InfoBytes, November 14, 2008
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Miscellany
- Mortgages
- Banking
- Consumer Finance
- Insurance
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
HUD Issues RESPA Reform Final Rule. On November 12, the U.S. Department of Housing and Urban Development (HUD) announced the publication of its long-anticipated final rule amending the Real Estate Settlement Procedures Act’s (RESPA) implementing Regulation X. The final rule is intended to protect consumers from “unnecessarily high settlement costs” by improving disclosures and making it easier for consumers to comparison shop. To this end, the rule:
- Creates new Good Faith Estimate (GFE) and HUD-1/HUD-1A settlement statement forms and facilitates required comparison between the GFE and the settlement statement at closing to better ensure compliance with newly-created tolerance limitations restricting the differences between estimated and actual costs for settlement services;
- Limits the charge originators may impose on consumers for delivery of the GFE, consistent with the Federal Reserve Board’s recently-issued revised regulations limiting the fees that a consumer may be charged for the delivery of Truth in Lending disclosures;
- Requires inclusion of yield spread premiums in the “origination charge” disclosed on the GFE, and treats lender payments to mortgage brokers as a credit towards settlement charges;
- Expands the definition of “mortgage broker” to include a non-employee exclusive agent of a lender who renders origination services and serves as an intermediary between the lender and the borrower;
- Amends the definition of “required use” to include incentives for the use of a particular service provider (e.g., builder or home seller discounts for the use of an affiliated lender);
- Clarifies and updates escrow account requirements and mortgage servicing transfer provisions; and
- Makes clear that all RESPA disclosures may be provided to consumers in electronic form, as long as the consumer consents to receive such disclosures in electronic form and the other specific conditions of ESIGN are met. The final rule also will permit documents required to be retained under RESPA to be retained in electronic format, as long as the ESIGN requirements for document retention are met.
The final rule makes a number of significant changes to the March 2008 proposed RESPA rule (reported in InfoBytes, Mar. 14, 2008). Notably, the rule eliminates the proposed separate GFE application process and does not require that a closing script be completed and read by the closing agent. Under the final rule, the GFE form is shorter than had been proposed, and originators have the option of not filling out the GFE tradeoff table (which provides information on different loans for which the borrower is qualified). HUD also has revised certain provisions dealing with GFE tolerances, and clarified how the new definition of “required use” will apply in the affiliated business exemption context. In addition, the final rule includes a provision to allow lenders a short period of time to correct certain violations of the new disclosure requirements and simplifies the process for utilizing an average charge mechanism.
The final rule does not include proposed language explicitly allowing negotiated discounts. According to the preamble to the rule, HUD will give this proposed regulatory change further consideration, but “[i]t remains HUD’s position…that discounts negotiated between loan originators and other settlement service providers, or by an individual settlement service provider on behalf of a borrower, where the discount is ultimately passed on to the borrower in full, is not, depending upon the specific circumstances of a particular transaction, a violation of Section 8 of RESPA.”
Compliance with the new GFE and settlement statement requirements is not required until January 1, 2010. However, certain provisions, including the average charge and required use provisions and the rule’s technical amendments, are to be implemented by January 16, 2009, the effective date of the final rule. HUD will issue guidance on compliance with the rule’s provisions during the implementation period. According to HUD, the amendments will save consumers an estimated $700 at closing.
For a copy of the final rule and for the new GFE and HUD-1/HUD-1A forms, please see http://www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm.
Agencies Overhaul Appraisal Guidelines. On November 13, the federal banking agencies and the National Credit Union Administration released an extensive proposed revision of their Interagency Appraisal and Evaluation Guidelines (Guidelines). The proposal appears to come in response to the tentative agreement announced this March between New York Attorney General Andrew Cuomo, Fannie Mae, Freddie Mac, and the Office of Federal Housing Enterprise Oversight (reported in InfoBytes, Mar. 7, 2008). Many of the proposed changes in the federal guidelines parallel aspects of the New York Attorney General agreement. The federal proposal, however, unlike the New York agreement, (i) does not prohibit lenders from using “in-house” staff appraisers to conduct initial appraisals, (ii) does not prohibit lenders from using appraisal management companies that they own or control, and (iii) does not bar mortgage brokers from selecting appraisers. Changes from the current Guidelines in the proposal include (i) an expansion of existing requirements for appraiser independence, such as an explicit ban on lenders setting a target value or loan-to-value ratio for property, (ii) a clarification that the Uniform Standards of Professional Appraisal Practice (USPAP) merely set minimum appraisal standards for federally-related transactions and that the Guidelines go beyond USPAP in some respects, (iii) the acknowledgement of the role of automated valuation models and tax assessment valuations, which may be used when an “evaluation” short of an appraisal is needed, but may not replace a mandatory appraisal, (iv) added emphasis on the importance of monitoring portfolios and replacing or updating valuations when necessary, and (v) a clarification of the exemptions from the statutory mandatory appraisal requirement. Comments on the proposal will be due 60 days after publication in the Federal Register, which is forthcoming. For a copy of the draft of the proposal, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20081113a1.pdf.
FDIC Revises Opinion Regarding “Deposit” for Stored Value Cards. On November 13, the Federal Deposit Insurance Corporation (FDIC) revised General Counsel’s Opinion No. 8, which clarifies the meaning of “deposit” as applied to funds underlying stored value cards. Under the new opinion, all funds underlying stored value products will be treated as deposits if they have been placed at an insured depository institution. As a result, the funds will be subject to FDIC assessments and will be insured by the FDIC up to the insurance limit. The opinion, however, does not affect the FDIC’s standards for determining “pass-through” insurance coverage. The Federal Register notice states that this treatment of underlying funds does not differ from an August 2005 proposed rule regarding stored value cards (reported in InfoBytes, Aug. 26, 2005). For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2008/pdf/E8-26867.pdf.
FHFA and HOPE NOW Announce Streamlined Loan Modification Program. On November 11, the Federal Housing Finance Agency (FHFA) and HOPE NOW announced a streamlined loan modification program that aims to reduce the number of preventable mortgage foreclosures. The new program results from a collaborative effort by the Federal Housing Authority, the FHFA, the U.S. Department of the Treasury, the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and HOPE NOW. Borrowers failing to meet the program’s criteria may still seek forbearance through a servicer’s standard modification process. The program targets high-risk borrowers who (i) own and occupy a single family home, (ii) have a LTV of at least 90%, and (iii) are at least 90 days delinquent on their mortgage payment. Under the program, loan servicers will attempt to lower a qualifying borrower’s mortgage payment to 38% of the borrower’s household’s monthly gross income. To achieve this target payment amount, loan servicers may (i) lower the interest rate, (ii) extend the life of the loan, or (iii) defer payment on part of the principal. If the target payment amount is economically feasible, the servicer must provide documents to the borrower to sign and return with the first month’s payment under the modified terms to begin the modification. These documents are (i) a hardship statement, (ii) an income verification form, and (iii) a modification agreement. The modification will be complete after a borrower makes three timely payments under the modified terms. A bulletin providing approved servicers with additional guidance is forthcoming from Fannie Mae and Freddie Mac. The FHFA anticipates that most servicers will be able to implement the new program by December 15, 2008. For a copy of the press releases, please see http://www.hopenow.com/upload/press_release/files/SMP%20Release%20Final.pdf and http://www.fhfa.gov/GetFile.aspx?FileID=169.
FDIC Proposes Loss Sharing Loan Modification Program. On November 13, the Federal Deposit Insurance Corporation (FDIC) issued a proposal to promote affordable loan modifications. By modifying more delinquent loans, the FDIC hopes to stem rising foreclosures, thereby stifling the decrease in home prices. To promote additional modifications, the FDIC will pay servicers $1,000 for the cost of modifying each loan and share up to 50% of the losses incurred for loans that “re-default.” Under the program, inter alia, (i) eligible loans must be secured by owner-occupied property, (ii) the borrower must make at least 6 payments on the modified loan before loss sharing is available, (iii) modified loans must result in a 31% borrower debt-to-income ratio, (iv) participating servicers must conduct a systematic review of their portfolio for candidate loans, (v) government loss sharing will be decreased as the loan to value ratio (LTV) rises, and (vi) no loss sharing will be available if the LTV exceeds 150%, if the new monthly payment under the modified loan is not at least 10% less, or if 8 years has passed since the modification. For a copy of the proposal, please see http://www.fdic.gov/consumers/loans/loanmod/index.html.
OTS Revises Examination Handbook. On November 13, the Office of Thrift Supervision (OTS) revised Section 750 of the Examination Handbook regarding mortgage banking. Section 750 now includes a discussion of the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin (SAB) No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings. The revisions reflect the SEC’s position that expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. For a copy of the Regulatory Bulletin containing the revised section, please see http://files.ots.treas.gov/74844.pdf.
Future TARP Funds Will Assist Consumer Lending. On November 12, Treasury Secretary Henry Paulson announced the remaining priorities for the Troubled Asset Relief Program (TARP) funds. TARP funds will not be used to purchase illiquid mortgage-related assets, as previously was planned. Instead, Secretary Paulson proposed possible new initiatives to be financed with TARP funds, such as (i) attracting private capital to financial institutions by “matching investments,” (ii) supporting access to credit in the non-bank financial sector, and (iii) examining new mortgage foreclosure mitigation strategies. For a copy of the announcement, please see http://www.treas.gov/press/releases/hp1265.htm.
FTC Charges Internet Payday Lenders for Violations of FTC Act, TILA. On November 6, the Federal Trade Commission (FTC) and the State of Nevada filed a joint complaint charging ten related Internet payday lenders and their principals with violating federal and state law for not disclosing key loan terms to consumers and for using abusive and deceptive collection tactics. According to the complaint, the defendants, through their web sites, offered consumers loans of $500 or less within 24 hours without requiring a credit check, proof of income, or documentation. In violation of the FTC Act, the defendants allegedly used unfair and deceptive collection tactics to collect the debt, including falsely threatening consumers with arrest or imprisonment, falsely claiming that consumers were legally obligated to pay the debts, making false threats of legal action, and repeatedly calling consumers at work using abusive and profane language and disclosing consumers’ purported debts to coworkers, employers, and other third parties. The defendants also allegedly violated the Truth in Lending Act and Regulation Z by failing to make required written disclosures – including the amount financed, an itemization of the amount financed, the finance charge, the annual percentage rate, the payment schedule, the total number of payments, and any late payment fees – clearly and conspicuously before consummating a consumer credit transaction. The defendants also allegedly violated Nevada’s Deceptive Trade Act by (i) not disclosing loan terms, (ii) making false representations when collecting debts, and (iii) making loans to consumers without licenses. For a copy of the complaint, please see http://www.ftc.gov/os/caselist/0923093/081112cmp0923093.pdf.
OCC Rejects Industry Request to Defer Credit Card Losses. On November 10, the Office of the Comptroller of the Currency (OCC) responded to industry requests for a new workout program for credit card debtors. The Financial Services Roundtable and the Consumer Federation of America requested that the OCC allow banks to provide workout programs for borrowers permitting borrowers to repay less than the full amount while deferring the loss recognition and income reporting. The OCC explained that (i) the proposal was imprudent because the program defers timely recognition of loss and (ii) the OCC maintains a policy against banks attempting long-term recoveries while assets deemed uncollectible have not been accounted for as charge offs and reported as losses. For a copy of the response, please see http://www.occ.gov/ftp/release/2008-132a.pdf.
FDIC Extends Comment Period for Proposed Rulemaking. On November 7, the Federal Deposit Insurance Corporation announced that it has extended the comment period for certain provisions of a proposed rule affecting risk-based assessments from November 17, 2008 to December 17, 2008 (reported in InfoBytes, Oct. 10, 2008). The extension applies to the provisions that would (i) alter the way in which the assessment system differentiates for risk and change assent rates beginning the second quarter 2009 assessment period and (ii) make technical and other changes to rules regarding the risk-based assessment system. The end of the comment period remains November 17, 2008 for a provision that would raise current assessment rates uniformly by seven basis points for the first quarter 2009 assessment period. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2008/pr08112.html.
Interagency Statement Calls for Focus on Creditworthy Borrowers. On November 12, the Department of the Treasury, the Federal Deposit Insurance Corporation, and the Federal Reserve issued a joint statement highlighting the importance to banking organizations of lending to creditworthy borrowers, strengthening capital positions, engaging in appropriate loss mitigation strategies, and reassessing the incentive implications of compensation policies. The statement, inter alia, (i) urges banking organizations to lend to creditworthy borrowers, (ii) encourages banking organizations to develop effective capital planning processes, including, for example, considering in setting dividend levels the adequacy of their loan loss allowance, the overall effect that a dividend payout would have on their cost of funding, and their ability to meet the needs of creditworthy borrowers, (iii) stresses that lenders are expected to avoid preventable foreclosures, and (iv) recommends management compensation programs balance current earnings capacity and the financial resources of the banking organization with the need to retain strong management. For a copy of the statement, please see
http://www.federalreserve.gov/newsevents/press/bcreg/20081112a.htm.
Fed Approves AmEx Bank Holding Company Application. On November 10, the Federal Reserve Board (Fed) announced the approval of the application and notices by American Express Company and American Express Travel Related Services Company, Inc. to become bank holding companies. In making its determination, the Fed assessed (i) the competitive effects of the proposal in the relevant geographic markets, (ii) the financial and managerial resources and future prospects of the companies and banks involved in the proposal, (iii) the convenience and needs of the community to be served, and (iv) the availability of information needed to determine and enforce compliance with the Bank Holding Company Act and other applicable federal banking laws. For a copy of the order, please see http://www.federalreserve.gov/newsevents/press/orders/orders20081110a1.pdf.
State Issues
Massachusetts AG Obtains Injunction Preventing Foreclosures. On November 12, Massachusetts Attorney General Martha Coakley obtained a preliminary injunction against Option One Mortgage Corp. (Option One) and H&R Block Mortgage Corp., preventing Option One and American Home Mortgage Servicing Inc. (AMHSI) from initiating or advancing foreclosures on loans deemed “presumptively unfair.” Under the order, a loan is “presumptively unfair” if (i) the loan is an adjustable rate mortgage with an introductory period of three years or less, (ii) the borrower has a total debt-to-income ratio that would have exceeded 50% if Option One had measured the debt – not by the debt due under the teaser rate, but by the debt due under the fully-indexed rate. (However, this debt-to-income ratio need exceed only 45% if the borrower had a student loan in deferment at least six months prior to the submission date of the mortgage loan application.), (iii) the loan has an introductory or “teaser” rate for the initial period that is at least 2% lower than the fully indexed rate, unless the debt-to-income ratio is 55% or above, in which case the difference between the teaser rate and fully indexed rate is not relevant, and (iv) the loan-to-value ratio of the loan is 97%, or the loan carries a substantial prepayment penalty, or a prepayment penalty that lasts beyond the introductory period. Under the order, AHMSI must provide the Attorney General’s Office at least 30 days notice before it intends to foreclose on a presumptively unfair loan. If the Attorney General objects to the foreclosure, AHMSI must obtain approval from the court before foreclosing on the loan. If AHMSI intends to foreclose on a loan that it believes does not meet the standards for presumptive unfairness, it must still provide the Attorney General’s Office 30 days notice. During this period, the Attorney General’s Office may still object to the foreclosure if it believes that the loan possesses any unfair characteristics. In addition to granting the preliminary injunction, the court allowed the Attorney General’s Office to proceed with claims that the defendants’ policies and practices and disparate pricing violate antidiscrimination law. The court also rejected the defendants’ arguments that the Attorney General’s claims under the Massachusetts Consumer Protection Act were (i) unconstitutionally vague, (ii) interfered with the companies’ ability to enforce their mortgage loans in violation of the Contracts Clause and Dormant Commerce Clause of the U.S. Constitution, and (iii) preempted by the Depository Institutions Deregulation and Monetary Control Act. For a copy of preliminary injunction, please see http://www.mass.gov/Cago/docs/press/2008_11_12_option_one_pi_attachment1.pdf.
North Carolina Declaratory Ruling Clarifies Definition of Points and Fees. On November 5, the North Carolina Commissioner of Banks issued Declaratory Ruling 2008-1, which clarifies whether seller-paid “points and fees” are included when determining “points and fees” under North Carolina’s High Cost Home Loan law. North Carolina H.B. 2188 (reported in InfoBytes, Aug. 22, 2008) amended the definition of “points and fees” to conform to North Carolina H.B. 1817, which includes yield spread premiums paid by a lender to a broker as part of the points and fees. The amended definition removed the requirement that points and fees be payable to the borrower at or before loan closing. However, a possible unintended consequence was a broadening of the points and fees calculation to include all points and fees paid to the lender by sellers and other third parties. The ruling clarifies that seller-paid points and fees are generally excluded from the points and fees calculation. However, seller-paid points and fees must be included in the calculation if they are (i) real estate related fees found under Section 226.4(c)(7) of the Truth in Lending Act if (1) the fee is not excluded from the definition of points and fees under the Law, and (2) the lender directly or indirectly benefits, or the fee is paid directly to the lender or its affiliate, (ii) seller-paid mortgage broker fees, or (iii) a prepayment penalty that seller agrees to pay at a future date. For a copy of Declaratory Ruling 2008-1, please see http://www.nccob.org/NR/rdonlyres/2FF0547E-D1C4-4F22-9133-8DC8A0CF37FA/1666/DeclaratoryRuling2008001.pdf.
California Requires Certificate of Registration for Title Insurance Marketing Representatives. On September 25, California Governor Arnold Schwarzenegger signed into law S.B. 133, a bill which prohibits the employment of a title marketing representative unless he or she holds a valid certificate of registration as a title marketing representative issued by the California Insurance Commissioner for a three-year period. A “title marketing representative” is defined, in part, as a natural person employed by a title company whose primary duty is to market, offer, solicit, negotiate, or sell title insurance. S.B. 133 also (i) requires title companies to notify the California Insurance Commissioner when a title marketing representative is terminated or becomes employed, (ii) specifies the application process for the certificate of registration and (iii) authorizes the California Insurance Commissioner to issue a cease and desist order from insurance marketing if title insurance is marketed without a valid certificate of registration. For a copy of S.B. 133, please see http://www.leginfo.ca.gov/pub/07-08/bill/sen/sb_0101-0150/sb_133_bill_20080925_chaptered.pdf.
Washington Department of Financial Institutions Adopts New Mortgage Lending, Credit Union Rules. On November 4, the Washington Department of Financial Institutions (Department) adopted a new rule regarding the disclosure summary required under the recently-enacted SB 2770 (reported in InfoBytes, Mar. 28, 2008). The Department also issued one-page disclosure summary forms for fixed rate and variable rate loans. In addition, the Department’s Division of Credit Unions adopted a rule that implements the “Interagency Guidance on Nontraditional Mortgage Product Risks” and the “Statement on Subprime Mortgage Lending” for credit unions. The rules take effect December 5, 2008. For a copy of the final rule implementing SB 2770, please see http://dfi.wa.gov/resources/pdf/2770-adopted-language.pdf. For a copy of the disclosure forms, please see http://dfi.wa.gov/resources/pdf/disclosure-summary-fixed-rate.pdf and http://dfi.wa.gov/resources/pdf/disclosure-summary-variable-rate.pdf. For a copy of the final rule implementing the federal guidelines for credit unions, please see http://dfi.wa.gov/cu/rulemaking/guidance-adopted-language.pdf.
Attorneys General, Data Collection Company Settle Privacy Suit. On October 30, a coalition of the majority of state Attorneys General entered into a consent agreement with Educational Research Center of America, Inc. (ERCA), settling allegations that ERCA violated various state consumer protection laws by providing survey information from students to educational institutions and commercial marketers. The information was obtained by offering gift cards to teachers and counselors to entice them to have their students complete the surveys. The surveys revealed, inter alia, information about ethnicity, high school courses taken, honors received, and involvement in extracurricular activities. While ERCA disclosed that students could opt-out of having their information shared, ERCA did not disclose that students could opt-out of completing the surveys. Pursuant to the terms of the consent agreement, ERCA is prohibited from offering anything of monetary value to educators relating to the collection of student information and must clearly disclose to students and to parents of students under 18 how to opt-out of completing its surveys. ERCA must also pay a $200,000 fine. For a copy of the consent agreement, please see http://www.azag.gov/press_releases/oct/2008/ERCA%20AVC.pdf.
Montana Regulator Proposes to Eliminate In-State Bank Account Requirement. On November 6, the Montana Division of Banking and Financial Institutions issued a proposed rule to waive the requirement for licensed mortgage lenders to keep an account for escrow funds, trust funds, or reserves in a financial institution having an office in Montana. Comments on the proposed rule must be submitted no later than December 5, 2008. Barring objection by at least 10 percent of those directly affected by the proposed rule, the waiver will take effect December 8, 2008. For a copy of the proposed rule, please see http://doa.mt.gov/pdfs/2-59-406pro-arm.pdf.
Courts
Fifth Circuit Compels Arbitration of FCRA, FDCPA Claims. On November 10, the U.S. Court of Appeals for the Fifth Circuit held that a borrower’s Fair Credit Reporting Act (FCRA) and Fair Debt Collection Practices Act (FDCPA) claims must be arbitrated, even though the defendant servicer was not a signatory to the original agreement. Sherer v. Green Tree Servicing LLC, No. 07-60567, 2008 WL 4838702 (5th Cir. Nov. 10, 2008). In Sherer, the defendant serviced the plaintiff borrower’s manufactured home loan. After the borrower paid the loan in full, the servicer attempted to collect an unauthorized prepayment penalty. When the plaintiff refused to pay, the servicer attempted to charge interest on the penalty, and also reported derogatory information on the plaintiff’s consumer credit report. After the borrower sued, the servicer filed a motion to dismiss the lawsuit and compel arbitration of the claims under the arbitration clause in the original agreement between the borrower and lender. The district court refused the motion because (i) the servicer was not a signatory to the original agreement and (ii) the court could not apply equitable estoppel. The Circuit Court reversed, reasoning that the original loan agreement identified circumstances, such as those faced by parties to this suit, in which the borrower would be compelled to arbitrate against a non-signatory to the agreement. For a copy of the opinion, please see http://www.ca5.uscourts.gov/opinions%5Cpub%5C07/07-60567-CV0.wpd.pdf.
West Virginia Federal Court Revises National Bank Preemption Ruling. On November 5, the U.S. District Court for the Southern District of West Virginia reconsidered whether the National Bank Act (NBA) preempts claims of unconscionable lending practices and loan terms brought against a national bank. Watkins v. Wells Fargo Home Mortgage, No. 08-0132 (S.D. W.Va. Nov. 5, 2008). The plaintiff initially brought claims against Wells Fargo Home Mortgage (Wells Fargo) alleging that certain terms of her loan were unconscionable (reported in InfoBytes, July 18, 2008). The court held that the NBA preempted these claims. Subsequently, the plaintiff moved for relief from the judgment and filed a second amended complaint amending, inter alia, her “unconscionable contract” claims to “unconscionable conduct” claims. The court granted the motion for relief, allowed the plaintiff to amend her complaint, and applied a new preemption analysis to the claims of the second amended complaint. Instead of applying the doctrine of field preemption – where “the federal scheme of regulation of a defined field is so pervasive that Congress must have intended to leave no room for the states to supplement it” – the court applied conflict preemption – where Congress may not have “completely displaced state regulation in a specific area” but “state law is nullified to the extent that it actually conflicts with federal law.” However, the court noted that the analysis does not turn on the name given to a claim – “in determining whether a claim is subject to conflict preemption, a court must look beyond the shell of how a plaintiff styles a claim to get to the nut of exactly what defendant conduct the plaintiff alleges caused her harm.” Accordingly, the court held that certain aspects of plaintiff’s “unconscionable conduct” claims – that the loan (i) was an adjustable rate mortgage (ARM); (ii) included an “exploding payment”; and (iii) could not be refinanced – were preempted because regulations issued by the Office of the Comptroller of the Currency (OCC) clearly allow the use of ARMs and do not require a lender to refinance a loan. However, other aspects of the claims – that Wells Fargo (i) did not consider plaintiff’s ability to repay, (ii) did not disclose “the realities of future payments after reset,” (iii) made “unfair loans in order to transfer…home equity from borrowers to…Defendant,” and (iv) misrepresented certain charges – were not preempted. According to the court, although OCC regulations permit national banks to “use any reasonable method to determine a borrower’s ability to repay,” the plaintiff’s claims were not preempted to the extent they allege that Wells Fargo completely disregards a borrowers’ repayment ability – i.e., Wells Fargo employs no method to determine a borrower’s ability to repay whatsoever. Because the claims do not attempt to impose restrictions inconsistent with federal regulations, the court found that those claims were not preempted. Employing similar logic, the court found that the NBA did not preempt the plaintiff’s claims that Wells Fargo misrepresents the “realities” of repaying an ARM loan – notwithstanding OCC regulated disclosure obligations – because the OCC does not authorize national banks to misrepresent loan terms to borrowers or to make loans it knows borrowers cannot repay. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Watkins_v_Wells_Fargo.pdf.
Oregon Federal Court Rules on the Relevancy of Evidence for FCRA Adverse Action Defense. On November 4, the U.S. District Court for the District of Oregon held that evidence of oral communications between insurance agents and customers could be relevant to defend against certain Fair Credit Reporting Act (FCRA) claims. Ashby v. Farmers Ins. Co. of Oregon, No. 01-CV-1446, 2008 WL 4838847 (D. Or. Nov. 4, 2008). The defendants sought to offer evidence at trial of oral communications between their agents and insureds to demonstrate that (i) the defendants did not willfully violate FCRA and that (ii) even if the jury were to find that the defendants willfully violated FCRA, the communications are relevant as to the amount of statutory damages within the range of $100-$1000 that may be awarded to class members who engaged in such communications. The plaintiffs argued that evidence of oral communications between agents and some insureds is not admissible for any purpose. Regarding the first issue, the court found that the evidence would tend to support the defendants’ argument that they attempted to comply with FCRA’s adverse action notice requirements and that these attempts did not constitute a willful violation of FCRA. As a result, the court agreed to screen the defendants’ proffers on this subject as the issues are framed at the pre-trial conference. However, regarding the second issue, the court found that the defendants’ evidence was irrelevant because the plaintiffs sought statutory damages, not actual damages. The court, citing Ramirez v. Midwest Airlines, Inc., 537 F. Supp. 2d 1161, 1168 (D. Kan. 2008), found that FCRA does not require that an award of statutory damages greater than $100 to each class member be supported by proof of actual harm or other circumstances specific to the class member rather than to the class as a whole. Accordingly, the oral communications evidence was irrelevant when determining the amount of statutory damages between $100 and $1000 that may be awarded, and thus was inadmissible with respect to the damages issue. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Ashby_v_Farmers.pdf.
Oregon Federal Court Finds Debt Collector Violated FDCPA. On October 27, the U.S. District Court for the District of Oregon granted partial summary judgment in favor of a debtor who alleged that a debt collector violated § 1692(e) of the Fair Debt Collection Practices Act (FDCPA) by falsely representing that the terms of an outdated credit card agreement controlled the issue of the debtor’s liability. Avery v. Gordon, No. 08-139, 2008 WL 4793686 (D. Or. Oct. 27, 2008). The case arose after Avery, the plaintiff and debtor, missed a credit card payment; the credit card company subsequently sold the delinquent debt to the defendants, First Resolution Investment Corporation (FRIC) and its collections attorney, Daniel Gordon, PC. FRIC’s and Gordon’s efforts to collect the debt resulted in the parties filing multiple legal actions against each other. Ultimately, Avery alleged that the defendants violated §1692 (e) of the FDCPA by (i) attempting to collect unauthorized charges based on incorrect allegations of the amount due, (ii) attempting to collect a debt based on an invalid cardholder agreement, and (iii) attempting to collect a time-barred debt. The court denied summary judgment on Avery’s first and third claims because determination of the exact amount of the debt that Avery owed was a question of fact for the jury, and a court previously determined that the claim was not time barred. However, the court granted summary judgment on Avery’s second claim because there was indisputable evidence that FRIC and Gordon alleged the debt was governed by a May 2001 credit card agreement, when in fact a June 2001 agreement controlled, and this was a “false representation of the character of a debt” in direct violation of § 1692(e). FRIC and Gordon also moved for summary judgment, alleging, inter alia, that Avery’s claims failed as a matter of law because the defendants never communicated directly with Avery in connection with the counterclaim. The court denied summary judgment to the defendants, finding, inter alia, that “a counterclaim for a debt is not a representation made to an attorney but rather a demand for money made on the debtor, through a pleading rather than a letter or a phone call,” and thus, the defendants had communicated directly with Avery. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Avery_v_Gordon.pdf.
Firm News
Jeff Naimon will be speaking at the District of Columbia Bar Association’s Off-The-Record luncheon program entitled “New Consumer Protection Rules for the Subprime Market…When It Returns!” being held in Washington, DC on November 17 at 12 PM. His speech will cover the amended Regulation Z. Click here for additional information about the luncheon.
Jerry Buckley and Kirk Jensen were speakers at the Community Reinvestment Act & Fair Lending Colloquium Conference October 26-29 in Orlando, Florida. Jerry spoke on the panel entitled “Identifying Trends and Potential Regulatory Concerns.” Kirk spoke on the panel entitled “Analyzing Your CRA and Fair Lending Risks During Mergers and Acquisitions.”
Grant Mitchell was a featured speaker at the annual RESPRO Fall Seminar in New Orleans, Louisiana from November 5 - 7. His presentation concentrated on various RESPA issues.
Sara Emley spoke at the Investment Advisers Association Compliance Workshop in Atlanta, Georgia on November 6. Her topics included business continuity and the Form ADV proposal.
Chris Witeck spoke at the Mortgage Bankers Association’s Residential Underwriting Conference 2008 in Tampa, Florida on November 7. He spoke on the Red Flag Alert panel, and discussed, among other items, the recent FTC data security settlement with Premier Capital Lending.
Jerry Buckley and Margo Tank conducted a panel discussion on electronic-related legal and regulatory issues at the Electronic Signature and Records Association (ESRA) Second Annual Conference: E-Signatures ’08: Business, Legal and Technology Trends on November 12 and 13 in Washington, DC.
Miscellany
Citigroup Announces Measures to Avoid Foreclosures. On November 11, Citigroup Inc. (Citi) announced measures to assist certain at-risk borrowers to remain current on their payments and avoid foreclosure by (i) extending its moratorium on foreclosures, (ii) streamlining its existing loan modification program, and (iii) introducing the “Citi Homeowner Assistance” program to provide mortgage workouts to borrowers whose mortgages remain current but considered at-risk. JPMorgan Chase & Co. and Bank of America have recently announced similar measures. For a copy of the press release, please see http://www.citigroup.com/citi/press/2008/081111a.htm.
URAC Revises HIPAA Security Standards. On October 30, URAC, an independent, non-profit accreditation organization, announced “significant” revisions to its Health Insurance Portability and Accountability Act Privacy and Security Standards. The revised standard requires, inter alia, (i) changes in practices regarding notifying consumers of material changes in privacy policies, and (ii) risk assessment policies and procedures to include the analysis of portable media, such as USB drives and laptop computers. For a copy of the press release, please see http://www.urac.org/press/cmsDocument.aspx?id=612.
Mortgages
HUD Issues RESPA Reform Final Rule. On November 12, the U.S. Department of Housing and Urban Development (HUD) announced the publication of its long-anticipated final rule amending the Real Estate Settlement Procedures Act’s (RESPA) implementing Regulation X. The final rule is intended to protect consumers from “unnecessarily high settlement costs” by improving disclosures and making it easier for consumers to comparison shop. To this end, the rule:
• Creates new Good Faith Estimate (GFE) and HUD-1/HUD-1A settlement statement forms and facilitates required comparison between the GFE and the settlement statement at closing to better ensure compliance with newly-created tolerance limitations restricting the differences between estimated and actual costs for settlement services;
• Limits the charge originators may impose on consumers for delivery of the GFE, consistent with the Federal Reserve Board’s recently-issued revised regulations limiting the fees that a consumer may be charged for the delivery of Truth in Lending disclosures;
• Requires inclusion of yield spread premiums in the “origination charge” disclosed on the GFE, and treats lender payments to mortgage brokers as a credit towards settlement charges;
• Expands the definition of “mortgage broker” to include a non-employee exclusive agent of a lender who renders origination services and serves as an intermediary between the lender and the borrower;
• Amends the definition of “required use” to include incentives for the use of a particular service provider (e.g., builder or home seller discounts for the use of an affiliated lender);
• Clarifies and updates escrow account requirements and mortgage servicing transfer provisions; and
• Makes clear that all RESPA disclosures may be provided to consumers in electronic form, as long as the consumer consents to receive such disclosures in electronic form and the other specific conditions of ESIGN are met. The final rule also will permit documents required to be retained under RESPA to be retained in electronic format, as long as the ESIGN requirements for document retention are met.
The final rule makes a number of significant changes to the March 2008 proposed RESPA rule (reported in InfoBytes, Mar. 14, 2008). Notably, the rule eliminates the proposed separate GFE application process and does not require that a closing script be completed and read by the closing agent. Under the final rule, the GFE form is shorter than had been proposed, and originators have the option of not filling out the GFE tradeoff table (which provides information on different loans for which the borrower is qualified). HUD also has revised certain provisions dealing with GFE tolerances, and clarified how the new definition of “required use” will apply in the affiliated business exemption context. In addition, the final rule includes a provision to allow lenders a short period of time to correct certain violations of the new disclosure requirements and simplifies the process for utilizing an average charge mechanism.
The final rule does not include proposed language explicitly allowing negotiated discounts. According to the preamble to the rule, HUD will give this proposed regulatory change further consideration, but “[i]t remains HUD’s position…that discounts negotiated between loan originators and other settlement service providers, or by an individual settlement service provider on behalf of a borrower, where the discount is ultimately passed on to the borrower in full, is not, depending upon the specific circumstances of a particular transaction, a violation of Section 8 of RESPA.”
Compliance with the new GFE and settlement statement requirements is not required until January 1, 2010. However, certain provisions, including the average charge and required use provisions and the rule’s technical amendments, are to be implemented by January 16, 2009, the effective date of the final rule. HUD will issue guidance on compliance with the rule’s provisions during the implementation period. According to HUD, the amendments will save consumers an estimated $700 at closing.
For a copy of the final rule and for the new GFE and HUD-1/HUD-1A forms, please see http://www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm.
Agencies Overhaul Appraisal Guidelines. On November 13, the federal banking agencies and the National Credit Union Administration released an extensive proposed revision of their Interagency Appraisal and Evaluation Guidelines (Guidelines). The proposal appears to come in response to the tentative agreement announced this March between New York Attorney General Andrew Cuomo, Fannie Mae, Freddie Mac, and the Office of Federal Housing Enterprise Oversight (reported in InfoBytes, Mar. 7, 2008). Many of the proposed changes in the federal guidelines parallel aspects of the New York Attorney General agreement. The federal proposal, however, unlike the New York agreement, (i) does not prohibit lenders from using “in-house” staff appraisers to conduct initial appraisals, (ii) does not prohibit lenders from using appraisal management companies that they own or control, and (iii) does not bar mortgage brokers from selecting appraisers. Changes from the current Guidelines in the proposal include (i) an expansion of existing requirements for appraiser independence, such as an explicit ban on lenders setting a target value or loan-to-value ratio for property, (ii) a clarification that the Uniform Standards of Professional Appraisal Practice (USPAP) merely set minimum appraisal standards for federally-related transactions and that the Guidelines go beyond USPAP in some respects, (iii) the acknowledgement of the role of automated valuation models and tax assessment valuations, which may be used when an “evaluation” short of an appraisal is needed, but may not replace a mandatory appraisal, (iv) added emphasis on the importance of monitoring portfolios and replacing or updating valuations when necessary, and (v) a clarification of the exemptions from the statutory mandatory appraisal requirement. Comments on the proposal will be due 60 days after publication in the Federal Register, which is forthcoming. For a copy of the draft of the proposal, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20081113a1.pdf.
FHFA and HOPE NOW Announce Streamlined Loan Modification Program. On November 11, the Federal Housing Finance Agency (FHFA) and HOPE NOW announced a streamlined loan modification program that aims to reduce the number of preventable mortgage foreclosures. The new program results from a collaborative effort by the Federal Housing Authority, the FHFA, the U.S. Department of the Treasury, the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and HOPE NOW. Borrowers failing to meet the program’s criteria may still seek forbearance through a servicer’s standard modification process. The program targets high-risk borrowers who (i) own and occupy a single family home, (ii) have a LTV of at least 90%, and (iii) are at least 90 days delinquent on their mortgage payment. Under the program, loan servicers will attempt to lower a qualifying borrower’s mortgage payment to 38% of the borrower’s household’s monthly gross income. To achieve this target payment amount, loan servicers may (i) lower the interest rate, (ii) extend the life of the loan, or (iii) defer payment on part of the principal. If the target payment amount is economically feasible, the servicer must provide documents to the borrower to sign and return with the first month’s payment under the modified terms to begin the modification. These documents are (i) a hardship statement, (ii) an income verification form, and (iii) a modification agreement. The modification will be complete after a borrower makes three timely payments under the modified terms. A bulletin providing approved servicers with additional guidance is forthcoming from Fannie Mae and Freddie Mac. The FHFA anticipates that most servicers will be able to implement the new program by December 15, 2008. For a copy of the press releases, please see http://www.hopenow.com/upload/press_release/files/SMP%20Release%20Final.pdf and http://www.fhfa.gov/GetFile.aspx?FileID=169.
FDIC Proposes Loss Sharing Loan Modification Program. On November 13, the Federal Deposit Insurance Corporation (FDIC) issued a proposal to promote affordable loan modifications. By modifying more delinquent loans, the FDIC hopes to stem rising foreclosures, thereby stifling the decrease in home prices. To promote additional modifications, the FDIC will pay servicers $1,000 for the cost of modifying each loan and share up to 50% of the losses incurred for loans that “re-default.” Under the program, inter alia, (i) eligible loans must be secured by owner-occupied property, (ii) the borrower must make at least 6 payments on the modified loan before loss sharing is available, (iii) modified loans must result in a 31% borrower debt-to-income ratio, (iv) participating servicers must conduct a systematic review of their portfolio for candidate loans, (v) government loss sharing will be decreased as the loan to value ratio (LTV) rises, and (vi) no loss sharing will be available if the LTV exceeds 150%, if the new monthly payment under the modified loan is not at least 10% less, or if 8 years has passed since the modification. For a copy of the proposal, please see http://www.fdic.gov/consumers/loans/loanmod/index.html.
Massachusetts AG Obtains Injunction Preventing Foreclosures. On November 12, Massachusetts Attorney General Martha Coakley obtained a preliminary injunction against Option One Mortgage Corp. (Option One) and H&R Block Mortgage Corp., preventing Option One and American Home Mortgage Servicing Inc. (AMHSI) from initiating or advancing foreclosures on loans deemed “presumptively unfair.” Under the order, a loan is “presumptively unfair” if (i) the loan is an adjustable rate mortgage with an introductory period of three years or less, (ii) the borrower has a total debt-to-income ratio that would have exceeded 50% if Option One had measured the debt – not by the debt due under the teaser rate, but by the debt due under the fully-indexed rate. (However, this debt-to-income ratio need exceed only 45% if the borrower had a student loan in deferment at least six months prior to the submission date of the mortgage loan application.), (iii) the loan has an introductory or “teaser” rate for the initial period that is at least 2% lower than the fully indexed rate, unless the debt-to-income ratio is 55% or above, in which case the difference between the teaser rate and fully indexed rate is not relevant, and (iv) the loan-to-value ratio of the loan is 97%, or the loan carries a substantial prepayment penalty, or a prepayment penalty that lasts beyond the introductory period. Under the order, AHMSI must provide the Attorney General’s Office at least 30 days notice before it intends to foreclose on a presumptively unfair loan. If the Attorney General objects to the foreclosure, AHMSI must obtain approval from the court before foreclosing on the loan. If AHMSI intends to foreclose on a loan that it believes does not meet the standards for presumptive unfairness, it must still provide the Attorney General’s Office 30 days notice. During this period, the Attorney General’s Office may still object to the foreclosure if it believes that the loan possesses any unfair characteristics. In addition to granting the preliminary injunction, the court allowed the Attorney General’s Office to proceed with claims that the defendants’ policies and practices and disparate pricing violate antidiscrimination law. The court also rejected the defendants’ arguments that the Attorney General’s claims under the Massachusetts Consumer Protection Act were (i) unconstitutionally vague, (ii) interfered with the companies’ ability to enforce their mortgage loans in violation of the Contracts Clause and Dormant Commerce Clause of the U.S. Constitution, and (iii) preempted by the Depository Institutions Deregulation and Monetary Control Act. For a copy of preliminary injunction, please see http://www.mass.gov/Cago/docs/press/2008_11_12_option_one_pi_attachment1.pdf.
North Carolina Declaratory Ruling Clarifies Definition of Points and Fees. On November 5, the North Carolina Commissioner of Banks issued Declaratory Ruling 2008-1, which clarifies whether seller-paid “points and fees” are included when determining “points and fees” under North Carolina’s High Cost Home Loan law. North Carolina H.B. 2188 (reported in InfoBytes, Aug. 22, 2008) amended the definition of “points and fees” to conform to North Carolina H.B. 1817, which includes yield spread premiums paid by a lender to a broker as part of the points and fees. The amended definition removed the requirement that points and fees be payable to the borrower at or before loan closing. However, a possible unintended consequence was a broadening of the points and fees calculation to include all points and fees paid to the lender by sellers and other third parties. The ruling clarifies that seller-paid points and fees are generally excluded from the points and fees calculation. However, seller-paid points and fees must be included in the calculation if they are (i) real estate related fees found under Section 226.4(c)(7) of the Truth in Lending Act if (1) the fee is not excluded from the definition of points and fees under the Law, and (2) the lender directly or indirectly benefits, or the fee is paid directly to the lender or its affiliate, (ii) seller-paid mortgage broker fees, or (iii) a prepayment penalty that seller agrees to pay at a future date. For a copy of Declaratory Ruling 2008-1, please see http://www.nccob.org/NR/rdonlyres/2FF0547E-D1C4-4F22-9133-8DC8A0CF37FA/1666/DeclaratoryRuling2008001.pdf.
Washington Department of Financial Institutions Adopts New Mortgage Lending, Credit Union Rules. On November 4, the Washington Department of Financial Institutions (Department) adopted a new rule regarding the disclosure summary required under the recently-enacted SB 2770 (reported in InfoBytes, Mar. 28, 2008). The Department also issued one-page disclosure summary forms for fixed rate and variable rate loans. In addition, the Department’s Division of Credit Unions adopted a rule that implements the “Interagency Guidance on Nontraditional Mortgage Product Risks” and the “Statement on Subprime Mortgage Lending” for credit unions. The rules take effect December 5, 2008. For a copy of the final rule implementing SB 2770, please see http://dfi.wa.gov/resources/pdf/2770-adopted-language.pdf. For a copy of the disclosure forms, please see http://dfi.wa.gov/resources/pdf/disclosure-summary-fixed-rate.pdf and http://dfi.wa.gov/resources/pdf/disclosure-summary-variable-rate.pdf. For a copy of the final rule implementing the federal guidelines for credit unions, please see http://dfi.wa.gov/cu/rulemaking/guidance-adopted-language.pdf.
Montana Regulator Proposes to Eliminate In-State Bank Account Requirement. On November 6, the Montana Division of Banking and Financial Institutions issued a proposed rule to waive the requirement for licensed mortgage lenders to keep an account for escrow funds, trust funds, or reserves in a financial institution having an office in Montana. Comments on the proposed rule must be submitted no later than December 5, 2008. Barring objection by at least 10 percent of those directly affected by the proposed rule, the waiver will take effect December 8, 2008. For a copy of the proposed rule, please see http://doa.mt.gov/pdfs/2-59-406pro-arm.pdf.
Fifth Circuit Compels Arbitration of FCRA, FDCPA Claims. On November 10, the U.S. Court of Appeals for the Fifth Circuit held that a borrower’s Fair Credit Reporting Act (FCRA) and Fair Debt Collection Practices Act (FDCPA) claims must be arbitrated, even though the defendant servicer was not a signatory to the original agreement. Sherer v. Green Tree Servicing LLC, No. 07-60567, 2008 WL 4838702 (5th Cir. Nov. 10, 2008). In Sherer, the defendant serviced the plaintiff borrower’s manufactured home loan. After the borrower paid the loan in full, the servicer attempted to collect an unauthorized prepayment penalty. When the plaintiff refused to pay, the servicer attempted to charge interest on the penalty, and also reported derogatory information on the plaintiff’s consumer credit report. After the borrower sued, the servicer filed a motion to dismiss the lawsuit and compel arbitration of the claims under the arbitration clause in the original agreement between the borrower and lender. The district court refused the motion because (i) the servicer was not a signatory to the original agreement and (ii) the court could not apply equitable estoppel. The Circuit Court reversed, reasoning that the original loan agreement identified circumstances, such as those faced by parties to this suit, in which the borrower would be compelled to arbitrate against a non-signatory to the agreement. For a copy of the opinion, please see http://www.ca5.uscourts.gov/opinions%5Cpub%5C07/07-60567-CV0.wpd.pdf.
Citigroup Announces Measures to Avoid Foreclosures. On November 11, Citigroup Inc. (Citi) announced measures to assist certain at-risk borrowers to remain current on their payments and avoid foreclosure by (i) extending its moratorium on foreclosures, (ii) streamlining its existing loan modification program, and (iii) introducing the “Citi Homeowner Assistance” program to provide mortgage workouts to borrowers whose mortgages remain current but considered at-risk. JPMorgan Chase & Co. and Bank of America have recently announced similar measures. For a copy of the press release, please see http://www.citigroup.com/citi/press/2008/081111a.htm.
Banking
OTS Revises Examination Handbook. On November 13, the Office of Thrift Supervision (OTS) revised Section 750 of the Examination Handbook regarding mortgage banking. Section 750 now includes a discussion of the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin (SAB) No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings. The revisions reflect the SEC’s position that expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. For a copy of the Regulatory Bulletin containing the revised section, please see http://files.ots.treas.gov/74844.pdf.
OCC Rejects Industry Request to Defer Credit Card Losses. On November 10, the Office of the Comptroller of the Currency (OCC) responded to industry requests for a new workout program for credit card debtors. The Financial Services Roundtable and the Consumer Federation of America requested that the OCC allow banks to provide workout programs for borrowers permitting borrowers to repay less than the full amount while deferring the loss recognition and income reporting. The OCC explained that (i) the proposal was imprudent because the program defers timely recognition of loss and (ii) the OCC maintains a policy against banks attempting long-term recoveries while assets deemed uncollectible have not been accounted for as charge offs and reported as losses. For a copy of the response, please see http://www.occ.gov/ftp/release/2008-132a.pdf.
FDIC Extends Comment Period for Proposed Rulemaking. On November 7, the Federal Deposit Insurance Corporation announced that it has extended the comment period for certain provisions of a proposed rule affecting risk-based assessments from November 17, 2008 to December 17, 2008 (reported in InfoBytes, Oct. 10, 2008). The extension applies to the provisions that would (i) alter the way in which the assessment system differentiates for risk and change assent rates beginning the second quarter 2009 assessment period and (ii) make technical and other changes to rules regarding the risk-based assessment system. The end of the comment period remains November 17, 2008 for a provision that would raise current assessment rates uniformly by seven basis points for the first quarter 2009 assessment period. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2008/pr08112.html.
Future TARP Funds Will Assist Consumer Lending. On November 12, Treasury Secretary Henry Paulson announced the remaining priorities for the Troubled Asset Relief Program (TARP) funds. TARP funds will not be used to purchase illiquid mortgage-related assets, as previously was planned. Instead, Secretary Paulson proposed possible new initiatives to be financed with TARP funds, such as (i) attracting private capital to financial institutions by “matching investments,” (ii) supporting access to credit in the non-bank financial sector, and (iii) examining new mortgage foreclosure mitigation strategies. For a copy of the announcement, please see http://www.treas.gov/press/releases/hp1265.htm.
Interagency Statement Calls for Focus on Creditworthy Borrowers. On November 12, the Department of the Treasury, the Federal Deposit Insurance Corporation, and the Federal Reserve issued a joint statement highlighting the importance to banking organizations of lending to creditworthy borrowers, strengthening capital positions, engaging in appropriate loss mitigation strategies, and reassessing the incentive implications of compensation policies. The statement, inter alia, (i) urges banking organizations to lend to creditworthy borrowers, (ii) encourages banking organizations to develop effective capital planning processes, including, for example, considering in setting dividend levels the adequacy of their loan loss allowance, the overall effect that a dividend payout would have on their cost of funding, and their ability to meet the needs of creditworthy borrowers, (iii) stresses that lenders are expected to avoid preventable foreclosures, and (iv) recommends management compensation programs balance current earnings capacity and the financial resources of the banking organization with the need to retain strong management. For a copy of the statement, please see
http://www.federalreserve.gov/newsevents/press/bcreg/20081112a.htm.
Fed Approves AmEx Bank Holding Company Application. On November 10, the Federal Reserve Board (Fed) announced the approval of the application and notices by American Express Company and American Express Travel Related Services Company, Inc. to become bank holding companies. In making its determination, the Fed assessed (i) the competitive effects of the proposal in the relevant geographic markets, (ii) the financial and managerial resources and future prospects of the companies and banks involved in the proposal, (iii) the convenience and needs of the community to be served, and (iv) the availability of information needed to determine and enforce compliance with the Bank Holding Company Act and other applicable federal banking laws. For a copy of the order, please see http://www.federalreserve.gov/newsevents/press/orders/orders20081110a1.pdf.
West Virginia Federal Court Revises National Bank Preemption Ruling. On November 5, the U.S. District Court for the Southern District of West Virginia reconsidered whether the National Bank Act (NBA) preempts claims of unconscionable lending practices and loan terms brought against a national bank. Watkins v. Wells Fargo Home Mortgage, No. 08-0132 (S.D. W.Va. Nov. 5, 2008). The plaintiff initially brought claims against Wells Fargo Home Mortgage (Wells Fargo) alleging that certain terms of her loan were unconscionable (reported in InfoBytes, July 18, 2008). The court held that the NBA preempted these claims. Subsequently, the plaintiff moved for relief from the judgment and filed a second amended complaint amending, inter alia, her “unconscionable contract” claims to “unconscionable conduct” claims. The court granted the motion for relief, allowed the plaintiff to amend her complaint, and applied a new preemption analysis to the claims of the second amended complaint. Instead of applying the doctrine of field preemption – where “the federal scheme of regulation of a defined field is so pervasive that Congress must have intended to leave no room for the states to supplement it” – the court applied conflict preemption – where Congress may not have “completely displaced state regulation in a specific area” but “state law is nullified to the extent that it actually conflicts with federal law.” However, the court noted that the analysis does not turn on the name given to a claim – “in determining whether a claim is subject to conflict preemption, a court must look beyond the shell of how a plaintiff styles a claim to get to the nut of exactly what defendant conduct the plaintiff alleges caused her harm.” Accordingly, the court held that certain aspects of plaintiff’s “unconscionable conduct” claims – that the loan (i) was an adjustable rate mortgage (ARM); (ii) included an “exploding payment”; and (iii) could not be refinanced – were preempted because regulations issued by the Office of the Comptroller of the Currency (OCC) clearly allow the use of ARMs and do not require a lender to refinance a loan. However, other aspects of the claims – that Wells Fargo (i) did not consider plaintiff’s ability to repay, (ii) did not disclose “the realities of future payments after reset,” (iii) made “unfair loans in order to transfer…home equity from borrowers to…Defendant,” and (iv) misrepresented certain charges – were not preempted. According to the court, although OCC regulations permit national banks to “use any reasonable method to determine a borrower’s ability to repay,” the plaintiff’s claims were not preempted to the extent they allege that Wells Fargo completely disregards a borrowers’ repayment ability – i.e., Wells Fargo employs no method to determine a borrower’s ability to repay whatsoever. Because the claims do not attempt to impose restrictions inconsistent with federal regulations, the court found that those claims were not preempted. Employing similar logic, the court found that the NBA did not preempt the plaintiff’s claims that Wells Fargo misrepresents the “realities” of repaying an ARM loan – notwithstanding OCC regulated disclosure obligations – because the OCC does not authorize national banks to misrepresent loan terms to borrowers or to make loans it knows borrowers cannot repay. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Watkins_v_Wells_Fargo.pdf.
Consumer Finance
FTC Charges Internet Payday Lenders for Violations of FTC Act, TILA. On November 6, the Federal Trade Commission (FTC) and the State of Nevada filed a joint complaint charging ten related Internet payday lenders and their principals with violating federal and state law for not disclosing key loan terms to consumers and for using abusive and deceptive collection tactics. According to the complaint, the defendants, through their web sites, offered consumers loans of $500 or less within 24 hours without requiring a credit check, proof of income, or documentation. In violation of the FTC Act, the defendants allegedly used unfair and deceptive collection tactics to collect the debt, including falsely threatening consumers with arrest or imprisonment, falsely claiming that consumers were legally obligated to pay the debts, making false threats of legal action, and repeatedly calling consumers at work using abusive and profane language and disclosing consumers’ purported debts to coworkers, employers, and other third parties. The defendants also allegedly violated the Truth in Lending Act and Regulation Z by failing to make required written disclosures – including the amount financed, an itemization of the amount financed, the finance charge, the annual percentage rate, the payment schedule, the total number of payments, and any late payment fees – clearly and conspicuously before consummating a consumer credit transaction. The defendants also allegedly violated Nevada’s Deceptive Trade Act by (i) not disclosing loan terms, (ii) making false representations when collecting debts, and (iii) making loans to consumers without licenses. For a copy of the complaint, please see http://www.ftc.gov/os/caselist/0923093/081112cmp0923093.pdf.
Oregon Federal Court Rules on the Relevancy of Evidence for FCRA Adverse Action Defense. On November 4, the U.S. District Court for the District of Oregon held that evidence of oral communications between insurance agents and customers could be relevant to defend against certain Fair Credit Reporting Act (FCRA) claims. Ashby v. Farmers Ins. Co. of Oregon, No. 01-CV-1446, 2008 WL 4838847 (D. Or. Nov. 4, 2008). The defendants sought to offer evidence at trial of oral communications between their agents and insureds to demonstrate that (i) the defendants did not willfully violate FCRA and that (ii) even if the jury were to find that the defendants willfully violated FCRA, the communications are relevant as to the amount of statutory damages within the range of $100-$1000 that may be awarded to class members who engaged in such communications. The plaintiffs argued that evidence of oral communications between agents and some insureds is not admissible for any purpose. Regarding the first issue, the court found that the evidence would tend to support the defendants’ argument that they attempted to comply with FCRA’s adverse action notice requirements and that these attempts did not constitute a willful violation of FCRA. As a result, the court agreed to screen the defendants’ proffers on this subject as the issues are framed at the pre-trial conference. However, regarding the second issue, the court found that the defendants’ evidence was irrelevant because the plaintiffs sought statutory damages, not actual damages. The court, citing Ramirez v. Midwest Airlines, Inc., 537 F. Supp. 2d 1161, 1168 (D. Kan. 2008), found that FCRA does not require that an award of statutory damages greater than $100 to each class member be supported by proof of actual harm or other circumstances specific to the class member rather than to the class as a whole. Accordingly, the oral communications evidence was irrelevant when determining the amount of statutory damages between $100 and $1000 that may be awarded, and thus was inadmissible with respect to the damages issue. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Ashby_v_Farmers.pdf.
Oregon Federal Court Finds Debt Collector Violated FDCPA. On October 27, the U.S. District Court for the District of Oregon granted partial summary judgment in favor of a debtor who alleged that a debt collector violated § 1692(e) of the Fair Debt Collection Practices Act (FDCPA) by falsely representing that the terms of an outdated credit card agreement controlled the issue of the debtor’s liability. Avery v. Gordon, No. 08-139, 2008 WL 4793686 (D. Or. Oct. 27, 2008). The case arose after Avery, the plaintiff and debtor, missed a credit card payment; the credit card company subsequently sold the delinquent debt to the defendants, First Resolution Investment Corporation (FRIC) and its collections attorney, Daniel Gordon, PC. FRIC’s and Gordon’s efforts to collect the debt resulted in the parties filing multiple legal actions against each other. Ultimately, Avery alleged that the defendants violated §1692 (e) of the FDCPA by (i) attempting to collect unauthorized charges based on incorrect allegations of the amount due, (ii) attempting to collect a debt based on an invalid cardholder agreement, and (iii) attempting to collect a time-barred debt. The court denied summary judgment on Avery’s first and third claims because determination of the exact amount of the debt that Avery owed was a question of fact for the jury, and a court previously determined that the claim was not time barred. However, the court granted summary judgment on Avery’s second claim because there was indisputable evidence that FRIC and Gordon alleged the debt was governed by a May 2001 credit card agreement, when in fact a June 2001 agreement controlled, and this was a “false representation of the character of a debt” in direct violation of § 1692(e). FRIC and Gordon also moved for summary judgment, alleging, inter alia, that Avery’s claims failed as a matter of law because the defendants never communicated directly with Avery in connection with the counterclaim. The court denied summary judgment to the defendants, finding, inter alia, that “a counterclaim for a debt is not a representation made to an attorney but rather a demand for money made on the debtor, through a pleading rather than a letter or a phone call,” and thus, the defendants had communicated directly with Avery. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Avery_v_Gordon.pdf.
Insurance
California Requires Certificate of Registration for Title Insurance Marketing Representatives. On September 25, California Governor Arnold Schwarzenegger signed into law S.B. 133, a bill which prohibits the employment of a title marketing representative unless he or she holds a valid certificate of registration as a title marketing representative issued by the California Insurance Commissioner for a three-year period. A “title marketing representative” is defined, in part, as a natural person employed by a title company whose primary duty is to market, offer, solicit, negotiate, or sell title insurance. S.B. 133 also (i) requires title companies to notify the California Insurance Commissioner when a title marketing representative is terminated or becomes employed, (ii) specifies the application process for the certificate of registration and (iii) authorizes the California Insurance Commissioner to issue a cease and desist order from insurance marketing if title insurance is marketed without a valid certificate of registration. For a copy of S.B. 133, please see http://www.leginfo.ca.gov/pub/07-08/bill/sen/sb_0101-0150/sb_133_bill_20080925_chaptered.pdf.
Oregon Federal Court Rules on the Relevancy of Evidence for FCRA Adverse Action Defense. On November 4, the U.S. District Court for the District of Oregon held that evidence of oral communications between insurance agents and customers could be relevant to defend against certain Fair Credit Reporting Act (FCRA) claims. Ashby v. Farmers Ins. Co. of Oregon, No. 01-CV-1446, 2008 WL 4838847 (D. Or. Nov. 4, 2008). The defendants sought to offer evidence at trial of oral communications between their agents and insureds to demonstrate that (i) the defendants did not willfully violate FCRA and that (ii) even if the jury were to find that the defendants willfully violated FCRA, the communications are relevant as to the amount of statutory damages within the range of $100-$1000 that may be awarded to class members who engaged in such communications. The plaintiffs argued that evidence of oral communications between agents and some insureds is not admissible for any purpose. Regarding the first issue, the court found that the evidence would tend to support the defendants’ argument that they attempted to comply with FCRA’s adverse action notice requirements and that these attempts did not constitute a willful violation of FCRA. As a result, the court agreed to screen the defendants’ proffers on this subject as the issues are framed at the pre-trial conference. However, regarding the second issue, the court found that the defendants’ evidence was irrelevant because the plaintiffs sought statutory damages, not actual damages. The court, citing Ramirez v. Midwest Airlines, Inc., 537 F. Supp. 2d 1161, 1168 (D. Kan. 2008), found that FCRA does not require that an award of statutory damages greater than $100 to each class member be supported by proof of actual harm or other circumstances specific to the class member rather than to the class as a whole. Accordingly, the oral communications evidence was irrelevant when determining the amount of statutory damages between $100 and $1000 that may be awarded, and thus was inadmissible with respect to the damages issue. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Ashby_v_Farmers.pdf.
Litigation
Fifth Circuit Compels Arbitration of FCRA, FDCPA Claims. On November 10, the U.S. Court of Appeals for the Fifth Circuit held that a borrower’s Fair Credit Reporting Act (FCRA) and Fair Debt Collection Practices Act (FDCPA) claims must be arbitrated, even though the defendant servicer was not a signatory to the original agreement. Sherer v. Green Tree Servicing LLC, No. 07-60567, 2008 WL 4838702 (5th Cir. Nov. 10, 2008). In Sherer, the defendant serviced the plaintiff borrower’s manufactured home loan. After the borrower paid the loan in full, the servicer attempted to collect an unauthorized prepayment penalty. When the plaintiff refused to pay, the servicer attempted to charge interest on the penalty, and also reported derogatory information on the plaintiff’s consumer credit report. After the borrower sued, the servicer filed a motion to dismiss the lawsuit and compel arbitration of the claims under the arbitration clause in the original agreement between the borrower and lender. The district court refused the motion because (i) the servicer was not a signatory to the original agreement and (ii) the court could not apply equitable estoppel. The Circuit Court reversed, reasoning that the original loan agreement identified circumstances, such as those faced by parties to this suit, in which the borrower would be compelled to arbitrate against a non-signatory to the agreement. For a copy of the opinion, please see http://www.ca5.uscourts.gov/opinions%5Cpub%5C07/07-60567-CV0.wpd.pdf.
West Virginia Federal Court Revises National Bank Preemption Ruling. On November 5, the U.S. District Court for the Southern District of West Virginia reconsidered whether the National Bank Act (NBA) preempts claims of unconscionable lending practices and loan terms brought against a national bank. Watkins v. Wells Fargo Home Mortgage, No. 08-0132 (S.D. W.Va. Nov. 5, 2008). The plaintiff initially brought claims against Wells Fargo Home Mortgage (Wells Fargo) alleging that certain terms of her loan were unconscionable (reported in InfoBytes, July 18, 2008). The court held that the NBA preempted these claims. Subsequently, the plaintiff moved for relief from the judgment and filed a second amended complaint amending, inter alia, her “unconscionable contract” claims to “unconscionable conduct” claims. The court granted the motion for relief, allowed the plaintiff to amend her complaint, and applied a new preemption analysis to the claims of the second amended complaint. Instead of applying the doctrine of field preemption – where “the federal scheme of regulation of a defined field is so pervasive that Congress must have intended to leave no room for the states to supplement it” – the court applied conflict preemption – where Congress may not have “completely displaced state regulation in a specific area” but “state law is nullified to the extent that it actually conflicts with federal law.” However, the court noted that the analysis does not turn on the name given to a claim – “in determining whether a claim is subject to conflict preemption, a court must look beyond the shell of how a plaintiff styles a claim to get to the nut of exactly what defendant conduct the plaintiff alleges caused her harm.” Accordingly, the court held that certain aspects of plaintiff’s “unconscionable conduct” claims – that the loan (i) was an adjustable rate mortgage (ARM); (ii) included an “exploding payment”; and (iii) could not be refinanced – were preempted because regulations issued by the Office of the Comptroller of the Currency (OCC) clearly allow the use of ARMs and do not require a lender to refinance a loan. However, other aspects of the claims – that Wells Fargo (i) did not consider plaintiff’s ability to repay, (ii) did not disclose “the realities of future payments after reset,” (iii) made “unfair loans in order to transfer…home equity from borrowers to…Defendant,” and (iv) misrepresented certain charges – were not preempted. According to the court, although OCC regulations permit national banks to “use any reasonable method to determine a borrower’s ability to repay,” the plaintiff’s claims were not preempted to the extent they allege that Wells Fargo completely disregards a borrowers’ repayment ability – i.e., Wells Fargo employs no method to determine a borrower’s ability to repay whatsoever. Because the claims do not attempt to impose restrictions inconsistent with federal regulations, the court found that those claims were not preempted. Employing similar logic, the court found that the NBA did not preempt the plaintiff’s claims that Wells Fargo misrepresents the “realities” of repaying an ARM loan – notwithstanding OCC regulated disclosure obligations – because the OCC does not authorize national banks to misrepresent loan terms to borrowers or to make loans it knows borrowers cannot repay. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Watkins_v_Wells_Fargo.pdf.
Oregon Federal Court Rules on the Relevancy of Evidence for FCRA Adverse Action Defense. On November 4, the U.S. District Court for the District of Oregon held that evidence of oral communications between insurance agents and customers could be relevant to defend against certain Fair Credit Reporting Act (FCRA) claims. Ashby v. Farmers Ins. Co. of Oregon, No. 01-CV-1446, 2008 WL 4838847 (D. Or. Nov. 4, 2008). The defendants sought to offer evidence at trial of oral communications between their agents and insureds to demonstrate that (i) the defendants did not willfully violate FCRA and that (ii) even if the jury were to find that the defendants willfully violated FCRA, the communications are relevant as to the amount of statutory damages within the range of $100-$1000 that may be awarded to class members who engaged in such communications. The plaintiffs argued that evidence of oral communications between agents and some insureds is not admissible for any purpose. Regarding the first issue, the court found that the evidence would tend to support the defendants’ argument that they attempted to comply with FCRA’s adverse action notice requirements and that these attempts did not constitute a willful violation of FCRA. As a result, the court agreed to screen the defendants’ proffers on this subject as the issues are framed at the pre-trial conference. However, regarding the second issue, the court found that the defendants’ evidence was irrelevant because the plaintiffs sought statutory damages, not actual damages. The court, citing Ramirez v. Midwest Airlines, Inc., 537 F. Supp. 2d 1161, 1168 (D. Kan. 2008), found that FCRA does not require that an award of statutory damages greater than $100 to each class member be supported by proof of actual harm or other circumstances specific to the class member rather than to the class as a whole. Accordingly, the oral communications evidence was irrelevant when determining the amount of statutory damages between $100 and $1000 that may be awarded, and thus was inadmissible with respect to the damages issue. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Ashby_v_Farmers.pdf.
Oregon Federal Court Finds Debt Collector Violated FDCPA. On October 27, the U.S. District Court for the District of Oregon granted partial summary judgment in favor of a debtor who alleged that a debt collector violated § 1692(e) of the Fair Debt Collection Practices Act (FDCPA) by falsely representing that the terms of an outdated credit card agreement controlled the issue of the debtor’s liability. Avery v. Gordon, No. 08-139, 2008 WL 4793686 (D. Or. Oct. 27, 2008). The case arose after Avery, the plaintiff and debtor, missed a credit card payment; the credit card company subsequently sold the delinquent debt to the defendants, First Resolution Investment Corporation (FRIC) and its collections attorney, Daniel Gordon, PC. FRIC’s and Gordon’s efforts to collect the debt resulted in the parties filing multiple legal actions against each other. Ultimately, Avery alleged that the defendants violated §1692 (e) of the FDCPA by (i) attempting to collect unauthorized charges based on incorrect allegations of the amount due, (ii) attempting to collect a debt based on an invalid cardholder agreement, and (iii) attempting to collect a time-barred debt. The court denied summary judgment on Avery’s first and third claims because determination of the exact amount of the debt that Avery owed was a question of fact for the jury, and a court previously determined that the claim was not time barred. However, the court granted summary judgment on Avery’s second claim because there was indisputable evidence that FRIC and Gordon alleged the debt was governed by a May 2001 credit card agreement, when in fact a June 2001 agreement controlled, and this was a “false representation of the character of a debt” in direct violation of § 1692(e). FRIC and Gordon also moved for summary judgment, alleging, inter alia, that Avery’s claims failed as a matter of law because the defendants never communicated directly with Avery in connection with the counterclaim. The court denied summary judgment to the defendants, finding, inter alia, that “a counterclaim for a debt is not a representation made to an attorney but rather a demand for money made on the debtor, through a pleading rather than a letter or a phone call,” and thus, the defendants had communicated directly with Avery. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Avery_v_Gordon.pdf.
E-Financial Services
URAC Revises HIPAA Security Standards. On October 30, URAC, an independent, non-profit accreditation organization, announced “significant” revisions to its Health Insurance Portability and Accountability Act Privacy and Security Standards. The revised standard requires, inter alia, (i) changes in practices regarding notifying consumers of material changes in privacy policies, and (ii) risk assessment policies and procedures to include the analysis of portable media, such as USB drives and laptop computers. For a copy of the press release, please see http://www.urac.org/press/cmsDocument.aspx?id=612.
Privacy/Data Security
Attorneys General, Data Collection Company Settle Privacy Suit. On October 30, a coalition of the majority of state Attorneys General entered into a consent agreement with Educational Research Center of America, Inc. (ERCA), settling allegations that ERCA violated various state consumer protection laws by providing survey information from students to educational institutions and commercial marketers. The information was obtained by offering gift cards to teachers and counselors to entice them to have their students complete the surveys. The surveys revealed, inter alia, information about ethnicity, high school courses taken, honors received, and involvement in extracurricular activities. While ERCA disclosed that students could opt-out of having their information shared, ERCA did not disclose that students could opt-out of completing the surveys. Pursuant to the terms of the consent agreement, ERCA is prohibited from offering anything of monetary value to educators relating to the collection of student information and must clearly disclose to students and to parents of students under 18 how to opt-out of completing its surveys. ERCA must also pay a $200,000 fine. For a copy of the consent agreement, please see http://www.azag.gov/press_releases/oct/2008/ERCA%20AVC.pdf.
Credit Cards
FDIC Revises Opinion Regarding “Deposit” for Stored Value Cards. On November 13, the Federal Deposit Insurance Corporation (FDIC) revised General Counsel’s Opinion No. 8, which clarifies the meaning of “deposit” as applied to funds underlying stored value cards. Under the new opinion, all funds underlying stored value products will be treated as deposits if they have been placed at an insured depository institution. As a result, the funds will be subject to FDIC assessments and will be insured by the FDIC up to the insurance limit. The opinion, however, does not affect the FDIC’s standards for determining “pass-through” insurance coverage. The Federal Register notice states that this treatment of underlying funds does not differ from an August 2005 proposed rule regarding stored value cards (reported in InfoBytes, Aug. 26, 2005). For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2008/pdf/E8-26867.pdf.
OCC Rejects Industry Request to Defer Credit Card Losses. On November 10, the Office of the Comptroller of the Currency (OCC) responded to industry requests for a new workout program for credit card debtors. The Financial Services Roundtable and the Consumer Federation of America requested that the OCC allow banks to provide workout programs for borrowers permitting borrowers to repay less than the full amount while deferring the loss recognition and income reporting. The OCC explained that (i) the proposal was imprudent because the program defers timely recognition of loss and (ii) the OCC maintains a policy against banks attempting long-term recoveries while assets deemed uncollectible have not been accounted for as charge offs and reported as losses. For a copy of the response, please see http://www.occ.gov/ftp/release/2008-132a.pdf.
Oregon Federal Court Finds Debt Collector Violated FDCPA. On October 27, the U.S. District Court for the District of Oregon granted partial summary judgment in favor of a debtor who alleged that a debt collector violated § 1692(e) of the Fair Debt Collection Practices Act (FDCPA) by falsely representing that the terms of an outdated credit card agreement controlled the issue of the debtor’s liability. Avery v. Gordon, No. 08-139, 2008 WL 4793686 (D. Or. Oct. 27, 2008). The case arose after Avery, the plaintiff and debtor, missed a credit card payment; the credit card company subsequently sold the delinquent debt to the defendants, First Resolution Investment Corporation (FRIC) and its collections attorney, Daniel Gordon, PC. FRIC’s and Gordon’s efforts to collect the debt resulted in the parties filing multiple legal actions against each other. Ultimately, Avery alleged that the defendants violated §1692 (e) of the FDCPA by (i) attempting to collect unauthorized charges based on incorrect allegations of the amount due, (ii) attempting to collect a debt based on an invalid cardholder agreement, and (iii) attempting to collect a time-barred debt. The court denied summary judgment on Avery’s first and third claims because determination of the exact amount of the debt that Avery owed was a question of fact for the jury, and a court previously determined that the claim was not time barred. However, the court granted summary judgment on Avery’s second claim because there was indisputable evidence that FRIC and Gordon alleged the debt was governed by a May 2001 credit card agreement, when in fact a June 2001 agreement controlled, and this was a “false representation of the character of a debt” in direct violation of § 1692(e). FRIC and Gordon also moved for summary judgment, alleging, inter alia, that Avery’s claims failed as a matter of law because the defendants never communicated directly with Avery in connection with the counterclaim. The court denied summary judgment to the defendants, finding, inter alia, that “a counterclaim for a debt is not a representation made to an attorney but rather a demand for money made on the debtor, through a pleading rather than a letter or a phone call,” and thus, the defendants had communicated directly with Avery. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Avery_v_Gordon.pdf.