InfoBytes, October 16, 2009
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Litigation
- Privacy/Data Security
Federal Issues
OTS Revises Regulation C Reporting Procedures to Reflect HMDA Amendments. On October 15, the Office of Thrift Supervision (OTS) updated its examination procedures to address revised Regulation C reporting requirements for higher-priced loans under the Home Mortgage Disclosure Act (HMDA). Under the revised requirements, lenders are required to establish procedures for collecting the rate spread between each loan’s annual percentage rate (APR) and the “average prime offer rate” (APOR) for comparable transactions at the time the interest rate is set. The APOR is a survey-based estimate of APRs currently offered on prime mortgage loans and can be found on the Federal Financial Institutions Examination Council (FFIEC) website entitled “Average Prime Offer Rate Tables.” Lenders must also report when the rate spread between the APR and APOR is equal to or exceeds 1.5% for first-lien loans and 3.5% for subordinate-lien loans. Finally, the OTS reminds OTS-regulated institutions that institutions must continue to have a system for tracking rate lock dates and rate spread calculations. The revision applies to loans taken on or after October 1, 2009 and that are closed by January 1, 2010. For a copy of the OTS memorandum, please see http://files.ots.treas.gov/25323.pdf. For a copy of the regulatory bulletin, please see http://files.ots.treas.gov/74863.pdf.
FinCEN Issues Advisory to Financial Institutions Regarding the Filing of Suspicious Activity Reports for TARP-Related Programs. On October 14, the Financial Crimes Enforcement Network (FinCEN) issued an advisory that guides financial institutions on how to file Suspicious Activity Reports (SARs) for activities potentially related to the federal government’s Troubled Asset Relief Program (TARP). The advisory requests that, when financial institutions submit SARs, they check the appropriate box to indicate the type of suspicious activity and include the term “SIGTARP” in the narrative portion of the SAR. Additionally, the advisory reminds financial institutions that the Suspect/Subject Information Section of the SAR should include all available information for each party suspected of engaging in a suspicious activity (e.g., a party’s name, address, phone number, etc.). In addition to technical advice on how to file reports, the advisory also counsels financial institutions on how to recognize suspicious TARP-related transactions. For example, the guidance provides that financial institutions should utilize Customer Identification Programs and Anti-Money Laundering Programs to aid in (i) identifying customers who qualify for TARP-related program funding, (ii) anticipating the types of TARP-related transactions that may be conducted by such customers, and (iii) identifying any suspicious activity attempted by these customers in the context of any TARP- related transactions. Finally, the guidance advises financial institutions to avail themselves of public information, such as wire transactions involving Capital Purchase Program-funded banks or Public Private Investment Program Fund Managers, to help identify TARP-related transactions. For a copy of the guidance, please see http://www.fincen.gov/statutes_regs/guidance/pdf/fin-2009-a006.pdf.
FinCEN Expands Outreach Program to Small, Medium Sized Financial Institutions. On October 13, the Financial Crimes Enforcement Network (FinCEN) announced a new outreach program for financial institutions with assets under $5 billion. Through the program, FinCEN hopes to gain insight into how small and medium sized financial institutions comply with the four key components of the Bank Secrecy Act’s regulatory regime: program requirements, designation of a compliance officer, training, and independent audit. Participation in the outreach program is completely voluntary and is open to all qualifying U.S. depository institutions. Depository institutions interested in participating in the program must notify FinCEN by November 30, 2009. FinCEN plans to select at least 15 institutions that provide a representative cross-section of depository institutions with assets under $5 billion. For a copy of the press release, please see http://www.fincen.gov/news_room/nr/pdf/20091013a.pdf.
Freddie Mac Announces New Pilot Program for Warehouse Lines of Credit. On October 9, Freddie Mac announced a new pilot program to help lenders, in particular single and multi-family lenders, obtain warehouse lines of credit with participating warehouse lenders. Under the pilot program, Freddie Mac will provide participating warehouse lenders with standby commitments to purchase qualifying loans should the seller or servicer fail or otherwise not meet its contract obligations. According to Freddie Mac, pre-funding reviews are required and normal Freddie Mac purchase and origination processes and procedures apply to the program. For a copy of the press release, please see http://www.freddiemac.com/news/archives/corporate/2009/20091009_warehouse-lender.html.
FDIC Updates FAQs for Temporary Liquidity Guarantee Program. On October 13, the Federal Deposit Insurance Corporation updated its Frequently Asked Questions (FAQs) for the Temporary Liquidity Guarantee Program (TLGP). The FAQs generally address eligibility requirements, disclosure requirements, coverage of deposits, coverage of debt, debt guarantee limits, fees and costs, opting out of the program, and accessing TLGP transactions in FDICconnect. For a copy of the revised FAQs, please see http://www.fdic.gov/regulations/resources/TLGP/faq.html.
State Issues
California Enacts SAFE Act Legislation. On October 11, California Governor Arnold Schwarzenegger signed into law S.B. 36, a bill that requires the employees of licensees under the California Finance Lenders Law (CFLL) and the California Residential Mortgage Lending Act (RMLA) that are engaged in the business of mortgage loan origination to be licensed, beginning July 1, 2010. The bill similarly requires licensees under the California Real Estate Law (REL) to obtain an endorsement from the Commissioner of the California Department of Real Estate to engage in the business of mortgage loan origination, beginning December 1, 2010. Mortgage loan originator license and endorsement applicants are required to, among other things, (i) submit to fingerprinting for the purpose of a criminal history background check, (ii) complete at least twenty hours of pre-license education, and (iii) pass a qualified written test developed by the Nationwide Mortgage Licensing System (NMLS). The bill further provides that licensed mortgage loan originators must complete at least eight hours of continuing education annually and must disclose their NMLS identifier on all residential mortgage loan application forms, solicitations, and advertisements. The bill also enacts other related provisions, such as requiring REL licensees to submit an annual business activities report to the Commissioner of the California Department of Real Estate. For a copy of S.B. 36, please see http://www.buckleysandler.com/CA_SB36_2009.pdf.
California Passes Slate of Mortgage Laws. On October 11, in addition to S.B. 36, California Governor Arnold Schwarzenegger signed into law a collection of bills designed to protect the interests of California homebuyers.
• A.B. 260, among other things, (i) prohibits “steering” borrowers into higher-priced loans that are more risky than lower-interest, fixed-rate loans for which the borrower had actually qualified, (ii) bans negative amortization loans where the loan gets larger the longer the borrower holds the loan, and (iii) establishes strict caps on prepayment penalties. A.B. 260 also imposes a fiduciary duty for all mortgage brokers and banks acting as mortgage brokers, and prohibits lenders and brokers from making false or misleading statements relative to the terms of a subprime loan. For a copy of A.B. 260, please see http://www.buckleysandler.com/CA_AB260_2009.pdf.
• A.B. 329 requires reverse mortgage lenders to provide additional, clear information to senior consumers interested in reverse mortgage products. Among its specific provisions are requirements that a lender provide a prospective borrower with (i) a list of at least ten HUD-approved reverse mortgage counseling agencies, and (ii) a written checklist of issues to discuss with the reverse mortgage counselor. For a copy of A.B. 329, please see http://www.buckleysandler.com/CA_AB329_2009.pdf.
• A.B. 957 prohibits the seller of certain foreclosed residential real property from conditioning the sale of such property on a buyer’s purchase of title insurance from a particular insurer or title company and/or escrow services from a particular provider. The bill took immediate effect, and remains in effect until January 15, 2015. For a copy of A.B. 957, please see http://www.buckleysandler.com/CA_AB957_2009.pdf.
• A.B. 1160 provides that a lender that negotiates a mortgage loan primarily in Spanish, Chinese, Tagalog, Vietnamese, or Korean is required to deliver to the borrower a specified form in that same language. The form, to be created by the Department of Corporations and the Department of Financial Institutions, will provide a summary of the terms of the loan contract or agreement. A.B. 1160 becomes effective July 1, 2010, or 90 days after the Department of Corporations and the Department of Financial Institutions create the specified form, whichever is later. For a copy of A.B. 1160, please see http://www.buckleysandler.com/CA_AB1160_2009.pdf.
• S.B. 237 requires appraisal management companies to register with the California Office of Real Estate Appraisers, and provides that an appraisal management company is prohibited from improperly influencing or attempting to improperly influence an appraisal. For a copy of S.B. 237, please see http://www.buckleysandler.com/CA_SB237_2009.pdf.
• S.B. 239 makes it a felony to commit fraud in connection with a mortgage loan application, where the value of the fraud meets the threshold for grand theft under California law (currently, $400). For a copy of S.B. 239, please see http://www.buckleysandler.com/CA_SB239_2009.pdf.
Courts
California Federal Court Denies Motion to Dismiss RESPA Lawsuit. On September 18, the U.S. District Court for the Eastern District of California denied a defendant’s motion for judgment on the pleadings in a case alleging violations of the Real Estate Settlement Procedures Act (RESPA), finding that the reinsurance of private mortgage insurance (PMI) may be part of a RESPA violation and that borrowers need not always show an overcharge to establish standing to sue under RESPA. Munoz v. PHH Corp., No. Civ. 08075, 2009 WL 3048909 (E.D. Cal. Sept. 18, 2009). In Munoz, the defendant lender made mortgage loans to the borrowers and required private mortgage insurance in connection with the loans. The borrowers alleged that the mortgage insurer pooled the insurance contracts and reinsured them with an insurance company subsidiary of the lender in exchange for a portion of the monthly insurance premiums. The borrowers further alleged that, under this reinsurance arrangement, the insurance company subsidiary assumed little, if any, risk and that the arrangement operated instead to provide the lender with a referral fee in violation of RESPA. The company argued that reinsurance of PMI occurs post-settlement and is not covered under RESPA, that the borrowers were barred from challenging the reasonableness of the rates because they were filed with and approved by the relevant regulations (the so-called “filed rate” doctrine), and that the borrowers would lack standing absent an allegation that they were actually overcharged. With respect to the reach of RESPA, the court stated that “[p]laintiffs allege that PHH received a referral fee for directing PMI business to certain providers. The reinsurance is only the means by which the alleged fee is transferred; the PMI itself is the settlement service at issue.” The court further held that the filed rate doctrine was inapplicable given that the borrowers were not challenging the PMI premium rates, but rather alleging an unfair business practice. With respect to the borrowers’ standing, the court found that allegations of actual overcharging are not required to establish standing under RESPA. For a copy of the opinion, please see http://www.buckleysandler.com/Munoz_v_PHH.pdf.
New York Federal Court Finds Defendants May Assert TILA Tolerance for Accuracy Defense; HOLA Preempts Certain State Law Claims. On September 29, in a certified class action, the U.S. District Court for the Eastern District of New York, in deciding cross-motions for summary judgment, granted, in part, the defendants’ motion for summary judgment, holding, among other things, that the defendants, originators and purchasers of residential mortgage loans, were or would be entitled to TILA’s tolerance for accuracy defense regarding the calculation of certain fees and that certain of state law claims brought by the class were preempted by the Home Owners’ Loan Act (HOLA) and its implementing regulations. McAnaney v. Astoria Fin. Corp., No. 04-cv-1101, 2009 WL 3150430 (E.D.N.Y. Sept. 29, 2009).
The class in McAnaney alleged, among other things, that the defendants violated TILA by failing to disclose as finance charges several fees that were “necessary to satisfy” the subject loans. The defendants sought summary judgment on the class plaintiffs’ TILA claims, arguing that an “Atty Doc Prep Fee” was properly disclosed to the class plaintiffs and that all other fees at issue – even assuming those fees should have been included in the finance charge – were within TILA’s $100 tolerance for accuracy. The class plaintiffs, in their motion for summary judgment, countered by arguing, among other things, that the accuracy tolerance threshold (i) does not bar a TILA claim regarding undisclosed finance charges, (ii) only applies to unintentional finance charge omissions, and (iii) does not apply to omissions of entire components of the finance charge. Although the court denied the defendants’ motion for summary judgment as to the class plaintiffs’ TILA claims, finding that the question of whether the Atty Doc Prep Fee was properly disclosed was a disputed issue of material fact, it observed that, to the extent that fee is found to have been properly disclosed, the defendants, as with the other fees at issue, could invoke the benefit of TILA’s accuracy tolerance defense. In this regard, the court rejected each of the class plaintiffs’ arguments regarding TILA’s accuracy tolerance threshold, holding that TILA (i) explicitly provides that errors in the finance charge that do not exceed $ 100 shall be “treated as accurate,” (ii) does not include a “motive requirement,” and (iii) applies “even if entire components of the finance charge are omitted, so long as the total variance is less than $ 100.”
As to the class plaintiffs’ state statutory and common law claims, the court granted summary judgment to the defendants, who argued that HOLA preempted them. The court held that certain state law claims were preempted while others were not. More specifically, the court held that the class plaintiffs’ claim under § 274-a of the New York Real Property Law—which entitles an owner of real property that is encumbered by a mortgage to receive, upon demand, payoff statements at no charge—was preempted because it imposes a substantive limit on federal savings associations’ ability to charge “[l]oan-related fees.” The court also held that the class plaintiffs’ claim under § 1921 of the New York Real Property Actions & Proceedings Law—which provides that “’[a]fter payment of authorized principal, interest, and any other amounts due . . . a mortgagee of real property . . . must execute and acknowledge . . . a satisfaction of mortgage’ which is to be recorded.”— was preempted because the statute “imposes a substantive, affirmative requirement on lenders to complete the satisfaction of a mortgage within a specific time frame, a requirement that, when applied to federal savings associations, directly impacts their lending activities, particularly with respect to the processing and servicing of mortgages….” The court held that the class plaintiffs’ claims for unjust enrichment and fraud were not preempted because, in this context, the claims did not “impose specific substantive standards which more than incidentally affect lending operations.”
With regard to the remaining claims, the court rejected, in whole or in part, the defendants’ preemption arguments. In particular, the court held that the class plaintiffs’ breach of contract claim was not preempted because requiring lenders to comply with their contractual obligations “does not seek to impose specific substantive requirements upon the operations of defendants, apart from compliance with specific contractual obligations.” The court also held that the class plaintiffs’ claim under New York General Business Law § 349—which prohibits “[d]eceptive acts or practices in the conduct of any business, trade or commerce or in furnishing of any service in this state”— was not preempted “to the extent that plaintiffs seek relief for deceptive acts and practices incident to the alleged breach of the mortgage agreements with defendants,” but was preempted, to the extent the claim was based on an alleged violation of the New York Real Property Law and New York Real Property Actions & Proceedings Law. Accordingly, as to these claims, the court denied both the defendants and the class plaintiffs’ motions for summary judgment. For a copy of the opinion, please see http://www.buckleysandler.com/McAnaney_v_Astoria.pdf.
New Jersey Bankruptcy Court Finds Borrower Entitled to Rescission Under TILA; Rejects Preemption of State Law Claims. On September 17, the U.S. Bankruptcy Court for the District of New Jersey held that a borrower was entitled under the Truth in Lending Act (TILA) to the rescission, in part, of a refinanced mortgage loan and that the National Bank Act (NBA) and Office of the Comptroller of the Currency regulations did not preempt the relevant New Jersey fraud and consumer protection laws. Orr v. Ameriquest Mortg. Co., Case No. 07-22759, 2009 WL 3030125 (Bankr.D.N.J. Sept. 17, 2009). In Orr, the borrower refinanced two mortgages with the defendant lender; the lender’s assignee subsequently filed foreclosure proceedings against the borrower. After the borrower filed for bankruptcy, the borrower and the borrower’s trustee filed suit against the defendants, alleging violations of TILA and New Jersey state fraud and consumer protection laws. The plaintiffs alleged that material disclosures in connection with one of the mortgage loans were inaccurate because they did not correctly state the borrower’s finance charge, including recording fees. Regarding the TILA claim, the court first found that the TILA action was timely under equitable principles because the borrower’s bankruptcy filing stayed the foreclosure and prevented the borrower from asserting recoupment of TILA damages as an affirmative defense to the foreclosure action. The court next found that the stated recording fees provided to the borrower fell outside of TILA’s tolerance for accuracy provision and relied on the Federal Reserve Board’s Official Staff Interpretation to Regulation Z to determine that the borrower was entitled to rescission of the new money advanced for the refinancing as well as any amounts paid by the borrower as part of the refinancing. The court, thus, found for the plaintiffs regarding the rescission of the borrower’s settlement and interest charges. The court, however, did not find for the plaintiffs on the narrow issue of whether other contested amounts were paid “as part of” the refinancing. Regarding the state law claims, the defendants argued that the NBA preempted the state law claims because the assignee of the mortgage is a national bank. The court held that the bank failed to establish that the state law at issue conflicts “with the letter or the general purposes of the NBA,” and that “engaging in fraudulent lending practices is not an express or incidental power granted to federal banks.” The court also held that TILA did not preempt the state law claims against defendants, nor did TILA’s assignee liability provisions entitle defendants to summary judgment. For a copy of the opinion, please contact .
Eleventh Circuit Holds Answering Machine Messages by Debt Collector Not Entitled to FDCPA Bona Fide Error Defense. On October 14, the U.S. Court of Appeals for the Eleventh Circuit held that the bona fide error defense in the Fair Debt Collection Practices Act (FDCPA) does not cover an instance where the debt collector violates one provision of the FDCPA to avoid violating a different provision of the FDCPA. Edwards v. Niagara Credit Solutions, Inc., No. 08-17006, 2009 WL 3273300 (11th Cir. Oct. 14, 2009). In the case, Niagara Credit Solutions (Niagara) left numerous messages on the plaintiff’s answering machine to collect on a debt, each of which intentionally omitted (i) Niagara’s name, (ii) that they were a debt collector, and (iii) that the call had been made to collect a debt—all in violation of § 1692e(11). Niagara stated that this was done intentionally to avoid violating § 1692c(b), which forbids a debt collector from communicating about the debt with a third party, out of concern that, for example, the message could be played or heard by a family member or roommate. On appeal of a summary judgment ruling in favor of the plaintiff, Niagara argued that their violation is protected by the bona fide error defense. The Eleventh Circuit disagreed, finding that Niagara could not meet at least two of the three prongs of the defense, including (i) that the violation was not intentional and (ii) that the error was “bona fide”. The court noted that Niagara admitted that it intentionally omitted the information from the messages, which clearly did not meet the first prong. It also said that it was not a “bona fide error” because it was unreasonable to violate the FDCPA “with every message it left in order to avoid the possibility that some of those messages might lead to a violation” of another section. Finally, in dicta, the court responded to Niagara’s complaint that, if it cannot omit the disclosures required by § 1692e, it cannot leave answering machine messages by stating that “even if Niagara’s assumption [that leaving a message on a machine would violate the Act] is correct, the answer is that the Act does not guarantee a debt collector the right to leave answering machine messages.” Consequently, the court affirmed the summary judgment to the plaintiff. For a copy of the opinion, please see http://www.buckleysandler.com/Edwards_v_Niagara.pdf.
New York Federal Court Holds Law Firm Liable for Misrepresentation in Violation of the FDCPA. On September 30, the U.S. District Court for the Eastern District of New York held that a law firm that fails to undertake a meaningful review of a debtor’s file before sending a debt-collection letter and commencing legal action is liable for misrepresenting that the letter is “from an attorney” in violation of the Fair Debt Collection Practices Act (FDCPA). Miller v. Upton, Cohen & Slamowitz, No. 01-CV-1126, 2009 WL 3212556 (E.D.N.Y. Sept. 30, 2009). In the case, the plaintiff debtor alleged that the defendant law firm issued a debt collection letter and subsequently filed a legal complaint without meaningfully investigating or determining the validity of the alleged debt. The court held that, even if a debt collection letter comes from a law firm, for a letter to be “from an attorney” under the FDCPA, it must have adequate attorney involvement or review to comply with the FDCPA. In this case, the court based its decision on evidence of (i) the daily and monthly volume of matters handled jointly by the signing attorney and one other attorney in the law firm, including the issuance of 211 debt-collection letters on the date on which the plaintiff’s letter was sent, and more than 3,000 such letters in the month in which the plaintiff’s letter was sent, (ii) the signing attorney’s complete lack of involvement with the plaintiff debtor’s file until well after the commencement of litigation against the plaintiff debtor, and (iii) the signing attorney’s lack of knowledge of the governing law applicable to the suit filed against the plaintiff debtor. The court rejected the law firm’s argument that the prior review by others, including the initial creditor and a referring law firm, obviated the need for further review to comply with the requisites of the FDCPA. The court noted that an attorney may, to some extent, reasonably rely upon and consider a prior review and/or opinion from reputable and reliable attorneys, clients, and paralegals. However, such reliance does not wholly obviate the need for independent inquiry. The court further noted that, in FDCPA cases, the attorney bearing the conclusive responsibility for issuing debt-collection letters may not simply substitute the judgment of another party for his or her own. As a result, the court held that the law firm violated the FDCPA. For a copy of the opinion, please see http://www.buckleysandler.com/Miller_v_Upton.pdf.
Second Circuit Rejects Cramdown Attempt; Holds PMSI Includes Negative Equity. On October 9, the U.S. Court of Appeals for the Second Circuit held that an auto finance creditor’s purchase-money security interest (PMSI) included the financing of negative equity from a trade-in vehicle, and, thus, rejected the debtors’ attempt to "cramdown" their bankruptcy claims. In re Peaslee, Nos. 07-3962-BK, 07-3986-BK, 07-3952-BK, 07-3990-BK, 07-3964-BK, 2009 WL 3233823 (2nd Cir. Oct. 9, 2009) (per curiam). In this consolidated appeal, the debtors traded in vehicles in which they held "negative equity" (i.e., the amount owed on the trade-in vehicle exceeded the value of that vehicle) in conjunction with financing a new vehicle purchase. The amount financed to purchase the new vehicle included the "negative equity" from the trade-in vehicle. The debtors subsequently filed for bankruptcy protection and sought to "cramdown" their bankruptcy plan by bifurcating the creditor’s claim into (i) a secured portion, and (ii) an unsecured portion (the negative equity from the trade-in vehicle). Answering the Second Circuit’s certified question in this matter, the New York Court of Appeals held that negative equity fits both definitions of “purchase-money obligation” under the New York Uniform Commercial Code, such that there was a ‘close nexus between the acquisition of collateral and the secured obligation.’ As a result, the Second Circuit affirmed that the portion of an automobile retail installment sale attributable to a trade-in vehicle’s negative equity constitutes a PMSI under New York law and the court rejected the debtors’ attempt to "cramdown" their bankruptcy claims. A previous opinion in this dispute was reported in InfoBytes, Aug. 24, 2007. For a copy of the opinion, please see http://www.buckleysandler.com/Peaslee.pdf.
Nebraska Federal Court Holds Home Foreclosure Not Debt Collection Under FDCPA. On October 8, the U.S. District Court for the District of Nebraska, among other conclusions of law, held that foreclosing on a home is not “debt collection” as contemplated by the Fair Debt Collection Practices Act (FDCPA). Siegel v. Deutsche Bank Nat’l Trust Co., No. 8:08CV517, 2009 WL 3254491 (D. Neb. Oct. 8, 2009). In Siegel, a defendant servicer initiated foreclosure proceedings against the plaintiff borrower. In response, the borrower filed suit, alleging, among other things, that the defendants, including the lender and assignee, violated the FDCPA by foreclosing on the home. The court rejected the borrower’s claims, holding that the defendants did not violate the FDCPA by foreclosing on the home because foreclosing on a home is not “debt collection” as contemplated by the FDCPA and that the defendants are not “debt collectors” under the FDCPA. For a copy of the opinion, please see http://www.buckleysandler.com/Siegel_v_Deutsche.pdf.
Pennsylvania Federal Court Allows Claim that LexisNexis is a Consumer Reporting Agency. On October 6, the U.S. District Court for the Eastern District of Pennsylvania denied a motion to dismiss filed by LexisNexis Risk and Information Analytics Groups, Inc. (Lexis) and Reed Elsevier, Inc. (Reed) in a claim that LexisNexis and Reed acted as consumer reporting agencies (CRAs) under the Fair Credit Reporting Act (FCRA). Marricone v. Experian Information Solutions, Inc., No. 09-CV-1123, 2009 WL 3245417 (E.D. Pa. Oct. 6, 2009). In their motion to dismiss, the defendants claimed that the plaintiff did not plead enough facts to allege that Lexis and Reed were CRAs. However, the court stated that the definition of a consumer reporting agency in FCRA “is fairly broad,” and that “whether an entity is acting as a consumer reporting agency in a particular situation is a fact-specific inquiry.” The court found no “binding case law holding that Lexis and Reed are not CRAs as a matter of law,” and, because factual discovery was needed, denied the motion to dismiss. The defendants also argued that the plaintiff was not entitled to injunctive or declaratory relief under FCRA as a matter of law. The court denied this motion as well, finding that the Third Circuit has not specifically addressed this issue, but it allowed the defendants to raise the issue at a later stage of the litigation. The court’s holding that coverage as a CRA is a factual question that cannot be resolved at the pleadings stage could have major implications, not only for companies such as Lexis and Reed that have attempted to structure their activities to avoid coverage, but also for their customers, who could face liability for obtaining and using a consumer report without a permissible purpose under FCRA. For a copy of the opinion, please see http://www.buckleysandler.com/Marricone_v_Experian.pdf.
Texas Federal Court Finds FCRA Does Not Completely Preempt State Law. On September 29, the U.S. District Court for the Southern District of Texas held that the Fair Credit Reporting Act (FCRA) did not completely preempt a borrower’s state law claims against a mortgage servicer. Ortiz v. National City Home Loan Services Inc., Civ. No. H-09-2033, 2009 WL 3255088 (S.D. Tex. Sept. 29, 2009). In this case, the defendant servicer deducted a portion of the borrower’s monthly mortgage payment to cover required insurance on the borrower’s property, thereby resulting in a shortage in the borrower’s Promissory Note obligation. As a result of the shortage, the servicer filed foreclosure proceedings against the borrower. Subsequently, the borrower alleged that the servicer damaged his credit by wrongfully reporting to credit reporting agencies that there was a delinquency in the mortgage payments and claimed violations of the Texas Deceptive Trade Practices – Consumer Protection Act, as well as claims of slander of credit and wrongful foreclosure. The defendant servicer attempted to remove the proceedings to federal court by arguing that the borrower’s state law claims were totally preempted by FCRA and, thus, gave rise to federal question jurisdiction. The court held that (i) FCRA only preempts state law claims when the relevant state law conflicts with FCRA and that no such conflict exists between FCRA and the relevant Texas law, and (ii) in any event, preemption is merely an affirmative defense that is not a basis for removal. For a copy of the opinion, please see http://www.buckleysandler.com/Ortiz_v_NC.pdf.
Firm News
Jeff Naimon will be speaking about developments in appraisal requirements and related risks at the North Carolina Bankers Association’s Management Team Conference on October 20 in Greensboro, North Carolina.
Andrew Sandler will be speaking at the District of Columbia Bar’s program “Is the proposed Consumer Financial Protection Agency the appropriate remedy for consumers of financial products?" on October 27 in Washington, DC.
Kirk Jensen and Clint Rockwell participated in a West LegalWorks webcast entitled “Underwater World: The Rippling Effect of California’s Foreclosure Crisis” on September 23.
Margo Tank spoke at the Electronic Signature and Records Association (ESRA) Annual Meeting on September 23 on the Mortgage Disclosure Improvement Act requirements and the impact on the electronic delivery of disclosures under the new rules. She also discussed the proposed FHA Electronic Signature Guidelines.
Andrea Mitchell spoke on a panel regarding new closed-end credit rules under Regulation Z for Women in Housing and Finance on September 30.
Andrew Sandler and Jeff Naimon spoke at the 2009 CRA and Fair Lending Colloquium October 4-7 in New Orleans. Andrew Sandler spoke on Regulatory Reform, and Jeff Naimon spoke on Navigating a HMDA Data Analysis.
Andrew Sandler spoke on October 6 at the Financial Access Roundtable Discussion with Bankers and Regulators, sponsored by Louisiana Appleseed, on a Latino Outreach Roundtable regarding Latino immigrant access to banks.
Joe Kolar presented on September 22 a webcast seminar to members of the Federal Home Loan Bank of Chicago on the new Truth in Lending and RESPA Rules.
Mortgages
OTS Revises Regulation C Reporting Procedures to Reflect HMDA Amendments. On October 15, the Office of Thrift Supervision (OTS) updated its examination procedures to address revised Regulation C reporting requirements for higher-priced loans under the Home Mortgage Disclosure Act (HMDA). Under the revised requirements, lenders are required to establish procedures for collecting the rate spread between each loan’s annual percentage rate (APR) and the “average prime offer rate” (APOR) for comparable transactions at the time the interest rate is set. The APOR is a survey-based estimate of APRs currently offered on prime mortgage loans and can be found on the Federal Financial Institutions Examination Council (FFIEC) website entitled “Average Prime Offer Rate Tables.” Lenders must also report when the rate spread between the APR and APOR is equal to or exceeds 1.5% for first-lien loans and 3.5% for subordinate-lien loans. Finally, the OTS reminds OTS-regulated institutions that institutions must continue to have a system for tracking rate lock dates and rate spread calculations. The revision applies to loans taken on or after October 1, 2009 and that are closed by January 1, 2010. For a copy of the OTS memorandum, please see http://files.ots.treas.gov/25323.pdf. For a copy of the regulatory bulletin, please see http://files.ots.treas.gov/74863.pdf.
Freddie Mac Announces New Pilot Program for Warehouse Lines of Credit. On October 9, Freddie Mac announced a new pilot program to help lenders, in particular single and multi-family lenders, obtain warehouse lines of credit with participating warehouse lenders. Under the pilot program, Freddie Mac will provide participating warehouse lenders with standby commitments to purchase qualifying loans should the seller or servicer fail or otherwise not meet its contract obligations. According to Freddie Mac, pre-funding reviews are required and normal Freddie Mac purchase and origination processes and procedures apply to the program. For a copy of the press release, please see http://www.freddiemac.com/news/archives/corporate/2009/20091009_warehouse-lender.html.
California Enacts SAFE Act Legislation. On October 11, California Governor Arnold Schwarzenegger signed into law S.B. 36, a bill that requires the employees of licensees under the California Finance Lenders Law (CFLL) and the California Residential Mortgage Lending Act (RMLA) that are engaged in the business of mortgage loan origination to be licensed, beginning July 1, 2010. The bill similarly requires licensees under the California Real Estate Law (REL) to obtain an endorsement from the Commissioner of the California Department of Real Estate to engage in the business of mortgage loan origination, beginning December 1, 2010. Mortgage loan originator license and endorsement applicants are required to, among other things, (i) submit to fingerprinting for the purpose of a criminal history background check, (ii) complete at least twenty hours of pre-license education, and (iii) pass a qualified written test developed by the Nationwide Mortgage Licensing System (NMLS). The bill further provides that licensed mortgage loan originators must complete at least eight hours of continuing education annually and must disclose their NMLS identifier on all residential mortgage loan application forms, solicitations, and advertisements. The bill also enacts other related provisions, such as requiring REL licensees to submit an annual business activities report to the Commissioner of the California Department of Real Estate. For a copy of S.B. 36, please see http://www.buckleysandler.com/CA_SB36_2009.pdf.
California Passes Slate of Mortgage Laws. On October 11, in addition to S.B. 36, California Governor Arnold Schwarzenegger signed into law a collection of bills designed to protect the interests of California homebuyers.
• A.B. 260, among other things, (i) prohibits “steering” borrowers into higher-priced loans that are more risky than lower-interest, fixed-rate loans for which the borrower had actually qualified, (ii) bans negative amortization loans where the loan gets larger the longer the borrower holds the loan, and (iii) establishes strict caps on prepayment penalties. A.B. 260 also imposes a fiduciary duty for all mortgage brokers and banks acting as mortgage brokers, and prohibits lenders and brokers from making false or misleading statements relative to the terms of a subprime loan. For a copy of A.B. 260, please see http://www.buckleysandler.com/CA_AB260_2009.pdf.
• A.B. 329 requires reverse mortgage lenders to provide additional, clear information to senior consumers interested in reverse mortgage products. Among its specific provisions are requirements that a lender provide a prospective borrower with (i) a list of at least ten HUD-approved reverse mortgage counseling agencies, and (ii) a written checklist of issues to discuss with the reverse mortgage counselor. For a copy of A.B. 329, please see http://www.buckleysandler.com/CA_AB329_2009.pdf.
• A.B. 957 prohibits the seller of certain foreclosed residential real property from conditioning the sale of such property on a buyer’s purchase of title insurance from a particular insurer or title company and/or escrow services from a particular provider. The bill took immediate effect, and remains in effect until January 15, 2015. For a copy of A.B. 957, please see http://www.buckleysandler.com/CA_AB957_2009.pdf.
• A.B. 1160 provides that a lender that negotiates a mortgage loan primarily in Spanish, Chinese, Tagalog, Vietnamese, or Korean is required to deliver to the borrower a specified form in that same language. The form, to be created by the Department of Corporations and the Department of Financial Institutions, will provide a summary of the terms of the loan contract or agreement. A.B. 1160 becomes effective July 1, 2010, or 90 days after the Department of Corporations and the Department of Financial Institutions create the specified form, whichever is later. For a copy of A.B. 1160, please see http://www.buckleysandler.com/CA_AB1160_2009.pdf.
• S.B. 237 requires appraisal management companies to register with the California Office of Real Estate Appraisers, and provides that an appraisal management company is prohibited from improperly influencing or attempting to improperly influence an appraisal. For a copy of S.B. 237, please see http://www.buckleysandler.com/CA_SB237_2009.pdf.
• S.B. 239 makes it a felony to commit fraud in connection with a mortgage loan application, where the value of the fraud meets the threshold for grand theft under California law (currently, $400). For a copy of S.B. 239, please see http://www.buckleysandler.com/CA_SB239_2009.pdf.
New York Federal Court Finds Defendants May Assert TILA Tolerance for Accuracy Defense; HOLA Preempts Certain State Law Claims. On September 29, in a certified class action, the U.S. District Court for the Eastern District of New York, in deciding cross-motions for summary judgment, granted, in part, the defendants’ motion for summary judgment, holding, among other things, that the defendants, originators and purchasers of residential mortgage loans, were or would be entitled to TILA’s tolerance for accuracy defense regarding the calculation of certain fees and that certain of state law claims brought by the class were preempted by the Home Owners’ Loan Act (HOLA) and its implementing regulations. McAnaney v. Astoria Fin. Corp., No. 04-cv-1101, 2009 WL 3150430 (E.D.N.Y. Sept. 29, 2009).
The class in McAnaney alleged, among other things, that the defendants violated TILA by failing to disclose as finance charges several fees that were “necessary to satisfy” the subject loans. The defendants sought summary judgment on the class plaintiffs’ TILA claims, arguing that an “Atty Doc Prep Fee” was properly disclosed to the class plaintiffs and that all other fees at issue – even assuming those fees should have been included in the finance charge – were within TILA’s $100 tolerance for accuracy. The class plaintiffs, in their motion for summary judgment, countered by arguing, among other things, that the accuracy tolerance threshold (i) does not bar a TILA claim regarding undisclosed finance charges, (ii) only applies to unintentional finance charge omissions, and (iii) does not apply to omissions of entire components of the finance charge. Although the court denied the defendants’ motion for summary judgment as to the class plaintiffs’ TILA claims, finding that the question of whether the Atty Doc Prep Fee was properly disclosed was a disputed issue of material fact, it observed that, to the extent that fee is found to have been properly disclosed, the defendants, as with the other fees at issue, could invoke the benefit of TILA’s accuracy tolerance defense. In this regard, the court rejected each of the class plaintiffs’ arguments regarding TILA’s accuracy tolerance threshold, holding that TILA (i) explicitly provides that errors in the finance charge that do not exceed $ 100 shall be “treated as accurate,” (ii) does not include a “motive requirement,” and (iii) applies “even if entire components of the finance charge are omitted, so long as the total variance is less than $ 100.”
As to the class plaintiffs’ state statutory and common law claims, the court granted summary judgment to the defendants, who argued that HOLA preempted them. The court held that certain state law claims were preempted while others were not. More specifically, the court held that the class plaintiffs’ claim under § 274-a of the New York Real Property Law—which entitles an owner of real property that is encumbered by a mortgage to receive, upon demand, payoff statements at no charge—was preempted because it imposes a substantive limit on federal savings associations’ ability to charge “[l]oan-related fees.” The court also held that the class plaintiffs’ claim under § 1921 of the New York Real Property Actions & Proceedings Law—which provides that “’[a]fter payment of authorized principal, interest, and any other amounts due . . . a mortgagee of real property . . . must execute and acknowledge . . . a satisfaction of mortgage’ which is to be recorded.”— was preempted because the statute “imposes a substantive, affirmative requirement on lenders to complete the satisfaction of a mortgage within a specific time frame, a requirement that, when applied to federal savings associations, directly impacts their lending activities, particularly with respect to the processing and servicing of mortgages….” The court held that the class plaintiffs’ claims for unjust enrichment and fraud were not preempted because, in this context, the claims did not “impose specific substantive standards which more than incidentally affect lending operations.”
With regard to the remaining claims, the court rejected, in whole or in part, the defendants’ preemption arguments. In particular, the court held that the class plaintiffs’ breach of contract claim was not preempted because requiring lenders to comply with their contractual obligations “does not seek to impose specific substantive requirements upon the operations of defendants, apart from compliance with specific contractual obligations.” The court also held that the class plaintiffs’ claim under New York General Business Law § 349—which prohibits “[d]eceptive acts or practices in the conduct of any business, trade or commerce or in furnishing of any service in this state”— was not preempted “to the extent that plaintiffs seek relief for deceptive acts and practices incident to the alleged breach of the mortgage agreements with defendants,” but was preempted, to the extent the claim was based on an alleged violation of the New York Real Property Law and New York Real Property Actions & Proceedings Law. Accordingly, as to these claims, the court denied both the defendants and the class plaintiffs’ motions for summary judgment. For a copy of the opinion, please see http://www.buckleysandler.com/McAnaney_v_Astoria.pdf.
New Jersey Bankruptcy Court Finds Borrower Entitled to Rescission Under TILA; Rejects Preemption of State Law Claims. On September 17, the U.S. Bankruptcy Court for the District of New Jersey held that a borrower was entitled under the Truth in Lending Act (TILA) to the rescission, in part, of a refinanced mortgage loan and that the National Bank Act (NBA) and Office of the Comptroller of the Currency regulations did not preempt the relevant New Jersey fraud and consumer protection laws. Orr v. Ameriquest Mortg. Co., Case No. 07-22759, 2009 WL 3030125 (Bankr.D.N.J. Sept. 17, 2009). In Orr, the borrower refinanced two mortgages with the defendant lender; the lender’s assignee subsequently filed foreclosure proceedings against the borrower. After the borrower filed for bankruptcy, the borrower and the borrower’s trustee filed suit against the defendants, alleging violations of TILA and New Jersey state fraud and consumer protection laws. The plaintiffs alleged that material disclosures in connection with one of the mortgage loans were inaccurate because they did not correctly state the borrower’s finance charge, including recording fees. Regarding the TILA claim, the court first found that the TILA action was timely under equitable principles because the borrower’s bankruptcy filing stayed the foreclosure and prevented the borrower from asserting recoupment of TILA damages as an affirmative defense to the foreclosure action. The court next found that the stated recording fees provided to the borrower fell outside of TILA’s tolerance for accuracy provision and relied on the Federal Reserve Board’s Official Staff Interpretation to Regulation Z to determine that the borrower was entitled to rescission of the new money advanced for the refinancing as well as any amounts paid by the borrower as part of the refinancing. The court, thus, found for the plaintiffs regarding the rescission of the borrower’s settlement and interest charges. The court, however, did not find for the plaintiffs on the narrow issue of whether other contested amounts were paid “as part of” the refinancing. Regarding the state law claims, the defendants argued that the NBA preempted the state law claims because the assignee of the mortgage is a national bank. The court held that the bank failed to establish that the state law at issue conflicts “with the letter or the general purposes of the NBA,” and that “engaging in fraudulent lending practices is not an express or incidental power granted to federal banks.” The court also held that TILA did not preempt the state law claims against defendants, nor did TILA’s assignee liability provisions entitle defendants to summary judgment. For a copy of the opinion, please contact .
Texas Federal Court Finds FCRA Does Not Completely Preempt State Law. On September 29, the U.S. District Court for the Southern District of Texas held that the Fair Credit Reporting Act (FCRA) did not completely preempt a borrower’s state law claims against a mortgage servicer. Ortiz v. National City Home Loan Services Inc., Civ. No. H-09-2033, 2009 WL 3255088 (S.D. Tex. Sept. 29, 2009). In this case, the defendant servicer deducted a portion of the borrower’s monthly mortgage payment to cover required insurance on the borrower’s property, thereby resulting in a shortage in the borrower’s Promissory Note obligation. As a result of the shortage, the servicer filed foreclosure proceedings against the borrower. Subsequently, the borrower alleged that the servicer damaged his credit by wrongfully reporting to credit reporting agencies that there was a delinquency in the mortgage payments and claimed violations of the Texas Deceptive Trade Practices – Consumer Protection Act, as well as claims of slander of credit and wrongful foreclosure. The defendant servicer attempted to remove the proceedings to federal court by arguing that the borrower’s state law claims were totally preempted by FCRA and, thus, gave rise to federal question jurisdiction. The court held that (i) FCRA only preempts state law claims when the relevant state law conflicts with FCRA and that no such conflict exists between FCRA and the relevant Texas law, and (ii) in any event, preemption is merely an affirmative defense that is not a basis for removal. For a copy of the opinion, please see http://www.buckleysandler.com/Ortiz_v_NC.pdf.
Nebraska Federal Court Holds Home Foreclosure Not Debt Collection Under FDCPA. On October 8, the U.S. District Court for the District of Nebraska, among other conclusions of law, held that foreclosing on a home is not “debt collection” as contemplated by the Fair Debt Collection Practices Act (FDCPA). Siegel v. Deutsche Bank Nat’l Trust Co., No. 8:08CV517, 2009 WL 3254491 (D. Neb. Oct. 8, 2009). In Siegel, a defendant servicer initiated foreclosure proceedings against the plaintiff borrower. In response, the borrower filed suit, alleging, among other things, that the defendants, including the lender and assignee, violated the FDCPA by foreclosing on the home. The court rejected the borrower’s claims, holding that the defendants did not violate the FDCPA by foreclosing on the home because foreclosing on a home is not “debt collection” as contemplated by the FDCPA and that the defendants are not “debt collectors” under the FDCPA. For a copy of the opinion, please see http://www.buckleysandler.com/Siegel_v_Deutsche.pdf.
Banking
FinCEN Issues Advisory to Financial Institutions Regarding the Filing of Suspicious Activity Reports for TARP-Related Programs. On October 14, the Financial Crimes Enforcement Network (FinCEN) issued an advisory that guides financial institutions on how to file Suspicious Activity Reports (SARs) for activities potentially related to the federal government’s Troubled Asset Relief Program (TARP). The advisory requests that, when financial institutions submit SARs, they check the appropriate box to indicate the type of suspicious activity and include the term “SIGTARP” in the narrative portion of the SAR. Additionally, the advisory reminds financial institutions that the Suspect/Subject Information Section of the SAR should include all available information for each party suspected of engaging in a suspicious activity (e.g., a party’s name, address, phone number, etc.). In addition to technical advice on how to file reports, the advisory also counsels financial institutions on how to recognize suspicious TARP-related transactions. For example, the guidance provides that financial institutions should utilize Customer Identification Programs and Anti-Money Laundering Programs to aid in (i) identifying customers who qualify for TARP-related program funding, (ii) anticipating the types of TARP-related transactions that may be conducted by such customers, and (iii) identifying any suspicious activity attempted by these customers in the context of any TARP- related transactions. Finally, the guidance advises financial institutions to avail themselves of public information, such as wire transactions involving Capital Purchase Program-funded banks or Public Private Investment Program Fund Managers, to help identify TARP-related transactions. For a copy of the guidance, please see http://www.fincen.gov/statutes_regs/guidance/pdf/fin-2009-a006.pdf.
FinCEN Expands Outreach Program to Small, Medium Sized Financial Institutions. On October 13, the Financial Crimes Enforcement Network (FinCEN) announced a new outreach program for financial institutions with assets under $5 billion. Through the program, FinCEN hopes to gain insight into how small and medium sized financial institutions comply with the four key components of the Bank Secrecy Act’s regulatory regime: program requirements, designation of a compliance officer, training, and independent audit. Participation in the outreach program is completely voluntary and is open to all qualifying U.S. depository institutions. Depository institutions interested in participating in the program must notify FinCEN by November 30, 2009. FinCEN plans to select at least 15 institutions that provide a representative cross-section of depository institutions with assets under $5 billion. For a copy of the press release, please see http://www.fincen.gov/news_room/nr/pdf/20091013a.pdf.
FDIC Updates FAQs for Temporary Liquidity Guarantee Program. On October 13, the Federal Deposit Insurance Corporation updated its Frequently Asked Questions (FAQs) for the Temporary Liquidity Guarantee Program (TLGP). The FAQs generally address eligibility requirements, disclosure requirements, coverage of deposits, coverage of debt, debt guarantee limits, fees and costs, opting out of the program, and accessing TLGP transactions in FDICconnect. For a copy of the revised FAQs, please see http://www.fdic.gov/regulations/resources/TLGP/faq.html.
New York Federal Court Finds Defendants May Assert TILA Tolerance for Accuracy Defense; HOLA Preempts Certain State Law Claims. On September 29, in a certified class action, the U.S. District Court for the Eastern District of New York, in deciding cross-motions for summary judgment, granted, in part, the defendants’ motion for summary judgment, holding, among other things, that the defendants, originators and purchasers of residential mortgage loans, were or would be entitled to TILA’s tolerance for accuracy defense regarding the calculation of certain fees and that certain of state law claims brought by the class were preempted by the Home Owners’ Loan Act (HOLA) and its implementing regulations. McAnaney v. Astoria Fin. Corp., No. 04-cv-1101, 2009 WL 3150430 (E.D.N.Y. Sept. 29, 2009).
The class in McAnaney alleged, among other things, that the defendants violated TILA by failing to disclose as finance charges several fees that were “necessary to satisfy” the subject loans. The defendants sought summary judgment on the class plaintiffs’ TILA claims, arguing that an “Atty Doc Prep Fee” was properly disclosed to the class plaintiffs and that all other fees at issue – even assuming those fees should have been included in the finance charge – were within TILA’s $100 tolerance for accuracy. The class plaintiffs, in their motion for summary judgment, countered by arguing, among other things, that the accuracy tolerance threshold (i) does not bar a TILA claim regarding undisclosed finance charges, (ii) only applies to unintentional finance charge omissions, and (iii) does not apply to omissions of entire components of the finance charge. Although the court denied the defendants’ motion for summary judgment as to the class plaintiffs’ TILA claims, finding that the question of whether the Atty Doc Prep Fee was properly disclosed was a disputed issue of material fact, it observed that, to the extent that fee is found to have been properly disclosed, the defendants, as with the other fees at issue, could invoke the benefit of TILA’s accuracy tolerance defense. In this regard, the court rejected each of the class plaintiffs’ arguments regarding TILA’s accuracy tolerance threshold, holding that TILA (i) explicitly provides that errors in the finance charge that do not exceed $ 100 shall be “treated as accurate,” (ii) does not include a “motive requirement,” and (iii) applies “even if entire components of the finance charge are omitted, so long as the total variance is less than $ 100.”
As to the class plaintiffs’ state statutory and common law claims, the court granted summary judgment to the defendants, who argued that HOLA preempted them. The court held that certain state law claims were preempted while others were not. More specifically, the court held that the class plaintiffs’ claim under § 274-a of the New York Real Property Law—which entitles an owner of real property that is encumbered by a mortgage to receive, upon demand, payoff statements at no charge—was preempted because it imposes a substantive limit on federal savings associations’ ability to charge “[l]oan-related fees.” The court also held that the class plaintiffs’ claim under § 1921 of the New York Real Property Actions & Proceedings Law—which provides that “’[a]fter payment of authorized principal, interest, and any other amounts due . . . a mortgagee of real property . . . must execute and acknowledge . . . a satisfaction of mortgage’ which is to be recorded.”— was preempted because the statute “imposes a substantive, affirmative requirement on lenders to complete the satisfaction of a mortgage within a specific time frame, a requirement that, when applied to federal savings associations, directly impacts their lending activities, particularly with respect to the processing and servicing of mortgages….” The court held that the class plaintiffs’ claims for unjust enrichment and fraud were not preempted because, in this context, the claims did not “impose specific substantive standards which more than incidentally affect lending operations.”
With regard to the remaining claims, the court rejected, in whole or in part, the defendants’ preemption arguments. In particular, the court held that the class plaintiffs’ breach of contract claim was not preempted because requiring lenders to comply with their contractual obligations “does not seek to impose specific substantive requirements upon the operations of defendants, apart from compliance with specific contractual obligations.” The court also held that the class plaintiffs’ claim under New York General Business Law § 349—which prohibits “[d]eceptive acts or practices in the conduct of any business, trade or commerce or in furnishing of any service in this state”— was not preempted “to the extent that plaintiffs seek relief for deceptive acts and practices incident to the alleged breach of the mortgage agreements with defendants,” but was preempted, to the extent the claim was based on an alleged violation of the New York Real Property Law and New York Real Property Actions & Proceedings Law. Accordingly, as to these claims, the court denied both the defendants and the class plaintiffs’ motions for summary judgment. For a copy of the opinion, please see http://www.buckleysandler.com/McAnaney_v_Astoria.pdf.
Consumer Finance
New York Federal Court Finds Defendants May Assert TILA Tolerance for Accuracy Defense; HOLA Preempts Certain State Law Claims. On September 29, in a certified class action, the U.S. District Court for the Eastern District of New York, in deciding cross-motions for summary judgment, granted, in part, the defendants’ motion for summary judgment, holding, among other things, that the defendants, originators and purchasers of residential mortgage loans, were or would be entitled to TILA’s tolerance for accuracy defense regarding the calculation of certain fees and that certain of state law claims brought by the class were preempted by the Home Owners’ Loan Act (HOLA) and its implementing regulations. McAnaney v. Astoria Fin. Corp., No. 04-cv-1101, 2009 WL 3150430 (E.D.N.Y. Sept. 29, 2009).
The class in McAnaney alleged, among other things, that the defendants violated TILA by failing to disclose as finance charges several fees that were “necessary to satisfy” the subject loans. The defendants sought summary judgment on the class plaintiffs’ TILA claims, arguing that an “Atty Doc Prep Fee” was properly disclosed to the class plaintiffs and that all other fees at issue – even assuming those fees should have been included in the finance charge – were within TILA’s $100 tolerance for accuracy. The class plaintiffs, in their motion for summary judgment, countered by arguing, among other things, that the accuracy tolerance threshold (i) does not bar a TILA claim regarding undisclosed finance charges, (ii) only applies to unintentional finance charge omissions, and (iii) does not apply to omissions of entire components of the finance charge. Although the court denied the defendants’ motion for summary judgment as to the class plaintiffs’ TILA claims, finding that the question of whether the Atty Doc Prep Fee was properly disclosed was a disputed issue of material fact, it observed that, to the extent that fee is found to have been properly disclosed, the defendants, as with the other fees at issue, could invoke the benefit of TILA’s accuracy tolerance defense. In this regard, the court rejected each of the class plaintiffs’ arguments regarding TILA’s accuracy tolerance threshold, holding that TILA (i) explicitly provides that errors in the finance charge that do not exceed $ 100 shall be “treated as accurate,” (ii) does not include a “motive requirement,” and (iii) applies “even if entire components of the finance charge are omitted, so long as the total variance is less than $ 100.”
As to the class plaintiffs’ state statutory and common law claims, the court granted summary judgment to the defendants, who argued that HOLA preempted them. The court held that certain state law claims were preempted while others were not. More specifically, the court held that the class plaintiffs’ claim under § 274-a of the New York Real Property Law—which entitles an owner of real property that is encumbered by a mortgage to receive, upon demand, payoff statements at no charge—was preempted because it imposes a substantive limit on federal savings associations’ ability to charge “[l]oan-related fees.” The court also held that the class plaintiffs’ claim under § 1921 of the New York Real Property Actions & Proceedings Law—which provides that “’[a]fter payment of authorized principal, interest, and any other amounts due . . . a mortgagee of real property . . . must execute and acknowledge . . . a satisfaction of mortgage’ which is to be recorded.”— was preempted because the statute “imposes a substantive, affirmative requirement on lenders to complete the satisfaction of a mortgage within a specific time frame, a requirement that, when applied to federal savings associations, directly impacts their lending activities, particularly with respect to the processing and servicing of mortgages….” The court held that the class plaintiffs’ claims for unjust enrichment and fraud were not preempted because, in this context, the claims did not “impose specific substantive standards which more than incidentally affect lending operations.”
With regard to the remaining claims, the court rejected, in whole or in part, the defendants’ preemption arguments. In particular, the court held that the class plaintiffs’ breach of contract claim was not preempted because requiring lenders to comply with their contractual obligations “does not seek to impose specific substantive requirements upon the operations of defendants, apart from compliance with specific contractual obligations.” The court also held that the class plaintiffs’ claim under New York General Business Law § 349—which prohibits “[d]eceptive acts or practices in the conduct of any business, trade or commerce or in furnishing of any service in this state”— was not preempted “to the extent that plaintiffs seek relief for deceptive acts and practices incident to the alleged breach of the mortgage agreements with defendants,” but was preempted, to the extent the claim was based on an alleged violation of the New York Real Property Law and New York Real Property Actions & Proceedings Law. Accordingly, as to these claims, the court denied both the defendants and the class plaintiffs’ motions for summary judgment. For a copy of the opinion, please see http://www.buckleysandler.com/McAnaney_v_Astoria.pdf.
Eleventh Circuit Holds Answering Machine Messages by Debt Collector Not Entitled to FDCPA Bona Fide Error Defense. On October 14, the U.S. Court of Appeals for the Eleventh Circuit held that the bona fide error defense in the Fair Debt Collection Practices Act (FDCPA) does not cover an instance where the debt collector violates one provision of the FDCPA to avoid violating a different provision of the FDCPA. Edwards v. Niagara Credit Solutions, Inc., No. 08-17006, 2009 WL 3273300 (11th Cir. Oct. 14, 2009). In the case, Niagara Credit Solutions (Niagara) left numerous messages on the plaintiff’s answering machine to collect on a debt, each of which intentionally omitted (i) Niagara’s name, (ii) that they were a debt collector, and (iii) that the call had been made to collect a debt—all in violation of § 1692e(11). Niagara stated that this was done intentionally to avoid violating § 1692c(b), which forbids a debt collector from communicating about the debt with a third party, out of concern that, for example, the message could be played or heard by a family member or roommate. On appeal of a summary judgment ruling in favor of the plaintiff, Niagara argued that their violation is protected by the bona fide error defense. The Eleventh Circuit disagreed, finding that Niagara could not meet at least two of the three prongs of the defense, including (i) that the violation was not intentional and (ii) that the error was “bona fide”. The court noted that Niagara admitted that it intentionally omitted the information from the messages, which clearly did not meet the first prong. It also said that it was not a “bona fide error” because it was unreasonable to violate the FDCPA “with every message it left in order to avoid the possibility that some of those messages might lead to a violation” of another section. Finally, in dicta, the court responded to Niagara’s complaint that, if it cannot omit the disclosures required by § 1692e, it cannot leave answering machine messages by stating that “even if Niagara’s assumption [that leaving a message on a machine would violate the Act] is correct, the answer is that the Act does not guarantee a debt collector the right to leave answering machine messages.” Consequently, the court affirmed the summary judgment to the plaintiff. For a copy of the opinion, please see http://www.buckleysandler.com/Edwards_v_Niagara.pdf.
New York Federal Court Holds Law Firm Liable for Misrepresentation in Violation of the FDCPA. On September 30, the U.S. District Court for the Eastern District of New York held that a law firm that fails to undertake a meaningful review of a debtor’s file before sending a debt-collection letter and commencing legal action is liable for misrepresenting that the letter is “from an attorney” in violation of the Fair Debt Collection Practices Act (FDCPA). Miller v. Upton, Cohen & Slamowitz, No. 01-CV-1126, 2009 WL 3212556 (E.D.N.Y. Sept. 30, 2009). In the case, the plaintiff debtor alleged that the defendant law firm issued a debt collection letter and subsequently filed a legal complaint without meaningfully investigating or determining the validity of the alleged debt. The court held that, even if a debt collection letter comes from a law firm, for a letter to be “from an attorney” under the FDCPA, it must have adequate attorney involvement or review to comply with the FDCPA. In this case, the court based its decision on evidence of (i) the daily and monthly volume of matters handled jointly by the signing attorney and one other attorney in the law firm, including the issuance of 211 debt-collection letters on the date on which the plaintiff’s letter was sent, and more than 3,000 such letters in the month in which the plaintiff’s letter was sent, (ii) the signing attorney’s complete lack of involvement with the plaintiff debtor’s file until well after the commencement of litigation against the plaintiff debtor, and (iii) the signing attorney’s lack of knowledge of the governing law applicable to the suit filed against the plaintiff debtor. The court rejected the law firm’s argument that the prior review by others, including the initial creditor and a referring law firm, obviated the need for further review to comply with the requisites of the FDCPA. The court noted that an attorney may, to some extent, reasonably rely upon and consider a prior review and/or opinion from reputable and reliable attorneys, clients, and paralegals. However, such reliance does not wholly obviate the need for independent inquiry. The court further noted that, in FDCPA cases, the attorney bearing the conclusive responsibility for issuing debt-collection letters may not simply substitute the judgment of another party for his or her own. As a result, the court held that the law firm violated the FDCPA. For a copy of the opinion, please see http://www.buckleysandler.com/Miller_v_Upton.pdf.
Second Circuit Rejects Cramdown Attempt; Holds PMSI Includes Negative Equity. On October 9, the U.S. Court of Appeals for the Second Circuit held that an auto finance creditor’s purchase-money security interest (PMSI) included the financing of negative equity from a trade-in vehicle, and, thus, rejected the debtors’ attempt to "cramdown" their bankruptcy claims. In re Peaslee, Nos. 07-3962-BK, 07-3986-BK, 07-3952-BK, 07-3990-BK, 07-3964-BK, 2009 WL 3233823 (2nd Cir. Oct. 9, 2009) (per curiam). In this consolidated appeal, the debtors traded in vehicles in which they held "negative equity" (i.e., the amount owed on the trade-in vehicle exceeded the value of that vehicle) in conjunction with financing a new vehicle purchase. The amount financed to purchase the new vehicle included the "negative equity" from the trade-in vehicle. The debtors subsequently filed for bankruptcy protection and sought to "cramdown" their bankruptcy plan by bifurcating the creditor’s claim into (i) a secured portion, and (ii) an unsecured portion (the negative equity from the trade-in vehicle). Answering the Second Circuit’s certified question in this matter, the New York Court of Appeals held that negative equity fits both definitions of “purchase-money obligation” under the New York Uniform Commercial Code, such that there was a ‘close nexus between the acquisition of collateral and the secured obligation.’ As a result, the Second Circuit affirmed that the portion of an automobile retail installment sale attributable to a trade-in vehicle’s negative equity constitutes a PMSI under New York law and the court rejected the debtors’ attempt to "cramdown" their bankruptcy claims. A previous opinion in this dispute was reported in InfoBytes, Aug. 24, 2007. For a copy of the opinion, please see http://www.buckleysandler.com/Peaslee.pdf.
Pennsylvania Federal Court Allows Claim that LexisNexis is a Consumer Reporting Agency. On October 6, the U.S. District Court for the Eastern District of Pennsylvania denied a motion to dismiss filed by LexisNexis Risk and Information Analytics Groups, Inc. (Lexis) and Reed Elsevier, Inc. (Reed) in a claim that LexisNexis and Reed acted as consumer reporting agencies (CRAs) under the Fair Credit Reporting Act (FCRA). Marricone v. Experian Information Solutions, Inc., No. 09-CV-1123, 2009 WL 3245417 (E.D. Pa. Oct. 6, 2009). In their motion to dismiss, the defendants claimed that the plaintiff did not plead enough facts to allege that Lexis and Reed were CRAs. However, the court stated that the definition of a consumer reporting agency in FCRA “is fairly broad,” and that “whether an entity is acting as a consumer reporting agency in a particular situation is a fact-specific inquiry.” The court found no “binding case law holding that Lexis and Reed are not CRAs as a matter of law,” and, because factual discovery was needed, denied the motion to dismiss. The defendants also argued that the plaintiff was not entitled to injunctive or declaratory relief under FCRA as a matter of law. The court denied this motion as well, finding that the Third Circuit has not specifically addressed this issue, but it allowed the defendants to raise the issue at a later stage of the litigation. The court’s holding that coverage as a CRA is a factual question that cannot be resolved at the pleadings stage could have major implications, not only for companies such as Lexis and Reed that have attempted to structure their activities to avoid coverage, but also for their customers, who could face liability for obtaining and using a consumer report without a permissible purpose under FCRA. For a copy of the opinion, please see http://www.buckleysandler.com/Marricone_v_Experian.pdf.
Texas Federal Court Finds FCRA Does Not Completely Preempt State Law. On September 29, the U.S. District Court for the Southern District of Texas held that the Fair Credit Reporting Act (FCRA) did not completely preempt a borrower’s state law claims against a mortgage servicer. Ortiz v. National City Home Loan Services Inc., Civ. No. H-09-2033, 2009 WL 3255088 (S.D. Tex. Sept. 29, 2009). In this case, the defendant servicer deducted a portion of the borrower’s monthly mortgage payment to cover required insurance on the borrower’s property, thereby resulting in a shortage in the borrower’s Promissory Note obligation. As a result of the shortage, the servicer filed foreclosure proceedings against the borrower. Subsequently, the borrower alleged that the servicer damaged his credit by wrongfully reporting to credit reporting agencies that there was a delinquency in the mortgage payments and claimed violations of the Texas Deceptive Trade Practices – Consumer Protection Act, as well as claims of slander of credit and wrongful foreclosure. The defendant servicer attempted to remove the proceedings to federal court by arguing that the borrower’s state law claims were totally preempted by FCRA and, thus, gave rise to federal question jurisdiction. The court held that (i) FCRA only preempts state law claims when the relevant state law conflicts with FCRA and that no such conflict exists between FCRA and the relevant Texas law, and (ii) in any event, preemption is merely an affirmative defense that is not a basis for removal. For a copy of the opinion, please see http://www.buckleysandler.com/Ortiz_v_NC.pdf.
Litigation
California Federal Court Denies Motion to Dismiss RESPA Lawsuit. On September 18, the U.S. District Court for the Eastern District of California denied a defendant’s motion for judgment on the pleadings in a case alleging violations of the Real Estate Settlement Procedures Act (RESPA), finding that the reinsurance of private mortgage insurance (PMI) may be part of a RESPA violation and that borrowers need not always show an overcharge to establish standing to sue under RESPA. Munoz v. PHH Corp., No. Civ. 08075, 2009 WL 3048909 (E.D. Cal. Sept. 18, 2009). In Munoz, the defendant lender made mortgage loans to the borrowers and required private mortgage insurance in connection with the loans. The borrowers alleged that the mortgage insurer pooled the insurance contracts and reinsured them with an insurance company subsidiary of the lender in exchange for a portion of the monthly insurance premiums. The borrowers further alleged that, under this reinsurance arrangement, the insurance company subsidiary assumed little, if any, risk and that the arrangement operated instead to provide the lender with a referral fee in violation of RESPA. The company argued that reinsurance of PMI occurs post-settlement and is not covered under RESPA, that the borrowers were barred from challenging the reasonableness of the rates because they were filed with and approved by the relevant regulations (the so-called “filed rate” doctrine), and that the borrowers would lack standing absent an allegation that they were actually overcharged. With respect to the reach of RESPA, the court stated that “[p]laintiffs allege that PHH received a referral fee for directing PMI business to certain providers. The reinsurance is only the means by which the alleged fee is transferred; the PMI itself is the settlement service at issue.” The court further held that the filed rate doctrine was inapplicable given that the borrowers were not challenging the PMI premium rates, but rather alleging an unfair business practice. With respect to the borrowers’ standing, the court found that allegations of actual overcharging are not required to establish standing under RESPA. For a copy of the opinion, please see http://www.buckleysandler.com/Munoz_v_PHH.pdf.
New York Federal Court Finds Defendants May Assert TILA Tolerance for Accuracy Defense; HOLA Preempts Certain State Law Claims. On September 29, in a certified class action, the U.S. District Court for the Eastern District of New York, in deciding cross-motions for summary judgment, granted, in part, the defendants’ motion for summary judgment, holding, among other things, that the defendants, originators and purchasers of residential mortgage loans, were or would be entitled to TILA’s tolerance for accuracy defense regarding the calculation of certain fees and that certain of state law claims brought by the class were preempted by the Home Owners’ Loan Act (HOLA) and its implementing regulations. McAnaney v. Astoria Fin. Corp., No. 04-cv-1101, 2009 WL 3150430 (E.D.N.Y. Sept. 29, 2009).
The class in McAnaney alleged, among other things, that the defendants violated TILA by failing to disclose as finance charges several fees that were “necessary to satisfy” the subject loans. The defendants sought summary judgment on the class plaintiffs’ TILA claims, arguing that an “Atty Doc Prep Fee” was properly disclosed to the class plaintiffs and that all other fees at issue – even assuming those fees should have been included in the finance charge – were within TILA’s $100 tolerance for accuracy. The class plaintiffs, in their motion for summary judgment, countered by arguing, among other things, that the accuracy tolerance threshold (i) does not bar a TILA claim regarding undisclosed finance charges, (ii) only applies to unintentional finance charge omissions, and (iii) does not apply to omissions of entire components of the finance charge. Although the court denied the defendants’ motion for summary judgment as to the class plaintiffs’ TILA claims, finding that the question of whether the Atty Doc Prep Fee was properly disclosed was a disputed issue of material fact, it observed that, to the extent that fee is found to have been properly disclosed, the defendants, as with the other fees at issue, could invoke the benefit of TILA’s accuracy tolerance defense. In this regard, the court rejected each of the class plaintiffs’ arguments regarding TILA’s accuracy tolerance threshold, holding that TILA (i) explicitly provides that errors in the finance charge that do not exceed $ 100 shall be “treated as accurate,” (ii) does not include a “motive requirement,” and (iii) applies “even if entire components of the finance charge are omitted, so long as the total variance is less than $ 100.”
As to the class plaintiffs’ state statutory and common law claims, the court granted summary judgment to the defendants, who argued that HOLA preempted them. The court held that certain state law claims were preempted while others were not. More specifically, the court held that the class plaintiffs’ claim under § 274-a of the New York Real Property Law—which entitles an owner of real property that is encumbered by a mortgage to receive, upon demand, payoff statements at no charge—was preempted because it imposes a substantive limit on federal savings associations’ ability to charge “[l]oan-related fees.” The court also held that the class plaintiffs’ claim under § 1921 of the New York Real Property Actions & Proceedings Law—which provides that “’[a]fter payment of authorized principal, interest, and any other amounts due . . . a mortgagee of real property . . . must execute and acknowledge . . . a satisfaction of mortgage’ which is to be recorded.”— was preempted because the statute “imposes a substantive, affirmative requirement on lenders to complete the satisfaction of a mortgage within a specific time frame, a requirement that, when applied to federal savings associations, directly impacts their lending activities, particularly with respect to the processing and servicing of mortgages….” The court held that the class plaintiffs’ claims for unjust enrichment and fraud were not preempted because, in this context, the claims did not “impose specific substantive standards which more than incidentally affect lending operations.”
With regard to the remaining claims, the court rejected, in whole or in part, the defendants’ preemption arguments. In particular, the court held that the class plaintiffs’ breach of contract claim was not preempted because requiring lenders to comply with their contractual obligations “does not seek to impose specific substantive requirements upon the operations of defendants, apart from compliance with specific contractual obligations.” The court also held that the class plaintiffs’ claim under New York General Business Law § 349—which prohibits “[d]eceptive acts or practices in the conduct of any business, trade or commerce or in furnishing of any service in this state”— was not preempted “to the extent that plaintiffs seek relief for deceptive acts and practices incident to the alleged breach of the mortgage agreements with defendants,” but was preempted, to the extent the claim was based on an alleged violation of the New York Real Property Law and New York Real Property Actions & Proceedings Law. Accordingly, as to these claims, the court denied both the defendants and the class plaintiffs’ motions for summary judgment. For a copy of the opinion, please see http://www.buckleysandler.com/McAnaney_v_Astoria.pdf.
New Jersey Bankruptcy Court Finds Borrower Entitled to Rescission Under TILA; Rejects Preemption of State Law Claims. On September 17, the U.S. Bankruptcy Court for the District of New Jersey held that a borrower was entitled under the Truth in Lending Act (TILA) to the rescission, in part, of a refinanced mortgage loan and that the National Bank Act (NBA) and Office of the Comptroller of the Currency regulations did not preempt the relevant New Jersey fraud and consumer protection laws. Orr v. Ameriquest Mortg. Co., Case No. 07-22759, 2009 WL 3030125 (Bankr.D.N.J. Sept. 17, 2009). In Orr, the borrower refinanced two mortgages with the defendant lender; the lender’s assignee subsequently filed foreclosure proceedings against the borrower. After the borrower filed for bankruptcy, the borrower and the borrower’s trustee filed suit against the defendants, alleging violations of TILA and New Jersey state fraud and consumer protection laws. The plaintiffs alleged that material disclosures in connection with one of the mortgage loans were inaccurate because they did not correctly state the borrower’s finance charge, including recording fees. Regarding the TILA claim, the court first found that the TILA action was timely under equitable principles because the borrower’s bankruptcy filing stayed the foreclosure and prevented the borrower from asserting recoupment of TILA damages as an affirmative defense to the foreclosure action. The court next found that the stated recording fees provided to the borrower fell outside of TILA’s tolerance for accuracy provision and relied on the Federal Reserve Board’s Official Staff Interpretation to Regulation Z to determine that the borrower was entitled to rescission of the new money advanced for the refinancing as well as any amounts paid by the borrower as part of the refinancing. The court, thus, found for the plaintiffs regarding the rescission of the borrower’s settlement and interest charges. The court, however, did not find for the plaintiffs on the narrow issue of whether other contested amounts were paid “as part of” the refinancing. Regarding the state law claims, the defendants argued that the NBA preempted the state law claims because the assignee of the mortgage is a national bank. The court held that the bank failed to establish that the state law at issue conflicts “with the letter or the general purposes of the NBA,” and that “engaging in fraudulent lending practices is not an express or incidental power granted to federal banks.” The court also held that TILA did not preempt the state law claims against defendants, nor did TILA’s assignee liability provisions entitle defendants to summary judgment. For a copy of the opinion, please contact .
Eleventh Circuit Holds Answering Machine Messages by Debt Collector Not Entitled to FDCPA Bona Fide Error Defense. On October 14, the U.S. Court of Appeals for the Eleventh Circuit held that the bona fide error defense in the Fair Debt Collection Practices Act (FDCPA) does not cover an instance where the debt collector violates one provision of the FDCPA to avoid violating a different provision of the FDCPA. Edwards v. Niagara Credit Solutions, Inc., No. 08-17006, 2009 WL 3273300 (11th Cir. Oct. 14, 2009). In the case, Niagara Credit Solutions (Niagara) left numerous messages on the plaintiff’s answering machine to collect on a debt, each of which intentionally omitted (i) Niagara’s name, (ii) that they were a debt collector, and (iii) that the call had been made to collect a debt—all in violation of § 1692e(11). Niagara stated that this was done intentionally to avoid violating § 1692c(b), which forbids a debt collector from communicating about the debt with a third party, out of concern that, for example, the message could be played or heard by a family member or roommate. On appeal of a summary judgment ruling in favor of the plaintiff, Niagara argued that their violation is protected by the bona fide error defense. The Eleventh Circuit disagreed, finding that Niagara could not meet at least two of the three prongs of the defense, including (i) that the violation was not intentional and (ii) that the error was “bona fide”. The court noted that Niagara admitted that it intentionally omitted the information from the messages, which clearly did not meet the first prong. It also said that it was not a “bona fide error” because it was unreasonable to violate the FDCPA “with every message it left in order to avoid the possibility that some of those messages might lead to a violation” of another section. Finally, in dicta, the court responded to Niagara’s complaint that, if it cannot omit the disclosures required by § 1692e, it cannot leave answering machine messages by stating that “even if Niagara’s assumption [that leaving a message on a machine would violate the Act] is correct, the answer is that the Act does not guarantee a debt collector the right to leave answering machine messages.” Consequently, the court affirmed the summary judgment to the plaintiff. For a copy of the opinion, please see http://www.buckleysandler.com/Edwards_v_Niagara.pdf.
New York Federal Court Holds Law Firm Liable for Misrepresentation in Violation of the FDCPA. On September 30, the U.S. District Court for the Eastern District of New York held that a law firm that fails to undertake a meaningful review of a debtor’s file before sending a debt-collection letter and commencing legal action is liable for misrepresenting that the letter is “from an attorney” in violation of the Fair Debt Collection Practices Act (FDCPA). Miller v. Upton, Cohen & Slamowitz, No. 01-CV-1126, 2009 WL 3212556 (E.D.N.Y. Sept. 30, 2009). In the case, the plaintiff debtor alleged that the defendant law firm issued a debt collection letter and subsequently filed a legal complaint without meaningfully investigating or determining the validity of the alleged debt. The court held that, even if a debt collection letter comes from a law firm, for a letter to be “from an attorney” under the FDCPA, it must have adequate attorney involvement or review to comply with the FDCPA. In this case, the court based its decision on evidence of (i) the daily and monthly volume of matters handled jointly by the signing attorney and one other attorney in the law firm, including the issuance of 211 debt-collection letters on the date on which the plaintiff’s letter was sent, and more than 3,000 such letters in the month in which the plaintiff’s letter was sent, (ii) the signing attorney’s complete lack of involvement with the plaintiff debtor’s file until well after the commencement of litigation against the plaintiff debtor, and (iii) the signing attorney’s lack of knowledge of the governing law applicable to the suit filed against the plaintiff debtor. The court rejected the law firm’s argument that the prior review by others, including the initial creditor and a referring law firm, obviated the need for further review to comply with the requisites of the FDCPA. The court noted that an attorney may, to some extent, reasonably rely upon and consider a prior review and/or opinion from reputable and reliable attorneys, clients, and paralegals. However, such reliance does not wholly obviate the need for independent inquiry. The court further noted that, in FDCPA cases, the attorney bearing the conclusive responsibility for issuing debt-collection letters may not simply substitute the judgment of another party for his or her own. As a result, the court held that the law firm violated the FDCPA. For a copy of the opinion, please see http://www.buckleysandler.com/Miller_v_Upton.pdf.
Second Circuit Rejects Cramdown Attempt; Holds PMSI Includes Negative Equity. On October 9, the U.S. Court of Appeals for the Second Circuit held that an auto finance creditor’s purchase-money security interest (PMSI) included the financing of negative equity from a trade-in vehicle, and, thus, rejected the debtors’ attempt to "cramdown" their bankruptcy claims. In re Peaslee, Nos. 07-3962-BK, 07-3986-BK, 07-3952-BK, 07-3990-BK, 07-3964-BK, 2009 WL 3233823 (2nd Cir. Oct. 9, 2009) (per curiam). In this consolidated appeal, the debtors traded in vehicles in which they held "negative equity" (i.e., the amount owed on the trade-in vehicle exceeded the value of that vehicle) in conjunction with financing a new vehicle purchase. The amount financed to purchase the new vehicle included the "negative equity" from the trade-in vehicle. The debtors subsequently filed for bankruptcy protection and sought to "cramdown" their bankruptcy plan by bifurcating the creditor’s claim into (i) a secured portion, and (ii) an unsecured portion (the negative equity from the trade-in vehicle). Answering the Second Circuit’s certified question in this matter, the New York Court of Appeals held that negative equity fits both definitions of “purchase-money obligation” under the New York Uniform Commercial Code, such that there was a ‘close nexus between the acquisition of collateral and the secured obligation.’ As a result, the Second Circuit affirmed that the portion of an automobile retail installment sale attributable to a trade-in vehicle’s negative equity constitutes a PMSI under New York law and the court rejected the debtors’ attempt to "cramdown" their bankruptcy claims. A previous opinion in this dispute was reported in InfoBytes, Aug. 24, 2007. For a copy of the opinion, please see http://www.buckleysandler.com/Peaslee.pdf.
Nebraska Federal Court Holds Home Foreclosure Not Debt Collection Under FDCPA. On October 8, the U.S. District Court for the District of Nebraska, among other conclusions of law, held that foreclosing on a home is not “debt collection” as contemplated by the Fair Debt Collection Practices Act (FDCPA). Siegel v. Deutsche Bank Nat’l Trust Co., No. 8:08CV517, 2009 WL 3254491 (D. Neb. Oct. 8, 2009). In Siegel, a defendant servicer initiated foreclosure proceedings against the plaintiff borrower. In response, the borrower filed suit, alleging, among other things, that the defendants, including the lender and assignee, violated the FDCPA by foreclosing on the home. The court rejected the borrower’s claims, holding that the defendants did not violate the FDCPA by foreclosing on the home because foreclosing on a home is not “debt collection” as contemplated by the FDCPA and that the defendants are not “debt collectors” under the FDCPA. For a copy of the opinion, please see http://www.buckleysandler.com/Siegel_v_Deutsche.pdf.
Pennsylvania Federal Court Allows Claim that LexisNexis is a Consumer Reporting Agency. On October 6, the U.S. District Court for the Eastern District of Pennsylvania denied a motion to dismiss filed by LexisNexis Risk and Information Analytics Groups, Inc. (Lexis) and Reed Elsevier, Inc. (Reed) in a claim that LexisNexis and Reed acted as consumer reporting agencies (CRAs) under the Fair Credit Reporting Act (FCRA). Marricone v. Experian Information Solutions, Inc., No. 09-CV-1123, 2009 WL 3245417 (E.D. Pa. Oct. 6, 2009). In their motion to dismiss, the defendants claimed that the plaintiff did not plead enough facts to allege that Lexis and Reed were CRAs. However, the court stated that the definition of a consumer reporting agency in FCRA “is fairly broad,” and that “whether an entity is acting as a consumer reporting agency in a particular situation is a fact-specific inquiry.” The court found no “binding case law holding that Lexis and Reed are not CRAs as a matter of law,” and, because factual discovery was needed, denied the motion to dismiss. The defendants also argued that the plaintiff was not entitled to injunctive or declaratory relief under FCRA as a matter of law. The court denied this motion as well, finding that the Third Circuit has not specifically addressed this issue, but it allowed the defendants to raise the issue at a later stage of the litigation. The court’s holding that coverage as a CRA is a factual question that cannot be resolved at the pleadings stage could have major implications, not only for companies such as Lexis and Reed that have attempted to structure their activities to avoid coverage, but also for their customers, who could face liability for obtaining and using a consumer report without a permissible purpose under FCRA. For a copy of the opinion, please see http://www.buckleysandler.com/Marricone_v_Experian.pdf.
Texas Federal Court Finds FCRA Does Not Completely Preempt State Law. On September 29, the U.S. District Court for the Southern District of Texas held that the Fair Credit Reporting Act (FCRA) did not completely preempt a borrower’s state law claims against a mortgage servicer. Ortiz v. National City Home Loan Services Inc., Civ. No. H-09-2033, 2009 WL 3255088 (S.D. Tex. Sept. 29, 2009). In this case, the defendant servicer deducted a portion of the borrower’s monthly mortgage payment to cover required insurance on the borrower’s property, thereby resulting in a shortage in the borrower’s Promissory Note obligation. As a result of the shortage, the servicer filed foreclosure proceedings against the borrower. Subsequently, the borrower alleged that the servicer damaged his credit by wrongfully reporting to credit reporting agencies that there was a delinquency in the mortgage payments and claimed violations of the Texas Deceptive Trade Practices – Consumer Protection Act, as well as claims of slander of credit and wrongful foreclosure. The defendant servicer attempted to remove the proceedings to federal court by arguing that the borrower’s state law claims were totally preempted by FCRA and, thus, gave rise to federal question jurisdiction. The court held that (i) FCRA only preempts state law claims when the relevant state law conflicts with FCRA and that no such conflict exists between FCRA and the relevant Texas law, and (ii) in any event, preemption is merely an affirmative defense that is not a basis for removal. For a copy of the opinion, please see http://www.buckleysandler.com/Ortiz_v_NC.pdf.
Privacy/Data Security
Pennsylvania Federal Court Allows Claim that LexisNexis is a Consumer Reporting Agency. On October 6, the U.S. District Court for the Eastern District of Pennsylvania denied a motion to dismiss filed by LexisNexis Risk and Information Analytics Groups, Inc. (Lexis) and Reed Elsevier, Inc. (Reed) in a claim that LexisNexis and Reed acted as consumer reporting agencies (CRAs) under the Fair Credit Reporting Act (FCRA). Marricone v. Experian Information Solutions, Inc., No. 09-CV-1123, 2009 WL 3245417 (E.D. Pa. Oct. 6, 2009). In their motion to dismiss, the defendants claimed that the plaintiff did not plead enough facts to allege that Lexis and Reed were CRAs. However, the court stated that the definition of a consumer reporting agency in FCRA “is fairly broad,” and that “whether an entity is acting as a consumer reporting agency in a particular situation is a fact-specific inquiry.” The court found no “binding case law holding that Lexis and Reed are not CRAs as a matter of law,” and, because factual discovery was needed, denied the motion to dismiss. The defendants also argued that the plaintiff was not entitled to injunctive or declaratory relief under FCRA as a matter of law. The court denied this motion as well, finding that the Third Circuit has not specifically addressed this issue, but it allowed the defendants to raise the issue at a later stage of the litigation. The court’s holding that coverage as a CRA is a factual question that cannot be resolved at the pleadings stage could have major implications, not only for companies such as Lexis and Reed that have attempted to structure their activities to avoid coverage, but also for their customers, who could face liability for obtaining and using a consumer report without a permissible purpose under FCRA. For a copy of the opinion, please see http://www.buckleysandler.com/Marricone_v_Experian.pdf.
Texas Federal Court Finds FCRA Does Not Completely Preempt State Law. On September 29, the U.S. District Court for the Southern District of Texas held that the Fair Credit Reporting Act (FCRA) did not completely preempt a borrower’s state law claims against a mortgage servicer. Ortiz v. National City Home Loan Services Inc., Civ. No. H-09-2033, 2009 WL 3255088 (S.D. Tex. Sept. 29, 2009). In this case, the defendant servicer deducted a portion of the borrower’s monthly mortgage payment to cover required insurance on the borrower’s property, thereby resulting in a shortage in the borrower’s Promissory Note obligation. As a result of the shortage, the servicer filed foreclosure proceedings against the borrower. Subsequently, the borrower alleged that the servicer damaged his credit by wrongfully reporting to credit reporting agencies that there was a delinquency in the mortgage payments and claimed violations of the Texas Deceptive Trade Practices – Consumer Protection Act, as well as claims of slander of credit and wrongful foreclosure. The defendant servicer attempted to remove the proceedings to federal court by arguing that the borrower’s state law claims were totally preempted by FCRA and, thus, gave rise to federal question jurisdiction. The court held that (i) FCRA only preempts state law claims when the relevant state law conflicts with FCRA and that no such conflict exists between FCRA and the relevant Texas law, and (ii) in any event, preemption is merely an affirmative defense that is not a basis for removal. For a copy of the opinion, please see http://www.buckleysandler.com/Ortiz_v_NC.pdf.