InfoBytes, November 21, 2008
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Securities
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
HUD Modifies HOPE for Homeowners Program. On November 19, the Board of Directors (Board) for the Hope for Homeowners Program (the Program) approved three changes to the Program that aim to reduce refinancing costs, increase lender participation, and expand borrower eligibility. First, for borrowers whose mortgage payments represent no more than 31% of their monthly gross income and no more 43% of household debt, the Board has increased the loan-to-value ratio (LTV) on eligible loans to 96.5%. In conjunction with the LTV change, the Board has also eliminated its trial modification requirements, because the negotiations needed to implement those requirements were too complex. Second, the Board has modified the Program to allow subordinate lienholders to receive immediate payment in exchange for a release of their liens. Prior to the Board’s modification, these lienholders would only receive a payment once the home was eventually sold, significantly reducing the value of their guaranteed return. Finally, the Board authorized lenders to extend the mortgage term on eligible loans from 30 to 40 years. The Board believes that this measure will increase number of borrowers eligible for the Program by reducing the amount of monthly payments. The Board’s modifications do not amend any of the Program’s other eligibility requirements (reported in InfoBytes, Oct. 10, 2008). For a copy of the press release, please see http://www.hud.gov/news/release.cfm?content=pr08-178.cfm.
FDIC Issues Loan Modification Program Guide. Recently, the Federal Deposit Insurance Corporation (FDIC) published a loan modification program guide to assist bankers, servicers, and investors with making affordable loan modifications. The guide aims to use the FDIC’s experience establishing a loan modification program at IndyMac Federal Bank, FSB (IndyMac) to create a model program for other financial institutions. To this effect, the guide (i) describes the modification program terms implemented by the FDIC at IndyMac, (ii) offers insights into the specific portfolio characteristics that drove modification modeling at IndyMac, (iii) provides a framework modification program for other financial institutions, (iv) provides general direction on the loan modification process and the marketing of loan modifications, (v) outlines the proposed modification terms, and (vi) includes samples of marketing materials, investor reporting tools, modification agreements, counseling agreements, and income verification forms. This model program reiterates the terms of the loss sharing proposal issued on November 13 (reported in InfoBytes, Nov. 14, 2008). For a copy of the guidelines, please see http://www.fdic.gov/consumers/loans/loanmod/loanmodguide.html.
Fannie, Freddie Announce Foreclosure Sale Freeze. On November 20, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) announced a foreclosure suspension for all loans owned or securitized by Fannie Mae and Freddie Mac. The streamlined modification program is aimed at the highest-risk borrower who has missed three payments or more, owns and occupies the primary residence, and has not filed for bankruptcy. The program creates a fast-track method for providing troubled borrowers an affordable monthly payment by reducing the mortgage interest rate, extending the life of the loan, and/or deferring payments on part of the principal. The suspension is effective November 26, 2008 until January 9, 2009. For a copy Fannie Mae’s letter to lenders, please see https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/ll0408.pdf.
Fannie Mae Issues New Appraisal Requirements. On November 14, the Federal National Mortgage Association (Fannie Mae) announced amendments to its Selling Guide regarding appraisal-related policy changes and clarifications. The guide now requires (i) a “Market Conditions Addendum” be included in the Appraisal Report (Form 1004MC), (ii) supervisory appraisers to inspect and sign all appraisal reports, (iii) the lender to provide the sales contract to the appraiser, and (iv) the appraiser to provide an explanation as to why he or she used the specific comparable sales in the appraisal report, if the appraiser utilizes comparable sales outside of the subject’s neighborhood when closer comparable sales appear to be available. The guide also clarifies existing appraisal requirements. For a copy of the announcement, please see https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0830.pdf.
OCC Clarifies Regulation DD’s Relationship with E-Sign Act. On November 19, the Office of the Comptroller of the Currency (OCC) issued revised compliance examination procedures for Regulation DD, implementing the Truth-in-Savings Act. The revised procedures reflect changes made to Regulation DD that simplify and clarify requirements regarding e-communication and the Electronic Signatures in Global and National Commerce Act (E-Sign Act). The procedures remind examiners that the E-Sign Act does not mandate that institutions or consumers use or accept electronic records or signatures, but does permit institutions to use electronic records and signatures to satisfy requirements that information, such as Regulation DD disclosures, be provided in writing to a consumer. For a copy of the announcement, please see http://www.occ.gov/ftp/bulletin/2008-33.html.
OTS Bulletin Discusses Preventing Discriminatory Lending Practices Through Assessment, Internal Analysis. On November 19, the Office of Thrift Supervision issued Thrift Bulletin (TB) 25a, which addresses the prevention of discriminatory lending practices. TB 25a reminds thrift institutions to assess, at least annually, policies, procedures, lending activity and data (including written underwriting standards and practices implementing them) directed towards preventing discriminatory lending practices. The bulletin further advises that thrift institutions should use "internal analysis" to identify issues that might arise in the analysis of Home Mortgage Disclosure Act (HMDA) data. Institutions should be prepared to provide pricing and decisioning methodologies to address HMDA reporting issues. TB 25a rescinds TB 25. For a copy of TB 25a, please see http://files.ots.treas.gov/84299.pdf.
Illinois Federal Court Approves DOJ, National Association of Realtors® Settlement Agreement. On November 20, a U.S. District Court for the Northern District of Illinois issued a final judgment approving a settlement agreement between the National Association of Realtors® (NAR) and the U.S. Department of Justice regarding alleged antitrust violations. The suit arose from NAR’s multiple listing policy as it pertained to the display of listings from Multiple Listing Services (MLSs) on brokers’ virtual office websites (VOW). Under the terms of the settlement, inter alia, NAR admits to no liability or wrongdoing, and has adopted a revised VOW policy, which MLSs with whom NAR transacts must adopt within 90 days. For a copy of the settlement agreement, please see http://www.buckleykolar.com/documents/Realtors_Settlement.pdf.
OCC Issues Preliminary Approval for First National Bank “Shelf Charter.” On November 21, the Office of the Comptroller of the Currency (OCC) announced it has granted its first preliminary approval of a new national bank "shelf charter." Under a self charter, a preliminary approval to investors for a national bank charter remains inactive– that is, put “on the shelf” – until the investor is able to acquire a troubled institution. The shelf charter process involves (i) an initial review, where the OCC evaluates the qualifications of the proposed management team, the sources and amount of capital that would be available to the bank, and a streamlined business plan that describes how the acquired bank will be operated, and (ii) a conditional preliminary approval, where the OCC can grant conditional preliminary approval of a national bank charter, subject to certain conditions and requirements. In the case of a Federal Deposit Insurance Corporation (FDIC) resolution of a failing institution, after a bid is submitted, the OCC will evaluate the specific proposal. If acceptable, the FDIC will approve the bid, allowing for the FDIC to grant (i) a final charter approval and (ii) final approval of FDIC deposit insurance. If the bid is not accepted by the FDIC, the charter remains “on the shelf” for up to 18 months, during which time the charter can be used for other bids. For a copy of the press release, please see http://www.occ.gov/ftp/release/2008-137.htm. For a copy of the preliminary “shelf charter” approval letter issued for Ford Group Bank, N.A., please see http://www.occ.gov/ftp/release/2008-137a.pdf.
FTC Reaches $2.25 Million Settlement for Violations of FDCPA, FTC Act by Debt Collector. On November 21, the Federal Trade Commission (FTC) announced that it has entered into a settlement agreement with Academy Collection Service, Inc. and its owner (Academy) regarding charges that Academy allegedly engaged in debt collection practices that violated the FTC Act and the Fair Debt Collection Practices Act (FDCPA). Academy allegedly, inter alia, made harassing and abusive calls to consumers, contacted consumers at work while aware that such communications were prohibited by the consumers’ employers, deposited postdated checks early, and made unauthorized withdrawals from consumers’ bank accounts. Pursuant to the terms of the consent decree, Academy (i) will pay a $2.25 million civil penalty, (ii) is enjoined from further violating any of the provisions of the FTC Act or the FDCPA, and (iii) must inform consumers that they can stop Academy from contacting them regarding their debt. For a copy of the press release, please see http://www.ftc.gov/opa/2008/11/academy.shtm.
President’s Working Group Announces OTC Derivative Initiatives. On November 14, the President’s Working Group on Financial Markets (PWG) announced a series of initiatives designed to strengthen oversight and the infrastructure of the over-the-counter (OTC) derivatives market. The PWG’s priority is the implementation of central counterparty services for credit default swaps (CDS), which, if well-regulated and managed, could reduce systemic risk associated with CDS exposures and increase competition through greater market transparency. One or more CDS counterparties are expected to commence operations before the end of 2008. A second initiative included the establishment of a Memorandum of Understanding (MOU) regarding CDS central counterparties among the Federal Reserve Board of Governors, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The MOU defines a framework for consultation and information sharing for issues related to CDS central counterparties. The PWG also set out certain policy objectives consistent with recommendations by the Financial Stability Forum, to be enacted legislatively when necessary. The objectives include (i) improved transparency and integrity of the CDS market, (ii) enhanced risk management of OTC derivatives, (iii) strengthening the OTC derivatives market infrastructure, and (iv) strengthening cooperation among regulatory authorities. For a copy of the press release, please see http://www.ustreas.gov/press/releases/hp1272.htm.
White Paper States eNotes Enforceable in All Jurisdictions. On November 21, the Mortgage Industry Standards Maintenance Organization (MISMO), the Electronic Signature and Records Association (ESRA), and the American Land Title Association (ALTA) issued a white paper stating that electronically signed promissory notes (eNotes) are enforceable in all jurisdictions under the Electronic Signatures in Global and National Commerce Act (E-Sign Act) and the Uniform Electronic Transaction Act (UETA). For a copy of the white paper, please see https://www.esignrecords.org.
Fannie Mae Issues Preview to 2009 Selling Guide. On November 17, the Federal National Mortgage Association (Fannie Mae) released a "preview" version of its 2009 Selling Guide. Fannie Mae-approved sellers must continue to deliver loans using the current version of the Selling Guide until the official release of the 2009 Selling Guide. Until that time, the preview version is subject to revision. For a copy of the press release, please see https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/ll0308.pdf. To access the preview version of the 2009 Selling Guide, please see https://www.efanniemae.com/sf/guides/ssg/index.jsp.
State Issues
Colorado Division of Real Estate Indicates Loan Modifiers May Require Licensure as Mortgage Brokers. On November 19, the Director of the Colorado Division of Real Estate issued Position Statement MB-1.5, which indicates that “loan modifiers” – those who engage in the act of directly or indirectly negotiating a loan modification – may be required to be licensed as mortgage brokers under Colorado law. MB-1.5 takes the position that “individuals offering or negotiating loan modifications are, at a minimum, indirectly acting as mortgage brokers.” Consequently, individuals that directly or indirectly negotiate, originate or offer or attempt to negotiate or originate loan modifications for a borrower, for compensation, as well as persons who directly supervise these individuals, are required to be licensed as mortgage brokers. These individuals must also comply with all other mortgage broker statutes and rules. Employees of mortgage loan servicing companies operating on behalf of mortgage lenders are exempt from the licensing and compliance requirements for loan modifiers. For a full copy of the position statement, please see http://www.dora.state.co.us/real-estate/mortgage/documents/1_5_Loan_Modifications.pdf.
Massachusetts Extends Deadline for Compliance with Personal Information Security Standards. On November 14, the Massachusetts Office of Consumer Affairs and Business Regulation (OCABR) extended the deadline for compliance with recently-enacted security standards for those who “own, license, store, or maintain” personal information (reported in InfoBytes, Sept. 26, 2008). OCABR extended the compliance deadline from January 1, 2009 to May 1, 2009 for (i) the general compliance deadline, (ii) the provision ensuring that third-party service providers are capable of protecting personal information, and contractually binding them to do so, and (iii) the provision ensuring the encryption of laptops. OCABR also extended the compliance deadline from January 1, 2009 to January 1, 2010 for (i) the provision for requiring written certification regarding security standards from third-party providers, and (ii) the provision for ensuring encryption of portable devices other than laptops, such as memory sticks. For a copy of the press release, please see http://www.mass.gov/?pageID=ocapressrelease&L=1&L0=Home&sid=Eoca&b=pressrelease&f=081114_IDTheftupdate&csid=Eoca.
City of Birmingham Files Suit Against Mortgage Lenders Alleging Discriminatory Lending Practices. On November 12, the City of Birmingham, Alabama filed suit against a number of mortgage lenders, including Argent Mortgage Company, Countrywide Financial Corporation (and affiliated entities), Wells Fargo Bank, N.A. (and affiliated entities), and Regions Bank (and affiliated entities) City of Birmingham v. Argent Mortgage Company, et al., CV-2008-903691 (Cir. Ct. Ala. Nov. 12, 2008). The City of Birmingham alleges that the defendants engaged in the practice of “reverse redlining,” the targeting minority neighborhoods for predatory or unfair lending practices, in violation of the Fair Housing Act. The plaintiff seeks to recover damages for injuries caused by foreclosures resulting from reverse redlining, as well as injunctive and declaratory relief. For a copy of the suit, please see http://www.buckleykolar.com/documents/Birmingham.pdf.
Maryland Enacts Plan to Improve Foreclosure Mitigation, Customer Access to Servicers. On November 7, Maryland Governor Martin O’Maley announced a five-tiered agreement with six major mortgage servicing companies to improve the loss mitigation process for distressed homeowners. The program (i) creates a streamlined timeline for loss mitigation, during which fees and penalties may not accrue, (ii) requires the servicers to designate employees as a “Team Maryland” to help homeowners work through the Foreclosure Prevention Assistance Network and provide “escalation contacts,” with the authority to resolve more complex work-outs, (iii) encourages servicers to agree to participate in any pilot programs for software Maryland undertakes to manage and facilitate collections and to provide periodic data reports to the Commissioner of Financial Regulation, (iv) requires servicers provide Maryland with their general loss mitigation guidelines and to create internal policies and incentives for staff and foreclosure counsel to encourage loan modification rather than foreclosure, and (v) encourages increased participation in marketing and outreach. For a copy of the press release, please see http://www.dllr.state.md.us/whatsnews/mortservagree.shtml.
New York Governor, Consumer Protection Board Issue Guide Regarding Personal Information Security. Recently, New York Governor David A. Paterson and the New York Consumer Protection Board issued their "Business Privacy Guide," which provides guidelines on handling personal identification information and reducing the likelihood of identity theft. The guide stresses that business should (i) identify how data is collected, transferred, and transmitted and limit the collection of personal information to that which is necessary to promote a legitimate business purpose, (ii) implement administrative, physical and technological safeguards for personal information, including the use of encryption and firewalls, (iii) educate consumers and employees regarding the collection and use of personal information, and (iv) maintain policies and procedures regarding how to respond to a data breach. For a copy of the guide, please see http://www.consumer.state.ny.us/pdf/the_new_york_business_guide_to_privacy.pdf.
Colorado Attorney General Takes Action Against Deceptive Mortgage Brokers, Foreclosure Firms. On November 18, Colorado Attorney General John Suthers announced various steps his office has taken against deceptive mortgage brokers and foreclosure rescue firms engaged in false or misleading advertising and other deceptive tactics. The Attorney General, inter alia, has (i) prosecuted and entered into settlement agreements with several mortgage companies to eliminate the use of “teaser” rates and “concealed” loan terms in advertisements for option ARM loans, (ii) filed suit against a lending company that deposited money into borrower’s accounts to qualify them for higher loans, (iii) filed suit against a mortgage broker who sent advertisement letters that looked like letters from the homeowners’ banks, and (iv) halted operations of 15 “rescue” firms that failed to comply with Colorado’s Foreclosure Protection Act. For a copy of the press release, please see http://www.ago.state.co.us/press_detail.cfmpressID=928.html.
Courts
Seventh Circuit Rules that Debt Collector’s Notice Complies with FDCPA. On November 13, the U.S. Court of Appeals for the Seventh Circuit reversed a district court’s judgment that a debt collector’s notice violated the Fair Debt Collection Practices Act (FDCPA) because, inter alia, an unsophisticated debtor would not have been confused about the ability to dispute the notice. McKinney v. Cadleway Properties, Inc., No. 07-1075, 2008 WL 4876826 (7th Cir. Nov. 13, 2008). In McKinney, Cadleway Properties (Cadleway) purchased a debt owed by the plaintiff. To collect on the debt, Cadleway sent the plaintiff a two-sided debt collection letter. The front of the letter contained a form that confirmed the amount of the debt. The back of the letter contained a validation-of-debt notice, including disclosures required under § 1692g of the FDCPA. Subsequently, the plaintiff filed suit, alleging that Cadleway violated § 1692g of the FDCPA because the collection letter was likely to confuse an unsophisticated debtor that the debtor could not dispute their debt. The district court agreed with the plaintiff; however, the Seventh Circuit reversed, stating that the plaintiff failed to produce adequate evidence of confusion. The court also held that the front page of the notice satisfied § 1692g because it “permits the consumer to either confirm the debt or to dispute it and insert any other amount (including ‘zero’).” As a result, the court ruled that Cadleway was entitled to judgment as a matter of law. For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&caseno=&shofile=07-1075_016.pdf.
Pennsylvania Bankruptcy Court Finds TILA Does Not Permit Damages for Failure to Honor Rescission Notice. On October 29, the Bankruptcy Court for the Western District of Pennsylvania granted partial summary judgment in favor of a defendant assignee of a mortgage loan, finding that, inter alia, the Truth in Lending Act (TILA) does not permit an award of damages against an assignee for the failure to honor a notice of rescission. Dougal v. Saxon Mortgage, No. 07-70247, 2008 WL 4735898 (Bkrtcy. W.D. Pa. Oct. 29, 2008). In this case, the consumer plaintiffs entered into a mortgage loan refinancing in 2005; the loan subsequently went into default in 2006 and Mortgage Electronic Registration Systems, Inc. (MERS) brought a foreclosure action against the plaintiffs in a Pennsylvania state court. In 2007, the plaintiffs filed a bankruptcy petition to prevent a sheriff’s sale of the property. The plaintiffs then brought TILA claims against the assignee of their mortgage, alleging that they did not receive the proper material disclosures in connection with the loan transaction. Plaintiffs also claimed that their rescission letter, which was sent more than a year after the foreclosure judgment was entered, was not honored by the assignee. As a result, the plaintiffs claim that the assignee violated their right to rescind. The plaintiffs sought rescission of the mortgages, as well as damages, in connection with the assignee’s failure to act on the rescission letter. The bankruptcy court dismissed the rescission claim, finding that, under the Rooker-Feldman doctrine, it lacked the power to provide the requested relief to the plaintiffs because of a pre-existing consent foreclosure judgment in Pennsylvania state court. The bankruptcy court further found that summary judgment in favor of the defendant assignee was appropriate because (i) there was no basis for an award of damages for failure to honor the notice of rescission (because there was no enforceable right of rescission), and (ii) TILA does not permit an award of damages against an assignee for failure to honor a notice of rescission. For assistance with obtaining a copy of the opinion, please contact .
Illinois District Court Permits Individual TILA Rescission, Rejects Class Certification for Rescission Claims. On November 7, the U.S. District Court for the Northern District of Illinois rejected a defendant lender’s motion to dismiss a borrower’s claim for rescission under the Truth in Lending Act (TILA) because the TILA statement provided to the borrower was inadequate. Briscoe v. Deutsche Bank Nat. Trust Co., No. 08 C 1279, 2008 WL 4852977 (N.D. Ill. Nov. 7, 2008). In Briscoe, the borrower received an adjustable-rate mortgage loan from New Century Mortgage Corporation in 2005, the rights for which were transferred to the defendant. When the borrower’s interest rate adjusted upward in 2007, the borrower contacted the servicer to rescind the loan; however, the servicer did not honor the request. The borrower subsequently sued the defendant for statutory penalties, alleging that she was entitled to rescind the transaction because New Century failed to disclose the frequency of the payments, failed to provide two copies of the Notice of Right to Cancel, and failed to honor her request for rescission. The borrower also sought class certification for all borrowers who did not receive adequate notice of the frequency of the payments. The district court agreed that the borrower’s TILA statement was inadequate, reasoning that it required her to “make assumptions regarding the payment period,” and that the borrower had made an adequate case that she did not receive two copies of the Notice of Right to Cancel. While agreeing that rescission was warranted, the court found that her claims for statutory damages were time-barred. The court further rejected the plaintiff’s request for declaratory judgment that all class members may rescind their loans based on the alleged payment-disclosure violation, holding that class actions may not be certified for borrowers seeking class-wide rescission. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Briscoe_v_Deutsche.pdf.
Second Circuit Holds Equitable Estoppel Doctrine Does Not Authorize Amex to Use Competitor’s Arbitration Clause. On October 21, the U.S. Court of Appeals for the Second Circuit held that American Express Company, American Express travel Related Services Company, and American Express Centurion Bank (collectively, Amex) could not avail themselves of arbitration clauses found in credit card agreements between cardholders and other card companies to defend against conspiracy claims. Ross v. American Express Co., No. 06-4598, 2008 WL 4630314 (2nd Cir. Oct. 21, 2008). In this case, the plaintiffs were cardholders of credit cards issued by various banks on the Visa, MasterCard and Diners Club card networks – but not with Amex. The plaintiffs brought a class action suit, alleging that Amex engaged in a conspiracy with the other networks to fix foreign currency transaction fees well above a rate that would be charged on an open market and to conceal those fees from the cardholders. In response, Amex sought to avail themselves of the mandatory arbitration clauses found in the cardholder agreements that the plaintiffs signed with the other card companies. The district court held that the plaintiffs could be compelled to arbitrate the dispute. On appeal, the Second Circuit reversed. Amex argued that they could avail themselves of the arbitration clauses through the doctrine of equitable estoppel, under which “a non-signatory to an arbitration agreement may compel a signatory to that agreement to arbitrate a dispute where a careful review … discloses that ‘the issues the non-signatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed.’” (citing JLM Indus., Inc. v. Stolt-Nielsen, S.A., 387 F.3d 163, 171 (2nd. Cir. 2004). The court reviewed relevant precedent regarding the application of equitable estoppel and found that the doctrine is only appropriate where the party seeking estoppel has a special relationship to the signatory party (e.g. a corporate relationship, such as a parent-subsidiary). However, the court found that the doctrine does not extend to where the only relationship between the non-signatory third-party and the contract signatory is as a third-party wrongdoer. Applying this framework, the court held that Amex had no special relationship with the plaintiffs sufficient to demonstrate that the plaintiffs intended to arbitrate disputes with Amex. Consequently, the court reversed the decision that plaintiffs may be compelled to arbitrate. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Ross_v_Am_Ex.pdf.
Illinois Federal Court Holds Third Parties Had No Obligations to Provide Certain Disclosures Under TILA. On October 14, the U.S. District Court for the Northern District of Illinois dismissed mortgage lenders’ (Lenders) third party negligence claims against closing agents, title underwriters and mortgage brokers (Third Party Defendants), holding that the Lenders failed to show that those entities had a duty – separate from a contractual duty – to properly provide certain disclosures required by the Truth in Lending Act (TILA). In Re Ameriquest Mortgage Co. Mortgage Lending Practices Litig., MDL No. 1715, No. 05-7097, 2008 WL 4594834 (N.D. Ill. Oct. 14, 2008). In this consolidated case involving borrowers’ TILA claims against their Lenders, the Lenders filed a complaint against the Third Party Defendants alleging that, if the borrowers’ allegations that the Lenders failed to provide certain TILA disclosures were true, the Third Party Defendants breached their contractual promise to deliver the disclosures and were negligent. By way of relief, the Lenders sought damages and equitable indemnity and contribution. The Third Party Defendants filed a motion to dismiss, which the court granted in part and denied in part. First, the court denied the motion to dismiss to the extent it sought to dispose of the contractual claims, finding that the complaint sufficiently identified the contracts between the Lenders and the various Third Party Defendants. Second, the court granted the motion with respect to the negligence claims, holding that the Lenders failed to identify a “plausible source” of a duty owed to them by the Third Party Defendants. The court specifically noted that there was no statutory basis to impose a duty on the Third Party Defendants because TILA imposes a duty only on “creditors.” The Lenders did not allege that the Third Party Defendants qualified as “creditors” under TILA. Finally, the court also dismissed the Lenders’ demand for equitable indemnity and contribution, finding that such relief was not authorized by TILA, which was not designed to protect the Lenders, but rather “singled out creditors to be the liable party for disclosure violations.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/In_Re_Ameriquest.pdf.
Pennsylvania Federal Court Accepts FACTA Truncation Settlement Despite Clarification Act. On November 14, the U.S. District Court for the Eastern District of Pennsylvania held that a class action settlement agreement regarding an alleged violation of the Fair and Accurate Credit Transaction Act (FACTA) was not moot in light of Congress’ recent enactment of the Credit and Debit Card Clarification Act (Clarification Act). Curiale v. Lenox Group, Inc., Civ. No. 07-1432, 2008 WL 4899474 (E.D. Pa. Nov. 14, 2008). In Curiale, the plaintiff sued the defendant for violating FACTA by printing the expiration date of customers’ credit cards on its receipts. The parties eventually mediated the claims and submitted a class action settlement agreement to the court for approval. While approval was pending, Congress enacted the Clarification Act, which eliminated a private cause of action based solely on failing to truncate a credit card’s expiration date and applied retroactively to encompass claims like the plaintiff’s. Consequently, the defendant filed a suggestion of mootness with the court, requesting that the court “deny the parties’ request for preliminary approval of a settlement class as moot.” In arriving at its decision to approve the class action settlement agreement, the court emphasized that the parties were fully aware that the Clarification Act was pending at the time of negotiating the settlement agreement and understood that its enactment could affect their interests in the litigation. For assistance with obtaining this opinion, please contact .
Florida Federal Court Dismisses RESPA, TILA Claims. On October 8, the U.S. District Court for the Southern District of Florida dismissed claims arising under the Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA) and Florida state law. Bush v. Countrywide Home Loans, No. 08-60978, 2008 WL 4540450 (S.D. Fla. Oct. 9, 2008). In Bush, the plaintiff borrower alleged that the defendant lender violated RESPA when it did not provide (i) a good faith estimate within 3 days of the loan application, (ii) a good faith estimate disclosing the yield spread premium, and (c) notice of change of service upon assignment of the loan. The court dismissed the claim, holding that the relevant section of RESPA does not provide a private civil right of action. The court also dismissed a claim alleging that the loan’s disclosure statement did not conform to requirements under TILA, holding that the claim was time-barred and that, in this case, TILA does not allow for the requested remedy of rescission. Extinguishing the plaintiff’s federal claims, the court then refused to exercise supplemental jurisdiction over the alleged violations of state law. Also on October 8, the same court dismissed several other suits brought by additional, separate plaintiffs against the defendant, Countrywide Home Loans. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Bush_v_Countrywide.pdf.
South Carolina Federal Court Uses Lodestar Formula to Calculate Attorney Fees in RESPA Case. On October 16, the U.S. District Court for the District of South Carolina applied the lodestar formula to determine whether attorney fees and costs were “reasonable” in a case arising under the Real Estate Settlement Procedures Act (RESPA). Serfass v. CIT Group/Consumer Finance, Inc., No. 8:07-90, 2008 WL 4616763 (D. S.C. Oct. 16, 2008). In Serfass, the plaintiffs sought attorney fees in the amount of $45,502.50 and costs in the amount of $5,808 subsequent to a bench trial wherein the plaintiffs were awarded $1,000 in statutory damages for RESPA violations (reported in InfoBytes, Sept. 19, 2008). In Brodziak v. Runyon, 145 F.3d 194 (4th Cir. 1998), the Fourth Circuit determined that RESPA permits a court to award “reasonable” attorney fees and costs to a prevailing party by using the lodestar formula – the number of hours reasonably expended on the litigation multiplied by a reasonable hourly rate. After considering the time and labor required to litigate the suit, and the amount in controversy and the results obtained, all of which weighed in favor of reducing the fees requested, the court found that a reasonable amount for attorney fees in this action was $19,500 and granted the plaintiffs an award of attorney fees in this amount. The plaintiffs also requested costs of $5,808. However, Federal Rule of Civil Procedure 68(d) precludes the awarding of costs when a judgment is not more favorable than an unaccepted settlement offer. Here, the defendant previously offered, but the plaintiffs did not accept, as little as $5,000 to settle the case. Because the trial verdict of $1,000 was significantly less than the lowest offer, the court held that the plaintiffs could not recover their requested costs. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Serfass_v_CIT_Oct.pdf.
Pennsylvania Federal Court Denies Implied Contractual Duty in Spyware Fraud Case. On November 14, the U.S. District Court for the Western District of Pennsylvania held, inter alia, that an implied contract did not exist because explicit credit card agreements dealt with the same contractual terms at issue. Grimm v. Discover Financial Services, Nos. 08-747, 08-832, 2008 WL 482169 (W.D. Pa. Nov. 14, 2008). In Grimm, identity thieves used spyware to fraudulently charge credit cards issued by the defendants. The plaintiffs claimed that the defendants failed to identify the fraudulent activity in violation of the cardholder agreements and the Consumer Credit Protection Act (CCPA). The plaintiffs subsequently filed suit, alleging breach of implied contract, negligence, fraudulent and negligent misrepresentation, negligence per se, and breach of fiduciary duty in addition to Truth in Lending Act (TILA), CCPA, and state law claims. The court granted the defendant’s motion for summary judgment on all claims, holding, inter alia, that (i) under Delaware law, an implied contract cannot exist when an express contract – in this case, the cardholder agreement – deals with the same contractual terms, and (ii) the TILA claim was time-barred. The court also reasoned that doctrines under Pennsylvania law barred the torts claims. Also on November 14, the same court arrived at a substantively similar decision in a case arising under the same facts against a separate credit card issuer – see Grimm v. Citibank, N.A., No. 8-788 (W.D. Pa. Nov.14, 2008). For a copy of the opinion, please see http://www.buckleykolar.com/documents/Grimm_v_Discover.pdf.
California Federal Court Denies Motion to Dismiss Click-Fraud Claims. On November 9, the U.S. District Court for the Central District of California denied a motion to dismiss claims arising from allegedly fraudulent “click-through” advertising fees charged by the defendants pursuant to a contractual agreement. Lambotte v. IAC/InterActiveCorp., et al., No. 08-04263, 2008 WL 4829882 (C.D. Cal. Nov. 4, 2008). In Lambotte, the plaintiffs paid IAC/Interactive Corp., Ticketmaster, d/b/a Citysearch.com, and Citysearch.com (Citysearch) for "click-throughs" to the plaintiffs’ websites via Citysearch’s online advertisements. The agreements between Citysearch and the plaintiffs stated that each plaintiff would pay for click-throughs made by "users," and that Citysearch was not responsible for the "quality and timing" of the click-throughs. After suspecting fraudulent click-throughs, the plaintiffs filed suit, ultimately alleging (i) breach of the express terms of the agreement and (ii) a breach of the covenant of good faith and fair dealing under California state law. Regarding the first claim, the plaintiffs argued that the suspicious click-throughs were not made by "users" because they were allegedly made by automated computers and the defendant’s staff, and not "potential clients." The court rejected Citysearch’s motion to dismiss this claim, reasoning that summary judgment was appropriate to determine whether the plaintiffs’ interpretation of "user" was reasonable. With respect to the second claim, the court also rejected the defendants’ motion to dismiss the claim of breach of the covenant of good faith and fair dealing, ultimately reasoning that the plaintiffs sufficiently alleged a claim that did not conflict with the express language of the contract. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Lambotte_v_IAC.pdf.
Firm News
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, D.C.
Jeff Naimon spoke about the amended Regulation Z at the District of Columbia Bar Association’s Off-The-Record luncheon program in Washington, DC on November 17.
Mortgages
HUD Modifies HOPE for Homeowners Program. On November 19, the Board of Directors (Board) for the Hope for Homeowners Program (the Program) approved three changes to the Program that aim to reduce refinancing costs, increase lender participation, and expand borrower eligibility. First, for borrowers whose mortgage payments represent no more than 31% of their monthly gross income and no more 43% of household debt, the Board has increased the loan-to-value ratio (LTV) on eligible loans to 96.5%. In conjunction with the LTV change, the Board has also eliminated its trial modification requirements, because the negotiations needed to implement those requirements were too complex. Second, the Board has modified the Program to allow subordinate lienholders to receive immediate payment in exchange for a release of their liens. Prior to the Board’s modification, these lienholders would only receive a payment once the home was eventually sold, significantly reducing the value of their guaranteed return. Finally, the Board authorized lenders to extend the mortgage term on eligible loans from 30 to 40 years. The Board believes that this measure will increase number of borrowers eligible for the Program by reducing the amount of monthly payments. The Board’s modifications do not amend any of the Program’s other eligibility requirements (reported in InfoBytes, Oct. 10, 2008). For a copy of the press release, please see http://www.hud.gov/news/release.cfm?content=pr08-178.cfm.
FDIC Issues Loan Modification Program Guide. Recently, the Federal Deposit Insurance Corporation (FDIC) published a loan modification program guide to assist bankers, servicers, and investors with making affordable loan modifications. The guide aims to use the FDIC’s experience establishing a loan modification program at IndyMac Federal Bank, FSB (IndyMac) to create a model program for other financial institutions. To this effect, the guide (i) describes the modification program terms implemented by the FDIC at IndyMac, (ii) offers insights into the specific portfolio characteristics that drove modification modeling at IndyMac, (iii) provides a framework modification program for other financial institutions, (iv) provides general direction on the loan modification process and the marketing of loan modifications, (v) outlines the proposed modification terms, and (vi) includes samples of marketing materials, investor reporting tools, modification agreements, counseling agreements, and income verification forms. This model program reiterates the terms of the loss sharing proposal issued on November 13 (reported in InfoBytes, Nov. 14, 2008). For a copy of the guidelines, please see http://www.fdic.gov/consumers/loans/loanmod/loanmodguide.html.
Fannie, Freddie Announce Foreclosure Sale Freeze. On November 20, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) announced a foreclosure suspension for all loans owned or securitized by Fannie Mae and Freddie Mac. The streamlined modification program is aimed at the highest-risk borrower who has missed three payments or more, owns and occupies the primary residence, and has not filed for bankruptcy. The program creates a fast-track method for providing troubled borrowers an affordable monthly payment by reducing the mortgage interest rate, extending the life of the loan, and/or deferring payments on part of the principal. The suspension is effective November 26, 2008 until January 9, 2009. For a copy Fannie Mae’s letter to lenders, please see https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/ll0408.pdf.
Fannie Mae Issues New Appraisal Requirements. On November 14, the Federal National Mortgage Association (Fannie Mae) announced amendments to its Selling Guide regarding appraisal-related policy changes and clarifications. The guide now requires (i) a “Market Conditions Addendum” be included in the Appraisal Report (Form 1004MC), (ii) supervisory appraisers to inspect and sign all appraisal reports, (iii) the lender to provide the sales contract to the appraiser, and (iv) the appraiser to provide an explanation as to why he or she used the specific comparable sales in the appraisal report, if the appraiser utilizes comparable sales outside of the subject’s neighborhood when closer comparable sales appear to be available. The guide also clarifies existing appraisal requirements. For a copy of the announcement, please see https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0830.pdf.
Illinois Federal Court Approves DOJ, National Association of Realtors® Settlement Agreement. On November 20, a U.S. District Court for the Northern District of Illinois issued a final judgment approving a settlement agreement between the National Association of Realtors® (NAR) and the U.S. Department of Justice regarding alleged antitrust violations. The suit arose from NAR’s multiple listing policy as it pertained to the display of listings from Multiple Listing Services (MLSs) on brokers’ virtual office websites (VOW). Under the terms of the settlement, inter alia, NAR admits to no liability or wrongdoing, and has adopted a revised VOW policy, which MLSs with whom NAR transacts must adopt within 90 days. For a copy of the settlement agreement, please see http://www.buckleykolar.com/documents/Realtors_Settlement.pdf.
Fannie Mae Issues Preview to 2009 Selling Guide. On November 17, the Federal National Mortgage Association (Fannie Mae) released a "preview" version of its 2009 Selling Guide. Fannie Mae-approved sellers must continue to deliver loans using the current version of the Selling Guide until the official release of the 2009 Selling Guide. Until that time, the preview version is subject to revision. For a copy of the press release, please see https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/ll0308.pdf. To access the preview version of the 2009 Selling Guide, please see https://www.efanniemae.com/sf/guides/ssg/index.jsp.
Colorado Division of Real Estate Indicates Loan Modifiers May Require Licensure as Mortgage Brokers. On November 19, the Director of the Colorado Division of Real Estate issued Position Statement MB-1.5, which indicates that “loan modifiers” – those who engage in the act of directly or indirectly negotiating a loan modification – may be required to be licensed as mortgage brokers under Colorado law. MB-1.5 takes the position that “individuals offering or negotiating loan modifications are, at a minimum, indirectly acting as mortgage brokers.” Consequently, individuals that directly or indirectly negotiate, originate or offer or attempt to negotiate or originate loan modifications for a borrower, for compensation, as well as persons who directly supervise these individuals, are required to be licensed as mortgage brokers. These individuals must also comply with all other mortgage broker statutes and rules. Employees of mortgage loan servicing companies operating on behalf of mortgage lenders are exempt from the licensing and compliance requirements for loan modifiers. For a full copy of the position statement, please see http://www.dora.state.co.us/real-estate/mortgage/documents/1_5_Loan_Modifications.pdf.
City of Birmingham Files Suit Against Mortgage Lenders Alleging Discriminatory Lending Practices. On November 12, the City of Birmingham, Alabama filed suit against a number of mortgage lenders, including Argent Mortgage Company, Countrywide Financial Corporation (and affiliated entities), Wells Fargo Bank, N.A. (and affiliated entities), and Regions Bank (and affiliated entities) City of Birmingham v. Argent Mortgage Company, et al., CV-2008-903691 (Cir. Ct. Ala. Nov. 12, 2008). The City of Birmingham alleges that the defendants engaged in the practice of “reverse redlining,” the targeting minority neighborhoods for predatory or unfair lending practices, in violation of the Fair Housing Act. The plaintiff seeks to recover damages for injuries caused by foreclosures resulting from reverse redlining, as well as injunctive and declaratory relief. For a copy of the suit, please see http://www.buckleykolar.com/documents/Birmingham.pdf.
Maryland Enacts Plan to Improve Foreclosure Mitigation, Customer Access to Servicers. On November 7, Maryland Governor Martin O’Maley announced a five-tiered agreement with six major mortgage servicing companies to improve the loss mitigation process for distressed homeowners. The program (i) creates a streamlined timeline for loss mitigation, during which fees and penalties may not accrue, (ii) requires the servicers to designate employees as a “Team Maryland” to help homeowners work through the Foreclosure Prevention Assistance Network and provide “escalation contacts,” with the authority to resolve more complex work-outs, (iii) encourages servicers to agree to participate in any pilot programs for software Maryland undertakes to manage and facilitate collections and to provide periodic data reports to the Commissioner of Financial Regulation, (iv) requires servicers provide Maryland with their general loss mitigation guidelines and to create internal policies and incentives for staff and foreclosure counsel to encourage loan modification rather than foreclosure, and (v) encourages increased participation in marketing and outreach. For a copy of the press release, please see http://www.dllr.state.md.us/whatsnews/mortservagree.shtml.
Colorado Attorney General Takes Action Against Deceptive Mortgage Brokers, Foreclosure Firms. On November 18, Colorado Attorney General John Suthers announced various steps his office has taken against deceptive mortgage brokers and foreclosure rescue firms engaged in false or misleading advertising and other deceptive tactics. The Attorney General, inter alia, has (i) prosecuted and entered into settlement agreements with several mortgage companies to eliminate the use of “teaser” rates and “concealed” loan terms in advertisements for option ARM loans, (ii) filed suit against a lending company that deposited money into borrower’s accounts to qualify them for higher loans, (iii) filed suit against a mortgage broker who sent advertisement letters that looked like letters from the homeowners’ banks, and (iv) halted operations of 15 “rescue” firms that failed to comply with Colorado’s Foreclosure Protection Act. For a copy of the press release, please see http://www.ago.state.co.us/press_detail.cfmpressID=928.html.
Pennsylvania Bankruptcy Court Finds TILA Does Not Permit Damages for Failure to Honor Rescission Notice. On October 29, the Bankruptcy Court for the Western District of Pennsylvania granted partial summary judgment in favor of a defendant assignee of a mortgage loan, finding that, inter alia, the Truth in Lending Act (TILA) does not permit an award of damages against an assignee for the failure to honor a notice of rescission. Dougal v. Saxon Mortgage, No. 07-70247, 2008 WL 4735898 (Bkrtcy. W.D. Pa. Oct. 29, 2008). In this case, the consumer plaintiffs entered into a mortgage loan refinancing in 2005; the loan subsequently went into default in 2006 and Mortgage Electronic Registration Systems, Inc. (MERS) brought a foreclosure action against the plaintiffs in a Pennsylvania state court. In 2007, the plaintiffs filed a bankruptcy petition to prevent a sheriff’s sale of the property. The plaintiffs then brought TILA claims against the assignee of their mortgage, alleging that they did not receive the proper material disclosures in connection with the loan transaction. Plaintiffs also claimed that their rescission letter, which was sent more than a year after the foreclosure judgment was entered, was not honored by the assignee. As a result, the plaintiffs claim that the assignee violated their right to rescind. The plaintiffs sought rescission of the mortgages, as well as damages, in connection with the assignee’s failure to act on the rescission letter. The bankruptcy court dismissed the rescission claim, finding that, under the Rooker-Feldman doctrine, it lacked the power to provide the requested relief to the plaintiffs because of a pre-existing consent foreclosure judgment in Pennsylvania state court. The bankruptcy court further found that summary judgment in favor of the defendant assignee was appropriate because (i) there was no basis for an award of damages for failure to honor the notice of rescission (because there was no enforceable right of rescission), and (ii) TILA does not permit an award of damages against an assignee for failure to honor a notice of rescission. For assistance with obtaining a copy of the opinion, please contact .
Illinois District Court Permits Individual TILA Rescission, Rejects Class Certification for Rescission Claims. On November 7, the U.S. District Court for the Northern District of Illinois rejected a defendant lender’s motion to dismiss a borrower’s claim for rescission under the Truth in Lending Act (TILA) because the TILA statement provided to the borrower was inadequate. Briscoe v. Deutsche Bank Nat. Trust Co., No. 08 C 1279, 2008 WL 4852977 (N.D. Ill. Nov. 7, 2008). In Briscoe, the borrower received an adjustable-rate mortgage loan from New Century Mortgage Corporation in 2005, the rights for which were transferred to the defendant. When the borrower’s interest rate adjusted upward in 2007, the borrower contacted the servicer to rescind the loan; however, the servicer did not honor the request. The borrower subsequently sued the defendant for statutory penalties, alleging that she was entitled to rescind the transaction because New Century failed to disclose the frequency of the payments, failed to provide two copies of the Notice of Right to Cancel, and failed to honor her request for rescission. The borrower also sought class certification for all borrowers who did not receive adequate notice of the frequency of the payments. The district court agreed that the borrower’s TILA statement was inadequate, reasoning that it required her to “make assumptions regarding the payment period,” and that the borrower had made an adequate case that she did not receive two copies of the Notice of Right to Cancel. While agreeing that rescission was warranted, the court found that her claims for statutory damages were time-barred. The court further rejected the plaintiff’s request for declaratory judgment that all class members may rescind their loans based on the alleged payment-disclosure violation, holding that class actions may not be certified for borrowers seeking class-wide rescission. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Briscoe_v_Deutsche.pdf.
Illinois Federal Court Holds Third Parties Had No Obligations to Provide Certain Disclosures Under TILA. On October 14, the U.S. District Court for the Northern District of Illinois dismissed mortgage lenders’ (Lenders) third party negligence claims against closing agents, title underwriters and mortgage brokers (Third Party Defendants), holding that the Lenders failed to show that those entities had a duty – separate from a contractual duty – to properly provide certain disclosures required by the Truth in Lending Act (TILA). In Re Ameriquest Mortgage Co. Mortgage Lending Practices Litig., MDL No. 1715, No. 05-7097, 2008 WL 4594834 (N.D. Ill. Oct. 14, 2008). In this consolidated case involving borrowers’ TILA claims against their Lenders, the Lenders filed a complaint against the Third Party Defendants alleging that, if the borrowers’ allegations that the Lenders failed to provide certain TILA disclosures were true, the Third Party Defendants breached their contractual promise to deliver the disclosures and were negligent. By way of relief, the Lenders sought damages and equitable indemnity and contribution. The Third Party Defendants filed a motion to dismiss, which the court granted in part and denied in part. First, the court denied the motion to dismiss to the extent it sought to dispose of the contractual claims, finding that the complaint sufficiently identified the contracts between the Lenders and the various Third Party Defendants. Second, the court granted the motion with respect to the negligence claims, holding that the Lenders failed to identify a “plausible source” of a duty owed to them by the Third Party Defendants. The court specifically noted that there was no statutory basis to impose a duty on the Third Party Defendants because TILA imposes a duty only on “creditors.” The Lenders did not allege that the Third Party Defendants qualified as “creditors” under TILA. Finally, the court also dismissed the Lenders’ demand for equitable indemnity and contribution, finding that such relief was not authorized by TILA, which was not designed to protect the Lenders, but rather “singled out creditors to be the liable party for disclosure violations.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/In_Re_Ameriquest.pdf.
Florida Federal Court Dismisses RESPA, TILA Claims. On October 8, the U.S. District Court for the Southern District of Florida dismissed claims arising under the Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA) and Florida state law. Bush v. Countrywide Home Loans, No. 08-60978, 2008 WL 4540450 (S.D. Fla. Oct. 9, 2008). In Bush, the plaintiff borrower alleged that the defendant lender violated RESPA when it did not provide (i) a good faith estimate within 3 days of the loan application, (ii) a good faith estimate disclosing the yield spread premium, and (c) notice of change of service upon assignment of the loan. The court dismissed the claim, holding that the relevant section of RESPA does not provide a private civil right of action. The court also dismissed a claim alleging that the loan’s disclosure statement did not conform to requirements under TILA, holding that the claim was time-barred and that, in this case, TILA does not allow for the requested remedy of rescission. Extinguishing the plaintiff’s federal claims, the court then refused to exercise supplemental jurisdiction over the alleged violations of state law. Also on October 8, the same court dismissed several other suits brought by additional, separate plaintiffs against the defendant, Countrywide Home Loans. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Bush_v_Countrywide.pdf.
South Carolina Federal Court Uses Lodestar Formula to Calculate Attorney Fees in RESPA Case. On October 16, the U.S. District Court for the District of South Carolina applied the lodestar formula to determine whether attorney fees and costs were “reasonable” in a case arising under the Real Estate Settlement Procedures Act (RESPA). Serfass v. CIT Group/Consumer Finance, Inc., No. 8:07-90, 2008 WL 4616763 (D. S.C. Oct. 16, 2008). In Serfass, the plaintiffs sought attorney fees in the amount of $45,502.50 and costs in the amount of $5,808 subsequent to a bench trial wherein the plaintiffs were awarded $1,000 in statutory damages for RESPA violations (reported in InfoBytes, Sept. 19, 2008). In Brodziak v. Runyon, 145 F.3d 194 (4th Cir. 1998), the Fourth Circuit determined that RESPA permits a court to award “reasonable” attorney fees and costs to a prevailing party by using the lodestar formula – the number of hours reasonably expended on the litigation multiplied by a reasonable hourly rate. After considering the time and labor required to litigate the suit, and the amount in controversy and the results obtained, all of which weighed in favor of reducing the fees requested, the court found that a reasonable amount for attorney fees in this action was $19,500 and granted the plaintiffs an award of attorney fees in this amount. The plaintiffs also requested costs of $5,808. However, Federal Rule of Civil Procedure 68(d) precludes the awarding of costs when a judgment is not more favorable than an unaccepted settlement offer. Here, the defendant previously offered, but the plaintiffs did not accept, as little as $5,000 to settle the case. Because the trial verdict of $1,000 was significantly less than the lowest offer, the court held that the plaintiffs could not recover their requested costs. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Serfass_v_CIT_Oct.pdf.
Banking
OCC Clarifies Regulation DD’s Relationship with E-Sign Act. On November 19, the Office of the Comptroller of the Currency (OCC) issued revised compliance examination procedures for Regulation DD, implementing the Truth-in-Savings Act. The revised procedures reflect changes made to Regulation DD that simplify and clarify requirements regarding e-communication and the Electronic Signatures in Global and National Commerce Act (E-Sign Act). The procedures remind examiners that the E-Sign Act does not mandate that institutions or consumers use or accept electronic records or signatures, but does permit institutions to use electronic records and signatures to satisfy requirements that information, such as Regulation DD disclosures, be provided in writing to a consumer. For a copy of the announcement, please see http://www.occ.gov/ftp/bulletin/2008-33.html.
OTS Bulletin Discusses Preventing Discriminatory Lending Practices Through Assessment, Internal Analysis. On November 19, the Office of Thrift Supervision issued Thrift Bulletin (TB) 25a, which addresses the prevention of discriminatory lending practices. TB 25a reminds thrift institutions to assess, at least annually, policies, procedures, lending activity and data (including written underwriting standards and practices implementing them) directed towards preventing discriminatory lending practices. The bulletin further advises that thrift institutions should use "internal analysis" to identify issues that might arise in the analysis of Home Mortgage Disclosure Act (HMDA) data. Institutions should be prepared to provide pricing and decisioning methodologies to address HMDA reporting issues. TB 25a rescinds TB 25. For a copy of TB 25a, please see http://files.ots.treas.gov/84299.pdf.
OCC Issues Preliminary Approval for First National Bank “Shelf Charter.” On November 21, the Office of the Comptroller of the Currency (OCC) announced it has granted its first preliminary approval of a new national bank "shelf charter." Under a self charter, a preliminary approval to investors for a national bank charter remains inactive– that is, put “on the shelf” – until the investor is able to acquire a troubled institution. The shelf charter process involves (i) an initial review, where the OCC evaluates the qualifications of the proposed management team, the sources and amount of capital that would be available to the bank, and a streamlined business plan that describes how the acquired bank will be operated, and (ii) a conditional preliminary approval, where the OCC can grant conditional preliminary approval of a national bank charter, subject to certain conditions and requirements. In the case of a Federal Deposit Insurance Corporation (FDIC) resolution of a failing institution, after a bid is submitted, the OCC will evaluate the specific proposal. If acceptable, the FDIC will approve the bid, allowing for the FDIC to grant (i) a final charter approval and (ii) final approval of FDIC deposit insurance. If the bid is not accepted by the FDIC, the charter remains “on the shelf” for up to 18 months, during which time the charter can be used for other bids. For a copy of the press release, please see http://www.occ.gov/ftp/release/2008-137.htm. For a copy of the preliminary “shelf charter” approval letter issued for Ford Group Bank, N.A., please see http://www.occ.gov/ftp/release/2008-137a.pdf.
Consumer Finance
FTC Reaches $2.25 Million Settlement for Violations of FDCPA, FTC Act by Debt Collector. On November 21, the Federal Trade Commission (FTC) announced that it has entered into a settlement agreement with Academy Collection Service, Inc. and its owner (Academy) regarding charges that Academy allegedly engaged in debt collection practices that violated the FTC Act and the Fair Debt Collection Practices Act (FDCPA). Academy allegedly, inter alia, made harassing and abusive calls to consumers, contacted consumers at work while aware that such communications were prohibited by the consumers’ employers, deposited postdated checks early, and made unauthorized withdrawals from consumers’ bank accounts. Pursuant to the terms of the consent decree, Academy (i) will pay a $2.25 million civil penalty, (ii) is enjoined from further violating any of the provisions of the FTC Act or the FDCPA, and (iii) must inform consumers that they can stop Academy from contacting them regarding their debt. For a copy of the press release, please see http://www.ftc.gov/opa/2008/11/academy.shtm.
Seventh Circuit Rules that Debt Collector’s Notice Complies with FDCPA. On November 13, the U.S. Court of Appeals for the Seventh Circuit reversed a district court’s judgment that a debt collector’s notice violated the Fair Debt Collection Practices Act (FDCPA) because, inter alia, an unsophisticated debtor would not have been confused about the ability to dispute the notice. McKinney v. Cadleway Properties, Inc., No. 07-1075, 2008 WL 4876826 (7th Cir. Nov. 13, 2008). In McKinney, Cadleway Properties (Cadleway) purchased a debt owed by the plaintiff. To collect on the debt, Cadleway sent the plaintiff a two-sided debt collection letter. The front of the letter contained a form that confirmed the amount of the debt. The back of the letter contained a validation-of-debt notice, including disclosures required under § 1692g of the FDCPA. Subsequently, the plaintiff filed suit, alleging that Cadleway violated § 1692g of the FDCPA because the collection letter was likely to confuse an unsophisticated debtor that the debtor could not dispute their debt. The district court agreed with the plaintiff; however, the Seventh Circuit reversed, stating that the plaintiff failed to produce adequate evidence of confusion. The court also held that the front page of the notice satisfied § 1692g because it “permits the consumer to either confirm the debt or to dispute it and insert any other amount (including ‘zero’).” As a result, the court ruled that Cadleway was entitled to judgment as a matter of law. For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&caseno=&shofile=07-1075_016.pdf.
Pennsylvania Federal Court Accepts FACTA Truncation Settlement Despite Clarification Act. On November 14, the U.S. District Court for the Eastern District of Pennsylvania held that a class action settlement agreement regarding an alleged violation of the Fair and Accurate Credit Transaction Act (FACTA) was not moot in light of Congress’ recent enactment of the Credit and Debit Card Clarification Act (Clarification Act). Curiale v. Lenox Group, Inc., Civ. No. 07-1432, 2008 WL 4899474 (E.D. Pa. Nov. 14, 2008). In Curiale, the plaintiff sued the defendant for violating FACTA by printing the expiration date of customers’ credit cards on its receipts. The parties eventually mediated the claims and submitted a class action settlement agreement to the court for approval. While approval was pending, Congress enacted the Clarification Act, which eliminated a private cause of action based solely on failing to truncate a credit card’s expiration date and applied retroactively to encompass claims like the plaintiff’s. Consequently, the defendant filed a suggestion of mootness with the court, requesting that the court “deny the parties’ request for preliminary approval of a settlement class as moot.” In arriving at its decision to approve the class action settlement agreement, the court emphasized that the parties were fully aware that the Clarification Act was pending at the time of negotiating the settlement agreement and understood that its enactment could affect their interests in the litigation. For assistance with obtaining this opinion, please contact .
Securities
President’s Working Group Announces OTC Derivative Initiatives. On November 14, the President’s Working Group on Financial Markets (PWG) announced a series of initiatives designed to strengthen oversight and the infrastructure of the over-the-counter (OTC) derivatives market. The PWG’s priority is the implementation of central counterparty services for credit default swaps (CDS), which, if well-regulated and managed, could reduce systemic risk associated with CDS exposures and increase competition through greater market transparency. One or more CDS counterparties are expected to commence operations before the end of 2008. A second initiative included the establishment of a Memorandum of Understanding (MOU) regarding CDS central counterparties among the Federal Reserve Board of Governors, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The MOU defines a framework for consultation and information sharing for issues related to CDS central counterparties. The PWG also set out certain policy objectives consistent with recommendations by the Financial Stability Forum, to be enacted legislatively when necessary. The objectives include (i) improved transparency and integrity of the CDS market, (ii) enhanced risk management of OTC derivatives, (iii) strengthening the OTC derivatives market infrastructure, and (iv) strengthening cooperation among regulatory authorities. For a copy of the press release, please see http://www.ustreas.gov/press/releases/hp1272.htm.
Litigation
Seventh Circuit Rules that Debt Collector’s Notice Complies with FDCPA. On November 13, the U.S. Court of Appeals for the Seventh Circuit reversed a district court’s judgment that a debt collector’s notice violated the Fair Debt Collection Practices Act (FDCPA) because, inter alia, an unsophisticated debtor would not have been confused about the ability to dispute the notice. McKinney v. Cadleway Properties, Inc., No. 07-1075, 2008 WL 4876826 (7th Cir. Nov. 13, 2008). In McKinney, Cadleway Properties (Cadleway) purchased a debt owed by the plaintiff. To collect on the debt, Cadleway sent the plaintiff a two-sided debt collection letter. The front of the letter contained a form that confirmed the amount of the debt. The back of the letter contained a validation-of-debt notice, including disclosures required under § 1692g of the FDCPA. Subsequently, the plaintiff filed suit, alleging that Cadleway violated § 1692g of the FDCPA because the collection letter was likely to confuse an unsophisticated debtor that the debtor could not dispute their debt. The district court agreed with the plaintiff; however, the Seventh Circuit reversed, stating that the plaintiff failed to produce adequate evidence of confusion. The court also held that the front page of the notice satisfied § 1692g because it “permits the consumer to either confirm the debt or to dispute it and insert any other amount (including ‘zero’).” As a result, the court ruled that Cadleway was entitled to judgment as a matter of law. For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&caseno=&shofile=07-1075_016.pdf.
Pennsylvania Bankruptcy Court Finds TILA Does Not Permit Damages for Failure to Honor Rescission Notice. On October 29, the Bankruptcy Court for the Western District of Pennsylvania granted partial summary judgment in favor of a defendant assignee of a mortgage loan, finding that, inter alia, the Truth in Lending Act (TILA) does not permit an award of damages against an assignee for the failure to honor a notice of rescission. Dougal v. Saxon Mortgage, No. 07-70247, 2008 WL 4735898 (Bkrtcy. W.D. Pa. Oct. 29, 2008). In this case, the consumer plaintiffs entered into a mortgage loan refinancing in 2005; the loan subsequently went into default in 2006 and Mortgage Electronic Registration Systems, Inc. (MERS) brought a foreclosure action against the plaintiffs in a Pennsylvania state court. In 2007, the plaintiffs filed a bankruptcy petition to prevent a sheriff’s sale of the property. The plaintiffs then brought TILA claims against the assignee of their mortgage, alleging that they did not receive the proper material disclosures in connection with the loan transaction. Plaintiffs also claimed that their rescission letter, which was sent more than a year after the foreclosure judgment was entered, was not honored by the assignee. As a result, the plaintiffs claim that the assignee violated their right to rescind. The plaintiffs sought rescission of the mortgages, as well as damages, in connection with the assignee’s failure to act on the rescission letter. The bankruptcy court dismissed the rescission claim, finding that, under the Rooker-Feldman doctrine, it lacked the power to provide the requested relief to the plaintiffs because of a pre-existing consent foreclosure judgment in Pennsylvania state court. The bankruptcy court further found that summary judgment in favor of the defendant assignee was appropriate because (i) there was no basis for an award of damages for failure to honor the notice of rescission (because there was no enforceable right of rescission), and (ii) TILA does not permit an award of damages against an assignee for failure to honor a notice of rescission. For assistance with obtaining a copy of the opinion, please contact .
Illinois District Court Permits Individual TILA Rescission, Rejects Class Certification for Rescission Claims. On November 7, the U.S. District Court for the Northern District of Illinois rejected a defendant lender’s motion to dismiss a borrower’s claim for rescission under the Truth in Lending Act (TILA) because the TILA statement provided to the borrower was inadequate. Briscoe v. Deutsche Bank Nat. Trust Co., No. 08 C 1279, 2008 WL 4852977 (N.D. Ill. Nov. 7, 2008). In Briscoe, the borrower received an adjustable-rate mortgage loan from New Century Mortgage Corporation in 2005, the rights for which were transferred to the defendant. When the borrower’s interest rate adjusted upward in 2007, the borrower contacted the servicer to rescind the loan; however, the servicer did not honor the request. The borrower subsequently sued the defendant for statutory penalties, alleging that she was entitled to rescind the transaction because New Century failed to disclose the frequency of the payments, failed to provide two copies of the Notice of Right to Cancel, and failed to honor her request for rescission. The borrower also sought class certification for all borrowers who did not receive adequate notice of the frequency of the payments. The district court agreed that the borrower’s TILA statement was inadequate, reasoning that it required her to “make assumptions regarding the payment period,” and that the borrower had made an adequate case that she did not receive two copies of the Notice of Right to Cancel. While agreeing that rescission was warranted, the court found that her claims for statutory damages were time-barred. The court further rejected the plaintiff’s request for declaratory judgment that all class members may rescind their loans based on the alleged payment-disclosure violation, holding that class actions may not be certified for borrowers seeking class-wide rescission. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Briscoe_v_Deutsche.pdf.
Second Circuit Holds Equitable Estoppel Doctrine Does Not Authorize Amex to Use Competitor’s Arbitration Clause. On October 21, the U.S. Court of Appeals for the Second Circuit held that American Express Company, American Express travel Related Services Company, and American Express Centurion Bank (collectively, Amex) could not avail themselves of arbitration clauses found in credit card agreements between cardholders and other card companies to defend against conspiracy claims. Ross v. American Express Co., No. 06-4598, 2008 WL 4630314 (2nd Cir. Oct. 21, 2008). In this case, the plaintiffs were cardholders of credit cards issued by various banks on the Visa, MasterCard and Diners Club card networks – but not with Amex. The plaintiffs brought a class action suit, alleging that Amex engaged in a conspiracy with the other networks to fix foreign currency transaction fees well above a rate that would be charged on an open market and to conceal those fees from the cardholders. In response, Amex sought to avail themselves of the mandatory arbitration clauses found in the cardholder agreements that the plaintiffs signed with the other card companies. The district court held that the plaintiffs could be compelled to arbitrate the dispute. On appeal, the Second Circuit reversed. Amex argued that they could avail themselves of the arbitration clauses through the doctrine of equitable estoppel, under which “a non-signatory to an arbitration agreement may compel a signatory to that agreement to arbitrate a dispute where a careful review … discloses that ‘the issues the non-signatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed.’” (citing JLM Indus., Inc. v. Stolt-Nielsen, S.A., 387 F.3d 163, 171 (2nd. Cir. 2004). The court reviewed relevant precedent regarding the application of equitable estoppel and found that the doctrine is only appropriate where the party seeking estoppel has a special relationship to the signatory party (e.g. a corporate relationship, such as a parent-subsidiary). However, the court found that the doctrine does not extend to where the only relationship between the non-signatory third-party and the contract signatory is as a third-party wrongdoer. Applying this framework, the court held that Amex had no special relationship with the plaintiffs sufficient to demonstrate that the plaintiffs intended to arbitrate disputes with Amex. Consequently, the court reversed the decision that plaintiffs may be compelled to arbitrate. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Ross_v_Am_Ex.pdf.
Illinois Federal Court Holds Third Parties Had No Obligations to Provide Certain Disclosures Under TILA. On October 14, the U.S. District Court for the Northern District of Illinois dismissed mortgage lenders’ (Lenders) third party negligence claims against closing agents, title underwriters and mortgage brokers (Third Party Defendants), holding that the Lenders failed to show that those entities had a duty – separate from a contractual duty – to properly provide certain disclosures required by the Truth in Lending Act (TILA). In Re Ameriquest Mortgage Co. Mortgage Lending Practices Litig., MDL No. 1715, No. 05-7097, 2008 WL 4594834 (N.D. Ill. Oct. 14, 2008). In this consolidated case involving borrowers’ TILA claims against their Lenders, the Lenders filed a complaint against the Third Party Defendants alleging that, if the borrowers’ allegations that the Lenders failed to provide certain TILA disclosures were true, the Third Party Defendants breached their contractual promise to deliver the disclosures and were negligent. By way of relief, the Lenders sought damages and equitable indemnity and contribution. The Third Party Defendants filed a motion to dismiss, which the court granted in part and denied in part. First, the court denied the motion to dismiss to the extent it sought to dispose of the contractual claims, finding that the complaint sufficiently identified the contracts between the Lenders and the various Third Party Defendants. Second, the court granted the motion with respect to the negligence claims, holding that the Lenders failed to identify a “plausible source” of a duty owed to them by the Third Party Defendants. The court specifically noted that there was no statutory basis to impose a duty on the Third Party Defendants because TILA imposes a duty only on “creditors.” The Lenders did not allege that the Third Party Defendants qualified as “creditors” under TILA. Finally, the court also dismissed the Lenders’ demand for equitable indemnity and contribution, finding that such relief was not authorized by TILA, which was not designed to protect the Lenders, but rather “singled out creditors to be the liable party for disclosure violations.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/In_Re_Ameriquest.pdf.
Pennsylvania Federal Court Accepts FACTA Truncation Settlement Despite Clarification Act. On November 14, the U.S. District Court for the Eastern District of Pennsylvania held that a class action settlement agreement regarding an alleged violation of the Fair and Accurate Credit Transaction Act (FACTA) was not moot in light of Congress’ recent enactment of the Credit and Debit Card Clarification Act (Clarification Act). Curiale v. Lenox Group, Inc., Civ. No. 07-1432, 2008 WL 4899474 (E.D. Pa. Nov. 14, 2008). In Curiale, the plaintiff sued the defendant for violating FACTA by printing the expiration date of customers’ credit cards on its receipts. The parties eventually mediated the claims and submitted a class action settlement agreement to the court for approval. While approval was pending, Congress enacted the Clarification Act, which eliminated a private cause of action based solely on failing to truncate a credit card’s expiration date and applied retroactively to encompass claims like the plaintiff’s. Consequently, the defendant filed a suggestion of mootness with the court, requesting that the court “deny the parties’ request for preliminary approval of a settlement class as moot.” In arriving at its decision to approve the class action settlement agreement, the court emphasized that the parties were fully aware that the Clarification Act was pending at the time of negotiating the settlement agreement and understood that its enactment could affect their interests in the litigation. For assistance with obtaining this opinion, please contact .
Florida Federal Court Dismisses RESPA, TILA Claims. On October 8, the U.S. District Court for the Southern District of Florida dismissed claims arising under the Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA) and Florida state law. Bush v. Countrywide Home Loans, No. 08-60978, 2008 WL 4540450 (S.D. Fla. Oct. 9, 2008). In Bush, the plaintiff borrower alleged that the defendant lender violated RESPA when it did not provide (i) a good faith estimate within 3 days of the loan application, (ii) a good faith estimate disclosing the yield spread premium, and (c) notice of change of service upon assignment of the loan. The court dismissed the claim, holding that the relevant section of RESPA does not provide a private civil right of action. The court also dismissed a claim alleging that the loan’s disclosure statement did not conform to requirements under TILA, holding that the claim was time-barred and that, in this case, TILA does not allow for the requested remedy of rescission. Extinguishing the plaintiff’s federal claims, the court then refused to exercise supplemental jurisdiction over the alleged violations of state law. Also on October 8, the same court dismissed several other suits brought by additional, separate plaintiffs against the defendant, Countrywide Home Loans. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Bush_v_Countrywide.pdf.
South Carolina Federal Court Uses Lodestar Formula to Calculate Attorney Fees in RESPA Case. On October 16, the U.S. District Court for the District of South Carolina applied the lodestar formula to determine whether attorney fees and costs were “reasonable” in a case arising under the Real Estate Settlement Procedures Act (RESPA). Serfass v. CIT Group/Consumer Finance, Inc., No. 8:07-90, 2008 WL 4616763 (D. S.C. Oct. 16, 2008). In Serfass, the plaintiffs sought attorney fees in the amount of $45,502.50 and costs in the amount of $5,808 subsequent to a bench trial wherein the plaintiffs were awarded $1,000 in statutory damages for RESPA violations (reported in InfoBytes, Sept. 19, 2008). In Brodziak v. Runyon, 145 F.3d 194 (4th Cir. 1998), the Fourth Circuit determined that RESPA permits a court to award “reasonable” attorney fees and costs to a prevailing party by using the lodestar formula – the number of hours reasonably expended on the litigation multiplied by a reasonable hourly rate. After considering the time and labor required to litigate the suit, and the amount in controversy and the results obtained, all of which weighed in favor of reducing the fees requested, the court found that a reasonable amount for attorney fees in this action was $19,500 and granted the plaintiffs an award of attorney fees in this amount. The plaintiffs also requested costs of $5,808. However, Federal Rule of Civil Procedure 68(d) precludes the awarding of costs when a judgment is not more favorable than an unaccepted settlement offer. Here, the defendant previously offered, but the plaintiffs did not accept, as little as $5,000 to settle the case. Because the trial verdict of $1,000 was significantly less than the lowest offer, the court held that the plaintiffs could not recover their requested costs. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Serfass_v_CIT_Oct.pdf.
Pennsylvania Federal Court Denies Implied Contractual Duty in Spyware Fraud Case. On November 14, the U.S. District Court for the Western District of Pennsylvania held, inter alia, that an implied contract did not exist because explicit credit card agreements dealt with the same contractual terms at issue. Grimm v. Discover Financial Services, Nos. 08-747, 08-832, 2008 WL 482169 (W.D. Pa. Nov. 14, 2008). In Grimm, identity thieves used spyware to fraudulently charge credit cards issued by the defendants. The plaintiffs claimed that the defendants failed to identify the fraudulent activity in violation of the cardholder agreements and the Consumer Credit Protection Act (CCPA). The plaintiffs subsequently filed suit, alleging breach of implied contract, negligence, fraudulent and negligent misrepresentation, negligence per se, and breach of fiduciary duty in addition to Truth in Lending Act (TILA), CCPA, and state law claims. The court granted the defendant’s motion for summary judgment on all claims, holding, inter alia, that (i) under Delaware law, an implied contract cannot exist when an express contract – in this case, the cardholder agreement – deals with the same contractual terms, and (ii) the TILA claim was time-barred. The court also reasoned that doctrines under Pennsylvania law barred the torts claims. Also on November 14, the same court arrived at a substantively similar decision in a case arising under the same facts against a separate credit card issuer – see Grimm v. Citibank, N.A., No. 8-788 (W.D. Pa. Nov. 14, 2008). For a copy of the opinion, please see http://www.buckleykolar.com/documents/Grimm_v_Discover.pdf.
California Federal Court Denies Motion to Dismiss Click-Fraud Claims. On November 9, the U.S. District Court for the Central District of California denied a motion to dismiss claims arising from allegedly fraudulent “click-through” advertising fees charged by the defendants pursuant to a contractual agreement. Lambotte v. IAC/InterActiveCorp., et al., No. 08-04263, 2008 WL 4829882 (C.D. Cal. Nov. 4, 2008). In Lambotte, the plaintiffs paid IAC/Interactive Corp., Ticketmaster, d/b/a Citysearch.com, and Citysearch.com (Citysearch) for "click-throughs" to the plaintiffs’ websites via Citysearch’s online advertisements. The agreements between Citysearch and the plaintiffs stated that each plaintiff would pay for click-throughs made by "users," and that Citysearch was not responsible for the "quality and timing" of the click-throughs. After suspecting fraudulent click-throughs, the plaintiffs filed suit, ultimately alleging (i) breach of the express terms of the agreement and (ii) a breach of the covenant of good faith and fair dealing under California state law. Regarding the first claim, the plaintiffs argued that the suspicious click-throughs were not made by "users" because they were allegedly made by automated computers and the defendant’s staff, and not "potential clients." The court rejected Citysearch’s motion to dismiss this claim, reasoning that summary judgment was appropriate to determine whether the plaintiffs’ interpretation of "user" was reasonable. With respect to the second claim, the court also rejected the defendants’ motion to dismiss the claim of breach of the covenant of good faith and fair dealing, ultimately reasoning that the plaintiffs sufficiently alleged a claim that did not conflict with the express language of the contract. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Lambotte_v_IAC.pdf.
E-Financial Services
OCC Clarifies Regulation DD’s Relationship with E-Sign Act. On November 19, the Office of the Comptroller of the Currency (OCC) issued revised compliance examination procedures for Regulation DD, implementing the Truth-in-Savings Act. The revised procedures reflect changes made to Regulation DD that simplify and clarify requirements regarding e-communication and the Electronic Signatures in Global and National Commerce Act (E-Sign Act). The procedures remind examiners that the E-Sign Act does not mandate that institutions or consumers use or accept electronic records or signatures, but does permit institutions to use electronic records and signatures to satisfy requirements that information, such as Regulation DD disclosures, be provided in writing to a consumer. For a copy of the announcement, please see http://www.occ.gov/ftp/bulletin/2008-33.html.
White Paper States eNotes Enforceable in All Jurisdictions. On November 21, the Mortgage Industry Standards Maintenance Organization (MISMO), the Electronic Signature and Records Association (ESRA), and the American Land Title Association (ALTA) issued a white paper stating that electronically signed promissory notes (eNotes) are enforceable in all jurisdictions under the Electronic Signatures in Global and National Commerce Act (E-Sign Act) and the Uniform Electronic Transaction Act (UETA). For a copy of the white paper, please see https://www.esignrecords.org.
Massachusetts Extends Deadline for Compliance with Personal Information Security Standards. On November 14, the Massachusetts Office of Consumer Affairs and Business Regulation (OCABR) extended the deadline for compliance with recently-enacted security standards for those who “own, license, store, or maintain” personal information (reported in InfoBytes, Sept. 26, 2008). OCABR extended the compliance deadline from January 1, 2009 to May 1, 2009 for (i) the general compliance deadline, (ii) the provision ensuring that third-party service providers are capable of protecting personal information, and contractually binding them to do so, and (iii) the provision ensuring the encryption of laptops. OCABR also extended the compliance deadline from January 1, 2009 to January 1, 2010 for (i) the provision for requiring written certification regarding security standards from third-party providers, and (ii) the provision for ensuring encryption of portable devices other than laptops, such as memory sticks. For a copy of the press release, please see http://www.mass.gov/?pageID=ocapressrelease&L=1&L0=Home&sid=Eoca&b=pressrelease&f=081114_IDTheftupdate&csid=Eoca.
New York Governor, Consumer Protection Board Issue Guide Regarding Personal Information Security. Recently, New York Governor David A. Paterson and the New York Consumer Protection Board issued their "Business Privacy Guide," which provides guidelines on handling personal identification information and reducing the likelihood of identity theft. The guide stresses that business should (i) identify how data is collected, transferred, and transmitted and limit the collection of personal information to that which is necessary to promote a legitimate business purpose, (ii) implement administrative, physical and technological safeguards for personal information, including the use of encryption and firewalls, (iii) educate consumers and employees regarding the collection and use of personal information, and (iv) maintain policies and procedures regarding how to respond to a data breach. For a copy of the guide, please see http://www.consumer.state.ny.us/pdf/the_new_york_business_guide_to_privacy.pdf.
Pennsylvania Federal Court Denies Implied Contractual Duty in Spyware Fraud Case. On November 14, the U.S. District Court for the Western District of Pennsylvania held, inter alia, that an implied contract did not exist because explicit credit card agreements dealt with the same contractual terms at issue. Grimm v. Discover Financial Services, Nos. 08-747, 08-832, 2008 WL 482169 (W.D. Pa. Nov. 14, 2008). In Grimm, identity thieves used spyware to fraudulently charge credit cards issued by the defendants. The plaintiffs claimed that the defendants failed to identify the fraudulent activity in violation of the cardholder agreements and the Consumer Credit Protection Act (CCPA). The plaintiffs subsequently filed suit, alleging breach of implied contract, negligence, fraudulent and negligent misrepresentation, negligence per se, and breach of fiduciary duty in addition to Truth in Lending Act (TILA), CCPA, and state law claims. The court granted the defendant’s motion for summary judgment on all claims, holding, inter alia, that (i) under Delaware law, an implied contract cannot exist when an express contract – in this case, the cardholder agreement – deals with the same contractual terms, and (ii) the TILA claim was time-barred. The court also reasoned that doctrines under Pennsylvania law barred the torts claims. Also on November 14, the same court arrived at a substantively similar decision in a case arising under the same facts against a separate credit card issuer – see Grimm v. Citibank, N.A., No. 8-788 (W.D. Pa. Nov. 14, 2008). For a copy of the opinion, please see http://www.buckleykolar.com/documents/Grimm_v_Discover.pdf.
California Federal Court Denies Motion to Dismiss Click-Fraud Claims. On November 9, the U.S. District Court for the Central District of California denied a motion to dismiss claims arising from allegedly fraudulent “click-through” advertising fees charged by the defendants pursuant to a contractual agreement. Lambotte v. IAC/InterActiveCorp., et al., No. 08-04263, 2008 WL 4829882 (C.D. Cal. Nov. 4, 2008). In Lambotte, the plaintiffs paid IAC/Interactive Corp., Ticketmaster, d/b/a Citysearch.com, and Citysearch.com (Citysearch) for "click-throughs" to the plaintiffs’ websites via Citysearch’s online advertisements. The agreements between Citysearch and the plaintiffs stated that each plaintiff would pay for click-throughs made by "users," and that Citysearch was not responsible for the "quality and timing" of the click-throughs. After suspecting fraudulent click-throughs, the plaintiffs filed suit, ultimately alleging (i) breach of the express terms of the agreement and (ii) a breach of the covenant of good faith and fair dealing under California state law. Regarding the first claim, the plaintiffs argued that the suspicious click-throughs were not made by "users" because they were allegedly made by automated computers and the defendant’s staff, and not "potential clients." The court rejected Citysearch’s motion to dismiss this claim, reasoning that summary judgment was appropriate to determine whether the plaintiffs’ interpretation of "user" was reasonable. With respect to the second claim, the court also rejected the defendants’ motion to dismiss the claim of breach of the covenant of good faith and fair dealing, ultimately reasoning that the plaintiffs sufficiently alleged a claim that did not conflict with the express language of the contract. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Lambotte_v_IAC.pdf.
Privacy/Data Security
President’s Working Group Announces OTC Derivative Initiatives. On November 14, the President’s Working Group on Financial Markets (PWG) announced a series of initiatives designed to strengthen oversight and the infrastructure of the over-the-counter (OTC) derivatives market. The PWG’s priority is the implementation of central counterparty services for credit default swaps (CDS), which, if well-regulated and managed, could reduce systemic risk associated with CDS exposures and increase competition through greater market transparency. One or more CDS counterparties are expected to commence operations before the end of 2008. A second initiative included the establishment of a Memorandum of Understanding (MOU) regarding CDS central counterparties among the Federal Reserve Board of Governors, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The MOU defines a framework for consultation and information sharing for issues related to CDS central counterparties. The PWG also set out certain policy objectives consistent with recommendations by the Financial Stability Forum, to be enacted legislatively when necessary. The objectives include (i) improved transparency and integrity of the CDS market, (ii) enhanced risk management of OTC derivatives, (iii) strengthening the OTC derivatives market infrastructure, and (iv) strengthening cooperation among regulatory authorities. For a copy of the press release, please see http://www.ustreas.gov/press/releases/hp1272.htm.
Pennsylvania Federal Court Accepts FACTA Truncation Settlement Despite Clarification Act. On November 14, the U.S. District Court for the Eastern District of Pennsylvania held that a class action settlement agreement regarding an alleged violation of the Fair and Accurate Credit Transaction Act (FACTA) was not moot in light of Congress’ recent enactment of the Credit and Debit Card Clarification Act (Clarification Act). Curiale v. Lenox Group, Inc., No. 07-1432, 2008 WL 4899474 (E.D. Pa. Nov. 14, 2008). In Curiale, the plaintiff sued the defendant for violating FACTA by printing the expiration date of customers’ credit cards on its receipts. The parties eventually mediated the claims and submitted a class action settlement agreement to the court for approval. While approval was pending, Congress enacted the Clarification Act, which eliminated a private cause of action based solely on failing to truncate a credit card’s expiration date and applied retroactively to encompass claims like the plaintiff’s. Consequently, the defendant filed a suggestion of mootness with the court, requesting that the court “deny the parties’ request for preliminary approval of a settlement class as moot.” In arriving at its decision to approve the class action settlement agreement, the court emphasized that the parties were fully aware that the Clarification Act was pending at the time of negotiating the settlement agreement and understood that its enactment could affect their interests in the litigation. For assistance with obtaining this opinion, please contact .
Pennsylvania Federal Court Denies Implied Contractual Duty in Spyware Fraud Case. On November 14, the U.S. District Court for the Western District of Pennsylvania held, inter alia, that an implied contract did not exist because explicit credit card agreements dealt with the same contractual terms at issue. Grimm v. Discover Financial Services, Nos. 08-747, 08-832, 2008 WL 482169 (W.D. Pa. Nov. 14, 2008). In Grimm, identity thieves used spyware to fraudulently charge credit cards issued by the defendants. The plaintiffs claimed that the defendants failed to identify the fraudulent activity in violation of the cardholder agreements and the Consumer Credit Protection Act (CCPA). The plaintiffs subsequently filed suit, alleging breach of implied contract, negligence, fraudulent and negligent misrepresentation, negligence per se, and breach of fiduciary duty in addition to Truth in Lending Act (TILA), CCPA, and state law claims. The court granted the defendant’s motion for summary judgment on all claims, holding, inter alia, that (i) under Delaware law, an implied contract cannot exist when an express contract – in this case, the cardholder agreement – deals with the same contractual terms, and (ii) the TILA claim was time-barred. The court also reasoned that doctrines under Pennsylvania law barred the torts claims. Also on November 14, the same court arrived at a substantively similar decision in a case arising under the same facts against a separate credit card issuer – see Grimm v. Citibank, N.A., No. 8-788 (W.D. Pa. Nov. 14, 2008). For a copy of the opinion, please see http://www.buckleykolar.com/documents/Grimm_v_Discover.pdf.
Credit Cards
Pennsylvania Federal Court Denies Implied Contractual Duty in Spyware Fraud Case. On November 14, the U.S. District Court for the Western District of Pennsylvania held, inter alia, that an implied contract did not exist because explicit credit card agreements dealt with the same contractual terms at issue. Grimm v. Discover Financial Services, Nos. 08-747, 08-832, 2008 WL 482169 (W.D. Pa. Nov. 14, 2008). In Grimm, identity thieves used spyware to fraudulently charge credit cards issued by the defendants. The plaintiffs claimed that the defendants failed to identify the fraudulent activity in violation of the cardholder agreements and the Consumer Credit Protection Act (CCPA). The plaintiffs subsequently filed suit, alleging breach of implied contract, negligence, fraudulent and negligent misrepresentation, negligence per se, and breach of fiduciary duty in addition to Truth in Lending Act (TILA), CCPA, and state law claims. The court granted the defendant’s motion for summary judgment on all claims, holding, inter alia, that (i) under Delaware law, an implied contract cannot exist when an express contract – in this case, the cardholder agreement – deals with the same contractual terms, and (ii) the TILA claim was time-barred. The court also reasoned that doctrines under Pennsylvania law barred the torts claims. Also on November 14, the same court arrived at a substantively similar decision in a case arising under the same facts against a separate credit card issuer – see Grimm v. Citibank, N.A., No. 8-788 (W.D. Pa. Nov.14, 2008). For a copy of the opinion, please see http://www.buckleykolar.com/documents/Grimm_v_Discover.pdf.
Second Circuit Holds Equitable Estoppel Doctrine Does Not Authorize Amex to Use Competitor’s Arbitration Clause. On October 21, the U.S. Court of Appeals for the Second Circuit held that American Express Company, American Express travel Related Services Company, and American Express Centurion Bank (collectively, Amex) could not avail themselves of arbitration clauses found in credit card agreements between cardholders and other card companies to defend against conspiracy claims. Ross v. American Express Co., No. 06-4598, , 2008 WL 4630314 (2nd Cir. Oct. 21, 2008). In this case, the plaintiffs were cardholders of credit cards issued by various banks on the Visa, MasterCard and Diners Club card networks – but not with Amex. The plaintiffs brought a class action suit, alleging that Amex engaged in a conspiracy with the other networks to fix foreign currency transaction fees well above a rate that would be charged on an open market and to conceal those fees from the cardholders. In response, Amex sought to avail themselves of the mandatory arbitration clauses found in the cardholder agreements that the plaintiffs signed with the other card companies. The district court held that the plaintiffs could be compelled to arbitrate the dispute. On appeal, the Second Circuit reversed. Amex argued that they could avail themselves of the arbitration clauses through the doctrine of equitable estoppel, under which “a non-signatory to an arbitration agreement may compel a signatory to that agreement to arbitrate a dispute where a careful review … discloses that ‘the issues the non-signatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed.’” (citing JLM Indus., Inc. v. Stolt-Nielsen, S.A., 387 F.3d 163, 171 (2nd. Cir. 2004). The court reviewed relevant precedent regarding the application of equitable estoppel and found that the doctrine is only appropriate where the party seeking estoppel has a special relationship to the signatory party (e.g. a corporate relationship, such as a parent-subsidiary). However, the court found that the doctrine does not extend to where the only relationship between the non-signatory third-party and the contract signatory is as a third-party wrongdoer. Applying this framework, the court held that Amex had no special relationship with the plaintiffs sufficient to demonstrate that the plaintiffs intended to arbitrate disputes with Amex. Consequently, the court reversed the decision that plaintiffs may be compelled to arbitrate. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Ross_v_Am_Ex.pdf.
Pennsylvania Federal Court Accepts FACTA Truncation Settlement Despite Clarification Act. On November 14, the U.S. District Court for the Eastern District of Pennsylvania held that a class action settlement agreement regarding an alleged violation of the Fair and Accurate Credit Transaction Act (FACTA) was not moot in light of Congress’ recent enactment of the Credit and Debit Card Clarification Act (Clarification Act). Curiale v. Lenox Group, Inc., Civ. No. 07-1432, 2008 WL 4899474 (E.D. Pa. Nov. 14, 2008). In Curiale, the plaintiff sued the defendant for violating FACTA by printing the expiration date of customers’ credit cards on its receipts. The parties eventually mediated the claims and submitted a class action settlement agreement to the court for approval. While approval was pending, Congress enacted the Clarification Act, which eliminated a private cause of action based solely on failing to truncate a credit card’s expiration date and applied retroactively to encompass claims like the plaintiff’s. Consequently, the defendant filed a suggestion of mootness with the court, requesting that the court “deny the parties’ request for preliminary approval of a settlement class as moot.” In arriving at its decision to approve the class action settlement agreement, the court emphasized that the parties were fully aware that the Clarification Act was pending at the time of negotiating the settlement agreement and understood that its enactment could affect their interests in the litigation. For assistance with obtaining this opinion, please contact .