InfoBytes, October 10, 2008
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Miscellany
- Mortgages
- Banking
- Consumer Finance
- Securities
- Litigation
- E-Financial Services
- Privacy/Data Security
Federal Issues
Treasury Announces Asset Manager Selection Procedures. On October 6, the U.S. Department of the Treasury (Treasury) announced procedures for selecting “securities asset managers” and “whole loan asset managers” for the portfolios of troubled assets, pursuant to the Emergency Economic Stabilization Act of 2008 (EESA). Securities asset managers will manage residential and commercial mortgage backed securities and collateralized debt obligations, while whole loan asset managers will manage a variety of residential and commercial loan products. The selection process, will involve a number of phases, from initial application to information sharing to face-to-face interviews. In its announcement, the Treasury reminded applicants that all selected asset managers will be financial agents of the United States, and not contractors, and therefore will have a fiduciary agent-principal relationship with the Treasury with a responsibility to protect the interests of the United States. In addition, under the authority grated by the EESA, private domestic financial institutions are eligible to be designated as financial agents of the United States. The Treasury expects to designate multiple asset managers and submanagers to obtain the proper expertise with different asset types and different segments of the mortgage credit market. For a copy of the press release, please see http://www.treas.gov/press/releases/reports/assetmanagers.pdf.
Treasury Solicits Services from Financial Institutions to Implement the Emergency Economic Stabilization Act of 2008. On October 6, the U.S. Department of the Treasury (Treasury) issued notices to financial institutions interested in providing (i) asset management services for a portfolio of troubled mortgage-related securities, (ii) asset management services for a portfolio of mortgage whole loans, and (iii) custodian, accounting, auction management, and other infrastructure services for a portfolio of troubled mortgage-related assets. The Treasury’s goal in obtaining services from eligible financial institutions in performing the foregoing tasks is to provide stability and prevent further disruption to the financial markets and banking system, ensure mortgage availability, and protect the interests of taxpayers. By acquiring, managing, and orderly liquidating the mortgage loans over time, the Treasury seeks to improve the capital positions of the financial institutions from which assets are acquired, improve liquidity and credit extension in the financial system, increase investor confidence, and provide market participants with more price transparency. Interested financial institutions meeting the organizational, service capacity, and other eligibility requirements specified in the notices were required to submit responses by October 8, 2008. For a copy of the notices, please see http://www.treasury.gov/initiatives/eesa/docs/notice_securities-asset-mgr.pdf, http://www.treasury.gov/initiatives/eesa/docs/notice_whole-loan-asset-mgr.pdf, and http://www.treasury.gov/initiatives/eesa/docs/notice_custodian-services.pdf.
Treasury Announces Procurement Authorities, Procedures; Conflicts of Interest Interim Guidelines. On October 6, the U.S. Department of the Treasury (Treasury) issued two documents regarding procurement authorities and procedures and interim guidelines for conflicts of interest pursuant to the Emergency Economic Stabilization Act of 2008 (EESA). The "Procurement Authorities and Procedures" document states that the Treasury has two mechanisms available for engaging private-sector firms under the EESA: financial agent authority and procurement under the Federal Acquisition Regulation. The Treasury will determine on a case-by-case basis which authority best applies. The "Interim Guidelines for Conflicts of Interest" document outlines procedures for reviewing and responding to conflicts of interest (COIs) among contractors performing services pursuant to the EESA including, among other items, that the Treasury “may obtain non-disclosure agreements and COI agreements in advance of supplying an offeror a solicitation.” For a copy of the press releases, please see http://www.ustreas.gov/press/releases/hp1179.htm and http://www.ustreas.gov/press/releases/hp1180.htm.
FDIC Plans to Raise Insurance Assessments for Insured Banks. On October 7, the Federal Deposit Insurance Corporation announced a proposal to increase the rates banks pay for deposit insurance and to make adjustments to risk assessment methods. Under the proposal, the assessment rate schedule would be raised uniformly by 7 basis points (annualized) beginning on January 1, 2009. Beginning with the second quarter of 2009, riskier institutions would be required to pay a larger share. The proposal would change the method of risk assessment by charging higher rates to institutions (i) with a significant reliance on secured liabilities, and (ii) with a significant reliance on brokered deposits but, for well-managed and well-capitalized institutions, only when accompanied by rapid asset growth. The proposal also would provide incentives in the form of a reduction in assessment rates for institutions to hold long-term unsecured debt and, for smaller institutions, high levels of Tier 1 capital. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2008/pr08094.html.
HUD Begins HOPE for Homeowners Program. On October 1, the U.S. Department of Housing and Urban Development (HUD) began its HOPE for Homeowners Program. Authorized under the Economic and Housing Recovery Act of 2008, the program refinances mortgages for troubled borrowers, who can qualify for new loans insured by the Federal Housing Administration (FHA). To be eligible for the program, borrowers must (i) own and occupy their primary residence, (ii) own no other residential property, (iii) have made at least six payments on a mortgage loan of not more than $550,440 that existed before January 1, 2008, (iv) have mortgage payments that exceed 31% of their gross monthly income, and (v) certify that they have not been convicted of fraud in the past 10 years, intentionally defaulted on debts, and did not knowingly or willingly provide material false information to obtain their existing mortgages. For qualifying borrowers, the program will provide a new 30-year fixed rate mortgage at 90% of the newly appraised value of their homes. However, the program places numerous restrictions on the borrower. First, the borrower is prohibited from taking out a second mortgage for the first five years of the loan, except when needed for emergency repairs. Additionally, if the borrower’s home is ever sold or refinanced, the borrower must share any equity with FHA on a sliding scale ranging from a 100% FHA share after the first year to a minimum of 50% after five years. This provision helps compensate the property’s original lien holders, who either had to accept the proceeds of the HOPE for Homeowners loan as full settlement of the borrower’s outstanding indebtedness, or had to release their liens completely without compensation. From the FHA’s equity share in the property, the lien holder that previously held the highest priority will receive payment up to a proportion of its original interest, not to exceed the FHA’s equity share. This type of delayed payoff will take place until all prior lien holders are satisfied or the amount of available equity is exhausted. Any remaining equity share will be remitted to FHA. For a copy of HUD’s announcement, please see http://www.hud.gov/news/release.cfm?content=pr08-150.cfm.
OCC Issues Bulletin Regarding Revisions to the Interagency Consumer Compliance Examination Procedures for Regulation Z. On October 6, Ann F. Jaedicke, Deputy Comptroller for Compliance Policy issued Office of the Comptroller of the Currency (OCC) Bulletin 2008-27, which contains revisions to the interagency consumer compliance examination procedures for Regulation Z. The Federal Financial Institutions Examination Council’s Task Force on Consumer Compliance revised the procedures in order to simplify e-communication requirements; specifically, the procedures clarify how the Electronic Signatures in Global and National Commerce Act (E-Sign) relate to Regulation Z. Further, the procedures specify examination requirements to assess whether banks have provided the appropriate disclosures to consumers pursuant to Regulation Z. OCC staff has incorporated the revised procedures into the Truth in Lending booklet of the Comptroller’s Compliance Handbook series. For a copy of the bulletin, please see http://www.occ.gov/ftp/bulletin/2008-27.html.
Banking Agencies Find Increase in Volume of Shared Credits But Lower Quality. On October 8, the federal banking agencies issued their review of the Shared National Credits (SNC) Program. The review indicates that the volume of loan commitments of $20 million or more held by three or more federally supervised financial institutions increased 22.6% to $2.8 trillion. However, there was a significant decrease in credit quality as criticized credits (credits categorized as substandard, doubtful, and loss under the Uniform Loan Classification standards) increased from 5% to 13.4% of the SNC portfolio. The report further evidences that examiners found the underwriting standards of syndicated loans to be “structurally weak.” For a copy of the press release, please see http://www.occ.gov/ftp/release/2008-120.htm.
Fed Announces Creation of Commercial Paper Funding Facility. On October 7, the Federal Reserve Board (FRB) announced the creation of the Commercial Paper Funding Facility (CPFF) to help provide liquidity to term funding markets. The CPFF will complement the FRB’s existing credit facilities and provide a liquidity backstop by using a special purpose vehicle (SPV), financed by the FRB, to purchase three-month unsecured and asset-backed commercial paper from eligible U.S. issuers of commercial paper. The financing of the SPV under the CPFF will be secured by all the underlying assets of the SPV, or in the case of commercial paper not backed by assets, by the up-front fees paid by the issuers or by other forms of security acceptable to the FRB in consultation with market participants. In support of the new facility, the U.S. Department of the Treasury (Treasury) will make a special deposit at the Federal Reserve Bank in New York. The Treasury believes the CPFF is necessary to eliminate risk associated with repayment of maturing commercial paper obligations to investors and increase the shrinking demand for longer-dated commercial paper. For a copy of the press release, see http://www.federalreserve.gov/newsevents/press/monetary/20081007c.htm.
Banking Agencies Issue Proposed Rule to Lower Risk Weighting for Fannie, Freddie. On October 7, the federal banking agencies announced a notice of proposed rulemaking. The proposed rule would lower the risk weighting of claims on, or guaranteed by, the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) from 20% to 10%. The 10% risk weighting would continue while the U.S. Treasury provided financial support through senior preferred stock purchase agreements. Comments are due within 30 days following publication in the Federal Register, which is forthcoming. For a copy of the press release, please see http://www.federalreserve.gov/newsevents/press/bcreg/20081007a.htm. For a copy of the proposed rule, please see http://www.fdic.gov/news/news/press/2008/pr08095a.pdf.
New York Banking Department, FDIC Lift Cease and Desist Order. On October 1, the New York State Banking Department and the Federal Deposit Insurance Corporation jointly announced the lifting of a 2006 cease and desist issued upon consent with Bank of Tokyo-Mitsubishi UFJ Trust Company (Bank of Tokyo). The lifting of the order followed a determination that Bank of Tokyo had resolved issues regarding its Bank Secrecy Act and Anti-Money Laundering compliance programs. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2008/pr08089.html.
State Issues
$8.68 Billion Multi-State Settlement Announced with Countrywide. On October 6, the Attorneys General of 11 states, including Arizona, California, Connecticut, Florida, Illinois, Iowa, Michigan, North Carolina, Ohio, Texas and Washington, announced a settlement with Countrywide Financial Corporation (Countrywide) that should provide an estimated $8.68 billion in home loan and foreclosure relief. The settlement is in response to recent allegations that Countrywide’s practices, prior to its July 2008 acquisition by Bank of America (BOA), deceived borrowers and were predatory in nature. As a result of the settlement, eligible borrowers may avoid foreclosure by modifying an existing loan to a more affordable loan. Loan modification, under the settlement, will include (i) suspension of foreclosures for eligible borrowers with subprime and pay-option adjustable rate loans pending determination of borrower ability to afford loan modifications, (ii) reduced interest payments, and for certain borrowers, reduction of their principal balances, (iii) waiver of late fees, (iv) waiver of prepayment penalties for borrower who receive modifications, pay offs, or refinance their loans, (v) payments to borrowers who are 120 or more days delinquent or whose homes have been foreclosed, and (vi) additional payments to borrowers who, in the future, cannot afford monthly payments under the loan modification program and lose their homes to foreclosure. The modification program covers subprime and pay-option adjustable-rate mortgage loans in which the borrower’s first payment was due between January 1, 2004 and December 31, 2007, as well as loans in default serviced by Countrywide or an affiliate. Further, the terms of the modification will vary based on the type of loan (i.e., pay-option ARM loans, subprime adjustable-rate loans, subprime fixed loans, “HOPE for Homeowners Program” loans, and Alt-A and prime loans). BOA, which negotiated the settlement, has also agreed to suspend subprime loans or loans resulting in negative amortization under its own name or the Countrywide name. For a copy of the California Attorney General’s press release, please see http://www.ag.ca.gov/newsalerts/release.php?id=1618. For a copy of the "Multistate Settlement Term Sheet," please see http://www.ct.gov/ag/lib/ag/consumers/finalmultistatecfcsettlementtermsheet.pdf.
Illinois Sheriff Suspends Foreclosure Evictions. On October 8, Cook County, Illinois Sheriff Thomas J. Dart announced the suspension of foreclosure evictions in Cook County, which includes Chicago, Illinois. Sheriff Dart wants mortgage companies to provide "sufficient information" prior to conducting an eviction. Such information "will provide greater notification to tenants that their building is in foreclosure and will require mortgage companies and their attorneys to do more leg work in advance of an eviction." For a copy of the press release, please see http://www.cookcountysheriff.org/press_page/press_evictionSuspension_10_08_08.html.
New York AG Reaches Auction Rate Securities Settlement with Bank of America, RBC. On October 8, New York Attorney General Andrew Cuomo reached a settlement with Bank of America (BOA) and Royal Bank of Canada (RBC) regarding claims that the banks misrepresented the liquidity risk of auction-rate securities (ARS) to investors. BOA agreed to buyback ARS from (i) all retail customers, (ii) small businesses with less than $15 million on deposit, and (iii) charities with less than $25 million on deposit. RBC agreed to buyback ARS from (i) individual customers, (ii) charities, non-profits and government entities with less than $25 million on deposit, and (ii) all other entities with less than $10 million on deposit. The settlement also requires the banks to (i) reimburse all retail investors who sold ARS at a discount after the market failed, (ii) consent to a special, public arbitration procedure to resolve claims of consequential damages suffered by retail investors as a result of not being able to access their funds, (iii) expeditiously provide liquidity solutions to all other institutional investors, and (iv) reimburse all refinancing fees to any municipal issuers that issued ARS through these firms since August 1, 2007. In addition, BOA will pay civil penalties in the amount of $50 million, and RBS will pay civil penalties in the amount of $9.8 million. The New York Attorney General’s investigation continues against other market participants. For a copy of the press release announcing the settlement, please see http://www.oag.state.ny.us/media_center/2008/oct/oct8a_08.html.
Courts
Ninth Circuit Allows Student Loan to Be Discharged in Bankruptcy Plan. The U.S. Court of Appeals for the Ninth Circuit has affirmed its prior opinion holding that a debtor’s student loan could be discharged in a Chapter 13 bankruptcy plan because the lender failed to object to the inclusion of the loan in the plan. Espinosa v. United Student Aid Funds, Inc., No. 06-16421, 2008 WL 4426634 (9th Cir. Oct. 2, 2008). In this case, the debtor filed a Chapter 13 proposed payment plan, which included $13,250 in student loans. The lender filed a proof of claim for $17,832. The court affirmed the plan with the lower amount, and the trustee mailed the creditor a notice of the plan and asked the creditor to notify the trustee of any disputes or objections within thirty days. The creditor did not object to or dispute the plan. The debtor successfully satisfied his repayment obligations under the plan, and the court granted a discharge. The student loan creditor subsequently began pursing the debtor for the unpaid portion of its alleged claim, and the debtor moved to hold the creditor in contempt for its alleged violation of the court’s order. The creditor then sought relief from the confirmation order, claiming that the order had been entered in violation of its rights because the debtor never made a showing of “undue hardship” in an adversarial proceeding, which is required to discharge student loans. The appeals court rejected the creditor’s argument, finding that, even though the debtor had not formally sought a specific judicial determination of undue hardship, the creditor had had sufficient notice of the inclusion of the reduced amount in the plan and had not objected to this inclusion. Therefore, the appeals court allowed the discharge to stand and precluded the creditor from pursing additional payments from the debtor. For a copy of the opinion, please see http://www.ca9.uscourts.gov/ca9/newopinions.nsf/C02E0422BA0DC94E882574D50080236B/$file/0616421.pdf.
California Federal Court Upholds TILA Claims; Dismisses Rescission Remedy. On September 30, a California federal district court upheld several TILA claims in response to a defendant lender’s motion to dismiss. Plascencia v. Lending 1st Mortgage, No. 07-4485 CW, 2008 WL 1902698 (N.D. Cal. Sept. 30, 2008). In this case, borrowers brought suit against Lending 1st Mortgage (Lending 1st) and EMC Mortgage Corp (EMC) for violations of, among other items, the Truth in Lending Act (TILA), the California Unfair Competition Law (UCL) and common law fraud and breach of contract, stemming from an Option Adjustable Rate Mortgage (ARM) loan the borrowers obtained from Lending 1st, which ECM subsequently bought and securitized. The plaintiffs’ loan included a low teaser rate that resulted in negative amortization of the loan principal, and the plaintiffs claimed that (i) the loan disclosures were inadequate to inform them of the actual interest rate, (ii) the teaser rate was a discounted rate, and (iii) negative amortization of the loan was a certainty under the payment plan. EMC moved to dismiss the claims, which the court granted in part and dismissed in part. The court dismissed the plaintiffs’ claims for rescission of the loan, agreeing with EMC’s argument, based upon Ninth Circuit precedent, that rescission is unavailable as a remedy because the plaintiffs already refinanced, and therefore paid off, the loan. The court rejected the argument that rescission is a remedy, even in the face of refinancing, because during the consideration and passage of the 1995 amendments to TILA, Congress considered, but ultimately did not include, a provision to cut off the rescission remedy for homeowners who refinance the loan. The court held that the failure to pass a particular legislative provision was not conclusive proof of Congressional intent. However, the court refused to dismiss the plaintiffs’ other claims. First, the defendants argued that the TILA claims should be dismissed because the statute of limitations expired. The court held that, although the action was not filed until more than a year after the loan was consummated, the equitable tolling doctrine applied because the plaintiffs could not discover the violations until after they began receiving their statements and realized that the principal was increasing rather than decreasing. Second, the court refused to dismiss the UCL claims. EMC argued that it could not be liable under UCL because the statute does not impose vicarious liability and because the UCL claims were preempted by TILA. The court disagreed, stating that EMC could be liable as an “aidor and abettor of the principal violator” if the plaintiffs could prove that EMC continued to purchase and securitize Lending 1st option ARM loans with knowledge of the TILA violations. The court also rejected EMC’s argument that the UCL’s longer statute of limitations (4 years) is inconsistent and therefore preempted by TILA, holding that the preemption provisions of TILA apply only to “inconsistencies in the substance of state disclosure requirements,” and, therefore, the UCL provisions simply provide additional, not inconsistent, protection for consumers. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Plascencia_v_Lending.pdf.
Pennsylvania Federal Court Finds Plaintiffs Lack Standing to Bring RESPA Claim. On September 29, the U.S. District Court for the Eastern District of Pennsylvania granted the defendants’ motion to dismiss a putative class action suit alleging violations of Section 8 of the Real Estate Settlement Procedure Act (RESPA), finding that the plaintiffs did not have standing to invoke the court’s jurisdiction because the defendants’ alleged RESPA violation did not result in the plaintiffs paying an inflated rate for private mortgage insurance. Alston v. Countrywide Fin. Corp., No. 07-3508, 2008 WL 4444243 (E.D. Pa. Sept. 29, 2008). The plaintiffs obtained their mortgage loans through defendants Countrywide Financial Corporation and Countrywide Home Loans, Inc. (Countrywide) and their private mortgage insurance policies were subject to captive reinsurance arrangements with defendant Balboa Reinsurance Company (Balboa), an affiliate and subsidiary of Countrywide. The plaintiffs alleged that the risk that Balboa assumed was not commensurate with the premiums that it received and constituted disguised kickbacks paid to Countrywide in exchange for the referral of primary mortgage business, in violation of Section 8 of RESPA. They further alleged that, (i) as a result of the alleged kickbacks, their monthly mortgage insurance premiums were artificially inflated, and (ii) RESPA provides for statutory damages when providers receive kickbacks for purchased settlement services. The court held that the mortgage insurance rates that the plaintiffs paid were per se reasonable in Pennsylvania. The court reasoned, under the filed rate doctrine, that the plaintiffs paid the only legal rate they could have paid for mortgage insurance in Pennsylvania, regardless of how the defendants may have distributed the mortgage insurance premiums the plaintiffs paid. The court further found that, where the plaintiffs had not been overcharged because of any illegal kickback or fee splitting, RESPA’s statutory damages provision does not authorize the plaintiffs to sue for damages. Citing several cases in various jurisdictions, the court acknowledged that there is considerable disagreement among federal courts that have addressed this issue. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Collier_v_Countrywide.pdf.
Illinois Federal Court Holds Refinancing Does Not Affect Rescission Rights Under TILA. On September 30, the U.S. District Court for the District of Northern Illinois held that, under the Truth in Lending Act (TILA), a borrower’s right of rescission outlives the refinancing of the loan. Hubbard v. Ameriquest Mortgage Co., No. 05-CV-389, 2008 WL 4449888 (N.D. Ill. Sept. 30, 2008). In this case, Ameriquest Mortgage Corporation (Ameriquest) provided the plaintiff with a loan containing a TILA disclosure statement that failed to disclose all of the scheduled due dates for payments. As a result, the plaintiff sued to rescind the contract under 15 U.S.C. § 1635(a). The suit for rescission involved not only Ameriquest, as the initial creditor, but also Deutsche Bank, an assignee of the loan, and AMC Mortgage Services (AMC), the loan’s servicer. AMC was ultimately dismissed from the case, because, as a servicer, it could not be liable for rescission under TILA because it did not own the underlying obligation or possessed an interest in it. Ameriquest and Deutsche Bank, as the remaining defendants, argued that the plaintiff’s right to rescind the contract ended when he refinanced the loan. The court rejected this argument, stating that Regulation Z enumerates only two specific ways to extinguish a borrower’s right to rescind: (i) complete transfer of interest in the property, (ii) or the sale of the property. See 12 C.F.R. § 226.23(a)(3). Based on this plain reading of the statute, the court held that the right of rescission remained available even after the subject loan has been completely paid off. As an additional defense, Deutsche Bank contended that it was not liable for rescission because the plaintiff did not provide it with notice of his intent to rescind within the three year time limit established by § 1635. However, the court rejected this argument. Examining § 1635, the court noted that the statute grants an obligor a right to rescind by notifying a “creditor” of his intention to do so, however, the statutory definition of creditor does not include subsequent assignees of the loan. As a result, the plaintiff was not a “creditor” required to provide Deutsche Bank with a “timely notice” as required by TILA. Denying both Ameriquest’s and Deutsche Bank’s defenses, the court rescinded the agreement and held both banks liable for any interest and fees paid to them by the plaintiff. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Hubbard_v_Ameriquest.pdf.
Michigan Federal Court Holds PMSI Includes Financed Negative Equity. On October 3, the U.S. District Court for the Eastern District of Michigan held that the negative equity from a trade-in that was rolled into the financing for a new vehicle is part of the purchase money security interest (PMSI) protected from cram-down by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). In re Muldrew, No. 08-11866, 2008 WL 445879 (E.D. Mich. Oct. 3, 2008). The debtor in Muldrew traded in his car to purchase a new one, including in his new financing the unpaid balance – the negative equity – of the old car’s lien. The debtor filed for Chapter 13 bankruptcy two years later, excluding – “cramming-down” – the amount of the negative equity from the secured amount of the claim. The bankruptcy court held that the creditor did not have a PMSI in the new car to the extent that the negative equity resulting from the trade-in was financed. On appeal, the district court reversed. Following decisions from the Eleventh Circuit and a “recently emerg[ing]” majority of district courts, the court looked to the text and purpose of the BAPCPA, the prevailing commercial interpretation of PMSI, and the definitions of PMSI in the UCC and the Michigan Motor Vehicle Sales Finance Act, holding that a PMSI in the total outstanding balance on the purchase money loan, whether or not a portion of the financed amount resulted from negative equity from a previous trade-in, is part of the creditor’s secured claim. According to the court, “[f]inancing of negative equity bears a close nexus to the purchase of the new vehicle, the transaction is a package deal, and the financing of the negative equity is an integral part of and inextricably intertwined with the sales transaction” (internal quotations omitted). For a copy of the opinion, please see http://www.buckleykolar.com/documents/In_Re_Muldrew.pdf.
First Circuit Vacates $750,000 Judgment Against Mortgage Lender. On October 3, U.S. Court of Appeals for the First Circuit vacated a $750,000 judgment against Ameriquest Mortgage Company (Ameriquest) in a Chapter 13 bankruptcy proceeding. In re Nosek, Nos. 07-2173, 07-2174, 2008 WL 4445707 (1st Cir. Oct. 3, 2008). The Bankruptcy Court for the District of Massachusetts concluded that Ameriquest violated 11 U.S.C. § 1322(b), which sets forth the permitted elements of a debtor’s Chapter 13 bankruptcy plan. Under the plan, the debtor was required to pay her pre-petition arrears over 60 months while continuing to make regular payments on her mortgage. Ameriquest’s computerized accounting system applied any mortgage payment received to the oldest obligation due. If the amount received did not meet the amount due on a single payment, the funds were placed in a suspense account until enough money was collected to satisfy a payment. The debtor sued Ameriquest after receiving an allegedly inaccurate payment history. According to the bankruptcy court, Ameriquest violated § 1322(b) by failing to distinguish between the debtor’s pre-petition and post-petition payments and promptly credit the debtor’s account from the suspense account. The bankruptcy court awarded the debtor $250,000 in emotional distress damages and $500,000 in punitive damages, and the district court affirmed the award. The First Circuit, however, vacated the bankruptcy court’s judgment, reasoning that § 1322(b) “does not impose any specific duties on a lender,” but “merely lists elements that a Chapter 13 debtor may include in her plan.” In addition, the court found that the debtor’s plan did not specify how payments should be accounted for, and held that, even if the payment history could have been construed as a threat to the debtor’s cure rights, the proper response would have been to amend the Chapter 13 plan. For a copy of the opinion, please see http://www.ca1.uscourts.gov/pdf.opinions/07-2173P-01A.pdf.
Ohio Federal Court Holds Debt Collector Not Liable Under FDCPA. On September 30, the U.S. District Court for the Northern District of Ohio granted in part and denied in part a motion for summary judgment filed by defendant Collection Consultants of California (CCC), a debt collection company, in a case in which the plaintiff alleged that she was financially harmed by CCC’s failure to remove disputed information from her credit report. Alarcon v. Transunion Marketing Solutions, No. 5:07 CV 0230, 2008 WL 4449387 (N.D. Ohio Sept. 30, 2008). In this case, the plaintiff, on several occasions, reported inaccuracies in her credit report to CCC. CCC assured the plaintiff that it would remove the disputed information but the disputed information subsequently remained on the plaintiff’s credit report. Among other items, the plaintiff claimed that CCC’s statements that it would remove the disputed information were false and/or misleading statements in violation of the Fair Debt Collection Practices Act (FDCPA). In ruling on CCC’s motion for summary judgment, the court held that CCC had not violated the FDCPA because CCC’s alleged false and/or misleading statements were made in response to the plaintiff’s requests to have the disputed information removed, and, thus, were not made “in connection with collection of a debt.” The court, however, denied CCC’s motion for summary judgment regarding the plaintiff’s claims under the Fair Credit Reporting Act, holding that there was a triable fact regarding whether CCC’s investigation of the plaintiff’s disputes was “reasonable.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/Alarcon_v_Transunion.pdf.
Ohio Federal Court Finds E-Mails Purposefully Availed Defendant to Forum State. On September 29, the U.S. District Court for the Southern District of Ohio held that an online-marketing business that sent over 900 emails to an individual in Ohio over the course of approximately 16 month purposefully availed itself to specific personal jurisdiction in Ohio. Ferron v. e360 Insight, et al., No. 07-1193, 2008 WL 4411516 (S.D. Ohio Sept. 29, 2008). In this case, the defendant allegedly sent over 900 emails containing deceptive email advertisements to the plaintiff; the plaintiff subsequently filed suit. In order to establish specific personal jurisdiction over the defendant, the court relied upon the three-part personal jurisdiction test from Southern Mach. Co. v. Mohasco Indus., Inc., 401 F.2d 374, 376 n.2 (6th Cir. 1968). The court held that the defendants "knew or reasonably should have known" that the emails would be received by "individuals in other states through servers located in other states," including Ohio. Relying on precedent, the court stated "[a] number of courts ... have found that sending numerous emails to a recipient in a forum state satisfies the purposeful availment requirement." The court further held that the cause of action arose out of the defendant’s activity – sending emails to the plaintiff – and that Ohio has an interest in protecting its residents against deceptive emails from out-of-state. As a result, the court denied the defendant’s motion to dismiss for lack of personal jurisdiction. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Ferron_v_E360.pdf.
Firm News
Jerry Buckley will be a featured speaker at the upcoming Corporate Risk Advisors & Fair Lending Colloquium Conference taking place October 27 in Orlando, Florida. The topic being discussed by his panel is entitled “Identifying Trends and Potential Regulatory Concerns.”
Grant Mitchell will be a featured speaker at the annual RESPRO Fall Seminar in New Orleans, Louisiana from November 5 - 7. His presentation will be concentrated on various RESPA issues. For additional information about this seminar please click here.
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 13th in Washington, DC. 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/
Margo Tank was a featured speaker at the New York State Bar Association’s Business Law Fall Meeting on September 12 in Newport, Rhode Island. Ms. Tank’s presentation was entitled “Electronic Signatures – What Does a Business Lawyer Need to Know?”
Matthew Previn presented in a panel discussion entitled “Litigation and Enforcement Update” at the Mortgage Bankers Association’s Regulatory Compliance Conference in Washington D.C. on September 15.
Jonathan Jerison participated in two events at the Mortgage Bankers Association’s Regulatory Compliance Conference in Washington, D.C. on September 15 & 16.
Jeff Naimon facilitated a roundtable discussion entitled “Miscellaneous Regulatory Concerns: RESPA and TILA Issues (including Right of Rescission)” at the Mortgage Bankers Association’s Regulatory Compliance Conference Roundtable on September 15.
Margo Tank was featured in a panel discussion on eLegal Issues at the Mortgage Bankers Association’s Document Management & Custody Conference on September 23 in Charlotte, North Carolina.
Jeff Naimon moderated a panel entitled “Ensuring Your Practices Keep Pace with Emerging Legislative and Regulatory Initiatives” at the American Conference Institute’s 5th National Forum on Preventing, Detecting And Resolving Mortgage Fraud on September 23 in Phoenix, Arizona.
Joe Kolar participated in an audio presentation on the Housing and Economic Recovery Act of 2008 (HERA) sponsored by the American Bar Association on September 25.
Clint Rockwell presented on topics related to recent state and federal mortgage lending developments at the American Financial Services Association’s State Government Affairs Forum / NACCA Annual Meeting on October 2 in Beverly Hills, California.
Colgate Selden presented on topics related to RESPA compliance at the Maryland Association of Mortgage Brokers Continuing Education Forum on October 8.
Miscellany
Latest Version of PCI DSS Released. On October 1, the Payment Card Industry Security Standards Council released the latest version of the Payment Card Industry Data Security Standard (PCI DSS). The PCI DSS is a set of data security standards for the processing of payment card transactions and the acceptance of credit or debit card payments. The latest version mainly “clarifies” and “enhances” the prior version of the standard. For a copy of the summary of changes, please see https://www.pcisecuritystandards.org/pdfs/pci_dss_summary_of_changes_v1-2.pdf.
FTC Will Co-Host Free Public Workshop Regarding Personal Data Protection. On November 13, the Federal Trade Commission (FTC) will co-host a free public workshop entitled “Protecting Personal Information: Best Practices for Business.” The half-day workshop will feature presentations by experts on how businesses can best secure and protect the privacy of consumers and employees. The workshop is being offered following a recommendation by President Bush’s Identity Theft Task Force that federal agencies host regional seminars to promote to the private sector “the importance of safeguarding information, preventing and reporting data breaches, and assisting identity theft victims.” For more information, including registration details, please see http://www.ftc.gov/opa/2008/10/datasecwksp.shtm.
Mortgages
Treasury Announces Asset Manager Selection Procedures. On October 6, the U.S. Department of the Treasury (Treasury) announced procedures for selecting “securities asset managers” and “whole loan asset managers” for the portfolios of troubled assets, pursuant to the Emergency Economic Stabilization Act of 2008 (EESA). Securities asset managers will manage residential and commercial mortgage backed securities and collateralized debt obligations, while whole loan asset managers will manage a variety of residential and commercial loan products. The selection process, will involve a number of phases, from initial application to information sharing to face-to-face interviews. In its announcement, the Treasury reminded applicants that all selected asset managers will be financial agents of the United States, and not contractors, and therefore will have a fiduciary agent-principal relationship with the Treasury with a responsibility to protect the interests of the United States. In addition, under the authority grated by the EESA, private domestic financial institutions are eligible to be designated as financial agents of the United States. The Treasury expects to designate multiple asset managers and submanagers to obtain the proper expertise with different asset types and different segments of the mortgage credit market. For a copy of the press release, please see http://www.treas.gov/press/releases/reports/assetmanagers.pdf.
Treasury Solicits Services from Financial Institutions to Implement the Emergency Economic Stabilization Act of 2008. On October 6, the U.S. Department of the Treasury (Treasury) issued notices to financial institutions interested in providing (i) asset management services for a portfolio of troubled mortgage-related securities, (ii) asset management services for a portfolio of mortgage whole loans, and (iii) custodian, accounting, auction management, and other infrastructure services for a portfolio of troubled mortgage-related assets. The Treasury’s goal in obtaining services from eligible financial institutions in performing the foregoing tasks is to provide stability and prevent further disruption to the financial markets and banking system, ensure mortgage availability, and protect the interests of taxpayers. By acquiring, managing, and orderly liquidating the mortgage loans over time, the Treasury seeks to improve the capital positions of the financial institutions from which assets are acquired, improve liquidity and credit extension in the financial system, increase investor confidence, and provide market participants with more price transparency. Interested financial institutions meeting the organizational, service capacity, and other eligibility requirements specified in the notices were required to submit responses by October 8, 2008. For a copy of the notices, please see http://www.treasury.gov/initiatives/eesa/docs/notice_securities-asset-mgr.pdf, http://www.treasury.gov/initiatives/eesa/docs/notice_whole-loan-asset-mgr.pdf, and http://www.treasury.gov/initiatives/eesa/docs/notice_custodian-services.pdf.
Treasury Announces Procurement Authorities, Procedures; Conflicts of Interest Interim Guidelines. On October 6, the U.S. Department of the Treasury (Treasury) issued two documents regarding procurement authorities and procedures and interim guidelines for conflicts of interest pursuant to the Emergency Economic Stabilization Act of 2008 (EESA). The "Procurement Authorities and Procedures" document states that the Treasury has two mechanisms available for engaging private-sector firms under the EESA: financial agent authority and procurement under the Federal Acquisition Regulation. The Treasury will determine on a case-by-case basis which authority best applies. The "Interim Guidelines for Conflicts of Interest" document outlines procedures for reviewing and responding to conflicts of interest (COIs) among contractors performing services pursuant to the EESA including, among other items, that the Treasury “may obtain non-disclosure agreements and COI agreements in advance of supplying an offeror a solicitation.” For a copy of the press releases, please see http://www.ustreas.gov/press/releases/hp1179.htm and http://www.ustreas.gov/press/releases/hp1180.htm.
HUD Begins HOPE for Homeowners Program. On October 1, the U.S. Department of Housing and Urban Development (HUD) began its HOPE for Homeowners Program. Authorized under the Economic and Housing Recovery Act of 2008, the program refinances mortgages for troubled borrowers, who can qualify for new loans insured by the Federal Housing Administration (FHA). To be eligible for the program, borrowers must (i) own and occupy their primary residence, (ii) own no other residential property, (iii) have made at least six payments on a mortgage loan of not more than $550,440 that existed before January 1, 2008, (iv) have mortgage payments that exceed 31% of their gross monthly income, and (v) certify that they have not been convicted of fraud in the past 10 years, intentionally defaulted on debts, and did not knowingly or willingly provide material false information to obtain their existing mortgages. For qualifying borrowers, the program will provide a new 30-year fixed rate mortgage at 90% of the newly appraised value of their homes. However, the program places numerous restrictions on the borrower. First, the borrower is prohibited from taking out a second mortgage for the first five years of the loan, except when needed for emergency repairs. Additionally, if the borrower’s home is ever sold or refinanced, the borrower must share any equity with FHA on a sliding scale ranging from a 100% FHA share after the first year to a minimum of 50% after five years. This provision helps compensate the property’s original lien holders, who either had to accept the proceeds of the HOPE for Homeowners loan as full settlement of the borrower’s outstanding indebtedness, or had to release their liens completely without compensation. From the FHA’s equity share in the property, the lien holder that previously held the highest priority will receive payment up to a proportion of its original interest, not to exceed the FHA’s equity share. This type of delayed payoff will take place until all prior lien holders are satisfied or the amount of available equity is exhausted. Any remaining equity share will be remitted to FHA. For a copy of HUD’s announcement, please see http://www.hud.gov/news/release.cfm?content=pr08-150.cfm.
OCC Issues Bulletin Regarding Revisions to the Interagency Consumer Compliance Examination Procedures for Regulation Z. On October 6, Ann F. Jaedicke, Deputy Comptroller for Compliance Policy issued Office of the Comptroller of the Currency (OCC) Bulletin 2008-27, which contains revisions to the interagency consumer compliance examination procedures for Regulation Z. The Federal Financial Institutions Examination Council’s Task Force on Consumer Compliance revised the procedures in order to simplify e-communication requirements; specifically, the procedures clarify how the Electronic Signatures in Global and National Commerce Act (E-Sign) relate to Regulation Z. Further, the procedures specify examination requirements to assess whether banks have provided the appropriate disclosures to consumers pursuant to Regulation Z. OCC staff has incorporated the revised procedures into the Truth in Lending booklet of the Comptroller’s Compliance Handbook series. For a copy of the bulletin, please see http://www.occ.gov/ftp/bulletin/2008-27.html.
Banking Agencies Issue Proposed Rule to Lower Risk Weighting for Fannie, Freddie. On October 7, the federal banking agencies announced a notice of proposed rulemaking. The proposed rule would lower the risk weighting of claims on, or guaranteed by, the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) from 20% to 10%. The 10% risk weighting would continue while the U.S. Treasury provided financial support through senior preferred stock purchase agreements. Comments are due within 30 days following publication in the Federal Register, which is forthcoming. For a copy of the press release, please see http://www.federalreserve.gov/newsevents/press/bcreg/20081007a.htm. For a copy of the proposed rule, please see http://www.fdic.gov/news/news/press/2008/pr08095a.pdf.
$8.68 Billion Multi-State Settlement Announced with Countrywide. On October 6, the Attorneys General of 11 states, including Arizona, California, Connecticut, Florida, Illinois, Iowa, Michigan, North Carolina, Ohio, Texas and Washington, announced a settlement with Countrywide Financial Corporation (Countrywide) that should provide an estimated $8.68 billion in home loan and foreclosure relief. The settlement is in response to recent allegations that Countrywide’s practices, prior to its July 2008 acquisition by Bank of America (BOA), deceived borrowers and were predatory in nature. As a result of the settlement, eligible borrowers may avoid foreclosure by modifying an existing loan to a more affordable loan. Loan modification, under the settlement, will include (i) suspension of foreclosures for eligible borrowers with subprime and pay-option adjustable rate loans pending determination of borrower ability to afford loan modifications, (ii) reduced interest payments, and for certain borrowers, reduction of their principal balances, (iii) waiver of late fees, (iv) waiver of prepayment penalties for borrower who receive modifications, pay offs, or refinance their loans, (v) payments to borrowers who are 120 or more days delinquent or whose homes have been foreclosed, and (vi) additional payments to borrowers who, in the future, cannot afford monthly payments under the loan modification program and lose their homes to foreclosure. The modification program covers subprime and pay-option adjustable-rate mortgage loans in which the borrower’s first payment was due between January 1, 2004 and December 31, 2007, as well as loans in default serviced by Countrywide or an affiliate. Further, the terms of the modification will vary based on the type of loan (i.e., pay-option ARM loans, subprime adjustable-rate loans, subprime fixed loans, “HOPE for Homeowners Program” loans, and Alt-A and prime loans). BOA, which negotiated the settlement, has also agreed to suspend subprime loans or loans resulting in negative amortization under its own name or the Countrywide name. For a copy of the California Attorney General’s press release, please see http://www.ag.ca.gov/newsalerts/release.php?id=1618. For a copy of the "Multistate Settlement Term Sheet," please see http://www.ct.gov/ag/lib/ag/consumers/finalmultistatecfcsettlementtermsheet.pdf.
Illinois Sheriff Suspends Foreclosure Evictions. On October 8, Cook County, Illinois Sheriff Thomas J. Dart announced the suspension of foreclosure evictions in Cook County, which includes Chicago, Illinois. Sheriff Dart wants mortgage companies to provide "sufficient information" prior to conducting an eviction. Such information "will provide greater notification to tenants that their building is in foreclosure and will require mortgage companies and their attorneys to do more leg work in advance of an eviction." For a copy of the press release, please see http://www.cookcountysheriff.org/press_page/press_evictionSuspension_10_08_08.html.
California Federal Court Upholds TILA Claims; Dismisses Rescission Remedy. On September 30, a California federal district court upheld several TILA claims in response to a defendant lender’s motion to dismiss. Plascencia v. Lending 1st Mortgage, No. 07-4485 CW, 2008 WL 1902698 (N.D. Cal. Sept. 30, 2008). In this case, borrowers brought suit against Lending 1st Mortgage (Lending 1st) and EMC Mortgage Corp (EMC) for violations of, among other items, the Truth in Lending Act (TILA), the California Unfair Competition Law (UCL) and common law fraud and breach of contract, stemming from an Option Adjustable Rate Mortgage (ARM) loan the borrowers obtained from Lending 1st, which ECM subsequently bought and securitized. The plaintiffs’ loan included a low teaser rate that resulted in negative amortization of the loan principal, and the plaintiffs claimed that (i) the loan disclosures were inadequate to inform them of the actual interest rate, (ii) the teaser rate was a discounted rate, and (iii) negative amortization of the loan was a certainty under the payment plan. EMC moved to dismiss the claims, which the court granted in part and dismissed in part. The court dismissed the plaintiffs’ claims for rescission of the loan, agreeing with EMC’s argument, based upon Ninth Circuit precedent, that rescission is unavailable as a remedy because the plaintiffs already refinanced, and therefore paid off, the loan. The court rejected the argument that rescission is a remedy, even in the face of refinancing, because during the consideration and passage of the 1995 amendments to TILA, Congress considered, but ultimately did not include, a provision to cut off the rescission remedy for homeowners who refinance the loan. The court held that the failure to pass a particular legislative provision was not conclusive proof of Congressional intent. However, the court refused to dismiss the plaintiffs’ other claims. First, the defendants argued that the TILA claims should be dismissed because the statute of limitations expired. The court held that, although the action was not filed until more than a year after the loan was consummated, the equitable tolling doctrine applied because the plaintiffs could not discover the violations until after they began receiving their statements and realized that the principal was increasing rather than decreasing. Second, the court refused to dismiss the UCL claims. EMC argued that it could not be liable under UCL because the statute does not impose vicarious liability and because the UCL claims were preempted by TILA. The court disagreed, stating that EMC could be liable as an “aidor and abettor of the principal violator” if the plaintiffs could prove that EMC continued to purchase and securitize Lending 1st option ARM loans with knowledge of the TILA violations. The court also rejected EMC’s argument that the UCL’s longer statute of limitations (4 years) is inconsistent and therefore preempted by TILA, holding that the preemption provisions of TILA apply only to “inconsistencies in the substance of state disclosure requirements,” and, therefore, the UCL provisions simply provide additional, not inconsistent, protection for consumers. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Plascencia_v_Lending.pdf.
Pennsylvania Federal Court Finds Plaintiffs Lack Standing to Bring RESPA Claim. On September 29, the U.S. District Court for the Eastern District of Pennsylvania granted the defendants’ motion to dismiss a putative class action suit alleging violations of Section 8 of the Real Estate Settlement Procedure Act (RESPA), finding that the plaintiffs did not have standing to invoke the court’s jurisdiction because the defendants’ alleged RESPA violation did not result in the plaintiffs paying an inflated rate for private mortgage insurance. Alston v. Countrywide Fin. Corp., No. 07-3508, 2008 WL 4444243 (E.D. Pa. Sept. 29, 2008). The plaintiffs obtained their mortgage loans through defendants Countrywide Financial Corporation and Countrywide Home Loans, Inc. (Countrywide) and their private mortgage insurance policies were subject to captive reinsurance arrangements with defendant Balboa Reinsurance Company (Balboa), an affiliate and subsidiary of Countrywide. The plaintiffs alleged that the risk that Balboa assumed was not commensurate with the premiums that it received and constituted disguised kickbacks paid to Countrywide in exchange for the referral of primary mortgage business, in violation of Section 8 of RESPA. They further alleged that, (i) as a result of the alleged kickbacks, their monthly mortgage insurance premiums were artificially inflated, and (ii) RESPA provides for statutory damages when providers receive kickbacks for purchased settlement services. The court held that the mortgage insurance rates that the plaintiffs paid were per se reasonable in Pennsylvania. The court reasoned, under the filed rate doctrine, that the plaintiffs paid the only legal rate they could have paid for mortgage insurance in Pennsylvania, regardless of how the defendants may have distributed the mortgage insurance premiums the plaintiffs paid. The court further found that, where the plaintiffs had not been overcharged because of any illegal kickback or fee splitting, RESPA’s statutory damages provision does not authorize the plaintiffs to sue for damages. Citing several cases in various jurisdictions, the court acknowledged that there is considerable disagreement among federal courts that have addressed this issue. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Collier_v_Countrywide.pdf.
Illinois Federal Court Holds Refinancing Does Not Affect Rescission Rights Under TILA. On September 30, the U.S. District Court for the District of Northern Illinois held that, under the Truth in Lending Act (TILA), a borrower’s right of rescission outlives the refinancing of the loan. Hubbard v. Ameriquest Mortgage Co., No. 05-CV-389, 2008 WL 4449888 (N.D. Ill. Sept. 30, 2008). In this case, Ameriquest Mortgage Corporation (Ameriquest) provided the plaintiff with a loan containing a TILA disclosure statement that failed to disclose all of the scheduled due dates for payments. As a result, the plaintiff sued to rescind the contract under 15 U.S.C. § 1635(a). The suit for rescission involved not only Ameriquest, as the initial creditor, but also Deutsche Bank, an assignee of the loan, and AMC Mortgage Services (AMC), the loan’s servicer. AMC was ultimately dismissed from the case, because, as a servicer, it could not be liable for rescission under TILA because it did not own the underlying obligation or possessed an interest in it. Ameriquest and Deutsche Bank, as the remaining defendants, argued that the plaintiff’s right to rescind the contract ended when he refinanced the loan. The court rejected this argument, stating that Regulation Z enumerates only two specific ways to extinguish a borrower’s right to rescind: (i) complete transfer of interest in the property, (ii) or the sale of the property. See 12 C.F.R. § 226.23(a)(3). Based on this plain reading of the statute, the court held that the right of rescission remained available even after the subject loan has been completely paid off. As an additional defense, Deutsche Bank contended that it was not liable for rescission because the plaintiff did not provide it with notice of his intent to rescind within the three year time limit established by § 1635. However, the court rejected this argument. Examining § 1635, the court noted that the statute grants an obligor a right to rescind by notifying a “creditor” of his intention to do so, however, the statutory definition of creditor does not include subsequent assignees of the loan. As a result, the plaintiff was not a “creditor” required to provide Deutsche Bank with a “timely notice” as required by TILA. Denying both Ameriquest’s and Deutsche Bank’s defenses, the court rescinded the agreement and held both banks liable for any interest and fees paid to them by the plaintiff. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Hubbard_v_Ameriquest.pdf.
First Circuit Vacates $750,000 Judgment Against Mortgage Lender. On October 3, U.S. Court of Appeals for the First Circuit vacated a $750,000 judgment against Ameriquest Mortgage Company (Ameriquest) in a Chapter 13 bankruptcy proceeding. In re Nosek, Nos. 07-2173, 07-2174, 2008 WL 4445707 (1st Cir. Oct. 3, 2008). The Bankruptcy Court for the District of Massachusetts concluded that Ameriquest violated 11 U.S.C. § 1322(b), which sets forth the permitted elements of a debtor’s Chapter 13 bankruptcy plan. Under the plan, the debtor was required to pay her pre-petition arrears over 60 months while continuing to make regular payments on her mortgage. Ameriquest’s computerized accounting system applied any mortgage payment received to the oldest obligation due. If the amount received did not meet the amount due on a single payment, the funds were placed in a suspense account until enough money was collected to satisfy a payment. The debtor sued Ameriquest after receiving an allegedly inaccurate payment history. According to the bankruptcy court, Ameriquest violated § 1322(b) by failing to distinguish between the debtor’s pre-petition and post-petition payments and promptly credit the debtor’s account from the suspense account. The bankruptcy court awarded the debtor $250,000 in emotional distress damages and $500,000 in punitive damages, and the district court affirmed the award. The First Circuit, however, vacated the bankruptcy court’s judgment, reasoning that § 1322(b) “does not impose any specific duties on a lender,” but “merely lists elements that a Chapter 13 debtor may include in her plan.” In addition, the court found that the debtor’s plan did not specify how payments should be accounted for, and held that, even if the payment history could have been construed as a threat to the debtor’s cure rights, the proper response would have been to amend the Chapter 13 plan. For a copy of the opinion, please see http://www.ca1.uscourts.gov/pdf.opinions/07-2173P-01A.pdf.
Banking
FDIC Plans to Raise Insurance Assessments for Insured Banks. On October 7, the Federal Deposit Insurance Corporation announced a proposal to increase the rates banks pay for deposit insurance and to make adjustments to risk assessment methods. Under the proposal, the assessment rate schedule would be raised uniformly by 7 basis points (annualized) beginning on January 1, 2009. Beginning with the second quarter of 2009, riskier institutions would be required to pay a larger share. The proposal would change the method of risk assessment by charging higher rates to institutions (i) with a significant reliance on secured liabilities, and (ii) with a significant reliance on brokered deposits but, for well-managed and well-capitalized institutions, only when accompanied by rapid asset growth. The proposal also would provide incentives in the form of a reduction in assessment rates for institutions to hold long-term unsecured debt and, for smaller institutions, high levels of Tier 1 capital. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2008/pr08094.html.
OCC Issues Bulletin Regarding Revisions to the Interagency Consumer Compliance Examination Procedures for Regulation Z. On October 6, Ann F. Jaedicke, Deputy Comptroller for Compliance Policy issued Office of the Comptroller of the Currency (OCC) Bulletin 2008-27, which contains revisions to the interagency consumer compliance examination procedures for Regulation Z. The Federal Financial Institutions Examination Council’s Task Force on Consumer Compliance revised the procedures in order to simplify e-communication requirements; specifically, the procedures clarify how the Electronic Signatures in Global and National Commerce Act (E-Sign) relate to Regulation Z. Further, the procedures specify examination requirements to assess whether banks have provided the appropriate disclosures to consumers pursuant to Regulation Z. OCC staff has incorporated the revised procedures into the Truth in Lending booklet of the Comptroller’s Compliance Handbook series. For a copy of the bulletin, please see http://www.occ.gov/ftp/bulletin/2008-27.html.
Banking Agencies Find Increase in Volume of Shared Credits But Lower Quality. On October 8, the federal banking agencies issued their review of the Shared National Credits (SNC) Program. The review indicates that the volume of loan commitments of $20 million or more held by three or more federally supervised financial institutions increased 22.6% to $2.8 trillion. However, there was a significant decrease in credit quality as criticized credits (credits categorized as substandard, doubtful, and loss under the Uniform Loan Classification standards) increased from 5% to 13.4% of the SNC portfolio. The report further evidences that examiners found the underwriting standards of syndicated loans to be “structurally weak.” For a copy of the press release, please see http://www.occ.gov/ftp/release/2008-120.htm.
Fed Announces Creation of Commercial Paper Funding Facility. On October 7, the Federal Reserve Board (FRB) announced the creation of the Commercial Paper Funding Facility (CPFF) to help provide liquidity to term funding markets. The CPFF will complement the FRB’s existing credit facilities and provide a liquidity backstop by using a special purpose vehicle (SPV), financed by the FRB, to purchase three-month unsecured and asset-backed commercial paper from eligible U.S. issuers of commercial paper. The financing of the SPV under the CPFF will be secured by all the underlying assets of the SPV, or in the case of commercial paper not backed by assets, by the up-front fees paid by the issuers or by other forms of security acceptable to the FRB in consultation with market participants. In support of the new facility, the U.S. Department of the Treasury (Treasury) will make a special deposit at the Federal Reserve Bank in New York. The Treasury believes the CPFF is necessary to eliminate risk associated with repayment of maturing commercial paper obligations to investors and increase the shrinking demand for longer-dated commercial paper. For a copy of the press release, see http://www.federalreserve.gov/newsevents/press/monetary/20081007c.htm.
Banking Agencies Issue Proposed Rule to Lower Risk Weighting for Fannie, Freddie. On October 7, the federal banking agencies announced a notice of proposed rulemaking. The proposed rule would lower the risk weighting of claims on, or guaranteed by, the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) from 20% to 10%. The 10% risk weighting would continue while the U.S. Treasury provided financial support through senior preferred stock purchase agreements. Comments are due within 30 days following publication in the Federal Register, which is forthcoming. For a copy of the press release, please see http://www.federalreserve.gov/newsevents/press/bcreg/20081007a.htm. For a copy of the proposed rule, please see http://www.fdic.gov/news/news/press/2008/pr08095a.pdf.
New York Banking Department, FDIC Lift Cease and Desist Order. On October 1, the New York State Banking Department and the Federal Deposit Insurance Corporation jointly announced the lifting of a 2006 cease and desist issued upon consent with Bank of Tokyo-Mitsubishi UFJ Trust Company (Bank of Tokyo). The lifting of the order followed a determination that Bank of Tokyo had resolved issues regarding its Bank Secrecy Act and Anti-Money Laundering compliance programs. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2008/pr08089.html.
Consumer Finance
Ninth Circuit Allows Student Loan to Be Discharged in Bankruptcy Plan. The U.S. Court of Appeals for the Ninth Circuit has affirmed its prior opinion holding that a debtor’s student loan could be discharged in a Chapter 13 bankruptcy plan because the lender failed to object to the inclusion of the loan in the plan. Espinosa v. United Student Aid Funds, Inc., No. 06-16421, 2008 WL 4426634 (9th Cir. Oct. 2, 2008). In this case, the debtor filed a Chapter 13 proposed payment plan, which included $13,250 in student loans. The lender filed a proof of claim for $17,832. The court affirmed the plan with the lower amount, and the trustee mailed the creditor a notice of the plan and asked the creditor to notify the trustee of any disputes or objections within thirty days. The creditor did not object to or dispute the plan. The debtor successfully satisfied his repayment obligations under the plan, and the court granted a discharge. The student loan creditor subsequently began pursing the debtor for the unpaid portion of its alleged claim, and the debtor moved to hold the creditor in contempt for its alleged violation of the court’s order. The creditor then sought relief from the confirmation order, claiming that the order had been entered in violation of its rights because the debtor never made a showing of “undue hardship” in an adversarial proceeding, which is required to discharge student loans. The appeals court rejected the creditor’s argument, finding that, even though the debtor had not formally sought a specific judicial determination of undue hardship, the creditor had had sufficient notice of the inclusion of the reduced amount in the plan and had not objected to this inclusion. Therefore, the appeals court allowed the discharge to stand and precluded the creditor from pursing additional payments from the debtor. For a copy of the opinion, please see http://www.ca9.uscourts.gov/ca9/newopinions.nsf/C02E0422BA0DC94E882574D50080236B/$file/0616421.pdf.
Michigan Federal Court Holds PMSI Includes Financed Negative Equity. On October 3, the U.S. District Court for the Eastern District of Michigan held that the negative equity from a trade-in that was rolled into the financing for a new vehicle is part of the purchase money security interest (PMSI) protected from cram-down by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). In re Muldrew, No. 08-11866, 2008 WL 445879 (E.D. Mich. Oct. 3, 2008). The debtor in Muldrew traded in his car to purchase a new one, including in his new financing the unpaid balance – the negative equity – of the old car’s lien. The debtor filed for Chapter 13 bankruptcy two years later, excluding – “cramming-down” – the amount of the negative equity from the secured amount of the claim. The bankruptcy court held that the creditor did not have a PMSI in the new car to the extent that the negative equity resulting from the trade-in was financed. On appeal, the district court reversed. Following decisions from the Eleventh Circuit and a “recently emerg[ing]” majority of district courts, the court looked to the text and purpose of the BAPCPA, the prevailing commercial interpretation of PMSI, and the definitions of PMSI in the UCC and the Michigan Motor Vehicle Sales Finance Act, holding that a PMSI in the total outstanding balance on the purchase money loan, whether or not a portion of the financed amount resulted from negative equity from a previous trade-in, is part of the creditor’s secured claim. According to the court, “[f]inancing of negative equity bears a close nexus to the purchase of the new vehicle, the transaction is a package deal, and the financing of the negative equity is an integral part of and inextricably intertwined with the sales transaction” (internal quotations omitted). For a copy of the opinion, please see http://www.buckleykolar.com/documents/In_Re_Muldrew.pdf.
Ohio Federal Court Holds Debt Collector Not Liable Under FDCPA. On September 30, the U.S. District Court for the Northern District of Ohio granted in part and denied in part a motion for summary judgment filed by defendant Collection Consultants of California (CCC), a debt collection company, in a case in which the plaintiff alleged that she was financially harmed by CCC’s failure to remove disputed information from her credit report. Alarcon v. Transunion Marketing Solutions, No. 5:07 CV 0230, 2008 WL 4449387 (N.D. Ohio Sept. 30, 2008). In this case, the plaintiff, on several occasions, reported inaccuracies in her credit report to CCC. CCC assured the plaintiff that it would remove the disputed information but the disputed information subsequently remained on the plaintiff’s credit report. Among other items, the plaintiff claimed that CCC’s statements that it would remove the disputed information were false and/or misleading statements in violation of the Fair Debt Collection Practices Act (FDCPA). In ruling on CCC’s motion for summary judgment, the court held that CCC had not violated the FDCPA because CCC’s alleged false and/or misleading statements were made in response to the plaintiff’s requests to have the disputed information removed, and, thus, were not made “in connection with collection of a debt.” The court, however, denied CCC’s motion for summary judgment regarding the plaintiff’s claims under the Fair Credit Reporting Act, holding that there was a triable fact regarding whether CCC’s investigation of the plaintiff’s disputes was “reasonable.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/Alarcon_v_Transunion.pdf.
FTC Will Co-Host Free Public Workshop Regarding Personal Data Protection. On November 13, the Federal Trade Commission (FTC) will co-host a free public workshop entitled “Protecting Personal Information: Best Practices for Business.” The half-day workshop will feature presentations by experts on how businesses can best secure and protect the privacy of consumers and employees. The workshop is being offered following a recommendation by President Bush’s Identity Theft Task Force that federal agencies host regional seminars to promote to the private sector “the importance of safeguarding information, preventing and reporting data breaches, and assisting identity theft victims.” For more information, including registration details, please see http://www.ftc.gov/opa/2008/10/datasecwksp.shtm.
Securities
Treasury Announces Asset Manager Selection Procedures. On October 6, the U.S. Department of the Treasury (Treasury) announced procedures for selecting “securities asset managers” and “whole loan asset managers” for the portfolios of troubled assets, pursuant to the Emergency Economic Stabilization Act of 2008 (EESA). Securities asset managers will manage residential and commercial mortgage backed securities and collateralized debt obligations, while whole loan asset managers will manage a variety of residential and commercial loan products. The selection process, will involve a number of phases, from initial application to information sharing to face-to-face interviews. In its announcement, the Treasury reminded applicants that all selected asset managers will be financial agents of the United States, and not contractors, and therefore will have a fiduciary agent-principal relationship with the Treasury with a responsibility to protect the interests of the United States. In addition, under the authority grated by the EESA, private domestic financial institutions are eligible to be designated as financial agents of the United States. The Treasury expects to designate multiple asset managers and submanagers to obtain the proper expertise with different asset types and different segments of the mortgage credit market. For a copy of the press release, please see http://www.treas.gov/press/releases/reports/assetmanagers.pdf.
Treasury Solicits Services from Financial Institutions to Implement the Emergency Economic Stabilization Act of 2008. On October 6, the U.S. Department of the Treasury (Treasury) issued notices to financial institutions interested in providing (i) asset management services for a portfolio of troubled mortgage-related securities, (ii) asset management services for a portfolio of mortgage whole loans, and (iii) custodian, accounting, auction management, and other infrastructure services for a portfolio of troubled mortgage-related assets. The Treasury’s goal in obtaining services from eligible financial institutions in performing the foregoing tasks is to provide stability and prevent further disruption to the financial markets and banking system, ensure mortgage availability, and protect the interests of taxpayers. By acquiring, managing, and orderly liquidating the mortgage loans over time, the Treasury seeks to improve the capital positions of the financial institutions from which assets are acquired, improve liquidity and credit extension in the financial system, increase investor confidence, and provide market participants with more price transparency. Interested financial institutions meeting the organizational, service capacity, and other eligibility requirements specified in the notices were required to submit responses by October 8, 2008. For a copy of the notices, please see http://www.treasury.gov/initiatives/eesa/docs/notice_securities-asset-mgr.pdf, http://www.treasury.gov/initiatives/eesa/docs/notice_whole-loan-asset-mgr.pdf, and http://www.treasury.gov/initiatives/eesa/docs/notice_custodian-services.pdf.
New York Banking Department, FDIC Lift Cease and Desist Order. On October 1, the New York State Banking Department and the Federal Deposit Insurance Corporation jointly announced the lifting of a 2006 cease and desist issued upon consent with Bank of Tokyo-Mitsubishi UFJ Trust Company (Bank of Tokyo). The lifting of the order followed a determination that Bank of Tokyo had resolved issues regarding its Bank Secrecy Act and Anti-Money Laundering compliance programs. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2008/pr08089.html.
New York AG Reaches Auction Rate Securities Settlement with Bank of America, RBC. On October 8, New York Attorney General Andrew Cuomo reached a settlement with Bank of America (BOA) and Royal Bank of Canada (RBC) regarding claims that the banks misrepresented the liquidity risk of auction-rate securities (ARS) to investors. BOA agreed to buyback ARS from (i) all retail customers, (ii) small businesses with less than $15 million on deposit, and (iii) charities with less than $25 million on deposit. RBC agreed to buyback ARS from (i) individual customers, (ii) charities, non-profits and government entities with less than $25 million on deposit, and (ii) all other entities with less than $10 million on deposit. The settlement also requires the banks to (i) reimburse all retail investors who sold ARS at a discount after the market failed, (ii) consent to a special, public arbitration procedure to resolve claims of consequential damages suffered by retail investors as a result of not being able to access their funds, (iii) expeditiously provide liquidity solutions to all other institutional investors, and (iv) reimburse all refinancing fees to any municipal issuers that issued ARS through these firms since August 1, 2007. In addition, BOA will pay civil penalties in the amount of $50 million, and RBS will pay civil penalties in the amount of $9.8 million. The New York Attorney General’s investigation continues against other market participants. For a copy of the press release announcing the settlement, please see http://www.oag.state.ny.us/media_center/2008/oct/oct8a_08.html.
Litigation
Ninth Circuit Allows Student Loan to Be Discharged in Bankruptcy Plan. The U.S. Court of Appeals for the Ninth Circuit has affirmed its prior opinion holding that a debtor’s student loan could be discharged in a Chapter 13 bankruptcy plan because the lender failed to object to the inclusion of the loan in the plan. Espinosa v. United Student Aid Funds, Inc., No. 06-16421, 2008 WL 4426634 (9th Cir. Oct. 2, 2008). In this case, the debtor filed a Chapter 13 proposed payment plan, which included $13,250 in student loans. The lender filed a proof of claim for $17,832. The court affirmed the plan with the lower amount, and the trustee mailed the creditor a notice of the plan and asked the creditor to notify the trustee of any disputes or objections within thirty days. The creditor did not object to or dispute the plan. The debtor successfully satisfied his repayment obligations under the plan, and the court granted a discharge. The student loan creditor subsequently began pursing the debtor for the unpaid portion of its alleged claim, and the debtor moved to hold the creditor in contempt for its alleged violation of the court’s order. The creditor then sought relief from the confirmation order, claiming that the order had been entered in violation of its rights because the debtor never made a showing of “undue hardship” in an adversarial proceeding, which is required to discharge student loans. The appeals court rejected the creditor’s argument, finding that, even though the debtor had not formally sought a specific judicial determination of undue hardship, the creditor had had sufficient notice of the inclusion of the reduced amount in the plan and had not objected to this inclusion. Therefore, the appeals court allowed the discharge to stand and precluded the creditor from pursing additional payments from the debtor. For a copy of the opinion, please see http://www.ca9.uscourts.gov/ca9/newopinions.nsf/C02E0422BA0DC94E882574D50080236B/$file/0616421.pdf.
California Federal Court Upholds TILA Claims; Dismisses Rescission Remedy. On September 30, a California federal district court upheld several TILA claims in response to a defendant lender’s motion to dismiss. Plascencia v. Lending 1st Mortgage, No. 07-4485 CW, 2008 WL 1902698 (N.D. Cal. Sept. 30, 2008). In this case, borrowers brought suit against Lending 1st Mortgage (Lending 1st) and EMC Mortgage Corp (EMC) for violations of, among other items, the Truth in Lending Act (TILA), the California Unfair Competition Law (UCL) and common law fraud and breach of contract, stemming from an Option Adjustable Rate Mortgage (ARM) loan the borrowers obtained from Lending 1st, which ECM subsequently bought and securitized. The plaintiffs’ loan included a low teaser rate that resulted in negative amortization of the loan principal, and the plaintiffs claimed that (i) the loan disclosures were inadequate to inform them of the actual interest rate, (ii) the teaser rate was a discounted rate, and (iii) negative amortization of the loan was a certainty under the payment plan. EMC moved to dismiss the claims, which the court granted in part and dismissed in part. The court dismissed the plaintiffs’ claims for rescission of the loan, agreeing with EMC’s argument, based upon Ninth Circuit precedent, that rescission is unavailable as a remedy because the plaintiffs already refinanced, and therefore paid off, the loan. The court rejected the argument that rescission is a remedy, even in the face of refinancing, because during the consideration and passage of the 1995 amendments to TILA, Congress considered, but ultimately did not include, a provision to cut off the rescission remedy for homeowners who refinance the loan. The court held that the failure to pass a particular legislative provision was not conclusive proof of Congressional intent. However, the court refused to dismiss the plaintiffs’ other claims. First, the defendants argued that the TILA claims should be dismissed because the statute of limitations expired. The court held that, although the action was not filed until more than a year after the loan was consummated, the equitable tolling doctrine applied because the plaintiffs could not discover the violations until after they began receiving their statements and realized that the principal was increasing rather than decreasing. Second, the court refused to dismiss the UCL claims. EMC argued that it could not be liable under UCL because the statute does not impose vicarious liability and because the UCL claims were preempted by TILA. The court disagreed, stating that EMC could be liable as an “aidor and abettor of the principal violator” if the plaintiffs could prove that EMC continued to purchase and securitize Lending 1st option ARM loans with knowledge of the TILA violations. The court also rejected EMC’s argument that the UCL’s longer statute of limitations (4 years) is inconsistent and therefore preempted by TILA, holding that the preemption provisions of TILA apply only to “inconsistencies in the substance of state disclosure requirements,” and, therefore, the UCL provisions simply provide additional, not inconsistent, protection for consumers. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Plascencia_v_Lending.pdf.
Pennsylvania Federal Court Finds Plaintiffs Lack Standing to Bring RESPA Claim. On September 29, the U.S. District Court for the Eastern District of Pennsylvania granted the defendants’ motion to dismiss a putative class action suit alleging violations of Section 8 of the Real Estate Settlement Procedure Act (RESPA), finding that the plaintiffs did not have standing to invoke the court’s jurisdiction because the defendants’ alleged RESPA violation did not result in the plaintiffs paying an inflated rate for private mortgage insurance. Alston v. Countrywide Fin. Corp., No. 07-3508, 2008 WL 4444243 (E.D. Pa. Sept. 29, 2008). The plaintiffs obtained their mortgage loans through defendants Countrywide Financial Corporation and Countrywide Home Loans, Inc. (Countrywide) and their private mortgage insurance policies were subject to captive reinsurance arrangements with defendant Balboa Reinsurance Company (Balboa), an affiliate and subsidiary of Countrywide. The plaintiffs alleged that the risk that Balboa assumed was not commensurate with the premiums that it received and constituted disguised kickbacks paid to Countrywide in exchange for the referral of primary mortgage business, in violation of Section 8 of RESPA. They further alleged that, (i) as a result of the alleged kickbacks, their monthly mortgage insurance premiums were artificially inflated, and (ii) RESPA provides for statutory damages when providers receive kickbacks for purchased settlement services. The court held that the mortgage insurance rates that the plaintiffs paid were per se reasonable in Pennsylvania. The court reasoned, under the filed rate doctrine, that the plaintiffs paid the only legal rate they could have paid for mortgage insurance in Pennsylvania, regardless of how the defendants may have distributed the mortgage insurance premiums the plaintiffs paid. The court further found that, where the plaintiffs had not been overcharged because of any illegal kickback or fee splitting, RESPA’s statutory damages provision does not authorize the plaintiffs to sue for damages. Citing several cases in various jurisdictions, the court acknowledged that there is considerable disagreement among federal courts that have addressed this issue. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Collier_v_Countrywide.pdf.
Illinois Federal Court Holds Refinancing Does Not Affect Rescission Rights Under TILA. On September 30, the U.S. District Court for the District of Northern Illinois held that, under the Truth in Lending Act (TILA), a borrower’s right of rescission outlives the refinancing of the loan. Hubbard v. Ameriquest Mortgage Co., No. 05-CV-389, 2008 WL 4449888 (N.D. Ill. Sept. 30, 2008). In this case, Ameriquest Mortgage Corporation (Ameriquest) provided the plaintiff with a loan containing a TILA disclosure statement that failed to disclose all of the scheduled due dates for payments. As a result, the plaintiff sued to rescind the contract under 15 U.S.C. § 1635(a). The suit for rescission involved not only Ameriquest, as the initial creditor, but also Deutsche Bank, an assignee of the loan, and AMC Mortgage Services (AMC), the loan’s servicer. AMC was ultimately dismissed from the case, because, as a servicer, it could not be liable for rescission under TILA because it did not own the underlying obligation or possessed an interest in it. Ameriquest and Deutsche Bank, as the remaining defendants, argued that the plaintiff’s right to rescind the contract ended when he refinanced the loan. The court rejected this argument, stating that Regulation Z enumerates only two specific ways to extinguish a borrower’s right to rescind: (i) complete transfer of interest in the property, (ii) or the sale of the property. See 12 C.F.R. § 226.23(a)(3). Based on this plain reading of the statute, the court held that the right of rescission remained available even after the subject loan has been completely paid off. As an additional defense, Deutsche Bank contended that it was not liable for rescission because the plaintiff did not provide it with notice of his intent to rescind within the three year time limit established by § 1635. However, the court rejected this argument. Examining § 1635, the court noted that the statute grants an obligor a right to rescind by notifying a “creditor” of his intention to do so, however, the statutory definition of creditor does not include subsequent assignees of the loan. As a result, the plaintiff was not a “creditor” required to provide Deutsche Bank with a “timely notice” as required by TILA. Denying both Ameriquest’s and Deutsche Bank’s defenses, the court rescinded the agreement and held both banks liable for any interest and fees paid to them by the plaintiff. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Hubbard_v_Ameriquest.pdf.
Michigan Federal Court Holds PMSI Includes Financed Negative Equity. On October 3, the U.S. District Court for the Eastern District of Michigan held that the negative equity from a trade-in that was rolled into the financing for a new vehicle is part of the purchase money security interest (PMSI) protected from cram-down by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). In re Muldrew, No. 08-11866, 2008 WL 445879 (E.D. Mich. Oct. 3, 2008). The debtor in Muldrew traded in his car to purchase a new one, including in his new financing the unpaid balance – the negative equity – of the old car’s lien. The debtor filed for Chapter 13 bankruptcy two years later, excluding – “cramming-down” – the amount of the negative equity from the secured amount of the claim. The bankruptcy court held that the creditor did not have a PMSI in the new car to the extent that the negative equity resulting from the trade-in was financed. On appeal, the district court reversed. Following decisions from the Eleventh Circuit and a “recently emerg[ing]” majority of district courts, the court looked to the text and purpose of the BAPCPA, the prevailing commercial interpretation of PMSI, and the definitions of PMSI in the UCC and the Michigan Motor Vehicle Sales Finance Act, holding that a PMSI in the total outstanding balance on the purchase money loan, whether or not a portion of the financed amount resulted from negative equity from a previous trade-in, is part of the creditor’s secured claim. According to the court, “[f]inancing of negative equity bears a close nexus to the purchase of the new vehicle, the transaction is a package deal, and the financing of the negative equity is an integral part of and inextricably intertwined with the sales transaction” (internal quotations omitted). For a copy of the opinion, please see http://www.buckleykolar.com/documents/In_Re_Muldrew.pdf.
First Circuit Vacates $750,000 Judgment Against Mortgage Lender. On October 3, U.S. Court of Appeals for the First Circuit vacated a $750,000 judgment against Ameriquest Mortgage Company (Ameriquest) in a Chapter 13 bankruptcy proceeding. In re Nosek, Nos. 07-2173, 07-2174, 2008 WL 4445707 (1st Cir. Oct. 3, 2008). The Bankruptcy Court for the District of Massachusetts concluded that Ameriquest violated 11 U.S.C. § 1322(b), which sets forth the permitted elements of a debtor’s Chapter 13 bankruptcy plan. Under the plan, the debtor was required to pay her pre-petition arrears over 60 months while continuing to make regular payments on her mortgage. Ameriquest’s computerized accounting system applied any mortgage payment received to the oldest obligation due. If the amount received did not meet the amount due on a single payment, the funds were placed in a suspense account until enough money was collected to satisfy a payment. The debtor sued Ameriquest after receiving an allegedly inaccurate payment history. According to the bankruptcy court, Ameriquest violated § 1322(b) by failing to distinguish between the debtor’s pre-petition and post-petition payments and promptly credit the debtor’s account from the suspense account. The bankruptcy court awarded the debtor $250,000 in emotional distress damages and $500,000 in punitive damages, and the district court affirmed the award. The First Circuit, however, vacated the bankruptcy court’s judgment, reasoning that § 1322(b) “does not impose any specific duties on a lender,” but “merely lists elements that a Chapter 13 debtor may include in her plan.” In addition, the court found that the debtor’s plan did not specify how payments should be accounted for, and held that, even if the payment history could have been construed as a threat to the debtor’s cure rights, the proper response would have been to amend the Chapter 13 plan. For a copy of the opinion, please see http://www.ca1.uscourts.gov/pdf.opinions/07-2173P-01A.pdf.
Ohio Federal Court Holds Debt Collector Not Liable Under FDCPA. On September 30, the U.S. District Court for the Northern District of Ohio granted in part and denied in part a motion for summary judgment filed by defendant Collection Consultants of California (CCC), a debt collection company, in a case in which the plaintiff alleged that she was financially harmed by CCC’s failure to remove disputed information from her credit report. Alarcon v. Transunion Marketing Solutions, No. 5:07 CV 0230, 2008 WL 4449387 (N.D. Ohio Sept. 30, 2008). In this case, the plaintiff, on several occasions, reported inaccuracies in her credit report to CCC. CCC assured the plaintiff that it would remove the disputed information but the disputed information subsequently remained on the plaintiff’s credit report. Among other items, the plaintiff claimed that CCC’s statements that it would remove the disputed information were false and/or misleading statements in violation of the Fair Debt Collection Practices Act (FDCPA). In ruling on CCC’s motion for summary judgment, the court held that CCC had not violated the FDCPA because CCC’s alleged false and/or misleading statements were made in response to the plaintiff’s requests to have the disputed information removed, and, thus, were not made “in connection with collection of a debt.” The court, however, denied CCC’s motion for summary judgment regarding the plaintiff’s claims under the Fair Credit Reporting Act, holding that there was a triable fact regarding whether CCC’s investigation of the plaintiff’s disputes was “reasonable.” For a copy of the opinion, please see http://www.buckleykolar.com/documents/Alarcon_v_Transunion.pdf.
Ohio Federal Court Finds E-Mails Purposefully Availed Defendant to Forum State. On September 29, the U.S. District Court for the Southern District of Ohio held that an online-marketing business that sent over 900 emails to an individual in Ohio over the course of approximately 16 month purposefully availed itself to specific personal jurisdiction in Ohio. Ferron v. e360 Insight, et al., No. 07-1193, 2008 WL 4411516 (S.D. Ohio Sept. 29, 2008). In this case, the defendant allegedly sent over 900 emails containing deceptive email advertisements to the plaintiff; the plaintiff subsequently filed suit. In order to establish specific personal jurisdiction over the defendant, the court relied upon the three-part personal jurisdiction test from Southern Mach. Co. v. Mohasco Indus., Inc., 401 F.2d 374, 376 n.2 (6th Cir. 1968). The court held that the defendants "knew or reasonably should have known" that the emails would be received by "individuals in other states through servers located in other states," including Ohio. Relying on precedent, the court stated "[a] number of courts ... have found that sending numerous emails to a recipient in a forum state satisfies the purposeful availment requirement." The court further held that the cause of action arose out of the defendant’s activity – sending emails to the plaintiff – and that Ohio has an interest in protecting its residents against deceptive emails from out-of-state. As a result, the court denied the defendant’s motion to dismiss for lack of personal jurisdiction. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Ferron_v_E360.pdf.
E-Financial Services
Ohio Federal Court Finds E-Mails Purposefully Availed Defendant to Forum State. On September 29, the U.S. District Court for the Southern District of Ohio held that an online-marketing business that sent over 900 emails to an individual in Ohio over the course of approximately 16 month purposefully availed itself to specific personal jurisdiction in Ohio. Ferron v. e360 Insight, et al., No. 07-1193, 2008 WL 4411516 (S.D. Ohio Sept. 29, 2008). In this case, the defendant allegedly sent over 900 emails containing deceptive email advertisements to the plaintiff; the plaintiff subsequently filed suit. In order to establish specific personal jurisdiction over the defendant, the court relied upon the three-part personal jurisdiction test from Southern Mach. Co. v. Mohasco Indus., Inc., 401 F.2d 374, 376 n.2 (6th Cir. 1968). The court held that the defendants "knew or reasonably should have known" that the emails would be received by "individuals in other states through servers located in other states," including Ohio. Relying on precedent, the court stated "[a] number of courts ... have found that sending numerous emails to a recipient in a forum state satisfies the purposeful availment requirement." The court further held that the cause of action arose out of the defendant’s activity – sending emails to the plaintiff – and that Ohio has an interest in protecting its residents against deceptive emails from out-of-state. As a result, the court denied the defendant’s motion to dismiss for lack of personal jurisdiction. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Ferron_v_E360.pdf.
Latest Version of PCI DSS Released. On October 1, the Payment Card Industry Security Standards Council released the latest version of the Payment Card Industry Data Security Standard (PCI DSS). The PCI DSS is a set of data security standards for the processing of payment card transactions and the acceptance of credit or debit card payments. The latest version mainly “clarifies” and “enhances” the prior version of the standard. For a copy of the summary of changes, please see https://www.pcisecuritystandards.org/pdfs/pci_dss_summary_of_changes_v1-2.pdf.
FTC Will Co-Host Free Public Workshop Regarding Personal Data Protection. On November 13, the Federal Trade Commission (FTC) will co-host a free public workshop entitled “Protecting Personal Information: Best Practices for Business.” The half-day workshop will feature presentations by experts on how businesses can best secure and protect the privacy of consumers and employees. The workshop is being offered following a recommendation by President Bush’s Identity Theft Task Force that federal agencies host regional seminars to promote to the private sector “the importance of safeguarding information, preventing and reporting data breaches, and assisting identity theft victims.” For more information, including registration details, please see http://www.ftc.gov/opa/2008/10/datasecwksp.shtm.
Privacy/Data Security
Latest Version of PCI DSS Released. On October 1, the Payment Card Industry Security Standards Council released the latest version of the Payment Card Industry Data Security Standard (PCI DSS). The PCI DSS is a set of data security standards for the processing of payment card transactions and the acceptance of credit or debit card payments. The latest version mainly “clarifies” and “enhances” the prior version of the standard. For a copy of the summary of changes, please see https://www.pcisecuritystandards.org/pdfs/pci_dss_summary_of_changes_v1-2.pdf.
FTC Will Co-Host Free Public Workshop Regarding Personal Data Protection. On November 13, the Federal Trade Commission (FTC) will co-host a free public workshop entitled “Protecting Personal Information: Best Practices for Business.” The half-day workshop will feature presentations by experts on how businesses can best secure and protect the privacy of consumers and employees. The workshop is being offered following a recommendation by President Bush’s Identity Theft Task Force that federal agencies host regional seminars to promote to the private sector “the importance of safeguarding information, preventing and reporting data breaches, and assisting identity theft victims.” For more information, including registration details, please see http://www.ftc.gov/opa/2008/10/datasecwksp.shtm.