InfoBytes, November 27, 2009
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Litigation
- E-Financial Services
- Privacy/Data Security
Federal Issues
NCUA Proposes Safety and Soundness Framework for Corporate Credit Unions. On November 19, the National Credit Union Administration (NCUA) issued a proposal to establish a new safety and soundness framework for the corporate credit union system. The framework includes (i) enhanced capital standards mirroring Basel I, (ii) asset-liability management requirements, (iii) risk concentration limits, and (iv) corporate governance requirements. The proposal builds on the NCUA’s advanced notice of proposed rulemaking from January 2009. Comments are due within 90 days after publication in the Federal Register. For a copy of the proposal, please see http://www.ncua.gov/news/press_releases/2009/Part70411-17-2009WebVersion.pdf.
FDIC Releases FAQs Regarding Prepaid Assessments. On November 20, the Federal Deposit Insurance Corporation (FDIC) released a list of "Frequently Asked Questions" (FAQs) regarding the recently-announced requirement for institutions to prepay their estimated quarterly risk-based assessments for 2010, 2011, and 2012 on December 30, 2009 (reported in InfoBytes, Nov. 13, 2009). The FAQs clarify, among other things, (i) why the prepayment is necessary for FDIC-insured institutions, (ii) how institutions should account for the prepayment under Generally Accepted Accounting Practices, (iii) that institutions may be exempt from the prepaid exemption if the FDIC, in consultation with the institution’s primary federal regulator, determines that the prepayment would adversely affect the safety and soundness of the institution, (iv) that prepaid assessments can only be used to offset regular quarterly risk-based deposit insurance assessments, and (v) that the FDIC will not refund any portion of the prepaid assessments – however, if actual assessments are lower than the FDIC’s estimates, beginning with the assessment due on March 30, 2010, actual assessments will be deducted from the prepaid amount until the prepaid amount is exhausted. For a copy of the FAQs, please see http://www.fdic.gov/deposit/insurance/prepay/.
FTC Extends Comment Period for Proposed Free Credit Report Rule. On November 20, the Federal Trade Commission (FTC) announced the extension of the comment period for its proposed amendments to the Free Annual File Disclosures Rule to December 7, 2009 (the proposal was reported in InfoBytes, Oct. 9, 2009). The proposed rule would implement the requirements of the Credit Card Accountability Responsibility and Disclosure Act of 2009 by instituting regulations outlawing deceptive marketing practices by credit reporting agencies (CRAs). Specifically, the proposed rule requires certain advertisements for “free credit reports” to include prominent disclosures to prevent confusion with federally-mandated free annual credit reports. Additionally, the proposed rule would prohibit CRAs from advertising other products or services to consumers seeking free credit reports until a consumer receives the free credit report, and further prohibit other practices that may interfere with the free credit report process. For a copy of the press release, please see http://www.ftc.gov/opa/2009/11/freeannual.shtm. For a copy of the proposed rule, please see http://www.ftc.gov/os/2009/10/R411005freeannualfile.pdf.
HUD Issues Mortgagee Letter Addressing Requirements for Subordinate Liens Under HECM Program. On November 18, the U.S. Department of Housing and Urban Development (HUD) issued Mortgage Letter 2009-49 to remind HUD-approved mortgagees and housing counseling agencies that subordinate liens are generally prohibited in connection with the origination of a home equity conversion mortgage (HECM) loan. However, certain subordinate liens are permissible at the time of HECM origination, including (i) liens resulting from outstanding federal obligations or state or local court judgments, provided that such liens are subordinated to the first and second HECM liens at closing, and (ii) federal judgments or debts, provided that a satisfactory repayment plan is in place prior to closing. The letter also emphasizes that it is the responsibility of a mortgagee to confirm that the first and second HECM liens are the first and second liens of record, and to check the prospective HECM borrower’s credit report for any debts against the collateral real estate and/or any federal debts. For a copy of Mortgagee Letter 2009-49, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-49ml.pdf.
State Issues
Pennsylvania Attorney General Sues Four Loan Modification Businesses. On November 23, Pennsylvania Attorney General Tom Corbett announced lawsuits alleging consumer fraud against four loan modification companies. According to Attorney General Corbett, one or more of the companies (i) made false or misleading claims about the ability to modify loans, (ii) used deceptive mailings implying that the companies were affiliated with government agencies and programs, (iii) failed to provide consumers with required financial disclosures, (iv) failed to inform consumers about their five-day right to cancel, (v) accepted up-front fees without posting a required surety bond or maintaining a trust account, and (vi) were not licensed by the Pennsylvania Department of Banking for the provided services. The four companies charged are Foreclosure Awareness Inc., Nationwide Foreclosure Prevention Center LLC, Best Interest Rate Mortgage Company LLC, and U.S. Mortgage Mod LLC, as well as their owners. For a copy of the press release, please see http://www.banking.state.pa.us/banking/lib/banking/news_and_events/press_releases/2009/11-23-09_ag_mortgage_mod_suits.pdf.
Courts
Pennsylvania, New Jersey Federal Courts Hold State Law Claims Alleging Deceptive Advertising of Gift Cards Not Preempted by National Bank Act. Recently, two separate federal district courts ruled that the National Bank Act (NBA) does not preempt the applicability of state consumer protection laws regulating deceptive advertising to gift cards issued by a national bank. Mwantembe v. TD Bank, N.A., Civil Action No. 09-0135, 2009 WL 3818745 (E.D. Pa. Nov. 17, 2009); Mann v. Td Bank, N.A., Civil No. 09-1062, 2009 WL 3818128 (D.N.J. Nov. 12, 2009). The two cases involve similar facts and claims. In each, the plaintiffs alleged that the banks did not adequately disclose the dormancy fees associated with the gift card, in violation of the applicable state consumer protection statutes. The defendant banks argued that the NBA and the regulations of the Office of the Comptroller of the Currency (OCC) preempted such claims because the state statutes “significantly interfered” with the banks’ banking activities.
In Mwantembe, the court denied the banks’ motion to dismiss, finding that the law regulating product disclosure only incidentally affected the business of the banks, stating, “the defendants have not articulated, and we cannot discern, how enforcement of the [state consumer protection statute] would prevent or significantly interfere with their ability to engage in the banking activity of issuing gift cards.” The court addressed the U.S. Supreme Court’s decisions in Watters v. Wachovia Bank (reported in InfoBytes Special Alert, Apr. 17, 2007) and Cuomo v. Clearing House Ass’n, LLC (reported in InfoBytes Special Alert, June 30, 2009), noting that only visitorial, and not enforcement, powers are preempted, and that a state may regulate a national bank where doing so does not prevent or significantly interfere with the bank’s or federal regulator’s exercise of its powers. Thus, where a state statute of general enforcement is not substantively preempted, the state retains the power to enforce the law. The court did not find persuasive the argument that the existence of OCC guidance on gift card disclosures created conflict preemption concerns, finding that the policy statements did not impose legal obligations on banks and did not constitute a regulation that would be in conflict with the state law.
In Mann, the court also noted the visitorial versus enforcement distinction spelled out in Watters and Cuomo, and also distinguished the New Jersey consumer protection statute at issue from state laws that prohibited altogether the issuance off gift cards with dormancy fees. Differing from Mwantembe, however, the court held that the law at issue merely requires all actors (banking or otherwise) to conform to a generally applicable standard of practice. In addition, the court noted that OCC guidance on issuing gift cards stressing adequate disclosure appears to “discourag[e] the same sort of conduct Plaintiff alleges violates New Jersey law.” Thus, rather than creating a legal conflict, the two laws appeared to complement each other. As such, the court denied the motion, and thus denied federal preemption, with respect to the deceptive advertising and marketing claims. The court, however, found that federal law preempted the plaintiffs’ claim that the banks were prohibited from issuing gift cards with dormancy fees. For a copy of the Mann opinion, please see http://www.buckleysandler.com/Mann_v_TD_Bank.pdf. For a copy of the Mwantembe opinion, please see http://www.buckleysandler.com/Mwantembe_v_TD_Bank.pdf.
Seventh Circuit Holds Servicers That Reported Borrower Who Did Not Provide Receipts as Delinquent Did Not Violate FCRA. On November 20, the U.S. Court of Appeals for the Seventh Circuit held that two mortgage servicers that furnished information to a consumer reporting agency (CRA) did not furnish inaccurate information under the Fair Credit Reporting Act (FCRA) about a mortgage borrower when the borrower failed to meet his contractual obligation to provide receipts for tax and insurance payments to the servicer. Hukic v. Aurora Loan Servs., No. 07-3826, 2009 WL 3878235 (7th Cir. Nov. 20, 2009). Under the terms of the borrower’s escrow waiver agreement with the lender, the borrower was required to forward receipts for taxes and insurance on the property to the servicer. Although the borrower made the payments, he failed to submit the receipts. As a result, the defendant mortgage servicers (which serviced the loan at different times) made these payments on the borrower’s behalf. The servicers also billed these payments to the borrower, notifying him that his monthly mortgage payments would increase by the prorated amount of his tax and insurance bill. The borrower failed to remit the amount of the increase, and the servicers reported his account as delinquent to the CRAs. The consumer alleged that the servicers furnished information to CRAs that they knew or had reason to know was inaccurate, in violation of FCRA.
The Seventh Circuit upheld the lower court’s grant of summary judgment to the servicers on this claim, noting that the reports were accurate because the borrower was delinquent because he failed to provide proof that he had paid his taxes and insurance (without noting that the lower court dismissed the case because there is no private right of action for furnishing inaccurate information under FCRA). The Seventh Circuit also upheld summary judgment for the defendants on the borrower’s claim that the servicers failed to conduct a reasonable investigation of a dispute raised by the borrower with a CRA, noting that one servicer stopped reporting negative information and the consumer never disputed the items reported by the other servicer with the CRA. Finally, the Seventh Circuit rejected (i) the consumer’s argument that the court lacked diversity jurisdiction, holding that federal-question jurisdiction applied by virtue of the FCRA claim; as a result, the court did not address whether a special provision of FCRA making a federal savings association a citizen only of the state where it has its home office extended to subsidiaries of those associations, and (ii) the consumer’s breach of contract and tortious interference claims, because the consumer had breached the contract in failing to submit the receipts.
For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=07-3826_034.pdf.
Class Action Settlement Reached in Financial Services Company Data Breach Case. On November 12, the U.S. District Court for the District of Montana issued final approval to a class action settlement in a case in which a data breach at a financial services company allegedly compromised the personal and financial information of approximately 226,000 clients. Pinter v. D.A. Davidson & Co., No.1:09-cv-00059 (D. Mont. Nov. 12, 2009). In Pinter, a hacker accessed the personal and financial information of former and existing clients of the defendant financial services company. Following the breach, the company (i) immediately notified law enforcement, (ii) sent written notice to all affected clients, (iii) publicly announced the breach, and (iv) agreed to pay the cost for credit monitoring services for affected clients. The plaintiffs subsequently filed a putative class action complaint asserting state law claims of negligence, negligence per se, and breach of fiduciary duty, in addition to a claim under the Gramm-Leach-Bliley Act, for the company’s failure to adequately protect the clients’ personal and financial information. Under the settlement, the company (i) admits no wrongdoing or liability for the claims, and (ii) will pay up to $1 million plus attorneys’ fees, costs, expenses, and related fees, which includes payments to customers for any actual damages resulting from the data breach. For a copy of the settlement, please see http://www.buckleysandler.com/Pinter_v_DA_Davidson.pdf.
Firm News
Jerry Buckley, Ben Klubes, Andrew Sandler, and Jonice Gray Tucker were recently included in the Washingtonian magazine’s annual lawyer’s edition. Jonice Gray Tucker is featured in an article about making partner. Jerry Buckley, Ben Klubes, and Andrew Sandler are recognized as top financial services lawyers in Washington, DC. BuckleySandler LLP is the only firm to have more than two lawyers included in the Washingtonian’s list of top financial services lawyers.
Jonathan Cannon will be speaking at the New Jersey Bankers Association’s Mortgage Lending Conference on December 3 regarding RESPA and TILA Regulatory Changes.
Clint Rockwell will be speaking at the CMBA’s Legislative, Regulatory, Quality Assurance & Compliance Conference on December 7 in Huntington Beach, CA regarding Federal Developments.
Andrew Sandler spoke at the 2009 Annual Conference of the International Association for Asset Recovery, in Las Vegas, NV on November 9 and 10.
Jerry Buckley participated in the 3rd Annual Leading Law Firm’s Conference in New York City on November 13.
Margo Tank spoke at the NCHELP Fall Training Conference in St. Pete Beach, Florida on November 16. She discussed electronic student lending platforms in compliance with ESIGN and the UETA.
Mortgages
HUD Issues Mortgagee Letter Addressing Requirements for Subordinate Liens Under HECM Program. On November 18, the U.S. Department of Housing and Urban Development (HUD) issued Mortgage Letter 2009-49 to remind HUD-approved mortgagees and housing counseling agencies that subordinate liens are generally prohibited in connection with the origination of a home equity conversion mortgage (HECM) loan. However, certain subordinate liens are permissible at the time of HECM origination, including (i) liens resulting from outstanding federal obligations or state or local court judgments, provided that such liens are subordinated to the first and second HECM liens at closing, and (ii) federal judgments or debts, provided that a satisfactory repayment plan is in place prior to closing. The letter also emphasizes that it is the responsibility of a mortgagee to confirm that the first and second HECM liens are the first and second liens of record, and to check the prospective HECM borrower’s credit report for any debts against the collateral real estate and/or any federal debts. For a copy of Mortgagee Letter 2009-49, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-49ml.pdf.
Pennsylvania Attorney General Sues Four Loan Modification Businesses. On November 23, Pennsylvania Attorney General Tom Corbett announced lawsuits alleging consumer fraud against four loan modification companies. According to Attorney General Corbett, one or more of the companies (i) made false or misleading claims about the ability to modify loans, (ii) used deceptive mailings implying that the companies were affiliated with government agencies and programs, (iii) failed to provide consumers with required financial disclosures, (iv) failed to inform consumers about their five-day right to cancel, (v) accepted up-front fees without posting a required surety bond or maintaining a trust account, and (vi) were not licensed by the Pennsylvania Department of Banking for the provided services. The four companies charged are Foreclosure Awareness Inc., Nationwide Foreclosure Prevention Center LLC, Best Interest Rate Mortgage Company LLC, and U.S. Mortgage Mod LLC, as well as their owners. For a copy of the press release, please see http://www.banking.state.pa.us/banking/lib/banking/news_and_events/press_releases/2009/11-23-09_ag_mortgage_mod_suits.pdf.
Banking
NCUA Proposes Safety and Soundness Framework for Corporate Credit Unions. On November 19, the National Credit Union Administration (NCUA) issued a proposal to establish a new safety and soundness framework for the corporate credit union system. The framework includes (i) enhanced capital standards mirroring Basel I, (ii) asset-liability management requirements, (iii) risk concentration limits, and (iv) corporate governance requirements. The proposal builds on the NCUA’s advanced notice of proposed rulemaking from January 2009. Comments are due within 90 days after publication in the Federal Register. For a copy of the proposal, please see http://www.ncua.gov/news/press_releases/2009/Part70411-17-2009WebVersion.pdf.
FDIC Releases FAQs Regarding Prepaid Assessments. On November 20, the Federal Deposit Insurance Corporation (FDIC) released a list of "Frequently Asked Questions" (FAQs) regarding the recently-announced requirement for institutions to prepay their estimated quarterly risk-based assessments for 2010, 2011, and 2012 on December 30, 2009 (reported in InfoBytes, Nov. 13, 2009). The FAQs clarify, among other things, (i) why the prepayment is necessary for FDIC-insured institutions, (ii) how institutions should account for the prepayment under Generally Accepted Accounting Practices, (iii) that institutions may be exempt from the prepaid exemption if the FDIC, in consultation with the institution’s primary federal regulator, determines that the prepayment would adversely affect the safety and soundness of the institution, (iv) that prepaid assessments can only be used to offset regular quarterly risk-based deposit insurance assessments, and (v) that the FDIC will not refund any portion of the prepaid assessments – however, if actual assessments are lower than the FDIC’s estimates, beginning with the assessment due on March 30, 2010, actual assessments will be deducted from the prepaid amount until the prepaid amount is exhausted. For a copy of the FAQs, please see http://www.fdic.gov/deposit/insurance/prepay/.
Pennsylvania, New Jersey Federal Courts Hold State Law Claims Alleging Deceptive Advertising of Gift Cards Not Preempted by National Bank Act. Recently, two separate federal district courts ruled that the National Bank Act (NBA) does not preempt the applicability of state consumer protection laws regulating deceptive advertising to gift cards issued by a national bank. Mwantembe v. TD Bank, N.A., Civil Action No. 09-0135, 2009 WL 3818745 (E.D. Pa. Nov. 17, 2009); Mann v. Td Bank, N.A., Civil No. 09-1062, 2009 WL 3818128 (D.N.J. Nov. 12, 2009). The two cases involve similar facts and claims. In each, the plaintiffs alleged that the banks did not adequately disclose the dormancy fees associated with the gift card, in violation of the applicable state consumer protection statutes. The defendant banks argued that the NBA and the regulations of the Office of the Comptroller of the Currency (OCC) preempted such claims because the state statutes “significantly interfered” with the banks’ banking activities.
In Mwantembe, the court denied the banks’ motion to dismiss, finding that the law regulating product disclosure only incidentally affected the business of the banks, stating, “the defendants have not articulated, and we cannot discern, how enforcement of the [state consumer protection statute] would prevent or significantly interfere with their ability to engage in the banking activity of issuing gift cards.” The court addressed the U.S. Supreme Court’s decisions in Watters v. Wachovia Bank (reported in InfoBytes Special Alert, Apr. 17, 2007) and Cuomo v. Clearing House Ass’n, LLC (reported in InfoBytes Special Alert, June 30, 2009), noting that only visitorial, and not enforcement, powers are preempted, and that a state may regulate a national bank where doing so does not prevent or significantly interfere with the bank’s or federal regulator’s exercise of its powers. Thus, where a state statute of general enforcement is not substantively preempted, the state retains the power to enforce the law. The court did not find persuasive the argument that the existence of OCC guidance on gift card disclosures created conflict preemption concerns, finding that the policy statements did not impose legal obligations on banks and did not constitute a regulation that would be in conflict with the state law.
In Mann, the court also noted the visitorial versus enforcement distinction spelled out in Watters and Cuomo, and also distinguished the New Jersey consumer protection statute at issue from state laws that prohibited altogether the issuance off gift cards with dormancy fees. Differing from Mwantembe, however, the court held that the law at issue merely requires all actors (banking or otherwise) to conform to a generally applicable standard of practice. In addition, the court noted that OCC guidance on issuing gift cards stressing adequate disclosure appears to “discourag[e] the same sort of conduct Plaintiff alleges violates New Jersey law.” Thus, rather than creating a legal conflict, the two laws appeared to complement each other. As such, the court denied the motion, and thus denied federal preemption, with respect to the deceptive advertising and marketing claims. The court, however, found that federal law preempted the plaintiffs’ claim that the banks were prohibited from issuing gift cards with dormancy fees. For a copy of the Mann opinion, please see http://www.buckleysandler.com/Mann_v_TD_Bank.pdf. For a copy of the Mwantembe opinion, please see http://www.buckleysandler.com/Mwantembe_v_TD_Bank.pdf.
Consumer Finance
FTC Extends Comment Period for Proposed Free Credit Report Rule. On November 20, the Federal Trade Commission (FTC) announced the extension of the comment period for its proposed amendments to the Free Annual File Disclosures Rule to December 7, 2009 (the proposal was reported in InfoBytes, Oct. 9, 2009). The proposed rule would implement the requirements of the Credit Card Accountability Responsibility and Disclosure Act of 2009 by instituting regulations outlawing deceptive marketing practices by credit reporting agencies (CRAs). Specifically, the proposed rule requires certain advertisements for “free credit reports” to include prominent disclosures to prevent confusion with federally-mandated free annual credit reports. Additionally, the proposed rule would prohibit CRAs from advertising other products or services to consumers seeking free credit reports until a consumer receives the free credit report, and further prohibit other practices that may interfere with the free credit report process. For a copy of the press release, please see http://www.ftc.gov/opa/2009/11/freeannual.shtm. For a copy of the proposed rule, please see http://www.ftc.gov/os/2009/10/R411005freeannualfile.pdf.
Pennsylvania, New Jersey Federal Courts Hold State Law Claims Alleging Deceptive Advertising of Gift Cards Not Preempted by National Bank Act. Recently, two separate federal district courts ruled that the National Bank Act (NBA) does not preempt the applicability of state consumer protection laws regulating deceptive advertising to gift cards issued by a national bank. Mwantembe v. TD Bank, N.A., Civil Action No. 09-0135, 2009 WL 3818745 (E.D. Pa. Nov. 17, 2009); Mann v. Td Bank, N.A., Civil No. 09-1062, 2009 WL 3818128 (D.N.J. Nov. 12, 2009). The two cases involve similar facts and claims. In each, the plaintiffs alleged that the banks did not adequately disclose the dormancy fees associated with the gift card, in violation of the applicable state consumer protection statutes. The defendant banks argued that the NBA and the regulations of the Office of the Comptroller of the Currency (OCC) preempted such claims because the state statutes “significantly interfered” with the banks’ banking activities.
In Mwantembe, the court denied the banks’ motion to dismiss, finding that the law regulating product disclosure only incidentally affected the business of the banks, stating, “the defendants have not articulated, and we cannot discern, how enforcement of the [state consumer protection statute] would prevent or significantly interfere with their ability to engage in the banking activity of issuing gift cards.” The court addressed the U.S. Supreme Court’s decisions in Watters v. Wachovia Bank (reported in InfoBytes Special Alert, Apr. 17, 2007) and Cuomo v. Clearing House Ass’n, LLC (reported in InfoBytes Special Alert, June 30, 2009), noting that only visitorial, and not enforcement, powers are preempted, and that a state may regulate a national bank where doing so does not prevent or significantly interfere with the bank’s or federal regulator’s exercise of its powers. Thus, where a state statute of general enforcement is not substantively preempted, the state retains the power to enforce the law. The court did not find persuasive the argument that the existence of OCC guidance on gift card disclosures created conflict preemption concerns, finding that the policy statements did not impose legal obligations on banks and did not constitute a regulation that would be in conflict with the state law.
In Mann, the court also noted the visitorial versus enforcement distinction spelled out in Watters and Cuomo, and also distinguished the New Jersey consumer protection statute at issue from state laws that prohibited altogether the issuance off gift cards with dormancy fees. Differing from Mwantembe, however, the court held that the law at issue merely requires all actors (banking or otherwise) to conform to a generally applicable standard of practice. In addition, the court noted that OCC guidance on issuing gift cards stressing adequate disclosure appears to “discourag[e] the same sort of conduct Plaintiff alleges violates New Jersey law.” Thus, rather than creating a legal conflict, the two laws appeared to complement each other. As such, the court denied the motion, and thus denied federal preemption, with respect to the deceptive advertising and marketing claims. The court, however, found that federal law preempted the plaintiffs’ claim that the banks were prohibited from issuing gift cards with dormancy fees. For a copy of the Mann opinion, please see http://www.buckleysandler.com/Mann_v_TD_Bank.pdf. For a copy of the Mwantembe opinion, please see http://www.buckleysandler.com/Mwantembe_v_TD_Bank.pdf.
Seventh Circuit Holds Servicers That Reported Borrower Who Did Not Provide Receipts as Delinquent Did Not Violate FCRA. On November 20, the U.S. Court of Appeals for the Seventh Circuit held that two mortgage servicers that furnished information to a consumer reporting agency (CRA) did not furnish inaccurate information under the Fair Credit Reporting Act (FCRA) about a mortgage borrower when the borrower failed to meet his contractual obligation to provide receipts for tax and insurance payments to the servicer. Hukic v. Aurora Loan Servs., No. 07-3826, 2009 WL 3878235 (7th Cir. Nov. 20, 2009). Under the terms of the borrower’s escrow waiver agreement with the lender, the borrower was required to forward receipts for taxes and insurance on the property to the servicer. Although the borrower made the payments, he failed to submit the receipts. As a result, the defendant mortgage servicers (which serviced the loan at different times) made these payments on the borrower’s behalf. The servicers also billed these payments to the borrower, notifying him that his monthly mortgage payments would increase by the prorated amount of his tax and insurance bill. The borrower failed to remit the amount of the increase, and the servicers reported his account as delinquent to the CRAs. The consumer alleged that the servicers furnished information to CRAs that they knew or had reason to know was inaccurate, in violation of FCRA.
The Seventh Circuit upheld the lower court’s grant of summary judgment to the servicers on this claim, noting that the reports were accurate because the borrower was delinquent because he failed to provide proof that he had paid his taxes and insurance (without noting that the lower court dismissed the case because there is no private right of action for furnishing inaccurate information under FCRA). The Seventh Circuit also upheld summary judgment for the defendants on the borrower’s claim that the servicers failed to conduct a reasonable investigation of a dispute raised by the borrower with a CRA, noting that one servicer stopped reporting negative information and the consumer never disputed the items reported by the other servicer with the CRA. Finally, the Seventh Circuit rejected (i) the consumer’s argument that the court lacked diversity jurisdiction, holding that federal-question jurisdiction applied by virtue of the FCRA claim; as a result, the court did not address whether a special provision of FCRA making a federal savings association a citizen only of the state where it has its home office extended to subsidiaries of those associations, and (ii) the consumer’s breach of contract and tortious interference claims, because the consumer had breached the contract in failing to submit the receipts.
For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=07-3826_034.pdf.
Litigation
Pennsylvania, New Jersey Federal Courts Hold State Law Claims Alleging Deceptive Advertising of Gift Cards Not Preempted by National Bank Act. Recently, two separate federal district courts ruled that the National Bank Act (NBA) does not preempt the applicability of state consumer protection laws regulating deceptive advertising to gift cards issued by a national bank. Mwantembe v. TD Bank, N.A., Civil Action No. 09-0135, 2009 WL 3818745 (E.D. Pa. Nov. 17, 2009); Mann v. Td Bank, N.A., Civil No. 09-1062, 2009 WL 3818128 (D.N.J. Nov. 12, 2009). The two cases involve similar facts and claims. In each, the plaintiffs alleged that the banks did not adequately disclose the dormancy fees associated with the gift card, in violation of the applicable state consumer protection statutes. The defendant banks argued that the NBA and the regulations of the Office of the Comptroller of the Currency (OCC) preempted such claims because the state statutes “significantly interfered” with the banks’ banking activities.
In Mwantembe, the court denied the banks’ motion to dismiss, finding that the law regulating product disclosure only incidentally affected the business of the banks, stating, “the defendants have not articulated, and we cannot discern, how enforcement of the [state consumer protection statute] would prevent or significantly interfere with their ability to engage in the banking activity of issuing gift cards.” The court addressed the U.S. Supreme Court’s decisions in Watters v. Wachovia Bank (reported in InfoBytes Special Alert, Apr. 17, 2007) and Cuomo v. Clearing House Ass’n, LLC (reported in InfoBytes Special Alert, June 30, 2009), noting that only visitorial, and not enforcement, powers are preempted, and that a state may regulate a national bank where doing so does not prevent or significantly interfere with the bank’s or federal regulator’s exercise of its powers. Thus, where a state statute of general enforcement is not substantively preempted, the state retains the power to enforce the law. The court did not find persuasive the argument that the existence of OCC guidance on gift card disclosures created conflict preemption concerns, finding that the policy statements did not impose legal obligations on banks and did not constitute a regulation that would be in conflict with the state law.
In Mann, the court also noted the visitorial versus enforcement distinction spelled out in Watters and Cuomo, and also distinguished the New Jersey consumer protection statute at issue from state laws that prohibited altogether the issuance off gift cards with dormancy fees. Differing from Mwantembe, however, the court held that the law at issue merely requires all actors (banking or otherwise) to conform to a generally applicable standard of practice. In addition, the court noted that OCC guidance on issuing gift cards stressing adequate disclosure appears to “discourag[e] the same sort of conduct Plaintiff alleges violates New Jersey law.” Thus, rather than creating a legal conflict, the two laws appeared to complement each other. As such, the court denied the motion, and thus denied federal preemption, with respect to the deceptive advertising and marketing claims. The court, however, found that federal law preempted the plaintiffs’ claim that the banks were prohibited from issuing gift cards with dormancy fees. For a copy of the Mann opinion, please see http://www.buckleysandler.com/Mann_v_TD_Bank.pdf. For a copy of the Mwantembe opinion, please see http://www.buckleysandler.com/Mwantembe_v_TD_Bank.pdf.
Seventh Circuit Holds Servicers That Reported Borrower Who Did Not Provide Receipts as Delinquent Did Not Violate FCRA. On November 20, the U.S. Court of Appeals for the Seventh Circuit held that two mortgage servicers that furnished information to a consumer reporting agency (CRA) did not furnish inaccurate information under the Fair Credit Reporting Act (FCRA) about a mortgage borrower when the borrower failed to meet his contractual obligation to provide receipts for tax and insurance payments to the servicer. Hukic v. Aurora Loan Servs., No. 07-3826, 2009 WL 3878235 (7th Cir. Nov. 20, 2009). Under the terms of the borrower’s escrow waiver agreement with the lender, the borrower was required to forward receipts for taxes and insurance on the property to the servicer. Although the borrower made the payments, he failed to submit the receipts. As a result, the defendant mortgage servicers (which serviced the loan at different times) made these payments on the borrower’s behalf. The servicers also billed these payments to the borrower, notifying him that his monthly mortgage payments would increase by the prorated amount of his tax and insurance bill. The borrower failed to remit the amount of the increase, and the servicers reported his account as delinquent to the CRAs. The consumer alleged that the servicers furnished information to CRAs that they knew or had reason to know was inaccurate, in violation of FCRA.
The Seventh Circuit upheld the lower court’s grant of summary judgment to the servicers on this claim, noting that the reports were accurate because the borrower was delinquent because he failed to provide proof that he had paid his taxes and insurance (without noting that the lower court dismissed the case because there is no private right of action for furnishing inaccurate information under FCRA). The Seventh Circuit also upheld summary judgment for the defendants on the borrower’s claim that the servicers failed to conduct a reasonable investigation of a dispute raised by the borrower with a CRA, noting that one servicer stopped reporting negative information and the consumer never disputed the items reported by the other servicer with the CRA. Finally, the Seventh Circuit rejected (i) the consumer’s argument that the court lacked diversity jurisdiction, holding that federal-question jurisdiction applied by virtue of the FCRA claim; as a result, the court did not address whether a special provision of FCRA making a federal savings association a citizen only of the state where it has its home office extended to subsidiaries of those associations, and (ii) the consumer’s breach of contract and tortious interference claims, because the consumer had breached the contract in failing to submit the receipts.
For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=07-3826_034.pdf.
Class Action Settlement Reached in Financial Services Company Data Breach Case. On November 12, the U.S. District Court for the District of Montana issued final approval to a class action settlement in a case in which a data breach at a financial services company allegedly compromised the personal and financial information of approximately 226,000 clients. Pinter v. D.A. Davidson & Co., No.1:09-cv-00059 (D. Mont. Nov. 12, 2009). In Pinter, a hacker accessed the personal and financial information of former and existing clients of the defendant financial services company. Following the breach, the company (i) immediately notified law enforcement, (ii) sent written notice to all affected clients, (iii) publicly announced the breach, and (iv) agreed to pay the cost for credit monitoring services for affected clients. The plaintiffs subsequently filed a putative class action complaint asserting state law claims of negligence, negligence per se, and breach of fiduciary duty, in addition to a claim under the Gramm-Leach-Bliley Act, for the company’s failure to adequately protect the clients’ personal and financial information. Under the settlement, the company (i) admits no wrongdoing or liability for the claims, and (ii) will pay up to $1 million plus attorneys’ fees, costs, expenses, and related fees, which includes payments to customers for any actual damages resulting from the data breach. For a copy of the settlement, please see http://www.buckleysandler.com/Pinter_v_DA_Davidson.pdf.
E-Financial Services
Class Action Settlement Reached in Financial Services Company Data Breach Case. On November 12, the U.S. District Court for the District of Montana issued final approval to a class action settlement in a case in which a data breach at a financial services company allegedly compromised the personal and financial information of approximately 226,000 clients. Pinter v. D.A. Davidson & Co., No.1:09-cv-00059 (D. Mont. Nov. 12, 2009). In Pinter, a hacker accessed the personal and financial information of former and existing clients of the defendant financial services company. Following the breach, the company (i) immediately notified law enforcement, (ii) sent written notice to all affected clients, (iii) publicly announced the breach, and (iv) agreed to pay the cost for credit monitoring services for affected clients. The plaintiffs subsequently filed a putative class action complaint asserting state law claims of negligence, negligence per se, and breach of fiduciary duty, in addition to a claim under the Gramm-Leach-Bliley Act, for the company’s failure to adequately protect the clients’ personal and financial information. Under the settlement, the company (i) admits no wrongdoing or liability for the claims, and (ii) will pay up to $1 million plus attorneys’ fees, costs, expenses, and related fees, which includes payments to customers for any actual damages resulting from the data breach. For a copy of the settlement, please see http://www.buckleysandler.com/Pinter_v_DA_Davidson.pdf.
Privacy/Data Security
Seventh Circuit Holds Servicers That Reported Borrower Who Did Not Provide Receipts as Delinquent Did Not Violate FCRA. On November 20, the U.S. Court of Appeals for the Seventh Circuit held that two mortgage servicers that furnished information to a consumer reporting agency (CRA) did not furnish inaccurate information under the Fair Credit Reporting Act (FCRA) about a mortgage borrower when the borrower failed to meet his contractual obligation to provide receipts for tax and insurance payments to the servicer. Hukic v. Aurora Loan Servs., No. 07-3826, 2009 WL 3878235 (7th Cir. Nov. 20, 2009). Under the terms of the borrower’s escrow waiver agreement with the lender, the borrower was required to forward receipts for taxes and insurance on the property to the servicer. Although the borrower made the payments, he failed to submit the receipts. As a result, the defendant mortgage servicers (which serviced the loan at different times) made these payments on the borrower’s behalf. The servicers also billed these payments to the borrower, notifying him that his monthly mortgage payments would increase by the prorated amount of his tax and insurance bill. The borrower failed to remit the amount of the increase, and the servicers reported his account as delinquent to the CRAs. The consumer alleged that the servicers furnished information to CRAs that they knew or had reason to know was inaccurate, in violation of FCRA.
The Seventh Circuit upheld the lower court’s grant of summary judgment to the servicers on this claim, noting that the reports were accurate because the borrower was delinquent because he failed to provide proof that he had paid his taxes and insurance (without noting that the lower court dismissed the case because there is no private right of action for furnishing inaccurate information under FCRA). The Seventh Circuit also upheld summary judgment for the defendants on the borrower’s claim that the servicers failed to conduct a reasonable investigation of a dispute raised by the borrower with a CRA, noting that one servicer stopped reporting negative information and the consumer never disputed the items reported by the other servicer with the CRA. Finally, the Seventh Circuit rejected (i) the consumer’s argument that the court lacked diversity jurisdiction, holding that federal-question jurisdiction applied by virtue of the FCRA claim; as a result, the court did not address whether a special provision of FCRA making a federal savings association a citizen only of the state where it has its home office extended to subsidiaries of those associations, and (ii) the consumer’s breach of contract and tortious interference claims, because the consumer had breached the contract in failing to submit the receipts.
For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=07-3826_034.pdf.
Class Action Settlement Reached in Financial Services Company Data Breach Case. On November 12, the U.S. District Court for the District of Montana issued final approval to a class action settlement in a case in which a data breach at a financial services company allegedly compromised the personal and financial information of approximately 226,000 clients. Pinter v. D.A. Davidson & Co., No.1:09-cv-00059 (D. Mont. Nov. 12, 2009). In Pinter, a hacker accessed the personal and financial information of former and existing clients of the defendant financial services company. Following the breach, the company (i) immediately notified law enforcement, (ii) sent written notice to all affected clients, (iii) publicly announced the breach, and (iv) agreed to pay the cost for credit monitoring services for affected clients. The plaintiffs subsequently filed a putative class action complaint asserting state law claims of negligence, negligence per se, and breach of fiduciary duty, in addition to a claim under the Gramm-Leach-Bliley Act, for the company’s failure to adequately protect the clients’ personal and financial information. Under the settlement, the company (i) admits no wrongdoing or liability for the claims, and (ii) will pay up to $1 million plus attorneys’ fees, costs, expenses, and related fees, which includes payments to customers for any actual damages resulting from the data breach. For a copy of the settlement, please see http://www.buckleysandler.com/Pinter_v_DA_Davidson.pdf.