InfoBytes, May 23, 2008
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Miscellany
- Mortgages
- Banking
- Consumer Finance
- Securities
- Insurance
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
Federal Financial Agencies Issue Illustrations of Hybrid Adjustable Rate Mortgage Products. On May 22, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration (collectively, the Agencies) jointly issued four documents that set forth illustrations of hybrid adjustable rate mortgage (ARM) products to assist institutions in implementing the consumer protection portion of the July 10, 2007 Interagency Statement on Subprime Mortgage Lending (Subprime Statement), and to provide information to consumers on hybrid ARM products as recommended by the Subprime Statement. The Subprime Statement recommends that institutions provide clear, balanced, and timely information to consumers about the relative benefits and risks of hybrid ARM products. The illustrations provide consumers with information regarding, among other things, prepayment penalties and balloon payments, and instruct consumers not to sign ARM loan contracts if they do not understand how they work. The Agencies also provided sample charts comparing payments on a fixed-rate mortgage with those on various hybrid ARM products. The illustrations are not intended to be model forms and use of the forms is optional for financial institutions. For a copy of the illustrations, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20080522a1.pdf.
FHA Announces Implementation of Risk-Based Premiums. On May 13, a notice was published in the Federal Register regarding the Federal Housing Administrations (FHA) implementation of risk-based premiums for most of its Title II single family mortgage insurance programs, enabling mortgage lenders to offer borrowers FHA-insured financing with a range of mortgage insurance premiums based on the risk the insurance contract represents. This notice follows a September 20, 2007, notice that solicited public comment on the proposal to implement risk-based premiums. The effective date for implementing risk-based premiums is July 14, 2008. For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2008/pdf/E8-10625.pdf.
Senate Banking Committee Passes Housing Legislation. On May 20, the U.S. Senate Committee on Banking, Housing, and Urban Affairs passed the Federal Housing Finance Regulatory Reform Act of 2008, which is intended to help prevent the rising number of foreclosures, to create more affordable housing for Americans, and to reform the regulation of Fannie Mae and Freddie Mac (the government-sponsored enterprises or GSEs) in order to improve their role in the housing finance system. The bill, among other things, would: (i) establish an independent agency of the Federal Government, the Federal Housing Finance Agency, which would have general regulatory authority over the GSEs, and the Federal Home Loan Banks; (ii) establish the high cost loan limit for the GSEs of 132 percent of the conforming loan limit (currently, this would allow for the purchase of loans up to $550,000); (iii) prohibit the GSEs from holding loans purchased with principal obligations greater than the normal conforming limit on their portfolios, either as whole loans or mortgage-backed securities, except to the extent that such loans are held for the purposes of securitization; (iv) establish in the Federal Housing Administration the “HOPE for Homeowners Program,” which is a voluntary program on the part of homeowners and existing loan holders to insure refinanced loans for distressed borrowers and allow homeowners to avoid foreclosure by reducing the principle balance outstanding and interest rate charged on their mortgages; and (v) establish a licensing system for all loan originators to help standardize requirements for mortgage brokers and ensure that they meet minimum educational and performance standards. The legislation passed by a vote of 19-2. For a copy of the bill, please see http://banking.senate.gov/public/_files/GSEBill.pdf. For a copy of the manager’s amendment, please see http://banking.senate.gov/public/_files/ManagersAmendmenttoGSEBill.pdf.
FRB Publishes Proposed UDAP and Related Rules on Consumer Credit Card and Overdraft Practices. On May 19, the Federal Reserve Board (FRB), together with the Office of Thrift Supervision and National Credit Union Administration, published in the Federal Register its proposal to revise Regulation AA (Unfair or Deceptive Acts of Practices or “UDAP”) as it applies to consumer credit card practices and overdraft practices on consumer checking accounts (first reported in InfoBytes, May 2, 2008). See 73 Fed. Reg. 28,904 (May 19, 2008). The FRB also published proposals making related changes to Regulation Z (Truth in Lending), see id. at 28,866, and Regulation DD (Truth in Savings). See id. at 28,739. Comments are due on the Regulation AA proposal by August 4, 2008 and on the Regulation Z and Regulation DD proposals by July 18, 2008.
The Regulation AA or UDAP proposal as it applies to credit card practices would (1) eliminate interest rate increases on existing balances, subject to exceptions for rate changes due to the operation of a variable rate index, the expiration or termination of a promotion, or default due to a late payment of 30 days or more; (2) establish payment allocation rules for accounts with multiple interest rates; (3) eliminate double-cycle billing; (4) limit upfront fees on subprime credit cards to 50% of the credit line, while allowing no more than 25% of such fees to be billed during the first billing period; (5) establish a de facto 21 day standard for the period between a statement mailing date and payment due date through the use of a safe harbor technique; (6) require a “tiered” or multiple rate offer to disclose the factors used to determine a consumer’s actual rate; and (7) prohibit the imposition of over the credit limit fees in cases where the creditor has placed a credit hold on an account. For a copy of the Regulation AA, Z, and DD proposals, please see http://www.buckleykolar.com/documents/FedUDAPProposedRuleMay2008.pdf, http://www.buckleykolar.com/documents/FedTILAProposedRuleMay2008.pdf, and http://www.buckleykolar.com/documents/FedTruthinSavingsProposedRuleMay2008.pdf, respectively.
American Securitization Forum Releases Guidelines for Reimbursement of Counseling Expenses in Residential Mortgage-Backed Securitizations. On May 20, the American Securitization Forum (ASF) released guidelines for the reimbursement of counseling expenses in residential mortgage-backed securitizations. The guidelines were adopted pursuant to the ASF “Statement on Reimbursement of Counseling Expenses in Residential Mortgage-Backed Securitizations,” released on October 10, 2007. Pursuant to the guidelines, mortgage loan servicers can consider the expenses of counseling borrowers as servicing advances so long as this is permitted by the terms of the securitizations in question. As such, the counseling expenses would be reimbursable from securitization trust cashflows for loans that are in default or where default is reasonably foreseeable, or where the servicer concludes that counseling is likely to mitigate losses and maximize recovery under the loan. The guidelines are in effect until July 31, 2010. For a copy of the guidelines, please see http://www.buckleykolar.com/documents/ASFCounselingFundingGuidelines.pdf.
FTC Testifies on Progress of Credit-Based Insurance Score Study. On May 21, the Federal Trade Commission (FTC) testified before the U.S. House Financial Services Committee, Subcommittee on Oversight and Investigations, to provide an update on the progress of its study on the use of credit-based insurance scores in homeowners insurance. Insurance companies have increasingly used information about credit history in the form of credit-based insurance scores to decide whether to offer consumers insurance, and if so, at what price. Pursuant to Section 215 of the Fair and Accurate Transactions Act (FACTA), the FTC is directed to study and report on the impact of credit-based insurance scores on consumers of homeowners insurance. The testimony stated that the FTC intends to use this authority to issue orders to the nine largest homeowners insurance companies to obtain data for its study. The testimony explained that, prior to issuing these orders, the FTC is seeking input from all interested parties on the information that the draft model order would require homeowners insurance companies to produce. For a copy of the draft model order, please see http://www.ftc.gov/be/080519draftmodelordercredbasedinsurscore.pdf.The FTC will be accepting public comment on the draft model order for 30 days. For a copy of the FTC testimony, please see http://www.ftc.gov/os/2008/05/080521creditbasedtest.pdf.
FTC Announces Telemarketing Fraud Sweep, Unveils Consumer Ed Campaign. On May 20, the Federal Trade Commission (FTC) announced Operation Tele-PHONEY, a telemarketing fraud sweep being carried out alongside more than 30 international, federal, state and local law enforcement agencies. As a result of the sweep, the FTC filed complaints against thirteen telemarketers alleging violations ranging from offering phony tax rebates to violating the rules of the Do-Not-Call Registry. In one case, the defendants allegedly used unauthorized consumer bank account information to levy billing charges for unordered products. The FTC states that, in addition to obtaining temporary restraining orders in eleven of the cases, it will seek to permanently bar the defendants from further violating federal law. In conjunction with its announcement, the FTC began a consumer education campaign offering tips to consumers for identifying, preventing, and reporting telemarketing fraud. For more information on the court filings and education campaign, please see http://www.ftc.gov/opa/2008/05/telephoney.shtm
Home-Buying Consulting Service Reaches Settlement with FTC Over Alleged Credit Repair Violations. A home-buying consulting service charged with violating the Credit Repair Organizations Act (CROA) and the Federal Trade Commission Act by falsely claiming that they can remove negative information from a consumer’s credit report, even if information is correct, has agreed to settle with the Federal Trade Commission (FTC). Consumers are led to Home Buyer’s Consulting Network, Inc. (HBCN) both through its web sites and through a company that sells lists of foreclosed properties and suggests that its customers call HBCN if they need credit report or access to zero- or low-down payment home financing. In connection with its credit repair business, HBCN claims that its program “offers the ability to REPAIR, RESTORE, or ESTABLISH your credit so that you may be able qualify for 100% home financing, lower interest rates and better quality credit.” HBCN typically requires advance payment of at least $99 for those credit repair services. HBCN and Douglas A. Moore, HBCN’s president, CEO and majority shareholder, were charged with violating the CROA by falsely claiming that HBCN can remove negative information from consumers’ credit reports, including bankruptcies, even if the information is accurate and timely. In addition, HBCN allegedly violated the CROA by requiring advance payment from consumers for credit repair services. For a copy of the FTC press release, please see http://www.ftc.gov/opa/2008/05/hbcn.shtm.
FINRA Issues Guidance to Broker-Dealers on “Improving Examination Results”. On May 21, the Financial Industry Regulatory Authority (FINRA) issued guidance to assist member broker-dealer firms with improving their compliance efforts and examination results. The publication imparts FINRA’s priorities in an examination and discusses frequently found deficiencies relating to FINRA’s examination program. FINRA’s list of examination priorities, though not exhaustive, addresses topics such as senior investors, deferred variable annuities, anti-money laundering, and business continuity. In the section on frequently found deficiencies, FINRA sets out recently discovered violations, the relevant rules, and also details a solution. For more information, see the publication at http://www.finra.org/RulesRegulation/ComplianceTools/ImprovingExamResults/p038526.
State Issues
Minnesota Legislature Passes Subprime Borrower Relief Act. On May 19, the Minnesota legislature presented the Minnesota Subprime Foreclosure Deferment Act (the “Act”) to Governor Tim Pawlenty. If signed by the Governor, the Act will give borrowers the right to defer a foreclosure sale of their residence for one year after the bill becomes law if their loan is (i) a subprime loan, or (ii) a loan with negative amortization for which the required minimum payment of principal and interest increased after the date the loan was originated. Every foreclosing lender would be required to send to each borrower who has an eligible foreclosed loan a notice of right to deferment. During the deferment period, the borrower would be required to make reduced monthly payments, and a borrower who fails to pay such reduced monthly payments will lose the right to deferment. Such reduced payments would be the lesser of: (1) the minimum monthly payment of principal and interest on the date the loan was originated; or (2) 65 percent of the minimum monthly payment of principal and interest at the time the borrower defaulted prior to foreclosure. If signed by the Governor, the bill will become effective seven days following final enactment. For a copy of the bill, please see http://www.buckleykolar.com/documents/MNSF3396.pdf.
Oregon Adopts Temporary Rule to Require Reports From Mortgage Bankers and Brokers. On May 6, the Oregon Department of Consumer and Business Services, Division of Finance and Corporate Securities (the “Department”), implemented S.B. 1064 by adopting a temporary rule, Or. Admin. Rule 441-865-0022, which requires mortgage bankers and mortgage brokers to file a report with the Department concerning their residential mortgage activity, and specifies what data must be included in such report. The temporary rule requires mortgage bankers and mortgage brokers to report the types of loans made, the purpose of the loans, and the loans’ features (e.g., variable interest rates, prepayment penalties, etc.). The temporary rule applies to residential mortgage activity from January 1, 2007, to December 31, 2007. Mortgage brokers and bankers must file their report by August 30, 2008. The temporary rule became effective upon filing, and will remain in effect through October 31, 2008. For a copy of the temporary rule, please see http://www.dfcs.oregon.gov/rules_statutes/rulemaking/441-865-0022.pdf.
Oklahoma Amends Education Requirements for Mortgage Brokers and Mortgage Loan Originators. On May 20, Oklahoma Governor Brad Henry signed S.B. 1927 and S.B. 1928 to amend education requirements pursuant to the Mortgage Broker Licensure Act, Okla. Stat. tit. 59 § 2081 et seq. S.B. 1927 will require mortgage broker applicants to have completed 20 hours of approved education during the three years immediately preceding the date of application, and will require mortgage loan originator applicants to have completed 16 hours of approved education during the three years immediately preceding the date of application. S.B. 1928 specifies that continuing education courses for mortgage broker and mortgage loan originator licensees must examine the individual to the satisfaction of the standards as established by the National Association of Mortgage Brokers. Both new laws become effective November 1, 2008. For a copy of S.B. 1927, please see http://www.sos.state.ok.us/documents/Legislation/51st/2008/2R/SB/1927.pdf. For a copy of S.B. 1928, please see http://www.sos.state.ok.us/documents/Legislation/51st/2008/2R/SB/1928.pdf.
Georgia To Participate In Nation-Wide Automated Residential Mortgage Licensing System. On April 28, Georgia Governor Sonny Perdue signed H.B. 921 to establish Georgia’s participation in a nation-wide residential mortgage licensing system to facilitate the sharing of information and standardization of the licensing and application processes for mortgage brokers and mortgage lenders. Irrespective of its participation in a nation-wide residential mortgage licensing system, the Georgia Department of Banking and Finance retains full and exclusive authority over determinations whether to grant, renew, or revoke licenses issued to mortgage brokers and mortgage lenders under Ga. Code § 7-1-1000 et seq. H.B. 921 becomes effective July 1, 2008. For a copy of the bill, please see http://www.legis.ga.gov/legis/2007_08/pdf/hb921.pdf.
Georgia Governor Signs Credit Freeze Bill into Law. On May 13, Georgia Governor Sonny Perdue signed H.B. 130 into law making Georgia the 44th state where residents are allowed to order a security freeze on their credit report to prevent identity thieves from affecting their credit reports. Under the new law, which goes into effect on August 1, 2008, a credit reporting agency must place a security freeze on an individual’s credit report within three business days of receiving the consumer’s written request via certified mail to do so. The security freeze will then remain in place until the consumer requests its removal. The law also contains procedures for the temporary lifting of the security freeze. The new law enumerates the permissible fees that a credit reporting agencies may charge a consumer for credit freeze services, but restricts the agencies from charging consumers who are victims of identity theft and those who are age 65 or older. For the full text of the new law, please see http://www.legis.ga.gov/legis/2007_08/pdf/hb130.pdf.
Ohio Legislature Dramatically Restricts Payday Lending. The Ohio legislature has sent to Governor Ted Strickland a bill that would effectively eliminate payday lending in the state. The legislation, Substitute House Bill Number 545, would repeal the state’s Check-Cashing Lender Law and would create the Short Term Lender Law. This legislation would limit borrowers to four short-term loans per year and would cap annual interest rates at 28 percent. The bill also would limit loan amounts to $500 per loan, or 25 percent of a consumer’s base monthly pay, whichever is less. The bill would also impose restrictions on debt collectors of short-term loans, and it would apply the state’s Consumer Sales Practices Act to short-term lenders. The Governor is expected to sign the bill some time next week. For a copy of the legislation, please see http://www.buckleykolar.com/documents/OHHB545.pdf.
Courts
Supreme Court Conference Scheduled in FCRA Willfulness Case. The U.S. Supreme Court announced that it will consider a suggestion of mootness and motion to vacate the judgment of the U.S. Court of Appeals for the Third Circuit in Whitfield v. Radian Guaranty, Inc., No. 07-834, at its conference of June 5, 2008. See http://www.supremecourtus.gov/docket/07-834.htm. As previously reported, Radian filed a petition for certiorari with the Supreme Court on the issue of whether it could have willfully violated the Fair Credit Reporting Act (FCRA) when it did not provide an adverse action notice to borrowers who accepted a loan with a higher-than-normal mortgage insurance rate (see InfoBytes, Nov. 9, 2007). Five major financial-services trade associations filed an amicus brief in support of a petition, with Buckley Kolar serving as lead counsel (see InfoBytes, Feb. 1, 2008). At issue in this case is whether “willfulness” under FCRA is an objective standard that can be determined by the court as a matter of law or is a subjective standard that requires factual development. The Third Circuit had directed the district court to treat the question of whether the mortgage insurer violated FCRA willfully as a factual, rather than legal, question (reported in the InfoBytes, Aug. 31, 2007 ). FCRA provides for statutory damages of $100-$1,000 for willful violations but only actual damages for negligent violations. Radian sought certiorari on the basis of the U.S. Supreme Court’s holding in Safeco Insurance Co. of America v. Burr, 127 S. Ct. 2201 (2007) (reported in the InfoBytes Special Alert, June 4, 2007). In Safeco, the Supreme Court held that an insurance company’s interpretation of FCRA’s adverse action requirement, although wrong, was not “objectively unreasonable” at the time of the transaction, and, therefore, could not be “willful” under FCRA. Radian’s petition for certiorari argued that Safeco required reversal of the Third Circuit’s holding. After receiving several extensions on filing their response to the petition, the plaintiffs unilaterally dismissed their case in the U.S. District Court without ever responding. Radian then filed a suggestion of mootness and motion to vacate the judgment of the Third Circuit. If the Supreme Court grants the motion, the effect will be that the Third Circuit’s opinion will no longer have value as a precedent. For a copy of Radian’s suggestion of mootness and motion to vacate the judgment, see http://www.buckleykolar.com/documents/RadianvWhitfield-SuggestionofMootness.pdf.
Electronic Signature on Uniform Traffic Ticket Sufficient Under New York Law. On May 6, a New York state court held that a police officer’s pre-programmed electronic signature on a “simplified” traffic ticket was sufficient to comply with a regulation governing local criminal court accusatory instruments and New York’s Electronic Signatures and Records Act. People v. Patanian, 2008 WL 1968544 (N.Y. Just. Ct. May 6, 2008). The process used in issuing such traffic tickets involves inputting information into a system and printing a ticket with the issuing officer’s pre-programmed signature. The defendant argued that, “while the simplified traffic information sets forth the words ‘Affirmed under penalty of perjury’ and then the pre-printed signature of [the issuing officer], the affirmation is ineffective because no actual signature is physically made and no other act suggesting some other acknowledgement or affirmation was made.” Although the court concluded that some affirmation or verification was necessary on a simplified traffic ticket, it held that “the officer met all requirements under the Electronic Signature and Records Act by preparing the simplified traffic informations personally and thereafter printing them and immediately serving the same to the Defendant allegedly at the time of the arrest.” According to the court, no further authentication or affirmation was required. “Under [these] circumstances, the need for a prompt or additional button formally affirming the uniform traffic ticket seems redundant in nature.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/PeoplevPatanian.pdf.
Court Finds Knowledge of FACTA Sufficient for Willful Violation. On May 9, the U.S. District Court for the District of Kansas denied the defendants’ motion to dismiss or, in the alternative, for a more definite statement, finding that the plaintiffs had alleged facts sufficient to plausibly prove a willful violation of the Fair and Accurate Credit Transactions Act (FACTA). In re TJX Companies, Inc. Fair and Accurate Credit Transactions Act Litigation, MDL No. 1853, No 07-md-1853-KHV, 2008 WL 2020375 (D. Kan. May 9, 2008). The consumer plaintiffs in this multidistrict putative class action alleged that the defendants violated FACTA by printing the expiration dates of their credit or debit cards on their transaction receipts. The defendants argued that the plaintiffs had not alleged willful violation of FACTA because mere knowledge of the statute and other retailers’ compliance with its terms are not sufficient to show knowing or reckless noncompliance. However, the court found this argument unpersuasive, noting that the plaintiffs’ allegations were typical of FACTA claims, and that courts have almost uniformly rejected that such allegations do not sufficiently allege willful violations. For a copy of the opinion, please see http://www.buckleykolar.com/documents/InreTJXCompaniesFACTALit.pdf.
Court Allows FCRA Claim for Lender’s Failure to Correct Own Error. On May 14, a federal district court held that failing to correct information provided to a consumer credit reporting agency was a “willful” violation for the purposes of the Fair Credit Reporting Act (FCRA). Johnson v. Wells Fargo Home Mortgage Inc., No. 3:05-CV-0321-RAM, 2008 WL 2074001 (D. Nev. May 14, 2008). The defendant lender misapplied the borrower’s payment to another loan of the borrower’s, causing the first loan to become delinquent. The borrower alleged that this inaccurate information caused a decrease in his credit score making it more difficult for him to secure credit. The court dismissed most of the borrower’s claims because they were based on credit for commercial purposes, which is not covered by FCRA. The court also granted summary judgment for any claims arising before the consumer reporting agency’s request the lender reinvestigate the borrower’s delinquency. However, for the claims that did survive, the court refused to dismiss claims for punitive damages, holding “acknowledging its own error and refusing to correct it, while still reporting negative information to the CRAs, certainly qualifies as willfulness under the FCRA.” For a copy of this decision, please see http://www.buckleykolar.com/documents/JohnsonvWellsFargo.pdf.
Termination of Business Relationship Ends Authorization to Pull Credit. On May 12, a Magistrate Judge for the U.S. District Court for the Eastern District of Virginia denied a defendant’s summary judgment motion regarding the plaintiffs’ Fair Credit Reporting Act (FCRA) claim on the basis that a genuine issue of material fact exists as to when the business relationship between plaintiffs and defendant terminated. Drewry v. Starr Motors, Inc., 2008 WL 2035607, No. 3:07CV624 (E.D. Va. May 12, 2008). In this case, Drewry (and others) purchased a car from Starr Motors, Inc. (Starr) and requested financing, but their credit application was denied by two separate financial institutions. Defendant then offered to finance the purchase itself, but plaintiffs decided not to pursue financing any further and returned the car. Plaintiffs later filed a complaint, which, among other things, claimed that Starr violated FCRA by pulling their credit report without having a permissible purpose. The judge found that the question of whether Starr had a permissible purpose to pull Drewry’s credit report a third time hinged on a factual determination of whether a business relationship still existed between the Drewry and Starr. The judge therefore denied summary judgment and forwarded this issue to trial for determination. For a copy of the opinion, please see http://www.buckleykolar.com/documents/DrewryvStarrMotors.pdf.
Firm News
Jerry Buckley, Margo Tank, and Lane Macalester spoke at the Managing Electronic Records (MER) Conference on May 19-21 in Chicago, Illinois. Their panel entitled, “Legal Considerations for Conducting Business Electronically: Practical Guidance,” focused on how the Electronic Signatures and Global and National Commerce Act (ESIGN) and the Uniform Electronic Transactions Act (UETA) now make it possible to present and store information and to sign agreements electronically in circumstances where, in the past, paper documents and wet signatures would have been required. Mr. Buckley, Ms. Tank, and Ms. Macalester discussed the new challenges presented and provided practical guidance to the industry. For more information on the conference, please visit www.merconference.com.
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
MBA Releases New Commercial/Multifamily Property Inspection Form. On May 22, the Mortgage Bankers Association (MBA) announced completion and implementation of a new commercial/multifamily real estate property inspection form for various property types, including office, retail, multifamily, healthcare, lodging and industrial. The updated inspection form already has industry-wide adoption by servicers for all funding sources, including Fannie Mae and Freddie Mac. The form will not be used by the Federal Housing Administration). Eight years ago, the MBA released the first industry-accepted commercial real estate property inspection form. Introduction of the new form reinforces standards of accuracy and effectiveness for inspection of property while expanding industry adoption to include Fannie Mae and Freddie Mac. Additionally, this 2008 form takes advantage of electronic data management and is MISMO-compliant. For a copy of the Commercial/Multifamily Property Inspection Form, please see http://www.mortgagebankers.org/.
Mortgages
Federal Financial Agencies Issue Illustrations of Hybrid Adjustable Rate Mortgage Products. On May 22, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration (collectively, the Agencies) jointly issued four documents that set forth illustrations of hybrid adjustable rate mortgage (ARM) products to assist institutions in implementing the consumer protection portion of the July 10, 2007 Interagency Statement on Subprime Mortgage Lending (Subprime Statement), and to provide information to consumers on hybrid ARM products as recommended by the Subprime Statement. The Subprime Statement recommends that institutions provide clear, balanced, and timely information to consumers about the relative benefits and risks of hybrid ARM products. The illustrations provide consumers with information regarding, among other things, prepayment penalties and balloon payments, and instruct consumers not to sign ARM loan contracts if they do not understand how they work. The Agencies also provided sample charts comparing payments on a fixed-rate mortgage with those on various hybrid ARM products. The illustrations are not intended to be model forms and use of the forms is optional for financial institutions. For a copy of the illustrations, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20080522a1.pdf.
FHA Announces Implementation of Risk-Based Premiums. On May 13, a notice was published in the Federal Register regarding the Federal Housing Administrations (FHA) implementation of risk-based premiums for most of its Title II single family mortgage insurance programs, enabling mortgage lenders to offer borrowers FHA-insured financing with a range of mortgage insurance premiums based on the risk the insurance contract represents. This notice follows a September 20, 2007, notice that solicited public comment on the proposal to implement risk-based premiums. The effective date for implementing risk-based premiums is July 14, 2008. For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2008/pdf/E8-10625.pdf.
Senate Banking Committee Passes Housing Legislation. On May 20, the U.S. Senate Committee on Banking, Housing, and Urban Affairs passed the Federal Housing Finance Regulatory Reform Act of 2008, which is intended to help prevent the rising number of foreclosures, to create more affordable housing for Americans, and to reform the regulation of Fannie Mae and Freddie Mac (the government-sponsored enterprises or GSEs) in order to improve their role in the housing finance system. The bill, among other things, would: (i) establish an independent agency of the Federal Government, the Federal Housing Finance Agency, which would have general regulatory authority over the GSEs, and the Federal Home Loan Banks; (ii) establish the high cost loan limit for the GSEs of 132 percent of the conforming loan limit (currently, this would allow for the purchase of loans up to $550,000); (iii) prohibit the GSEs from holding loans purchased with principal obligations greater than the normal conforming limit on their portfolios, either as whole loans or mortgage-backed securities, except to the extent that such loans are held for the purposes of securitization; (iv) establish in the Federal Housing Administration the “HOPE for Homeowners Program,” which is a voluntary program on the part of homeowners and existing loan holders to insure refinanced loans for distressed borrowers and allow homeowners to avoid foreclosure by reducing the principle balance outstanding and interest rate charged on their mortgages; and (v) establish a licensing system for all loan originators to help standardize requirements for mortgage brokers and ensure that they meet minimum educational and performance standards. The legislation passed by a vote of 19-2. For a copy of the bill, please see http://banking.senate.gov/public/_files/GSEBill.pdf. For a copy of the manager’s amendment, please see http://banking.senate.gov/public/_files/ManagersAmendmenttoGSEBill.pdf.
American Securitization Forum Releases Guidelines for Reimbursement of Counseling Expenses in Residential Mortgage-Backed Securitizations. On May 20, the American Securitization Forum (ASF) released guidelines for the reimbursement of counseling expenses in residential mortgage-backed securitizations. The guidelines were adopted pursuant to the ASF “Statement on Reimbursement of Counseling Expenses in Residential Mortgage-Backed Securitizations,” released on October 10, 2007. Pursuant to the guidelines, mortgage loan servicers can consider the expenses of counseling borrowers as servicing advances so long as this is permitted by the terms of the securitizations in question. As such, the counseling expenses would be reimbursable from securitization trust cashflows for loans that are in default or where default is reasonably foreseeable, or where the servicer concludes that counseling is likely to mitigate losses and maximize recovery under the loan. The guidelines are in effect until July 31, 2010. For a copy of the guidelines, please see http://www.buckleykolar.com/documents/ASFCounselingFundingGuidelines.pdf.
Home-Buying Consulting Service Reaches Settlement with FTC Over Alleged Credit Repair Violations. A home-buying consulting service charged with violating the Credit Repair Organizations Act (CROA) and the Federal Trade Commission Act by falsely claiming that they can remove negative information from a consumer’s credit report, even if information is correct, has agreed to settle with the Federal Trade Commission (FTC). Consumers are led to Home Buyer’s Consulting Network, Inc. (HBCN) both through its web sites and through a company that sells lists of foreclosed properties and suggests that its customers call HBCN if they need credit report or access to zero- or low-down payment home financing. In connection with its credit repair business, HBCN claims that its program “offers the ability to REPAIR, RESTORE, or ESTABLISH your credit so that you may be able qualify for 100% home financing, lower interest rates and better quality credit.” HBCN typically requires advance payment of at least $99 for those credit repair services. HBCN and Douglas A. Moore, HBCN’s president, CEO and majority shareholder, were charged with violating the CROA by falsely claiming that HBCN can remove negative information from consumers’ credit reports, including bankruptcies, even if the information is accurate and timely. In addition, HBCN allegedly violated the CROA by requiring advance payment from consumers for credit repair services. For a copy of the FTC press release, please see http://www.ftc.gov/opa/2008/05/hbcn.shtm.
Minnesota Legislature Passes Subprime Borrower Relief Act. On May 19, the Minnesota legislature presented the Minnesota Subprime Foreclosure Deferment Act (the “Act”) to Governor Tim Pawlenty. If signed by the Governor, the Act will give borrowers the right to defer a foreclosure sale of their residence for one year after the bill becomes law if their loan is (i) a subprime loan, or (ii) a loan with negative amortization for which the required minimum payment of principal and interest increased after the date the loan was originated. Every foreclosing lender would be required to send to each borrower who has an eligible foreclosed loan a notice of right to deferment. During the deferment period, the borrower would be required to make reduced monthly payments, and a borrower who fails to pay such reduced monthly payments will lose the right to deferment. Such reduced payments would be the lesser of: (1) the minimum monthly payment of principal and interest on the date the loan was originated; or (2) 65 percent of the minimum monthly payment of principal and interest at the time the borrower defaulted prior to foreclosure. If signed by the Governor, the bill will become effective seven days following final enactment. For a copy of the bill, please see http://www.buckleykolar.com/documents/MNSF3396.pdf.
Oregon Adopts Temporary Rule to Require Reports From Mortgage Bankers and Brokers. On May 6, the Oregon Department of Consumer and Business Services, Division of Finance and Corporate Securities (the “Department”), implemented S.B. 1064 by adopting a temporary rule, Or. Admin. Rule 441-865-0022, which requires mortgage bankers and mortgage brokers to file a report with the Department concerning their residential mortgage activity, and specifies what data must be included in such report. The temporary rule requires mortgage bankers and mortgage brokers to report the types of loans made, the purpose of the loans, and the loans’ features (e.g., variable interest rates, prepayment penalties, etc.). The temporary rule applies to residential mortgage activity from January 1, 2007, to December 31, 2007. Mortgage brokers and bankers must file their report by August 30, 2008. The temporary rule became effective upon filing, and will remain in effect through October 31, 2008. For a copy of the temporary rule, please see http://www.dfcs.oregon.gov/rules_statutes/rulemaking/441-865-0022.pdf.
Oklahoma Amends Education Requirements for Mortgage Brokers and Mortgage Loan Originators. On May 20, Oklahoma Governor Brad Henry signed S.B. 1927 and S.B. 1928 to amend education requirements pursuant to the Mortgage Broker Licensure Act, Okla. Stat. tit. 59 § 2081 et seq. S.B. 1927 will require mortgage broker applicants to have completed 20 hours of approved education during the three years immediately preceding the date of application, and will require mortgage loan originator applicants to have completed 16 hours of approved education during the three years immediately preceding the date of application. S.B. 1928 specifies that continuing education courses for mortgage broker and mortgage loan originator licensees must examine the individual to the satisfaction of the standards as established by the National Association of Mortgage Brokers. Both new laws become effective November 1, 2008. For a copy of S.B. 1927, please see http://www.sos.state.ok.us/documents/Legislation/51st/2008/2R/SB/1927.pdf. For a copy of S.B. 1928, please see http://www.sos.state.ok.us/documents/Legislation/51st/2008/2R/SB/1928.pdf.
Georgia To Participate In Nation-Wide Automated Residential Mortgage Licensing System. On April 28, Georgia Governor Sonny Perdue signed H.B. 921 to establish Georgia’s participation in a nation-wide residential mortgage licensing system to facilitate the sharing of information and standardization of the licensing and application processes for mortgage brokers and mortgage lenders. Irrespective of its participation in a nation-wide residential mortgage licensing system, the Georgia Department of Banking and Finance retains full and exclusive authority over determinations whether to grant, renew, or revoke licenses issued to mortgage brokers and mortgage lenders under Ga. Code § 7-1-1000 et seq. H.B. 921 becomes effective July 1, 2008. For a copy of the bill, please see http://www.legis.ga.gov/legis/2007_08/pdf/hb921.pdf.
Supreme Court Conference Scheduled in FCRA Willfulness Case. The U.S. Supreme Court announced that it will consider a suggestion of mootness and motion to vacate the judgment of the U.S. Court of Appeals for the Third Circuit in Whitfield v. Radian Guaranty, Inc., No. 07-834, at its conference of June 5, 2008. See http://www.supremecourtus.gov/docket/07-834.htm. As previously reported, Radian filed a petition for certiorari with the Supreme Court on the issue of whether it could have willfully violated the Fair Credit Reporting Act (FCRA) when it did not provide an adverse action notice to borrowers who accepted a loan with a higher-than-normal mortgage insurance rate (see InfoBytes, Nov. 9, 2007). Five major financial-services trade associations filed an amicus brief in support of a petition, with Buckley Kolar serving as lead counsel (see InfoBytes, Feb. 1, 2008). At issue in this case is whether “willfulness” under FCRA is an objective standard that can be determined by the court as a matter of law or is a subjective standard that requires factual development. The Third Circuit had directed the district court to treat the question of whether the mortgage insurer violated FCRA willfully as a factual, rather than legal, question (reported in the InfoBytes, Aug. 31, 2007 ). FCRA provides for statutory damages of $100-$1,000 for willful violations but only actual damages for negligent violations. Radian sought certiorari on the basis of the U.S. Supreme Court’s holding in Safeco Insurance Co. of America v. Burr, 127 S. Ct. 2201 (2007) (reported in the InfoBytes Special Alert, June 4, 2007). In Safeco, the Supreme Court held that an insurance company’s interpretation of FCRA’s adverse action requirement, although wrong, was not “objectively unreasonable” at the time of the transaction, and, therefore, could not be “willful” under FCRA. Radian’s petition for certiorari argued that Safeco required reversal of the Third Circuit’s holding. After receiving several extensions on filing their response to the petition, the plaintiffs unilaterally dismissed their case in the U.S. District Court without ever responding. Radian then filed a suggestion of mootness and motion to vacate the judgment of the Third Circuit. If the Supreme Court grants the motion, the effect will be that the Third Circuit’s opinion will no longer have value as a precedent. For a copy of Radian’s suggestion of mootness and motion to vacate the judgment, see http://www.buckleykolar.com/documents/RadianvWhitfield-SuggestionofMootness.pdf.
MBA Releases New Commercial/Multifamily Property Inspection Form. On May 22, the Mortgage Bankers Association (MBA) announced completion and implementation of a new commercial/multifamily real estate property inspection form for various property types, including office, retail, multifamily, healthcare, lodging and industrial. The updated inspection form already has industry-wide adoption by servicers for all funding sources, including Fannie Mae and Freddie Mac. The form will not be used by the Federal Housing Administration). Eight years ago, the MBA released the first industry-accepted commercial real estate property inspection form. Introduction of the new form reinforces standards of accuracy and effectiveness for inspection of property while expanding industry adoption to include Fannie Mae and Freddie Mac. Additionally, this 2008 form takes advantage of electronic data management and is MISMO-compliant. For a copy of the Commercial/Multifamily Property Inspection Form, please see http://www.mortgagebankers.org/.
Banking
Ohio Legislature Dramatically Restricts Payday Lending. The Ohio legislature has sent to Governor Ted Strickland a bill that would effectively eliminate payday lending in the state. The legislation, Substitute House Bill Number 545, would repeal the state’s Check-Cashing Lender Law and would create the Short Term Lender Law. This legislation would limit borrowers to four short-term loans per year and would cap annual interest rates at 28 percent. The bill also would limit loan amounts to $500 per loan, or 25 percent of a consumer’s base monthly pay, whichever is less. The bill would also impose restrictions on debt collectors of short-term loans, and it would apply the state’s Consumer Sales Practices Act to short-term lenders. The Governor is expected to sign the bill some time next week. For a copy of the legislation, please see http://www.buckleykolar.com/documents/OHHB545.pdf.
Court Allows FCRA Claim for Lender’s Failure to Correct Own Error. On May 14, a federal district court held that failing to correct information provided to a consumer credit reporting agency was a “willful” violation for the purposes of the Fair Credit Reporting Act (FCRA). Johnson v. Wells Fargo Home Mortgage Inc., No. 3:05-CV-0321-RAM, 2008 WL 2074001 (D. Nev. May 14, 2008). The defendant lender misapplied the borrower’s payment to another loan of the borrower’s, causing the first loan to become delinquent. The borrower alleged that this inaccurate information caused a decrease in his credit score making it more difficult for him to secure credit. The court dismissed most of the borrower’s claims because they were based on credit for commercial purposes, which is not covered by FCRA. The court also granted summary judgment for any claims arising before the consumer reporting agency’s request the lender reinvestigate the borrower’s delinquency. However, for the claims that did survive, the court refused to dismiss claims for punitive damages, holding “acknowledging its own error and refusing to correct it, while still reporting negative information to the CRAs, certainly qualifies as willfulness under the FCRA.” For a copy of this decision, please see http://www.buckleykolar.com/documents/JohnsonvWellsFargo.pdf.
Consumer Finance
FTC Announces Telemarketing Fraud Sweep, Unveils Consumer Ed Campaign. On May 20, the Federal Trade Commission (FTC) announced Operation Tele-PHONEY, a telemarketing fraud sweep being carried out alongside more than 30 international, federal, state and local law enforcement agencies. As a result of the sweep, the FTC filed complaints against thirteen telemarketers alleging violations ranging from offering phony tax rebates to violating the rules of the Do-Not-Call Registry. In one case, the defendants allegedly used unauthorized consumer bank account information to levy billing charges for unordered products. The FTC states that, in addition to obtaining temporary restraining orders in eleven of the cases, it will seek to permanently bar the defendants from further violating federal law. In conjunction with its announcement, the FTC began a consumer education campaign offering tips to consumers for identifying, preventing, and reporting telemarketing fraud. For more information on the court filings and education campaign, please see http://www.ftc.gov/opa/2008/05/telephoney.shtm
Home-Buying Consulting Service Reaches Settlement with FTC Over Alleged Credit Repair Violations. A home-buying consulting service charged with violating the Credit Repair Organizations Act (CROA) and the Federal Trade Commission Act by falsely claiming that they can remove negative information from a consumer’s credit report, even if information is correct, has agreed to settle with the Federal Trade Commission (FTC). Consumers are led to Home Buyer’s Consulting Network, Inc. (HBCN) both through its web sites and through a company that sells lists of foreclosed properties and suggests that its customers call HBCN if they need credit report or access to zero- or low-down payment home financing. In connection with its credit repair business, HBCN claims that its program “offers the ability to REPAIR, RESTORE, or ESTABLISH your credit so that you may be able qualify for 100% home financing, lower interest rates and better quality credit.” HBCN typically requires advance payment of at least $99 for those credit repair services. HBCN and Douglas A. Moore, HBCN’s president, CEO and majority shareholder, were charged with violating the CROA by falsely claiming that HBCN can remove negative information from consumers’ credit reports, including bankruptcies, even if the information is accurate and timely. In addition, HBCN allegedly violated the CROA by requiring advance payment from consumers for credit repair services. For a copy of the FTC press release, please see http://www.ftc.gov/opa/2008/05/hbcn.shtm.
Ohio Legislature Dramatically Restricts Payday Lending. The Ohio legislature has sent to Governor Ted Strickland a bill that would effectively eliminate payday lending in the state. The legislation, Substitute House Bill Number 545, would repeal the state’s Check-Cashing Lender Law and would create the Short Term Lender Law. This legislation would limit borrowers to four short-term loans per year and would cap annual interest rates at 28 percent. The bill also would limit loan amounts to $500 per loan, or 25 percent of a consumer’s base monthly pay, whichever is less. The bill would also impose restrictions on debt collectors of short-term loans, and it would apply the state’s Consumer Sales Practices Act to short-term lenders. The Governor is expected to sign the bill some time next week. For a copy of the legislation, please see http://www.buckleykolar.com/documents/OHHB545.pdf.
Court Allows FCRA Claim for Lender’s Failure to Correct Own Error. On May 14, a federal district court held that failing to correct information provided to a consumer credit reporting agency was a “willful” violation for the purposes of the Fair Credit Reporting Act (FCRA). Johnson v. Wells Fargo Home Mortgage Inc., No. 3:05-CV-0321-RAM, 2008 WL 2074001 (D. Nev. May 14, 2008). The defendant lender misapplied the borrower’s payment to another loan of the borrower’s, causing the first loan to become delinquent. The borrower alleged that this inaccurate information caused a decrease in his credit score making it more difficult for him to secure credit. The court dismissed most of the borrower’s claims because they were based on credit for commercial purposes, which is not covered by FCRA. The court also granted summary judgment for any claims arising before the consumer reporting agency’s request the lender reinvestigate the borrower’s delinquency. However, for the claims that did survive, the court refused to dismiss claims for punitive damages, holding “acknowledging its own error and refusing to correct it, while still reporting negative information to the CRAs, certainly qualifies as willfulness under the FCRA.” For a copy of this decision, please see http://www.buckleykolar.com/documents/JohnsonvWellsFargo.pdf.
Termination of Business Relationship Ends Authorization to Pull Credit. On May 12, a Magistrate Judge for the U.S. District Court for the Eastern District of Virginia denied a defendant’s summary judgment motion regarding the plaintiffs’ Fair Credit Reporting Act (FCRA) claim on the basis that a genuine issue of material fact exists as to when the business relationship between plaintiffs and defendant terminated. Drewry v. Starr Motors, Inc., 2008 WL 2035607, No. 3:07CV624 (E.D. Va. May 12, 2008). In this case, Drewry (and others) purchased a car from Starr Motors, Inc. (Starr) and requested financing, but their credit application was denied by two separate financial institutions. Defendant then offered to finance the purchase itself, but plaintiffs decided not to pursue financing any further and returned the car. Plaintiffs later filed a complaint, which, among other things, claimed that Starr violated FCRA by pulling their credit report without having a permissible purpose. The judge found that the question of whether Starr had a permissible purpose to pull Drewry’s credit report a third time hinged on a factual determination of whether a business relationship still existed between the Drewry and Starr. The judge therefore denied summary judgment and forwarded this issue to trial for determination. For a copy of the opinion, please see http://www.buckleykolar.com/documents/DrewryvStarrMotors.pdf.
Securities
American Securitization Forum Releases Guidelines for Reimbursement of Counseling Expenses in Residential Mortgage-Backed Securitizations. On May 20, the American Securitization Forum (ASF) released guidelines for the reimbursement of counseling expenses in residential mortgage-backed securitizations. The guidelines were adopted pursuant to the ASF “Statement on Reimbursement of Counseling Expenses in Residential Mortgage-Backed Securitizations,” released on October 10, 2007. Pursuant to the guidelines, mortgage loan servicers can consider the expenses of counseling borrowers as servicing advances so long as this is permitted by the terms of the securitizations in question. As such, the counseling expenses would be reimbursable from securitization trust cashflows for loans that are in default or where default is reasonably foreseeable, or where the servicer concludes that counseling is likely to mitigate losses and maximize recovery under the loan. The guidelines are in effect until July 31, 2010. For a copy of the guidelines, please see http://www.buckleykolar.com/documents/ASFCounselingFundingGuidelines.pdf .
FINRA Issues Guidance to Broker-Dealers on “Improving Examination Results”. On May 21, the Financial Industry Regulatory Authority (FINRA) issued guidance to assist member broker-dealer firms with improving their compliance efforts and examination results. The publication imparts FINRA’s priorities in an examination and discusses frequently found deficiencies relating to FINRA’s examination program. FINRA’s list of examination priorities, though not exhaustive, addresses topics such as senior investors, deferred variable annuities, anti-money laundering, and business continuity. In the section on frequently found deficiencies, FINRA sets out recently discovered violations, the relevant rules, and also details a solution. For more information, see the publication at http://www.finra.org/RulesRegulation/ComplianceTools/ImprovingExamResults/p038526 .
Insurance
FTC Testifies on Progress of Credit-Based Insurance Score Study. On May 21, the Federal Trade Commission (FTC) testified before the U.S. House Financial Services Committee, Subcommittee on Oversight and Investigations, to provide an update on the progress of its study on the use of credit-based insurance scores in homeowners insurance. Insurance companies have increasingly used information about credit history in the form of credit-based insurance scores to decide whether to offer consumers insurance, and if so, at what price. Pursuant to Section 215 of the Fair and Accurate Transactions Act (FACTA), the FTC is directed to study and report on the impact of credit-based insurance scores on consumers of homeowners insurance. The testimony stated that the FTC intends to use this authority to issue orders to the nine largest homeowners insurance companies to obtain data for its study. The testimony explained that, prior to issuing these orders, the FTC is seeking input from all interested parties on the information that the draft model order would require homeowners insurance companies to produce. For a copy of the draft model order, please see http://www.ftc.gov/be/080519draftmodelordercredbasedinsurscore.pdf.The FTC will be accepting public comment on the draft model order for 30 days. For a copy of the FTC testimony, please see http://www.ftc.gov/os/2008/05/080521creditbasedtest.pdf.
Supreme Court Conference Scheduled in FCRA Willfulness Case. The U.S. Supreme Court announced that it will consider a suggestion of mootness and motion to vacate the judgment of the U.S. Court of Appeals for the Third Circuit in Whitfield v. Radian Guaranty, Inc., No. 07-834, at its conference of June 5, 2008. See http://www.supremecourtus.gov/docket/07-834.htm. As previously reported, Radian filed a petition for certiorari with the Supreme Court on the issue of whether it could have willfully violated the Fair Credit Reporting Act (FCRA) when it did not provide an adverse action notice to borrowers who accepted a loan with a higher-than-normal mortgage insurance rate (see InfoBytes, Nov. 9, 2007). Five major financial-services trade associations filed an amicus brief in support of a petition, with Buckley Kolar serving as lead counsel (see InfoBytes, Feb. 1, 2008). At issue in this case is whether “willfulness” under FCRA is an objective standard that can be determined by the court as a matter of law or is a subjective standard that requires factual development. The Third Circuit had directed the district court to treat the question of whether the mortgage insurer violated FCRA willfully as a factual, rather than legal, question (reported in the InfoBytes, Aug. 31, 2007 ). FCRA provides for statutory damages of $100-$1,000 for willful violations but only actual damages for negligent violations. Radian sought certiorari on the basis of the U.S. Supreme Court’s holding in Safeco Insurance Co. of America v. Burr, 127 S. Ct. 2201 (2007) (reported in the InfoBytes Special Alert, June 4, 2007). In Safeco, the Supreme Court held that an insurance company’s interpretation of FCRA’s adverse action requirement, although wrong, was not “objectively unreasonable” at the time of the transaction, and, therefore, could not be “willful” under FCRA. Radian’s petition for certiorari argued that Safeco required reversal of the Third Circuit’s holding. After receiving several extensions on filing their response to the petition, the plaintiffs unilaterally dismissed their case in the U.S. District Court without ever responding. Radian then filed a suggestion of mootness and motion to vacate the judgment of the Third Circuit. If the Supreme Court grants the motion, the effect will be that the Third Circuit’s opinion will no longer have value as a precedent. For a copy of Radian’s suggestion of mootness and motion to vacate the judgment, see http://www.buckleykolar.com/documents/RadianvWhitfield-SuggestionofMootness.pdf.
Litigation
Supreme Court Conference Scheduled in FCRA Willfulness Case. The U.S. Supreme Court announced that it will consider a suggestion of mootness and motion to vacate the judgment of the U.S. Court of Appeals for the Third Circuit in Whitfield v. Radian Guaranty, Inc., No. 07-834, at its conference of June 5, 2008. See http://www.supremecourtus.gov/docket/07-834.htm. As previously reported, Radian filed a petition for certiorari with the Supreme Court on the issue of whether it could have willfully violated the Fair Credit Reporting Act (FCRA) when it did not provide an adverse action notice to borrowers who accepted a loan with a higher-than-normal mortgage insurance rate (see InfoBytes, Nov. 9, 2007). Five major financial-services trade associations filed an amicus brief in support of a petition, with Buckley Kolar serving as lead counsel (see InfoBytes, Feb. 1, 2008). At issue in this case is whether “willfulness” under FCRA is an objective standard that can be determined by the court as a matter of law or is a subjective standard that requires factual development. The Third Circuit had directed the district court to treat the question of whether the mortgage insurer violated FCRA willfully as a factual, rather than legal, question (reported in the InfoBytes, Aug. 31, 2007 ). FCRA provides for statutory damages of $100-$1,000 for willful violations but only actual damages for negligent violations. Radian sought certiorari on the basis of the U.S. Supreme Court’s holding in Safeco Insurance Co. of America v. Burr, 127 S. Ct. 2201 (2007) (reported in the InfoBytes Special Alert, June 4, 2007). In Safeco, the Supreme Court held that an insurance company’s interpretation of FCRA’s adverse action requirement, although wrong, was not “objectively unreasonable” at the time of the transaction, and, therefore, could not be “willful” under FCRA. Radian’s petition for certiorari argued that Safeco required reversal of the Third Circuit’s holding. After receiving several extensions on filing their response to the petition, the plaintiffs unilaterally dismissed their case in the U.S. District Court without ever responding. Radian then filed a suggestion of mootness and motion to vacate the judgment of the Third Circuit. If the Supreme Court grants the motion, the effect will be that the Third Circuit’s opinion will no longer have value as a precedent. For a copy of Radian’s suggestion of mootness and motion to vacate the judgment, see http://www.buckleykolar.com/documents/RadianvWhitfield-SuggestionofMootness.pdf.
Electronic Signature on Uniform Traffic Ticket Sufficient Under New York Law. On May 6, a New York state court held that a police officer’s pre-programmed electronic signature on a “simplified” traffic ticket was sufficient to comply with a regulation governing local criminal court accusatory instruments and New York’s Electronic Signatures and Records Act. People v. Patanian, 2008 WL 1968544 (N.Y. Just. Ct. May 6, 2008). The process used in issuing such traffic tickets involves inputting information into a system and printing a ticket with the issuing officer’s pre-programmed signature. The defendant argued that, “while the simplified traffic information sets forth the words ‘Affirmed under penalty of perjury’ and then the pre-printed signature of [the issuing officer], the affirmation is ineffective because no actual signature is physically made and no other act suggesting some other acknowledgement or affirmation was made.” Although the court concluded that some affirmation or verification was necessary on a simplified traffic ticket, it held that “the officer met all requirements under the Electronic Signature and Records Act by preparing the simplified traffic informations personally and thereafter printing them and immediately serving the same to the Defendant allegedly at the time of the arrest.” According to the court, no further authentication or affirmation was required. “Under [these] circumstances, the need for a prompt or additional button formally affirming the uniform traffic ticket seems redundant in nature.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/PeoplevPatanian.pdf.
Court Finds Knowledge of FACTA Sufficient for Willful Violation. On May 9, the U.S. District Court for the District of Kansas denied the defendants’ motion to dismiss or, in the alternative, for a more definite statement, finding that the plaintiffs had alleged facts sufficient to plausibly prove a willful violation of the Fair and Accurate Credit Transactions Act (FACTA). In re TJX Companies, Inc. Fair and Accurate Credit Transactions Act Litigation, MDL No. 1853, No 07-md-1853-KHV, 2008 WL 2020375 (D. Kan. May 9, 2008). The consumer plaintiffs in this multidistrict putative class action alleged that the defendants violated FACTA by printing the expiration dates of their credit or debit cards on their transaction receipts. The defendants argued that the plaintiffs had not alleged willful violation of FACTA because mere knowledge of the statute and other retailers’ compliance with its terms are not sufficient to show knowing or reckless noncompliance. However, the court found this argument unpersuasive, noting that the plaintiffs’ allegations were typical of FACTA claims, and that courts have almost uniformly rejected that such allegations do not sufficiently allege willful violations. For a copy of the opinion, please see http://www.buckleykolar.com/documents/InreTJXCompaniesFACTALit.pdf.
Court Allows FCRA Claim for Lender’s Failure to Correct Own Error. On May 14, a federal district court held that failing to correct information provided to a consumer credit reporting agency was a “willful” violation for the purposes of the Fair Credit Reporting Act (FCRA). Johnson v. Wells Fargo Home Mortgage Inc., No. 3:05-CV-0321-RAM, 2008 WL 2074001 (D. Nev. May 14, 2008). The defendant lender misapplied the borrower’s payment to another loan of the borrower’s, causing the first loan to become delinquent. The borrower alleged that this inaccurate information caused a decrease in his credit score making it more difficult for him to secure credit. The court dismissed most of the borrower’s claims because they were based on credit for commercial purposes, which is not covered by FCRA. The court also granted summary judgment for any claims arising before the consumer reporting agency’s request the lender reinvestigate the borrower’s delinquency. However, for the claims that did survive, the court refused to dismiss claims for punitive damages, holding “acknowledging its own error and refusing to correct it, while still reporting negative information to the CRAs, certainly qualifies as willfulness under the FCRA.” For a copy of this decision, please see http://www.buckleykolar.com/documents/JohnsonvWellsFargo.pdf.
Termination of Business Relationship Ends Authorization to Pull Credit. On May 12, a Magistrate Judge for the U.S. District Court for the Eastern District of Virginia denied a defendant’s summary judgment motion regarding the plaintiffs’ Fair Credit Reporting Act (FCRA) claim on the basis that a genuine issue of material fact exists as to when the business relationship between plaintiffs and defendant terminated. Drewry v. Starr Motors, Inc., 2008 WL 2035607, No. 3:07CV624 (E.D. Va. May 12, 2008). In this case, Drewry (and others) purchased a car from Starr Motors, Inc. (Starr) and requested financing, but their credit application was denied by two separate financial institutions. Defendant then offered to finance the purchase itself, but plaintiffs decided not to pursue financing any further and returned the car. Plaintiffs later filed a complaint, which, among other things, claimed that Starr violated FCRA by pulling their credit report without having a permissible purpose. The judge found that the question of whether Starr had a permissible purpose to pull Drewry’s credit report a third time hinged on a factual determination of whether a business relationship still existed between the Drewry and Starr. The judge therefore denied summary judgment and forwarded this issue to trial for determination. For a copy of the opinion, please see http://www.buckleykolar.com/documents/DrewryvStarrMotors.pdf.
E-Financial Services
MBA Releases New Commercial/Multifamily Property Inspection Form. On May 22, the Mortgage Bankers Association (MBA) announced completion and implementation of a new commercial/multifamily real estate property inspection form for various property types, including office, retail, multifamily, healthcare, lodging and industrial. The updated inspection form already has industry-wide adoption by servicers for all funding sources, including Fannie Mae and Freddie Mac. The form will not be used by the Federal Housing Administration). Eight years ago, the MBA released the first industry-accepted commercial real estate property inspection form. Introduction of the new form reinforces standards of accuracy and effectiveness for inspection of property while expanding industry adoption to include Fannie Mae and Freddie Mac. Additionally, this 2008 form takes advantage of electronic data management and is MISMO-compliant. For a copy of the Commercial/Multifamily Property Inspection Form, please see http://www.mortgagebankers.org/.
Electronic Signature on Uniform Traffic Ticket Sufficient Under New York Law. On May 6th, a New York state court held that a police officer’s pre-programmed electronic signature on a “simplified” traffic ticket was sufficient to comply with a regulation governing local criminal court accusatory instruments and New York’s Electronic Signatures and Records Act. People v. Patanian, 2008 WL 1968544 (N.Y. Just. Ct. May 6, 2008). The process used in issuing such traffic tickets involves inputting information into a system and printing a ticket with the issuing officer’s pre-programmed signature. The defendant argued that, “while the simplified traffic information sets forth the words ‘Affirmed under penalty of perjury’ and then the pre-printed signature of [the issuing officer], the affirmation is ineffective because no actual signature is physically made and no other act suggesting some other acknowledgement or affirmation was made.” Although the court concluded that some affirmation or verification was necessary on a simplified traffic ticket, it held that “the officer met all requirements under the Electronic Signature and Records Act by preparing the simplified traffic informations personally and thereafter printing them and immediately serving the same to the Defendant allegedly at the time of the arrest.” According to the court, no further authentication or affirmation was required. “Under [these] circumstances, the need for a prompt or additional button formally affirming the uniform traffic ticket seems redundant in nature.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/PeoplevPatanian.pdf.
Court Finds Knowledge of FACTA Sufficient for Willful Violation. On May 9, the U.S. District Court for the District of Kansas denied the defendants’ motion to dismiss or, in the alternative, for a more definite statement, finding that the plaintiffs had alleged facts sufficient to plausibly prove a willful violation of the Fair and Accurate Credit Transactions Act (FACTA). In re TJX Companies, Inc. Fair and Accurate Credit Transactions Act Litigation, MDL No. 1853, No 07-md-1853-KHV, 2008 WL 2020375 (D. Kan. May 9, 2008). The consumer plaintiffs in this multidistrict putative class action alleged that the defendants violated FACTA by printing the expiration dates of their credit or debit cards on their transaction receipts. The defendants argued that the plaintiffs had not alleged willful violation of FACTA because mere knowledge of the statute and other retailers’ compliance with its terms are not sufficient to show knowing or reckless noncompliance. However, the court found this argument unpersuasive, noting that the plaintiffs’ allegations were typical of FACTA claims, and that courts have almost uniformly rejected that such allegations do not sufficiently allege willful violations. For a copy of the opinion, please see http://www.buckleykolar.com/documents/InreTJXCompaniesFACTALit.pdf.
Privacy/Data Security
Georgia Governor Signs Credit Freeze Bill into Law. On May 13, Georgia Governor Sonny Perdue signed H.B. 130 into law making Georgia the 44th state where residents are allowed to order a security freeze on their credit report to prevent identity thieves from affecting their credit reports. Under the new law, which goes into effect on August 1, 2008, a credit reporting agency must place a security freeze on an individual’s credit report within three business days of receiving the consumer’s written request via certified mail to do so. The security freeze will then remain in place until the consumer requests its removal. The law also contains procedures for the temporary lifting of the security freeze. The new law enumerates the permissible fees that a credit reporting agencies may charge a consumer for credit freeze services, but restricts the agencies from charging consumers who are victims of identity theft and those who are age 65 or older. For the full text of the new law, please see http://www.legis.ga.gov/legis/2007_08/pdf/hb130.pdf.
Court Finds Knowledge of FACTA Sufficient for Willful Violation. On May 9, the U.S. District Court for the District of Kansas denied the defendants’ motion to dismiss or, in the alternative, for a more definite statement, finding that the plaintiffs had alleged facts sufficient to plausibly prove a willful violation of the Fair and Accurate Credit Transactions Act (FACTA). In re TJX Companies, Inc. Fair and Accurate Credit Transactions Act Litigation, MDL No. 1853, No 07-md-1853-KHV, 2008 WL 2020375 (D. Kan. May 9, 2008). The consumer plaintiffs in this multidistrict putative class action alleged that the defendants violated FACTA by printing the expiration dates of their credit or debit cards on their transaction receipts. The defendants argued that the plaintiffs had not alleged willful violation of FACTA because mere knowledge of the statute and other retailers’ compliance with its terms are not sufficient to show knowing or reckless noncompliance. However, the court found this argument unpersuasive, noting that the plaintiffs’ allegations were typical of FACTA claims, and that courts have almost uniformly rejected that such allegations do not sufficiently allege willful violations. For a copy of the opinion, please see http://www.buckleykolar.com/documents/InreTJXCompaniesFACTALit.pdf.
Termination of Business Relationship Ends Authorization to Pull Credit. On May 12, a Magistrate Judge for the U.S. District Court for the Eastern District of Virginia denied a defendant’s summary judgment motion regarding the plaintiffs’ Fair Credit Reporting Act (FCRA) claim on the basis that a genuine issue of material fact exists as to when the business relationship between plaintiffs and defendant terminated. Drewry v. Starr Motors, Inc., 2008 WL 2035607, No. 3:07CV624 (E.D. Va. May 12, 2008). In this case, Drewry (and others) purchased a car from Starr Motors, Inc. (Starr) and requested financing, but their credit application was denied by two separate financial institutions. Defendant then offered to finance the purchase itself, but plaintiffs decided not to pursue financing any further and returned the car. Plaintiffs later filed a complaint, which, among other things, claimed that Starr violated FCRA by pulling their credit report without having a permissible purpose. The judge found that the question of whether Starr had a permissible purpose to pull Drewry’s credit report a third time hinged on a factual determination of whether a business relationship still existed between the Drewry and Starr. The judge therefore denied summary judgment and forwarded this issue to trial for determination. For a copy of the opinion, please see http://www.buckleykolar.com/documents/DrewryvStarrMotors.pdf.
Credit Cards
FRB Publishes Proposed UDAP and Related Rules on Consumer Credit Card and Overdraft Practices. On May 19, the Federal Reserve Board (FRB), together with the Office of Thrift Supervision and National Credit Union Administration, published in the Federal Register its proposal to revise Regulation AA (Unfair or Deceptive Acts of Practices or “UDAP”) as it applies to consumer credit card practices and overdraft practices on consumer checking accounts (first reported in InfoBytes, May 2, 2008). See 73 Fed. Reg. 28,904 (May 19, 2008). The FRB also published proposals making related changes to Regulation Z (Truth in Lending), see id. at 28,866, and Regulation DD (Truth in Savings). See id. at 28,739. Comments are due on the Regulation AA proposal by August 4, 2008 and on the Regulation Z and Regulation DD proposals by July 18, 2008.
The Regulation AA or UDAP proposal as it applies to credit card practices would (1) eliminate interest rate increases on existing balances, subject to exceptions for rate changes due to the operation of a variable rate index, the expiration or termination of a promotion, or default due to a late payment of 30 days or more; (2) establish payment allocation rules for accounts with multiple interest rates; (3) eliminate double-cycle billing; (4) limit upfront fees on subprime credit cards to 50% of the credit line, while allowing no more than 25% of such fees to be billed during the first billing period; (5) establish a de facto 21 day standard for the period between a statement mailing date and payment due date through the use of a safe harbor technique; (6) require a “tiered” or multiple rate offer to disclose the factors used to determine a consumer’s actual rate; and (7) prohibit the imposition of over the credit limit fees in cases where the creditor has placed a credit hold on an account. For a copy of the Regulation AA, Z, and DD proposals, please see http://www.buckleykolar.com/documents/FedUDAPProposedRuleMay2008.pdf, http://www.buckleykolar.com/documents/FedTILAProposedRuleMay2008.pdf, and http://www.buckleykolar.com/documents/FedTruthinSavingsProposedRuleMay2008.pdf, respectively.
Court Finds Knowledge of FACTA Sufficient for Willful Violation. On May 9, the U.S. District Court for the District of Kansas denied the defendants’ motion to dismiss or, in the alternative, for a more definite statement, finding that the plaintiffs had alleged facts sufficient to plausibly prove a willful violation of the Fair and Accurate Credit Transactions Act (FACTA). In re TJX Companies, Inc. Fair and Accurate Credit Transactions Act Litigation, MDL No. 1853, No 07-md-1853-KHV, 2008 WL 2020375 (D. Kan. May 9, 2008). The consumer plaintiffs in this multidistrict putative class action alleged that the defendants violated FACTA by printing the expiration dates of their credit or debit cards on their transaction receipts. The defendants argued that the plaintiffs had not alleged willful violation of FACTA because mere knowledge of the statute and other retailers’ compliance with its terms are not sufficient to show knowing or reckless noncompliance. However, the court found this argument unpersuasive, noting that the plaintiffs’ allegations were typical of FACTA claims, and that courts have almost uniformly rejected that such allegations do not sufficiently allege willful violations. For a copy of the opinion, please see http://www.buckleykolar.com/documents/InreTJXCompaniesFACTALit.pdf.