Consumer Protection Law. The lenders sought to dismiss the lawsuit on a number of grounds, including that the debtor lacked standing to bring the lawsuit because of the bankruptcy filing. The court disagreed, holding that a Chapter 13 debtor has the rights and powers of a trustee to “use, sell, or lease” the property of the estate. The power to “use” the property until the bankruptcy has been administered, said the court, necessarily includes bringing a lawsuit on behalf of the estate. The defendants also argued that only the trustee could invoke the statute of limitations tolling provision in the bankruptcy code. The court stated that it would be incongruous to find that the debtor has the ability to prosecute pre-bankruptcy causes of action, but does not have the protections of the tolling provision. Consequently, the court held that (i) the debtor had standing, (ii) the claims were not time-barred, and (iii) the substantive claims were dismissed without prejudice, affording the debtor an opportunity to file a curative amendment to state a more particularized claim upon which relief could be granted. For a copy of the opinion, please see http://www.buckleykolar.com/documents/InReMcConnell.pdf.
Federal Court Reinstates FCRA Claim Against Mortgage Company Based on Employee’s Actions. On May 28, a federal district court in California reinstated a claim under the Fair Credit Reporting Act (FCRA) against a mortgage company on the theory of respondeat superior. Mahajan v. Kumar, 2008 WL 2233512 (E.D.Cal. May 28, 2008). The plaintiff claimed that the mortgage company, iFreedom, was responsible for the actions of its employee, who allegedly defrauded the plaintiff after meeting him on a dating website. The plaintiff also alleged that the employee obtained a credit report without receiving his consent. The court held that the FCRA claim could not be dismissed against iFreedom at this stage of litigation because the plaintiff had met the minimal requirements needed to overcome a 12(b)(6) motion. For a copy of the opinion, please see http://www.buckleykolar.com/documents/MahajanvKumar.pdf.
Firm News
Joseph Kolar will be speaking at the Mealey’s Subprime Mortgage Litigation & Insurance Coverage Conference on June 20 in Washington, DC. Mr. Kolar’s presentation is entitled, “The New Structure of the Mortgage Lending Industry.” For more information or to register, please see http://bookstore.lexis.com/bookstore/product/69880t.html.
Miscellany
Electronic Signature and Records Association Holds Press Conference to Announce Congressional Study on ESIGN. On June 5, the Electronic Signature and Records Association held a press conference at the National Press Club in Washington, DC to discuss trends in business and consumer adoption of electronic signatures, and to announce a new Congressional Research Study, requested by Congressman Jay Inslee (D-WA) as a result of these trends, that will focus on the impact of the Electronic Signatures in Global and National Commerce Act (ESIGN) in the following three areas: (i) the economic benefits that have been and can be achieved as a result of the enactment of ESIGN and related state adoption of the Uniform Electronic Transactions Act (UETA); (ii) what legislative and regulatory hurdles (at both the state and federal levels) need to be cleared to realize the full benefits of ESIGN and UETA; and (iii) what pending major legislative initiatives have the potential to strengthen ESIGN-related benefits. For more information on the press conference, please see http://www.buckleykolar.com/documents/FinalESRAJune5PressStatement.doc.
Mortgages
NY AG Announces Agreements With Credit Rating Agencies. On June 5, New York Attorney General (NY AG) Andrew Cuomo announced that he reached agreements with the three principal credit rating agencies, Standard & Poor’s, Moody’s Investors Service, Inc., and Fitch, Inc., to reduce their incentive to give favorable ratings on the Residential Mortgage-Backed Securities (RMBS). The agreements will establish a fee-for-service structure, where the rating agencies will be compensated regardless of whether the investment bank ultimately selects them to rate a RMBS. In addition, the three rating agencies have agreed to implement the following changes: (i) credit rating agencies will disclose information about all securitizations submitted for their initial review, which is intended to enable investors to determine whether issuers sought, but subsequently decided not to use, ratings from a credit rating agency; (ii) credit rating agencies will review and evaluate individual mortgage lenders and disclose their evaluations on their websites; (iii) credit rating agencies will receive loan level results of due diligence and review those results prior to issuing ratings; (iv) credit rating agencies will perform an annual review of their RMBS businesses to identify practices that could compromise their independent ratings; and (v) credit rating agencies will require a series of representations and warranties from investment banks and other financially responsible parties about the loans underlying the RMBS. For a copy of the NY AG press release, please see http://www.oag.state.ny.us/press/2008/june/june5a_08.html. For a copy of Securities and Exchange Commission Chairman Christopher Cox’s statement regarding the agreements, please see http://www.sec.gov/news/press/2008/2008-109.htm.
Senate Confirms Steve Preston as HUD Secretary. On June 4, the U.S. Senate confirmed Steve Preston to serve as Secretary of the Department of Housing and Urban Development. Preston was nominated by President Bush on April 18, 2008 (reported in InfoBytes, April 18, 2008), and previously served as head of the Small Business Administration. For a copy of the HUD news release, please see http://www.hud.gov/news/release.cfm?content=2008-06-05.cfm.
National City Mortgage Agrees to Pay $4.6 Million for Alleged False Claims Act Violations. On May 22, National City Mortgage agreed to pay the federal government $4.6 million to settle allegations arising under the False Claims Act in connection with 58 loans submitted to the Department of Housing and Urban Development (HUD) for FHA insurance coverage. HUD regulations require lenders to make certain certifications when submitting a loan for insurance more than 60 days following loan closing, referred to as “late endorsement loans.” One such certification is that the loan payment is not more than 30 days past due when the loan is submitted for FHA insurance coverage. The government alleges that National City improperly submitted 58 late endorsement loans to HUD that were not current, in violation of FHA regulations. For a copy of the Department of Justice press release, please see http://www.usdoj.gov/opa/pr/2008/May/08-civ-457.html.
FRB Approves Bank of America’s Acquisition of Countrywide. On June 5, the Federal Reserve Board (FRB) announced its approval of Bank of America to acquire Countrywide Financial Corporation, and thereby indirectly acquire Countrywide Bank, FSB and certain other nonbanking subsidiaries of Countrywide. According to the FRB Order, on consummation of the proposal, Bank of America would remain the largest depository organization in the United States, with total consolidated assets of approximately $1.9 trillion. Bank of America would control deposits of approximately $773.4 billion, representing approximately 10.91 percent of the total amount of deposits of insured depository institutions in the United States. For a copy of the FRB’s Order relating to this action, please see http://www.federalreserve.gov/newsevents/press/orders/orders20080605a1.pdf.
Florida Foreclosure Fraud Prevention Bill Enacted. On May 28, Florida Governor Charlie Crist signed into law H.B. 643, which creates a new Section 501.1377 of the Florida Statutes relating to protection of homeowners against foreclosure fraud schemes. The bill regulates certain activities of equity purchasers (persons who purchase residential real property from homeowners facing foreclosure) and foreclosure-rescue consultants (persons who, for a fee, offer to provide foreclosure-related rescue services to homeowners). The bill requires foreclosure-rescue consultants to execute a written agreement with the homeowner before engaging in services. The written agreement must contain certain disclosures, be provided to the homeowner for review at least 1 business day before the date it is signed, and provide the homeowner a right to cancel the agreement within 3 business days after signing the agreement. The consultant may not receive payment until the services have been completed. An equity purchaser must enter into a written agreement containing certain disclosures prior to executing any deed conveying an interest in the property to the equity purchaser. The agreement must provide the homeowner the right to cancel the transaction without penalty if the equity purchaser is notified no later than 5 pm on the third business day after signing the written agreement. If the transaction provides the homeowner the right to repurchase the property, the homeowner has a 30-day right to cure any default of the terms of the contract with the equity purchaser, and the equity purchaser must verify that the homeowner has a reasonable ability to make the required payments to repurchase the home (there is a rebuttable presumption that a reasonable ability to repurchase exists if the homeowner’s monthly payments for housing expenses and regular monthly principal and interest payments do not exceed 60% of the homeowner’s monthly gross income). The price the homeowner pays to repurchase must be reasonable (there is a rebuttable presumption that the price is unconscionable if it is greater than 17% more than the amount paid by the equity purchaser to acquire and maintain). Finally, there is a rebuttable presumption that a transaction involving a lease option is a loan transaction and the conveyance to the equity purchaser is a mortgage. The bill goes into effect October 1, 2008. Each violation of the bill is subject to a monetary penalty of up to $15,000. For a copy of H.B. 643, please see http://www.buckleykolar.com/documents/FLHB643.pdf.
Florida Governor Signs HB 743, Requiring Agencies to Notify Property Appraisers About Mortgage Fraud. On May 28, Florida Governor Charlie Crist signed H.B. 743, which requires law enforcement agencies to notify appraisers about incidents of mortgage fraud that could artificially inflate the value of the property affected by the fraud. The bill allows property appraisers to adjust assessments on affected properties. In addition, the bill establishes that mortgage fraud involving properties valued at more than $100,000 is considered a second-degree felony. The bill goes into effect on July 1, 2008. For a copy of H.B. 743, please see http://www.buckleykolar.com/documents/FLHB743.pdf.
Philadelphia Unveils Mortgage Foreclosure Protection Plan. On June 4, Philadelphia Mayor Michael Nutter unveiled the Philadelphia Mortgage Foreclosure Protection Plan. The Plan consists of a number of measures designed to help Philadelphia homeowners affected by the mortgage foreclosure crisis, including free housing counseling services and a hotline that people can call if they are having trouble with their mortgages. Other steps taken in Philadelphia to assist residents to stay in their homes include: (i) Sheriff John Green delayed foreclosure sales scheduled for the months of April and May until July (reported in InfoBytes, April 11, 2008); (ii) the Philadelphia Court of Common Pleas established the Residential Mortgage Foreclosure Diversion Pilot Program to require all owner occupied properties scheduled for sheriff’s sale to be scheduled for a conciliation conference before they can be sold; and (iii) additional funding in the FY 2009 budget to provide $700,000 for housing counseling, $300,000 for legal services, and $1 million for the Pennsylvania Housing Finance Agency’s HERO (Homeowners’ Equity Recovery Opportunity) program, which assists those who are unable to afford their current mortgage payments. For a copy of the Mayor’s press release, please see http://www.buckleykolar.com/documents/PhiladelphiaPressRelease.pdf.
Massachusetts Seeks to Increase Lender Responsiveness to Borrowers in Effort to Stem Foreclosures. On May 30, Massachusetts Governor Deval Patrick requested the Division of Banks to begin reviewing state licensed mortgage lenders’ responsiveness to delinquent borrowers seeking help through loan modifications. The request is intended to enhance one of the main provisions in Massachusetts’ recently enacted foreclosure prevention law, which extends Community Reinvestment Act (CRA)-type requirements to non-bank mortgage lenders. According to the Governor’s press release, the effort “would further extend CRA to include this evaluation through proposed regulation and the pace at which all state licensed mortgage lenders address the needs of the borrowers and modify loans will be assessed and made public.” In addition, lenders and homeowners will be brought together at regional workshops in communities that have been hard-hit by the mortgage crisis in an attempt to stem foreclosure and increase the pace of loan modifications. For a copy of the Massachusetts Governor’s press release, please see http://www.buckleykolar.com/documents/MAPR05-30-08.pdf.
Massachusetts AG Sues Mortgage Lender Alleging Unfair and Deceptive Lending and Servicing Practices and Fair Lending Violations. On June 3, the Massachusetts Attorney General filed a lawsuit in state court against subprime mortgage lender Option One, an H&R Block subsidiary, on allegations of predatory lending, inappropriate broker compensation policies, unfair servicing practices, and racial discrimination in pricing. The complaint alleges that Option One marketed loan products such as 80/20 piggybacks, 2/28s with teaser rates, stated income and no-doc/low-doc loans that the company knew, or should have known, were destined to fail. In addition, the AG alleges that Latino and black borrowers were targeted with special marketing campaigns promoting subprime products and were given subprime loans even when they were prime-rated borrowers. American Home Mortgage (AHM), the current servicer for most of Option One’s Massachusetts mortgages, has also been named as a defendant. The complaint requests the court to prohibit AHM and Option One from selling or transferring any Massachusetts mortgages or from foreclosing on any Massachusetts loan without giving the AG’s office a 90-day period to review and contest the foreclosure. It also requests a court order requiring the defendants to modify existing loans, provide fair lending training to employees, and report any racial disparities in lending-related activities. For a copy of the complaint, please see http://www.mass.gov/Cago/docs/press/2008_06_03_option_one_suit_attachment1.pdf.
Bankruptcy Court Holds that Chapter 13 Debtor Has Standing To Sue Lender. On May 30, a federal bankruptcy court in Pennsylvania held that an individual Chapter 13 debtor has standing to commence lawsuits on behalf of the bankruptcy estate. In re McConnell, No. 06-70724, 2008 Bankr. LEXIS 1559 (Bankr. W.D. Pa. 2008). The case arose when a Chapter 13 debtor filed a lawsuit against a mortgage lender (and the successors in interest to the mortgage) for various lender-liability claims, such as common law fraud, “predatory lending,” and the Pennsylvania Unfair Trade Practices and Consumer Protection Law. The lenders sought to dismiss the lawsuit on a number of grounds, including that the debtor lacked standing to bring the lawsuit because of the bankruptcy filing. The court disagreed, holding that a Chapter 13 debtor has the rights and powers of a trustee to “use, sell, or lease” the property of the estate. The power to “use” the property until the bankruptcy has been administered, said the court, necessarily includes bringing a lawsuit on behalf of the estate. The defendants also argued that only the trustee could invoke the statute of limitations tolling provision in the bankruptcy code. The court stated that it would be incongruous to find that the debtor has the ability to prosecute pre-bankruptcy causes of action, but does not have the protections of the tolling provision. Consequently, the court held that (i) the debtor had standing, (ii) the claims were not time-barred, and (iii) the substantive claims were dismissed without prejudice, affording the debtor an opportunity to file a curative amendment to state a more particularized claim upon which relief could be granted. For a copy of the opinion, please see http://www.buckleykolar.com/documents/InReMcConnell.pdf.
Federal Court Reinstates FCRA Claim Against Mortgage Company Based on Employee’s Actions. On May 28, a federal district court in California reinstated a claim under the Fair Credit Reporting Act (FCRA) against a mortgage company on the theory of respondeat superior. Mahajan v. Kumar, 2008 WL 2233512 (E.D.Cal. May 28, 2008). The plaintiff claimed that the mortgage company, iFreedom, was responsible for the actions of its employee, who allegedly defrauded the plaintiff after meeting him on a dating website. The plaintiff also alleged that the employee obtained a credit report without receiving his consent. The court held that the FCRA claim could not be dismissed against iFreedom at this stage of litigation because the plaintiff had met the minimal requirements needed to overcome a 12(b)(6) motion. For a copy of the opinion, please see http://www.buckleykolar.com/documents/MahajanvKumar.pdf.
Banking
NY AG Announces Agreements With Credit Rating Agencies. On June 5, New York Attorney General (NY AG) Andrew Cuomo announced that he reached agreements with the three principal credit rating agencies, Standard & Poor’s, Moody’s Investors Service, Inc., and Fitch, Inc., to reduce their incentive to give favorable ratings on the Residential Mortgage-Backed Securities (RMBS). The agreements will establish a fee-for-service structure, where the rating agencies will be compensated regardless of whether the investment bank ultimately selects them to rate a RMBS. In addition, the three rating agencies have agreed to implement the following changes: (i) credit rating agencies will disclose information about all securitizations submitted for their initial review, which is intended to enable investors to determine whether issuers sought, but subsequently decided not to use, ratings from a credit rating agency; (ii) credit rating agencies will review and evaluate individual mortgage lenders and disclose their evaluations on their websites; (iii) credit rating agencies will receive loan level results of due diligence and review those results prior to issuing ratings; (iv) credit rating agencies will perform an annual review of their RMBS businesses to identify practices that could compromise their independent ratings; and (v) credit rating agencies will require a series of representations and warranties from investment banks and other financially responsible parties about the loans underlying the RMBS. For a copy of the NY AG press release, please see http://www.oag.state.ny.us/press/2008/june/june5a_08.html. For a copy of Securities and Exchange Commission Chairman Christopher Cox’s statement regarding the agreements, please see http://www.sec.gov/news/press/2008/2008-109.htm.
FRB Approves Bank of America’s Acquisition of Countrywide. On June 5, the Federal Reserve Board (FRB) announced its approval of Bank of America to acquire Countrywide Financial Corporation, and thereby indirectly acquire Countrywide Bank, FSB and certain other nonbanking subsidiaries of Countrywide. According to the FRB Order, on consummation of the proposal, Bank of America would remain the largest depository organization in the United States, with total consolidated assets of approximately $1.9 trillion. Bank of America would control deposits of approximately $773.4 billion, representing approximately 10.91 percent of the total amount of deposits of insured depository institutions in the United States. For a copy of the FRB’s Order relating to this action, please see http://www.federalreserve.gov/newsevents/press/orders/orders20080605a1.pdf.
Supreme Court Issues Money Laundering Decisions. On June 2, the United States Supreme Court decided two cases concerning definitions within the federal money laundering statute, 18 U.S.C. § 1956. In the first case, Cuellar v. United States, No. 06-1456, 2008 WL 2229165 (U.S. June 2, 2008), the Court held that merely transporting illegal funds does not constitute money laundering. According to the Court, the government must prove that the purpose of the transportation was to conceal “the nature, the location, the source, the ownership, or the control” of the proceeds. In the second case, United States v. Santos, No. 06-1006, 2008 WL 2229212 (U.S. June 02, 2008), Justice Stevens’ controlling opinion held that whether “proceeds” of an illegal activity means profits or all money involved in the criminal activity is determined by the nature of the criminal activity. For a copy of the Cuellar and Santos decisions, please see http://www.buckleykolar.com/documents/CuellarvUS.pdf and http://www.buckleykolar.com/documents/USvSantos.pdf, respectively.
Consumer Finance
Pennsylvania Supreme Court Strikes Down Payday Lender’s “Line of Credit” Product. On May 29, the Pennsylvania Supreme Court upheld a ruling finding that a payday lender’s line of credit product violates the fee limits in the state’s Consumer Discount Company Act. Pa. Dept. of Banking v. NCAS of Delaware, LLC, No. 79 MAP 2007, J-97-2008 (Pa. May 29, 2008). In this case, the Pennsylvania Department of Banking filed suit against NCAS, doing business as Advance America Cash Advance Center (Advance America), alleging that Advance America’s modified loan program violated state consumer protection laws. Under Advance America’s “Choice Line of Credit,” consumers could receive a $500 credit line at six percent interest, but the consumers were charged a $150 “monthly participation fee” for each month the consumer had any outstanding charges. State law capped interest on these loans at six percent (because Advance America did not hold a license). The Department of Banking alleged that, with the monthly fee, these loans had annual percentage rates of up 368 percent. The supreme court upheld the trial court’s ruling that the monthly fee should be included in the aggregate APR calculation, thus rendering the loan product usurious. For a copy of the opinion, see http://www.courts.state.pa.us/OpPosting/Supreme/out/J-97-2008mo.pdf.
Federal Court Reinstates FCRA Claim Against Mortgage Company Based on Employee’s Actions. On May 28, a federal district court in California reinstated a claim under the Fair Credit Reporting Act (FCRA) against a mortgage company on the theory of respondeat superior. Mahajan v. Kumar, 2008 WL 2233512 (E.D.Cal. May 28, 2008). The plaintiff claimed that the mortgage company, iFreedom, was responsible for the actions of its employee, who allegedly defrauded the plaintiff after meeting him on a dating website. The plaintiff also alleged that the employee obtained a credit report without receiving his consent. The court held that the FCRA claim could not be dismissed against iFreedom at this stage of litigation because the plaintiff had met the minimal requirements needed to overcome a 12(b)(6) motion. For a copy of the opinion, please see http://www.buckleykolar.com/documents/MahajanvKumar.pdf.
Securities
NY AG Announces Agreements With Credit Rating Agencies. On June 5, New York Attorney General (NY AG) Andrew Cuomo announced that he reached agreements with the three principal credit rating agencies, Standard & Poor’s, Moody’s Investors Service, Inc., and Fitch, Inc., to reduce their incentive to give favorable ratings on the Residential Mortgage-Backed Securities (RMBS). The agreements will establish a fee-for-service structure, where the rating agencies will be compensated regardless of whether the investment bank ultimately selects them to rate a RMBS. In addition, the three rating agencies have agreed to implement the following changes: (i) credit rating agencies will disclose information about all securitizations submitted for their initial review, which is intended to enable investors to determine whether issuers sought, but subsequently decided not to use, ratings from a credit rating agency; (ii) credit rating agencies will review and evaluate individual mortgage lenders and disclose their evaluations on their websites; (iii) credit rating agencies will receive loan level results of due diligence and review those results prior to issuing ratings; (iv) credit rating agencies will perform an annual review of their RMBS businesses to identify practices that could compromise their independent ratings; and (v) credit rating agencies will require a series of representations and warranties from investment banks and other financially responsible parties about the loans underlying the RMBS. For a copy of the NY AG press release, please see http://www.oag.state.ny.us/press/2008/june/june5a_08.html . For a copy of Securities and Exchange Commission Chairman Christopher Cox’s statement regarding the agreements, please see http://www.sec.gov/news/press/2008/2008-109.htm .
Litigation
Massachusetts AG Sues Mortgage Lender Alleging Unfair and Deceptive Lending and Servicing Practices and Fair Lending Violations. On June 3, the Massachusetts Attorney General filed a lawsuit in state court against subprime mortgage lender Option One, an H&R Block subsidiary, on allegations of predatory lending, inappropriate broker compensation policies, unfair servicing practices, and racial discrimination in pricing. The complaint alleges that Option One marketed loan products such as 80/20 piggybacks, 2/28s with teaser rates, stated income and no-doc/low-doc loans that the company knew, or should have known, were destined to fail. In addition, the AG alleges that Latino and black borrowers were targeted with special marketing campaigns promoting subprime products and were given subprime loans even when they were prime-rated borrowers. American Home Mortgage (AHM), the current servicer for most of Option One’s Massachusetts mortgages, has also been named as a defendant. The complaint requests the court to prohibit AHM and Option One from selling or transferring any Massachusetts mortgages or from foreclosing on any Massachusetts loan without giving the AG’s office a 90-day period to review and contest the foreclosure. It also requests a court order requiring the defendants to modify existing loans, provide fair lending training to employees, and report any racial disparities in lending-related activities. For a copy of the complaint, please see http://www.mass.gov/Cago/docs/press/2008_06_03_option_one_suit_attachment1.pdf.
Pennsylvania Supreme Court Strikes Down Payday Lender’s “Line of Credit” Product. On May 29, the Pennsylvania Supreme Court upheld a ruling finding that a payday lender’s line of credit product violates the fee limits in the state’s Consumer Discount Company Act. Pa. Dept. of Banking v. NCAS of Delaware, LLC, No. 79 MAP 2007, J-97-2008 (Pa. May 29, 2008). In this case, the Pennsylvania Department of Banking filed suit against NCAS, doing business as Advance America Cash Advance Center (Advance America), alleging that Advance America’s modified loan program violated state consumer protection laws. Under Advance America’s “Choice Line of Credit,” consumers could receive a $500 credit line at six percent interest, but the consumers were charged a $150 “monthly participation fee” for each month the consumer had any outstanding charges. State law capped interest on these loans at six percent (because Advance America did not hold a license). The Department of Banking alleged that, with the monthly fee, these loans had annual percentage rates of up 368 percent. The supreme court upheld the trial court’s ruling that the monthly fee should be included in the aggregate APR calculation, thus rendering the loan product usurious. For a copy of the opinion, see http://www.courts.state.pa.us/OpPosting/Supreme/out/J-97-2008mo.pdf.
Supreme Court Issues Money Laundering Decisions. On June 2, the United States Supreme Court decided two cases concerning definitions within the federal money laundering statute, 18 U.S.C. § 1956. In the first case, Cuellar v. United States, No. 06-1456, 2008 WL 2229165 (U.S. June 2, 2008), the Court held that merely transporting illegal funds does not constitute money laundering. According to the Court, the government must prove that the purpose of the transportation was to conceal “the nature, the location, the source, the ownership, or the control” of the proceeds. In the second case, United States v. Santos, No. 06-1006, 2008 WL 2229212 (U.S. June 02, 2008), Justice Stevens’ controlling opinion held that whether “proceeds” of an illegal activity means profits or all money involved in the criminal activity is determined by the nature of the criminal activity. For a copy of the Cuellar and Santos decisions, please see http://www.buckleykolar.com/documents/CuellarvUS.pdf and http://www.buckleykolar.com/documents/USvSantos.pdf, respectively.
Bankruptcy Court Holds that Chapter 13 Debtor Has Standing To Sue Lender. On May 30, a federal bankruptcy court in Pennsylvania held that an individual Chapter 13 debtor has standing to commence lawsuits on behalf of the bankruptcy estate. In re McConnell, No. 06-70724, 2008 Bankr. LEXIS 1559 (Bankr. W.D. Pa. 2008). The case arose when a Chapter 13 debtor filed a lawsuit against a mortgage lender (and the successors in interest to the mortgage) for various lender-liability claims, such as common law fraud, “predatory lending,” and the Pennsylvania Unfair Trade Practices and Consumer Protection Law. The lenders sought to dismiss the lawsuit on a number of grounds, including that the debtor lacked standing to bring the lawsuit because of the bankruptcy filing. The court disagreed, holding that a Chapter 13 debtor has the rights and powers of a trustee to “use, sell, or lease” the property of the estate. The power to “use” the property until the bankruptcy has been administered, said the court, necessarily includes bringing a lawsuit on behalf of the estate. The defendants also argued that only the trustee could invoke the statute of limitations tolling provision in the bankruptcy code. The court stated that it would be incongruous to find that the debtor has the ability to prosecute pre-bankruptcy causes of action, but does not have the protections of the tolling provision. Consequently, the court held that (i) the debtor had standing, (ii) the claims were not time-barred, and (iii) the substantive claims were dismissed without prejudice, affording the debtor an opportunity to file a curative amendment to state a more particularized claim upon which relief could be granted. For a copy of the opinion, please see http://www.buckleykolar.com/documents/InReMcConnell.pdf.
Federal Court Reinstates FCRA Claim Against Mortgage Company Based on Employee’s Actions. On May 28, a federal district court in California reinstated a claim under the Fair Credit Reporting Act (FCRA) against a mortgage company on the theory of respondeat superior. Mahajan v. Kumar, 2008 WL 2233512 (E.D.Cal. May 28, 2008). The plaintiff claimed that the mortgage company, iFreedom, was responsible for the actions of its employee, who allegedly defrauded the plaintiff after meeting him on a dating website. The plaintiff also alleged that the employee obtained a credit report without receiving his consent. The court held that the FCRA claim could not be dismissed against iFreedom at this stage of litigation because the plaintiff had met the minimal requirements needed to overcome a 12(b)(6) motion. For a copy of the opinion, please see http://www.buckleykolar.com/documents/MahajanvKumar.pdf.
E-Financial Services
South Carolina Enacts Property Recording Act to Allow Electronic Recording of Documents. South Carolina Governor Mark Sanford recently approved the Uniform Real Property Recording Act (H.B. 3451), which authorizes electronic signatures and recording in real property transactions. Pursuant to the new law, if a law requires, as a condition for recording, that a document be signed, or that a document be an original, be on paper or another tangible medium, or be in writing, the requirement is satisfied by an electronic signature or by an electronic document, respectively. The new law also authorizes the electronic payment of any fee or tax that is collected by the recorder. The bill became effective on May 13, 2008. For a copy of the bill, please see http://www.scstatehouse.net/sess117_2007-2008/bills/3451.htm.
Electronic Signature and Records Association Holds Press Conference to Announce Congressional Study on ESIGN. On June 5, the Electronic Signature and Records Association held a press conference at the National Press Club in Washington, DC to discuss trends in business and consumer adoption of electronic signatures, and to announce a new Congressional Research Study, requested by Congressman Jay Inslee (D-WA) as a result of these trends, that will focus on the impact of the Electronic Signatures in Global and National Commerce Act (ESIGN) in the following three areas: (i) the economic benefits that have been and can be achieved as a result of the enactment of ESIGN and related state adoption of the Uniform Electronic Transactions Act (UETA); (ii) what legislative and regulatory hurdles (at both the state and federal levels) need to be cleared to realize the full benefits of ESIGN and UETA; and (iii) what pending major legislative initiatives have the potential to strengthen ESIGN-related benefits. For more information on the press conference, please see http://www.buckleykolar.com/documents/FinalESRAJune5PressStatement.doc.
Privacy/Data Security
Federal Court Reinstates FCRA Claim Against Mortgage Company Based on Employee’s Actions. On May 28, a federal district court in California reinstated a claim under the Fair Credit Reporting Act (FCRA) against a mortgage company on the theory of respondeat superior. Mahajan v. Kumar, 2008 WL 2233512 (E.D.Cal. May 28, 2008). The plaintiff claimed that the mortgage company, iFreedom, was responsible for the actions of its employee, who allegedly defrauded the plaintiff after meeting him on a dating website. The plaintiff also alleged that the employee obtained a credit report without receiving his consent. The court held that the FCRA claim could not be dismissed against iFreedom at this stage of litigation because the plaintiff had met the minimal requirements needed to overcome a 12(b)(6) motion. For a copy of the opinion, please see http://www.buckleykolar.com/documents/MahajanvKumar.pdf.