InfoBytes, November 7, 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
Federal Issues
Treasury Releases Additional Documents for Capital Purchase Program. On October 31, the U.S. Department of the Treasury (Treasury) issued additional documents for use by publicly traded financial companies applying for participation in the Treasury’s Capital Purchase Program (reported in InfoBytes Special Alert, Oct. 20, 2008). The four documents are (i) the Securities Purchase Agreement, which describes the terms of the agreement to issue shares and other requirements in return for the Treasury’s investment, (ii) the Form of Letter Agreement, which describes the firm-specific information necessary to implement the Securities Purchase Agreement, (iii) the Certificate of Designations, which creates the preferred shares, and (iv) the Form of Warrant, which describes the terms of the warrants that the Treasury will receive. Applications for participation in the program should be received by the Treasury no later than 5:00 p.m. (EDT), November 14, 2008. For a copy of the Treasury’s press release and the new application materials, please see http://www.treasury.gov/press/releases/hp1247.htm. Additional information can be obtained through discussions with Bob Serino of Buckley Kolar at 202-349-8053, or via email at .
FDIC Extends Opt-Out Deadline for Temporary Liquidity Guarantee Program. On November 3, the Federal Deposit Insurance Corporation (FDIC) announced it will extend the opt-out deadline for its Temporary Liquidity Guarantee Program (reported in InfoBytes, Oct. 24, 2008) from November 12, 2008 to December 5, 2008. Eligible entities that do not opt-out on or before December 5, 2008 will be required to pay an assessment. Beginning November 12, entities may opt-out by submitting an online form via FDIConnect. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2008/pr08110.html.
FHFA Announces 2009 Conforming Loan Limit Will Remain the Same. On November 7, the Federal Housing Finance Agency (FHFA) announced that the conforming loan limit for 2009 will remain $417,000 in most areas of the United States. Loan limits for two-, three-, and four-unit properties in 2009 will also remain the same – $533,850, $645,300, and $801,950, respectively. Following the provisions of the Housing and Economic Recovery Act of 2008, the FHFA has also set loan limits for “high-cost” areas. The limits are equal to 115% of local median house prices and cannot exceed 150% of the standard limit, which is $625,500 for one-unit homes. To calculate all of the loan limits, the FHFA used median house price estimates calculated by the Federal Housing Administration of the U.S. Department of Housing and Urban Development (HUD). HUD will allow a 30-day appeals period to contest its estimates. For a copy of the announcement, please see http://www.ofheo.gov/media/news%20releases/CONFLL110708forOFHEOgov.pdf.
Mortgage Company Settles FTC Data Security Charges. On November 6, the Federal Trade Commission (FTC) settled charges against a Texas-based mortgage lender, Premier Capital Lending, Inc. (Premier), for allegedly violating its Safeguards and Privacy Rules, as well as Section 5 of the FTC Act. The charges arose when a hacker compromised customer data by breaking into a third-party home seller’s computer. Premier allowed the home seller to use its account to access credit reports in order to refer purchasers for financing. The hacker then used Premier’s credentials to access hundreds of consumer credit reports. The FTC complaint alleges that Premier violated the Safeguards Rule because it (i) did not take reasonable steps to verify the home seller’s procedures to handle, store, or dispose of sensitive personal information, (ii) failed to assess the risks of allowing a third party to access credit reports through its account, (iii) failed to conduct reasonable reviews of credit report requests made on its account by using readily available information (such as management reports and invoices) to detect signs of unauthorized activity, and (iv) failed to assess the full scope of credit report information accessible through its account. The FTC complaint also alleged that Premier violated Section 5 of the FTC Act and the Privacy Rule by misrepresenting its own privacy policy, which stated “[w]e take our responsibility to protect the privacy and confidentiality of customer information very seriously[, and] maintain physical, electronic, and procedural safeguards that comply with federal standards to store and secure information about you from unauthorized access, alteration and destruction.” The proposed settlement bars deceptive claims about privacy and security policies and requires Premier to establish a comprehensive information security program, which must be independently reviewed by a third-party. For a copy of the proposed settlement agreement, please see http://www.ftc.gov/os/caselist/0723004/081106pclagree.pdf.
FinCen Withdraws Proposed Anti-Money Laundering Regulations. On November 4, the Financial Crimes Enforcement Network (FinCen) withdrew proposed USA PATRIOT Act rulemakings regarding anti-money laundering programs for (i) commodity trading advisors, (ii) investment advisors, and (iii) unregistered investment companies. The rules for unregistered investment companies were originally proposed on April 29, 2002 and the rules for investment advisors and commodity trading advisors were originally proposed on May 5, 2003. Because of the time elapsed since the original proposals, FinCen determined that no rulemaking should occur without an opportunity for industry to comment on a new proposed rule. In addition, FinCen stated that other financial institutions, such as banks, broker-dealers, and futures commissions merchants, are subject to comprehensive regulations passed in the interim. For a copy of the notice of withdrawals, please see http://edocket.access.gpo.gov/2008/pdf/E8-26204.pdf for commodity trading advisors, http://edocket.access.gpo.gov/2008/pdf/E8-26205.pdf for investment advisors, and http://edocket.access.gpo.gov/2008/pdf/E8-26202.pdf for unregistered investment companies.
Fannie Mae Amends Servicing Guide. On October 31, the Federal National Mortgage Association (Fannie Mae) issued Announcement 08-28 (Announcement), which sets forth revisions to the Fannie Mae Servicing Guide. The Announcement makes clarifications to Fannie Mae’s policies on second liens, electronic records for loan modifications and servicemember relief. The Announcement clarifies Fannie Mae’s requirement that the servicer protect the first lien mortgage loan owned or securitized by Fannie Mae without consideration of the status of or impact on subordinate liens. The revisions addressing electronic records clarify that (i) lenders submitting electronic loan modifications and HomeSaver Advance notes must ensure that the electronic record complies with all requirements of the Servicing Guide, as well as any other legal requirements, (ii) servicers may submit documents electronically in lieu of submitting a signed photocopy of Form 181 when modifying a government mortgage loan, and (iii) Fannie Mae no longer requires notarial acknowledgements to be obtained in conjunction with electronic loan modifications. The Announcement also updates the Servicing Guide to comply with the changes to military indulgences adopted by the Housing and Economic Recovery Act of 2008 (HERA) as follows: (i) interest rate caps for service member mortgages falling under the Servicemembers Civil Relief Act (SCRA) are extended by an extra 12 months and (ii) foreclosure stays under the SCRA have been extended from 90 days to 9 months. For a copy of Announcement 08-28, please see https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0828.pdf.
State Issues
Maryland Commissioner of Financial Regulation Issues Net Tangible Benefit Worksheet, Fraud Reporting Form. Recently, the Maryland Commissioner of Financial Regulation issued two documents regarding rules that became effective November 3 (reported in InfoBytes, Oct. 31, 2008). The “Net Tangible Benefit Worksheet” is for borrowers to sign affirming the borrower’s belief that the new loan provides an overall benefit for the reason(s) identified in the form and to certify the borrower’s understanding of the form. Additionally, a form was issued that facilitates the reporting of fraud, theft, or forgery by a regulated entity. For a copy of the Net Tangible Benefit Worksheet, please see http://www.dllr.state.md.us/forms/frnettangiblebenefitsworksheet.doc. For a copy of the reporting form, please see http://www.dllr.state.md.us/forms/frfraudtheftforgeryreporting.doc.
Ohio Voters Cap Payday Lending Rates, Arizona Voters Reject Payday Lending. On November 4, voters in Ohio approved Issue #5 and voters in Arizona rejected Proposition 200, two referendums regarding payday lending. Ohio Issue #5 approves Section 3 of Ohio H.B. 545, a bill enacted earlier this year. The section caps the Ohio payday loan industry’s interest rate at 28%. According to reports, 63% of voters approved the referendum. Arizona Proposition 200 would have extended the payday-loan industry’s right to practice in Arizona indefinitely. Currently, the industry faces elimination in 2010 when an enabling law expires. The referendum would also have reduced the permissible fees charged to consumers from $17.65 to $15 on a $100, two-week loan. According to reports, 59.5% of voters rejected the referendum. For a copy of Ohio H.B. 545, please see http://www.legislature.state.oh.us/bills.cfm?ID=127_HB_545; for a copy of Arizona Proposition 200, please see http://www.azsos.gov/election/2008/Info/PubPamphlet/english/Prop200.htm.
New York Governor Urges Congress to Include States in Economic Rescue Plan. On October 27, New York Governor David Paterson sent a letter to Congressional leadership calling for state representation in the Oversight Panel to implement the Emergency Economic Stabilization Act. The letter expresses the view that state participation would provide unique perspectives relating to foreclosures, which particularly impact state and local economies. The letter further notes that states are effective regulators and have been at the forefront of identifying and implementing plans to address the mortgage crisis. For a copy of the press release, which contains the complete letter, please see http://www.banking.state.ny.us/pr081027.htm.
California Authorities Break Up Foreclosure Prevention Scam. On November 3, the California Attorney General’s Office announced that state authorities arrested several members of an alleged mortgage fraud ring. Members of the group allegedly stole more than $700,000 by telling consumers they could renegotiate the consumers’ mortgage loans for an up-front fee of $1,500 to $5,000. In addition, borrowers were allegedly told to stop making payments on their mortgages because it would interfere with renegotiating the loan. For a copy of the press release, please see http://caag.state.ca.us/newsalerts/release.php?id=1627. For a copy of the complaint, please see http://ag.ca.gov/cms_attachments/press/pdfs/n1627_complaint.pdf.
Courts
Eleventh Circuit Upholds Dismissal of RESPA Claims Against Mortgage Servicer. The U.S. Court of Appeals for the Eleventh Circuit upheld summary judgment in favor of a defendant mortgage servicer in a case arising under, among other claims, the Real Estate Settlement Procedures Act (RESPA). Sellers v. GMAC Mortgage Group, Inc., No. 08-01782 (11th Cir. Nov. 3, 2008). In Sellers, the defendant serviced the plaintiff’s mortgage loan. In an attempt to rectify a deficiency with the balance in his escrow account, the plaintiff made two supplemental payments. Because of a misunderstanding between the parties, the payments were applied differently to the escrow account and to the principal and interest portion of the account. After communications between the parties failed to resolve the issues, the plaintiff filed suit for the servicer’s alleged failure (i) to correct the misapplied payments, (ii) to provide appropriate statements, and (iii) to correct erroneous credit reports. The plaintiff cited violations of RESPA and the Florida Consumer Collection Practices Act, in addition to claims for defamation, abuse of process, and malicious prosecution for filing a wrongful foreclosure action. The district court granted summary judgment to the servicer on all of the plaintiff’s claims, and the circuit court affirmed, finding that the plaintiff did not sustain any harm and that his loan was technically in default. For a copy of the opinion, please see http://www.ca11.uscourts.gov/unpub/ops/200810782.pdf.
Third Circuit Rejects Defendant Waived TILA “Tolerance for Accuracy” Defense. The U.S. Court of Appeals for the Third Circuit held that a creditor facing a Truth in Lending Act (TILA) disclosure claim need not raise “tolerance for accuracy” as an affirmative defense. Thus, the lender’s failure to raise such a defense did not constitute a waiver of that defense. Sterten v. Option One Mortgage Corp., No. 07-2237, 2008 WL 4780109 (3d Cir. Sept. 22, 2008). Initially, the defendant lender brought Chapter 13 bankruptcy proceedings against the plaintiff. The plaintiff responded to the defendant’s proof of claim filing with an adversary proceeding alleging that the lender violated TILA both by (i) failing to provide her with certain required disclosures at the closing of her loan and (ii) by inaccurately disclosing the loan’s finance charges. Following a bench trial, the bankruptcy court concluded that the required TILA disclosures had been provided. In addition, and notwithstanding the fact that the lender never raised the issue, the bankruptcy court held that the finance charges were within the tolerances allowed by TILA § 1605(f). The bankruptcy court subsequently reversed itself on a motion to amend, however, holding that the lender waived its right to rely on the error tolerance defense by failing to raise it as an affirmative defense or at any other time during the adversary proceeding. On appeal, the district court reversed, and the Third Circuit affirmed that reversal. According to the Third Circuit, the §1605(f) “tolerance for accuracy” defense was not a Rule 8(c) defense that required affirmative pleading, because the raising of such a defense cannot constitute “unfair surprise” to a plaintiff who has already made an issue of the accuracy of the disclosure in her very lawsuit. Thus, the lender’s general denial of the allegation – that, with respect to the disclosure of the finance charge it “acted at all times relevant hereto in full compliance with all applicable laws and/or acts” – sufficed to preserve the defense. In addition, and for similar reasons, the court held that the lender did not waive the defense by failing to raise it at any point in the litigation because the plaintiff could not show that she suffered any prejudice from the failure. For a copy of the opinion, please see http://www.ca3.uscourts.gov/opinarch/072237p.pdf.
Arkansas Supreme Court Rules Check-Cashers Act Unconstitutional. The Supreme Court of Arkansas held that the Arkansas Check-Cashers Act (the Act) is unconstitutional because it violates the state’s constitutional usury provision. McGhee v. Arkansas State Bd. Of Collection Agencies, No. 08-164 (Ark. Nov. 6, 2008). In McGhee, state taxpayers alleged that all transactions permitted under the Act involved interest rates that ran afoul of the usury provision in the state constitution. This provision allows a maximum interest rate for contracts of 5% above the Federal Reserve Discount Rate, and a maximum rate of interest for consumer loans and credit sales of 17%. On appeal, the Arkansas Supreme Court held that the lower court erred in declaring the Act constitutional. The court found that the transactions permitted by the Act were clearly loans, and that the fees permitted by the Act are properly categorized as interest, bringing the transactions under the application of the usury provision. After reviewing a sample of the transactions permitted by the Act that yielded APR rates ranging from 168% to 558%, the court determined that there is “no question” the Act authorized usurious transactions. Consequently, the court held, despite a severability clause, that the entire Act was unconstitutional, and reversed the lower court’s order. For a copy of the opinion, please see http://courts.arkansas.gov/court_opinions/sc/2008b/20081106/published/08-164.pdf.
Firm News
Jerry Buckley and Margo Tank will be conducting 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. This year, the ESRA conference will analyze a remarkably wide range of industries currently employing e-signature and electronic record technologies to improve business processes, including financial services, consumer products, banking, insurance, construction, equipment financing, government systems & services (civilian & military), cable television, mortgages and notarization. For more information on the conference and to register online, go to http://www.esignrecords.org/events/.
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 FTC data security settlement with Premier Capital Lending (reported above in this issue of InfoBytes).
Mortgages
FHFA Announces 2009 Conforming Loan Limit Will Remain the Same. On November 7, the Federal Housing Finance Agency (FHFA) announced that the conforming loan limit for 2009 will remain $417,000 in most areas of the United States. Loan limits for two-, three-, and four-unit properties in 2009 will also remain the same – $533,850, $645,300, and $801,950, respectively. Following the provisions of the Housing and Economic Recovery Act of 2008, the FHFA has also set loan limits for “high-cost” areas. The limits are equal to 115% of local median house prices and cannot exceed 150% of the standard limit, which is $625,500 for one-unit homes. To calculate all of the loan limits, the FHFA used median house price estimates calculated by the Federal Housing Administration of the U.S. Department of Housing and Urban Development (HUD). HUD will allow a 30-day appeals period to contest its estimates. For a copy of the announcement, please see http://www.ofheo.gov/media/news%20releases/CONFLL110708forOFHEOgov.pdf.
Mortgage Company Settles FTC Data Security Charges. On November 6, the Federal Trade Commission (FTC) settled charges against a Texas-based mortgage lender, Premier Capital Lending, Inc. (Premier), for allegedly violating its Safeguards and Privacy Rules, as well as Section 5 of the FTC Act. The charges arose when a hacker compromised customer data by breaking into a third-party home seller’s computer. Premier allowed the home seller to use its account to access credit reports in order to refer purchasers for financing. The hacker then used Premier’s credentials to access hundreds of consumer credit reports. The FTC complaint alleges that Premier violated the Safeguards Rule because it (i) did not take reasonable steps to verify the home seller’s procedures to handle, store, or dispose of sensitive personal information, (ii) failed to assess the risks of allowing a third party to access credit reports through its account, (iii) failed to conduct reasonable reviews of credit report requests made on its account by using readily available information (such as management reports and invoices) to detect signs of unauthorized activity, and (iv) failed to assess the full scope of credit report information accessible through its account. The FTC complaint also alleged that Premier violated Section 5 of the FTC Act and the Privacy Rule by misrepresenting its own privacy policy, which stated “[w]e take our responsibility to protect the privacy and confidentiality of customer information very seriously[, and] maintain physical, electronic, and procedural safeguards that comply with federal standards to store and secure information about you from unauthorized access, alteration and destruction.” The proposed settlement bars deceptive claims about privacy and security policies and requires Premier to establish a comprehensive information security program, which must be independently reviewed by a third-party. For a copy of the proposed settlement agreement, please see http://www.ftc.gov/os/caselist/0723004/081106pclagree.pdf.
Fannie Mae Amends Servicing Guide. On October 31, the Federal National Mortgage Association (Fannie Mae) issued Announcement 08-28 (Announcement), which sets forth revisions to the Fannie Mae Servicing Guide. The Announcement makes clarifications to Fannie Mae’s policies on second liens, electronic records for loan modifications and servicemember relief. The Announcement clarifies Fannie Mae’s requirement that the servicer protect the first lien mortgage loan owned or securitized by Fannie Mae without consideration of the status of or impact on subordinate liens. The revisions addressing electronic records clarify that (i) lenders submitting electronic loan modifications and HomeSaver Advance notes must ensure that the electronic record complies with all requirements of the Servicing Guide, as well as any other legal requirements, (ii) servicers may submit documents electronically in lieu of submitting a signed photocopy of Form 181 when modifying a government mortgage loan, and (iii) Fannie Mae no longer requires notarial acknowledgements to be obtained in conjunction with electronic loan modifications. The Announcement also updates the Servicing Guide to comply with the changes to military indulgences adopted by the Housing and Economic Recovery Act of 2008 (HERA) as follows: (i) interest rate caps for service member mortgages falling under the Servicemembers Civil Relief Act (SCRA) are extended by an extra 12 months and (ii) foreclosure stays under the SCRA have been extended from 90 days to 9 months. For a copy of Announcement 08-28, please see https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0828.pdf.
Maryland Commissioner of Financial Regulation Issues Net Tangible Benefit Worksheet, Fraud Reporting Form. Recently, the Maryland Commissioner of Financial Regulation issued two documents regarding rules that became effective November 3 (reported in InfoBytes, Oct. 31, 2008). The “Net Tangible Benefit Worksheet” is for borrowers to sign affirming the borrower’s belief that the new loan provides an overall benefit for the reason(s) identified in the form and to certify the borrower’s understanding of the form. Additionally, a form was issued that facilitates the reporting of fraud, theft, or forgery by a regulated entity. For a copy of the Net Tangible Benefit Worksheet, please see http://www.dllr.state.md.us/forms/frnettangiblebenefitsworksheet.doc. For a copy of the reporting form, please see http://www.dllr.state.md.us/forms/frfraudtheftforgeryreporting.doc.
California Authorities Break Up Foreclosure Prevention Scam. On November 3, the California Attorney General’s Office announced that state authorities arrested several members of an alleged mortgage fraud ring. Members of the group allegedly stole more than $700,000 by telling consumers they could renegotiate the consumers’ mortgage loans for an up-front fee of $1,500 to $5,000. In addition, borrowers were allegedly told to stop making payments on their mortgages because it would interfere with renegotiating the loan. For a copy of the press release, please see http://caag.state.ca.us/newsalerts/release.php?id=1627. For a copy of the complaint, please see http://ag.ca.gov/cms_attachments/press/pdfs/n1627_complaint.pdf.
Eleventh Circuit Upholds Dismissal of RESPA Claims Against Mortgage Servicer. The U.S. Court of Appeals for the Eleventh Circuit upheld summary judgment in favor of a defendant mortgage servicer in a case arising under, among other claims, the Real Estate Settlement Procedures Act (RESPA). Sellers v. GMAC Mortgage Group, Inc., No. 08-01782 (11th Cir. Nov. 3, 2008). In Sellers, the defendant serviced the plaintiff’s mortgage loan. In an attempt to rectify a deficiency with the balance in his escrow account, the plaintiff made two supplemental payments. Because of a misunderstanding between the parties, the payments were applied differently to the escrow account and to the principal and interest portion of the account. After communications between the parties failed to resolve the issues, the plaintiff filed suit for the servicer’s alleged failure (i) to correct the misapplied payments, (ii) to provide appropriate statements, and (iii) to correct erroneous credit reports. The plaintiff cited violations of RESPA and the Florida Consumer Collection Practices Act, in addition to claims for defamation, abuse of process, and malicious prosecution for filing a wrongful foreclosure action. The district court granted summary judgment to the servicer on all of the plaintiff’s claims, and the circuit court affirmed, finding that the plaintiff did not sustain any harm and that his loan was technically in default. For a copy of the opinion, please see http://www.ca11.uscourts.gov/unpub/ops/200810782.pdf.
Third Circuit Rejects Defendant Waived TILA “Tolerance for Accuracy” Defense. The U.S. Court of Appeals for the Third Circuit held that a creditor facing a Truth in Lending Act (TILA) disclosure claim need not raise “tolerance for accuracy” as an affirmative defense. Thus, the lender’s failure to raise such a defense did not constitute a waiver of that defense. Sterten v. Option One Mortgage Corp., No. 07-2237, 2008 WL 4780109 (3d Cir. Sept. 22, 2008). Initially, the defendant lender brought Chapter 13 bankruptcy proceedings against the plaintiff. The plaintiff responded to the defendant’s proof of claim filing with an adversary proceeding alleging that the lender violated TILA both by (i) failing to provide her with certain required disclosures at the closing of her loan and (ii) by inaccurately disclosing the loan’s finance charges. Following a bench trial, the bankruptcy court concluded that the required TILA disclosures had been provided. In addition, and notwithstanding the fact that the lender never raised the issue, the bankruptcy court held that the finance charges were within the tolerances allowed by TILA § 1605(f). The bankruptcy court subsequently reversed itself on a motion to amend, however, holding that the lender waived its right to rely on the error tolerance defense by failing to raise it as an affirmative defense or at any other time during the adversary proceeding. On appeal, the district court reversed, and the Third Circuit affirmed that reversal. According to the Third Circuit, the §1605(f) “tolerance for accuracy” defense was not a Rule 8(c) defense that required affirmative pleading, because the raising of such a defense cannot constitute “unfair surprise” to a plaintiff who has already made an issue of the accuracy of the disclosure in her very lawsuit. Thus, the lender’s general denial of the allegation – that, with respect to the disclosure of the finance charge it “acted at all times relevant hereto in full compliance with all applicable laws and/or acts” – sufficed to preserve the defense. In addition, and for similar reasons, the court held that the lender did not waive the defense by failing to raise it at any point in the litigation because the plaintiff could not show that she suffered any prejudice from the failure. For a copy of the opinion, please see http://www.ca3.uscourts.gov/opinarch/072237p.pdf.
Arkansas Supreme Court Rules Check-Cashers Act Unconstitutional. The Supreme Court of Arkansas held that the Arkansas Check-Cashers Act (the Act) is unconstitutional because it violates the state’s constitutional usury provision. McGhee v. Arkansas State Bd. Of Collection Agencies, No. 08-164 (Ark. Nov. 6, 2008). In McGhee, state taxpayers alleged that all transactions permitted under the Act involved interest rates that ran afoul of the usury provision in the state constitution. This provision allows a maximum interest rate for contracts of 5% above the Federal Reserve Discount Rate, and a maximum rate of interest for consumer loans and credit sales of 17%. On appeal, the Arkansas Supreme Court held that the lower court erred in declaring the Act constitutional. The court found that the transactions permitted by the Act were clearly loans, and that the fees permitted by the Act are properly categorized as interest, bringing the transactions under the application of the usury provision. After reviewing a sample of the transactions permitted by the Act that yielded APR rates ranging from 168% to 558%, the court determined that there is “no question” the Act authorized usurious transactions. Consequently, the court held, despite a severability clause, that the entire Act was unconstitutional, and reversed the lower court’s order. For a copy of the opinion, please see http://courts.arkansas.gov/court_opinions/sc/2008b/20081106/published/08-164.pdf.
Banking
Treasury Releases Additional Documents for Capital Purchase Program. On October 31, the U.S. Department of the Treasury (Treasury) issued additional documents for use by publicly traded financial companies applying for participation in the Treasury’s Capital Purchase Program (reported in InfoBytes Special Alert, Oct. 20, 2008). The four documents are (i) the Securities Purchase Agreement, which describes the terms of the agreement to issue shares and other requirements in return for the Treasury’s investment, (ii) the Form of Letter Agreement, which describes the firm-specific information necessary to implement the Securities Purchase Agreement, (iii) the Certificate of Designations, which creates the preferred shares, and (iv) the Form of Warrant, which describes the terms of the warrants that the Treasury will receive. Applications for participation in the program should be received by the Treasury no later than 5:00 p.m. (EDT), November 14, 2008. For a copy of the Treasury’s press release and the new application materials, please see http://www.treasury.gov/press/releases/hp1247.htm. Additional information can be obtained through discussions with Bob Serino of Buckley Kolar at 202-349-8053, or via email at .
FDIC Extends Opt-Out Deadline for Temporary Liquidity Guarantee Program. On November 3, the Federal Deposit Insurance Corporation (FDIC) announced it will extend the opt-out deadline for its Temporary Liquidity Guarantee Program (reported in InfoBytes, Oct. 24, 2008) from November 12, 2008 to December 5, 2008. Eligible entities that do not opt-out on or before December 5, 2008 will be required to pay an assessment. Beginning November 12, entities may opt-out by submitting an online form via FDIConnect. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2008/pr08110.html.
New York Governor Urges Congress to Include States in Economic Rescue Plan. On October 27, New York Governor David Paterson sent a letter to Congressional leadership calling for state representation in the Oversight Panel to implement the Emergency Economic Stabilization Act. The letter expresses the view that state participation would provide unique perspectives relating to foreclosures, which particularly impact state and local economies. The letter further notes that states are effective regulators and have been at the forefront of identifying and implementing plans to address the mortgage crisis. For a copy of the press release, which contains the complete letter, please see http://www.banking.state.ny.us/pr081027.htm.
Consumer Finance
Mortgage Company Settles FTC Data Security Charges. On November 6, the Federal Trade Commission (FTC) settled charges against a Texas-based mortgage lender, Premier Capital Lending, Inc. (Premier), for allegedly violating its Safeguards and Privacy Rules, as well as Section 5 of the FTC Act. The charges arose when a hacker compromised customer data by breaking into a third-party home seller’s computer. Premier allowed the home seller to use its account to access credit reports in order to refer purchasers for financing. The hacker then used Premier’s credentials to access hundreds of consumer credit reports. The FTC complaint alleges that Premier violated the Safeguards Rule because it (i) did not take reasonable steps to verify the home seller’s procedures to handle, store, or dispose of sensitive personal information, (ii) failed to assess the risks of allowing a third party to access credit reports through its account, (iii) failed to conduct reasonable reviews of credit report requests made on its account by using readily available information (such as management reports and invoices) to detect signs of unauthorized activity, and (iv) failed to assess the full scope of credit report information accessible through its account. The FTC complaint also alleged that Premier violated Section 5 of the FTC Act and the Privacy Rule by misrepresenting its own privacy policy, which stated “[w]e take our responsibility to protect the privacy and confidentiality of customer information very seriously[, and] maintain physical, electronic, and procedural safeguards that comply with federal standards to store and secure information about you from unauthorized access, alteration and destruction.” The proposed settlement bars deceptive claims about privacy and security policies and requires Premier to establish a comprehensive information security program, which must be independently reviewed by a third-party. For a copy of the proposed settlement agreement, please see http://www.ftc.gov/os/caselist/0723004/081106pclagree.pdf.
Fannie Mae Amends Servicing Guide. On October 31, the Federal National Mortgage Association (Fannie Mae) issued Announcement 08-28 (Announcement), which sets forth revisions to the Fannie Mae Servicing Guide. The Announcement makes clarifications to Fannie Mae’s policies on second liens, electronic records for loan modifications and servicemember relief. The Announcement clarifies Fannie Mae’s requirement that the servicer protect the first lien mortgage loan owned or securitized by Fannie Mae without consideration of the status of or impact on subordinate liens. The revisions addressing electronic records clarify that (i) lenders submitting electronic loan modifications and HomeSaver Advance notes must ensure that the electronic record complies with all requirements of the Servicing Guide, as well as any other legal requirements, (ii) servicers may submit documents electronically in lieu of submitting a signed photocopy of Form 181 when modifying a government mortgage loan, and (iii) Fannie Mae no longer requires notarial acknowledgements to be obtained in conjunction with electronic loan modifications. The Announcement also updates the Servicing Guide to comply with the changes to military indulgences adopted by the Housing and Economic Recovery Act of 2008 (HERA) as follows: (i) interest rate caps for service member mortgages falling under the Servicemembers Civil Relief Act (SCRA) are extended by an extra 12 months and (ii) foreclosure stays under the SCRA have been extended from 90 days to 9 months. For a copy of Announcement 08-28, please see https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0828.pdf.
Ohio Voters Cap Payday Lending Rates, Arizona Voters Reject Payday Lending. On November 4, voters in Ohio approved Issue #5 and voters in Arizona rejected Proposition 200, two referendums regarding payday lending. Ohio Issue #5 approves Section 3 of Ohio H.B. 545, a bill enacted earlier this year. The section caps the Ohio payday loan industry’s interest rate at 28%. According to reports, 63% of voters approved the referendum. Arizona Proposition 200 would have extended the payday-loan industry’s right to practice in Arizona indefinitely. Currently, the industry faces elimination in 2010 when an enabling law expires. The referendum would also have reduced the permissible fees charged to consumers from $17.65 to $15 on a $100, two-week loan. According to reports, 59.5% of voters rejected the referendum. For a copy of Ohio H.B. 545, please see http://www.legislature.state.oh.us/bills.cfm?ID=127_HB_545; for a copy of Arizona Proposition 200, please see http://www.azsos.gov/election/2008/Info/PubPamphlet/english/Prop200.htm.
Arkansas Supreme Court Rules Check-Cashers Act Unconstitutional. The Supreme Court of Arkansas held that the Arkansas Check-Cashers Act (the Act) is unconstitutional because it violates the state’s constitutional usury provision. McGhee v. Arkansas State Bd. Of Collection Agencies, No. 08-164 (Ark. Nov. 6, 2008). In McGhee, state taxpayers alleged that all transactions permitted under the Act involved interest rates that ran afoul of the usury provision in the state constitution. This provision allows a maximum interest rate for contracts of 5% above the Federal Reserve Discount Rate, and a maximum rate of interest for consumer loans and credit sales of 17%. On appeal, the Arkansas Supreme Court held that the lower court erred in declaring the Act constitutional. The court found that the transactions permitted by the Act were clearly loans, and that the fees permitted by the Act are properly categorized as interest, bringing the transactions under the application of the usury provision. After reviewing a sample of the transactions permitted by the Act that yielded APR rates ranging from 168% to 558%, the court determined that there is “no question” the Act authorized usurious transactions. Consequently, the court held, despite a severability clause, that the entire Act was unconstitutional, and reversed the lower court’s order. For a copy of the opinion, please see http://courts.arkansas.gov/court_opinions/sc/2008b/20081106/published/08-164.pdf.
Securities
FinCen Withdraws Proposed Anti-Money Laundering Regulations. On November 4, the Financial Crimes Enforcement Network (FinCen) withdrew proposed USA PATRIOT Act rulemakings regarding anti-money laundering programs for (i) commodity trading advisors, (ii) investment advisors, and (iii) unregistered investment companies. The rules for unregistered investment companies were originally proposed on April 29, 2002 and the rules for investment advisors and commodity trading advisors were originally proposed on May 5, 2003. Because of the time elapsed since the original proposals, FinCen determined that no rulemaking should occur without an opportunity for industry to comment on a new proposed rule. In addition, FinCen stated that other financial institutions, such as banks, broker-dealers, and futures commissions merchants, are subject to comprehensive regulations passed in the interim. For a copy of the notice of withdrawals, please see http://edocket.access.gpo.gov/2008/pdf/E8-26204.pdf for commodity trading advisors, http://edocket.access.gpo.gov/2008/pdf/E8-26205.pdf for investment advisors, and http://edocket.access.gpo.gov/2008/pdf/E8-26202.pdf for unregistered investment companies.
Litigation
Eleventh Circuit Upholds Dismissal of RESPA Claims Against Mortgage Servicer. The U.S. Court of Appeals for the Eleventh Circuit upheld summary judgment in favor of a defendant mortgage servicer in a case arising under, among other claims, the Real Estate Settlement Procedures Act (RESPA). Sellers v. GMAC Mortgage Group, Inc., No. 08-01782 (11th Cir. Nov. 3, 2008). In Sellers, the defendant serviced the plaintiff’s mortgage loan. In an attempt to rectify a deficiency with the balance in his escrow account, the plaintiff made two supplemental payments. Because of a misunderstanding between the parties, the payments were applied differently to the escrow account and to the principal and interest portion of the account. After communications between the parties failed to resolve the issues, the plaintiff filed suit for the servicer’s alleged failure (i) to correct the misapplied payments, (ii) to provide appropriate statements, and (iii) to correct erroneous credit reports. The plaintiff cited violations of RESPA and the Florida Consumer Collection Practices Act, in addition to claims for defamation, abuse of process, and malicious prosecution for filing a wrongful foreclosure action. The district court granted summary judgment to the servicer on all of the plaintiff’s claims, and the circuit court affirmed, finding that the plaintiff did not sustain any harm and that his loan was technically in default. For a copy of the opinion, please see http://www.ca11.uscourts.gov/unpub/ops/200810782.pdf.
Third Circuit Rejects Defendant Waived TILA “Tolerance for Accuracy” Defense. The U.S. Court of Appeals for the Third Circuit held that a creditor facing a Truth in Lending Act (TILA) disclosure claim need not raise “tolerance for accuracy” as an affirmative defense. Thus, the lender’s failure to raise such a defense did not constitute a waiver of that defense. Sterten v. Option One Mortgage Corp., No. 07-2237, 2008 WL 4780109 (3d Cir. Sept. 22, 2008). Initially, the defendant lender brought Chapter 13 bankruptcy proceedings against the plaintiff. The plaintiff responded to the defendant’s proof of claim filing with an adversary proceeding alleging that the lender violated TILA both by (i) failing to provide her with certain required disclosures at the closing of her loan and (ii) by inaccurately disclosing the loan’s finance charges. Following a bench trial, the bankruptcy court concluded that the required TILA disclosures had been provided. In addition, and notwithstanding the fact that the lender never raised the issue, the bankruptcy court held that the finance charges were within the tolerances allowed by TILA § 1605(f). The bankruptcy court subsequently reversed itself on a motion to amend, however, holding that the lender waived its right to rely on the error tolerance defense by failing to raise it as an affirmative defense or at any other time during the adversary proceeding. On appeal, the district court reversed, and the Third Circuit affirmed that reversal. According to the Third Circuit, the §1605(f) “tolerance for accuracy” defense was not a Rule 8(c) defense that required affirmative pleading, because the raising of such a defense cannot constitute “unfair surprise” to a plaintiff who has already made an issue of the accuracy of the disclosure in her very lawsuit. Thus, the lender’s general denial of the allegation – that, with respect to the disclosure of the finance charge it “acted at all times relevant hereto in full compliance with all applicable laws and/or acts” – sufficed to preserve the defense. In addition, and for similar reasons, the court held that the lender did not waive the defense by failing to raise it at any point in the litigation because the plaintiff could not show that she suffered any prejudice from the failure. For a copy of the opinion, please see http://www.ca3.uscourts.gov/opinarch/072237p.pdf.
Arkansas Supreme Court Rules Check-Cashers Act Unconstitutional. The Supreme Court of Arkansas held that the Arkansas Check-Cashers Act (the Act) is unconstitutional because it violates the state’s constitutional usury provision. McGhee v. Arkansas State Bd. Of Collection Agencies, No. 08-164 (Ark. Nov. 6, 2008). In McGhee, state taxpayers alleged that all transactions permitted under the Act involved interest rates that ran afoul of the usury provision in the state constitution. This provision allows a maximum interest rate for contracts of 5% above the Federal Reserve Discount Rate, and a maximum rate of interest for consumer loans and credit sales of 17%. On appeal, the Arkansas Supreme Court held that the lower court erred in declaring the Act constitutional. The court found that the transactions permitted by the Act were clearly loans, and that the fees permitted by the Act are properly categorized as interest, bringing the transactions under the application of the usury provision. After reviewing a sample of the transactions permitted by the Act that yielded APR rates ranging from 168% to 558%, the court determined that there is “no question” the Act authorized usurious transactions. Consequently, the court held, despite a severability clause, that the entire Act was unconstitutional, and reversed the lower court’s order. For a copy of the opinion, please see http://courts.arkansas.gov/court_opinions/sc/2008b/20081106/published/08-164.pdf.
E-Financial Services
Fannie Mae Amends Servicing Guide. On October 31, the Federal National Mortgage Association (Fannie Mae) issued Announcement 08-28 (Announcement), which sets forth revisions to the Fannie Mae Servicing Guide. The Announcement makes clarifications to Fannie Mae’s policies on second liens, electronic records for loan modifications and servicemember relief. The Announcement clarifies Fannie Mae’s requirement that the servicer protect the first lien mortgage loan owned or securitized by Fannie Mae without consideration of the status of or impact on subordinate liens. The revisions addressing electronic records clarify that (i) lenders submitting electronic loan modifications and HomeSaver Advance notes must ensure that the electronic record complies with all requirements of the Servicing Guide, as well as any other legal requirements, (ii) servicers may submit documents electronically in lieu of submitting a signed photocopy of Form 181 when modifying a government mortgage loan, and (iii) Fannie Mae no longer requires notarial acknowledgements to be obtained in conjunction with electronic loan modifications. The Announcement also updates the Servicing Guide to comply with the changes to military indulgences adopted by the Housing and Economic Recovery Act of 2008 (HERA) as follows: (i) interest rate caps for service member mortgages falling under the Servicemembers Civil Relief Act (SCRA) are extended by an extra 12 months and (ii) foreclosure stays under the SCRA have been extended from 90 days to 9 months. For a copy of Announcement 08-28, please see https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0828.pdf.
Mortgage Company Settles FTC Data Security Charges. On November 6, the Federal Trade Commission (FTC) settled charges against a Texas-based mortgage lender, Premier Capital Lending, Inc. (Premier), for allegedly violating its Safeguards and Privacy Rules, as well as Section 5 of the FTC Act. The charges arose when a hacker compromised customer data by breaking into a third-party home seller’s computer. Premier allowed the home seller to use its account to access credit reports in order to refer purchasers for financing. The hacker then used Premier’s credentials to access hundreds of consumer credit reports. The FTC complaint alleges that Premier violated the Safeguards Rule because it (i) did not take reasonable steps to verify the home seller’s procedures to handle, store, or dispose of sensitive personal information, (ii) failed to assess the risks of allowing a third party to access credit reports through its account, (iii) failed to conduct reasonable reviews of credit report requests made on its account by using readily available information (such as management reports and invoices) to detect signs of unauthorized activity, and (iv) failed to assess the full scope of credit report information accessible through its account. The FTC complaint also alleged that Premier violated Section 5 of the FTC Act and the Privacy Rule by misrepresenting its own privacy policy, which stated “[w]e take our responsibility to protect the privacy and confidentiality of customer information very seriously[, and] maintain physical, electronic, and procedural safeguards that comply with federal standards to store and secure information about you from unauthorized access, alteration and destruction.” The proposed settlement bars deceptive claims about privacy and security policies and requires Premier to establish a comprehensive information security program, which must be independently reviewed by a third-party. For a copy of the proposed settlement agreement, please see http://www.ftc.gov/os/caselist/0723004/081106pclagree.pdf.
Privacy/Data Security
Mortgage Company Settles FTC Data Security Charges. On November 6, the Federal Trade Commission (FTC) settled charges against a Texas-based mortgage lender, Premier Capital Lending, Inc. (Premier), for allegedly violating its Safeguards and Privacy Rules, as well as Section 5 of the FTC Act. The charges arose when a hacker compromised customer data by breaking into a third-party home seller’s computer. Premier allowed the home seller to use its account to access credit reports in order to refer purchasers for financing. The hacker then used Premier’s credentials to access hundreds of consumer credit reports. The FTC complaint alleges that Premier violated the Safeguards Rule because it (i) did not take reasonable steps to verify the home seller’s procedures to handle, store, or dispose of sensitive personal information, (ii) failed to assess the risks of allowing a third party to access credit reports through its account, (iii) failed to conduct reasonable reviews of credit report requests made on its account by using readily available information (such as management reports and invoices) to detect signs of unauthorized activity, and (iv) failed to assess the full scope of credit report information accessible through its account. The FTC complaint also alleged that Premier violated Section 5 of the FTC Act and the Privacy Rule by misrepresenting its own privacy policy, which stated “[w]e take our responsibility to protect the privacy and confidentiality of customer information very seriously[, and] maintain physical, electronic, and procedural safeguards that comply with federal standards to store and secure information about you from unauthorized access, alteration and destruction.” The proposed settlement bars deceptive claims about privacy and security policies and requires Premier to establish a comprehensive information security program, which must be independently reviewed by a third-party. For a copy of the proposed settlement agreement, please see http://www.ftc.gov/os/caselist/0723004/081106pclagree.pdf.