InfoBytes, October 2, 2009
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Securities
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
FDIC Proposes Rule that Would Require Insured Institutions to Prepay Risk-Based Assessments. On September 29, the FDIC issued a proposed rule that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC anticipates that the new rule would immediately strengthen the Deposit Insurance Fund’s (DIF’s) cash position by approximately $45 billion. Though the FDIC considered alternative proposals, such as imposing a special assessment or borrowing funds, the FDIC opted for the prepayment approach because (i) it would not necessarily result in the need for a future special assessment and (ii) it would allow the capital impact of deposit insurance assessments to be felt more gradually over time. In addition to the proposed rule on prepaid assessments, the FDIC Board also voted to amend its 2008 restoration plan for the DIF (reported in InfoBytes, Oct. 10, 2008). Under the amended plan, the FDIC will extend the restoration plan by one year and will increase assessments rates by three basis points starting on January 1, 2011. For a copy of the FDIC’s press release announcing the proposed rule and amended restoration plan, please see http://www.fdic.gov/news/news/press/2009/pr09178.html. For a copy of Q&As regarding the prepayment of assessments, please see http://www.fdic.gov/deposit/insurance/prepay/index.html.
Federal Reserve Issues Proposed Rule to Implement the Second Phase of the Credit Card Act. On September 29, the Federal Reserve Board issued a proposed rule to implement the provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 slated to go into effect on February 22, 2010. Among other things, the provisions of the proposed rule would prohibit card issuers from (i) increasing rates on existing balances, subject to certain exceptions, (ii) increasing rates during the first year of an account, (iii) opening a new credit card account or increasing the credit limit for an existing credit card account unless the creditor considers the consumer’s ability to make the required payments, (iv) issuing credit cards to minors, subject to certain exceptions, and (v) imposing certain fees (e.g., charging consumers fees for exceeding their credit limit without their consent; "double-cycle" billing; and, except in certain circumstances, collecting a fee for making a payment). The proposal also addresses certain disclosure requirements, including (i) marketing to students of higher learning, (ii) requiring creditors to post credit card agreements on their web sites and to submit those agreements to the Fed for posting on its website, subject to certain exclusions, and (iii) providing a card holder with an the estimate of the time to repay account balances. Comments on the proposed rule must be submitted within 30 days of its publication in the Federal Register. For a copy of the press release on the proposed rule, please see http://www.federalreserve.gov/newsevents/press/bcreg/20090929a.htm. For a copy of the proposal, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090929a1.pdf.
FFIEC Releases 2008 HMDA Data. On September 30, the Federal Financial Institutions Examination Council (FFIEC) released the data on mortgage applications, denials, originations, and purchases for 2008 (reported in InfoBytes Special Alert, Sept. 30, 2009). According to the FFIEC’s press release, there was a sharp decline in lending activity and an even greater decline in subprime lending in 2008. Reported originated loans of all types decreased by 31%, and higher-priced (generally subprime) loans as a proportion of the total originated have decreased dramatically from their high of 29% in 2006, to 18% in 2007 and 12% in 2008. The FFIEC notes that the average rate spread on higher-priced loans has also decreased, implying that fewer loans are being made to the most credit-impaired borrowers. The reductions in lending activity were accompanied with continued disparities in the number of higher-priced loans made to minorities as compared to non-Hispanic whites, as well as a higher minority denial rate. As the press release notes, the HMDA numbers released to the public are not adjusted for creditworthiness factors, and the data continues to show that minorities are over-represented in lower credit score bands. For a copy of the press release, please see http://www.ffiec.gov/hmcrpr/hm093009.htm. Please call Andy Sandler (202-349-8001), Ben Klubes (202-349-8002), Jeff Naimon (202-349-8030), or Jonice Gray Tucker (202-349-8005) with any questions regarding the FFIEC’s release of the 2008 HMDA data.
FINRA Proposes to Designate Asset-Backed Securities as TRACE-Eligible Securities. On October 1, the Financial Industry Regulatory Authority (FINRA) filed with the Securities and Exchange Commission (SEC) a proposed rule change that would expand the coverage of Trade Reporting and Compliance Engine (TRACE)-Eligible Securities to include asset-backed securities, mortgage-backed securities and other similar securities (collectively, Asset-Backed Securities). This change would require FINRA members to report all transactions in Asset-Backed Securities. The proposed rule includes a more liberal reporting requirement than for other TRACE-Eligible Securities, permitting members to report such transactions at the end of the business day (as opposed to within 15 minutes of the Time of Execution). In addition, Asset-Backed Securities transactions initially will not be disseminated publicly to market participants. FINRA also recently announced that debt securities that are issued or guaranteed by an agency or by a Government-Sponsored Enterprise will become TRACE-Eligible Securities, and that transactions in such debt securities will be reported and disseminated. This change, reported in Regulatory Notice 09-57, becomes effective March 1, 2010. For a copy of Regulatory Notice 09-57, please see http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p120043.pdf. For a copy of the proposal filed with the SEC, please see http://www.finra.org/web/groups/industry/@ip/@reg/@rulfil/documents/rulefilings/p120062.pdf.
Treasury Announces Completion of Initial Closings Under Legacy Securities Public-Private Investment Program. On September 30, the U.S. Department of the Treasury (Treasury) announced that two Public-Private Investment Funds (PPIFs) established under the Legacy Securities Public-Private Investment Program (PPIP) have completed their initial closings, each with at least $500 million of committed equity capital from private investors. The entities are Invesco Ltd. (Invesco Legacy Securities Master Fund, L.P.) and The TCW Group, Inc. (UST/TCW Senior Mortgage Securities Fund, L.P.). These funds were created by two of the nine fund managers prequalified by Treasury under the Legacy Securities PPIP on July 8, 2009 (reported in InfoBytes, July 10, 2009). Treasury expects that the remaining seven managers will conduct initial closings for the other PPIFs sometime in October. According to Treasury, the PPIFs have collectively closed on approximately $1.13 billion of private sector capital commitments, which have now been matched 100 percent by Treasury, for a total equity capital commitment of $2.26 billion. Additionally, Treasury will provide debt financing up to 100 percent of the total capital commitments, thus representing approximately $4.52 billion of total equity and debt capital commitments. For a copy of the press release, please see http://www.treas.gov/press/releases/tg304.htm.
FDIC Issues Financial Institution Letter Addressing the Protecting Tenants at Foreclosure Act. On September 28, the Federal Deposit Insurance Corporation (FDIC) issued a Financial Institution Letter regarding the Protecting Tenants at Foreclosure Act (the Act), which provides protections for tenants living in homes subject to foreclosure. According to the letter, the Act requires creditors to provide tenants with 90-days notice before evicting those tenants as the result of a foreclosure. Additionally, in the event a foreclosure takes place, the Act obliges creditors to honor existing leases with renters until the end of their terms, subject to certain exceptions. However, these provisions will not preempt the requirements of any state or local law that provides longer time periods or other additional protections for tenants in homes subject to foreclosure. The protections under the Act became effective May 20, 2009. For a copy of the Financial Institution Letter, please see http://www.fdic.gov/news/news/financial/2009/fil09056.pdf.
FTC Investigates Two Mortgage Foreclosure Rescue Companies. On September 19, the Federal Trade Commission (FTC) announced the investigation of two mortgage foreclosure rescue companies that allegedly claimed that they would obtain a mortgage modification for virtually all customers and charged large up-front fees, but generally failed to provide the promised foreclosure relief services. Nations Housing Modification Center is charged with (i) violating the FTC Act and the FTC’s Telemarketing Sales Rule, (ii) misrepresenting itself as a federal government agency, (iii) charging at least $3,000 in fees per customer, (iv) falsely claiming a 90% success rate, and (v) fraudulently promising that they would secure mortgage modifications. Infinity Group Services (Infinity) is charged with violating the FTC Act by falsely telling customers they would succeed in obtaining a modified mortgage loan and that, if unsuccessful, the customer would be refunded the up-front fee of $995, in addition to fees ranging from $2,000 to $15,000. Infinity allegedly failed to update homeowners on the status of their loan and refused to take homeowners’ calls. According to FTC officials, the agency has begun to determine whether new rules could be instituted to address the proliferation of fraudulent mortgage rescue companies. For a copy of the press release, please see http://www.ftc.gov/opa/2009/09/loanmods.shtm.
State Issues
California Bar Releases Names of Attorneys Under Investigation for Loan Modification Misconduct. On September 18, the State Bar of California (State Bar) released the names of 16 attorneys who are under investigation for misconduct with respect to loan modification services. The named attorneys allegedly collected fees for loan modification services from homeowners who were facing potential foreclosure and then failed to provide those services. According to the State Bar, several attorneys involved with loan modification services have given up their licenses to practice law rather than face disciplinary charges by the State Bar’s Office of Chief Trial Counsel and possible disbarment. The State Bar reportedly waived confidentiality in the interest of protecting consumers. For a copy of the press release, please see http://calbar.ca.gov/state/calbar/calbar_generic.jsp?cid=10144&n=96395.
North Carolina Identity Theft Legislation Becomes Effective. On October 1, the operative provisions of North Carolina SB 1017, an Act enhancing protections available to victims of identity theft, went into effect (SB 1017 was initially reported in InfoBytes, Aug. 7, 2009). In general, the Act creates new legal obligations for credit reporting agencies (CRAs), creditors, businesses, and credit monitoring services. Under the Act, CRAs must notify a North Carolina consumer who requests a security freeze that, in order to obtain a freeze from another CRA, he or she must make a separate, individual request to that CRA because only it can obtain the consumer authorization necessary to freeze its own files. The Act also mandates that CRAs lower their response times to a consumer’s request to add or remove a freeze. With respect to creditors, the Act prohibits any communication about a debt to a CRA during the pendency of a consumer’s application for an award from the North Carolina Crime Victims Compensation Fund. The Act also requires credit monitoring services to notify consumers that they have the right to one free credit report per year before charging the consumer a fee to obtain or monitor the consumer’s credit report on behalf of the consumer. For a copy of the Act, please see http://www.ncleg.net/Sessions/2009/Bills/Senate/PDF/S1017v7.pdf.
Courts
D.C. Federal Court Holds Substitute Trustee is a “Debt Collector” Under FDCPA. On September 28, the U.S. District Court for the District of Columbia held that a substitute trustee under a deed of trust was a “debt collector” under the federal Fair Debt Collection Practices Act (FDCPA). Muldrow v. EMC Mortgage Corp., No. 08-1771, 2009 WL 3069731 (D.D.C. Sept. 28, 2009). In Muldrow, the substitute trustee - a Maryland law firm - was hired by a mortgage company to initiate foreclosure proceedings against a borrower that had defaulted on her loan. The substitute trustee sent the borrower a collection notice and subsequently notified the borrower that her property was being sold at a foreclosure sale to satisfy her debt. After the borrower brought suit for violations of the FDCPA, the substitute trustee argued that it was not a debt collector within the meaning of the statute, and that substitute trustees can be liable only under § 1692f(6) of the FDCPA, which applies to businesses engaged in the enforcement of security interests. According to the court, however, concluding that substitute trustees are exempt from the FDCPA’s debt collection restrictions would be “contrary to the stated purpose of the FDCPA.” Persuaded by the Fourth Circuit’s opinion in Wilson v. Draper & Goldberg, PLLC, 443 F.3d 373 (4th Cir. 2006), the court concluded that the substitute trustee was a debt collector under the FDCPA—because it “undertook the role of debt collector and communicated with the plaintiff in a manner regulated by the FDCPA.” The court therefore denied the substitute trustee’s motion to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/Muldrow_v_EMC.pdf.
Pennsylvania Federal Court Holds State Law Claims Not Preempted by NBA. On September 11, the U.S. District Court for the Western District of Pennsylvania held that the National Bank Act (NBA) does not preempt state law claims of malicious prosecution, violations of Pennsylvania’s unfair trade practices statute, breach of fiduciary duty, or breach of the duty of good faith and fair dealing. Poskin v. TD Banknorth, N.A., Civil Action 06-463, 2009 WL 298196 (W.D. Pa. Sept. 11, 2009). In Poskin, the plaintiff borrowers refinanced a loan for a mobile home. After the borrowers fell behind on their loan, the defendant bank filed actions for replevin and foreclosure. In response, the borrowers filed suit against, among others, the defendant bank and the defendant mortgage broker, alleging, among other things, (i) that the defendants engaged in unfair or deceptive practices by fraudulently misrepresenting employment history and earnings on the loan application, and (ii) that the bank’s action for replevin and foreclosure constituted malicious prosecution. The court granted in part and denied in part the bank’s motion to dismiss, specifically holding that the borrowers’ state law claims of malicious prosecution and violation of the unfair trade practices statute were not preempted by the NBA because both claims were brought under state law and neither contradicted the language or purpose of the NBA. The court found that, under Pennsylvania law, the tort of malicious prosecution was consistent with the language and purpose of the NBA. Furthermore, the court held that although the NBA can preempt an unfair trade practices claim based on excessive annual interest rate charges, the borrowers’ claim was not based on usurious interest rate charges, and, thus, the provisions of the state statute cited did not conflict with or contradict the NBA. The court also rejected the bank’s argument that the NBA preempts the borrowers’ state claims for breach of fiduciary duty and breach of the duty of good faith and fair dealing, holding that such claims were not inconsistent with the language or the purpose of the NBA. For a copy of the opinion, please see http://www.buckleysandler.com/Poskin_v_TD_Banknorth.pdf.
New York Federal Court Holds Debt Collector Violated FDCPA for Defective Validation Notice. On September 10, the U.S. District Court for the Eastern District of New York held that a debt collection “validation notice” that does not inform the consumer that debt disputes must be in writing to be entitled to debt verification violates the federal Fair Debt Collection Practices Act (FDCPA). Nero v. Law Office of Sam Streeter, P.L.L.C., No. 08-CV-1459, 2009, 2009 WL 2981973 (E.D.N.Y. Sept. 10, 2009). In Nero, the defendant debt collector sent the plaintiff debtor a “validation notice”—a notice that advises consumers of specific rights enumerated in the FDCPA—providing that the debtor had 30 days to notify the debt collector if the debt was disputed in order to have the debt verified. However, the validation notice did not specify that the plaintiff was required to notify the debt collector in writing of any debt disputes entitled to a debt verification. The debtor alleged that the debt collector violated the FDCPA by (i) failing to inform her that debt disputes must be communicated in writing to be entitled to debt verification, and (ii) failing to be properly licensed as a debt collector in New York City. The judge agreed with the debtor on the first claim, finding that, although there is no Second Circuit authority on whether the failure to include the words “in writing” amounts to a violation of the FDCPA, the debt validation notice must state that a debt dispute is required to be in writing to be entitled to debt verification. The court reasoned that debt collectors have no duty to honor oral requests, and that the plain text of the FDCPA requires debt collectors to advise consumers of their rights in a prescribed manner. As a result, the court awarded the debtor statutory damages, costs and reasonable attorneys’ fees. On the second claim, the judge found that the debt collector’s failure to obtain a New York City debt collector license was a non-actionable technical failure because the debt collection letter contained no threats of litigation or other action that an unlicensed debt collector could not carry out. For a copy of the opinion, please see http://www.buckleysandler.com/Nero_v_Streeter.pdf.
California Federal Court Denies Bank’s Motion to Seal Complaint that Reveals Data Breach. On September 18, the U.S. District Court for the Northern District of California denied a plaintiff bank’s motion to seal all pleadings and filings in a matter involving a data breach not yet disclosed to those affected, finding that the bank did not show sufficiently compelling reasons to override the public’s common law right of access to records in civil proceedings. Rocky Mountain Bank v. Google, Inc., No. 09-4385, 2009 WL 3053716 (N.D. Cal. Sept. 18, 2009). In this case, the plaintiff bank inadvertently sent confidential customer information via e-mail to an unintended recipient’s Google e-mail address. The bank unsuccessfully tried to recall the e-mail and subsequently contacted Google to determine whether the e-mail account was active or dormant and what steps could be taken to ensure that the confidential customer information was not used or disclosed. Google refused to assist and the bank filed a motion to file all pleadings and other filings in this matter under seal. In denying the bank’s motion, the court held that the bank’s attempt to shield information about the data breach until determining whether the information had been further disclosed or misused was not a compelling reason that overrides the public’s common law right of access to court filings. The court noted that the bank did not disclose any actual customer information in its pleadings or motion papers, and that the bank had not shown that the information contained in its complaint and motion papers could result in improper use of the material for scandalous or libelous purposes, infringement of trade secrets, or invasion of any personal privacy rights that might warrant protection. For a copy of the opinion, please see http://www.buckleysandler.com/Rocky_Mountain_Bank_v_Google.pdf.
Firm News
Andrew Sandler and Jeff Naimon will be speaking at the 2009 CRA and Fair Lending Colloquium October 4-7 in New Orleans. Andrew Sandler will speak on Regulatory Reform, and Jeff Naimon will speak on Navigating a HMDA Data Analysis. For registration or additional information about this conference, go to www.cracolloquium.com.
Andrew Sandler will be speaking 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.
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.
Margo Tank gave an audio conference entitled “Building Effective Electronic Records and Electronic Records Management Systems: Navigating the Legal Traps” on September 10. For more information, please see http://www.alexinformation.com/store/10700909.php.
Chris Witeck gave a presentation at the Mortgage Bankers Association’s Reverse Mortgage Conference in San Diego on September 10 entitled “The HECM Challenge.” He also moderated the “Secondary Market Update” panel on September 11.
Jeff Naimon and Chris Witeck spoke at the Mortgage Bankers Association’s Regulatory Compliance Conference in Washington D.C. held on September 14-16. Jeff Naimon addressed fair lending developments as part of the “Hot Topics” Panel. Chris Witeck spoke on the Secondary Market Panel.
Margo Tank spoke at a NCHELP Committee Meeting on September 16 on the new Truth in Lending Act requirements for student lending transactions and the impact on the electronic disclosure delivery disclosures under the new rules.
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.
Mortgages
FDIC Issues Financial Institution Letter Addressing the Protecting Tenants at Foreclosure Act. On September 28, the Federal Deposit Insurance Corporation (FDIC) issued a Financial Institution Letter regarding the Protecting Tenants at Foreclosure Act (the Act), which provides protections for tenants living in homes subject to foreclosure. According to the letter, the Act requires creditors to provide tenants with 90-days notice before evicting those tenants as the result of a foreclosure. Additionally, in the event a foreclosure takes place, the Act obliges creditors to honor existing leases with renters until the end of their terms, subject to certain exceptions. However, these provisions will not preempt the requirements of any state or local law that provides longer time periods or other additional protections for tenants in homes subject to foreclosure. The protections under the Act became effective May 20, 2009. For a copy of the Financial Institution Letter, please see http://www.fdic.gov/news/news/financial/2009/fil09056.pdf.
FTC Investigates Two Mortgage Foreclosure Rescue Companies. On September 19, the Federal Trade Commission (FTC) announced the investigation of two mortgage foreclosure rescue companies that allegedly claimed that they would obtain a mortgage modification for virtually all customers and charged large up-front fees, but generally failed to provide the promised foreclosure relief services. Nations Housing Modification Center is charged with (i) violating the FTC Act and the FTC’s Telemarketing Sales Rule, (ii) misrepresenting itself as a federal government agency, (iii) charging at least $3,000 in fees per customer, (iv) falsely claiming a 90% success rate, and (v) fraudulently promising that they would secure mortgage modifications. Infinity Group Services (Infinity) is charged with violating the FTC Act by falsely telling customers they would succeed in obtaining a modified mortgage loan and that, if unsuccessful, the customer would be refunded the up-front fee of $995, in addition to fees ranging from $2,000 to $15,000. Infinity allegedly failed to update homeowners on the status of their loan and refused to take homeowners’ calls. According to FTC officials, the agency has begun to determine whether new rules could be instituted to address the proliferation of fraudulent mortgage rescue companies. For a copy of the press release, please see http://www.ftc.gov/opa/2009/09/loanmods.shtm.
California Bar Releases Names of Attorneys Under Investigation for Loan Modification Misconduct. On September 18, the State Bar of California (State Bar) released the names of 16 attorneys who are under investigation for misconduct with respect to loan modification services. The named attorneys allegedly collected fees for loan modification services from homeowners who were facing potential foreclosure and then failed to provide those services. According to the State Bar, several attorneys involved with loan modification services have given up their licenses to practice law rather than face disciplinary charges by the State Bar’s Office of Chief Trial Counsel and possible disbarment. The State Bar reportedly waived confidentiality in the interest of protecting consumers. For a copy of the press release, please see http://calbar.ca.gov/state/calbar/calbar_generic.jsp?cid=10144&n=96395.
D.C. Federal Court Holds Substitute Trustee is a “Debt Collector” Under FDCPA. On September 28, the U.S. District Court for the District of Columbia held that a substitute trustee under a deed of trust was a “debt collector” under the federal Fair Debt Collection Practices Act (FDCPA). Muldrow v. EMC Mortgage Corp., No. 08-1771, 2009 WL 3069731 (D.D.C. Sept. 28, 2009). In Muldrow, the substitute trustee - a Maryland law firm - was hired by a mortgage company to initiate foreclosure proceedings against a borrower that had defaulted on her loan. The substitute trustee sent the borrower a collection notice and subsequently notified the borrower that her property was being sold at a foreclosure sale to satisfy her debt. After the borrower brought suit for violations of the FDCPA, the substitute trustee argued that it was not a debt collector within the meaning of the statute, and that substitute trustees can be liable only under § 1692f(6) of the FDCPA, which applies to businesses engaged in the enforcement of security interests. According to the court, however, concluding that substitute trustees are exempt from the FDCPA’s debt collection restrictions would be “contrary to the stated purpose of the FDCPA.” Persuaded by the Fourth Circuit’s opinion in Wilson v. Draper & Goldberg, PLLC, 443 F.3d 373 (4th Cir. 2006), the court concluded that the substitute trustee was a debt collector under the FDCPA—because it “undertook the role of debt collector and communicated with the plaintiff in a manner regulated by the FDCPA.” The court therefore denied the substitute trustee’s motion to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/Muldrow_v_EMC.pdf.
Banking
FDIC Proposes Rule that Would Require Insured Institutions to Prepay Risk-Based Assessments. On September 29, the FDIC issued a proposed rule that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC anticipates that the new rule would immediately strengthen the Deposit Insurance Fund’s (DIF’s) cash position by approximately $45 billion. Though the FDIC considered alternative proposals, such as imposing a special assessment or borrowing funds, the FDIC opted for the prepayment approach because (i) it would not necessarily result in the need for a future special assessment and (ii) it would allow the capital impact of deposit insurance assessments to be felt more gradually over time. In addition to the proposed rule on prepaid assessments, the FDIC Board also voted to amend its 2008 restoration plan for the DIF (reported in InfoBytes, Oct. 10, 2008). Under the amended plan, the FDIC will extend the restoration plan by one year and will increase assessments rates by three basis points starting on January 1, 2011. For a copy of the FDIC’s press release announcing the proposed rule and amended restoration plan, please see http://www.fdic.gov/news/news/press/2009/pr09178.html. For a copy of Q&As regarding the prepayment of assessments, please see http://www.fdic.gov/deposit/insurance/prepay/index.html.
FFIEC Releases 2008 HMDA Data. On September 30, the Federal Financial Institutions Examination Council (FFIEC) released the data on mortgage applications, denials, originations, and purchases for 2008 (reported in InfoBytes Special Alert, Sept. 30, 2009). According to the FFIEC’s press release, there was a sharp decline in lending activity and an even greater decline in subprime lending in 2008. Reported originated loans of all types decreased by 31%, and higher-priced (generally subprime) loans as a proportion of the total originated have decreased dramatically from their high of 29% in 2006, to 18% in 2007 and 12% in 2008. The FFIEC notes that the average rate spread on higher-priced loans has also decreased, implying that fewer loans are being made to the most credit-impaired borrowers. The reductions in lending activity were accompanied with continued disparities in the number of higher-priced loans made to minorities as compared to non-Hispanic whites, as well as a higher minority denial rate. As the press release notes, the HMDA numbers released to the public are not adjusted for creditworthiness factors, and the data continues to show that minorities are over-represented in lower credit score bands. For a copy of the press release, please see http://www.ffiec.gov/hmcrpr/hm093009.htm. Please call Andy Sandler (202-349-8001), Ben Klubes (202-349-8002), Jeff Naimon (202-349-8030), or Jonice Gray Tucker (202-349-8005) with any questions regarding the FFIEC’s release of the 2008 HMDA data.
Treasury Announces Completion of Initial Closings Under Legacy Securities Public-Private Investment Program. On September 30, the U.S. Department of the Treasury (Treasury) announced that two Public-Private Investment Funds (PPIFs) established under the Legacy Securities Public-Private Investment Program (PPIP) have completed their initial closings, each with at least $500 million of committed equity capital from private investors. The entities are Invesco Ltd. (Invesco Legacy Securities Master Fund, L.P.) and The TCW Group, Inc. (UST/TCW Senior Mortgage Securities Fund, L.P.). These funds were created by two of the nine fund managers prequalified by Treasury under the Legacy Securities PPIP on July 8, 2009 (reported in InfoBytes, July 10, 2009). Treasury expects that the remaining seven managers will conduct initial closings for the other PPIFs sometime in October. According to Treasury, the PPIFs have collectively closed on approximately $1.13 billion of private sector capital commitments, which have now been matched 100 percent by Treasury, for a total equity capital commitment of $2.26 billion. Additionally, Treasury will provide debt financing up to 100 percent of the total capital commitments, thus representing approximately $4.52 billion of total equity and debt capital commitments. For a copy of the press release, please see http://www.treas.gov/press/releases/tg304.htm.
Pennsylvania Federal Court Holds State Law Claims Not Preempted by NBA. On September 11, the U.S. District Court for the Western District of Pennsylvania held that the National Bank Act (NBA) does not preempt state law claims of malicious prosecution, violations of Pennsylvania’s unfair trade practices statute, breach of fiduciary duty, or breach of the duty of good faith and fair dealing. Poskin v. TD Banknorth, N.A., Civil Action 06-463, 2009 WL 298196 (W.D. Pa. Sept. 11, 2009). In Poskin, the plaintiff borrowers refinanced a loan for a mobile home. After the borrowers fell behind on their loan, the defendant bank filed actions for replevin and foreclosure. In response, the borrowers filed suit against, among others, the defendant bank and the defendant mortgage broker, alleging, among other things, (i) that the defendants engaged in unfair or deceptive practices by fraudulently misrepresenting employment history and earnings on the loan application, and (ii) that the bank’s action for replevin and foreclosure constituted malicious prosecution. The court granted in part and denied in part the bank’s motion to dismiss, specifically holding that the borrowers’ state law claims of malicious prosecution and violation of the unfair trade practices statute were not preempted by the NBA because both claims were brought under state law and neither contradicted the language or purpose of the NBA. The court found that, under Pennsylvania law, the tort of malicious prosecution was consistent with the language and purpose of the NBA. Furthermore, the court held that although the NBA can preempt an unfair trade practices claim based on excessive annual interest rate charges, the borrowers’ claim was not based on usurious interest rate charges, and, thus, the provisions of the state statute cited did not conflict with or contradict the NBA. The court also rejected the bank’s argument that the NBA preempts the borrowers’ state claims for breach of fiduciary duty and breach of the duty of good faith and fair dealing, holding that such claims were not inconsistent with the language or the purpose of the NBA. For a copy of the opinion, please see http://www.buckleysandler.com/Poskin_v_TD_Banknorth.pdf.
Consumer Finance
FFIEC Releases 2008 HMDA Data. On September 30, the Federal Financial Institutions Examination Council (FFIEC) released the data on mortgage applications, denials, originations, and purchases for 2008 (reported in InfoBytes Special Alert, Sept. 30, 2009). According to the FFIEC’s press release, there was a sharp decline in lending activity and an even greater decline in subprime lending in 2008. Reported originated loans of all types decreased by 31%, and higher-priced (generally subprime) loans as a proportion of the total originated have decreased dramatically from their high of 29% in 2006, to 18% in 2007 and 12% in 2008. The FFIEC notes that the average rate spread on higher-priced loans has also decreased, implying that fewer loans are being made to the most credit-impaired borrowers. The reductions in lending activity were accompanied with continued disparities in the number of higher-priced loans made to minorities as compared to non-Hispanic whites, as well as a higher minority denial rate. As the press release notes, the HMDA numbers released to the public are not adjusted for creditworthiness factors, and the data continues to show that minorities are over-represented in lower credit score bands. For a copy of the press release, please see http://www.ffiec.gov/hmcrpr/hm093009.htm. Please call Andy Sandler (202-349-8001), Ben Klubes (202-349-8002), Jeff Naimon (202-349-8030), or Jonice Gray Tucker (202-349-8005) with any questions regarding the FFIEC’s release of the 2008 HMDA data.
New York Federal Court Holds Debt Collector Violated FDCPA for Defective Validation Notice. On September 10, the U.S. District Court for the Eastern District of New York held that a debt collection “validation notice” that does not inform the consumer that debt disputes must be in writing to be entitled to debt verification violates the federal Fair Debt Collection Practices Act (FDCPA). Nero v. Law Office of Sam Streeter, P.L.L.C., No. 08-CV-1459, 2009, 2009 WL 2981973 (E.D.N.Y. Sept. 10, 2009). In Nero, the defendant debt collector sent the plaintiff debtor a “validation notice”—a notice that advises consumers of specific rights enumerated in the FDCPA—providing that the debtor had 30 days to notify the debt collector if the debt was disputed in order to have the debt verified. However, the validation notice did not specify that the plaintiff was required to notify the debt collector in writing of any debt disputes entitled to a debt verification. The debtor alleged that the debt collector violated the FDCPA by (i) failing to inform her that debt disputes must be communicated in writing to be entitled to debt verification, and (ii) failing to be properly licensed as a debt collector in New York City. The judge agreed with the debtor on the first claim, finding that, although there is no Second Circuit authority on whether the failure to include the words “in writing” amounts to a violation of the FDCPA, the debt validation notice must state that a debt dispute is required to be in writing to be entitled to debt verification. The court reasoned that debt collectors have no duty to honor oral requests, and that the plain text of the FDCPA requires debt collectors to advise consumers of their rights in a prescribed manner. As a result, the court awarded the debtor statutory damages, costs and reasonable attorneys’ fees. On the second claim, the judge found that the debt collector’s failure to obtain a New York City debt collector license was a non-actionable technical failure because the debt collection letter contained no threats of litigation or other action that an unlicensed debt collector could not carry out. For a copy of the opinion, please see http://www.buckleysandler.com/Nero_v_Streeter.pdf.
Securities
FINRA Proposes to Designate Asset-Backed Securities as TRACE-Eligible Securities. On October 1, the Financial Industry Regulatory Authority (FINRA) filed with the Securities and Exchange Commission (SEC) a proposed rule change that would expand the coverage of Trade Reporting and Compliance Engine (TRACE)-Eligible Securities to include asset-backed securities, mortgage-backed securities and other similar securities (collectively, Asset-Backed Securities). This change would require FINRA members to report all transactions in Asset-Backed Securities. The proposed rule includes a more liberal reporting requirement than for other TRACE-Eligible Securities, permitting members to report such transactions at the end of the business day (as opposed to within 15 minutes of the Time of Execution). In addition, Asset-Backed Securities transactions initially will not be disseminated publicly to market participants. FINRA also recently announced that debt securities that are issued or guaranteed by an agency or by a Government-Sponsored Enterprise will become TRACE-Eligible Securities, and that transactions in such debt securities will be reported and disseminated. This change, reported in Regulatory Notice 09-57, becomes effective March 1, 2010. For a copy of Regulatory Notice 09-57, please see http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p120043.pdf. For a copy of the proposal filed with the SEC, please see http://www.finra.org/web/groups/industry/@ip/@reg/@rulfil/documents/rulefilings/p120062.pdf.
Litigation
D.C. Federal Court Holds Substitute Trustee is a “Debt Collector” Under FDCPA. On September 28, the U.S. District Court for the District of Columbia held that a substitute trustee under a deed of trust was a “debt collector” under the federal Fair Debt Collection Practices Act (FDCPA). Muldrow v. EMC Mortgage Corp., No. 08-1771, 2009 WL 3069731 (D.D.C. Sept. 28, 2009). In Muldrow, the substitute trustee - a Maryland law firm - was hired by a mortgage company to initiate foreclosure proceedings against a borrower that had defaulted on her loan. The substitute trustee sent the borrower a collection notice and subsequently notified the borrower that her property was being sold at a foreclosure sale to satisfy her debt. After the borrower brought suit for violations of the FDCPA, the substitute trustee argued that it was not a debt collector within the meaning of the statute, and that substitute trustees can be liable only under § 1692f(6) of the FDCPA, which applies to businesses engaged in the enforcement of security interests. According to the court, however, concluding that substitute trustees are exempt from the FDCPA’s debt collection restrictions would be “contrary to the stated purpose of the FDCPA.” Persuaded by the Fourth Circuit’s opinion in Wilson v. Draper & Goldberg, PLLC, 443 F.3d 373 (4th Cir. 2006), the court concluded that the substitute trustee was a debt collector under the FDCPA—because it “undertook the role of debt collector and communicated with the plaintiff in a manner regulated by the FDCPA.” The court therefore denied the substitute trustee’s motion to dismiss. For a copy of the opinion, please see http://www.buckleysandler.com/Muldrow_v_EMC.pdf.
Pennsylvania Federal Court Holds State Law Claims Not Preempted by NBA. On September 11, the U.S. District Court for the Western District of Pennsylvania held that the National Bank Act (NBA) does not preempt state law claims of malicious prosecution, violations of Pennsylvania’s unfair trade practices statute, breach of fiduciary duty, or breach of the duty of good faith and fair dealing. Poskin v. TD Banknorth, N.A., Civil Action 06-463, 2009 WL 298196 (W.D. Pa. Sept. 11, 2009). In Poskin, the plaintiff borrowers refinanced a loan for a mobile home. After the borrowers fell behind on their loan, the defendant bank filed actions for replevin and foreclosure. In response, the borrowers filed suit against, among others, the defendant bank and the defendant mortgage broker, alleging, among other things, (i) that the defendants engaged in unfair or deceptive practices by fraudulently misrepresenting employment history and earnings on the loan application, and (ii) that the bank’s action for replevin and foreclosure constituted malicious prosecution. The court granted in part and denied in part the bank’s motion to dismiss, specifically holding that the borrowers’ state law claims of malicious prosecution and violation of the unfair trade practices statute were not preempted by the NBA because both claims were brought under state law and neither contradicted the language or purpose of the NBA. The court found that, under Pennsylvania law, the tort of malicious prosecution was consistent with the language and purpose of the NBA. Furthermore, the court held that although the NBA can preempt an unfair trade practices claim based on excessive annual interest rate charges, the borrowers’ claim was not based on usurious interest rate charges, and, thus, the provisions of the state statute cited did not conflict with or contradict the NBA. The court also rejected the bank’s argument that the NBA preempts the borrowers’ state claims for breach of fiduciary duty and breach of the duty of good faith and fair dealing, holding that such claims were not inconsistent with the language or the purpose of the NBA. For a copy of the opinion, please see http://www.buckleysandler.com/Poskin_v_TD_Banknorth.pdf.
New York Federal Court Holds Debt Collector Violated FDCPA for Defective Validation Notice. On September 10, the U.S. District Court for the Eastern District of New York held that a debt collection “validation notice” that does not inform the consumer that debt disputes must be in writing to be entitled to debt verification violates the federal Fair Debt Collection Practices Act (FDCPA). Nero v. Law Office of Sam Streeter, P.L.L.C., No. 08-CV-1459, 2009, 2009 WL 2981973 (E.D.N.Y. Sept. 10, 2009). In Nero, the defendant debt collector sent the plaintiff debtor a “validation notice”—a notice that advises consumers of specific rights enumerated in the FDCPA—providing that the debtor had 30 days to notify the debt collector if the debt was disputed in order to have the debt verified. However, the validation notice did not specify that the plaintiff was required to notify the debt collector in writing of any debt disputes entitled to a debt verification. The debtor alleged that the debt collector violated the FDCPA by (i) failing to inform her that debt disputes must be communicated in writing to be entitled to debt verification, and (ii) failing to be properly licensed as a debt collector in New York City. The judge agreed with the debtor on the first claim, finding that, although there is no Second Circuit authority on whether the failure to include the words “in writing” amounts to a violation of the FDCPA, the debt validation notice must state that a debt dispute is required to be in writing to be entitled to debt verification. The court reasoned that debt collectors have no duty to honor oral requests, and that the plain text of the FDCPA requires debt collectors to advise consumers of their rights in a prescribed manner. As a result, the court awarded the debtor statutory damages, costs and reasonable attorneys’ fees. On the second claim, the judge found that the debt collector’s failure to obtain a New York City debt collector license was a non-actionable technical failure because the debt collection letter contained no threats of litigation or other action that an unlicensed debt collector could not carry out. For a copy of the opinion, please see http://www.buckleysandler.com/Nero_v_Streeter.pdf.
California Federal Court Denies Bank’s Motion to Seal Complaint that Reveals Data Breach. On September 18, the U.S. District Court for the Northern District of California denied a plaintiff bank’s motion to seal all pleadings and filings in a matter involving a data breach not yet disclosed to those affected, finding that the bank did not show sufficiently compelling reasons to override the public’s common law right of access to records in civil proceedings. Rocky Mountain Bank v. Google, Inc., No. 09-4385, 2009 WL 3053716 (N.D. Cal. Sept. 18, 2009). In this case, the plaintiff bank inadvertently sent confidential customer information via e-mail to an unintended recipient’s Google e-mail address. The bank unsuccessfully tried to recall the e-mail and subsequently contacted Google to determine whether the e-mail account was active or dormant and what steps could be taken to ensure that the confidential customer information was not used or disclosed. Google refused to assist and the bank filed a motion to file all pleadings and other filings in this matter under seal. In denying the bank’s motion, the court held that the bank’s attempt to shield information about the data breach until determining whether the information had been further disclosed or misused was not a compelling reason that overrides the public’s common law right of access to court filings. The court noted that the bank did not disclose any actual customer information in its pleadings or motion papers, and that the bank had not shown that the information contained in its complaint and motion papers could result in improper use of the material for scandalous or libelous purposes, infringement of trade secrets, or invasion of any personal privacy rights that might warrant protection. For a copy of the opinion, please see http://www.buckleysandler.com/Rocky_Mountain_Bank_v_Google.pdf.
E-Financial Services
California Federal Court Denies Bank’s Motion to Seal Complaint that Reveals Data Breach. On September 18, the U.S. District Court for the Northern District of California denied a plaintiff bank’s motion to seal all pleadings and filings in a matter involving a data breach not yet disclosed to those affected, finding that the bank did not show sufficiently compelling reasons to override the public’s common law right of access to records in civil proceedings. Rocky Mountain Bank v. Google, Inc., No. 09-4385, 2009 WL 3053716 (N.D. Cal. Sept. 18, 2009). In this case, the plaintiff bank inadvertently sent confidential customer information via e-mail to an unintended recipient’s Google e-mail address. The bank unsuccessfully tried to recall the e-mail and subsequently contacted Google to determine whether the e-mail account was active or dormant and what steps could be taken to ensure that the confidential customer information was not used or disclosed. Google refused to assist and the bank filed a motion to file all pleadings and other filings in this matter under seal. In denying the bank’s motion, the court held that the bank’s attempt to shield information about the data breach until determining whether the information had been further disclosed or misused was not a compelling reason that overrides the public’s common law right of access to court filings. The court noted that the bank did not disclose any actual customer information in its pleadings or motion papers, and that the bank had not shown that the information contained in its complaint and motion papers could result in improper use of the material for scandalous or libelous purposes, infringement of trade secrets, or invasion of any personal privacy rights that might warrant protection. For a copy of the opinion, please see http://www.buckleysandler.com/Rocky_Mountain_Bank_v_Google.pdf.
Privacy/Data Security
North Carolina Identity Theft Legislation Becomes Effective. On October 1, the operative provisions of North Carolina SB 1017, an Act enhancing protections available to victims of identity theft, went into effect (SB 1017 was initially reported in InfoBytes, Aug. 7, 2009). In general, the Act creates new legal obligations for credit reporting agencies (CRAs), creditors, businesses, and credit monitoring services. Under the Act, CRAs must notify a North Carolina consumer who requests a security freeze that, in order to obtain a freeze from another CRA, he or she must make a separate, individual request to that CRA because only it can obtain the consumer authorization necessary to freeze its own files. The Act also mandates that CRAs lower their response times to a consumer’s request to add or remove a freeze. With respect to creditors, the Act prohibits any communication about a debt to a CRA during the pendency of a consumer’s application for an award from the North Carolina Crime Victims Compensation Fund. The Act also requires credit monitoring services to notify consumers that they have the right to one free credit report per year before charging the consumer a fee to obtain or monitor the consumer’s credit report on behalf of the consumer. For a copy of the Act, please see http://www.ncleg.net/Sessions/2009/Bills/Senate/PDF/S1017v7.pdf.
California Federal Court Denies Bank’s Motion to Seal Complaint that Reveals Data Breach. On September 18, the U.S. District Court for the Northern District of California denied a plaintiff bank’s motion to seal all pleadings and filings in a matter involving a data breach not yet disclosed to those affected, finding that the bank did not show sufficiently compelling reasons to override the public’s common law right of access to records in civil proceedings. Rocky Mountain Bank v. Google, Inc., No. 09-4385, 2009 WL 3053716 (N.D. Cal. Sept. 18, 2009). In this case, the plaintiff bank inadvertently sent confidential customer information via e-mail to an unintended recipient’s Google e-mail address. The bank unsuccessfully tried to recall the e-mail and subsequently contacted Google to determine whether the e-mail account was active or dormant and what steps could be taken to ensure that the confidential customer information was not used or disclosed. Google refused to assist and the bank filed a motion to file all pleadings and other filings in this matter under seal. In denying the bank’s motion, the court held that the bank’s attempt to shield information about the data breach until determining whether the information had been further disclosed or misused was not a compelling reason that overrides the public’s common law right of access to court filings. The court noted that the bank did not disclose any actual customer information in its pleadings or motion papers, and that the bank had not shown that the information contained in its complaint and motion papers could result in improper use of the material for scandalous or libelous purposes, infringement of trade secrets, or invasion of any personal privacy rights that might warrant protection. For a copy of the opinion, please see http://www.buckleysandler.com/Rocky_Mountain_Bank_v_Google.pdf.
Credit Cards
Federal Reserve Issues Proposed Rule to Implement the Second Phase of the Credit Card Act. On September 29, the Federal Reserve Board issued a proposed rule to implement the provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 slated to go into effect on February 22, 2010. Among other things, the provisions of the proposed rule would prohibit card issuers from (i) increasing rates on existing balances, subject to certain exceptions, (ii) increasing rates during the first year of an account, (iii) opening a new credit card account or increasing the credit limit for an existing credit card account unless the creditor considers the consumer’s ability to make the required payments, (iv) issuing credit cards to minors, subject to certain exceptions, and (v) imposing certain fees (e.g., charging consumers fees for exceeding their credit limit without their consent; "double-cycle" billing; and, except in certain circumstances, collecting a fee for making a payment). The proposal also addresses certain disclosure requirements, including (i) marketing to students of higher learning, (ii) requiring creditors to post credit card agreements on their web sites and to submit those agreements to the Fed for posting on its website, subject to certain exclusions, and (iii) providing a card holder with an the estimate of the time to repay account balances. Comments on the proposed rule must be submitted within 30 days of its publication in the Federal Register. For a copy of the press release on the proposed rule, please see http://www.federalreserve.gov/newsevents/press/bcreg/20090929a.htm. For a copy of the proposal, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090929a1.pdf.