InfoBytes, May 15, 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
HUD and Treasury Publicize New Details on the Making Home Affordable Program. On May 14, U.S. Treasury Secretary Tim Geithner and Department of Housing and Urban Development (HUD) Secretary Shaun Donovan announced an expansion of the administration’s Making Home Affordable program. In addition to providing incentives for servicers to modify mortgages, the program will now offer incentives for services and borrowers to pursue short sales and deeds-in-lieu of foreclosure in instances where a borrower cannot qualify for modification. Additionally, when implementing the expansion, Treasury and HUD will ensure that the process for short selling will be streamlined by providing a standard process flow, minimum performance timeframes and standard documentation for sales. Besides the new short selling program, Treasury and HUD plan to provide creditors with additional incentives to modify loans in areas where home price declines are most severe. This new Home Price Decline Protection program will calculate incentive payments by directly linking the payment amount to both the rate of home price declines in a local housing market and the average cost of a home in that market. For a copy of the Treasury’s press release, please see http://www.financialstability.gov/latest/tg_05142009.html.
Federal Agencies Make Technical Corrections to FACTA Rules. On May 14, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National Credit Union Administration, and the Federal Trade Commission (the “Agencies”) issued final rules that make technical corrections to their affiliate marketing rules and their identity theft red flags and address discrepancy rules under the Fair and Accurate Credit Transactions Act (FACTA). Through the rulemaking, the Agencies made two corrections to their affiliate marketing rules: (i) they amended Model Form C-5, which allows consumers to voluntarily opt-out of marketing by businesses and their affiliates, by inserting language in brackets that allow businesses to disclose the duration of any opt-out period; and (ii) they added an additional provision to the instructions to the affiliate marketing rules addressing acceptable changes to the model forms clarifying that a person may add a disclosure to the forms that explains the treatment of opt-outs by joint consumers (e.g., where the notice pertains to a joint account and the opt-out will apply to everyone on the account, the statement may provide that, for joint accounts, the opt-out will apply to everyone on the account). In addition to amending the affiliate marketing rules, the agencies also made several technical corrections to the identity theft red flags and address discrepancies final rules. Among other amendments, the corrections clarify that address discrepancy notices need only be provided by nationwide consumer reporting agencies that are described in § 603(p) of the Fair Credit Reporting Act (FCRA). For a copy of the final rules, please see http://edocket.access.gpo.gov/2009/pdf/E9-10009.pdf.
Congress Holds Hearing on Consumer Credit and Debt Protection Act. On May 12, the House Subcommittee on Commerce, Trade, and Consumer Protection held a hearing on the Consumer Credit and Debt Protection Act (H.R. 2309). Among other things, the bill would expand the Federal Trade Commission’s (FTC’s) authority to regulate consumer debt and credit. Currently, the FTC can regulate non-mortgage consumer credit or debt services only by promulgating rules through the Magnuson-Moss rulemaking procedures set forth in section 18 of the FTC Act. However, the FTC considers these procedures costly, burdensome, and time consuming. If enacted, H.R. 2309, would provide the FTC with new authority to use Administrative Procedures Act notice and comment rulemaking to draft rules affecting the financial services industry. The bill would grant the FTC the power to impose civil penalties. In addition to expanding the FTC’s authority, the bill would grant state attorneys general the power to bring suits in state or federal courts under any laws enforced by the FTC or any rule relating to consumer credit or debt. For a copy of the bill, please see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h2309ih.txt.pdf. For a copy of testimony heard during the House Subcommittee on Commerce, Trade, and Consumer Protection hearing, please see http://energycommerce.house.gov/index.php?option=com_content&view=article&id=1616:energy-and-commerce-subcommittee-legislative-hearing-on-qhr-2309-the-consumer-credit-and-debt-protection-act-and-hr-2190-the-mercury-pollution-reduction-actq&catid=129:subcommittee-on-commerce-trade-and-consumer-protection&Itemid=70.
FTC Sues Mortgage Company for Pricing Discrimination Against Hispanic Borrowers. On May 11, the Federal Trade Commission (FTC) announced that it has filed suit against Golden Empire Mortgage (GEM) and owner Howard D. Koostra for allegedly violating the Equal Credit Opportunity Act (ECOA) by charging Hispanic consumers higher prices for mortgage loans than non-Hispanic white consumers. The complaint argues that the price disparities cannot be explained by the applicants’ credit characteristics or underwriting risk. The complaint alleges that the defendants gave loan officers and branch managers wide discretion to charge, in addition to the risk-based price, “overages” through higher interest rates and higher up-front charges. The defendants allegedly paid loan officers a percentage of the overages as a commission and failed to monitor whether Hispanic consumers were paying higher overages than non-Hispanic white borrowers. The complaint alleges that the defendant’s policy and practice of allowing loan officers to charge discretionary overages resulted in Hispanics being charged higher prices because of their national origin – price disparities that are “substantial, statistically significant, and cannot be explained by factors related to underwriting risk or credit characteristics of the applicants.” For a copy of the FTC’s press release, please see http://www.ftc.gov/opa/2009/05/gem.shtm.
HUD Withdraws Revisions to “Required Use” Definition. On May 11, Department of Housing and Urban Development (HUD) Secretary Shaun Donovan announced that the revised definition of “required use,” as published in HUD’s November 17, 2008 final rule amending the Real Estate Settlement Procedures Act (RESPA), will be withdrawn. The decision to withdraw the definition was made in response to more than 1,200 public comments, as well as litigation, filed after publication of the November 17, 2008 final rule. As a result, HUD’s definition of “required use” that was in place prior to the revisions made by the November 17, 2008 final rule will remain in effect. However, HUD intends to initiate a new rulemaking process to revise the “required use” definition. For a copy of HUD’s notice to withdraw, please see http://www.buckleysandler.com/HUD%20Withdraws%20Definition%20of%20Required%20Use%20.pdf.
FinCEN Issues Proposed Rule Updating Definition of Money Services Business. On May 12, the Financial Crimes Enforcement Network (FinCEN) published a Notice of Proposed Rulemaking (NPRM) that would change the definition of Money Services Businesses (MSBs) under the Bank Secrecy Act’s (BSA) implementing rules. The proposal incorporates past FinCEN rulings and policy determinations, which the agency hopes will clarify the types of financial activities that would cause a business to be considered an MSB under the rules. Currently, under the rule, to meet one of the definitional thresholds of an MSB a person must conduct $1,000 of transactions per person per day. If a person meets this threshold, then he or she is subject to BSA recordkeeping and reporting requirements. This threshold applies to all categories of MSBs except for "money transmission." If a person engages in money transmission, then he or she triggers the MSB threshold by engaging in a money transmission of any amount. FinCEN’s Notice of Proposed Rulemaking (NPRM) solicits comment on modifying these definitional thresholds. Additionally, the NPRM proposes measures to ensure that foreign-located entities engaging in MSB activities within the United States are regulated as MSBs. To this end, the proposed rule would clarify when foreign-located entities were engaging in MSB activities in the United States and when they were subject to the BSA rules. All comments concerning the NPRM are due by September 9, 2009. For a copy of the proposed rule, please see http://edocket.access.gpo.gov/2009/pdf/E9-10864.pdf.
FTC Creates Guided, Four Step Process to Help Low Risk Entities Comply With "Red Flags" Rule. On May 13 the Federal Trade Commission (FTC) announced an online guide developed to help entities with a low risk of identity theft comply with the Fair and Accurate Credit Transactions Act (FACTA). The Act requires many businesses and organizations to implement a written Identity Theft Prevention Program in order to detect any warning signs (“red flags”) of identity theft. Identifying these red flags as early as possible will help those entities spot an impostor trying to defraud them by using someone else’s identity to get products and services. The online guide is called “Create Your Own Identity Theft Prevention Program: A Guided 4-Step Process.” This guide is comprised of a template with instructions that enable companies to complete and print a fill-in-the-blank form online. The guided online format makes compliance with the "Red Flags" Rule easily attainable for most companies covered by the Act. For a full copy of the FTC’s announcement, please see http://www.ftc.gov/opa/2009/05/redflags.shtm.
State Issues
Goldman Sachs Settles Massachusetts AG Investigation Into Subprime Origination and Securitization Practices. On May 7, 2009, Goldman Sachs & Co. (“Goldman”) entered into a settlement agreement with the Attorney General of Massachusetts (“AG”) to resolve potential claims raised as part of the AG’s investigation into the origination and securitization of subprime residential mortgage loans. On a general level, the AG has been investigating various aspects of the securitization of subprime loans, including whether securitizers: (1) facilitated the origination by others of “unfair” loans under Massachusetts law; (2) failed to ascertain whether loans purchased from originators complied with the originators’ stated underwriting guidelines; (3) failed to take sufficient steps to avoid placing problem loans in securitization pools; (4) were aware of allegedly unfair or problem loans; (5) failed to correct inaccurate information in securitization trustee reports concerning repurchases of loans; and (6) failed to make available to potential investors certain information concerning allegedly unfair or problem loans, including information obtained during loan diligence and the pre-securitization process, as well as information concerning their practices in making repurchase claims relating to loans both in and out of securitizations. Under the settlement agreement, Goldman will provide nearly $50 million in relief to homeowners through loan restructuring, plus an additional $10 million to the state. Specifically, Goldman will restructure both first and second mortgage loans to replace “unfair” loans with new, affordable loans that are based on the current value of the home. Goldman will write down up to 35% for first lien loans and up to 50% for second lien loans (or, if the second lien loan is more than 180 days delinquent by April 1, 2009, write off the full amount). Goldman also agreed to use its “best efforts” to accomplish the goals in the agreement, including communicating the offers to each borrower, and working with borrowers to avoid foreclosure for those loans not held by Goldman but serviced by its servicer. For a copy of the settlement materials, please see http://www.mass.gov/Cago/docs/press/2009_05_07_goldman_settlement.pdf.
Supreme Court of South Carolina Grants Temporary Restraining Order Preventing Certain Home Foreclosures. On May 4, 2009, the Supreme Court of South Carolina, the state’s highest court, issued a temporary restraining order preventing the foreclosure sale of any property arising out of a loan potentially subject to modification under the Home Affordable Modification Program (“HMP”). In re Federal National Mortgage Associations (“Fannie Mae”) Loans Subject to Foreclosure Sale. The petitioner, Federal National Mortgage Association (“Fannie Mae”) asked the Court to issue a temporary injunction to prevent South Carolina judges from finalizing foreclosure sales in order to give homeowners additional time to take advantage of potential loan modifications under the HMP. Fannie Mae asserted that absent injunctive relief, mortgagors eligible for loan modifications under the HMP may be denied their right to participate because their property was sold at a foreclosure sale. In the interest of the mortgagors that may be entitled to loan modification, the court granted a temporary restraining order preventing the foreclosure sale of any property arising out of a loan owned by Fannie Mae, Freddie Mac, or a servicer who has signed an agreement to take part in the HMP. For a full copy of the order, please see http://www.buckleysandler.com/In%20re%20Federal%20National%20Mortgage%20Association%20.pdf.
Washington Legislature Enacts “Prevent or Reduce Owner-Occupied Foreclosure Program.” On May 7, 2009, Washington Governor Christine Gregoire signed into law S.B. 6033, which creates the “Prevent or Reduce Owner-occupied Foreclosure Program” (PROOF). The Act requires the Washington Department of Financial Institutions (Department) and the Washington State Housing Finance Commission (Commission) to enter into an interagency agreement to implement and administer the program. The Commission, in consultation with the Department, will assist households and individuals facing foreclosure in obtaining work-out or modification agreements with their creditors. The Commission must also provide an annual report in which the Commission will create specific metrics and criteria by which the PROOF program can be measured. Section 4 of the Act, which would have required the State Housing Finance Commission to establish a program oversight committee, was vetoed by the Governor. For a copy of the Act, please see http://apps.leg.wa.gov/documents/billdocs/2009-10/Pdf/Bills/Session%20Law%202009/6033.SL.pdf.
West Virginia Enacts SAFE Mortgage Act. On May 8, West Virginia Governor Joe Manchin approved a bill to create the West Virginia SAFE Mortgage Licensing Act (S.B. 532). The Act (i) requires licensing and registration of mortgage loan originators, (ii) authorizes the Division of Banking to participate in the Nationwide Mortgage Licensing System and Registry, (iii) requires prelicensure education of mortgage loan originators, (iv) implements a prelicensure testing requirement for mortgage loan originators; (v) explains standards for mortgage loan originator license renewal, (vi) clarifies annual continuing education requirements for mortgage loan originators, and (vii) outlines prohibited acts and practices for mortgage loan originators. The effective date of the West Virginia SAFE Mortgage Licensing Act for all individuals licensed as mortgage loan originators before July 1, 2009, is January 1, 2011. For all other individuals, the effective date is January 31, 2010. In addition to creating the West Virginia SAFE Mortgage Licensing Act, S.B. 532 makes amendments to the West Virginia Residential Mortgage Lender, Broker and Servicer Act, and the West Virginia Consumer Credit and Protection Act, relating to the West Virginia Division of Banking’s participation in the Nationwide Mortgage Licensing System and Registry. For a copy of the Act, please see http://www.buckleysandler.com/West%20Virginia%20SB%20532.pdf.
Courts
California Federal Court Upholds Account Agreements Despite Website Terms. The U.S. District Court for the Northern District of California recently held that a standard customer account agreement and not the terms of use on a company’s website determined the venue and choice of law in customer suits. McMillan v. Wells Fargo Bank, N.A., No. 08-5739, 2009 WL 1035969 (N.D. Cal., Apr. 17, 2009). The plaintiffs brought a class action alleging that the defendant charged unlawful overdraft fees. Defendant moved to dismiss the case for improper venue pursuant to a forum selection provision contained in the standard consumer account agreement, which required that suits be brought in the state where the account was initially opened. Plaintiffs argued that the consumer account agreement did not control their claims, because after their accounts were opened they entered into a new agreement contained in the terms of use on the defendant’s website, which did not have a forum selection provision. The court rejected the plaintiffs’ argument finding that their complaint failed to reference the website’s terms of use. The court reasoned that since the complaint focused on the consumer account agreement, the order too must focus on that agreement. As a result, the court held that venue was inappropriate, because none of the plaintiffs resided in California. The court then dismissed the case. For a copy of the opinion, please see http://www.buckleysandler.com/McMillan%20v_%20Wells%20Fargo%20Bank.pdf.
California Federal Court Holds that CAN-SPAM Act Does not Preempt State Law Claims. The U.S. District Court for the Northern District of California recently ruled that the federal Controlling Assault of Non-Solicited Pornography and Marketing Act (CAN-SPAM Act) does not preempt California’s Deceptive Commercial Email statute (the Code). Asis Internet Servs. v. Consumerbargaingiveaways, LLC, No. C 08-04856, 2009 WL 1035538 (N.D. Cal. Apr. 17, 2009). In this case, the plaintiffs sued email advertising companies for violating § 17529.5 of the Code, alleging that the companies sent emails containing (i) third-party domain names without the permission of the third party; (ii) falsified, misrepresented, or forged header information; and (iii) subject lines that would likely mislead a recipient about a material fact regarding the message’s contents. The defendants moved to dismiss the case on grounds that that § 7707(b)(1) of the CAN-SPAM Act preempted the plaintiffs’ claims. Section 7707(b)(1) of the CAN-SPAM Act preempts any state statute, regulation, or rule that expressly regulates the use of electronic mail to send commercial messages, unless the statute, regulation, or rule prohibits “falsity or deception.” The defendants interpreted the phrase “falsity or deception” to mean that the plaintiffs needed to plead fraud in order to make a valid claim under the California Code. The court disagreed, finding that the defendants’ interpretation conflicted with the statute’s plain meaning. According to the court, the phrase must have a broader meaning than simply fraud, because if Congress had meant for it to mean only fraud, it simply would have used the word fraud. The court concluded that the phrase encompasses general false advertising wrongs in addition to fraudulent claims. As a result, the court held that the plaintiffs sufficiently pled false advertising and the court denied the defendants’ motion to dismiss the § 17529.5 claims. For a copy of the opinion, please see http://www.buckleysandler.com/Asis_Internet_Services_v_Consumerbargaingiveaways.pdf.
California State Court Rules that CAN-SPAM Preempts State’s Deceptive Commercial Email Statute. On May 4, the Los Angeles Superior Court held that the federal Controlling Assault of Non-Solicited Pornography and Marketing Act (CAN-SPAM Act) preempted California’s Deceptive Commercial Email statute, Cal. Bus. & Prof. Code § 17529 et seq. (the Code). Hypertouch, Inc. v. ValueClick, Inc., No. LC081000 (Cal. Super. Ct. May 4, 2009). In Hypertouch, the plaintiff sued a California-based marketing company under § 17529.5 of the Code for sending emails containing (i) third-party domain names without the permission of the third party; (ii) falsified, misrepresented, or forged header information; and (iii) subject lines that would likely mislead a recipient about a material fact regarding the message’s contents. The defendant moved for summary judgment arguing that the CAN-SPAM Act preempts all state law claims of deceptive commercial email that do not allege fraud. The court analyzed case law from the Northern District of California (NDC), which has given conflicting rulings on the preemption issue. In Hoang v. Reunion.com, Inc., the NDC concluded that the phrase “falsity or deception” meant fraud and that therefore any claim not alleging fraud was preempted by the Act. In a subsequent ruling in Asis Internet Servs. v. Consumerbargaingiveaways LLC (reported above), the NDC held that “falsity or deception” includes both fraud and unfair and deceptive trade practices, thus expanding the number of permissible claims under the California law. Here, the court rejected the reasoning in Asis, believing that its interpretation would weaken the Act’s preemption clause too greatly. As a result, the court held that valid claims under California’s Deceptive Commercial Email statute must include allegations of fraud. Because the plaintiff’s claim lacked allegations of fraud, the court granted the defendant’s motion for summary judgment. For a copy of the opinion, please see http://www.buckleysandler.com/Hypertouch%20v%20Value%20Click.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, 2009. For more information on the conference, please see http://www.alexinformation.com/store/39N.php#author.
Bob Serino will be presenting the Mornin Center’s A. John Serino Award for outstanding graduates in domestic and international law programs at the graduation ceremony for Boston University School of Law on May 17, 2009.
Mortgages
HUD and Treasury Publicize New Details on the Making Home Affordable Program. On May 14, U.S. Treasury Secretary Tim Geithner and Department of Housing and Urban Development (HUD) Secretary Shaun Donovan announced an expansion of the administration’s Making Home Affordable program. In addition to providing incentives for servicers to modify mortgages, the program will now offer incentives for services and borrowers to pursue short sales and deeds-in-lieu of foreclosure in instances where a borrower cannot qualify for modification. Additionally, when implementing the expansion, Treasury and HUD will ensure that the process for short selling will be streamlined by providing a standard process flow, minimum performance timeframes and standard documentation for sales. Besides the new short selling program, Treasury and HUD plan to provide creditors with additional incentives to modify loans in areas where home price declines are most severe. This new Home Price Decline Protection program will calculate incentive payments by directly linking the payment amount to both the rate of home price declines in a local housing market and the average cost of a home in that market. For a copy of the Treasury’s press release, please see http://www.financialstability.gov/latest/tg_05142009.html.
FTC Sues Mortgage Company for Pricing Discrimination Against Hispanic Borrowers. On May 11, the Federal Trade Commission (FTC) announced that it has filed suit against Golden Empire Mortgage (GEM) and owner Howard D. Koostra for allegedly violating the Equal Credit Opportunity Act (ECOA) by charging Hispanic consumers higher prices for mortgage loans than non-Hispanic white consumers. The complaint argues that the price disparities cannot be explained by the applicants’ credit characteristics or underwriting risk. The complaint alleges that the defendants gave loan officers and branch managers wide discretion to charge, in addition to the risk-based price, "overages" through higher interest rates and higher up-front charges. The defendants allegedly paid loan officers a percentage of the overages as a commission and failed to monitor whether Hispanic consumers were paying higher overages than non-Hispanic white borrowers. The complaint alleges that the defendant’s policy and practice of allowing loan officers to charge discretionary overages resulted in Hispanics being charged higher prices because of their national origin - price disparities that are "substantial, statistically significant, and cannot be explained by factors related to underwriting risk or credit characteristics of the applicants." For a copy of the FTC’s press release, please see http://www.ftc.gov/opa/2009/05/gem.shtm.
HUD Withdraws Revisions to "Required Use" Definition. On May 11, Department of Housing and Urban Development (HUD) Secretary Shaun Donovan announced that the revised definition of "required use," as published in HUD’s November 17, 2008 final rule amending the Real Estate Settlement Procedures Act (RESPA), will be withdrawn. The decision to withdraw the definition was made in response to more than 1,200 public comments, as well as litigation, filed after publication of the November 17, 2008 final rule. As a result, HUD’s definition of "required use" that was in place prior to the revisions made by the November 17, 2008 final rule will remain in effect. However, HUD intends to initiate a new rulemaking process to revise the "required use" definition. For a copy of HUD’s notice to withdraw, please see http://www.buckleysandler.com/HUD%20Withdraws%20Definition%20of%20Required%20Use%20.pdf.
Goldman Sachs Settles Massachusetts AG Investigation Into Subprime Origination and Securitization Practices. On May 7, 2009, Goldman Sachs & Co. ("Goldman") entered into a settlement agreement with the Attorney General of Massachusetts ("AG") to resolve potential claims raised as part of the AG’s investigation into the origination and securitization of subprime residential mortgage loans. On a general level, the AG has been investigating various aspects of the securitization of subprime loans, including whether securitizers: (1) facilitated the origination by others of "unfair" loans under Massachusetts law; (2) failed to ascertain whether loans purchased from originators complied with the originators’ stated underwriting guidelines; (3) failed to take sufficient steps to avoid placing problem loans in securitization pools; (4) were aware of allegedly unfair or problem loans; (5) failed to correct inaccurate information in securitization trustee reports concerning repurchases of loans; and (6) failed to make available to potential investors certain information concerning allegedly unfair or problem loans, including information obtained during loan diligence and the pre-securitization process, as well as information concerning their practices in making repurchase claims relating to loans both in and out of securitizations. Under the settlement agreement, Goldman will provide nearly $50 million in relief to homeowners through loan restructuring, plus an additional $10 million to the state. Specifically, Goldman will restructure both first and second mortgage loans to replace "unfair" loans with new, affordable loans that are based on the current value of the home. Goldman will write down up to 35% for first lien loans and up to 50% for second lien loans (or, if the second lien loan is more than 180 days delinquent by April 1, 2009, write off the full amount). Goldman also agreed to use its "best efforts" to accomplish the goals in the agreement, including communicating the offers to each borrower, and working with borrowers to avoid foreclosure for those loans not held by Goldman but serviced by its servicer. For a copy of the settlement materials, please see http://www.mass.gov/Cago/docs/press/2009_05_07_goldman_settlement.pdf.
Supreme Court of South Carolina Grants Temporary Restraining Order Preventing Certain Home Foreclosures. On May 4, 2009, the Supreme Court of South Carolina, the state’s highest court, issued a temporary restraining order preventing the foreclosure sale of any property arising out of a loan potentially subject to modification under the Home Affordable Modification Program ("HMP"). In re Federal National Mortgage Associations ("Fannie Mae") Loans Subject to Foreclosure Sale. The petitioner, Federal National Mortgage Association ("Fannie Mae") asked the Court to issue a temporary injunction to prevent South Carolina judges from finalizing foreclosure sales in order to give homeowners additional time to take advantage of potential loan modifications under the HMP. Fannie Mae asserted that absent injunctive relief, mortgagors eligible for loan modifications under the HMP may be denied their right to participate because their property was sold at a foreclosure sale. In the interest of the mortgagors that may be entitled to loan modification, the court granted a temporary restraining order preventing the foreclosure sale of any property arising out of a loan owned by Fannie Mae, Freddie Mac, or a servicer who has signed an agreement to take part in the HMP. For a full copy of the order, please see http://www.buckleysandler.com/In%20re%20Federal%20National%20Mortgage%20Association%20.pdf.
Washington Legislature Enacts "Prevent or Reduce Owner-Occupied Foreclosure Program." On May 7, 2009, Washington Governor Christine Gregoire signed into law S.B. 6033, which creates the "Prevent or Reduce Owner-occupied Foreclosure Program" (PROOF). The Act requires the Washington Department of Financial Institutions (Department) and the Washington State Housing Finance Commission (Commission) to enter into an interagency agreement to implement and administer the program. The Commission, in consultation with the Department, will assist households and individuals facing foreclosure in obtaining work-out or modification agreements with their creditors. The Commission must also provide an annual report in which the Commission will create specific metrics and criteria by which the PROOF program can be measured. Section 4 of the Act, which would have required the State Housing Finance Commission to establish a program oversight committee, was vetoed by the Governor. For a copy of the Act, please see http://apps.leg.wa.gov/documents/billdocs/2009-10/Pdf/Bills/Session%20Law%202009/6033.SL.pdf.
West Virginia Enacts SAFE Mortgage Act. On May 8, West Virginia Governor Joe Manchin approved a bill to create the West Virginia SAFE Mortgage Licensing Act (S.B. 532). The Act (i) requires licensing and registration of mortgage loan originators, (ii) authorizes the Division of Banking to participate in the Nationwide Mortgage Licensing System and Registry, (iii) requires prelicensure education of mortgage loan originators, (iv) implements a prelicensure testing requirement for mortgage loan originators; (v) explains standards for mortgage loan originator license renewal, (vi) clarifies annual continuing education requirements for mortgage loan originators, and (vii) outlines prohibited acts and practices for mortgage loan originators. The effective date of the West Virginia SAFE Mortgage Licensing Act for all individuals licensed as mortgage loan originators before July 1, 2009, is January 1, 2011. For all other individuals, the effective date is January 31, 2010. In addition to creating the West Virginia SAFE Mortgage Licensing Act, S.B. 532 makes amendments to the West Virginia Residential Mortgage Lender, Broker and Servicer Act, and the West Virginia Consumer Credit and Protection Act, relating to the West Virginia Division of Banking’s participation in the Nationwide Mortgage Licensing System and Registry. For a copy of the Act, please see http://www.buckleysandler.com/West%20Virginia%20SB%20532.pdf.
Banking
Federal Agencies Make Technical Corrections to FACTA Rules. On May 14, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National Credit Union Administration, and the Federal Trade Commission (the "Agencies") issued final rules that make technical corrections to their affiliate marketing rules and their identity theft red flags and address discrepancy rules under the Fair and Accurate Credit Transactions Act (FACTA). Through the rulemaking, the Agencies made two corrections to their affiliate marketing rules: (i) they amended Model Form C-5, which allows consumers to voluntarily opt-out of marketing by businesses and their affiliates, by inserting language in brackets that allow businesses to disclose the duration of any opt-out period; and (ii) they added an additional provision to the instructions to the affiliate marketing rules addressing acceptable changes to the model forms clarifying that a person may add a disclosure to the forms that explains the treatment of opt-outs by joint consumers (e.g., where the notice pertains to a joint account and the opt-out will apply to everyone on the account, the statement may provide that, for joint accounts, the opt-out will apply to everyone on the account). In addition to amending the affiliate marketing rules, the agencies also made several technical corrections to the identity theft red flags and address discrepancies final rules. Among other amendments, the corrections clarify that address discrepancy notices need only be provided by nationwide consumer reporting agencies that are described in § 603(p) of the Fair Credit Reporting Act (FCRA). For a copy of the final rules, please see http://edocket.access.gpo.gov/2009/pdf/E9-10009.pdf.
FinCEN Issues Proposed Rule Updating Definition of Money Services Business. On May 12, the Financial Crimes Enforcement Network (FinCEN) published a Notice of Proposed Rulemaking (NPRM) that would change the definition of Money Services Businesses (MSBs) under the Bank Secrecy Act’s (BSA) implementing rules. The proposal incorporates past FinCEN rulings and policy determinations, which the agency hopes will clarify the types of financial activities that would cause a business to be considered an MSB under the rules. Currently, under the rule, to meet one of the definitional thresholds of an MSB a person must conduct $1,000 of transactions per person per day. If a person meets this threshold, then he or she is subject to BSA recordkeeping and reporting requirements. This threshold applies to all categories of MSBs except for "money transmission." If a person engages in money transmission, then he or she triggers the MSB threshold by engaging in a money transmission of any amount. FinCEN’s Notice of Proposed Rulemaking (NPRM) solicits comment on modifying these definitional thresholds. Additionally, the NPRM proposes measures to ensure that foreign-located entities engaging in MSB activities within the United States are regulated as MSBs. To this end, the proposed rule would clarify when foreign-located entities were engaging in MSB activities in the United States and when they were subject to the BSA rules. All comments concerning the NPRM are due by September 9, 2009. For a copy of the proposed rule, please see http://edocket.access.gpo.gov/2009/pdf/E9-10864.pdf.
Consumer Finance
Federal Agencies Make Technical Corrections to FACTA Rules. On May 14, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National Credit Union Administration, and the Federal Trade Commission (the "Agencies") issued final rules that make technical corrections to their affiliate marketing rules and their identity theft red flags and address discrepancy rules under the Fair and Accurate Credit Transactions Act (FACTA). Through the rulemaking, the Agencies made two corrections to their affiliate marketing rules: (i) they amended Model Form C-5, which allows consumers to voluntarily opt-out of marketing by businesses and their affiliates, by inserting language in brackets that allow businesses to disclose the duration of any opt-out period; and (ii) they added an additional provision to the instructions to the affiliate marketing rules addressing acceptable changes to the model forms clarifying that a person may add a disclosure to the forms that explains the treatment of opt-outs by joint consumers (e.g., where the notice pertains to a joint account and the opt-out will apply to everyone on the account, the statement may provide that, for joint accounts, the opt-out will apply to everyone on the account). In addition to amending the affiliate marketing rules, the agencies also made several technical corrections to the identity theft red flags and address discrepancies final rules. Among other amendments, the corrections clarify that address discrepancy notices need only be provided by nationwide consumer reporting agencies that are described in § 603(p) of the Fair Credit Reporting Act (FCRA). For a copy of the final rules, please see http://edocket.access.gpo.gov/2009/pdf/E9-10009.pdf.
Congress Holds Hearing on Consumer Credit and Debt Protection Act. On May 12, the House Subcommittee on Commerce, Trade, and Consumer Protection held a hearing on the Consumer Credit and Debt Protection Act (H.R. 2309). Among other things, the bill would expand the Federal Trade Commission’s (FTC’s) authority to regulate consumer debt and credit. Currently, the FTC can regulate non-mortgage consumer credit or debt services only by promulgating rules through the Magnuson-Moss rulemaking procedures set forth in section 18 of the FTC Act. However, the FTC considers these procedures costly, burdensome, and time consuming. If enacted, H.R. 2309, would provide the FTC with new authority to use Administrative Procedures Act notice and comment rulemaking to draft rules affecting the financial services industry. The bill would grant the FTC the power to impose civil penalties. In addition to expanding the FTC’s authority, the bill would grant state attorneys general the power to bring suits in state or federal courts under any laws enforced by the FTC or any rule relating to consumer credit or debt. For a copy of the bill, please see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h2309ih.txt.pdf. For a copy of testimony heard during the House Subcommittee on Commerce, Trade, and Consumer Protection hearing, please see http://energycommerce.house.gov/index.php?option=com_content&view=article&id=1616:energy-and-commerce-subcommittee-legislative-hearing-on-qhr-2309-the-consumer-credit-and-debt-protection-act-and-hr-2190-the-mercury-pollution-reduction-actq&catid=129:subcommittee-on-commerce-trade-and-consumer-protection&Itemid=70.
Litigation
FTC Sues Mortgage Company for Pricing Discrimination Against Hispanic Borrowers. On May 11, the Federal Trade Commission (FTC) announced that it has filed suit against Golden Empire Mortgage (GEM) and owner Howard D. Koostra for allegedly violating the Equal Credit Opportunity Act (ECOA) by charging Hispanic consumers higher prices for mortgage loans than non-Hispanic white consumers. The complaint argues that the price disparities cannot be explained by the applicants’ credit characteristics or underwriting risk. The complaint alleges that the defendants gave loan officers and branch managers wide discretion to charge, in addition to the risk-based price, "overages" through higher interest rates and higher up-front charges. The defendants allegedly paid loan officers a percentage of the overages as a commission and failed to monitor whether Hispanic consumers were paying higher overages than non-Hispanic white borrowers.The complaint alleges that the defendant’s policy and practice of allowing loan officers to charge discretionary overages resulted in Hispanics being charged higher prices because of their national origin - price disparities that are "substantial, statistically significant, and cannot be explained by factors related to underwriting risk or credit characteristics of the applicants." For a copy of the FTC’s press release, please see http://www.ftc.gov/opa/2009/05/gem.shtm.
Goldman Sachs Settles Massachusetts AG Investigation Into Subprime Origination and Securitization Practices. On May 7, 2009, Goldman Sachs & Co. ("Goldman") entered into a settlement agreement with the Attorney General of Massachusetts ("AG") to resolve potential claims raised as part of the AG’s investigation into the origination and securitization of subprime residential mortgage loans. On a general level, the AG has been investigating various aspects of the securitization of subprime loans, including whether securitizers: (1) facilitated the origination by others of "unfair" loans under Massachusetts law; (2) failed to ascertain whether loans purchased from originators complied with the originators’ stated underwriting guidelines; (3) failed to take sufficient steps to avoid placing problem loans in securitization pools; (4) were aware of allegedly unfair or problem loans; (5) failed to correct inaccurate information in securitization trustee reports concerning repurchases of loans; and (6) failed to make available to potential investors certain information concerning allegedly unfair or problem loans, including information obtained during loan diligence and the pre-securitization process, as well as information concerning their practices in making repurchase claims relating to loans both in and out of securitizations. Under the settlement agreement, Goldman will provide nearly $50 million in relief to homeowners through loan restructuring, plus an additional $10 million to the state. Specifically, Goldman will restructure both first and second mortgage loans to replace "unfair" loans with new, affordable loans that are based on the current value of the home. Goldman will write down up to 35% for first lien loans and up to 50% for second lien loans (or, if the second lien loan is more than 180 days delinquent by April 1, 2009, write off the full amount). Goldman also agreed to use its "best efforts" to accomplish the goals in the agreement, including communicating the offers to each borrower, and working with borrowers to avoid foreclosure for those loans not held by Goldman but serviced by its servicer. For a copy of the settlement materials, please see http://www.mass.gov/Cago/docs/press/2009_05_07_goldman_settlement.pdf.
Supreme Court of South Carolina Grants Temporary Restraining Order Preventing Certain Home Foreclosures. On May 4, 2009, the Supreme Court of South Carolina, the state’s highest court, issued a temporary restraining order preventing the foreclosure sale of any property arising out of a loan potentially subject to modification under the Home Affordable Modification Program ("HMP"). In re Federal National Mortgage Associations ("Fannie Mae") Loans Subject to Foreclosure Sale. The petitioner, Federal National Mortgage Association ("Fannie Mae") asked the Court to issue a temporary injunction to prevent South Carolina judges from finalizing foreclosure sales in order to give homeowners additional time to take advantage of potential loan modifications under the HMP. Fannie Mae asserted that absent injunctive relief, mortgagors eligible for loan modifications under the HMP may be denied their right to participate because their property was sold at a foreclosure sale. In the interest of the mortgagors that may be entitled to loan modification, the court granted a temporary restraining order preventing the foreclosure sale of any property arising out of a loan owned by Fannie Mae, Freddie Mac, or a servicer who has signed an agreement to take part in the HMP. For a full copy of the order, please see http://www.buckleysandler.com/In%20re%20Federal%20National%20Mortgage%20Association%20.pdf.
California Federal Court Upholds Account Agreements Despite Website Terms. The U.S. District Court for the Northern District of California recently held that a standard customer account agreement and not the terms of use on a company’s website determined the venue and choice of law in customer suits. McMillan v. Wells Fargo Bank, N.A., No. 08-5739,2009 WL 1035969 (N.D. Cal., Apr. 17, 2009). The plaintiffs brought a class action alleging that the defendant charged unlawful overdraft fees. Defendant moved to dismiss the case for improper venue pursuant to a forum selection provision contained in the standard consumer account agreement, which required that suits be brought in the state where the account was initially opened. Plaintiffs argued that the consumer account agreement did not control their claims, because after their accounts were opened they entered into a new agreement contained in the terms of use on the defendant’s website, which did not have a forum selection provision. The court rejected the plaintiffs’ argument finding that their complaint failed to reference the website’s terms of use. The court reasoned that since the complaint focused on the consumer account agreement, the order too must focus on that agreement. As a result, the court held that venue was inappropriate, because none of the plaintiffs resided in California. The court then dismissed the case. For a copy of the opinion, please see http://www.buckleysandler.com/McMillan%20v_%20Wells%20Fargo%20Bank.pdf.
California Federal Court Holds that CAN-SPAM Act Does not Preempt State Law Claims. The U.S. District Court for the Northern District of California recently ruled that the federal Controlling Assault of Non-Solicited Pornography and Marketing Act (CAN-SPAM Act) does not preempt California’s Deceptive Commercial Email statute (the Code). Asis Internet Servs. v. Consumerbargaingiveaways, LLC, No. C 08-04856, 2009 WL 1035538 (N.D. Cal. Apr. 17, 2009). In this case, the plaintiffs sued email advertising companies for violating § 17529.5 of the Code, alleging that the companies sent emails containing (i) third-party domain names without the permission of the third party; (ii) falsified, misrepresented, or forged header information; and (iii) subject lines that would likely mislead a recipient about a material fact regarding the message’s contents. The defendants moved to dismiss the case on grounds that that § 7707(b)(1) of the CAN-SPAM Act preempted the plaintiffs’ claims. Section 7707(b)(1) of the CAN-SPAM Act preempts any state statute, regulation, or rule that expressly regulates the use of electronic mail to send commercial messages, unless the statute, regulation, or rule prohibits "falsity or deception." The defendants interpreted the phrase "falsity or deception" to mean that the plaintiffs needed to plead fraud in order to make a valid claim under the California Code. The court disagreed, finding that the defendants’ interpretation conflicted with the statute’s plain meaning. According to the court, the phrase must have a broader meaning than simply fraud, because if Congress had meant for it to mean only fraud, it simply would have used the word fraud. The court concluded that the phrase encompasses general false advertising wrongs in addition to fraudulent claims. As a result, the court held that the plaintiffs sufficiently pled false advertising and the court denied the defendants’ motion to dismiss the § 17529.5 claims. For a copy of the opinion, please see http://www.buckleysandler.com/Asis_Internet_Services_v_Consumerbargaingiveaways.pdf.
California State Court Rules that CAN-SPAM Preempts State’s Deceptive Commercial Email Statute. On May 4, the Los Angeles Superior Court held that the federal Controlling Assault of Non-Solicited Pornography and Marketing Act (CAN-SPAM Act) preempted California’s Deceptive Commercial Email statute, Cal. Bus. & Prof. Code § 17529 et seq. (the Code). Hypertouch, Inc. v. ValueClick, Inc., No. LC081000 (Cal. Super. Ct. May 4, 2009). In Hypertouch, the plaintiff sued a California-based marketing company under § 17529.5 of the Code for sending emails containing (i) third-party domain names without the permission of the third party; (ii) falsified, misrepresented, or forged header information; and (iii) subject lines that would likely mislead a recipient about a material fact regarding the message’s contents. The defendant moved for summary judgment arguing that the CAN-SPAM Act preempts all state law claims of deceptive commercial email that do not allege fraud. The court analyzed case law from the Northern District of California (NDC), which has given conflicting rulings on the preemption issue. In Hoang v. Reunion.com, Inc., the NDC concluded that the phrase "falsity or deception" meant fraud and that therefore any claim not alleging fraud was preempted by the Act. In a subsequent ruling in Asis Internet Servs. v. Consumerbargaingiveaways LLC (reported above), the NDC held that "falsity or deception" includes both fraud and unfair and deceptive trade practices, thus expanding the number of permissible claims under the California law. Here, the court rejected the reasoning in Asis, believing that its interpretation would weaken the Act’s preemption clause too greatly. As a result, the court held that valid claims under California’s Deceptive Commercial Email statute must include allegations of fraud. Because the plaintiff’s claim lacked allegations of fraud, the court granted the defendant’s motion for summary judgment. For a copy of the opinion, please see http://www.buckleysandler.com/Hypertouch%20v%20Value%20Click.pdf.
E-Financial Services
California Federal Court Upholds Account Agreements Despite Website Terms. The U.S. District Court for the Northern District of California recently held that a standard customer account agreement and not the terms of use on a company’s website determined the venue and choice of law in customer suits. McMillan v. Wells Fargo Bank, N.A., No. 08-5739,2009 WL 1035969 (N.D. Cal., Apr. 17, 2009). The plaintiffs brought a class action alleging that the defendant charged unlawful overdraft fees. Defendant moved to dismiss the case for improper venue pursuant to a forum selection provision contained in the standard consumer account agreement, which required that suits be brought in the state where the account was initially opened. Plaintiffs argued that the consumer account agreement did not control their claims, because after their accounts were opened they entered into a new agreement contained in the terms of use on the defendant’s website, which did not have a forum selection provision. The court rejected the plaintiffs’ argument finding that their complaint failed to reference the website’s terms of use. The court reasoned that since the complaint focused on the consumer account agreement, the order too must focus on that agreement. As a result, the court held that venue was inappropriate, because none of the plaintiffs resided in California. The court then dismissed the case. For a copy of the opinion, please see http://www.buckleysandler.com/McMillan%20v_%20Wells%20Fargo%20Bank.pdf.
Privacy/Data Security
FTC Creates Guided, Four Step Process to Help Low Risk Entities Comply With "Red Flags" Rule. On May 13 the Federal Trade Commission (FTC) announced an online guide developed to help entities with a low risk of identity theft comply with the Fair and Accurate Credit Transactions Act (FACTA). The Act requires many businesses and organizations to implement a written Identity Theft Prevention Program in order to detect any warning signs ("red flags") of identity theft. Identifying these red flags as early as possible will help those entities spot an impostor trying to defraud them by using someone else’s identity to get products and services. The online guide is called "Create Your Own Identity Theft Prevention Program: A Guided 4-Step Process." This guide is comprised of a template with instructions that enable companies to complete and print a fill-in-the-blank form online. The guided online format makes compliance with the "Red Flags" Rule easily attainable for most companies covered by the Act. For a full copy of the FTC’s announcement, please see http://www.ftc.gov/opa/2009/05/redflags.shtm.