InfoBytes, October 3, 2008
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Miscellany
- Mortgages
- Banking
- Consumer Finance
- Securities
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
President Bush Signs Bailout Legislation. On October 3, President Bush signed H.R. 1424, the “Emergency Economic Stabilization Act of 2008,” which implements the U.S. Treasury Department’s (Treasury) Troubled Assets Relief Program (TARP). This bill authorizes the Treasury to acquire and manage troubled assets from financial institutions through a newly created Office of Financial Stability. The bill immediately authorizes $250 billion for the Treasury to buy troubled assets, with an additional $100 billion upon presidential certification; a final $350 billion may be disbursed by presidential request pending Congressional approval. In addition to the initial Treasury asset relief proposal, the bill (i) requires loan servicers of assets acquired by the Treasury to engage in reasonable foreclosure mitigation efforts, such as term extensions, rate reductions, and principal write downs, (ii) places limitations on executive compensation for entities that sell assets to the government under TARP, (iii) creates a Financial Stability Oversight Board, (iv) increases the enforcement authority of the Federal Deposit Insurance Corporation (FDIC), (v) enhances the HOPE for Homeowners program, (vi) authorizes the Securities and Exchange Commission (SEC) to suspend mark-to-market accounting, and (vii) temporarily increases the FDIC’s deposit insurance from $100,000 to $250,000. The House of Representatives passed the bill on the same day after rejecting an earlier version on September 29. The Senate approved the bill on October 1. For a copy of the bill, please see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h1424eas.txt.pdf.
House Passes Credit Card Bill Proposing to Amend Truth in Lending Act. On September 23, the U.S. House of Representatives passed H.R. 5244, the “Credit Cardholders’ Bill of Rights Act of 2008.” The bill is substantively similar to the joint proposed rule by the Federal Reserve Board, Office of Thrift Supervision, and National Credit Union Administration regarding unfair and deceptive acts or practices (UDAP) (reported in InfoBytes, May 23, 2008), however, H.R. 5244 differs by proposing to amend the Truth in Lending Act. Among other items, the bill (i) prohibits a creditor from increasing the annual percentage rate (APR) of an existing balance on a credit card, except for situations involving changes in an index not under the creditor’s control, the expiration of a promotional rate, and a penalty rate increase if a payment is not received within 30 days after the due date, (ii) allows a creditor, in instances where an outstanding balance has two or more different APRs, to allocate a larger share of a payment to the portion of the balance bearing the higher APR, (iii) grants consumers the option to opt-out of over-the-limit transactions when fees are imposed, (iv) prohibits double-cycle billing, (v) requires a 45-day advance notice of an APR increase, (vi) prohibits fees to be charged on an outstanding balance attributable only to accrued interest, (vii) imposes fee restrictions on "subprime" cards, (viii) prohibits knowingly issuing a credit card to consumers under the age of 18, and (ix) prohibits a creditor from furnishing any information to a consumer reporting agency concerning a newly opened credit card account until the credit card has been activated. For a copy of the bill, as passed by the House, please see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h5244eh.txt.pdf.
Bill Regarding VA-Backed Mortgages Cleared for White House. On October 2, S. 3023, the “Veterans’ Benefits Improvement Act of 2008,” was sent to the President. The bill pertains to mortgages extended to veterans that are guaranteed by the Department of Veterans’ Affairs (VA). Among other matters, the bill would (i) temporarily increase the maximum loan guaranty on loans guaranteed by the VA, (ii) require the VA to report on the impact of mortgage foreclosures to veterans, (iii) mandate updates to the handbook for veterans who qualify for housing assistance, (iv) enhance the refinancing of home loans for veterans by increasing the guaranty of loans from a loan to value ratio of 90% to 100%, and (v) extend the demonstration project on adjustable rate mortgages (ARMs) and hybrid ARMs to 2012. President Bush is expected to sign the bill into law. For a copy of the bill, please see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:s3023enr.txt.pdf.
SEC Announces Proposed Fair Value Interpretive Guidance, ABA Recommends Fair Value Accounting Solutions. On September 23, the American Bar Association (ABA) addressed what it views as existing problems in today’s financial markets and suggested potential solutions in a letter to Securities and Exchange Commission (SEC) Chairman Cox. The ABA stated that the Statement of Financial Accounting Standards No. 157 (SFAS 157) and related accounting literature fail to provide an adequate “framework to guide preparers of financial statements and auditors in applying their fundamental concepts when markets become illiquid.” The ABA recommended that the SEC issue guidance that “intrinsic value or economic value” (where instrument credit losses would be deducted from the value) are the appropriate proxies for fair value, in lieu of the current rule, which requires the evaluation of “exit price” and “market participants.” The ABA also asked for the reform of proposed accounting standards that, if issued, “would dramatically change the accounting for securitizations or require additional use of fair value accounting,” and could exacerbate the existing problems in the marketplace. The ABA’s letter specifically referenced the Statement of Financial Accounting Standards No. 140 (SFAS 140), which the Financial Accounting Standards Board (FASB) proposed in response to SEC requests. As a precautionary measure, the ABA requested that the SEC place a temporary stay on the issue of new accounting standards until a more comprehensive analysis of the impact on the markets is completed. On September 30, SEC Chairman Cox announced that the FASB was preparing to propose additional interpretative guidance on fair value measurement under U.S. Generally Accepted Accounting Principles and, together with the SEC, would make efforts to provide immediate clarifications to preparers and auditors. The SEC’s press release restates that SFAS 157 is currently the proper reference for fair value measurement guidance. For a copy of the ABA letter, please e-mail ; for a copy of the SEC’s press release, please see http://www.sec.gov/news/press/2008/2008-234.htm.
HUD Mortgagee Letter Bans Mortgagee Funded Home Equity Conversion Mortgage Counseling. On September 29, Assistant Secretary for Housing Brian Montgomery issued Mortgagee Letter 2008-28, a letter that prohibits mortgagees from paying for Home Equity Conversion Mortgage (HECM) counseling on behalf of mortgagors. The new requirements, which were enacted into law under §2122 of the Housing and Economic Recovery Act of 2008 (HERA), cover both direct and indirect payments to counseling agencies, regardless of whether the payment is made through a lump-sum or on a case-by-case basis. For example, the letter forbids lenders from paying for HECM counseling through any entity associated with the lender. However, mortgagees may continue to pay for other types of non-HECM counseling, including pre-purchase and foreclosure prevention counseling. For a copy of the mortgagee letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-28ml.doc.
HUD Mortgagee Letter Discusses Treble Damages for Failure to Engage in Loss Mitigation. On September 26, Assistant Secretary for Housing Brian Montgomery issued Mortgagee Letter 2008-27, a letter which warns mortgagees that treble damages may be assessed whenever a mortgagee fails to engage in “loss mitigation,” as defined by U.S. Department of Housing and Urban Development (HUD) regulations. In order to comply fully with the regulations, mortgagees must be able to provide documentation of their loss mitigation evaluations, except when a mortgagee can demonstrate that a borrower was uncooperative or ineligible. A mortgagee’s failure to comply with these regulations could result in the assessment of civil money penalties by HUD, including the possibility of treble damages. To avoid the assessment of treble damages, HUD recommends that mortgagees take three key actions. First, mortgagees should “ensure that the loss mitigation evaluations are completed for all delinquent mortgages before four full monthly installments are due and unpaid. Second, mortgagees must ensure that the appropriate action is taken based on these evaluations. Third, mortgagees must maintain documentation of all initial and subsequent loss mitigation evaluations and actions taken.” To help mortgagees comply with the new regulations, HUD’s National Servicing Center (NSC) is offering loss mitigation training to lenders via classes scheduled throughout the year. The NSC provides a toll-free hotline (1-888-297-8685) to assist mortgagees with FHA’s servicing requirements, including HUD’s Loss Mitigation Program. For a copy of the mortgagee letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-27ml.doc.
HUD Mortgagee Letters Address Origination, Servicing Issues Under HOPE for Homeowners. On October 1, the Assistant Secretary for Housing Brian Montgomery issued two mortgagee letters addressing potential origination and servicing issues in connection with mortgages insured under the new HOPE for Homeowners (H4H) program. The first letter, Mortgagee Letter 2008-29, “HOPE for Homeowners Origination Guidance” (Oct. 1, 2008), provides extensive details and guidance regarding issues that might arise in originating loans under the H4H program. These issues include borrower and property eligibility, use of appraisals, mortgage underwriting, and sharing of equity and appreciation. The second letter, Mortgagee Letter 2008-30, “HOPE for Homeowners Servicing Guidance” (Oct. 1, 2008), offers servicing and loss-mitigation guidance under the H4H program. This letter addresses issues such as refinancing, capital improvements to the property, default and loss mitigation, first-payment default, sale or disposal of property, and mortgage payoff. H4H is a temporary program that was authorized by the Housing and Economic Recovery Act of 2008. This program makes struggling borrowers eligible to refinance into an FHA-insured mortgage, with the original lender agreeing to accept the proceeds of the new H4H mortgage as payment in full. The H4H Program became effective on October 1, 2008 and is scheduled to sunset on September 30, 2011. For a copy of the mortgagee letters, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-29ml.doc and http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-30ml.doc.
FTC Reaches Settlement with List Broker Charged with Violating FTC Act, Telemarketing Sales Rule. On October 1, the Federal Trade Commission (FTC) issued a press release announcing a settlement against a list broker who allegedly violated the FTC Act and the Telemarketing Sales Rule (TSR) by selling consumers’ unencrypted consumer account numbers (such as credit card numbers, bank account and routing information) without first obtaining the consumers’ authorization. According to the FTC’s complaint, the defendant sold the information to a variety of sources, including the telemarketers of fraudulent advance-fee credit cards. Such disclosure, for payment and for use in telemarketing, is an abusive telemarketing act or practice under the TSR. Among other items, the proposed order prohibits the defendant from collecting or disclosing consumers’ account numbers, except in specified circumstances. The defendant is also required to turn over any lists of consumers’ account numbers in his possession to the FTC. In addition to a monetary judgment, the defendant is required to comply with monitoring and record-keeping requirements set out in the proposed order. For a copy of the press release, please see http://www.ftc.gov/opa/2008/10/glenpatten.shtm.
Fed Board of Governors Establish Lending Facility to Aid Money Market Mutual Funds. On September 19, the Board of the Federal Reserve System established a lending facility (the ABCP Lending Facility) for depository institutions and bank holding companies. These institutions can borrow from the Federal Reserve Bank of Boston on a nonrecourse basis if the institutions use the proceeds of the loan to purchase certain types of asset-backed commercial paper from money market mutual funds. The measure is intended to "reduce liquidity and other strains being experienced by money market mutual funds." The rule establishing the facility became effective on September 19, 2008 and the public comment period will last until October 31, 2008. For a copy of the Federal Register notice, please see http://www.occ.gov/fr/fedregister/73fr55704.pdf.
HUD Allocates Nearly $4 Billion to Stabilize Neighborhoods Impacted by Foreclosure. On September 26, U.S. Housing and Urban Development (HUD) Secretary Steve Preston allocated $3.92 billion to provide targeted emergency assistance to state and local governments for the purpose of acquiring and redeveloping foreclosed properties. HUD will allocate funds for the Neighborhood Stabilization Program (NSP) based on an area’s number/percent of foreclosures, subprime mortgages, and mortgage defaults and delinquencies. HUD will issue specific rules that will assist communities with the administration of the NSP and to ensure that NSP funds are obligated for specific activities within 18 months. The NSP requires housing counseling for families receiving homebuyer assistance and further requires states and local grantees to ensure that new homebuyers under this program obtain a mortgage loan from a lender that agrees to comply with sound lending practices. The funding is provided pursuant to HUD’s Community Development Block Grant Program under the Housing and Economic Recovery Act of 2008. For more information regarding the NSP, please see http://www.hud.gov/offices/cpd/communitydevelopment/programs/neighborhoodspg/.
State Issues
California Governor Approves Mortgage Foreclosure, Mortgage Lending Bills. On September 25, California Governor Arnold Schwarzenegger signed A.B. 69, A.B. 180, and S.B. 1737, three bills aimed at addressing the recent subprime mortgage crisis. A.B. 69 gives the California Department of Corporations continued authority to collect information from licensees regarding their residential mortgage loan servicing activities, to accept information voluntarily provided by servicers not under its jurisdiction, and to post the aggregate results of its servicer surveys on its website. A.B. 180 requires foreclosure consultants to register with the California Department of Justice and maintain a surety bond of $100,000. Failure to do so shall be a crime punishable by a fine of up to $25,000 and up to a year in jail, or both. In addition, such consultants must provide a complete copy of a contract to a homeowner in any language in which the contract was negotiated and in any language that the homeowner requests. The bill also allows a homeowner to cancel a contract within five days after signing the contract, an increase from the three-day window provided under previous law.
S.B. 1737 authorizes the California Real Estate Commissioner (Commissioner) to suspend or bar a person from a position of employment, management, or control for a specified period for a violation of the California Real Estate Law or its rules. In addition, the bill authorizes the Commissioner to suspend or bar a person if the person has been convicted of, or has pleaded nolo contendere to, a crime or been held liable in a civil action, or any administrative judgment, for offenses involving dishonesty, fraud, or deceit, or any other offense reasonably related to a person’s activities in the real estate business. Further, the Commissioner may suspend or revoke a real estate licensee who has been guilty of generating an inaccurate valuation of residential real property requested in connection with a debt forgiveness sale in order to manipulate the lien holder to reflect the proposed debt forgiveness sale or to acquire a financial or business advantage. Finally, the bill requires a person or entity that arranges financing in connection with a sale, lease or exchange of property and acts as an agent with respect to that property to make a written disclosure of those roles, within 24 hours, to all parties to the sale, lease or exchange or any related transaction. The new laws take effect Jan. 1, 2009. For the full text of A.B. 69, please see http://www.leginfo.ca.gov/pub/07-08/bill/asm/ab_0051-0100/ab_69_bill_20080821_enrolled.pdf. For the full text of A.B. 180, please see http://www.leginfo.ca.gov/pub/07-08/bill/asm/ab_0151-0200/ab_180_bill_20080911_enrolled.pdf. For the full text of S.B. 1737, please see http://www.leginfo.ca.gov/pub/07-08/bill/sen/sb_1701-1750/sb_1737_bill_20080825_enrolled.pdf.
State Foreclosure Prevention Working Group Issues Servicing Report. On September 29, the State Foreclosure Prevention Working Group, whose members include state attorneys general and state banking regulators, published its third report on the servicing of sub-prime mortgages. The report expresses concern that servicers permit delinquent debtors to foreclose rather than offering alternatives for those who cannot pay their mortgages. The report statistics, which were compiled at the end of May, 2008 using data compiled from a group of thirteen servicers, indicate that 305,000 sub-prime and Alt-A mortgage loans were in foreclosure, and indicate that more than 1.1 million sub-prime and Alt-A loans, or 24.1%, were at least 30 days delinquent. The report further indicates that loan modifications, used by servicers as a tool to avoid foreclosure, have declined in early 2008, with a focus on increased short sales of foreclosed homes. In addition, one out of five mortgages that have been modified are now delinquent. The report urges federal and state intervention to create and implement broader-based loan modification plans that are focused on homeowner sustainability, such as the federal HOPE for Homeowners program. For a copy of the report, please see http://www.banking.state.ny.us/pr080929.pdf.
New York Banking Department Responds to Credit Crunch, Allows Temporary Relaxation of Lending Limits. On September 25, the New York State Banking Department (Banking Department), responding to the slowdown in the credit markets, adopted a resolution designed to add liquidity to the market. The resolution, made pursuant to Section 12-a(4) of the New York State Banking Law, allows New York State-chartered banks and trust companies, under the supervision of the New York Superintendent of Banks, to make emergency temporary loans that exceed regular lending limits. The Banking Department adopted the resolutions, in part, to maintain parity between New York State-chartered banks and national banks, for which the OCC recently permitted identical temporary exemptions. In announcing the resolution, Superintendent of Banks, Richard H. Neiman emphasized that “These are serious times and we have a responsibility to be responsive to changing market conditions and to ensure that we have the ability to enable New York State-chartered banks to help ease the credit and liquidity crunch that the financial markets are experiencing.” For a copy of the press release, please see http://www.banking.state.ny.us/pr080927.htm. For copies of the full resolution approved by the Banking Board, please see www.banking.state.ny.us/legal/wild.htm.
Courts
Pennsylvania Federal Court Holds TILA “Actual Damages” Recovery Requires Detrimental Reliance. On September 22, the U.S. District Court for the Western District of Pennsylvania held that the recovery of “actual damages” under the Truth in Lending Act (TILA) “requires proof that the consumer suffered a loss because he or she relied on an inaccurate or incomplete disclosure to his or her detriment.” Vallies v. Sky Bank, No. 2:01cv1438, 2008 U.S. Dist. Lexis 72476 (W.D. Pa. Sept. 22, 2008). In this case, the plaintiff obtained car financing from the defendant and later sought actual damages in a class action suit alleging that the defendant violated TILA when it excluded a $395 debt cancellation insurance fee from its calculation of the finance charge for the car without disclosing that the coverage and the amount charged for it were voluntary. The plaintiff ultimately did receive all the required disclosure information to make the financial transaction accurate and complete, but did not receive all of it from the defendant lender. The defendant moved for summary judgment, arguing that the plaintiff did not show detrimental reliance as required to recover actual damages under TILA. In granting the defendant’s motion for summary judgment, the court held that a showing of detrimental reliance is necessary to establish actual damages under TILA. Further, in order to recover actual damages, “a plaintiff must show that (i) he read the TILA disclosure statement, (ii) he understood the charges being disclosed, (iii) had the disclosure statement been accurate, he would have sought a lower price, and (iv) he could have obtained a lower price.” The court held that, because the plaintiff received all of the required information and voluntarily elected to incur the debt cancellation insurance when he purchased his vehicle, the plaintiff could not satisfy the third or fourth element of this test. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Vallies_v_Sky_Bank.pdf.
Connecticut Superior Court Holds FCRA Preempts Several State Law Claims. On September 9, the Superior Court of Connecticut granted in part and denied in part a motion to dismiss filed by defendants Greenpoint Mortgage Funding, Inc., Wells Fargo Home Mortgage, Inc., and Mortgage Electronic Registrations Systems, Inc. in a case in which the plaintiff alleged that the defendants caused him injuries and losses by mistakenly instituting foreclosure proceedings against him. Carocci v. Greenpoint Mortgage Funding, Inc., No. 030476223S, 2008 WL 4415855 (Conn. Super. Ct. Sept. 9, 2008). The defendants moved to dismiss several state law claims, arguing that § 1681t(b)(1)(F) of the Fair Credit Reporting Act (FCRA) preempted such claims. The plaintiff counter-argued that many of his state law claims fell outside the scope of § 1681t(b)(1)(F) and that § 1681t(b)(1)(F) did not preempt his claims because he did not allege that he notified a consumer reporting agency regarding the error. The court explained that FCRA contains two provisions that arguably preempted the plaintiff’s state law claims, § 1681h(e) and § 1681t(b)(1)(F). In an attempt to resolve these sections of FCRA, federal district courts have generally adopted three competing approaches, namely (i) the “sweeping” approach, which holds that § 1681t completely supercedes § 1681h, (ii) the “statutory preemption” approach, which attempts to resolve the ambiguities between the two statutory sections, and (iii) the “temporal approach,” which permits common-law tort claims to go forward only if they concern acts of malice or willful intent that occurred before the furnisher had notice of any inaccuracies of a dispute. The court rejected these three approaches in favor of the approach adopted by the Connecticut District Court in Holtman v. Citifinancial Mortgage Co., No. 3:05 CV 151 (D.Conn. June 19, 2006). In Holtman, the court found that § 1681t(b)(1)(F) only applies to persons who provide information to consumer reporting agencies, and that § 1681h(e) applies only to consumer reporting agencies and those who take adverse actions against consumers based on consumer reports. Following Holtman, the court held that § 1681t(b)(1)(F) preempted several, but not all, of the plaintiff’s claims, which the court dismissed. The court further held that § 1681h(e) did not preempt any of the plaintiff’s claims because the plaintiff did not allege that any of the defendants qualified as consumer reporting agencies or that any of the defendants took adverse action against him based upon consumer reports. For a copy of the opinion, please e-mail .
Class Action Lawsuit Filed Against The Princeton Review Alleging Leak of Students’ Personal Information. On September 19, a class action lawsuit was filed against The Princeton Review, Inc. (The Princeton Review) in the U.S. District Court for the Middle District of Florida on behalf of more than 100,000 public school students whose personal information was allegedly leaked on The Princeton Review’s website. Townsend v. The Princeton Review, Inc., No. 08-cv-01879-T-33 (M.D. Fla. Sept. 19, 2008). The complaint alleges that the students’ personal information - which included, among other items, birth dates, Social Security numbers, standardized test scores, and ethnicities - was publicly available on The Princeton Review website for seven weeks and was also accessible via Internet search engines. According to the complaint, which alleges claims of negligence, breach of contract, and unfair trade practices, The Princeton Review failed to adhere to several accepted on-line security practices for storing personal information and failed to monitor its network and access logs, which might have evidenced the data breach much earlier. The complaint claims over $5 million in damages, based on allegations that The Princeton Review violated the students’ privacy rights and exposed the students to the risk of fraud and identity theft. The complaint also asks for injunctive relief, including the provision of personal data monitoring services for the class members. For a copy of the complaint, please see http://www.buckleykolar.com/documents/Townsend_v_Princeton_Review.pdf.
Eighth Circuit Holds Assignee Can Compel Arbitration Under Settled Credit Card Agreement. On September 23, the U.S. Court of Appeals for the Eighth Circuit held that a purchaser of an extinguished credit card debt could compel arbitration under the credit card agreement. Koch v. Compucredit Corp., No. 07-1948, 2008 WL 4305903 (8th Cir. Sept. 23, 2008). The plaintiff in the case filed a class action lawsuit alleging that the assignee of her credit card debt violated the Fair Debt Collection Practices Act and the Arkansas Deceptive Trade Practices Act by attempting to collect on a credit card debt that she had already paid. The assignee moved to compel arbitration under the credit card agreement between the plaintiff and the original creditor, but the district court held that the assignment was invalid because the original creditor had no remaining interest in the plaintiff’s account after it was settled. The Eighth Circuit found the validity of the assignment was a matter for the court, not the arbitrator. However, the Eighth Circuit reversed the district court, finding that, “[e]ven if the underlying credit agreement was terminated by the settlement, such a termination does not necessarily release the parties from their obligations under that agreement, including the obligation to arbitrate.” The continuing obligation to arbitrate gave the assignor “a ‘present interest’ in the contract” and, thus, “something to assign.” Because the court determined that the dispute involved “‘facts and occurrences that arose before expiration’ of the credit agreement” and fell within the scope of the arbitration clause, it held that the assignee could compel arbitration under the agreement. For a copy of the opinion, please see http://www.ca8.uscourts.gov/opndir/08/09/071948P.pdf.
Pennsylvania Federal Court Holds Credit Card, Checking Account Arbitration Provisions Not Unconscionable. On September 16, U.S. District Court for the Western District of Pennsylvania held that the arbitration provisions of checking account and credit card agreements with the defendants, First National Bank of Pennsylvania (First National) and Chase Bank USA, NA (Chase), respectively, were not unconscionable. Grimm v. First National Bank of Pennsylvania, No. 08-785 (W.D. Pa. Sept. 16, 2008). In this case, identity thieves defrauded funds from the plaintiffs’ checking and credit card accounts. The plaintiffs filed suit, claiming that the defendants failed to identify the fraudulent activity. The defendants then petitioned the court to stay the proceeding and to compel arbitration of the claims pursuant to the arbitration provisions of the checking and credit card agreements. The court held that the agreement with First National was not procedurally unconscionable, reasoning that the agreement conspicuously displayed the arbitration clause and that the failure to read an arbitration agreement does not constitute "special circumstances" which would invalidate the agreement. The court also held that the agreement with First National was not substantively unconscionable, reasoning that the defendants did not have superior bargaining power because the plaintiffs could have opened their accounts elsewhere, and because the Third Circuit "has repeatedly held that inequality in bargaining power, alone, is not a valid basis upon which to invalidate an agreement." The court held that the agreements with Chase were not procedurally or substantively unconscionable because (i) the plaintiffs could have opened credit cards with other issuers, (ii) compelling arbitration is not “one-sided” or “oppressive” because the arbitration provision allows both parties to arbitrate disputes, and (iii) other state and federal courts have “routinely” held that such arbitration provisions are not unconscionable. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Grimm_v_First_National.pdf.
Pennsylvania Federal Court Holds Contract Incorporated by Reference to Internet Terms Binding. On September 16, the U.S. District Court for the Western District of Pennsylvania held that an agreement incorporated by reference to terms and conditions posted on a website was binding and not unconscionable. Pentecostal Temple Church v. Streaming Faith, LLC, No. 08-554 (W.D. Pa. Sept. 16, 2008). In this case, an agreement for the design and implementation of an internet broadcasting system contained a clause that referred the plaintiff to the defendant’s website to find further terms and conditions, including a forum selection clause. The plaintiffs subsequently filed claims, including contractual breach and fraud, against the defendant. The defendants then argued that the case should be transferred pursuant to the forum selection clause. The plaintiffs argued that the forum selection clause was not valid because it was part of the terms and conditions incorporated via the defendant’s website and because the agreement was unconscionable. Relying upon Schwartz v. Comcast Corp., No. 06-4855, WL 4212693 (3rd Cir. Nov. 30, 2007), the court held that the forum selection clause was binding, reasoning that a party is adequately “on notice“ when an agreement contains a provision to incorporate terms and conditions posted on the internet, and that the terms and conditions were posted pursuant to that provision. The court also held that the contract was not unconscionable, reasoning that the parties had several months to negotiate the agreement, that the terms were "plainly and clearly" available on the internet, and that, while favorable to the defendants, did not "shock the conscience." After assessing additional factors, the court approved the defendant’s motion to transfer. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Pentecostal_Temple_Church_v_Streaming_Faith.pdf.
Illinois Federal Court Certifies Class Action Suit for FACTA Violations. On September 24, the U.S. District Court for the Northern District of Illinois granted plaintiffs’ motion for class certification in an action against the defendant for violations of the Fair and Accurate Transactions Act (FACTA). Beringer v. Standard Parking Corp., Nos. 07 C 5027, 2008 WL 4390626 (N.D. Ill. Sept. 24, 2008). The case arose when the operator of a parking facility printed the first four digits, the last four digits, and the expiration dates of the plaintiffs’ credit cards on their parking receipts in violation of § 1681c(g)(1) of FACTA, which prohibits printing "more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction." Though the plaintiffs did not allege that they suffered any actual damages as a result of Defendant’s noncompliance with the statute, they claimed statutory damages of "not less than $100 and not more than $1,000" pursuant to § 1681n(a)(1)(A) of FACTA. Furthermore, because the defendant was out of compliance with § 1681c(g)(1) from December 4, 2006 to April 26, 2007, the plaintiffs sought class certification in order to address the 751,078 additional potential FACTA violations committed by the defendant. The court granted the plaintiffs’ motion after finding, under Rule 23(b)(3) of the Federal Rules of Civil Procedure, that common questions of law or fact predominated and that a class action was superior to other available methods for the fair and efficient adjudication of the controversy. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Beringer_v_Standard.pdf.
Firm News
Colgate Selden will be presenting on topics related to RESPA compliance at the Maryland Association of Mortgage Brokers Continuing Education Forum on October 8. Click here for additional information about this conference.
Jerry Buckley will be a featured speaker at the upcoming Corporate Risk Advisors & Fair Lending Colloquium Conference taking place October 27 in Orlando, Florida. The topic being discussed by his panel is entitled “Identifying Trends and Potential Regulatory Concerns.”
Grant Mitchell will be a featured speaker at the annual RESPRO Fall Seminar in New Orleans, Louisiana from November 5 - 7. His presentation will be concentrated on various RESPA issues. For additional information about this seminar please click here.
Jerry Buckley and Margo Tank will be conducting a panel discussion on electronic-related legal and regulatory issues at the Electronic Signature and Records Association (ESRA) Second Annual Conference: E-Signatures ’08: Business, Legal and Technology Trends on November 12 and 13th in Washington, DC. This year, the ESRA conference will analyze a remarkably wide range of industries currently employing e-signature and electronic record technologies to improve business processes, including financial services, consumer products, banking, insurance, construction, equipment financing, government systems & services (civilian & military), cable television, mortgages and notarization. For more information on the conference and to register online, go to: http://www.esignrecords.org/events/
Jeff Naimon participated in the American Bankers Association Telephone Briefing entitled “Is Your Bank Ready for Regulation Z?” on September 3, discussing the Federal Reserve Board’s recently adopted HOEPA rule.
Margo Tank was a featured speaker at the New York State Bar Association’s Business Law Fall Meeting on September 12 in Newport, Rhode Island. Ms. Tank’s presentation was entitled “Electronic Signatures – What Does a Business Lawyer Need to Know?”
Matthew Previn presented in a panel discussion entitled “Litigation and Enforcement Update” at the Mortgage Bankers Association’s Regulatory Compliance Conference in Washington D.C. on September 15.
Jonathan Jerison participated in two events at the Mortgage Bankers Association’s Regulatory Compliance Conference in Washington, D.C. on September 15 & 16.
Jeff Naimon facilitated a roundtable discussion entitled “Miscellaneous Regulatory Concerns: RESPA and TILA Issues (including Right of Rescission)” at the Mortgage Bankers Association’s Regulatory Compliance Conference Roundtable on September 15.
Margo Tank was featured in a panel discussion on eLegal Issues at the Mortgage Bankers Association’s Document Management & Custody Conference on September 23 in Charlotte, North Carolina.
Jeff Naimon moderated a panel entitled “Ensuring Your Practices Keep Pace with Emerging Legislative and Regulatory Initiatives” at the American Conference Institute’s 5th National Forum on Preventing, Detecting And Resolving Mortgage Fraud on September 23 in Phoenix, Arizona.
Joe Kolar participated in an audio presentation on the Housing and Economic Recovery Act of 2008 (HERA) sponsored by the American Bar Association on September 25.
Clint Rockwell presented on topics related to recent state and federal mortgage lending developments at the American Financial Services Association’s State Government Affairs Forum / NACCA Annual Meeting on October 2 in Beverly Hills, California.
Miscellany
Wells Fargo, Wachovia to Merge. On October 3, Wells Fargo & Company (Wells Fargo) and Wachovia Corporation (Wachovia) announced a definitive agreement for the merger of the two companies. Under the agreement, subject to Wachovia shareholder and regulatory approvals, Wells Fargo will acquire the entire operations of Wachovia. The planned merger will require no financial assistance from the Federal Deposit Insurance Corporation or other government agencies. The announcement follows a September 29 announcement that Citigroup, Inc. (Citi) would acquire the banking operations of Wachovia for approximately $2.1 billion. According to reports, Citi may challenge Wells Fargo’s offer or increase its bid. For a copy of the press release, please see http://www.wachovia.com/misc/1,,2148,00.html?DCMP=ILL-194&ATTINFO=133-1.
Mortgages
President Bush Signs Bailout Legislation. On October 3, President Bush signed H.R. 1424, the “Emergency Economic Stabilization Act of 2008,” which implements the U.S. Treasury Department’s (Treasury) Troubled Assets Relief Program (TARP). This bill authorizes the Treasury to acquire and manage troubled assets from financial institutions through a newly created Office of Financial Stability. The bill immediately authorizes $250 billion for the Treasury to buy troubled assets, with an additional $100 billion upon presidential certification; a final $350 billion may be disbursed by presidential request pending Congressional approval. In addition to the initial Treasury asset relief proposal, the bill (i) requires loan servicers of assets acquired by the Treasury to engage in reasonable foreclosure mitigation efforts, such as term extensions, rate reductions, and principal write downs, (ii) places limitations on executive compensation for entities that sell assets to the government under TARP, (iii) creates a Financial Stability Oversight Board, (iv) increases the enforcement authority of the Federal Deposit Insurance Corporation (FDIC), (v) enhances the HOPE for Homeowners program, (vi) authorizes the Securities and Exchange Commission (SEC) to suspend mark-to-market accounting, and (vii) temporarily increases the FDIC’s deposit insurance from $100,000 to $250,000. The House of Representatives passed the bill on the same day after rejecting an earlier version on September 29. The Senate approved the bill on October 1. For a copy of the bill, please see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h1424eas.txt.pdf.
Bill Regarding VA-Backed Mortgages Cleared for White House. On October 2, S. 3023, the “Veterans’ Benefits Improvement Act of 2008,” was sent to the President. The bill pertains to mortgages extended to veterans that are guaranteed by the Department of Veterans’ Affairs (VA). Among other matters, the bill would (i) temporarily increase the maximum loan guaranty on loans guaranteed by the VA, (ii) require the VA to report on the impact of mortgage foreclosures to veterans, (iii) mandate updates to the handbook for veterans who qualify for housing assistance, (iv) enhance the refinancing of home loans for veterans by increasing the guaranty of loans from a loan to value ratio of 90% to 100%, and (v) extend the demonstration project on adjustable rate mortgages (ARMs) and hybrid ARMs to 2012. President Bush is expected to sign the bill into law. For a copy of the bill, please see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:s3023enr.txt.pdf.
HUD Mortgagee Letter Bans Mortgagee Funded Home Equity Conversion Mortgage Counseling. On September 29, Assistant Secretary for Housing Brian Montgomery issued Mortgagee Letter 2008-28, a letter that prohibits mortgagees from paying for Home Equity Conversion Mortgage (HECM) counseling on behalf of mortgagors. The new requirements, which were enacted into law under §2122 of the Housing and Economic Recovery Act of 2008 (HERA), cover both direct and indirect payments to counseling agencies, regardless of whether the payment is made through a lump-sum or on a case-by-case basis. For example, the letter forbids lenders from paying for HECM counseling through any entity associated with the lender. However, mortgagees may continue to pay for other types of non-HECM counseling, including pre-purchase and foreclosure prevention counseling. For a copy of the mortgagee letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-28ml.doc.
HUD Mortgagee Letter Discusses Treble Damages for Failure to Engage in Loss Mitigation. On September 26, Assistant Secretary for Housing Brian Montgomery issued Mortgagee Letter 2008-27, a letter which warns mortgagees that treble damages may be assessed whenever a mortgagee fails to engage in “loss mitigation,” as defined by U.S. Department of Housing and Urban Development (HUD) regulations. In order to comply fully with the regulations, mortgagees must be able to provide documentation of their loss mitigation evaluations, except when a mortgagee can demonstrate that a borrower was uncooperative or ineligible. A mortgagee’s failure to comply with these regulations could result in the assessment of civil money penalties by HUD, including the possibility of treble damages. To avoid the assessment of treble damages, HUD recommends that mortgagees take three key actions. First, mortgagees should “ensure that the loss mitigation evaluations are completed for all delinquent mortgages before four full monthly installments are due and unpaid. Second, mortgagees must ensure that the appropriate action is taken based on these evaluations. Third, mortgagees must maintain documentation of all initial and subsequent loss mitigation evaluations and actions taken.” To help mortgagees comply with the new regulations, HUD’s National Servicing Center (NSC) is offering loss mitigation training to lenders via classes scheduled throughout the year. The NSC provides a toll-free hotline (1-888-297-8685) to assist mortgagees with FHA’s servicing requirements, including HUD’s Loss Mitigation Program. For a copy of the mortgagee letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-27ml.doc.
HUD Mortgagee Letters Address Origination, Servicing Issues Under HOPE for Homeowners. On October 1, the Assistant Secretary for Housing Brian Montgomery issued two mortgagee letters addressing potential origination and servicing issues in connection with mortgages insured under the new HOPE for Homeowners (H4H) program. The first letter, Mortgagee Letter 2008-29, “HOPE for Homeowners Origination Guidance” (Oct. 1, 2008), provides extensive details and guidance regarding issues that might arise in originating loans under the H4H program. These issues include borrower and property eligibility, use of appraisals, mortgage underwriting, and sharing of equity and appreciation. The second letter, Mortgagee Letter 2008-30, “HOPE for Homeowners Servicing Guidance” (Oct. 1, 2008), offers servicing and loss-mitigation guidance under the H4H program. This letter addresses issues such as refinancing, capital improvements to the property, default and loss mitigation, first-payment default, sale or disposal of property, and mortgage payoff. H4H is a temporary program that was authorized by the Housing and Economic Recovery Act of 2008. This program makes struggling borrowers eligible to refinance into an FHA-insured mortgage, with the original lender agreeing to accept the proceeds of the new H4H mortgage as payment in full. The H4H Program became effective on October 1, 2008 and is scheduled to sunset on September 30, 2011. For a copy of the mortgagee letters, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-29ml.doc and http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-30ml.doc.
HUD Allocates Nearly $4 Billion to Stabilize Neighborhoods Impacted by Foreclosure. On September 26, U.S. Housing and Urban Development (HUD) Secretary Steve Preston allocated $3.92 billion to provide targeted emergency assistance to state and local governments for the purpose of acquiring and redeveloping foreclosed properties. HUD will allocate funds for the Neighborhood Stabilization Program (NSP) based on an area’s number/percent of foreclosures, subprime mortgages, and mortgage defaults and delinquencies. HUD will issue specific rules that will assist communities with the administration of the NSP and to ensure that NSP funds are obligated for specific activities within 18 months. The NSP requires housing counseling for families receiving homebuyer assistance and further requires states and local grantees to ensure that new homebuyers under this program obtain a mortgage loan from a lender that agrees to comply with sound lending practices. The funding is provided pursuant to HUD’s Community Development Block Grant Program under the Housing and Economic Recovery Act of 2008. For more information regarding the NSP, please see http://www.hud.gov/offices/cpd/communitydevelopment/programs/neighborhoodspg/.
California Governor Approves Mortgage Foreclosure, Mortgage Lending Bills. On September 25, California Governor Arnold Schwarzenegger signed A.B. 69, A.B. 180, and S.B. 1737, three bills aimed at addressing the recent subprime mortgage crisis. A.B. 69 gives the California Department of Corporations continued authority to collect information from licensees regarding their residential mortgage loan servicing activities, to accept information voluntarily provided by servicers not under its jurisdiction, and to post the aggregate results of its servicer surveys on its website. A.B. 180 requires foreclosure consultants to register with the California Department of Justice and maintain a surety bond of $100,000. Failure to do so shall be a crime punishable by a fine of up to $25,000 and up to a year in jail, or both. In addition, such consultants must provide a complete copy of a contract to a homeowner in any language in which the contract was negotiated and in any language that the homeowner requests. The bill also allows a homeowner to cancel a contract within five days after signing the contract, an increase from the three-day window provided under previous law.
S.B. 1737 authorizes the California Real Estate Commissioner (Commissioner) to suspend or bar a person from a position of employment, management, or control for a specified period for a violation of the California Real Estate Law or its rules. In addition, the bill authorizes the Commissioner to suspend or bar a person if the person has been convicted of, or has pleaded nolo contendere to, a crime or been held liable in a civil action, or any administrative judgment, for offenses involving dishonesty, fraud, or deceit, or any other offense reasonably related to a person’s activities in the real estate business. Further, the Commissioner may suspend or revoke a real estate licensee who has been guilty of generating an inaccurate valuation of residential real property requested in connection with a debt forgiveness sale in order to manipulate the lien holder to reflect the proposed debt forgiveness sale or to acquire a financial or business advantage. Finally, the bill requires a person or entity that arranges financing in connection with a sale, lease or exchange of property and acts as an agent with respect to that property to make a written disclosure of those roles, within 24 hours, to all parties to the sale, lease or exchange or any related transaction. The new laws take effect Jan. 1, 2009. For the full text of A.B. 69, please see http://www.leginfo.ca.gov/pub/07-08/bill/asm/ab_0051-0100/ab_69_bill_20080821_enrolled.pdf. For the full text of A.B. 180, please see http://www.leginfo.ca.gov/pub/07-08/bill/asm/ab_0151-0200/ab_180_bill_20080911_enrolled.pdf. For the full text of S.B. 1737, please see http://www.leginfo.ca.gov/pub/07-08/bill/sen/sb_1701-1750/sb_1737_bill_20080825_enrolled.pdf.
State Foreclosure Prevention Working Group Issues Servicing Report. On September 29, the State Foreclosure Prevention Working Group, whose members include state attorneys general and state banking regulators, published its third report on the servicing of sub-prime mortgages. The report expresses concern that servicers permit delinquent debtors to foreclose rather than offering alternatives for those who cannot pay their mortgages. The report statistics, which were compiled at the end of May, 2008 using data compiled from a group of thirteen servicers, indicate that 305,000 sub-prime and Alt-A mortgage loans were in foreclosure, and indicate that more than 1.1 million sub-prime and Alt-A loans, or 24.1%, were at least 30 days delinquent. The report further indicates that loan modifications, used by servicers as a tool to avoid foreclosure, have declined in early 2008, with a focus on increased short sales of foreclosed homes. In addition, one out of five mortgages that have been modified are now delinquent. The report urges federal and state intervention to create and implement broader-based loan modification plans that are focused on homeowner sustainability, such as the federal HOPE for Homeowners program. For a copy of the report, please see http://www.banking.state.ny.us/pr080929.pdf.
Pennsylvania Federal Court Holds TILA “Actual Damages” Recovery Requires Detrimental Reliance. On September 22, the U.S. District Court for the Western District of Pennsylvania held that the recovery of “actual damages” under the Truth in Lending Act (TILA) “requires proof that the consumer suffered a loss because he or she relied on an inaccurate or incomplete disclosure to his or her detriment.” Vallies v. Sky Bank, No. 2:01cv1438, 2008 U.S. Dist. Lexis 72476 (W.D. Pa. Sept. 22, 2008). In this case, the plaintiff obtained car financing from the defendant and later sought actual damages in a class action suit alleging that the defendant violated TILA when it excluded a $395 debt cancellation insurance fee from its calculation of the finance charge for the car without disclosing that the coverage and the amount charged for it were voluntary. The plaintiff ultimately did receive all the required disclosure information to make the financial transaction accurate and complete, but did not receive all of it from the defendant lender. The defendant moved for summary judgment, arguing that the plaintiff did not show detrimental reliance as required to recover actual damages under TILA. In granting the defendant’s motion for summary judgment, the court held that a showing of detrimental reliance is necessary to establish actual damages under TILA. Further, in order to recover actual damages, “a plaintiff must show that (i) he read the TILA disclosure statement, (ii) he understood the charges being disclosed, (iii) had the disclosure statement been accurate, he would have sought a lower price, and (iv) he could have obtained a lower price.” The court held that, because the plaintiff received all of the required information and voluntarily elected to incur the debt cancellation insurance when he purchased his vehicle, the plaintiff could not satisfy the third or fourth element of this test. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Vallies_v_Sky_Bank.pdf.
Banking
President Bush Signs Bailout Legislation. On October 3, President Bush signed H.R. 1424, the “Emergency Economic Stabilization Act of 2008,” which implements the U.S. Treasury Department’s (Treasury) Troubled Assets Relief Program (TARP). This bill authorizes the Treasury to acquire and manage troubled assets from financial institutions through a newly created Office of Financial Stability. The bill immediately authorizes $250 billion for the Treasury to buy troubled assets, with an additional $100 billion upon presidential certification; a final $350 billion may be disbursed by presidential request pending Congressional approval. In addition to the initial Treasury asset relief proposal, the bill (i) requires loan servicers of assets acquired by the Treasury to engage in reasonable foreclosure mitigation efforts, such as term extensions, rate reductions, and principal write downs, (ii) places limitations on executive compensation for entities that sell assets to the government under TARP, (iii) creates a Financial Stability Oversight Board, (iv) increases the enforcement authority of the Federal Deposit Insurance Corporation (FDIC), (v) enhances the HOPE for Homeowners program, (vi) authorizes the Securities and Exchange Commission (SEC) to suspend mark-to-market accounting, and (vii) temporarily increases the FDIC’s deposit insurance from $100,000 to $250,000. The House of Representatives passed the bill on the same day after rejecting an earlier version on September 29. The Senate approved the bill on October 1. For a copy of the bill, please see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h1424eas.txt.pdf.
Wells Fargo, Wachovia to Merge. On October 3, Wells Fargo & Company (Wells Fargo) and Wachovia Corporation (Wachovia) announced a definitive agreement for the merger of the two companies. Under the agreement, subject to Wachovia shareholder and regulatory approvals, Wells Fargo will acquire the entire operations of Wachovia. The planned merger will require no financial assistance from the Federal Deposit Insurance Corporation or other government agencies. The announcement follows a September 29 announcement that Citigroup, Inc. (Citi) would acquire the banking operations of Wachovia for approximately $2.1 billion. According to reports, Citi may challenge Wells Fargo’s offer or increase its bid. For a copy of the press release, please see http://www.wachovia.com/misc/1,,2148,00.html?DCMP=ILL-194&ATTINFO=133-1.
Fed Board of Governors Establish Lending Facility to Aid Money Market Mutual Funds. On September 19, the Board of the Federal Reserve System established a lending facility (the ABCP Lending Facility) for depository institutions and bank holding companies. These institutions can borrow from the Federal Reserve Bank of Boston on a nonrecourse basis if the institutions use the proceeds of the loan to purchase certain types of asset-backed commercial paper from money market mutual funds. The measure is intended to "reduce liquidity and other strains being experienced by money market mutual funds." The rule establishing the facility became effective on September 19, 2008 and the public comment period will last until October 31, 2008. For a copy of the Federal Register notice, please see http://www.occ.gov/fr/fedregister/73fr55704.pdf.
New York Banking Department Responds to Credit Crunch, Allows Temporary Relaxation of Lending Limits. On September 25, the New York State Banking Department (Banking Department), responding to the slowdown in the credit markets, adopted a resolution designed to add liquidity to the market. The resolution, made pursuant to Section 12-a(4) of the New York State Banking Law, allows New York State-chartered banks and trust companies, under the supervision of the New York Superintendent of Banks, to make emergency temporary loans that exceed regular lending limits. The Banking Department adopted the resolutions, in part, to maintain parity between New York State-chartered banks and national banks, for which the OCC recently permitted identical temporary exemptions. In announcing the resolution, Superintendent of Banks, Richard H. Neiman emphasized that “These are serious times and we have a responsibility to be responsive to changing market conditions and to ensure that we have the ability to enable New York State-chartered banks to help ease the credit and liquidity crunch that the financial markets are experiencing.” For a copy of the press release, please see http://www.banking.state.ny.us/pr080927.htm. For copies of the full resolution approved by the Banking Board, please see www.banking.state.ny.us/legal/wild.htm.
Consumer Finance
House Passes Credit Card Bill Proposing to Amend Truth in Lending Act. On September 23, the U.S. House of Representatives passed H.R. 5244, the “Credit Cardholders’ Bill of Rights Act of 2008.” The bill is substantively similar to the joint proposed rule by the Federal Reserve Board, Office of Thrift Supervision, and National Credit Union Administration regarding unfair and deceptive acts or practices (UDAP) (reported in InfoBytes, May 23, 2008), however, H.R. 5244 differs by proposing to amend the Truth in Lending Act. Among other items, the bill (i) prohibits a creditor from increasing the annual percentage rate (APR) of an existing balance on a credit card, except for situations involving changes in an index not under the creditor’s control, the expiration of a promotional rate, and a penalty rate increase if a payment is not received within 30 days after the due date, (ii) allows a creditor, in instances where an outstanding balance has two or more different APRs, to allocate a larger share of a payment to the portion of the balance bearing the higher APR, (iii) grants consumers the option to opt-out of over-the-limit transactions when fees are imposed, (iv) prohibits double-cycle billing, (v) requires a 45-day advance notice of an APR increase, (vi) prohibits fees to be charged on an outstanding balance attributable only to accrued interest, (vii) imposes fee restrictions on "subprime" cards, (viii) prohibits knowingly issuing a credit card to consumers under the age of 18, and (ix) prohibits a creditor from furnishing any information to a consumer reporting agency concerning a newly opened credit card account until the credit card has been activated. For a copy of the bill, as passed by the House, please see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h5244eh.txt.pdf.
FTC Reaches Settlement with List Broker Charged with Violating FTC Act, Telemarketing Sales Rule. On October 1, the Federal Trade Commission (FTC) issued a press release announcing a settlement against a list broker who allegedly violated the FTC Act and the Telemarketing Sales Rule (TSR) by selling consumers’ unencrypted consumer account numbers (such as credit card numbers, bank account and routing information) without first obtaining the consumers’ authorization. According to the FTC’s complaint, the defendant sold the information to a variety of sources, including the telemarketers of fraudulent advance-fee credit cards. Such disclosure, for payment and for use in telemarketing, is an abusive telemarketing act or practice under the TSR. Among other items, the proposed order prohibits the defendant from collecting or disclosing consumers’ account numbers, except in specified circumstances. The defendant is also required to turn over any lists of consumers’ account numbers in his possession to the FTC. In addition to a monetary judgment, the defendant is required to comply with monitoring and record-keeping requirements set out in the proposed order. For a copy of the press release, please see http://www.ftc.gov/opa/2008/10/glenpatten.shtm.
Connecticut Superior Court Holds FCRA Preempts Several State Law Claims. On September 9, the Superior Court of Connecticut granted in part and denied in part a motion to dismiss filed by defendants Greenpoint Mortgage Funding, Inc., Wells Fargo Home Mortgage, Inc., and Mortgage Electronic Registrations Systems, Inc. in a case in which the plaintiff alleged that the defendants caused him injuries and losses by mistakenly instituting foreclosure proceedings against him. Carocci v. Greenpoint Mortgage Funding, Inc., No. 030476223S, 2008 WL 4415855 (Conn. Super. Ct. Sept. 9, 2008). The defendants moved to dismiss several state law claims, arguing that § 1681t(b)(1)(F) of the Fair Credit Reporting Act (FCRA) preempted such claims. The plaintiff counter-argued that many of his state law claims fell outside the scope of § 1681t(b)(1)(F) and that § 1681t(b)(1)(F) did not preempt his claims because he did not allege that he notified a consumer reporting agency regarding the error. The court explained that FCRA contains two provisions that arguably preempted the plaintiff’s state law claims, § 1681h(e) and § 1681t(b)(1)(F). In an attempt to resolve these sections of FCRA, federal district courts have generally adopted three competing approaches, namely (i) the “sweeping” approach, which holds that § 1681t completely supercedes § 1681h, (ii) the “statutory preemption” approach, which attempts to resolve the ambiguities between the two statutory sections, and (iii) the “temporal approach,” which permits common-law tort claims to go forward only if they concern acts of malice or willful intent that occurred before the furnisher had notice of any inaccuracies of a dispute. The court rejected these three approaches in favor of the approach adopted by the Connecticut District Court in Holtman v. Citifinancial Mortgage Co., No. 3:05 CV 151 (D.Conn. June 19, 2006). In Holtman, the court found that § 1681t(b)(1)(F) only applies to persons who provide information to consumer reporting agencies, and that § 1681h(e) applies only to consumer reporting agencies and those who take adverse actions against consumers based on consumer reports. Following Holtman, the court held that § 1681t(b)(1)(F) preempted several, but not all, of the plaintiff’s claims, which the court dismissed. The court further held that § 1681h(e) did not preempt any of the plaintiff’s claims because the plaintiff did not allege that any of the defendants qualified as consumer reporting agencies or that any of the defendants took adverse action against him based upon consumer reports. For a copy of the opinion, please e-mail .
Class Action Lawsuit Filed Against The Princeton Review Alleging Leak of Students’ Personal Information. On September 19, a class action lawsuit was filed against The Princeton Review, Inc. (The Princeton Review) in the U.S. District Court for the Middle District of Florida on behalf of more than 100,000 public school students whose personal information was allegedly leaked on The Princeton Review’s website. Townsend v. The Princeton Review, Inc., No. 08-cv-01879-T-33 (M.D. Fla. Sept. 19, 2008). The complaint alleges that the students’ personal information - which included, among other items, birth dates, Social Security numbers, standardized test scores, and ethnicities - was publicly available on The Princeton Review website for seven weeks and was also accessible via Internet search engines. According to the complaint, which alleges claims of negligence, breach of contract, and unfair trade practices, The Princeton Review failed to adhere to several accepted on-line security practices for storing personal information and failed to monitor its network and access logs, which might have evidenced the data breach much earlier. The complaint claims over $5 million in damages, based on allegations that The Princeton Review violated the students’ privacy rights and exposed the students to the risk of fraud and identity theft. The complaint also asks for injunctive relief, including the provision of personal data monitoring services for the class members. For a copy of the complaint, please see http://www.buckleykolar.com/documents/Townsend_v_Princeton_Review.pdf.
Eighth Circuit Holds Assignee Can Compel Arbitration Under Settled Credit Card Agreement. On September 23, the U.S. Court of Appeals for the Eighth Circuit held that a purchaser of an extinguished credit card debt could compel arbitration under the credit card agreement. Koch v. Compucredit Corp., No. 07-1948, 2008 WL 4305903 (8th Cir. Sept. 23, 2008). The plaintiff in the case filed a class action lawsuit alleging that the assignee of her credit card debt violated the Fair Debt Collection Practices Act and the Arkansas Deceptive Trade Practices Act by attempting to collect on a credit card debt that she had already paid. The assignee moved to compel arbitration under the credit card agreement between the plaintiff and the original creditor, but the district court held that the assignment was invalid because the original creditor had no remaining interest in the plaintiff’s account after it was settled. The Eighth Circuit found the validity of the assignment was a matter for the court, not the arbitrator. However, the Eighth Circuit reversed the district court, finding that, “[e]ven if the underlying credit agreement was terminated by the settlement, such a termination does not necessarily release the parties from their obligations under that agreement, including the obligation to arbitrate.” The continuing obligation to arbitrate gave the assignor “a ‘present interest’ in the contract” and, thus, “something to assign.” Because the court determined that the dispute involved “‘facts and occurrences that arose before expiration’ of the credit agreement” and fell within the scope of the arbitration clause, it held that the assignee could compel arbitration under the agreement. For a copy of the opinion, please see http://www.ca8.uscourts.gov/opndir/08/09/071948P.pdf.
Pennsylvania Federal Court Holds Credit Card, Checking Account Arbitration Provisions Not Unconscionable. On September 16, U.S. District Court for the Western District of Pennsylvania held that the arbitration provisions of checking account and credit card agreements with the defendants, First National Bank of Pennsylvania (First National) and Chase Bank USA, NA (Chase), respectively, were not unconscionable. Grimm v. First National Bank of Pennsylvania, No. 08-785 (W.D. Pa. Sept. 16, 2008). In this case, identity thieves defrauded funds from the plaintiffs’ checking and credit card accounts. The plaintiffs filed suit, claiming that the defendants failed to identify the fraudulent activity. The defendants then petitioned the court to stay the proceeding and to compel arbitration of the claims pursuant to the arbitration provisions of the checking and credit card agreements. The court held that the agreement with First National was not procedurally unconscionable, reasoning that the agreement conspicuously displayed the arbitration clause and that the failure to read an arbitration agreement does not constitute "special circumstances" which would invalidate the agreement. The court also held that the agreement with First National was not substantively unconscionable, reasoning that the defendants did not have superior bargaining power because the plaintiffs could have opened their accounts elsewhere, and because the Third Circuit "has repeatedly held that inequality in bargaining power, alone, is not a valid basis upon which to invalidate an agreement." The court held that the agreements with Chase were not procedurally or substantively unconscionable because (i) the plaintiffs could have opened credit cards with other issuers, (ii) compelling arbitration is not “one-sided” or “oppressive” because the arbitration provision allows both parties to arbitrate disputes, and (iii) other state and federal courts have “routinely” held that such arbitration provisions are not unconscionable. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Grimm_v_First_National.pdf.
Illinois Federal Court Certifies Class Action Suit for FACTA Violations. On September 24, the U.S. District Court for the Northern District of Illinois granted plaintiffs’ motion for class certification in an action against the defendant for violations of the Fair and Accurate Transactions Act (FACTA). Beringer v. Standard Parking Corp., Nos. 07 C 5027, 2008 WL 4390626 (N.D. Ill. Sept. 24, 2008). The case arose when the operator of a parking facility printed the first four digits, the last four digits, and the expiration dates of the plaintiffs’ credit cards on their parking receipts in violation of § 1681c(g)(1) of FACTA, which prohibits printing "more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction." Though the plaintiffs did not allege that they suffered any actual damages as a result of Defendant’s noncompliance with the statute, they claimed statutory damages of "not less than $100 and not more than $1,000" pursuant to § 1681n(a)(1)(A) of FACTA. Furthermore, because the defendant was out of compliance with § 1681c(g)(1) from December 4, 2006 to April 26, 2007, the plaintiffs sought class certification in order to address the 751,078 additional potential FACTA violations committed by the defendant. The court granted the plaintiffs’ motion after finding, under Rule 23(b)(3) of the Federal Rules of Civil Procedure, that common questions of law or fact predominated and that a class action was superior to other available methods for the fair and efficient adjudication of the controversy. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Beringer_v_Standard.pdf.
Securities
SEC Announces Proposed Fair Value Interpretive Guidance, ABA Recommends Fair Value Accounting Solutions. On September 23, the American Bar Association (ABA) addressed what it views as existing problems in today’s financial markets and suggested potential solutions in a letter to Securities and Exchange Commission (SEC) Chairman Cox. The ABA stated that the Statement of Financial Accounting Standards No. 157 (SFAS 157) and related accounting literature fail to provide an adequate “framework to guide preparers of financial statements and auditors in applying their fundamental concepts when markets become illiquid.” The ABA recommended that the SEC issue guidance that “intrinsic value or economic value” (where instrument credit losses would be deducted from the value) are the appropriate proxies for fair value, in lieu of the current rule, which requires the evaluation of “exit price” and “market participants.” The ABA also asked for the reform of proposed accounting standards that, if issued, “would dramatically change the accounting for securitizations or require additional use of fair value accounting,” and could exacerbate the existing problems in the marketplace. The ABA’s letter specifically referenced the Statement of Financial Accounting Standards No. 140 (SFAS 140), which the Financial Accounting Standards Board (FASB) proposed in response to SEC requests. As a precautionary measure, the ABA requested that the SEC place a temporary stay on the issue of new accounting standards until a more comprehensive analysis of the impact on the markets is completed. On September 30, SEC Chairman Cox announced that the FASB was preparing to propose additional interpretative guidance on fair value measurement under U.S. Generally Accepted Accounting Principles and, together with the SEC, would make efforts to provide immediate clarifications to preparers and auditors. The SEC’s press release restates that SFAS 157 is currently the proper reference for fair value measurement guidance. For a copy of the ABA letter, please e-mail ; for a copy of the SEC’s press release, please see http://www.sec.gov/news/press/2008/2008-234.htm.
Litigation
Pennsylvania Federal Court Holds TILA “Actual Damages” Recovery Requires Detrimental Reliance. On September 22, the U.S. District Court for the Western District of Pennsylvania held that the recovery of “actual damages” under the Truth in Lending Act (TILA) “requires proof that the consumer suffered a loss because he or she relied on an inaccurate or incomplete disclosure to his or her detriment.” Vallies v. Sky Bank, No. 2:01cv1438, 2008 U.S. Dist. Lexis 72476 (W.D. Pa. Sept. 22, 2008). In this case, the plaintiff obtained car financing from the defendant and later sought actual damages in a class action suit alleging that the defendant violated TILA when it excluded a $395 debt cancellation insurance fee from its calculation of the finance charge for the car without disclosing that the coverage and the amount charged for it were voluntary. The plaintiff ultimately did receive all the required disclosure information to make the financial transaction accurate and complete, but did not receive all of it from the defendant lender. The defendant moved for summary judgment, arguing that the plaintiff did not show detrimental reliance as required to recover actual damages under TILA. In granting the defendant’s motion for summary judgment, the court held that a showing of detrimental reliance is necessary to establish actual damages under TILA. Further, in order to recover actual damages, “a plaintiff must show that (i) he read the TILA disclosure statement, (ii) he understood the charges being disclosed, (iii) had the disclosure statement been accurate, he would have sought a lower price, and (iv) he could have obtained a lower price.” The court held that, because the plaintiff received all of the required information and voluntarily elected to incur the debt cancellation insurance when he purchased his vehicle, the plaintiff could not satisfy the third or fourth element of this test. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Vallies_v_Sky_Bank.pdf.
Connecticut Superior Court Holds FCRA Preempts Several State Law Claims. On September 9, the Superior Court of Connecticut granted in part and denied in part a motion to dismiss filed by defendants Greenpoint Mortgage Funding, Inc., Wells Fargo Home Mortgage, Inc., and Mortgage Electronic Registrations Systems, Inc. in a case in which the plaintiff alleged that the defendants caused him injuries and losses by mistakenly instituting foreclosure proceedings against him. Carocci v. Greenpoint Mortgage Funding, Inc., No. 030476223S, 2008 WL 4415855 (Conn. Super. Ct. Sept. 9, 2008). The defendants moved to dismiss several state law claims, arguing that § 1681t(b)(1)(F) of the Fair Credit Reporting Act (FCRA) preempted such claims. The plaintiff counter-argued that many of his state law claims fell outside the scope of § 1681t(b)(1)(F) and that § 1681t(b)(1)(F) did not preempt his claims because he did not allege that he notified a consumer reporting agency regarding the error. The court explained that FCRA contains two provisions that arguably preempted the plaintiff’s state law claims, § 1681h(e) and § 1681t(b)(1)(F). In an attempt to resolve these sections of FCRA, federal district courts have generally adopted three competing approaches, namely (i) the “sweeping” approach, which holds that § 1681t completely supercedes § 1681h, (ii) the “statutory preemption” approach, which attempts to resolve the ambiguities between the two statutory sections, and (iii) the “temporal approach,” which permits common-law tort claims to go forward only if they concern acts of malice or willful intent that occurred before the furnisher had notice of any inaccuracies of a dispute. The court rejected these three approaches in favor of the approach adopted by the Connecticut District Court in Holtman v. Citifinancial Mortgage Co., No. 3:05 CV 151 (D.Conn. June 19, 2006). In Holtman, the court found that § 1681t(b)(1)(F) only applies to persons who provide information to consumer reporting agencies, and that § 1681h(e) applies only to consumer reporting agencies and those who take adverse actions against consumers based on consumer reports. Following Holtman, the court held that § 1681t(b)(1)(F) preempted several, but not all, of the plaintiff’s claims, which the court dismissed. The court further held that § 1681h(e) did not preempt any of the plaintiff’s claims because the plaintiff did not allege that any of the defendants qualified as consumer reporting agencies or that any of the defendants took adverse action against him based upon consumer reports. For a copy of the opinion, please e-mail .
Class Action Lawsuit Filed Against The Princeton Review Alleging Leak of Students’ Personal Information. On September 19, a class action lawsuit was filed against The Princeton Review, Inc. (The Princeton Review) in the U.S. District Court for the Middle District of Florida on behalf of more than 100,000 public school students whose personal information was allegedly leaked on The Princeton Review’s website. Townsend v. The Princeton Review, Inc., No. 08-cv-01879-T-33 (M.D. Fla. Sept. 19, 2008). The complaint alleges that the students’ personal information - which included, among other items, birth dates, Social Security numbers, standardized test scores, and ethnicities - was publicly available on The Princeton Review website for seven weeks and was also accessible via Internet search engines. According to the complaint, which alleges claims of negligence, breach of contract, and unfair trade practices, The Princeton Review failed to adhere to several accepted on-line security practices for storing personal information and failed to monitor its network and access logs, which might have evidenced the data breach much earlier. The complaint claims over $5 million in damages, based on allegations that The Princeton Review violated the students’ privacy rights and exposed the students to the risk of fraud and identity theft. The complaint also asks for injunctive relief, including the provision of personal data monitoring services for the class members. For a copy of the complaint, please see http://www.buckleykolar.com/documents/Townsend_v_Princeton_Review.pdf.
Eighth Circuit Holds Assignee Can Compel Arbitration Under Settled Credit Card Agreement. On September 23, the U.S. Court of Appeals for the Eighth Circuit held that a purchaser of an extinguished credit card debt could compel arbitration under the credit card agreement. Koch v. Compucredit Corp., No. 07-1948, 2008 WL 4305903 (8th Cir. Sept. 23, 2008). The plaintiff in the case filed a class action lawsuit alleging that the assignee of her credit card debt violated the Fair Debt Collection Practices Act and the Arkansas Deceptive Trade Practices Act by attempting to collect on a credit card debt that she had already paid. The assignee moved to compel arbitration under the credit card agreement between the plaintiff and the original creditor, but the district court held that the assignment was invalid because the original creditor had no remaining interest in the plaintiff’s account after it was settled. The Eighth Circuit found the validity of the assignment was a matter for the court, not the arbitrator. However, the Eighth Circuit reversed the district court, finding that, “[e]ven if the underlying credit agreement was terminated by the settlement, such a termination does not necessarily release the parties from their obligations under that agreement, including the obligation to arbitrate.” The continuing obligation to arbitrate gave the assignor “a ‘present interest’ in the contract” and, thus, “something to assign.” Because the court determined that the dispute involved “‘facts and occurrences that arose before expiration’ of the credit agreement” and fell within the scope of the arbitration clause, it held that the assignee could compel arbitration under the agreement. For a copy of the opinion, please see http://www.ca8.uscourts.gov/opndir/08/09/071948P.pdf.
Pennsylvania Federal Court Holds Credit Card, Checking Account Arbitration Provisions Not Unconscionable. On September 16, U.S. District Court for the Western District of Pennsylvania held that the arbitration provisions of checking account and credit card agreements with the defendants, First National Bank of Pennsylvania (First National) and Chase Bank USA, NA (Chase), respectively, were not unconscionable. Grimm v. First National Bank of Pennsylvania, No. 08-785 (W.D. Pa. Sept. 16, 2008). In this case, identity thieves defrauded funds from the plaintiffs’ checking and credit card accounts. The plaintiffs filed suit, claiming that the defendants failed to identify the fraudulent activity. The defendants then petitioned the court to stay the proceeding and to compel arbitration of the claims pursuant to the arbitration provisions of the checking and credit card agreements. The court held that the agreement with First National was not procedurally unconscionable, reasoning that the agreement conspicuously displayed the arbitration clause and that the failure to read an arbitration agreement does not constitute "special circumstances" which would invalidate the agreement. The court also held that the agreement with First National was not substantively unconscionable, reasoning that the defendants did not have superior bargaining power because the plaintiffs could have opened their accounts elsewhere, and because the Third Circuit "has repeatedly held that inequality in bargaining power, alone, is not a valid basis upon which to invalidate an agreement." The court held that the agreements with Chase were not procedurally or substantively unconscionable because (i) the plaintiffs could have opened credit cards with other issuers, (ii) compelling arbitration is not “one-sided” or “oppressive” because the arbitration provision allows both parties to arbitrate disputes, and (iii) other state and federal courts have “routinely” held that such arbitration provisions are not unconscionable. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Grimm_v_First_National.pdf.
Pennsylvania Federal Court Holds Contract Incorporated by Reference to Internet Terms Binding. On September 16, the U.S. District Court for the Western District of Pennsylvania held that an agreement incorporated by reference to terms and conditions posted on a website was binding and not unconscionable. Pentecostal Temple Church v. Streaming Faith, LLC, No. 08-554 (W.D. Pa. Sept. 16, 2008). In this case, an agreement for the design and implementation of an internet broadcasting system contained a clause that referred the plaintiff to the defendant’s website to find further terms and conditions, including a forum selection clause. The plaintiffs subsequently filed claims, including contractual breach and fraud, against the defendant. The defendants then argued that the case should be transferred pursuant to the forum selection clause. The plaintiffs argued that the forum selection clause was not valid because it was part of the terms and conditions incorporated via the defendant’s website and because the agreement was unconscionable. Relying upon Schwartz v. Comcast Corp., No. 06-4855, WL 4212693 (3rd Cir. Nov. 30, 2007), the court held that the forum selection clause was binding, reasoning that a party is adequately “on notice“ when an agreement contains a provision to incorporate terms and conditions posted on the internet, and that the terms and conditions were posted pursuant to that provision. The court also held that the contract was not unconscionable, reasoning that the parties had several months to negotiate the agreement, that the terms were "plainly and clearly" available on the internet, and that, while favorable to the defendants, did not "shock the conscience." After assessing additional factors, the court approved the defendant’s motion to transfer. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Pentecostal_Temple_Church_v_Streaming_Faith.pdf.
Illinois Federal Court Certifies Class Action Suit for FACTA Violations. On September 24, the U.S. District Court for the Northern District of Illinois granted plaintiffs’ motion for class certification in an action against the defendant for violations of the Fair and Accurate Transactions Act (FACTA). Beringer v. Standard Parking Corp., Nos. 07 C 5027, 2008 WL 4390626 (N.D. Ill. Sept. 24, 2008). The case arose when the operator of a parking facility printed the first four digits, the last four digits, and the expiration dates of the plaintiffs’ credit cards on their parking receipts in violation of § 1681c(g)(1) of FACTA, which prohibits printing "more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction." Though the plaintiffs did not allege that they suffered any actual damages as a result of Defendant’s noncompliance with the statute, they claimed statutory damages of "not less than $100 and not more than $1,000" pursuant to § 1681n(a)(1)(A) of FACTA. Furthermore, because the defendant was out of compliance with § 1681c(g)(1) from December 4, 2006 to April 26, 2007, the plaintiffs sought class certification in order to address the 751,078 additional potential FACTA violations committed by the defendant. The court granted the plaintiffs’ motion after finding, under Rule 23(b)(3) of the Federal Rules of Civil Procedure, that common questions of law or fact predominated and that a class action was superior to other available methods for the fair and efficient adjudication of the controversy. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Beringer_v_Standard.pdf.
E-Financial Services
Class Action Lawsuit Filed Against The Princeton Review Alleging Leak of Students’ Personal Information. On September 19, a class action lawsuit was filed against The Princeton Review, Inc. (The Princeton Review) in the U.S. District Court for the Middle District of Florida on behalf of more than 100,000 public school students whose personal information was allegedly leaked on The Princeton Review’s website. Townsend v. The Princeton Review, Inc., No. 08-cv-01879-T-33 (M.D. Fla. Sept. 19, 2008). The complaint alleges that the students’ personal information - which included, among other items, birth dates, Social Security numbers, standardized test scores, and ethnicities - was publicly available on The Princeton Review website for seven weeks and was also accessible via Internet search engines. According to the complaint, which alleges claims of negligence, breach of contract, and unfair trade practices, The Princeton Review failed to adhere to several accepted on-line security practices for storing personal information and failed to monitor its network and access logs, which might have evidenced the data breach much earlier. The complaint claims over $5 million in damages, based on allegations that The Princeton Review violated the students’ privacy rights and exposed the students to the risk of fraud and identity theft. The complaint also asks for injunctive relief, including the provision of personal data monitoring services for the class members. For a copy of the complaint, please see http://www.buckleykolar.com/documents/Townsend_v_Princeton_Review.pdf.
Pennsylvania Federal Court Holds Credit Card, Checking Account Arbitration Provisions Not Unconscionable. On September 16, U.S. District Court for the Western District of Pennsylvania held that the arbitration provisions of checking account and credit card agreements with the defendants, First National Bank of Pennsylvania (First National) and Chase Bank USA, NA (Chase), respectively, were not unconscionable. Grimm v. First National Bank of Pennsylvania, No. 08-785 (W.D. Pa. Sept. 16, 2008). In this case, identity thieves defrauded funds from the plaintiffs’ checking and credit card accounts. The plaintiffs filed suit, claiming that the defendants failed to identify the fraudulent activity. The defendants then petitioned the court to stay the proceeding and to compel arbitration of the claims pursuant to the arbitration provisions of the checking and credit card agreements. The court held that the agreement with First National was not procedurally unconscionable, reasoning that the agreement conspicuously displayed the arbitration clause and that the failure to read an arbitration agreement does not constitute "special circumstances" which would invalidate the agreement. The court also held that the agreement with First National was not substantively unconscionable, reasoning that the defendants did not have superior bargaining power because the plaintiffs could have opened their accounts elsewhere, and because the Third Circuit "has repeatedly held that inequality in bargaining power, alone, is not a valid basis upon which to invalidate an agreement." The court held that the agreements with Chase were not procedurally or substantively unconscionable because (i) the plaintiffs could have opened credit cards with other issuers, (ii) compelling arbitration is not “one-sided” or “oppressive” because the arbitration provision allows both parties to arbitrate disputes, and (iii) other state and federal courts have “routinely” held that such arbitration provisions are not unconscionable. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Grimm_v_First_National.pdf.
Pennsylvania Federal Court Holds Contract Incorporated by Reference to Internet Terms Binding. On September 16, the U.S. District Court for the Western District of Pennsylvania held that an agreement incorporated by reference to terms and conditions posted on a website was binding and not unconscionable. Pentecostal Temple Church v. Streaming Faith, LLC, No. 08-554 (W.D. Pa. Sept. 16, 2008). In this case, an agreement for the design and implementation of an internet broadcasting system contained a clause that referred the plaintiff to the defendant’s website to find further terms and conditions, including a forum selection clause. The plaintiffs subsequently filed claims, including contractual breach and fraud, against the defendant. The defendants then argued that the case should be transferred pursuant to the forum selection clause. The plaintiffs argued that the forum selection clause was not valid because it was part of the terms and conditions incorporated via the defendant’s website and because the agreement was unconscionable. Relying upon Schwartz v. Comcast Corp., No. 06-4855, WL 4212693 (3rd Cir. Nov. 30, 2007), the court held that the forum selection clause was binding, reasoning that a party is adequately “on notice“ when an agreement contains a provision to incorporate terms and conditions posted on the internet, and that the terms and conditions were posted pursuant to that provision. The court also held that the contract was not unconscionable, reasoning that the parties had several months to negotiate the agreement, that the terms were "plainly and clearly" available on the internet, and that, while favorable to the defendants, did not "shock the conscience." After assessing additional factors, the court approved the defendant’s motion to transfer. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Pentecostal_Temple_Church_v_Streaming_Faith.pdf.
Privacy/Data Security
FTC Reaches Settlement with List Broker Charged with Violating FTC Act, Telemarketing Sales Rule. On October 1, the Federal Trade Commission (FTC) issued a press release announcing a settlement against a list broker who allegedly violated the FTC Act and the Telemarketing Sales Rule (TSR) by selling consumers’ unencrypted consumer account numbers (such as credit card numbers, bank account and routing information) without first obtaining the consumers’ authorization. According to the FTC’s complaint, the defendant sold the information to a variety of sources, including the telemarketers of fraudulent advance-fee credit cards. Such disclosure, for payment and for use in telemarketing, is an abusive telemarketing act or practice under the TSR. Among other items, the proposed order prohibits the defendant from collecting or disclosing consumers’ account numbers, except in specified circumstances. The defendant is also required to turn over any lists of consumers’ account numbers in his possession to the FTC. In addition to a monetary judgment, the defendant is required to comply with monitoring and record-keeping requirements set out in the proposed order. For a copy of the press release, please see http://www.ftc.gov/opa/2008/10/glenpatten.shtm.
Illinois Federal Court Certifies Class Action Suit for FACTA Violations. On September 24, the U.S. District Court for the Northern District of Illinois granted plaintiffs’ motion for class certification in an action against the defendant for violations of the Fair and Accurate Transactions Act (FACTA). Beringer v. Standard Parking Corp., Nos. 07 C 5027, 2008 WL 4390626 (N.D. Ill. Sept. 24, 2008). The case arose when the operator of a parking facility printed the first four digits, the last four digits, and the expiration dates of the plaintiffs’ credit cards on their parking receipts in violation of § 1681c(g)(1) of FACTA, which prohibits printing "more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction." Though the plaintiffs did not allege that they suffered any actual damages as a result of Defendant’s noncompliance with the statute, they claimed statutory damages of "not less than $100 and not more than $1,000" pursuant to § 1681n(a)(1)(A) of FACTA. Furthermore, because the defendant was out of compliance with § 1681c(g)(1) from December 4, 2006 to April 26, 2007, the plaintiffs sought class certification in order to address the 751,078 additional potential FACTA violations committed by the defendant. The court granted the plaintiffs’ motion after finding, under Rule 23(b)(3) of the Federal Rules of Civil Procedure, that common questions of law or fact predominated and that a class action was superior to other available methods for the fair and efficient adjudication of the controversy. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Beringer_v_Standard.pdf.
Credit Cards
House Passes Credit Card Bill Proposing to Amend Truth in Lending Act. On September 23, the U.S. House of Representatives passed H.R. 5244, the “Credit Cardholders’ Bill of Rights Act of 2008.” The bill is substantively similar to the joint proposed rule by the Federal Reserve Board, Office of Thrift Supervision, and National Credit Union Administration regarding unfair and deceptive acts or practices (UDAP) (reported in InfoBytes, May 23, 2008), however, H.R. 5244 differs by proposing to amend the Truth in Lending Act. Among other items, the bill (i) prohibits a creditor from increasing the annual percentage rate (APR) of an existing balance on a credit card, except for situations involving changes in an index not under the creditor’s control, the expiration of a promotional rate, and a penalty rate increase if a payment is not received within 30 days after the due date, (ii) allows a creditor, in instances where an outstanding balance has two or more different APRs, to allocate a larger share of a payment to the portion of the balance bearing the higher APR, (iii) grants consumers the option to opt-out of over-the-limit transactions when fees are imposed, (iv) prohibits double-cycle billing, (v) requires a 45-day advance notice of an APR increase, (vi) prohibits fees to be charged on an outstanding balance attributable only to accrued interest, (vii) imposes fee restrictions on "subprime" cards, (viii) prohibits knowingly issuing a credit card to consumers under the age of 18, and (ix) prohibits a creditor from furnishing any information to a consumer reporting agency concerning a newly opened credit card account until the credit card has been activated. For a copy of the bill, as passed by the House, please see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h5244eh.txt.pdf.
Illinois Federal Court Certifies Class Action Suit for FACTA Violations. On September 24, the U.S. District Court for the Northern District of Illinois granted plaintiffs’ motion for class certification in an action against the defendant for violations of the Fair and Accurate Transactions Act (FACTA). Beringer v. Standard Parking Corp., Nos. 07 C 5027, 2008 WL 4390626 (N.D. Ill. Sept. 24, 2008). The case arose when the operator of a parking facility printed the first four digits, the last four digits, and the expiration dates of the plaintiffs’ credit cards on their parking receipts in violation of § 1681c(g)(1) of FACTA, which prohibits printing "more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction." Though the plaintiffs did not allege that they suffered any actual damages as a result of Defendant’s noncompliance with the statute, they claimed statutory damages of "not less than $100 and not more than $1,000" pursuant to § 1681n(a)(1)(A) of FACTA. Furthermore, because the defendant was out of compliance with § 1681c(g)(1) from December 4, 2006 to April 26, 2007, the plaintiffs sought class certification in order to address the 751,078 additional potential FACTA violations committed by the defendant. The court granted the plaintiffs’ motion after finding, under Rule 23(b)(3) of the Federal Rules of Civil Procedure, that common questions of law or fact predominated and that a class action was superior to other available methods for the fair and efficient adjudication of the controversy. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Beringer_v_Standard.pdf.
Eighth Circuit Holds Assignee Can Compel Arbitration Under Settled Credit Card Agreement. On September 23, the U.S. Court of Appeals for the Eighth Circuit held that a purchaser of an extinguished credit card debt could compel arbitration under the credit card agreement. Koch v. Compucredit Corp., No. 07-1948, 2008 WL 4305903 (8th Cir. Sept. 23, 2008). The plaintiff in the case filed a class action lawsuit alleging that the assignee of her credit card debt violated the Fair Debt Collection Practices Act and the Arkansas Deceptive Trade Practices Act by attempting to collect on a credit card debt that she had already paid. The assignee moved to compel arbitration under the credit card agreement between the plaintiff and the original creditor, but the district court held that the assignment was invalid because the original creditor had no remaining interest in the plaintiff’s account after it was settled. The Eighth Circuit found the validity of the assignment was a matter for the court, not the arbitrator. However, the Eighth Circuit reversed the district court, finding that, “[e]ven if the underlying credit agreement was terminated by the settlement, such a termination does not necessarily release the parties from their obligations under that agreement, including the obligation to arbitrate.” The continuing obligation to arbitrate gave the assignor “a ‘present interest’ in the contract” and, thus, “something to assign.” Because the court determined that the dispute involved “‘facts and occurrences that arose before expiration’ of the credit agreement” and fell within the scope of the arbitration clause, it held that the assignee could compel arbitration under the agreement. For a copy of the opinion, please see http://www.ca8.uscourts.gov/opndir/08/09/071948P.pdf.
Pennsylvania Federal Court Holds Credit Card, Checking Account Arbitration Provisions Not Unconscionable. On September 16, U.S. District Court for the Western District of Pennsylvania held that the arbitration provisions of checking account and credit card agreements with the defendants, First National Bank of Pennsylvania (First National) and Chase Bank USA, NA (Chase), respectively, were not unconscionable. Grimm v. First National Bank of Pennsylvania, No. 08-785 (W.D. Pa. Sept. 16, 2008). In this case, identity thieves defrauded funds from the plaintiffs’ checking and credit card accounts. The plaintiffs filed suit, claiming that the defendants failed to identify the fraudulent activity. The defendants then petitioned the court to stay the proceeding and to compel arbitration of the claims pursuant to the arbitration provisions of the checking and credit card agreements. The court held that the agreement with First National was not procedurally unconscionable, reasoning that the agreement conspicuously displayed the arbitration clause and that the failure to read an arbitration agreement does not constitute "special circumstances" which would invalidate the agreement. The court also held that the agreement with First National was not substantively unconscionable, reasoning that the defendants did not have superior bargaining power because the plaintiffs could have opened their accounts elsewhere, and because the Third Circuit "has repeatedly held that inequality in bargaining power, alone, is not a valid basis upon which to invalidate an agreement." The court held that the agreements with Chase were not procedurally or substantively unconscionable because (i) the plaintiffs could have opened credit cards with other issuers, (ii) compelling arbitration is not “one-sided” or “oppressive” because the arbitration provision allows both parties to arbitrate disputes, and (iii) other state and federal courts have “routinely” held that such arbitration provisions are not unconscionable. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Grimm_v_First_National.pdf.
Illinois Federal Court Certifies Class Action Suit for FACTA Violations. On September 24, the U.S. District Court for the Northern District of Illinois granted plaintiffs’ motion for class certification in an action against the defendant for violations of the Fair and Accurate Transactions Act (FACTA). Beringer v. Standard Parking Corp., Nos. 07 C 5027, 2008 WL 4390626 (N.D. Ill. Sept. 24, 2008). The case arose when the operator of a parking facility printed the first four digits, the last four digits, and the expiration dates of the plaintiffs’ credit cards on their parking receipts in violation of § 1681c(g)(1) of FACTA, which prohibits printing "more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction." Though the plaintiffs did not allege that they suffered any actual damages as a result of Defendant’s noncompliance with the statute, they claimed statutory damages of "not less than $100 and not more than $1,000" pursuant to § 1681n(a)(1)(A) of FACTA. Furthermore, because the defendant was out of compliance with § 1681c(g)(1) from December 4, 2006 to April 26, 2007, the plaintiffs sought class certification in order to address the 751,078 additional potential FACTA violations committed by the defendant. The court granted the plaintiffs’ motion after finding, under Rule 23(b)(3) of the Federal Rules of Civil Procedure, that common questions of law or fact predominated and that a class action was superior to other available methods for the fair and efficient adjudication of the controversy. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Beringer_v_Standard.pdf.