InfoBytes, November 13, 2009
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Insurance
- Litigation
- E-Financial Services
- Privacy/Data Security
Federal Issues
HUD Announces Four-Month Period of “Restraint” to Enforce New RESPA Rule. On November 13, the U.S. Department of Housing and Urban Development (HUD) announced that the staff of its Mortgagee Review Board (MRB) will exercise “restraint” in enforcing new regulatory requirements under the Real Estate Settlement Procedures Act (RESPA), which are set to become fully effective on January 1, 2010, against certain entities for the first four months of 2010. According to HUD, the MRB will exercise such restraint for Federal Housing Administration (FHA)-approved lenders that have demonstrated that they are making a “good faith effort” to comply with the new requirements. In determining whether a mortgagee has made a good faith effort, MRB staff will consider (i) whether the mortgagee has relied on the new RESPA rule (the Rule) and other written guidance issued by HUD, and (ii) the extent to which the mortgagee has made sufficient investment and commitment in technology, training, and quality control designed to comply with the Rule. Additionally, HUD is asking other federal and relevant state enforcement agencies to exercise the same 120-day restraint in enforcement for non-FHA originators and other settlement service providers who demonstrate a good faith effort to implement the Rule. For a copy of the press release, please see http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2009/HUDNo.09-215. For a copy of HUD’s frequently asked questions addressing the Rule, please see http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs.pdf.
Senator Dodd Releases Financial Reform Bill. On November 10, Senate Banking Committee Chairman Christopher Dodd (D-CT) announced legislation that would fundamentally reform the regulatory structure for financial services. The bill differs from comparable House legislation in several respects, most notably in the creation of one single bank regulator to oversee the financial system, called the “Financial Institutions Regulatory Administration” (FIRA). The bill also would create a new, independent agency called the Agency for Financial Stability (AFS) to regulate “systemic risk” and institutions that are considered “too big to fail,” instead of housing such authority in the Federal Reserve Board. The AFS would have the ability to monitor, regulate, and enforce systemic risk-related issues. In addition, the bill includes a new resolution authority regime to wind down complex institutions whose failure would have “serious adverse effects on financial stability or economic conditions” in the U.S., with the Federal Deposit Insurance Corporation serving as the resolution authority. Like the primary legislation in the House, Dodd’s bill would create the new Consumer Financial Protection Agency (CFPA), which the Dodd bill would house within the FIRA. As drafted, Senator Dodd’s CFPA language is substantially similar to the “discussion draft” released by Rep. Barney Frank (D-MA) on September 25, prior to any amendments added to that bill during markup in the House Financial Services Committee (see InfoBytes, Regulatory Restructuring Report, Issue Ten, Oct. 27, 2009 for a discussion of the markup). Therefore, some of the more notable language amendments adopted in the House committee markup, including changes in the preemption standards applicable to national banks and their subsidiaries, are not included in Dodd’s bill. As the Dodd bill is drafted, both nationally-chartered institutions and their subsidiaries would be subject to state consumer protection laws. Also, under Dodd’s bill, the CFPA would have authority to enforce the Community Reinvestment Act and the Home Ownership and Equity Protection Act, among other “enumerated consumer laws.” Finally, the Dodd bill would require the Securities and Exchange Commission and the new FIRA to adopt regulations that would mandate that any securitizer retains an economic interest in a “material portion of the credit risk” of any asset included in an asset-backed security that is sold or transferred, which should be not less than 10% of the credit risk. A copy of the full text of the Dodd bill is available at http://banking.senate.gov/public/_files/AYO09D44_xml.pdf, and a summary of the bill is available at http://banking.senate.gov/public/_files/FinancialReformDiscussionDraftRevised111009.pdf.
FDIC Adopts Final Rules to Implement SAFE Act Requirements. On November 12, the Federal Deposit Insurance Corporation (FDIC) adopted final rules regarding the implementation of the Secure and Fair Enforcement for Mortgage Licensing Act (the SAFE Act). The SAFE Act requires an employee of a banking institution (and certain depository institution subsidiaries) regulated by one of the banking agencies (i) to register with the Nationwide Mortgage Licensing System and Registry (NMLS&R), (ii) to obtain a unique identifier, and (iii) to maintain this registration in order to act as a residential mortgage loan originator. To obtain a registration through the NMLS&R, an employee must submit fingerprints for use in a background check and information on personal history and experience. The rule provides an exception to the registration requirement for an employee of an agency-regulated institution who has never been registered or licensed through the NMLS&R as a mortgage loan originator and who has acted as a mortgage loan originator for five or fewer residential mortgage loans during the last twelve months. (However, a proposal to exempt institutions that originated 25 or fewer loans from registering employees was not included in the final rule.) The rule also provides that employees who engage in loan modification activities are not considered mortgage loan originators and are, therefore, not required to register, provided that these employees do not otherwise act as mortgage loan originators. With regard to the timing of registrations, employees are not required to obtain registrations until the NMLS&R has been modified to accommodate these types of registrations. Once the NMLS&R is available, employees must register within 180 days. The final rule further provides that agency-regulated institutions must supervise employees by (i) requiring the employees who act as residential mortgage loan originators to comply with the SAFE Act’s requirements to register and obtain a unique identifier and (ii) adopting and following written policies and procedures designed to assure compliance with these requirements. The final rules will be issued jointly by the FDIC, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, the Farm Credit Administration, and the National Credit Union Administration. For a copy of the draft of the final rule, please see http://www.fdic.gov/news/board/2009nov12no8.pdf.
Fed Requires Opt-In to Charge Fees for ATM, Debit Card Overdrafts. On November 12, the Federal Reserve Board issued a final rule that prohibits financial institutions from charging consumers overdraft fees on ATM and "one-time" (i.e., non-recurring) debit card transactions without the consumer’s consent. Under the rule, financial institutions must give consumers a disclosure that outlines the fees and terms associated with the financial institution’s overdraft services for ATMs and cards. Once a financial institution provides this disclosure, it can offer consumers the option to opt-in to the terms of its overdraft services. Unless it obtains the consumer’s prior consent, a financial institution may not charge fees for these overdraft services. Additionally, the rule prohibits financial institutions from requiring the consumer to opt-in for ATM and card overdraft services before the institution will pay other types of overdrafts, such as those for personal checks. The opt-in right applies to all consumers, including a financial institution’s existing customers, and all financial institutions must comply with the rule by July 1, 2010. For a copy of the press release, please see http://www.federalreserve.gov/newsevents/press/bcreg/20091112a.htm. For a copy of the final rule, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20091112a1.pdf.
FHA’s Capital Reserve Ratio Falls Below Congressionally Mandated Threshold. On November 12, the U.S. Department of Housing and Urban Development (HUD) announced that its annual independent actuarial study determined that the Federal Housing Administration’s (FHA’s) capital reserve ratio has fallen below the 2% minimum threshold mandated by Congress. In response to the study’s finding, effective January 1, 2010, the FHA will (i) require supervised mortgagees to submit audited financial statements, (ii) modify the procedures for streamlining refinance transactions, (iii) require appraiser independence in loan originations, (iv) modify the appraisal validity period, and (v) allow appraisal portability. Additionally, HUD plans to propose changes to its approval process for loan originations and to propose increases to its net worth requirements for mortgagees. For a copy of HUD’s announcement, please see http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2009/HUDNo.09-214.
FHFA Announces Fannie, Freddie Maximum Conforming Loan Limits for 2010. On November 12, the Federal Housing Finance Agency announced that the maximum conforming loan limits for mortgages originated in 2010 for Freddie Mac and Fannie Mae will remain unchanged from the 2009 limits despite the decline in home values in many parts of the country. As a result, for 2010, the standard maximum loan limit for one-unit properties in most of the U.S. will remain $417,000, with a maximum of $729,750 in certain high-cost areas. The maximums for two-to-four-unit properties and in statutorily-designated locations, such as Alaska, Hawaii, Guam and the U.S. Virgin Islands, will also remain at their 2009 levels. For a copy of the press release, please see http://www.fhfa.gov/webfiles/15180/CLL_November_Release_11_12_09.pdf.
Federal Banking Regulators Finalize Making Home Affordable Program Capital Rules. On November 13, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision approved making permanent the interim interagency rule addressing the capital treatment of residential mortgage loans modified under the Making Home Affordable Program (HAMP). The final rule treats risk-weight assignments identically to an interim rule issued by the agencies in June 2009 (reported in InfoBytes, June 26, 2009). Under the final rule, mortgage loans modified under the program will retain the risk weight assigned to the loan prior to the modification if the loan continues to meet other applicable prudential criteria. The final rule revises the interim rule to clarify that mortgage loans whose HAMP modifications are in the trial period are subject to the same risk weight assessment treatment. The rule will become final thirty days after publication in the Federal Register. For a copy of the rule, please see http://www.fdic.gov/news/board/2009nov12no2.pdf. For a copy of the joint press release announcing the action, please see http://www.fdic.gov/news/news/press/2009/pr09204.html.
HUD Issues Mortgagee Letter Addressing HECM Counseling Standardization, HECM Counselor Roster. On November 6, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2009-47 (ML 09-47) to establish testing standards for Home Equity Conversion Mortgage (HECM) counselors and to establish a roster of eligible HECM counselors (the Roster). ML 09-47 specifically notes that only persons on the Roster may provide HECM counseling to potential HECM borrowers. ML 09-47 also provides guidance to counselors and lenders for, among other things (i) determining eligibility for placement on the Roster, (ii) HUD’s review of Roster applications, (iii) Roster application instructions, (iv) understanding the reasons for removal from the Roster, (v) appealing removal from the Roster and applying for reinstatement to the Roster, and (vi) providing a list of HECM counseling providers to potential borrowers. For a copy of ML 09-47, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-47ml.pdf.
Federal Banking Agencies Reopen Public Comment Period for Correspondent Concentration Risk Guidance. On November 12, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision announced the re-opening of the comment period for proposed “Correspondent Concentration Risks” guidance (the initial comment period was reported in InfoBytes, Sept. 25, 2009). In general, the guidance addresses supervisory matters relating to identifying, monitoring, managing and performing appropriate due diligence of correspondent concentration risks. Specifically, the guidance proposes that an institution should (i) identify the totality of the institution’s aggregate credit and funding exposure to other institutions on a standalone basis, (ii) take into account exposures to other institutions’ affiliates, and (iii) be aware of exposures of its affiliates to other institutions and their affiliates. As a result, while the federal banking regulatory agencies generally have considered credit exposures greater than 25 percent of Tier 1 capital as “concentrations,” according to the guidance, funding exposures as low as 5 percent of an institution’s total liabilities could, under some circumstances, be considered a “concentration.” The extended comment period will be open until November 27, 2009. For a copy of the notice, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20091112b1.pdf.
FDIC Requires Prepayment of Assessments. On November 12, the Federal Deposit Insurance Corporation (FDIC) announced that FDIC insured institutions must prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012 on December 30, 2009. The FDIC will collect approximately $45 billion from the prepaid assessments. For a copy of the final rule, please see http://www.fdic.gov/news/board/2009nov12no4.pdf.
State Issues
Florida Attorney General Sues Foreclosure Rescue Services for Collecting Up-Front Fees. On November 9, Florida Attorney General Bill McCollum announced a lawsuit filed against two Florida foreclosure rescue service companies that allegedly charged up to $2,500 in illegal up-front fees for foreclosure assistance services. According to the Attorney General, an investigation revealed that Payment Modification Company and The Bostonian Group, LLC (d/b/a People’s First) charged the fee in five installments secured by post dated checks. The Attorney General is seeking (i) permanent injunctions prohibiting the companies from charging up-front fees, (ii) restitution on behalf of injured consumers, (iii) civil penalties of $15,000 for each violation, and (iv) reimbursement for attorney’s fees and costs related to the investigation. For a copy of the press release, please see http://www.buckleysandler.com/FL_AG_110909.pdf.
Courts
California Federal Court Holds Failure to Disclose Negative Amortization Does Not Extend TILA Right of Rescission. On November 9, the U.S. District Court for the Eastern District of California held that a lender’s failure to disclose the risk of negative amortization in connection with a borrower’s adjustable rate mortgage loan did not entitle the borrower to the extended three-year statute of limitations for rescission of the loan afforded under the Truth in Lending Act (TILA). Reagen v. Aurora Loan Servs., Inc., No. 1:09-CV-00839 (E.D. Cal. Nov. 9, 2009). In Reagen, the plaintiff borrower alleged that the failure to explain or provide adequate disclosure of the negative amortization feature of the borrower’s loan (i) violated TILA, and (ii) constituted an unlawful and unfair business practice and financial elder abuse in violation of California law. As relief, the borrower requested rescission of the transaction, as well as an injunction, statutory damages, and restitution. In dismissing the borrower’s TILA claim, the court emphasized that disclosure of the risk of negative amortization is not a “material” disclosure, and therefore, a lender’s failure to provide the disclosure does not trigger the extended rescission period. The court also refused to exercise supplemental jurisdiction over the plaintiff’s remaining state law claims. For a copy of the opinion, please see http://www.buckleysandler.com/Reagen_v_ALS.pdf.
California Federal Court Holds State Law Claims Preempted by FCRA. On October 30, the U.S. District Court for the Central District of California held that a claim brought under California Bus. & Prof. Code § 17200 was preempted by the Fair Credit Reporting Act (FCRA) because it related to the responsibilities of a furnisher of information to credit reporting agencies (CRAs). Forester v. Pennsylvania Higher Education Assistance Agency, No. SACV 09-0930, 2009 WL 3710517 (C.D. Cal. Oct. 30, 2009). The consumer in Forester sued the servicer of his student loans, alleging that the servicer violated FCRA and Cal. Bus. & Prof. Code § 17200 by failing to investigate the accuracy of their credit reporting after the consumer filed a “Notice of Dispute” and that the servicer violated Cal. Bus. & Prof. Code §§ 17200 and 17500 by falsely promising that the consumer’s credit report would not show any derogatory history if the consumer rehabilitated his student loans. The servicer argued that FCRA preempted the state law claims. Acknowledging that FCRA and § 17200 both “relate to the duties of the furnishers of information to CRAs,” and following the recent trend of courts in the Ninth Circuit that hold that FCRA “totally preempts ‘all state statutory and common law causes of action which fall within the conduct proscribed by [15] § 1681s-2 [Section 623 of FCRA],’” the court found that FCRA clearly preempted the consumer’s claims, which relate to the servicer’s responsibilities as furnishers of information to CRAs, the court dismissed the consumer’s state law claims. The court, however, refused to dismiss the consumer’s FCRA claims, rejecting the servicer’s argument that they were time-barred because the alleged violation was a failure to investigate the item raised in the dispute, which occurred during the limitations period. For a copy of the opinion, please see http://www.buckleysandler.com/Forester_v_PHEAA.pdf.
New York Federal Court Denies FCRA Claim of Lack of Permissible Purpose. On November 5, the U.S. District Court for the Western District of New York held that an insurance agency responding to a an insurance quote request has a “permissible purpose” for accessing consumer credit information, and thus does not violate the Fair Credit Reporting Act (FCRA). Wojtczak v. Safeco Property & Casualty Insurance Companies, No. 08-CV-6436, 2009 WL 3733049 (W.D.N.Y. Nov. 5, 2009). In Wojtczak, the plaintiff consumer requested an insurance quote from the defendant insurance agency. When an employee of the insurance company requested personal information from the consumer, the consumer terminated the call. Subsequently, the consumer received a declination letter from the insurance agency advising him that his request for insurance had been denied. The letter included a notice under FCRA informing him of the reasons for denial and his right to receive a copy of his credit report from a credit reporting agency (CRA). The consumer claimed that he never gave the insurance agency permission to access his credit information and filed suit, alleging that the insurance agency, among other things, violated FCRA by obtaining his credit information without a “permissible purpose.” The court ruled that, even if the insurance agency had obtained the consumer’s credit information without his permission, “such conduct did not violate the FCRA.” The court indicated that FCRA allows a CRA to furnish a consumer credit report, among other things, when the person seeking the information intends to use it in connection with underwriting insurance involving the consumer. In determining whether the insurance agency was “underwriting insurance,” the court looked to Wilting v. Progressive County Mut. Ins. Co., 227 F.3d 474 (5th Cir. 2000) to reason that, even where the plaintiff “only request[s] a quotation,” the insurer must “obtain a credit report to weigh the risks presented by the consumer.” Therefore, the insurer engaged in underwriting the insurance to provide a quote. The Safeco court determined that the facts of this case were identical to those of Wilting and dismissed the FCRA claim. For a copy of the opinion, please see http://www.buckleysandler.com/Wojtczk_v_Safeco.pdf.
California Federal Court Rejects Proposed Settlement, Decertifies Class in Data Breach Case. On October 23, the U.S. District Court for the Northern District of California denied final approval of a proposed class action settlement agreement and abrogated a previously granted provisional class certification in a case alleging that a security breach by a securities brokerage services provider exposed accountholders’ private information to spammers and other third parties. In re TD Ameritrade Accountholder Litigation, 07-CV-02852 (N.D. Cal. Oct. 23, 2009). In a previous order, the court granted preliminary approval of the class action settlement and preliminary approval of a provisional certification of the settlement class. Under the proposed settlement, the defendant, TD Ameritrade, agreed to (i) retain an independent expert who would determine whether its information security system had vulnerabilities, (ii) retain a company to conduct an additional analysis to determine whether the data breach may have resulted in identity theft for any members of the settlement class, and (iii) provide each class member with a one-year subscription or a one-year renewal for an anti-virus, anti-spam Internet security product. Denying the final approval of the settlement, the court found that the proposed settlement was not “fair, reasonable, and adequate” because there was no discernible benefit and no meaningful relief to the class members. Specifically, the court found that retaining the experts would benefit TD Ameritrade more than the class and were measures that should be conducted by any company that deals in sensitive personal information, irrespective of any litigation. Regarding the anti-virus subscription, the court found that the software provided little benefit to the class because, among other things, it was available for most Internet users, either for free or for a nominal fee. For a copy of the order, please see http://www.buckleysandler.com/In_re_TD_Ameritrade.pdf.
Firm News
Jerry Buckley will be participating in the 3rd Annual Leading Law Firm’s Conference in New York City on November 13. He will be on a panel entitled “Building Sustainable Law Firm Business Models."
Margo Tank will be speaking at the NCHELP Fall Training Conference in St. Pete Beach, Florida on November 16. She will discuss building electronic student lending platforms in compliance with ESIGN and the UETA.
Jeff Naimon spoke about developments in appraisal requirements and related risks at the North Carolina Bankers Association’s Management Team Conference on October 20 in Greensboro, North Carolina.
Stephen Ambrose and Andrew Sandler spoke about Consumer Arbitration at the American Financial Services Association’s Annual Law Committee meeting on October 26 in Washington, DC.
Andrew Sandler spoke at the District of Columbia Bar regarding the proposed Consumer Financial Protection Agency on October 27 in Washington, DC.
Andrew Sandler also spoke at the 2009 Annual Conference of the International Association for Asset Recovery, in Las Vegas, NV on November 9 and 10.
Mortgages
HUD Announces Four-Month Period of “Restraint” to Enforce New RESPA Rule. On November 13, the U.S. Department of Housing and Urban Development (HUD) announced that the staff of its Mortgagee Review Board (MRB) will exercise “restraint” in enforcing new regulatory requirements under the Real Estate Settlement Procedures Act (RESPA), which are set to become fully effective on January 1, 2010, against certain entities for the first four months of 2010. According to HUD, the MRB will exercise such restraint for Federal Housing Administration (FHA)-approved lenders that have demonstrated that they are making a “good faith effort” to comply with the new requirements. In determining whether a mortgagee has made a good faith effort, MRB staff will consider (i) whether the mortgagee has relied on the new RESPA rule (the Rule) and other written guidance issued by HUD, and (ii) the extent to which the mortgagee has made sufficient investment and commitment in technology, training, and quality control designed to comply with the Rule. Additionally, HUD is asking other federal and relevant state enforcement agencies to exercise the same 120-day restraint in enforcement for non-FHA originators and other settlement service providers who demonstrate a good faith effort to implement the Rule. For a copy of the press release, please see http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2009/HUDNo.09-215. For a copy of HUD’s frequently asked questions addressing the Rule, please see http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs.pdf.
Senator Dodd Releases Financial Reform Bill. On November 10, Senate Banking Committee Chairman Christopher Dodd (D-CT) announced legislation that would fundamentally reform the regulatory structure for financial services. The bill differs from comparable House legislation in several respects, most notably in the creation of one single bank regulator to oversee the financial system, called the “Financial Institutions Regulatory Administration” (FIRA). The bill also would create a new, independent agency called the Agency for Financial Stability (AFS) to regulate “systemic risk” and institutions that are considered “too big to fail,” instead of housing such authority in the Federal Reserve Board. The AFS would have the ability to monitor, regulate, and enforce systemic risk-related issues. In addition, the bill includes a new resolution authority regime to wind down complex institutions whose failure would have “serious adverse effects on financial stability or economic conditions” in the U.S., with the Federal Deposit Insurance Corporation serving as the resolution authority. Like the primary legislation in the House, Dodd’s bill would create the new Consumer Financial Protection Agency (CFPA), which the Dodd bill would house within the FIRA. As drafted, Senator Dodd’s CFPA language is substantially similar to the “discussion draft” released by Rep. Barney Frank (D-MA) on September 25, prior to any amendments added to that bill during markup in the House Financial Services Committee (see InfoBytes, Regulatory Restructuring Report, Issue Ten, Oct. 27, 2009 for a discussion of the markup). Therefore, some of the more notable language amendments adopted in the House committee markup, including changes in the preemption standards applicable to national banks and their subsidiaries, are not included in Dodd’s bill. As the Dodd bill is drafted, both nationally-chartered institutions and their subsidiaries would be subject to state consumer protection laws. Also, under Dodd’s bill, the CFPA would have authority to enforce the Community Reinvestment Act and the Home Ownership and Equity Protection Act, among other “enumerated consumer laws.” Finally, the Dodd bill would require the Securities and Exchange Commission and the new FIRA to adopt regulations that would mandate that any securitizer retains an economic interest in a “material portion of the credit risk” of any asset included in an asset-backed security that is sold or transferred, which should be not less than 10% of the credit risk. A copy of the full text of the Dodd bill is available at http://banking.senate.gov/public/_files/AYO09D44_xml.pdf, and a summary of the bill is available at http://banking.senate.gov/public/_files/FinancialReformDiscussionDraftRevised111009.pdf.
FDIC Adopts Final Rules to Implement SAFE Act Requirements. On November 12, the Federal Deposit Insurance Corporation (FDIC) adopted final rules regarding the implementation of the Secure and Fair Enforcement for Mortgage Licensing Act (the SAFE Act). The SAFE Act requires an employee of a banking institution (and certain depository institution subsidiaries) regulated by one of the banking agencies (i) to register with the Nationwide Mortgage Licensing System and Registry (NMLS&R), (ii) to obtain a unique identifier, and (iii) to maintain this registration in order to act as a residential mortgage loan originator. To obtain a registration through the NMLS&R, an employee must submit fingerprints for use in a background check and information on personal history and experience. The rule provides an exception to the registration requirement for an employee of an agency-regulated institution who has never been registered or licensed through the NMLS&R as a mortgage loan originator and who has acted as a mortgage loan originator for five or fewer residential mortgage loans during the last twelve months. (However, a proposal to exempt institutions that originated 25 or fewer loans from registering employees was not included in the final rule.) The rule also provides that employees who engage in loan modification activities are not considered mortgage loan originators and are, therefore, not required to register, provided that these employees do not otherwise act as mortgage loan originators. With regard to the timing of registrations, employees are not required to obtain registrations until the NMLS&R has been modified to accommodate these types of registrations. Once the NMLS&R is available, employees must register within 180 days. The final rule further provides that agency-regulated institutions must supervise employees by (i) requiring the employees who act as residential mortgage loan originators to comply with the SAFE Act’s requirements to register and obtain a unique identifier and (ii) adopting and following written policies and procedures designed to assure compliance with these requirements. The final rules will be issued jointly by the FDIC, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, the Farm Credit Administration, and the National Credit Union Administration. For a copy of the draft of the final rule, please see http://www.fdic.gov/news/board/2009nov12no8.pdf.
FHA’s Capital Reserve Ratio Falls Below Congressionally Mandated Threshold. On November 12, the U.S. Department of Housing and Urban Development (HUD) announced that its annual independent actuarial study determined that the Federal Housing Administration’s (FHA’s) capital reserve ratio has fallen below the 2% minimum threshold mandated by Congress. In response to the study’s finding, effective January 1, 2010, the FHA will (i) require supervised mortgagees to submit audited financial statements, (ii) modify the procedures for streamlining refinance transactions, (iii) require appraiser independence in loan originations, (iv) modify the appraisal validity period, and (v) allow appraisal portability. Additionally, HUD plans to propose changes to its approval process for loan originations and to propose increases to its net worth requirements for mortgagees. For a copy of HUD’s announcement, please see http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2009/HUDNo.09-214.
FHFA Announces Fannie, Freddie Maximum Conforming Loan Limits for 2010. On November 12, the Federal Housing Finance Agency announced that the maximum conforming loan limits for mortgages originated in 2010 for Freddie Mac and Fannie Mae will remain unchanged from the 2009 limits despite the decline in home values in many parts of the country. As a result, for 2010, the standard maximum loan limit for one-unit properties in most of the U.S. will remain $417,000, with a maximum of $729,750 in certain high-cost areas. The maximums for two-to-four-unit properties and in statutorily-designated locations, such as Alaska, Hawaii, Guam and the U.S. Virgin Islands, will also remain at their 2009 levels. For a copy of the press release, please see http://www.fhfa.gov/webfiles/15180/CLL_November_Release_11_12_09.pdf.
Federal Banking Regulators Finalize Making Home Affordable Program Capital Rules. On November 13, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision approved making permanent the interim interagency rule addressing the capital treatment of residential mortgage loans modified under the Making Home Affordable Program (HAMP). The final rule treats risk-weight assignments identically to an interim rule issued by the agencies in June 2009 (reported in InfoBytes, June 26, 2009). Under the final rule, mortgage loans modified under the program will retain the risk weight assigned to the loan prior to the modification if the loan continues to meet other applicable prudential criteria. The final rule revises the interim rule to clarify that mortgage loans whose HAMP modifications are in the trial period are subject to the same risk weight assessment treatment. The rule will become final thirty days after publication in the Federal Register. For a copy of the rule, please see http://www.fdic.gov/news/board/2009nov12no2.pdf. For a copy of the joint press release announcing the action, please see http://www.fdic.gov/news/news/press/2009/pr09204.html.
HUD Issues Mortgagee Letter Addressing HECM Counseling Standardization, HECM Counselor Roster. On November 6, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2009-47 (ML 09-47) to establish testing standards for Home Equity Conversion Mortgage (HECM) counselors and to establish a roster of eligible HECM counselors (the Roster). ML 09-47 specifically notes that only persons on the Roster may provide HECM counseling to potential HECM borrowers. ML 09-47 also provides guidance to counselors and lenders for, among other things (i) determining eligibility for placement on the Roster, (ii) HUD’s review of Roster applications, (iii) Roster application instructions, (iv) understanding the reasons for removal from the Roster, (v) appealing removal from the Roster and applying for reinstatement to the Roster, and (vi) providing a list of HECM counseling providers to potential borrowers. For a copy of ML 09-47, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-47ml.pdf.
Florida Attorney General Sues Foreclosure Rescue Services for Collecting Up-Front Fees. On November 9, Florida Attorney General Bill McCollum announced a lawsuit filed against two Florida foreclosure rescue service companies that allegedly charged up to $2,500 in illegal up-front fees for foreclosure assistance services. According to the Attorney General, an investigation revealed that Payment Modification Company and The Bostonian Group, LLC (d/b/a People’s First) charged the fee in five installments secured by post dated checks. The Attorney General is seeking (i) permanent injunctions prohibiting the companies from charging up-front fees, (ii) restitution on behalf of injured consumers, (iii) civil penalties of $15,000 for each violation, and (iv) reimbursement for attorney’s fees and costs related to the investigation. For a copy of the press release, please see http://www.buckleysandler.com/FL_AG_110909.pdf.
California Federal Court Holds Failure to Disclose Negative Amortization Does Not Extend TILA Right of Rescission. On November 9, the U.S. District Court for the Eastern District of California held that a lender’s failure to disclose the risk of negative amortization in connection with a borrower’s adjustable rate mortgage loan did not entitle the borrower to the extended three-year statute of limitations for rescission of the loan afforded under the Truth in Lending Act (TILA). Reagen v. Aurora Loan Servs., Inc., No. 1:09-CV-00839 (E.D. Cal. Nov. 9, 2009). In Reagen, the plaintiff borrower alleged that the failure to explain or provide adequate disclosure of the negative amortization feature of the borrower’s loan (i) violated TILA, and (ii) constituted an unlawful and unfair business practice and financial elder abuse in violation of California law. As relief, the borrower requested rescission of the transaction, as well as an injunction, statutory damages, and restitution. In dismissing the borrower’s TILA claim, the court emphasized that disclosure of the risk of negative amortization is not a “material” disclosure, and therefore, a lender’s failure to provide the disclosure does not trigger the extended rescission period. The court also refused to exercise supplemental jurisdiction over the plaintiff’s remaining state law claims. For a copy of the opinion, please see http://www.buckleysandler.com/Reagen_v_ALS.pdf.
Banking
Senator Dodd Releases Financial Reform Bill. On November 10, Senate Banking Committee Chairman Christopher Dodd (D-CT) announced legislation that would fundamentally reform the regulatory structure for financial services. The bill differs from comparable House legislation in several respects, most notably in the creation of one single bank regulator to oversee the financial system, called the “Financial Institutions Regulatory Administration” (FIRA). The bill also would create a new, independent agency called the Agency for Financial Stability (AFS) to regulate “systemic risk” and institutions that are considered “too big to fail,” instead of housing such authority in the Federal Reserve Board. The AFS would have the ability to monitor, regulate, and enforce systemic risk-related issues. In addition, the bill includes a new resolution authority regime to wind down complex institutions whose failure would have “serious adverse effects on financial stability or economic conditions” in the U.S., with the Federal Deposit Insurance Corporation serving as the resolution authority. Like the primary legislation in the House, Dodd’s bill would create the new Consumer Financial Protection Agency (CFPA), which the Dodd bill would house within the FIRA. As drafted, Senator Dodd’s CFPA language is substantially similar to the “discussion draft” released by Rep. Barney Frank (D-MA) on September 25, prior to any amendments added to that bill during markup in the House Financial Services Committee (see InfoBytes, Regulatory Restructuring Report, Issue Ten, Oct. 27, 2009 for a discussion of the markup). Therefore, some of the more notable language amendments adopted in the House committee markup, including changes in the preemption standards applicable to national banks and their subsidiaries, are not included in Dodd’s bill. As the Dodd bill is drafted, both nationally-chartered institutions and their subsidiaries would be subject to state consumer protection laws. Also, under Dodd’s bill, the CFPA would have authority to enforce the Community Reinvestment Act and the Home Ownership and Equity Protection Act, among other “enumerated consumer laws.” Finally, the Dodd bill would require the Securities and Exchange Commission and the new FIRA to adopt regulations that would mandate that any securitizer retains an economic interest in a “material portion of the credit risk” of any asset included in an asset-backed security that is sold or transferred, which should be not less than 10% of the credit risk. A copy of the full text of the Dodd bill is available at http://banking.senate.gov/public/_files/AYO09D44_xml.pdf, and a summary of the bill is available at http://banking.senate.gov/public/_files/FinancialReformDiscussionDraftRevised111009.pdf.
FDIC Adopts Final Rules to Implement SAFE Act Requirements. On November 12, the Federal Deposit Insurance Corporation (FDIC) adopted final rules regarding the implementation of the Secure and Fair Enforcement for Mortgage Licensing Act (the SAFE Act). The SAFE Act requires an employee of a banking institution (and certain depository institution subsidiaries) regulated by one of the banking agencies (i) to register with the Nationwide Mortgage Licensing System and Registry (NMLS&R), (ii) to obtain a unique identifier, and (iii) to maintain this registration in order to act as a residential mortgage loan originator. To obtain a registration through the NMLS&R, an employee must submit fingerprints for use in a background check and information on personal history and experience. The rule provides an exception to the registration requirement for an employee of an agency-regulated institution who has never been registered or licensed through the NMLS&R as a mortgage loan originator and who has acted as a mortgage loan originator for five or fewer residential mortgage loans during the last twelve months. (However, a proposal to exempt institutions that originated 25 or fewer loans from registering employees was not included in the final rule.) The rule also provides that employees who engage in loan modification activities are not considered mortgage loan originators and are, therefore, not required to register, provided that these employees do not otherwise act as mortgage loan originators. With regard to the timing of registrations, employees are not required to obtain registrations until the NMLS&R has been modified to accommodate these types of registrations. Once the NMLS&R is available, employees must register within 180 days. The final rule further provides that agency-regulated institutions must supervise employees by (i) requiring the employees who act as residential mortgage loan originators to comply with the SAFE Act’s requirements to register and obtain a unique identifier and (ii) adopting and following written policies and procedures designed to assure compliance with these requirements. The final rules will be issued jointly by the FDIC, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, the Farm Credit Administration, and the National Credit Union Administration. For a copy of the draft of the final rule, please see http://www.fdic.gov/news/board/2009nov12no8.pdf.
Fed Requires Opt-In to Charge Fees for ATM, Debit Card Overdrafts. On November 12, the Federal Reserve Board issued a final rule that prohibits financial institutions from charging consumers overdraft fees on ATM and "one-time" (i.e., non-recurring) debit card transactions without the consumer’s consent. Under the rule, financial institutions must give consumers a disclosure that outlines the fees and terms associated with the financial institution’s overdraft services for ATMs and cards. Once a financial institution provides this disclosure, it can offer consumers the option to opt-in to the terms of its overdraft services. Unless it obtains the consumer’s prior consent, a financial institution may not charge fees for these overdraft services. Additionally, the rule prohibits financial institutions from requiring the consumer to opt-in for ATM and card overdraft services before the institution will pay other types of overdrafts, such as those for personal checks. The opt-in right applies to all consumers, including a financial institution’s existing customers, and all financial institutions must comply with the rule by July 1, 2010. For a copy of the press release, please see http://www.federalreserve.gov/newsevents/press/bcreg/20091112a.htm. For a copy of the final rule, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20091112a1.pdf.
Federal Banking Regulators Finalize Making Home Affordable Program Capital Rules. On November 13, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision approved making permanent the interim interagency rule addressing the capital treatment of residential mortgage loans modified under the Making Home Affordable Program (HAMP). The final rule treats risk-weight assignments identically to an interim rule issued by the agencies in June 2009 (reported in InfoBytes, June 26, 2009). Under the final rule, mortgage loans modified under the program will retain the risk weight assigned to the loan prior to the modification if the loan continues to meet other applicable prudential criteria. The final rule revises the interim rule to clarify that mortgage loans whose HAMP modifications are in the trial period are subject to the same risk weight assessment treatment. The rule will become final thirty days after publication in the Federal Register. For a copy of the rule, please see http://www.fdic.gov/news/board/2009nov12no2.pdf. For a copy of the joint press release announcing the action, please see http://www.fdic.gov/news/news/press/2009/pr09204.html.
Federal Banking Agencies Reopen Public Comment Period for Correspondent Concentration Risk Guidance. On November 12, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision announced the re-opening of the comment period for proposed “Correspondent Concentration Risks” guidance (the initial comment period was reported in InfoBytes, Sept. 25, 2009). In general, the guidance addresses supervisory matters relating to identifying, monitoring, managing and performing appropriate due diligence of correspondent concentration risks. Specifically, the guidance proposes that an institution should (i) identify the totality of the institution’s aggregate credit and funding exposure to other institutions on a standalone basis, (ii) take into account exposures to other institutions’ affiliates, and (iii) be aware of exposures of its affiliates to other institutions and their affiliates. As a result, while the federal banking regulatory agencies generally have considered credit exposures greater than 25 percent of Tier 1 capital as “concentrations,” according to the guidance, funding exposures as low as 5 percent of an institution’s total liabilities could, under some circumstances, be considered a “concentration.” The extended comment period will be open until November 27, 2009. For a copy of the notice, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20091112b1.pdf.
FDIC Requires Prepayment of Assessments. On November 12, the Federal Deposit Insurance Corporation (FDIC) announced that FDIC insured institutions must prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012 on December 30, 2009. The FDIC will collect approximately $45 billion from the prepaid assessments. For a copy of the final rule, please see http://www.fdic.gov/news/board/2009nov12no4.pdf.
Consumer Finance
Senator Dodd Releases Financial Reform Bill. On November 10, Senate Banking Committee Chairman Christopher Dodd (D-CT) announced legislation that would fundamentally reform the regulatory structure for financial services. The bill differs from comparable House legislation in several respects, most notably in the creation of one single bank regulator to oversee the financial system, called the “Financial Institutions Regulatory Administration” (FIRA). The bill also would create a new, independent agency called the Agency for Financial Stability (AFS) to regulate “systemic risk” and institutions that are considered “too big to fail,” instead of housing such authority in the Federal Reserve Board. The AFS would have the ability to monitor, regulate, and enforce systemic risk-related issues. In addition, the bill includes a new resolution authority regime to wind down complex institutions whose failure would have “serious adverse effects on financial stability or economic conditions” in the U.S., with the Federal Deposit Insurance Corporation serving as the resolution authority. Like the primary legislation in the House, Dodd’s bill would create the new Consumer Financial Protection Agency (CFPA), which the Dodd bill would house within the FIRA. As drafted, Senator Dodd’s CFPA language is substantially similar to the “discussion draft” released by Rep. Barney Frank (D-MA) on September 25, prior to any amendments added to that bill during markup in the House Financial Services Committee (see InfoBytes, Regulatory Restructuring Report, Issue Ten, Oct. 27, 2009 for a discussion of the markup). Therefore, some of the more notable language amendments adopted in the House committee markup, including changes in the preemption standards applicable to national banks and their subsidiaries, are not included in Dodd’s bill. As the Dodd bill is drafted, both nationally-chartered institutions and their subsidiaries would be subject to state consumer protection laws. Also, under Dodd’s bill, the CFPA would have authority to enforce the Community Reinvestment Act and the Home Ownership and Equity Protection Act, among other “enumerated consumer laws.” Finally, the Dodd bill would require the Securities and Exchange Commission and the new FIRA to adopt regulations that would mandate that any securitizer retains an economic interest in a “material portion of the credit risk” of any asset included in an asset-backed security that is sold or transferred, which should be not less than 10% of the credit risk. A copy of the full text of the Dodd bill is available at http://banking.senate.gov/public/_files/AYO09D44_xml.pdf, and a summary of the bill is available at http://banking.senate.gov/public/_files/FinancialReformDiscussionDraftRevised111009.pdf.
California Federal Court Holds State Law Claims Preempted by FCRA. On October 30, the U.S. District Court for the Central District of California held that a claim brought under California Bus. & Prof. Code § 17200 was preempted by the Fair Credit Reporting Act (FCRA) because it related to the responsibilities of a furnisher of information to credit reporting agencies (CRAs). Forester v. Pennsylvania Higher Education Assistance Agency, No. SACV 09-0930, 2009 WL 3710517 (C.D. Cal. Oct. 30, 2009). The consumer in Forester sued the servicer of his student loans, alleging that the servicer violated FCRA and Cal. Bus. & Prof. Code § 17200 by failing to investigate the accuracy of their credit reporting after the consumer filed a “Notice of Dispute” and that the servicer violated Cal. Bus. & Prof. Code §§ 17200 and 17500 by falsely promising that the consumer’s credit report would not show any derogatory history if the consumer rehabilitated his student loans. The servicer argued that FCRA preempted the state law claims. Acknowledging that FCRA and § 17200 both “relate to the duties of the furnishers of information to CRAs,” and following the recent trend of courts in the Ninth Circuit that hold that FCRA “totally preempts ‘all state statutory and common law causes of action which fall within the conduct proscribed by [15] § 1681s-2 [Section 623 of FCRA],’” the court found that FCRA clearly preempted the consumer’s claims, which relate to the servicer’s responsibilities as furnishers of information to CRAs, the court dismissed the consumer’s state law claims. The court, however, refused to dismiss the consumer’s FCRA claims, rejecting the servicer’s argument that they were time-barred because the alleged violation was a failure to investigate the item raised in the dispute, which occurred during the limitations period. For a copy of the opinion, please see http://www.buckleysandler.com/Forester_v_PHEAA.pdf.
New York Federal Court Denies FCRA Claim of Lack of Permissible Purpose. On November 5, the U.S. District Court for the Western District of New York held that an insurance agency responding to a an insurance quote request has a “permissible purpose” for accessing consumer credit information, and thus does not violate the Fair Credit Reporting Act (FCRA). Wojtczak v. Safeco Property & Casualty Insurance Companies, No. 08-CV-6436, 2009 WL 3733049 (W.D.N.Y. Nov. 5, 2009). In Wojtczak, the plaintiff consumer requested an insurance quote from the defendant insurance agency. When an employee of the insurance company requested personal information from the consumer, the consumer terminated the call. Subsequently, the consumer received a declination letter from the insurance agency advising him that his request for insurance had been denied. The letter included a notice under FCRA informing him of the reasons for denial and his right to receive a copy of his credit report from a credit reporting agency (CRA). The consumer claimed that he never gave the insurance agency permission to access his credit information and filed suit, alleging that the insurance agency, among other things, violated FCRA by obtaining his credit information without a “permissible purpose.” The court ruled that, even if the insurance agency had obtained the consumer’s credit information without his permission, “such conduct did not violate the FCRA.” The court indicated that FCRA allows a CRA to furnish a consumer credit report, among other things, when the person seeking the information intends to use it in connection with underwriting insurance involving the consumer. In determining whether the insurance agency was “underwriting insurance,” the court looked to Wilting v. Progressive County Mut. Ins. Co., 227 F.3d 474 (5th Cir. 2000) to reason that, even where the plaintiff “only request[s] a quotation,” the insurer must “obtain a credit report to weigh the risks presented by the consumer.” Therefore, the insurer engaged in underwriting the insurance to provide a quote. The Safeco court determined that the facts of this case were identical to those of Wilting and dismissed the FCRA claim. For a copy of the opinion, please see http://www.buckleysandler.com/Wojtczk_v_Safeco.pdf.
Insurance
HUD Announces Four-Month Period of “Restraint” to Enforce New RESPA Rule. On November 13, the U.S. Department of Housing and Urban Development (HUD) announced that the staff of its Mortgagee Review Board (MRB) will exercise “restraint” in enforcing new regulatory requirements under the Real Estate Settlement Procedures Act (RESPA), which are set to become fully effective on January 1, 2010, against certain entities for the first four months of 2010. According to HUD, the MRB will exercise such restraint for Federal Housing Administration (FHA)-approved lenders that have demonstrated that they are making a “good faith effort” to comply with the new requirements. In determining whether a mortgagee has made a good faith effort, MRB staff will consider (i) whether the mortgagee has relied on the new RESPA rule (the Rule) and other written guidance issued by HUD, and (ii) the extent to which the mortgagee has made sufficient investment and commitment in technology, training, and quality control designed to comply with the Rule. Additionally, HUD is asking other federal and relevant state enforcement agencies to exercise the same 120-day restraint in enforcement for non-FHA originators and other settlement service providers who demonstrate a good faith effort to implement the Rule. For a copy of the press release, please see http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2009/HUDNo.09-215. For a copy of HUD’s frequently asked questions addressing the Rule, please see http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs.pdf.
Litigation
California Federal Court Holds Failure to Disclose Negative Amortization Does Not Extend TILA Right of Rescission. On November 9, the U.S. District Court for the Eastern District of California held that a lender’s failure to disclose the risk of negative amortization in connection with a borrower’s adjustable rate mortgage loan did not entitle the borrower to the extended three-year statute of limitations for rescission of the loan afforded under the Truth in Lending Act (TILA). Reagen v. Aurora Loan Servs., Inc., No. 1:09-CV-00839 (E.D. Cal. Nov. 9, 2009). In Reagen, the plaintiff borrower alleged that the failure to explain or provide adequate disclosure of the negative amortization feature of the borrower’s loan (i) violated TILA, and (ii) constituted an unlawful and unfair business practice and financial elder abuse in violation of California law. As relief, the borrower requested rescission of the transaction, as well as an injunction, statutory damages, and restitution. In dismissing the borrower’s TILA claim, the court emphasized that disclosure of the risk of negative amortization is not a “material” disclosure, and therefore, a lender’s failure to provide the disclosure does not trigger the extended rescission period. The court also refused to exercise supplemental jurisdiction over the plaintiff’s remaining state law claims. For a copy of the opinion, please see http://www.buckleysandler.com/Reagen_v_ALS.pdf.
California Federal Court Holds State Law Claims Preempted by FCRA. On October 30, the U.S. District Court for the Central District of California held that a claim brought under California Bus. & Prof. Code § 17200 was preempted by the Fair Credit Reporting Act (FCRA) because it related to the responsibilities of a furnisher of information to credit reporting agencies (CRAs). Forester v. Pennsylvania Higher Education Assistance Agency, No. SACV 09-0930, 2009 WL 3710517 (C.D. Cal. Oct. 30, 2009). The consumer in Forester sued the servicer of his student loans, alleging that the servicer violated FCRA and Cal. Bus. & Prof. Code § 17200 by failing to investigate the accuracy of their credit reporting after the consumer filed a “Notice of Dispute” and that the servicer violated Cal. Bus. & Prof. Code §§ 17200 and 17500 by falsely promising that the consumer’s credit report would not show any derogatory history if the consumer rehabilitated his student loans. The servicer argued that FCRA preempted the state law claims. Acknowledging that FCRA and § 17200 both “relate to the duties of the furnishers of information to CRAs,” and following the recent trend of courts in the Ninth Circuit that hold that FCRA “totally preempts ‘all state statutory and common law causes of action which fall within the conduct proscribed by [15] § 1681s-2 [Section 623 of FCRA],’” the court found that FCRA clearly preempted the consumer’s claims, which relate to the servicer’s responsibilities as furnishers of information to CRAs, the court dismissed the consumer’s state law claims. The court, however, refused to dismiss the consumer’s FCRA claims, rejecting the servicer’s argument that they were time-barred because the alleged violation was a failure to investigate the item raised in the dispute, which occurred during the limitations period. For a copy of the opinion, please see http://www.buckleysandler.com/Forester_v_PHEAA.pdf.
New York Federal Court Denies FCRA Claim of Lack of Permissible Purpose. On November 5, the U.S. District Court for the Western District of New York held that an insurance agency responding to a an insurance quote request has a “permissible purpose” for accessing consumer credit information, and thus does not violate the Fair Credit Reporting Act (FCRA). Wojtczak v. Safeco Property & Casualty Insurance Companies, No. 08-CV-6436, 2009 WL 3733049 (W.D.N.Y. Nov. 5, 2009). In Wojtczak, the plaintiff consumer requested an insurance quote from the defendant insurance agency. When an employee of the insurance company requested personal information from the consumer, the consumer terminated the call. Subsequently, the consumer received a declination letter from the insurance agency advising him that his request for insurance had been denied. The letter included a notice under FCRA informing him of the reasons for denial and his right to receive a copy of his credit report from a credit reporting agency (CRA). The consumer claimed that he never gave the insurance agency permission to access his credit information and filed suit, alleging that the insurance agency, among other things, violated FCRA by obtaining his credit information without a “permissible purpose.” The court ruled that, even if the insurance agency had obtained the consumer’s credit information without his permission, “such conduct did not violate the FCRA.” The court indicated that FCRA allows a CRA to furnish a consumer credit report, among other things, when the person seeking the information intends to use it in connection with underwriting insurance involving the consumer. In determining whether the insurance agency was “underwriting insurance,” the court looked to Wilting v. Progressive County Mut. Ins. Co., 227 F.3d 474 (5th Cir. 2000) to reason that, even where the plaintiff “only request[s] a quotation,” the insurer must “obtain a credit report to weigh the risks presented by the consumer.” Therefore, the insurer engaged in underwriting the insurance to provide a quote. The Safeco court determined that the facts of this case were identical to those of Wilting and dismissed the FCRA claim. For a copy of the opinion, please see http://www.buckleysandler.com/Wojtczk_v_Safeco.pdf.
California Federal Court Rejects Proposed Settlement, Decertifies Class in Data Breach Case. On October 23, the U.S. District Court for the Northern District of California denied final approval of a proposed class action settlement agreement and abrogated a previously granted provisional class certification in a case alleging that a security breach by a securities brokerage services provider exposed accountholders’ private information to spammers and other third parties. In re TD Ameritrade Accountholder Litigation, 07-CV-02852 (N.D. Cal. Oct. 23, 2009). In a previous order, the court granted preliminary approval of the class action settlement and preliminary approval of a provisional certification of the settlement class. Under the proposed settlement, the defendant, TD Ameritrade, agreed to (i) retain an independent expert who would determine whether its information security system had vulnerabilities, (ii) retain a company to conduct an additional analysis to determine whether the data breach may have resulted in identity theft for any members of the settlement class, and (iii) provide each class member with a one-year subscription or a one-year renewal for an anti-virus, anti-spam Internet security product. Denying the final approval of the settlement, the court found that the proposed settlement was not “fair, reasonable, and adequate” because there was no discernible benefit and no meaningful relief to the class members. Specifically, the court found that retaining the experts would benefit TD Ameritrade more than the class and were measures that should be conducted by any company that deals in sensitive personal information, irrespective of any litigation. Regarding the anti-virus subscription, the court found that the software provided little benefit to the class because, among other things, it was available for most Internet users, either for free or for a nominal fee. For a copy of the order, please see http://www.buckleysandler.com/In_re_TD_Ameritrade.pdf.
E-Financial Services
California Federal Court Rejects Proposed Settlement, Decertifies Class in Data Breach Case. On October 23, the U.S. District Court for the Northern District of California denied final approval of a proposed class action settlement agreement and abrogated a previously granted provisional class certification in a case alleging that a security breach by a securities brokerage services provider exposed accountholders’ private information to spammers and other third parties. In re TD Ameritrade Accountholder Litigation, 07-CV-02852 (N.D. Cal. Oct. 23, 2009). In a previous order, the court granted preliminary approval of the class action settlement and preliminary approval of a provisional certification of the settlement class. Under the proposed settlement, the defendant, TD Ameritrade, agreed to (i) retain an independent expert who would determine whether its information security system had vulnerabilities, (ii) retain a company to conduct an additional analysis to determine whether the data breach may have resulted in identity theft for any members of the settlement class, and (iii) provide each class member with a one-year subscription or a one-year renewal for an anti-virus, anti-spam Internet security product. Denying the final approval of the settlement, the court found that the proposed settlement was not “fair, reasonable, and adequate” because there was no discernible benefit and no meaningful relief to the class members. Specifically, the court found that retaining the experts would benefit TD Ameritrade more than the class and were measures that should be conducted by any company that deals in sensitive personal information, irrespective of any litigation. Regarding the anti-virus subscription, the court found that the software provided little benefit to the class because, among other things, it was available for most Internet users, either for free or for a nominal fee. For a copy of the order, please see http://www.buckleysandler.com/In_re_TD_Ameritrade.pdf.
Privacy/Data Security
California Federal Court Holds State Law Claims Preempted by FCRA. On October 30, the U.S. District Court for the Central District of California held that a claim brought under California Bus. & Prof. Code § 17200 was preempted by the Fair Credit Reporting Act (FCRA) because it related to the responsibilities of a furnisher of information to credit reporting agencies (CRAs). Forester v. Pennsylvania Higher Education Assistance Agency, No. SACV 09-0930, 2009 WL 3710517 (C.D. Cal. Oct. 30, 2009). The consumer in Forester sued the servicer of his student loans, alleging that the servicer violated FCRA and Cal. Bus. & Prof. Code § 17200 by failing to investigate the accuracy of their credit reporting after the consumer filed a “Notice of Dispute” and that the servicer violated Cal. Bus. & Prof. Code §§ 17200 and 17500 by falsely promising that the consumer’s credit report would not show any derogatory history if the consumer rehabilitated his student loans. The servicer argued that FCRA preempted the state law claims. Acknowledging that FCRA and § 17200 both “relate to the duties of the furnishers of information to CRAs,” and following the recent trend of courts in the Ninth Circuit that hold that FCRA “totally preempts ‘all state statutory and common law causes of action which fall within the conduct proscribed by [15] § 1681s-2 [Section 623 of FCRA],’” the court found that FCRA clearly preempted the consumer’s claims, which relate to the servicer’s responsibilities as furnishers of information to CRAs, the court dismissed the consumer’s state law claims. The court, however, refused to dismiss the consumer’s FCRA claims, rejecting the servicer’s argument that they were time-barred because the alleged violation was a failure to investigate the item raised in the dispute, which occurred during the limitations period. For a copy of the opinion, please see http://www.buckleysandler.com/Forester_v_PHEAA.pdf.
New York Federal Court Denies FCRA Claim of Lack of Permissible Purpose. On November 5, the U.S. District Court for the Western District of New York held that an insurance agency responding to a an insurance quote request has a “permissible purpose” for accessing consumer credit information, and thus does not violate the Fair Credit Reporting Act (FCRA). Wojtczak v. Safeco Property & Casualty Insurance Companies, No. 08-CV-6436, 2009 WL 3733049 (W.D.N.Y. Nov. 5, 2009). In Wojtczak, the plaintiff consumer requested an insurance quote from the defendant insurance agency. When an employee of the insurance company requested personal information from the consumer, the consumer terminated the call. Subsequently, the consumer received a declination letter from the insurance agency advising him that his request for insurance had been denied. The letter included a notice under FCRA informing him of the reasons for denial and his right to receive a copy of his credit report from a credit reporting agency (CRA). The consumer claimed that he never gave the insurance agency permission to access his credit information and filed suit, alleging that the insurance agency, among other things, violated FCRA by obtaining his credit information without a “permissible purpose.” The court ruled that, even if the insurance agency had obtained the consumer’s credit information without his permission, “such conduct did not violate the FCRA.” The court indicated that FCRA allows a CRA to furnish a consumer credit report, among other things, when the person seeking the information intends to use it in connection with underwriting insurance involving the consumer. In determining whether the insurance agency was “underwriting insurance,” the court looked to Wilting v. Progressive County Mut. Ins. Co., 227 F.3d 474 (5th Cir. 2000) to reason that, even where the plaintiff “only request[s] a quotation,” the insurer must “obtain a credit report to weigh the risks presented by the consumer.” Therefore, the insurer engaged in underwriting the insurance to provide a quote. The Safeco court determined that the facts of this case were identical to those of Wilting and dismissed the FCRA claim. For a copy of the opinion, please see http://www.buckleysandler.com/Wojtczk_v_Safeco.pdf.
California Federal Court Rejects Proposed Settlement, Decertifies Class in Data Breach Case. On October 23, the U.S. District Court for the Northern District of California denied final approval of a proposed class action settlement agreement and abrogated a previously granted provisional class certification in a case alleging that a security breach by a securities brokerage services provider exposed accountholders’ private information to spammers and other third parties. In re TD Ameritrade Accountholder Litigation, 07-CV-02852 (N.D. Cal. Oct. 23, 2009). In a previous order, the court granted preliminary approval of the class action settlement and preliminary approval of a provisional certification of the settlement class. Under the proposed settlement, the defendant, TD Ameritrade, agreed to (i) retain an independent expert who would determine whether its information security system had vulnerabilities, (ii) retain a company to conduct an additional analysis to determine whether the data breach may have resulted in identity theft for any members of the settlement class, and (iii) provide each class member with a one-year subscription or a one-year renewal for an anti-virus, anti-spam Internet security product. Denying the final approval of the settlement, the court found that the proposed settlement was not “fair, reasonable, and adequate” because there was no discernible benefit and no meaningful relief to the class members. Specifically, the court found that retaining the experts would benefit TD Ameritrade more than the class and were measures that should be conducted by any company that deals in sensitive personal information, irrespective of any litigation. Regarding the anti-virus subscription, the court found that the software provided little benefit to the class because, among other things, it was available for most Internet users, either for free or for a nominal fee. For a copy of the order, please see http://www.buckleysandler.com/In_re_TD_Ameritrade.pdf.